Overview

Outbound investment is considered when a company or an individual invest money or in a particular instrument of a company outside India. This can also be done by subscribing to the memorandum of a foreign company.

Outbound investments can happen through investment in instruments in foreign companies. A company or an individual can invest in a foreign company. However, strict adherence is required for these investments.

Eligibility criteria

An Indian Party is eligible to make an outbound investment under FEMA under the Automatic Route.

An Indian party can include the following:

• Company
• Partnership under the Partnership Act, 1932
• Limited Liability Partnership under the LLP Act 2008
• Any other entity; or
• Combination of the parties- When more than one such company, body, or entity makes investment in the foreign JV / WOS

Process and Procedure

The Indian Party intending to make an overseas direct investment under the automatic route is required to fill up form ODI duly supported by the documents listed therein, i.e., a certified copy of the Board Resolution, Statutory Auditors Certificate and Valuation report (in case of acquisition of an existing company) as per the valuation norms listed in answer to and approach an Authorized Dealer (designated Authorized Dealer) for investing/remittance.

The valuation norms are as follows:

• First, if the investment is more than 5 million USD, then the valuation shall be required.

• Where there is partial/full acquisition of an existing foreign company where the investment is more than USD five million, share valuation of the company has to be done by a:

1. Category I Merchant Banker registered with the Securities and Exchange Board of India (SEBI)
2.  or an Investment Banker/ Merchant Banker outside India registered with the appropriate regulatory authority in the host country
3.  and all other cases by a Chartered Accountant/ Certified Public Accountant.

• However, in the case of investment by the acquisition of shares where the consideration is to be paid fully or partly by issue of the Indian Party's shares (swap of shares), irrespective of the amount, the valuation will have to be done by a Category I Merchant Banker registered with SEBI or an Investment Banker/ Merchant Banker outside India registered with the appropriate regulatory authority in the host country.
• The host country is the place where the investment is sent to.
• In case of additional overseas direct investments by the Indian party in its JV / WOS (Joint Venture/ Wholly Owned Subsidiary) , whether at premium or discount or face value, the concept of valuation, as indicated above, shall be applicable.
• The RBI has provided a master direction on direct investment by the resident in a Joint Venture/ Wholly Owned Subsidiary aboard. In compliance with the master directions, there is a requirement of
• Any further clarifications in respect of cases not specifically or generally covered by the instructions may be obtained from the concerned Authorized Dealer (AD) bank. If, however, AD bank fails to provide a satisfactory reply, a request may be made, giving full details of the case, to the Central Office of the Reserve Bank by routing it through AD bank at the following address:

The Chief General Manager

Reserve Bank of India

Foreign Exchange Department

Overseas Investment Division

Central Office, Amar Building, 5th Floor

Mumbai 400 001 

There are two routes:

• Automatic Route
• Approval Route

Automatic Route

Under the automatic route, the Indian party does not need prior approval from the Reserve Bank of India. The individual should approach the Authorized Dealer (AD) (i.e. Banks) with the Form ODI with the prescribed documents to make a remittance.

If there is any transfer of financial services, then approval is required from the finance board.

Form ODI is available in the master direction for foreign exchange management.  Transactions which are not covered under the automatic route will be covered under the approval route.

Approval Route

The applicant should approach their designated Authorized Dealer (AD) (i.e. Banks) with the proposal which shall be submitted to Reserve Bank after due scrutiny and with the specific recommendations of the designated AD bank along with supporting documents (as mentioned below) to the following address:

The Chief General Manager,

Reserve Bank of India,

Foreign Exchange Department,

Overseas Investment Division,

Amar Building, 5th Floor,

Sir P. M. Road, Fort,

Mumbai 400001.

The designated AD should upload the form online on the OID website.

In case the proposal is approved, the AD bank should perform the remittance under advice to Reserve Bank so that the UIN (Unique Identification Number) is provided.

For approval by the Reserve Bank, the following documents should be submitted along with Section D and Section E of Form ODI - Part I by the designated authority dealer:

a) A letter from the designated AD in a sealed cover mentioning the following details:

• Transaction number generated by the OID application.
• Brief details of the Indian entity.
• Brief details of the overseas entity.
• Background of the proposal.
• Brief details of the transaction.
• Reasons for seeking approval mentioning the extant FEMA provisions.

Observations of the designated AD bank concerning the following :

• Prima facie viability of the JV/ WOS outside India;
• Contribution to external trade and other benefits which will accrue to India through such investment;
• Financial position and business track record of the IP and the foreign entity;
• Expertise and experience of the IP in the same or related line of activity of the JV/ WOS outside India.
• Recommendations of the designated AD bank.

b) A letter which is addressed to the authorized bank.

c) Board resolution for the proposed transaction.

d) Diagrammatic representation of the organizational structure indicating all the subsidiaries of the IP horizontally and vertically with their stake (direct & indirect) and status (whether the operating company or SPV). This is important to provide clarifications in case there are any other considerations.

e) Incorporation certificate and the valuation certificate for the overseas entity.

f) Other relevant documents correctly numbered, indexed and flagged.

Required Documents

• Form ODI.
• Certified Copy of the Board Resolution.
• Statutory Auditors certificate.
• Valuation report.
• Form ODI Part II – Reporting of remittances to be submitted by the AD Category Bank to RBI.
• Form ODI Part III – Annual Performance Report (APR) – To be submitted, certified by Statutory Auditors of the Indian party, through the designated AD Category– I bank every year.
• Form ODI Part IV – To be submitted for reporting the closure/ disinvestment/ voluntary liquidation, winding up of the JV/WOS abroad.
• Annual Return on Foreign Liabilities and Assets.

How can Servzone help for – Outbound Investment under FEMA

• We can provide you with advice on the procedure for outbound investment under FEMA.
• We assist in providing advice on the routes for outbound investment.
• We value time and money.
• We offer post compliance services.

What is the direct investment outside India?

Direct investment outside India means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity but does not include portfolio investment.

Who are allowed to make an outbound investment under FEMA?

Resident corporate entities and partnership firms registered under the Indian Partnership Act, 1932 are eligible to make investment abroad in Joint Ventures/ Wholly Owned Subsidiaries.

Can foreign investment be made in any activity?

An Indian company can make an overseas investment in any activity (except those that are expressly prohibited) in which it has experience and expertise. However, for undertaking activities in the financial sector, certain additional conditions have to be adhered to.

What are the prohibited activities for foreign investment?

Real estate sector and Banking are the prohibited sectors for foreign investment. However, Indian banks operating in India can set up JV/WOS (Joint venture/ Wholly owned subsidiary) abroad provided they obtain clearance under the Banking Regulation Act 1949.

Can an Indian company invest abroad in JV / WOS, which will be engaged in financial services sector?

Only an Indian Company involved in financial sector activities can invest in the financial services sector provided it fulfils the following norms besides complying with the principles laid down by the Reserve Bank of India.