Overseas Direct Investment (ODI): Rules, Limits and Reporting for Indian Businesses

Kerala businesses increasingly expand abroad, especially to the Gulf, by setting up or acquiring subsidiaries, branches or joint ventures there. Investment by an Indian entity or a resident individual in a foreign entity is governed by the Foreign Exchange Management (Overseas Investment) Rules, 2022, the Overseas Investment Regulations, 2022 and the RBI’s directions under them. The framework is largely automatic, but it has firm limits and strict reporting requirements.

This article explains who can make overseas investment, the limits, the restrictions, and the reporting obligations.

ODI and OPI

• Overseas Direct Investment (ODI): acquisition of unlisted equity capital of a foreign entity, subscription to its memorandum, or acquisition of 10% or more of a listed foreign entity, or any investment that gives control.
• Overseas Portfolio Investment (OPI): investment in listed foreign securities below 10% without control, and certain other securities.
• Financial commitment: the total of equity, debt, guarantees and other commitments made by the Indian entity to the foreign entity.

Who can invest, and the limits

Investor	Position
Indian company or LLP	ODI under the automatic route, with total financial commitment up to 400% of its net worth as per the last audited balance sheet, subject to the other conditions
Resident individual	ODI only in an operating foreign entity that is not engaged in financial services, and within the overall limit of the Liberalised Remittance Scheme (currently USD 250,000 per financial year)
Registered partnership firm and others	As provided in the rules

Key restrictions

• Bona fide business: the foreign entity must be engaged in bona fide business activity.
• Financial services: investment in a foreign entity engaged in financial services requires conditions to be met, including that the Indian entity is itself in financial services and meets the regulatory requirements.
• Round tripping: an ODI structure that results in the foreign entity investing back into India (an ODI-FDI structure) is restricted, and is not permitted where it results in more than two layers of subsidiaries.
• Defaulters and investigation: an Indian entity that is on the RBI’s caution list, under investigation by certain agencies, or a wilful defaulter must obtain a no-objection from its bank or the agency concerned.
• Strategic sectors and prohibited activities: investment in certain activities, such as real estate business, gambling and some financial products, is not permitted.

Procedure

1. Board approval for the investment, and members’ approval where required under the Companies Act (for example, for investments above the limits under section 186).
2. A valuation of the foreign entity, where shares are acquired, on an arm’s length basis.
3. Remittance through the designated AD bank, which must be the same bank for all transactions relating to that foreign entity.
4. Reporting in Form ODI on the RBI’s portal through the AD bank, within 30 days of the remittance or transaction.

Ongoing reporting

Event	Form	Time limit
ODI and subsequent financial commitment	ODI (Part I)	Within 30 days
Annual performance report of each foreign entity	APR	By 31 December each year, based on the foreign entity’s audited accounts
Disinvestment, winding up or transfer	As prescribed	Within 30 days
Annual return on foreign liabilities and assets	FLA	By 15 July every year

Delays can be regularised by a late submission fee within the time allowed, but further financial commitment is not permitted while reporting is pending. The Indian entity must also realise dues from the foreign entity, such as dividends, interest and royalties, within the time prescribed.

Points for Kerala businesses expanding to the Gulf

• Many Gulf countries require a local sponsor or partner for some activities. Arrangements under which a local person holds shares on behalf of the Indian investor must be examined carefully under both the local law and the ODI rules.
• Where an NRI promoter already holds a business abroad and the Indian company invests into it, the transaction needs particular care on valuation and round tripping.
• Income from the foreign entity, and its distribution, has tax consequences in India, including under the double taxation avoidance agreement with the country concerned.

Frequently asked questions

Can a private limited company in Kerala set up a subsidiary in Dubai?

Yes, under the automatic route, within the financial commitment limit and subject to the other conditions, with reporting through the AD bank.

Can an individual buy a business abroad?

A resident individual can make ODI in an operating entity not engaged in financial services, within the LRS limit.

What is the APR, and why does it matter?

The Annual Performance Report gives the RBI details of the foreign entity’s performance. Not filing it is a contravention and blocks further investment.

ചുരുക്കം (Summary in Malayalam)

ഇന്ത്യൻ കമ്പനികളും വ്യക്തികളും വിദേശത്ത് സബ്സിഡിയറി, ജോയിന്റ് വെഞ്ച്വർ തുടങ്ങിയവയിൽ നിക്ഷേപിക്കുന്നതിന് ഓവർസീസ് ഇൻവെസ്റ്റ്മെന്റ് ചട്ടങ്ങൾ, 2022 ബാധകമാണ്. കമ്പനികൾക്ക് നെറ്റ് വർത്തിന്റെ 400% വരെ അനുമതി കൂടാതെ നിക്ഷേപിക്കാം. വ്യക്തികൾക്ക് LRS പരിധിക്കുള്ളിൽ സാമ്പത്തിക സേവനമല്ലാത്ത പ്രവർത്തന സ്ഥാപനങ്ങളിൽ നിക്ഷേപിക്കാം. നിക്ഷേപം കഴിഞ്ഞ് 30 ദിവസത്തിനകം ബാങ്ക് വഴി ODI ഫോം ഫയൽ ചെയ്യണം; എല്ലാ വർഷവും ഡിസംബർ 31-നകം APR നൽകണം.

This article gives a general overview of overseas investment under FEMA. The rules, regulations, directions and limits are revised from time to time; for accurate and current requirements, refer to the latest RBI directions and consult the AD bank. The article is not advice on any particular case.