Challenges in Overseas Direct Investment (ODI)

While ODI offers opportunities for persons resident in India to expand their market reach in bona fide businesses, access new resources, and achieve economies of scale, it also comes with significant challenges that can affect the success of such investments.

Key challenges and recommendations

● Identification of First Subscriber of Foreign Entity: First subscribers to be identified at the time of incorporation of the foreign entity, to avoid additional undertakings by CA/CPAs.

● Documentation to entail recent Forex Rate: Check with your AD bank at what rate the transaction will go through. Exchange rate volatility can affect the value of investments and returns when converted back to INR and AD banks usually insist on putting recent dates in all their documents.

● Certification Complexity: Obtaining various certifications from Chartered Accountants to verify investment limits, source of funds, and compliance with both Indian and foreign regulations adds to administrative burden. Bankers typically require Audited Financials not older than six (6) months or CA Certified provisional statements and interim reports in addition to Section E certification & host country compliances certification.

● Financial commitment Cap: Financial commitments of an Indian Entity must not exceed 400% of the net worth from the latest audited balance sheet (within 18 months) or USD 1 billion per year, whichever is lower. Resident individuals can invest in equity capital up to the Liberalized Remittance Scheme limit of USD 250,000 annually.

● Deferred Payment Agreement (DPA): Mandatory requirement if securities are not subscribed to immediately upon incorporation of Foreign Entity.

● Submission of Evidence of Investment: Share certificate to be submitted as a proof of investment within six months of the generation of UIN.

● Permissibility of ODI in specific cases: If there are outstanding reports or submissions such as  APR, Share Certificate, Foreign Liabilities & Assets (FLA), LSF payment for that Foreign Entity, ODI will not be permitted.

●  All ODIs under the same UIN: All future ODIs must be processed through the same AD Bank that issued the UIN. Transactions through a different AD Bank are only possible after transferring the UIN, which is a complex and cumbersome process.

Conclusion

Foreign Exchange Management (Overseas Investment) Directions, 2022 (dated August 22, 2022) offers Indian companies significant opportunities for growth and expansion. However, the process is complex and requires careful navigation of legal, regulatory, and financial challenges.

Success in overseas investment requires careful planning and a good grasp of both Indian and international regulations. Overall, the ODI process requires meticulous planning, adherence to regulatory requirements, and coordination between various stakeholders.

Therefore, Indian businesses looking to venture abroad must engage with legal and financial experts who can guide them through these challenges, ensuring compliance with all relevant regulations and maximizing the potential return on their investments. With the right strategy, businesses can seize global opportunities, minimize risks, and expand their international footprint.

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Priya Kapasi Shah

Associate Partner | Tax & Regulatory | [email protected]

Heads Treelife’s Financial Advisory practice, specializing in investment structuring, cross-border transactions, and tax and regulatory advisory. Also leads on AIF setups and advisory services for GIFT IFSC.

Rohit Gandhi

Senior Associate | Tax & Regulatory | [email protected]

Specializes in financial due diligence, valuations, business structuring, and income tax advisory. Contributes to the Financial Advisory team by helping startups and businesses make informed strategic decisions.