image

India's Overseas Direct Investment 

Inward Foreign Direct Investment (FDI) highlights a country’s attractiveness as a destination for global investors, while Outward Direct Investment (ODI) signifies its ability and willingness to expand beyond its borders. For a growing economy like India, these dynamics are particularly important, as they not only bolster the nation’s economic growth but also enhance its presence on the global stage.

WATCH

Unlocking Cross-Border Success: ODI Opportunities and Considerations for Indian Enterprises

This video is unavailable in your region. Please enable VPN to view

Historically, Indian enterprises have primarily relied on exports as the main avenue for reaching international markets. However, the past two decades have marked a significant shift. Indian businesses are increasingly recognizing that future growth is not just about exporting goods but also about establishing a direct presence in foreign markets. This can be achieved either through organic growth or by acquiring overseas companies and assets, including intangible assets such as brands and goodwill. This shift towards ODI reflects a broader trend among developing countries, where the rise in outward investments is becoming a key driver of global competitiveness.

This trend is evident in the increasing number of approved projects for investment abroad. Although India remains a net recipient of FDI, the gap between inflows and outflows has been narrowing, signaling a growing confidence among Indian businesses to venture abroad.

The objective of this article is to provide a comprehensive guide for businesses, investors, and policymakers to shed light on how Indian enterprises can strategically leverage ODI to enhance their global footprint and contribute to the nation’s long-term economic growth.

Key components of the Outward Investment framework

Overseas Direct Investment (ODI) by Indian entities is governed under the Foreign Exchange Management Act (FEMA) and the guidelines set by the Reserve Bank of India (RBI). FEMA regulates all capital account transactions related to foreign exchange, including investment abroad.

The following entities are eligible to make ODI:

  • Companies incorporated in India;
  • Bodies created under an Act of Parliament;
  • Partnership firms registered under the Indian Partnership Act, 1932;
  • Limited Liability Partnerships (LLPs); and,
  • Registered Trusts and Societies (under restricted conditions and with RBI approval)

Permitted routes

Automatic Route

Under this route, Indian entities can invest abroad without prior approval from RBI if the investment is within 400 percent of the entity’s net worth. The ceiling applies to all ODI made by the entity, including loans and guarantees. Under this route, businesses can make financial commitments to their foreign JVs or WOS through an Authorized Dealer (AD) bank, provided they meet certain conditions set by the RBI.

This route is particularly advantageous for well-established businesses in sectors such as pharmaceuticals, information technology, and automotive manufacturing, which frequently seek to tap into global markets.

Permissible investments:
  • Equity investments:
    • Indian entities can invest in equity capital of a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS) abroad. They are allowed to acquire shares in new or existing companies.
    • At least 10 percent equity participation is required to consider the investment as a JV.
  • Debt instruments:
    • Indian companies can also extend loans or provide debt funding to their JV/WOS abroad.
  • Guarantees:
    • Indian entities can issue guarantees on behalf of their JV/WOS, such as corporate guarantees, performance guarantees, and personal guarantees by the promoters of the company.
    • The total financial commitment, including equity, loans, and guarantees, must not exceed 400 percent of the company’s net worth under the Automatic Route.
  • Investment in startups:
    • Under certain conditions, Indian entities can invest in overseas startups, which allows companies to diversify and explore high-growth markets.
  • Investment by Resident Individuals:
    • Resident individuals are allowed to invest in foreign entities, subject to the Liberalised Remittance Scheme (LRS), which permits remittances up to US$250,000 per financial year. This can be used for both equity and debt investments in foreign companies.
  • Financial services:
    • Investments in foreign financial services companies are permitted, but the Indian entity must meet specific conditions, such as having earned net profits in the preceding three financial years and being registered with a financial regulatory body in India.

While no prior approval is needed under the Automatic Route, the Indian entity must still file Form ODI with its Authorized Dealer (AD) Bank to report the details of the investment. Additionally, an Annual Performance Report (APR) is mandatory to track the performance of the overseas investment.

Approval Route

If an overseas investment does not qualify under the Automatic Route, it falls under the Approval Route, where prior approval from the RBI is mandatory.

Key scenarios requiring Approval:
  • Investment exceeding 400 percent of the net worth of the Indian entity as per the latest audited balance sheet.
  • Investments in sectors specifically restricted under the Automatic Route (e.g., real estate, banking).
  • Investments in countries identified as "non-cooperative" by the FATF or under sanctions imposed by the Indian government.
  • Investments by proprietorship concerns and unregistered partnership firms, which require prior RBI approval.
  • Disinvestment or closure of the foreign entity resulting in write-offs that exceed the permissible limits.
  • Investment in a foreign entity involved in non-deliverable derivative contracts or currency swaps.
Approval process:
  • Entities must submit a formal request to the RBI through the AD Bank, justifying the need for approval.
  • The RBI evaluates the proposal based on the nature of the business, profitability, purpose of the investment, and the impact on the foreign exchange reserves of India.
  • Approval is granted on a case-by-case basis, typically involving scrutiny of financial details, business plans, and valuation reports for the investment.

Key differences between the Automatic and Approval Route

Aspect

Automatic Route

Approval Route

RBI Approval

Not required if within the set limits and conditions

Required for specific cases (exceeding 400% of net worth, restricted sectors, etc.)

Investment limit

Up to 400% of the net worth of the Indian entity

Investments exceeding 400% of net worth need RBI approval

Sectors

Permitted for all except prohibited sectors

Restricted sectors require approval (e.g., real estate, banking)

Approval time

No time required as no approval is needed

Depends on the complexity of the proposal (usually several weeks)

Ease of process

Simple and quicker due to no need for RBI approval

More stringent, with detailed scrutiny and approval required

Exceptions and special cases

  • Financial services sector must meet profitability and regulatory requirements to make investments abroad.
  • Investments in Pakistan and Nepal require prior approval from RBI, regardless of the amount or sector.
  • Registered Trusts and Societies can make ODI only with prior approval from the RBI, and only for charitable or religious purposes.

Funding and financial obligations

Indian entities have certain financial obligations and must follow specific methods for funding overseas direct investments. The methods allowed for financing such investments ensure compliance with the FEMA and RBI guidelines.

Funding options for Overseas Investment:

  • Indian companies can use internal resources or accumulated profits for funding their ODI. This is one of the simplest ways to finance overseas investments without external borrowing.
  • Indian companies can issue new shares or use equity capital to fund their investments in foreign JVs or WOS.
  • Indian entities can raise funds through external borrowings or domestic borrowings.
    • External Commercial Borrowings (ECB): ECBs are loans taken by Indian entities from foreign lenders to finance overseas investment.
    • Domestic Borrowings: Indian companies can use loans raised from Indian banks or financial institutions for overseas investment, provided they meet the financial commitment cap (up to 400% of net worth under Automatic Route).
  • Indian entities can use the proceeds from the issue of American Depository Receipts (ADR) or Global Depository Receipts (GDR) to finance ODI. ADR/GDR proceeds must comply with FEMA and capital market regulations.
  • In specific cases, Indian entities can fund overseas investments through the swap of shares. In this case, the Indian entity exchanges its shares with those of the foreign JV/WOS.
  • Share swaps require prior approval from the Indian regulatory authorities.
  • Indian companies are allowed to enter into deferred payment arrangements with the foreign JV/WOS to pay for their equity participation over a period of time.

Financial obligations

The total financial commitment, including equity, loan, and guarantees, by an Indian entity in all its overseas JV/WOS must not exceed 400 percent of the entity’s net worth, as per the last audited balance sheet. Remittances to fund overseas investment should be routed through the Indian entity’s Authorized Dealer Bank. The AD Bank ensures that the remittance is in compliance with FEMA and ODI guidelines.

Any loans extended to the foreign JV/WOS should have a clear repayment schedule, and the Indian entity is responsible for ensuring that repayments are made on time. For guarantees issued by the Indian entity, if the foreign JV/WOS defaults, the Indian entity must honor the guarantee and fulfill the obligations to the creditors.

Indian entities are encouraged to repatriate dividends, profits, or surplus earnings from their overseas investment back to India. Repatriation helps boost foreign exchange reserves and must be reported to the RBI.

Regulatory compliance

Once an Indian entity makes an overseas investment, it must comply with several obligations to ensure regulatory compliance with Indian laws, particularly those under the Foreign Exchange Management Act (FEMA) and guidelines issued by the Reserve Bank of India (RBI).

Key compliance obligations

Form ODI Reporting

Every Indian entity making overseas direct investment must submit details of the investment to its Authorized Dealer (AD) Bank using Form ODI. This report includes details of the foreign company, amount of investment, and nature of the investment (equity, loan, or guarantees).

Any subsequent changes, such as additional investments or disinvestment, must also be reported using the updated Form ODI.

Annual Performance Report (APR)

Indian entities are required to submit an Annual Performance Report (APR) to the RBI through their AD Bank. This report details the financial performance of the foreign entity, including profits, losses, and business activities.

The APR must be submitted every year by December 31st. Failure to submit the APR can result in penalties or restrictions on future investments.

Disinvestment Reporting

If the Indian entity disinvests (sells or liquidates) its stake in the foreign entity, it must report the transaction to the AD Bank within 30 days of the transaction. Disinvestment is allowed through methods like sale of shares, liquidation, or buyback, subject to conditions such as not exceeding permissible write-offs.

Compliance with Sectoral Requirements

If the Indian entity operates in financial services, additional requirements like registration with Indian regulatory bodies, minimum capital adequacy, and profitability norms must be met.

Non-Performance and Write-Offs

If the foreign entity faces losses or becomes non-operational, the Indian entity can write off the investment, subject to certain conditions. The write-off limits under the Automatic Route are capped at 25 percent of the total investment.

Other Regulatory Compliances

Indian companies must adhere to regulations related to anti-money laundering, tax compliances, and KYC (Know Your Customer) norms for overseas investments.

Taxation and other implications

Indian entities are taxed on their global income, meaning any income earned through foreign investments, such as dividends, capital gains, or profits from a foreign JV/WOS, is taxable in India. The profits of the overseas entity will also be subject to taxes in the host country, leading to double taxation unless a Double Taxation Avoidance Agreement (DTAA) is in place.

Dividends and repatriated earnings

Dividends received from the foreign subsidiary are taxed as income in the hands of the Indian entity. Under certain DTAAs, the foreign withholding tax on dividends can be set off against the Indian tax liability to avoid double taxation.

Did You Know
Profits repatriated from overseas entities are subject to tax as per the applicable DTAA.

Indian entities are allowed to credit taxes paid in the foreign country under the Foreign Tax Credit (FTC) mechanism, reducing the tax burden in India.

Capital gains tax

If an Indian entity sells its stake in a foreign JV/WOS, capital gains tax is applicable both in the host country and in India, unless there is a tax relief under the relevant DTAA.

Arm’s length pricing

Transactions between the Indian parent company and its foreign subsidiary or JV must follow transfer pricing regulations to ensure that they are at arm's length (i.e., market value) to avoid tax avoidance. Detailed transfer pricing documentation is required to substantiate the pricing of cross-border transactions.

Indirect taxation

No direct GST implications on ODI, but transactions involving services rendered by Indian entities to foreign subsidiaries may attract GST, subject to export of services provisions.

Place of Effective Management (POEM)

If a foreign subsidiary or JV is effectively managed from India, it could be treated as a resident for tax purposes under Indian law, leading to its global income being taxed in India. To avoid this, the foreign entity should demonstrate independent control over its operations outside India.

Withholding tax

Indian entities may need to withhold taxes on payments made to the foreign subsidiary, such as royalty, fees, or interest, based on DTAA provisions.

Permanent Establishment (PE)

If the Indian entity has a significant presence or Permanent Establishment (PE) in the foreign country, the foreign government may impose additional taxes on the profits generated by the Indian entity’s operations in that country.

FEMA Compliance

All ODI transactions, including remittances, investments, and guarantees, must comply with the Foreign Exchange Management Act (FEMA). Indian entities need to ensure that all foreign exchange transactions are routed through an Authorized Dealer (AD) bank and reported accurately.

Indian entities must maintain separate books of accounts for their overseas operations and ensure that the financials of foreign subsidiaries are audited as per the laws of the host country. Indian entities must report all foreign income, tax liabilities, and overseas investments in their annual tax returns.

Non-compliance with FEMA or tax laws (e.g., failing to file Annual Performance Reports, incorrect reporting of foreign investments, etc.) can lead to penalties, restrictions on future ODI, and additional scrutiny from regulatory bodies like the RBI and the Income Tax Department.

Restrictions and considerations

Indian entities are prohibited from making investments in certain sectors, regardless of the country of investment. These sectors are restricted due to their potential for legal, moral, or security concerns. These include:

  • Investments in real estate business (buying and selling of land and buildings for profit) are strictly prohibited, except for development of townships, construction of residential/commercial premises, and roads or bridges.
  • Any investment in gambling or lottery activities abroad is prohibited for Indian entities.
  • Investment in the trade of development rights is not allowed.
  • Indian entities cannot invest in agricultural businesses or plantation activities overseas, except for leasing land for plantation if it is incidental to their core business.

In certain sectors, ODI may be subject to specific government approval, including:

  • Investments in the defense sector require clearance from Ministry of Defence and may face additional scrutiny.
  • Indian entities must be registered with the Reserve Bank of India (RBI) and meet specific financial criteria to make investments in financial services sectors abroad.
  • Investments in these sectors require compliance with specific regulations laid down by Indian authorities like IRDAI.

Prohibited countries

Indian entities are prohibited from making ODI in the following countries:

  • Countries identified by the Financial Action Task Force (FATF) as non-cooperative or high-risk in terms of anti-money laundering and combating the financing of terrorism (AML/CFT) efforts.
  • Investments are prohibited in North Korea and other countries with significant international sanctions.
  • Countries under sanctions by the UN, EU, or Indian Government (e.g., Iran, Syria, North Korea) are restricted. Indian entities are required to consult the RBI before pursuing any investment in these regions.
  • Countries with significant political unrest or where India has no diplomatic ties are often restricted due to legal and security risks.

Indian authorities require special attention for investments in countries that have unstable political environments and are flagged by international bodies for issues like corruption, weak legal systems, or human rights concerns.

Other crucial considerations

Indian entities must assess the existence of a DTAA between India and the destination country to ensure tax relief on profits, dividends, and capital gains. If a DTAA exists, it can minimize the risk of double taxation. In countries without a DTAA, taxes may be higher, and relief may not be available under Indian law, making investments less attractive.

Indian investors must also adhere to the specific foreign investment laws of the target country. Some countries may have sector-specific restrictions, investment caps, or local ownership rules that could impact the investment. Countries may require local partners or impose restrictions on foreign ownership, particularly in sectors like real estate, energy, and communications.

Political risk, including potential expropriation, nationalization, or regulatory changes, should be a critical factor when considering investments in politically unstable regions. Indian entities often obtain political risk insurance for ODI in high-risk countries to safeguard their investments.

In countries with exchange control regulations, repatriating profits back to India could be difficult. This can result in the accumulation of profits overseas without the ability to convert them back into Indian rupees. Indian entities should assess the host country’s currency risks, including the stability of the local currency, convertibility, and ease of transferring dividends or capital gains back to India.

Procedural requirements

India's Overseas Direct Investment (ODI) process involves multiple steps that entities must follow meticulously. Below is a simplified flowchart that outlines the key procedural requirements.

Step 1: Submission of Documents to Authorized Dealer (AD) Bank

Entities initiating ODI must submit required documents to the AD Bank. These typically include the Form ODI, board resolutions, financial statements, and any other documentation to support the proposed investment.

Step 2: Inspection by AD Bank

The AD Bank will review and verify the documentation to ensure that the proposed financial commitment qualifies under the automatic route, meaning that it does not require prior approval from the Reserve Bank of India (RBI).

Step 3: Generation of Unique Identification Number (UIN)

For the first transaction with a foreign entity, a Unique Identification Number (UIN) is generated. This UIN will serve as a reference for all subsequent transactions related to the same foreign entity.

Step 4: Outward Remittance Processing

Once the UIN is issued, the AD Bank can process the outward remittance, allowing the Indian entity to send funds abroad.

Step 5: Reporting for Subsequent Transactions

For future transactions with the same foreign entity, the Indian entity must report these activities using the same UIN. This ensures consistency and regulatory tracking of all related investments.

Step 6: Fulfillment of Compliance Obligations

Indian entities or individuals must fulfill ongoing obligations, including the submission of share certificates and filing of the Annual Performance Report (APR), to maintain compliance with the RBI.

Government initiatives and policies

India's government has made significant efforts to support and encourage Overseas Direct Investment (ODI) through various programs and policy frameworks.

One of the key government actions has been the removal of restrictions on Indian companies investing overseas. For instance, the government has lifted caps on raising funds through the pledge of shares, local assets, and foreign assets, making it easier for Indian entities to finance their international ventures. This has facilitated the participation of Indian businesses in overseas markets, offering access to advanced technologies, talent, and resources while enhancing their global brand image.

The government has also introduced several collaborative efforts with other countries to further bolster overseas investments. A notable initiative is the India-France Indo-Pacific Triangular Cooperation Fund, stemming from the "Horizon 2047" joint vision statement. This fund focuses on climate-centric innovations and startup support, aligning with the India-EU Connectivity Partnership, which is poised to drive sustainable investments across the Indo-Pacific region.

Additionally, India signed the Trade and Economic Partnership Agreement (TEPA) with the European Free Trade Association (EFTA) in 2024, enhancing trade relations with countries like Switzerland, Iceland, Norway, and Liechtenstein. This agreement offers Indian businesses a gateway to larger European markets, further encouraging ODI.

Policy reforms

India’s policy reforms have played a pivotal role in its transformation into a global investment hub. By liberalizing guidelines for ODI, the Reserve Bank of India (RBI) has simplified the process for Indian companies to make foreign investments. For example, the new ODI and Overseas Portfolio Investment (OPI) guidelines issued in August 2022 clarified the distinction between these two investment routes, allowing Indian investors to more easily determine their compliance requirements.

Furthermore, India’s ongoing efforts to negotiate free trade agreements (FTAs) with key global economies—such as the UK and the EU—have strengthened its international trade partnerships, making it an attractive destination for investors.

The India-UK Free Trade Agreement negotiations and India's increased cooperation with the EU have enhanced bilateral trade, expanding the scope for Indian companies to explore opportunities in Europe.

The government’s focus on international cooperation in key sectors has also expanded ODI opportunities. Partnerships with countries like Mauritius and Nepal have helped Indian firms enter new markets through infrastructure development projects, while agreements with countries like Turkmenistan and Spain promote mutual assistance in sectors such as disaster management and customs.

CHANGE SECTION

Events in India

How can we help?

Hi there!

Let me show you how I can be of assistance.

I can help you find and connect with an advisor, get guidance, search resources, or share feedback about this site.

Please select what you’d like to do:

Typing...
How can we help?

Hi there!

Our contact personel in Italy is:

profile Alberto Vettoretti

Please select what you’d like to do:

Typing...
Let us help you advance in Asia

Typing...
Speak to an expert!

Please share a few details about what guidance you seek. We can have a suitable advisor contact you within one business day.

Security Check
Back to top