In India, to foster future growth, expansion, and diversification, companies and businessmen are increasingly investing outside the country which is commonly referred to as Overseas Direct Investment. Overseas Direct Investment is governed by several laws, including the FEMA Act, Companies Act, and any other regulations that may be prescribed from time to time and defined as investments made in the following ways:
- Acquisition of any unlisted share capital of a foreign entity.
- Investment of at least 10% in a listed foreign company.
- Subscription as part of the memorandum of association of a foreign entity
- Investment with a controlling interest in a listed foreign company, even if such investment is less than 10%.
Eligibility Criteria for Investment Outside India
Indian entities and resident individuals are required to fulfil the following eligibility criteria to invest outside India:
a) Overseas Investment by Indian Entities
Indian entities can make overseas investments, subject to the following financial limits:
1. The financial commitment should not exceed 400% of the entity's net worth as per the latest audited balance sheet and should not be more than 18 months old at the time of the transaction.
2. Alternatively, the financial commitment should not exceed USD 1 billion in a financial year, whichever is lower.
b) Overseas Investment by Resident Individuals
Resident individuals in India are allowed to make Overseas Direct Investment (ODI) through investment in equity capital or Overseas Portfolio Investment (OPI) as outlined in Schedule III. These investments are subject to the overall ceiling set by the Liberalized Remittance Scheme (LRS), i.e. USD 250,000 per year.
Procedure for Investment Outside India
In order to invest outside India, Indian entities and resident individuals should follow the below mentioned steps:
a) Submission of Documents: All the documents required must be submitted to the Authorized Dealer (AD) Bank as below:
- Duly completed and signed Form FC.
- Statutory Auditor’s Certificate in the format as prescribed by RBI.
- Duly audited Financial Statements certified as true copy by Authorized Signatory of the Company
- Board resolution
- Valuation certificate as per Banks internal policy
- Request Letter for Clean Outward Remittances
b) Verification by AD Bank: The AD Bank will verify the documents to ensure that the financial commitment falls under the automatic route.
c) Unique Identification Number (UIN): It will be generated at the time of the first transaction with the foreign entity.
d) Processing Outward Remittance: The outward remittance will be processed by the AD Bank.
e) Reporting for Subsequent Transactions: The same UIN must be used to report future transactions.
f) Ongoing Obligations: The ongoing obligations must be fulfilled by the Indian entity or individual, such as submitting the share certificate and Annual Performance Report (APR).
New Challenges presented by Investment Outside India
New challenges are presented by investments outside India for Indian entities as well as the residents. They are:
a) Financial commitment by Indian entities through debt and guarantees
An Indian entity may invest in or borrow debt instruments that are issued by a foreign entity, provided these borrowings are secured by a duly executed loan agreement with market-based interest rates. The types and conditions of guarantees issued remain consistent with those under the erstwhile ODI system. A notable change is that if a guarantee is extended by a group company, it will be accounted for independently of the group's financial liability limit. However, if an Indian promoter extends the guarantee, it will be included in the financial liability limit of the Indian entity.
b) Financial commitment by way of pledge or charge
The revised ODI framework has significantly relaxed conditions for the use of foreign securities and both foreign and onshore assets by Indian entities. It permits the creation of security in favor of a foreign lender, irrespective of whether the foreign lender is regulated as a bank. It also permits security in favor of domestic SEBI-registered debenture trustees. Additionally, the revised framework allows foreign lenders to charge onshore assets held by an Indian entity and its foreign group companies. However, it specifies that foreign lenders must not be from any country or jurisdiction where "financial commitment" is not permitted under the revised ODI framework.
c) Requirement of No Objection Certificate from the Bank or regulatory authority in some cases
The requirement of a No Objection Certificate (NOC) is another important aspect to consider for Indian residents seeking to invest outside India if they have a Non-Performing Asset (NPA), and have been classified as a willful defaulter by any bank, or are under investigation by the Enforcement Directorate (ED), Central Bureau of Investigation (CBI), the Financial Services Regulatory Authority, or the Serious Fraud Investigation Office (SFIO). It remains to be seen whether entities investigated by the Competition Commission of India (CCI) will also fall under this provision. A welcome departure from the earlier ODI regime is that the revised ODI framework mandates the investigating agency or the lending bank to respond to written NOC requests within sixty days. If such proof is not submitted within the prescribed period, it will be considered as acceptance of the proposed transaction.
d) Round Tripping
The revised ODI framework aims to address regulatory uncertainties surrounding investments by Indian entities, yet it raises further questions. Any financial liability of a resident in India to a foreign entity, invested in India (directly or indirectly) at the time or thereafter, exceeding a two-subsidiary structure is prohibited except in specific sectors. It remains unclear whether ODIs resulting in round-tripping but not breaching this two-layer rule are permissible. Additionally, the RBI stated that "no new branches or subsidiaries will be added to structures having two or more branches." It is ambiguous whether this restriction applies solely to investments leading to repatriation to India or extends to multi-layered structures located entirely outside India.
e) Investment in financial services sectors
Unlike the Erstwhile ODI system, the revised ODI framework now permits Indian entities not affiliated with the Indian financial sector to pursue opportunities abroad through ODI in foreign entities directly or indirectly involved in financial services (excluding banking and insurance) under specific conditions. Similarly, non-insurance entities in India are allowed to engage in ODI for general and health insurance, subject to specified conditions.
f) Investment in strategic sectors
In the revised ODI framework, the term "strategic sector" comprises of energy and natural resource sectors like coal, gas, mineral ores, oil, submarine cable systems, startups, and any other sectors or sub-sectors as specified by the central government. Importantly, if the primary activity of a foreign entity falls within a strategic sector, there is no mandatory requirement for limited liability of that foreign entity. This allows for ODI in unincorporated entities operating within these strategic sectors.
Sectors Prohibited for Investment Outside India
Sectors Prohibited for Investment Outside India include:
- Real estate activities
- Dealing with financial products linked to the Indian Rupee without specific approval from the Reserve Bank of India (RBI).
- Gambling (in any form possible)
Note: Resident Individuals are not permitted to invest in the financial sector or establish any Step-Down Subsidiary (SDS) outside India.
Conclusion
In response to the evolving demands of Indian businesses in a rapidly interconnected global market, integrating into the global value chain has become imperative. The revised regulatory framework for overseas investment endeavors to streamline existing procedures, aligning them with current business and economic dynamics. By clarifying guidelines for Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI), the framework shifts numerous overseas investment transactions from the approval route to the automatic route.
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