Venturing Abroad
Expanding beyond India’s borders is a critical step in a business’s growth strategy. When setting up operations overseas, it is essential to comply with both the legal requirements of the target country and the relevant Indian laws.
Overseas Direct Investment (ODI) Provisions
Indian companies can invest abroad through ODI by either contributing capital or subscribing to the foreign entity’s Memorandum of Association, indicating a long-term commitment. This can be done via a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS).
Joint Ventures and Wholly Owned Subsidiaries
Joint Venture (JV): A foreign entity formed in accordance with the host country’s laws with investment from an Indian entity.
Wholly Owned Subsidiary (WOS): An entity where the entire capital is owned by an Indian enterprise.
Methods for Establishing a Company Abroad
Two primary methods for setting up a business outside India are the Liberalized Remittance Scheme (LRS) and Overseas Direct Investments (ODI). which are particularly relevant for expanding business internationally.
Liberalized Remittance Scheme (LRS)
Under LRS, a resident individual can remit up to USD 250,000 per financial year for permitted capital or current account transactions, or both. These transactions include acquiring shares, debt instruments, or property abroad without prior Reserve Bank approval. Since August 5, 2013, LRS permits setting up JVs or WOS abroad for legitimate business activities within the USD 250,000 limit, subject to FEMA Notification No. 263.
Key Conditions of FEMA Notification 263:
- Prohibited Investments: Direct investments in real estate, banking, or financial services abroad are prohibited.
- Bonafide Business: The JV or WOS must engage in legitimate business activities.
- Non-Cooperative Territories: Investments in countries identified by the Financial Action Task Force (FATF) as non-cooperative are prohibited.
- Eligibility: The resident individual must not be on the Reserve Bank’s caution list or a defaulter list and must not be under investigation.
- Investment Ceiling: The investment must adhere to the overall ceiling prescribed under LRS.
- Operating Entity Only: The JV or WOS should be an operating entity, with no step-down subsidiaries allowed.
Recently, the RBI has allowed the purchase of immovable property abroad under LRS, enabling businesses to set up offices within the USD 250,000 annual limit.
Overseas Direct Investment (ODI)
Residents can set up businesses abroad either by subscribing to the capital of a new company or purchasing shares of an existing company. ODI can be made through the Automatic Route or the Approval Route.
Automatic Route for ODI
No prior Reserve Bank approval is needed for investments in JVs/WOS abroad under the Automatic Route. Indian entities must approach an Authorized Dealer Category I bank with Form ODI and the necessary documents to remit funds. However, investments in the financial services sector require prior approval from relevant regulatory authorities.
Criteria for Automatic Route Investments:
- Investment Limit: Up to the net worth limit (as per the last audited balance sheet) for any legitimate activity.
- Eligibility: The Indian entity must not be on caution or defaulter lists and should route all transactions through a single authorized dealer branch.
- Net Worth Limit: Investments are capped at 100% of the net worth of the Indian entity.
Procedure:
- Documentation: Fill Form ODI, provide a certified Board Resolution, Statutory Auditors certificate, and Valuation report (for acquisitions).
- Authorized Dealer: Approach the designated Authorized Dealer for remittances.
Approval Route for ODI:
Approval Route for ODI:
Proposals not covered under the Automatic Route require prior Reserve Bank approval via Form ODI submitted through Authorized Dealer Category I banks. This includes:
- Energy and Natural Resources Sector: Investments exceeding the prescribed net worth limit.
- Oil Sector Investments: Investments exceeding net worth by resident corporations.
- Special Entities: Proprietorship concerns, unregistered partnerships, registered trusts, and societies meeting eligibility criteria.
Key Considerations:
Requests under the Approval Route are evaluated based on the JV/WOS’s viability, potential contributions to external trade, financial position, business track record, and the Indian party’s expertise in related activities.
Conclusion
Indian enterprises can establish JVs or WOS abroad under the Automatic Route or Approval Route, ensuring compliance with all regulatory requirements to foster international business growth.