ODI COMPLIANCE RULE

What is ODI

ODI refers to the investment made in the overseas entities by way of contribution to their capital or subscription to the MoA of a foreign entity OR buy way of purchase of existing shares of foreign entity either by market purchase or private placement or through stock exchange, but dose note include portfolio investment.

PROHIBITION ON DIRECT INVESTMENT OUTSIDE INDIA:

Real Estate Sector

Banking Sector

Entities Allowed to make ODI:

1. Company Incorporate in india
2. A body created under the act of Parliament
3. Partnership firm registered under the Indian partnership act, 1932
4. Limited liability Partnership
5. Registered Trust/ Society

Governed through ODI Regulations.

What is JV and WOS?

Ans. JV and WOS means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment;

A foreign entity is termed as JV of the Indian party when there are other foreign promoters holding the stake along with the Indian party. In case of WOS entire capital is held by the one or more Indian party.

For ODI under Automatic route:

1. Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments in a JV/WOS abroad. Indian Parties / Resident Individuals are required to follow below mentioned?procedure for ODI in WOS/JV:

• Filling form ODI Part I and getting it certified from Statutory Auditor. It is important to note that certification from Statutory Auditor is not required in case of RI.
• It is pertinent to note here that Valuation Report of JV/WOS is not required in case of ODI in new JV/WOS. However, AD Bank may ask for Valuation Report of subsequent investment or in case of investment in existing foreign entity.
• Submission of Form A2 of respective AD Bank along with above mentioned form ODI Part I;
• Part I contains details of the JV/WOS, Indian Parties/ Resident Individuals and the remittance/ other financial commitment of the overseas entity and shall be submitted:
• at the time of initial remittance.
• for reporting the remittance for supplementary investment and any other forms of financial commitment.

Subsequent remittances (or financial commitment) under the automatic route and remittances (or financial commitment) under the approval route should be made, only after receipt of auto generated e-mail from RBI confirming the UIN.

For valuation of shares, it is pertinent to note that in case of partial of full investment in existing foreign company where investment is more than $ 5 million or case of investment by way of swap of shares, valuation is to be done by Category I Merchant Banker registered with SEBI or by an Investment Banker / Merchant Banker registered with the appropriate of host country and in all other cases, by a Chartered Accountant or Certified Public Accountant.

2. For ODI under Approval route:

The applicant should approach their designated Authorized Dealer (AD) with the proposal which shall be submitted to Reserve Bank after due scrutiny and with the specific recommendations of the designated AD bank along with supporting documents (as mentioned below) to the following address:

The Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Overseas Investment Division, Amar Building, 5th Floor, Sir P. M. Road, Fort, Mumbai 400001

For approval by Reserve Bank, following documents need to be submitted along with Section D and Section E of Form ODI – Part I by the designated Authorized Dealer:

a) A letter from the designated AD of the IP in a sealed cover mentioning the following details:

• Transaction number generated by the OID application.
• Brief details of the Indian entity.
• Brief details of the overseas entity.
• Background of the proposal, if any.
• Brief details of the transaction.
• Reason/s for seeking approval mentioning the extant FEMA provisions.
• Observations of the designated AD bank with respect to the following:
• Prima facie viability of the JV/ WOS outside India;
• Contribution to external trade and other benefits which will accrue to India through such investment;
• Financial position and business track record of the IP and the foreign entity;
• Expertise and experience of the IP in the same or related line of activity of the JV/ WOS outside India.
• Recommendations of the designated AD bank.

b) A letter from the IP addressed to the designated AD bank.

c) Board resolution for the proposed transaction/s.

d) Diagrammatic representation of the organizational structure indicating all the subsidiaries of the IP horizontally and vertically with their stake (direct & indirect) and status (whether operating company or SPV).

e) Incorporation certificate and the valuation certificate for the overseas entity (if applicable).

f) Other relevant documents properly numbered, indexed and flagged.

COMPLIANCES

At the time of Investment:?

• Any Indian Party which intends to make an ODI shall approach a designated?AD- l for making the remittance/investment along with duly filled form ODI Part I along with the supporting documents like Board Resolution, Statutory Auditor Certificate, etc. Once the AD Bank scrutinizes and approves the documents as per the regulatory guidelines, the remittance/investment will be processed.?

Post Investment compliances:

• Indian Parties are required to file?two forms?with RBI every year for ODI:
• Foreign Assets and Liabilities (FLA)?on or before July 15 for ODI of preceding financial year;
• Annual Performance Report (APR)-??submit to the Reserve Bank through the designated Authorized Dealer, every year, an Annual Performance Report in Part II of Form ODI in respect of each JV or WOS outside India set up or acquired by the Indian party on or before 31st?December for ODI of preceding financial year through AD Bank.?

A copy of audited financial statements of the overseas JV/WOS (on a standalone basis) is to be filed along with the APR.

Whereas Resident Individuals are required to file APR every year as per point 2 above. They are not required to file FLA.

• Indian Parties are also required to submit Share Certificates?of its investment with designated AD Bank within 6 months of investment.
• Indian Party is obligated to repatriate all dues?receivable from the foreign entity, such as dividend, technical fees, royalty, etc.,?within 60 days of its falling due, or similar further period as the Reserve Bank may permit.
• Indian Party has to?report the changes?made concerning JV/WOS like diversification of its activities/setting up of step down subsidiaries/change in the shareholding pattern?within 30 days of the approval of the decisions by the competent authority concerned of such JV/WOS in terms of the local laws of the host country.
• The sale proceeds in case of disinvestment shall be repatriated to India within 90 days from the date of sale of the shares/securities and reporting needs to be done to Reserve Bank through designated AD Bank within 120 days from the date of disinvestment

Is it required to file APR in a host country where the law does not compulsorily require book auditing of accounts of JV/WOS?

The APR can be submitted by the Indian Party based on the un-audited annual accounts of the JV/WOS provided**:

(i) The Statutory Auditors of the Indian Party?certify that law of the host country does not mandatorily require auditing?of the books of accounts of JV/WOS and the figures in the APR are as per the un-audited accounts of the overseas JV/WOS; and

(ii)?That the un-audited annual accounts of the JV/WOS have been adopted and ratified by the Board of the Indian Party.

The above exemption from filing the APR based on the unaudited balance sheet will not be available in respect of JV/WOS in a country/jurisdiction which is either under the observation of the Financial Action Task Force (FATF) or in respect of which enhanced due diligence is recommended by FATF or any other country/jurisdiction as prescribed by Reserve Bank of India.

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