INVESTMENT BY an Indian Resident outside India

Author: Gaurav Shankar |

Article by Business Law Chamber

Flow of direct investment reflects unification of the economy with the world. Overseas Direct Investment (“ODI”) showcases the country’s capability to venture beyond the domestic arena. ODI is a strategy where the money flows out of the domestic country into a foreign country. In the Indian context, exports have been a predominant way of reaching the global markets, however, in the last few decades, increase in overseas investment has been playing a key role in globalizing the operations of the Indian entities.

An Indian resident or a ‘person resident in India’, as stated under Section 2(v)(i) of Foreign Exchange Management Act, 1999 (“FEMA”) includes the following:

(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—

  1. a person who has gone out of India or who stays outside India, in either case—
    1. for or on taking up employment outside India, or
    2. for carrying on outside India a business or vocation outside India, or
    3. for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
  2. a person who has come to or stays in India, in either case, otherwise than—
    1. for or on taking up employment in India, or
    2. for carrying on in India a business or vocation in India, or
    3. for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

(ii) any person or body corporate registered or incorporated in India,

(iii) an office, branch or agency in India owned or controlled by a person resident outside India,

(iv) an office, branch or agency outside India owned or controlled by a person resident in India;

ODI by resident individuals is governed by the RBI Master Direction on Liberalized Remittance Scheme (“LRS”) and Schedule V of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulation, 2004 (“ODI Regulations”), whereas ODI by a body corporate and other entities is governed solely by ODI Regulations.

ODI by a resident individual

Under the LRS, resident individuals are freely allowed to remit up to USD 2,50,000 per financial year (April-March). The amount can be remitted for either current or capital account transactions or a combination including both.

The capital account transactions permitted under LRS includes opening a foreign currency bank account abroad; purchase of property abroad; investments abroad - including acquisition and holding of shares; units of mutual funds, etc.; extending loans in Indian rupees to NRIs; and for setting up Wholly Owned Subsidiaries (“WOS”) and Joint Ventures (“JV”). Whereas, the current account transactions include remittances for private visit, gifts, emigration, business trips, medical treatment, etc.

For remittances under this scheme, the resident individual will have to designate an Authorised Dealer (“AD”). LRS is not available for capital account remittances to countries identified by Financial Action Task Force (“FATF”) as non-co-operative countries and territories as available on FATF website www.fatf-gafi.org or as notified by the Reserve Bank of India (“RBI”). Further, the resident seeking remittance under the scheme will have to furnish Form A2 and their permanent account number to the AD.

In addition to LRS, the overseas investment by resident individuals is also governed by the ODI Regulations. Under regulation 20A of the ODI Regulations, resident individuals are permitted to make investment in equity shares and compulsorily convertible preference shares of a JV or WOS outside India, subject to the criteria as specified under Schedule V of the ODI Regulations.

However, there are certain transactions which are prohibited under the purview of ODI Regulations such as investments in a JV or WOS which pertains to real estate business or banking business or financial services activity; JV or WOS located in countries which have been identified as non-co-operative by the FATF; where the resident is on the list of defaulters to the banking system or under investigation; where the investment exceeds the prescribed limit under LRS; no step-down subsidiary can be acquired or set up.

ODI by an ‘Indian party’

Apart from resident individuals, entities or an Indian Party (“IP”) is also permitted to make overseas investment under the ODI Regulations and the RBI Master Direction on direct investment by residents in JV or WOS abroad (“ODI Master Direction”). The term ‘Indian Party’ as defined under the ODI Regulations and the ODI Master Direction includes:

“a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932 making investment in a JV or WOS abroad, and includes any other entity in India as may be notified by the Reserve Bank: Provided that when more than one such company, body or entity make an investment in the foreign entity, all such companies or bodies or entities shall together constitute the 'Indian party'.”

The IP can make investment in a JV or WOS abroad, subject to the conditions as stated in the ODI Master Direction, including adhering to the financial commitment requirements i.e., 400% of the net worth as per the last audited balance sheet. The IP can also lend loans to or on behalf of JV or WOS by way of contribution to the equity capital of the JV.

  1. Transactions which alters the assets or liabilities including contingent liabilities outside India of persons resident in India or assets or liabilities in India of persons resident outside Indian and transaction including debt instruments
  2. Transactions other than capital account transactions, including foreign trade, payment due as interests on loan, remittances for living expenses of parents,spouse,etc.
  3. A money changer, offshore banking unit or any other person for the time being authorised to deal in foreign exchange or foreign securities

Furthermore, under the ODI Regulations and the ODI Master Direction, an IP is permitted to invest in JV’s or WOS’s in accordance with the prescribed limit of 400% of the net worth as per the last audited balance sheet through automatic route. From 2014, any transaction exceeding USD 1 billion in a financial year would require an approval from the RBI. Further, for investing in JV or WOS, the IP will have to approach the AD Category Bank I with an application in Form ODI (Part I) (Master Documenting on Reporting) and other prescribed documents for remittance. However, it must be noted that IPs are prohibited from investing in foreign real estate business or banking business without the approval of RBI.

ODI is recognized as an important aspect of promoting global business. Access to global market, promotion of brand image, transfer of technology, generation of employment are benefits of ODI. The flow of money marks the strength of economies and transnational body corporates which facilitates and upholds the stance of the country on the global platform.