As India’s economy grows, many Indian companies are looking to expand their business in other countries. These international investments are regulated by the Foreign Exchange Management Act (FEMA). One important part of FEMA is the Overseas Direct Investment (ODI) rules, which allow Indian individuals and businesses to invest in foreign companies. In this article, we’ll explain the main points of ODI and what Indian investors need to know before investing abroad.

As India’s economy gets stronger, many Indian companies want to grow their business in other countries. These types of foreign investments are controlled by a law called FEMA (Foreign Exchange Management Act). A key part of FEMA is called Overseas Direct Investment (ODI). ODI allows Indian people and companies to invest money in businesses outside India. In this article, we’ll explain the basic rules of ODI and what Indian investors should know before putting money into foreign companies.

One of the main rules under FEMA is that if something is not clearly allowed, it cannot be done in a roundabout way either. Trying to break the rules indirectly is still a violation and can lead to penalties.

i. For Individuals:

If you’re an Indian resident, you can send money abroad under the Liberalized Remittance Scheme (LRS). This scheme, set by the Reserve Bank of India (RBI), allows people to invest in foreign companies and for other approved purposes.

ii. For Businesses:

Indian companies, partnerships, and LLPs must follow the updated Overseas Investment (OI) Rules, which were revised in August 2022. These rules guide how Indian businesses can invest in foreign companies.

iii. Limit for Individuals:

Under the LRS, each person (including minors) can send up to USD 250,000 per financial year (April–March) for investments or other allowed purposes.

iv. Limit for Companies/Firms/LLPs:

Indian businesses can invest abroad up to 400% of their net worth (based on the latest audited balance sheet). If they want to send more than that, they must get approval from the RBI.

v. Ways to Invest Abroad (ODI Routes):

Indian investors can invest in foreign companies using either of the following:

• Automatic Route: No prior approval needed if conditions are met
• Approval Route: Requires RBI’s permission if the investment doesn’t meet automatic route conditions

vi. Where Overseas Investment Is Not Allowed

Indian investors are not allowed to invest in foreign businesses that:

• Deal in real estate trading (like buying or selling land or property rights)
• Are involved in gambling or betting
• Handle financial products linked to the Indian Rupee (unless approved by the RBI)

Note: Real estate activity means trading property, not construction. You can invest in infrastructure projects like building roads, bridges, houses, or commercial buildings.

vii. How Indians Can Invest in Foreign Companies

Indian individuals or businesses can invest in foreign companies in different ways, such as:

• Buying shares in a private (unlisted) foreign company
• Becoming a founding member by subscribing to the company’s legal papers (MoA)
• Buying more than 10% of shares in a listed foreign company
• Buying less than 10% of shares in a listed company if you have control
• Participating in public offers, rights issues, or receiving bonus shares
• Turning unpaid bills into shares (capitalizing dues)
• Getting shares as a gift or inheritance
• Receiving shares through employee schemes like ESOPs or sweat equity
• Investing during mergers, demergers, or company restructuring

viii. What Documents Are Needed for Overseas Investment

If you’re sending money abroad to invest, you must give certain documents to your bank (called the Authorized Dealer or AD bank). This applies whether you’re using the automatic or approval route.

Here’s what you need to know:

• Form FC (Sections A to E) is required. You must submit it when you either make a financial commitment or send money—whichever happens first.
  
  Example: If you sign up as a founding member of a foreign company (subscribe to the MoA), that counts as a financial commitment. You must submit Form FC before the company is incorporated to avoid penalties.
  
• Other documents include:
  
  • Form A2
  • Outward remittance forms
  • Any specific documents your bank may ask for

Since each bank may have different rules, it’s smart to check with your bank beforehand.

• Valuation Report:
  You’ll need a report from a Chartered Accountant (CA) or Merchant Banker if you invest in the foreign company again later. It’s not needed for the first-time investment.
• Deferred Payment Agreements:
  If you’re paying in parts (installments), you must have a proper agreement in place under the latest rules.

ix. What to Do After You Invest Overseas

Once you’ve invested abroad, there are some follow-up steps you must take:

• Proof of Investment:
  Submit share certificates or other proof to your AD bank within 180 days (6 months) from the date you sent the money.
• Annual Performance Report (APR):
  File this report every year for each Joint Venture (JV) or Wholly Owned Subsidiary (WOS) abroad by December 31. 

It’s safer to do it by November 30 so the bank has time to process it.

• Audit Requirement:
  The foreign company must have its accounts audited.
  • This can be done by a local CPA abroad or an Indian CA, depending on your bank’s preference.
    
• FLA Return:
  If your Indian company either received FDI or made ODI in the last financial year, you must file the Foreign Liabilities and Assets (FLA) return by July 15 on the RBI’s FLAIR portal.

x. Bringing Money Back to India (Repatriation)

If you’ve invested in a foreign company, you must bring certain types of money back to India. These include:

• Any payments or money owed to you by the foreign company
• Money received from selling your shares or exiting your investment
• Amounts received when the foreign company is shut down (liquidated)

When to bring it back:
You must bring this money to India within 90 days of:

• The due date for payment
• The date you sold or transferred your shares
• The date the liquidator distributed the company’s assets

xi. Other Important Rules

• If there’s any change in shareholding, sale of your investment, or transfer of shares in the foreign company, you must report it to your bank (AD bank) within the given time.
• In some situations, you may not need to submit an Annual Performance Report (APR). This depends on the type of investment and the RBI rules.
• If your Indian company gets control of another company abroad (called a Step Down Subsidiary or SDS), you must follow FEMA rules. This includes reporting the deal and submitting the required documents to the authorities.

FAQs

1. What is Overseas Direct Investment (ODI)?
Overseas Direct Investment (ODI) refers to investments made by Indian entities in foreign companies by acquiring ownership or control, including setting up subsidiaries, joint ventures, or opening branches abroad.

2. Who is eligible to make an ODI from India?
Indian companies, LLPs, and registered partnerships are eligible to invest abroad under the ODI route, provided they meet certain eligibility criteria defined by the RBI and FEMA regulations.

3. What are the common methods of making ODI?
ODI can be made by purchasing shares of a foreign company, subscribing to its capital, or extending loans and guarantees to overseas subsidiaries or joint ventures.

4. Is RBI approval required for all ODI transactions?
Not always. Many ODI transactions are allowed under the automatic route, but prior RBI approval is required in cases where the investment falls under restricted sectors or exceeds specified limits.

5. What are the reporting requirements for ODI?
Indian investors must file Form ODI and submit relevant supporting documents with their AD Bank and RBI, along with ongoing annual performance reports and compliance certifications.