What is Overseas Direct Investment limit under automatic route?


Posted May 21, 2021 by Neail1

Increasing the interconnection of the world, increasing globalization and liberal policies of the government are creating opportunities for businesses to operate at a global level.

 
INTRODUCTION- ODI By Indian Company- Increasing the interconnection of the world, increasing globalization and liberal policies of the government are creating opportunities for businesses to operate at a global level. The increasing amount of cross country capital flows in the form of investment is because of the high degree of economic and financial fusion. Two of the most important vehicles of global amalgamation are foreign direct investments and trade. The traditional form of integration is trading, whereas the significant mode of global integration is foreign direct investment. The primary source of FDI flows are developed countries. However, developing countries like China and India are also adding value to the economy in recent years. Developing countries like Brazil, China, India, and Russia have not only been the important host countries for overseas direct investment but for outward FDI, they have been important source countries. The significance of FDI is many such as new employment opportunities, skilled labor and improved skills of the manager. The growth of the country is usually reflected by overseas investment, whether it is in the form of inflow or outflow or in any direction.
CONCEPT OF OVERSEAS INVESTMENT
Investment which includes capital flows from one country to another, and where the power of ownership of a firm which is based in a foreign country is taken over by a business which is based in the domestic country this is called overseas investment. There are three types of overseas investment:
• Overseas Direct Investment– It is a direct investment by a business entity of one country into an industry which is engaged in the production of goods and services. Investment is made directly into the shares of the company or equity of the company which sums up to more than 10% of the company’s capital.
• Overseas Portfolio Investment– It includes the government’s and the corporate’s bond the shares convertible securities held by foreign companies and individuals. The purpose of overseas portfolio investment is to acquire an ownership stake in an international company.
• Overseas Institutional Investment– These investments basically include investments by foreign companies in the real estate property and other investment assets. The primary purpose of this kind of investment is to get and derive benefits from the securities and to receive high returns with quick entry and exit and not to control interest.
OVERSEAS DIRECT INVESTMENT
The whole concept of overseas direct investment revolves around the investor, which is the home country and the recipient which is the host country. The investor provides investment, technical know-how, managerial skills to the host country, and from the host country in return it receives profits royalties and fees. The main purpose of ODI is to get long term benefits. It is a kind of direct investment which is made in the shares of equity of the company. That share should be more than 10% of the company’s capital. Overseas direct investment’s main significance is that it provides employment, skilled labour and advanced technology. ODI By Indian Company
TYPES OF ODI
As there is a rapid increase in the economic growth rate of several countries so the definition of ODI has also expanded and the main basis of classifying overseas direct investment is the direction and the pattern. ODI can be classified as follows:
• The basis of categorizing FDI is its direction in its process through automatic and government route. The types of FDI are: –
• Inward and Outward FDI, Horizontal investment, Automatic route and Government route, Greenfield investment, Vertical route and Conglomerate investment.
REASON FOR OVERSEAS DIRECT INVESTMENT
• To increase the number of sales and profits– Directly investing in foreign countries will help to increase number of sales and hence profits which is the main motive behind every company. One of the essential reasons for investing and foreign countries is that the foreign markets of a much more opportunities for businesses to expand as compared to the domestic market.
• To compete with fast-growing markets to cut down costs– Foreign countries provide various resources like raw material, human resources etc. at lower prices. So CEO multinational companies invest in foreign countries with this objective to cut down the cost of production.
• To learn technological and managerial know-how– The foreign countries provide good administrative and technical knowledge so MNC invests in a foreign market to receive such kind of benefits.
PROHIBITED ACTIVITIES FOR OVERSEAS DIRECT INVESTMENTS
Real estate and banking business are the factors that are prohibited for overseas direct investment where real estate business means for buying and selling of real estate or trading in transferable development rights TDRS, but it does not include the development of townships construction of residential premises roads or bridges.
TRANSACTIONS OF OVERSEAS DIRECT INVESTMENT THAT REQUIRE THE APPROVAL OF RESERVE BANK OF INDIA RBI.
• Overseas direct investment which is invested in the energy and natural resources factor which exceeds the provided limit of the net worth of Indian companies as on the last date of the audited balance sheet.
• Overseas investment by resident corporates in unincorporated entities in all factor which exceeds the prescribed limit of the net worth as on the last date of audited balance sheets.
• Overseas investment band resistor partnership firms and proprietorship concern it satisfies certain eligibility criteria
• Overseas investments by registered societies/trusts who are engaged in the hospital/manufacturing /educational sector.
• Indian party that gives a corporate guarantee to the second and subsequent level of a step-down subsidiary.
• Indian party giving all forms of guarantee to its first and subsequent level of SDS.
ELIGIBILITY TO MAKE OVERSEAS DIRECT INVESTMENT UNDER AUTOMATIC ROUTE
• “An Indian party that is a company which is incorporated in India or a partnership firm registered under Indian partnership act 1932 for limited liability partnership incorporated under LLP act 2008 any other organization in India as may be notified by the Reserve Bank is eligible to make an overseas direct investment under the automatic route.”
• If more than such companies or body or entity invests in the foreign Joint Venture or Wholly Owned Subsidiaries, this combination will also be called as an Indian party. ODI By Indian Company
Limitations And Requirements For Overseas Direct Investment That Can Be Made Under Automatic Route
• The Indian party/company incorporated in India can invest only up to the provided limit of its net worth in the joint venture or wholly-owned subsidiaries for any activity permitted as per the laws of the host country.
• The Indian party must not be on the Reserve Bank list of defaulters circulated by the credit information bureau of India limited.
• Indian party should route all the transactions to be designated by the Indian party that is related to the investment in Joint Venture or Wholly Owned Subsidiary through one branch only of an authorized dealer.
Procedure to be followed by an Indian party or company in order to make overseas direct investment in a joint venture of the wholly-owned subsidiary under automatic route
An ODI form is required to be filled up by the Indian party or company intending to make an overseas direct investment under the automatic route, and it must be duly supported by the documents that is listed that is the certified copy of board resolution the valuation report as per the valuation norms and the statutory auditors certificate. After all, this Indian party must approach and authorized dealer for making an overseas direct investment.
FROM WHERE DOES ONE FIND THE ODI FORM
An ODI form is available on reporting under foreign exchange management act as an Annexto the master direction title master direction.
As per the norms laid down ineligible Indian company is free to acquire other state that is a joint venture for the entire state that is a wholly-owned subsidiary in an already existing entity. This is included in the definition of ODI.
The Indian party or the company is also allowed to issue a performance guarantee, and 50% of the amount of that guarantee will be reckoned for the aim of computing financial commitment to the joint venture of wholly-owned subsidiaries. All these should be within limits provided by the Reserve Bank of India from time to time. In any case, where the invocation of a performance guarantee is not complying with the limit of the prescribed financial commitment, the Indian company must seek approval of the Reserve Bank of India before dispatching funds from India.
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DUTIES AND OBLIGATIONS OF INDIAN PARTY WHICH HAS MADE DIRECT INVESTMENT OUTSIDE INDIA
The Indian party or company needs to comply with the following duties: –
• to receive the share certificate or any other document of investments in the foreign JV/WOS and to submit the same to the designated AD within 6 months.
• to return to India all the receivable dues from foreign JV/WOS like royalty, technical fees etc.
• to submit an annual performance report in part III of form ODI to the Reserve Bank of India through the designated Authorised Dealer every year.
CONCLUSION
Therefore it can be summed up by saying that India must use a large domestic market, managerial know-how, technical professionals to attract more of foreign direct investments and to be able to build capital for the economy by enabling for overseas direct investment. As more of the Indian economy is looking for good competition in the international market, the investors of the foreign market also see the potential to attract investment from India.

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Issued By LetsComply
Country India
Categories Finance , Law , Legal
Tags odi , overseas direct investment , recovery services
Last Updated May 21, 2021