Introduction
The Industrial Policy of 1991 introduced the scheme of LPG, i.e. Liberalisation, Privatisation, and Globalisation. Since then, India has grown manifold in terms of overseas Investment. Furthermore, it has diversified its financial reach in terms of both geography and industrial makeup. According to the Ministry of Economic Affairs, Government of India, the market for Outbound Investments from India stood at USD 17.53 billion in FY 2021-2022. This onslaught of overseas investments was brought about by the introduction of new schemes such as removing limits for overseas investments.
All these transactions, whether it is Inbound Investment in India or Outbound Investment from India, involve the interaction of cross-border taxation policies and regulatory compliances of the various economies that become participants in an international transaction.
Outbound Investment from India- What is it?
Investments made by Indian investors outside India i.e. in foreign markets are called outbound investments. Investments are made by Indian residents into foreign companies, branch offices, wholly owned services, joint ventures, etc. Let’s understand this concept with an example.
B Ltd., an Indian Company wants to make an investment in A Ltd, a company in the USA. It subscribes to shares of A Ltd., thus making an investment of capital in the American company. As a result, domestic funds get invested in the foreign economy. Subscription of shares can even lead to M&As between business entities across borders.
Due to the liberalization of economic barriers by various States around the world, investment in foreign economies has picked up pace. Outbound Investments from India are finding their home in economies of Belgium, France, Germany, Canada, the USA, the UK, Hong Kong, and many more. African and Latin American economies have proved to be a lucrative option for investments in sectors such as mining, and manufacturing.
Why make Outbound Investments from India?
Recently, India has been instrumental in signing of multiple MOUs, bilateral treaties, DTAAs, etc. with many nations across the globe. According to the Ministry of External Affairs, India is planning on funding architecture to create air routes and sea links to Latin America. With increasing opportunities for investment in mining, IT, oil, and pharmaceutical sectors, these nations have become prospective options to invest in. Furthermore, making overseas investments lead to:
- Access to foreign markets;
- Access to foreign resources, technology, skills, and knowledge;
- Reduction in costs of production.
How to make Outbound Investments from India
Outbound Investments from India are also of two types: Overseas Direct Investments and Overseas Portfolio Investments. These are forms of direct investment in the capital instruments or securities of a foreign company.
Overseas Direct Investment- All investments in unlisted foreign entities and more than 10% investment in a listed foreign entity) are called as ODIs.
Overseas Portfolio Investment- All investments made by listed Indian companies in listed foreign entities are called as OPIs.
An Indian investor can make outbound investments from India in the following manner:
- Making outbound transactions via Exchange Earners Foreign Currency (“EEFC”) Account
- Withdrawal of funds by an Indian Company up to 50% of its worth for outbound investment.
- Amounts raised from the issue of ADRs (American Depository Receipts) and GDRs (Global Depository Receipts) by the Indian business entity.
These are general guidelines that are to be followed while making outbound investments from India. Specific regulations and procedures vary as per the country of investment.
Individuals can also make Outbound Investments from India via Liberalised Remittance Scheme (LRS). This scheme allows individuals, including minors to remit up to USD 2, 50, 000 to make Outbound Investments in the form of capital and current account transactions or both. In case the remitter is a minor, such transactions are countersigned by the minor’s natural guardian.
It is to be noted that this scheme is applicable only to individuals. It is not available to companies, trusts, partnerships firms, cooperative societies, etc.
Routes for Outbound Investment from India
The Government has specified certain sectors where investment is regulated. However, there are some sectors where no approval is required before making such an investment. The Government of India, in order to promote the “ease of doing business” has shifted many transactions from the Approval Route to the Automatic Route. Let’s take a look at the two routes of making Outbound Investments from India.
Routes
- Automatic Route: Under this route, an Indian resident does not require the prior approval of the Reserve Bank of India. The investor can approach an Authorised Dealer Bank (AD Category I Bank) with the Form ODI and other relevant documents required for making Outbound Investments from India in the specified sectors. Form ODI can be found in RBI’s Master Directions for Foreign Exchange Management. In case of transfer of financial services, prior approval of the finance board is required.
- Approval Route: Transactions that are not covered under the Automatic Route need to go through the Approval Route. In this case, the Indian resident has to submit details regarding his Outbound Investments from India and other documents required for the cross-border transaction. These details and documents, after being scrutinized, are submitted to RBI by the AD, pending approval. These documents along with the application are uploaded on the Overseas Investment website by the AD. If such an application is approved, the AD Bank is tasked with the remittance of investments.
Entry route for foreign investors as well as specific limits of investments for each sector has been listed in Annexure 2 of RBI Master Circular on Foreign Investment in India.
Regulation for Outbound Investment from India
Currently, Outbound Investment from the Indian regime is being regulated by the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004, and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015.
However, in August 2022, the Ministry of Finance, with a view to further easing the process for making Outbound Investments from India, in consultation with the RBI, introduced the Draft Foreign Exchange Management (Overseas Investment) Rules and the Draft Foreign Exchange Management (Overseas Investment) Regulations. This aims at expanding the scope of economic activities covered under the foreign exchange statutes. It also reduces the need for applying for specific approvals, thus significantly reducing the cost of compliance.
Some of the key suggestions include:
- Investment by an Indian resident in the equity capital of a foreign entity shall be classified as an ODI;
- Late submission fees introduced for delays in reporting requirements;
- No approval is required for deferred payment of consideration;
- Introduced the concept of ‘strategic sector’;
Regulations governing the acquisition and transfer of immovable property outside India and overseas investment have been subsumed under these draft rules and regulations.
FAQs on Outbound Investment from India
What is the difference between ODI and OPI?
- Overseas Direct Investment- All investments in unlisted foreign entities and more than 10% investment in a listed foreign entity) are called as ODIs.
- Overseas Portfolio Investment- All investments made by listed Indian companies in listed foreign entities are called as OPIs.
Can Outbound Investments from India be made in all sectors?
An Indian company can make Outbound Investments from India in any sector except the ones that have been prohibited. And such an Indian company must have the necessary experience, knowledge, and skills in the industry. An Indian company can make an overseas investment in any activity (except those that are expressly prohibited) in which it has experience and expertise. However, as mentioned for the transfer of financial services, additional approvals and regulations need to be adhered to.
Which are the sectors where Outbound Investments from India are prohibited?
There are only two sectors currently where overseas investment is prohibited: The Real Estate sector and Banking. However, Indian banks operating in India can set up JV/WOS (Joint venture/ Wholly Owned Subsidiary) abroad.
What are the two routes by which a foreign investor can make inbound investments in India?
- Automatic Route: Under this route, an Indian resident does not require the prior approval of the Reserve Bank of India. The investor can approach an Authorised Dealer Bank (AD Category I Bank) with the Form ODI and other relevant documents required for making Outbound Investments from India in the specified sectors.
- Approval Route: Transactions that are not covered under the Automatic Route need to go through the Approval Route. In this case, the Indian resident has to submit details regarding his Outbound Investments from India and other documents required for the cross-border transaction.
