ODI Compliances under FEMA after making investment overseas

In today’s age, when globalisation is taking over the world, many Indian businesses are stepping out of the country to make substantial investments in international markets. 

Overseas direct investment i.e. ODI helps companies to get direct access to newer and more extensive markets, better technologies which would enable them to increase their customer base and achieve a global reach, but to unintentional violation of regulations, Investment in wholly owned subsidiaries and joint ventures outside India by person resident in India is governed by FEMA (Transfer or Issue of Foreign Security) (Amendment) Regulations, 2004.

1. What is an Overseas Direct Investment (ODI)?

According to Section 2(e) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, , any investment made by any person outside India:  

• By the way of purchasing existing shares of foreign entity which can be joint venture or wholly owned subsidiary, or  
• By making contribution to the capital of the foreign entity, or  
• By making subscription to the memorandum of the foreign entity  
• But does not include portfolio investment

Is considered to be an Overseas direct Investment. 

2. What are the sources for making an ODI with an Indian Party?

The following ways are a few examples through which overseas direct investment with an Indian party can be carried out:

• Acquisition of the shares of foreign entities by way of exchange of the shares of the Indian Party.  
• By drawal of foreign exchange from an AD bank in India.
• Capitalization of exports (the amount which is remained unrealized against exports proceeds) and other dues and entitlements.  
• Proceeds of External Commercial Borrowings / Foreign Currency Convertible Bonds. In exchange of ADRs / GDRs issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued by Government of India in the matter.  
• Balances held in Exchange Earners Foreign Currency account of the Indian Party maintained with an Authorized Dealer.  
• Proceeds of foreign currency funds raised through ADR / GDR issues.

3. Compliance of ODI regulations under FEMA

There are in total 8 FEMA compliances under Foreign Direct Investment norms, that help strike a fair and transparent governance of the transactions that take place. The compliance of ODI regulations is one of the 8. Under FEMA, An Indian Party and a Resident Individual making an overseas investment is required to submit Form ODI. When they receive share certificates or any other documentary evidence of investment in the foreign Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) as an evidence of investment and submit the same to the designated AD within 30 days.

Particulars of Compliance	Details of Compliance	Who is required to Comply	Due Date	Key Points
Form ODI	Overseas investments (or financial commitment) in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS)	An Indian Party and a Resident Individual making an overseas investment is required to submit form ODI	Receive share certificates or any other documentary evidence of investment in the foreign JV / WOS as an evidence of investment and submit the same to the designated AD within 6 months;	In case of disinvestment, sale proceeds of shares/securities shall be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares /securities and documentary evidence to this effect shall be submitted to the Reserve Bank through the designated Authorised Dealer.

4. What are the possible violations under ODI regulations?

Here are a few violations that one should avoid in order to save themselves from any contravention of ODI regulations under FEMA:

• An Indian Party invests in prohibited sectors viz. real estate or banking business without the prior approval of RBI.

• An overseas entity , having direct or indirect equity participation by an Indian Party, offers financial products linked to Indian Rupee (e.g. non-deliverable trades involving foreign currency, rupee exchange rates, stock indices linked to Indian market, etc.) without the specific approval of the Reserve Bank of India.

• An Indian Party breaches the limit of 400% of net worth limit, without seeking prior approval of RBI.

• Indian Party failed to seek prior approval of RBI for financial commitment (FC) exceeding USD 1 (one) billion (or its equivalent) in a financial year even when the total FC of the Indian Party is within the eligible limit under the automatic route, which means- within 400% of the net worth as per the last audited balance sheet. 

• The Indian Party or entity extends loan /guarantee to an overseas JV/WOS in which it has no equity participation without the approval of RBI.

• The Indian Party routes transactions through different branches or different AD Banks or Indian Party fails to obtain valuation report in case of partial or full acquisition of an existing foreign company, where the investment is more than USD 5 million.

• Indian Party issues corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries without the approval of RBI. 

• Portfolio investments by a listed entity or investment by Mutual funds beyond the prescribed limit. 

• Restructuring of the balance sheet of the overseas entity involving write off of capital and receivables beyond prescribed limit without approval of RBI.

• Failure to receive share certificates or any other documentary evidence of investment in the foreign JV/WOS as an evidence of investment by Indian Party or failure to submit the same to the designated AD within 6 months.

• Failure to repatriate all dues receivable from the foreign JV/WOS, like dividend, royalty, technical fees, etc., to India by the Indian Party.

• Failure to submit an Annual Performance Report in Part III of Form ODI in respect of each JV or WOS outside India to the Reserve Bank through the designated Authorized Dealer.

• Failure to provide the details of the decisions taken by a JV/WOS regarding diversification of its activities or setting up of step down subsidiaries to the Authorised Dealer.

• Failure to report any alteration in share holding pattern within 30 days of the approval of those decisions by the competent authority concerned of such JV/WOS in terms of the local laws of the host country. 

• In case of disinvestment, failure to repatriate sale proceeds of shares or securities to India immediately on receipt thereof and in any case within 90 days from the date of sale of the shares /securities and/ or failure to submit documentary evidence to this effect to the Authorised Dealer bank.

5. Some important details to be provided with ODI compounding application

• Name of the applicant. 
• Date of incorporation. 
• Income-tax PAN.
• Nature of activities undertaken.  
• Name of Overseas entity.
• Date of incorporation of an overseas entity.
• Nature of activities undertaken by the overseas entity.
• Nature of entity- WOS/JV.
• Details of remittance sent- Date of remittance, Amount in FCY and in INR.
• Details of other financial commitments. 
• Details of UIN applied and received.
• Date of receipt of share certificate.
• Approval of other regulators, if required.
• Details of APRs submitted: For the period ended; date of submission.
• Nature of contravention and reasons for the contravention.
• All supporting documents may be submitted.