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  • Writer's pictureGalactic Advisors

Overseas Direct Investment - The Compliance Conundrum

Quite often, we have seen Indian entities and individuals unintentionally violating the provisions of ODI regulations, and thereafter face show-causes from either the Enforcement Directorate (ED), Directorate of Revenue Intelligence (DRI), Reserve Bank of India (RBI), Banks or other authorities. A minor slip in the ODI compliances may land entrepreneurs into very serious penal consequences.

Before we start, you probably want to read on what ODI is, what are the restrictions and sources of funding. We covered all this and more in our article here.

Here's what's covered in this article:

Quick recap (for those of you who ignored the other article):

What is overseas direct investment (ODI)?

Investments made by Indian Entities (Companies or LLPs) or Resident Indian Individuals by way of:

  • Contribution to the capital of a newly formed foreign entity

  • Subscription to the Memorandum of Association of a foreign entity

  • By way of investment in the existing shares of a foreign entity either by market purchase or private placement or through stock exchange

This however, excludes include portfolio investments*

(*portfolio investment refers to passive investment in overseas securities made with the expectation of earning a return where the investor is not interested or a participant in the management and functions of the business of the overseas entity).

Few important definitions to understand:

Joint Venture (JV) Investment in an overseas entity is made jointly by one or more individuals or one or more entities or any combination of individuals and entities where at least one of the investor is resident in India

Wholly Owned Subsidiary (WOS)

When investment made by a single entity or individual is an entity overseas is referred to as the overseas Wholly owned subsidiary (WOS).

What are the compliances and reporting requirements?

The compliances and reporting requirements are applicable to both Indian Entities or Individuals making overseas direct investments outside India in a JV/ WOS:

A. Form ODI

Timeline for reporting:

One time requirement- at the time of remittance of funds (whether initial or subsequent)

Compliance Procedures and Reporting Requirements:

  • Submission of application in the Form ODI (part I) for remittance of funds overseas in the entity outside India along with the necessary annexures such as valuation Certificate, CA Certificate, copy of board resolution, Form A2 and other declarations as given under the rules with the bank.

  • After receiving the aforesaid documents, AD Bank shall verify all the Documents and if found in order, forwards the same to RBI.

  • RBI then allots an Unique Identification Number (UIN) for that particular JV/ WOS.

  • UIN No. is allotted by RBI to Indian Party in respect of each JV/ WOS outside India.

B. Submission of share certificates with the Reserve bank of India

Timeline for reporting:

One time requirement- within 6 months from the date of investment.

C. Filing of Form FLA (Foreign Liabilities and Assets)

Timeline for reporting:

Annually on or before 15 July

D. Filing of Annual Performance Report

Timeline for reporting:

Annually on or before 31 December

E. Reporting of any changes post investment in the overseas entity

Timeline for reporting:

Event based- within 30 days of the change being effected

F. Remittance of any source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments

Timeline for reporting:

within 60 days of its falling due

G. Disinvestments from the shares or repayment of loan given to the overseas JV/ WOS

Timeline for reporting:

within 30 days of disinvestment and sale proceeds of shares / securities shall be repatriated to India within 90 days from the date of sale.

Consequences of non-compliance

The regulators continue to have controls over ODI through the above-mentioned compliance reporting requirements. There are also stringent rules to regulate other important aspects such as write offs, or transfer of shares at a loss etc.