FAQs on Overseas Direct Investment

Q.1 What is direct investment outside India?

A. Direct investment outside India means investment by way of contribution to the
capital or subscription to the Memorandum of Association of a foreign entity but
does not include portfolio investment.
Q.2 Who is eligible to make overseas investment?
A. Resident corporate entities and partnership firms registered under the Indian
Partnership Act, 1!" are eligible to ma#e investment abroad in $oint %entures&
'holly (wned )ubsidiaries. Resident individuals may also invest abroad as
detailed in *.!.
Q.3 Can an individual invest in an overseas entity?
A. Resident individuals are permitted to ma#e overseas portfolio investments without
any limit in listed overseas companies that have at least 1+, share in an Indian
company listed in a recogni-ed stoc# e.change in India as on 1st $anuary of the
year of investment.
Q.4 Where can one get the guidelines pertaining to overseas investment?
A. /hese guidelines have been notified by Reserve 0an# of India in its 1otification
23MA 1o.1 dated !
rd
May "+++ as amended from time to time which can be
accessed at the Reserve 0an#4s website
Q.5 Where can one get clarifications pertaining to the
guidelines on overseas investment?
A. Any clarification in respect of specific cases could be
obtained from the Reserve Banks Central office at the
following address:
Overseas nvestment !ivision"
#$change Control !epartment"
Central office"
Reserve Bank of ndia"
%umbai &''''(.
or
e)mail: oid*rbi.org.in
Q.6 Can overseas investment be made in any activity?
A. An ndian company can make overseas investment in any
activity +e$cept those that are specifically prohibited, in
which it has e$perience and e$pertise. -owever" for
undertaking activities in the financial sector" certain
additional conditions specified in Regulation . may be
adhered to +/lease refer to 0.1,.
Q.7 What are the prohibited activities for overseas
investment?
A. Real estate sector and Banking are the prohibited sectors
for overseas investment. -owever" ndian banks
operating in ndia can set up 2345O6 abroad provided
they obtain clearance under the Banking Regulation Act
(1&1.
Q.8. What exactly is covered under the term real estate
business?
A. Real estate business means buying and selling of real
estate or trading in transferable development rights
+7!Rs, but does not include development of township"
construction of residential4commercial premises" roads
and bridges.
Q. Can an !ndian company ma"e investment in a
#$%W&' abroad( )hich )ill be engaged in the financial
services sector?
A. Only an ndian Company engaged in financial sector
activities can make investment in the financial services
sector provided it fulfills the following norms besides
complying with the parameters indicated at Answers to
the 0uestion 8os. (& and 9:.
i. has earned net profit during the preceding three
financial years from the financial services activities;
ii. is registered with the appropriate regulatory
authority in ndia for conducting financial services
activities;
iii. has a minimum net worth of Rs.(< crores as on the
date of the last audited balance sheet; and
iv. has fulfilled the prudential norms relating to capital
ade=uacy as prescribed by the concerned regulatory
authority in ndia.
Q.*+ What are the permissible sources for funding
overseas investment?
A. >unding for overseas investment could be made by
one or more of the following sources:
(. the balances held in #$change #arners >oreign
Currency account of the ndian party maintained
with an authorised dealer"
9. proceeds of A!R4?!R issues"
@. market purchases of foreign e$change"
&. share swap +refers to the ac=uisition of the shares
of an overseas entity by way of e$change of the
shares of the ndian entity,.
<. Capitalisation of e$ports" royalties" etc.
Q ** Can a company capitali,e the proceeds of the
exports of plant - machinery to its overseas #$%W&'?
A. Aes" capitaliBation of e$port proceeds is permitted subCect
to compliance of certain guidelines. i.e. the e$ports have
not remained outstanding beyond the stipulated period of
realisation etc.
Q.*. Which are the schemes under )hich an !ndian
Company can set up a #oint $enture or Wholly &)ned
'ubsidiary abroad?
A. Broadly there are two schemes under which one can set
up a 2345O6 abroad" namely automatic route and normal
route.
Q.*/ What is the automatic route?
A. Dnder the automatic route" a company does not re=uire
any prior approval from the regulatory authority for
setting up a 2345O6 abroad.
Q.*0 What are the criteria for investment to be made
under the automatic route?
A. 7he criteria for investment under the automatic route are
as under:
i. 7he total financial commitment of the ndian party
in 2oint 3entures45holly Owned 6ubsidiaries in any
country other than 8epal" Bhutan and /akistan is up
to D6E ('' million or its e=uivalent in any one
financial year or (''F of the net worth whichever is
lower" and the investment is in a lawful activity
permitted by a host country. 7he financial
commitment in respect of 2oint 3entures45holly
Owned 6ubsidiaries in %yanmar and 6AARC
countries +other than 8epal" Bhutan and /akistan, is
up to D6E (<' million or its e=uivalent in any one
financial year. +/lease also see answer to 0uestion
8o. 9',.
ii. 7he ndian party is not on the Reserve Bank
caution4defaulters list or under investigation by the
#nforcement !irectorate
iii. 7he ndian party routes all the transactions relating
to the investment in a 2oint 3enture45holly Owned
6ubsidiary through only one branch of an authorised
dealer to be designated by it.
iv. n respect of investments in non)core activities
+refer 0ues.(<, the investing company has a proven
track record.
Q.*5 What is the limit for investment in 1epal or 2hutan
under the automatic route?
A. n respect of direct investment in 8epal or Bhutan" the
total financial commitment is permitted up to ndian
Rupees .'' crores in any one financial year.
Q.*6 What is core activity?
A. Core activity means activities carried by an ndian party"
which constitutes at least <'F of its average turnover in
the previous accounting year.
Q.*7 What is financial commitment?
A. >inancial commitment means the amount of direct
investment outside ndia by way of contribution to e=uity
and loans and <'F of the amount of guarantee issued by
an ndian party to or on behalf of its overseas 2345O6.
Q.*8 Can one extend loan or guarantee to an overseas
entity )ithout any e3uity participation in that entity?
A. 8o. Goan and guarantee could be e$tended to an
overseas entity only if there is already an e=uity
participation by the ndian party in such entity.
Q.* !s there any relaxation for ma"ing investment out
of one4s o)n foreign exchange resources?
A. Aes" the limit of D6E ('' million will not be applicable in
case of investments made out of A!R4?!R proceeds and
investments could be made up to the total amount raised
out of the A!R4?!R proceeds.
Q..+ Can one ma"e investment beyond the stipulated
limit under the automatic route?
A. Aes" a company can make investment beyond the
stipulated limit after e$hausting the available limit by
obtaining a specific permission from Reserve Bank under
a block allocation
Q..* 5re there any limit on the 3uantum of mar"et
purchases for funding overseas investments under the
automatic route?
A. Aes" market purchases together with capitalisation of
e$ports or other entitlements is restricted up to (''F of
the net worth of the investing company for investment
proposed to be made under the automatic route.
Q.22 What is the concept o net !orth?
A. 1et worth means paid5up capital and free5reserves of the Indian
company.
Q.23 What is the procedure to be ollo!ed by a company intending to
make investment in a "#$W%& under the automatic route?
A. /he company intending to ma#e investment under automatic route is
re6uired to fill in the form (DA supported by documents listed therein,
i.e., 0oard Resolution, )tatutory Auditor4s certificate, %aluation report
7in case of ac6uisition of an e.isting company8 and approach an
Authorised Dealer for ma#ing the investment.
Q.24 Whether any prior registration !ith the 'eserve (ank is necessary
or investments under the automatic route?
A. 1o, once the report of remittance in form (DR is received by the
Reserve 0an# through the designated Authorised Dealer, an
identification number for that particular investment is issued for the
purpose of future reference. )ubse6uent investment in the same pro9ect
will be permitted to be made only after allotment of the identification
number.
Q.2) Is there any prohibition under the automatic route?
A. :es. ;ompanies, which are under the investigation by the 3nforcement
Directorate or are in the Reserve 0an#4s caution&defaulters list, are not
eligible to ma#e investment under the automatic route.
Q 2* What is the +ormal route?
A. Proposals not covered by the conditions under the automatic route
re6uire the prior clearance of the regulatory authority for which a
specific application in form (DI is re6uired to be made to the Reserve
0an# of India.
Q.2, What is the procedure to be ollo!ed or investment proposed to be
made under +ormal 'oute?
A. An application for direct investment in a $%&'() may be made in form
(DI to<
/he ;hief =eneral Manager,
(verseas Investment Division,
3.change ;ontrol Department,
Reserve 0an# of India, ;entral (ffice,
Amar 0uilding, )ir P.M.Road,
Mumbai >++ ++1.
Q.2- What are the parameters or considering proposals under the normal
route?
A. Re6uests under the normal route are considered by ta#ing into account
the prima facie viability of the proposal, business trac# record of the
promoters, e.perience and e.pertise of the promoters, benefits to the
country, etc.
Q.2. Who is the approving authority under the normal route?
A. Proposals under the normal route are approved by the )pecial
;ommittee on Indian Direct Investment Abroad, which consists of the
representatives of the Ministry of 2inance, Ministry of 3.ternal Affairs
and Ministry of ;ommerce of the =overnment of India and the Reserve
0an# of India.
Q.3/ Can one make investment in overseas concern by !ay o share s!ap?
A. :es, re6uests for direct investment outside India in a $%&'() by way
of share swap arrangement are considered under the 1ormal Route.
Q.31 Is there any speciic scheme or investment by !ay o share s!ap?
A. :es, there is a specific scheme, which permits ac6uisition by an eligible
entity of shares of a foreign company engaged in a similar activity in
e.change of issue of its own ADR&=DRs to the latter on an automatic
basis.
Q.32 What are the norms or investment under the 01'$21' stock s!ap
scheme?
A. /he norms for investment under the ADR&=DR stoc# swap scheme are
as follows<
a. the Indian party has already made an ADR and&or =DR issue
and such ADRs&=DRs are currently listed on any stoc#
e.change outside India?
b. such investment by the Indian party does not e.ceed the higher
of the following amounts, namely< 5
i. amount e6uivalent of @)A 1++ mn. or
ii. amount e6uivalent to 1+ times the e.port earnings of the
Indian party during the preceding financial year as
reflected in its audited balance sheet, inclusive of all
investments made under the automatic route in the same
financial year.
c. the ADR and&or =DR issue for the purpose of ac6uisition is
bac#ed by underlying fresh e6uity shares issued by the Indian
party?
d. the total holding in the Indian party by persons resident outside
India in the e.panded capital base, after the new ADR and&or
=DR issue, does not e.ceed the sectoral cap prescribed under
the relevant regulations for such investment?
e. the valuation of the shares of the foreign company is made< 5
i. as per the recommendations of the Investment 0an#er if
the shares are not listed on any stoc# e.change? or
ii. based on the current mar#et capitalisation of the foreign
company arrived at on the basis of monthly average price
on any stoc# e.change abroad for the three months
preceding the month in which the ac6uisition is
committed and over and above, the premium, if any, as
recommended by the Investment 0an#er in its due
diligence report in other cases.
Q.33 What are the procedural re3uirements or investment under the
01'$21' stock s!ap scheme?
A. An applicant company satisfying the above norms may ma#e such
investment on an automatic basis and subse6uently report the same in
form (D= to the Reserve 0an#.
Q.34 Can one make investment beyond the amount stipulated under the
01'$21' stock s!ap scheme?
A. :es, such re6uests are considered by the )pecial ;ommittee on case5to5
case basis. Indian companies desirous of ma#ing such investment are
re6uired to submit an application in form (D0 to Reserve 0an# for the
purpose.
Q.3) What is the procedure to be ollo!ed or ac3uisition by !ay o share
s!ap arrangement or a company4 !hich does not conorm4 to the
01'$21' stock s!ap scheme?
A. /he company will have to ma#e an application to the Reserve 0an# of
India in form (DI along with necessary documents under the 1ormal
Route.
Q. 3* What are the schemes or overseas investment by partnership irms?
A. Partnership firms engaged in providing professional services, such as
chartered accountancy, legal practice and related services, information
technology and entertainment software related services and medical and
healthcare services are eligible for investment abroad on an automatic
basis by filing form (DA with the AD without prior approval of the
Reserve 0an# up to an amount of @)A 1 million. Partnership firms,
which do not conform to the above parameters, are re6uired to obtain
specific approval of the Reserve 0an# by filing an application in form
(DI 7to the e.tent applicable8.
Q.3, Is there any speciic criteria or overseas investment by a partnership
irm under the automatic route?
A. /he investing firm will have to be the member of the respective all5
India professional organisation & body and the investment amount
should not e.ceed @)A 1 million. or its e6uivalent in one financial year.
Q.3- What is the procedure to be ollo!ed by a partnership irm or
making investment under the automatic route?
A. A partnership firm which fulfills the conditions stipulated under the
automatic route may ma#e the investment without prior approval and
submit a report containing the following details through an authorised
dealer with in !+ days of ma#ing such investments B
i. 1ame and full address and registration of partnership.
ii. 2ull details of investment abroad.
iii. Date and amount of remittance&amount of capitalisation of
fees&other entitlements due.
iv. 1ame and address of the foreign concern together with its line of
activities.
v. Identification number 7if already allotted by the Reserve 0an#8
Q.3. What is the procedure to be ollo!ed by partnership irms4 !hich are
not eligible under the 0utomatic 'oute?
A. Partnership firms, which are not eligible under the Automatic Route, are
re6uired to ma#e an application in form (DI to the Reserve 0an# for
necessary approval.
Q.4/ Can the partners hold shares o the overseas concerns or and on
behal o the irm?
A. It will be in order for individual partners to hold shares for and on
behalf of the firm in overseas $%&'() provided the entire funding for
the investment is done by the firm and if the host country regulations or
operational re6uirements warrant such holding.
Q.41 0re there any restrictions or setting up o a second generation
company?
A. Indian parties which have ma9ority share holding in a foreign entity
abroad are re6uired to see# specific approval of Reserve 0an# of India
for setting up of a second generation company in case<
i. the foreign entity has been in operation for a period of less than
two years? or
ii. the Indian party has not repatriated the amount of dividends, fees
and royalties due to it from the foreign entity? or
iii. proceeds of e.ports to the foreign entity have not been realised
in accordance with the 2oreign 3.change Management 73.port
of =oods and )ervices8 Regulations, "+++? or
iv. additional capital contribution is re6uired from India.
Q.42 Whether shares o a "#$W%& abroad could be pledged or the
purpose o inancial assistance?
A. /he shares of a $%&'() can be pledged as a security for availing fund
based or non5fund based facility for the concerned entity or for the
$%&'() from an authorised dealer& public financial institution in India.
Q.43 What is the procedure to be ollo!ed or disinvestment o e5isting
holding in a "#$W%&?
A. Disinvestment of holding in a $%&'() abroad re6uires prior approval
of the Reserve 0an# of India for which the holder will have to submit
an application furnishing the reasons &9ustifications for such
disinvestment along with a ;hartered Accountant4s valuation certificate,
latest audited financial statements of the $%&'(), 0oard Resolution
approving the disinvestment and ;hartered Accountant4s certificate
regarding position of dues of the '() and total amount to be received
by parent company on disinvestment.
Q.44 What are the obligations o the Indian party4 !hich has made direct
investment outside India?
A. An Indian Party will have to comply with the following< 5
i. receive share certificates or any other documentary evidence of
investment in the foreign entity to the satisfaction of the Reserve
0an# within si. months, failing which an application for
e.tension of time citing reasons for non5receipt will have to be
made to the Reserve 0an#.
ii. repatriate to India, all dues receivable from the foreign entity,
li#e dividend, royalty, technical fees etc., within C+ days of its
falling due, or such further period as the Reserve 0an# may
permit.
iii. submit to the Reserve 0an# every year within C+ days from the
date of e.piry of the statutory period as prescribed by the
respective laws of the host country for finalisation of the audited
accounts of the $oint %enture&'holly (wned )ubsidiary outside
India an Annual Performance Report in form APR in respect of
each $oint %enture or 'holly (wned )ubsidiary outside India
set up or ac6uired by the Indian party. /his APR should
inevitably be accompanied by
a. ;opies of 2IR;s in support of inward remittances on
account of dividend, royalty, etc.
b. Audited 2inancial )tatements of the overseas venture.
c. ;A4s certificate in support of reali-ation of e.port
proceeds.
d. A note on the wor#ing of the $%&'() during the
previous year highlighting the ups and downs, reasons
for non5performance, etc. in monetary terms. In case the
promoter company is unable to submit APRs within the
stipulated time, an application on the due date should be
made to the Reserve 0an# of India see#ing e.tension,
giving reasons for the same.
Q.4) What are the penalties or non6submission o 07's?
A. Reserve 0an# ta#es a serious view on non5submission of such reports
and can ta#e such measures against the delin6uent company as it deems
fit including reference to 3nforcement Directorate.
Q.4* Can a resident individual in India ac3uire oreign securities !ithout
prior approval?
A. Resident individuals in India can ac6uire foreign securities without prior
approval in the following cases< 5
i. by way of gift from a person outside India? or
ii. issued by a company incorporated outside India under ;ashless
3mployees )toc# (ption )cheme which does not involve any
remittance from India? or
iii. by way of inheritance from a person whether resident in or
outside India? or
iv. purchase of foreign securities out of funds held in the Resident
2oreign ;urrency Account maintained in accordance with the
2oreign 3.change Management 72oreign ;urrency Account8
Regulations, "+++? or
v. bonus shares on the foreign securities already held by them? or
vi. Resident individuals are permitted to ma#e overseas investments
without any limit in listed overseas companies that have at least
1+, share in an Indian company listed in a recogni-ed stoc#
e.change in India as on 1st $anuary of the year of investment.
Q.4, 0re there any other provisions by !hich an individual can ac3uire
shares o a oreign company?
A. :es, a person resident in India, being an individual, who is an employee
or a director of Indian office or branch of a foreign company or of a
subsidiary in India of a foreign company or of an Indian company in
which foreign e6uity holding is not less than D1 per cent, may purchase
the e6uity shares offered by the said foreign company< 5
Provided that the shares are offered at a concessional price.
Q.4- Can one ac3uire shares o a oreign company in his capacity as
director?
A. :es, Reserve 0an# has given general permission to a person resident of
India to ac6uire foreign security to the e.tent of the minimum number
of 6ualification shares re6uired to be held for holding the post of
Director and this amount shall not e.ceed 1, of the paid5up capital of
the company sub9ect to a limit of @)D "+,+++ in a calendar year.
Q.4. Can a resident individual subscribe to the rights issue o shares held
by him?
A. :es, Reserve 0an# on an application may permit a person resident in
India to ac6uire foreign securities by way of rights shares issued by a
company incorporated outside India up to an amount not e.ceeding @)A
"+,+++ in a bloc# of five calendar years in case the e.isting shares were
held in accordance with the provisions of the law.
Q.)/ 0re there any rela5ations or individual employees$directors o an
Indian company engaged in the ield o sot!are or ac3uisition o shares
in their "#$W%& abroad?
A. :es, Reserve 0an# on an application will permit the individual
employees&directors of an Indian promoter company engaged in the
field of software for ac6uisition of shares of a $%&'() abroad provided
5
i. the consideration for purchase does not e.ceed @)A 1+,+++ or its
e6uivalent per employee in a bloc# of five calendar years,
ii. the shares so ac6uired do not e.ceed D, of the paid5up capital
of the $oint %enture or 'holly (wned )ubsidiary outside India,
and
iii. after allotment of such shares, the percentage of shares held by
the Indian promoter company, together with shares allotted to its
employees is not less than the percentage of shares held by the
Indian promoter company prior to such allotment.
2urther, Reserve 0an# may also on an application made to it by
an Indian company engaged in the field of software allow its
resident employees 7including wor#ing directors8 to purchase
foreign securities under the ADR&=DR lin#ed stoc# option
scheme provided the consideration for purchase does not e.ceed
@)A D+,+++ or its e6uivalent in a bloc# of five calendar years.
Q.)1 Whether mutual unds are permitted to ac3uire shares o overseas
companies?
A. Reserve 0an# has given general permission to mutual funds approved
by )30I to purchase foreign securities, sub9ect to such terms and
conditions as may be stipulated.