Within the framework of the Foreign Exchange Management Act (FEMA), an outbound investment signifies any deployment of financial resources by an Indian resident or company towards an entity or asset located outside of India. The overarching goal is to generate a future return on this investment. The spectrum of outbound investments is broad, encompassing ownership interests (equity) in foreign companies – be it through a controlling stake in a joint venture or a wholly-owned subsidiary – or portfolio investments in stocks, bonds, or mutual funds of foreign corporations. Additionally, it can extend to the acquisition of real estate, including land or buildings, situated in a foreign country.

Types of Outbound Investment:

Under FEMA, outbound investments can be categorized into three main types, each offering distinct advantages and considerations:

  1. Direct Investment: This strategy involves acquiring a significant level of ownership (over 10%) in a foreign company, granting you a greater say in its operations and potential for higher returns. There are two ways to achieve this:
    • Establishment of a Foreign Operation: You can set up a new business abroad, either through a Joint Venture (JV) where you partner with a local company to leverage their market expertise and navigate regulations. Alternatively, you can establish a Wholly Owned Subsidiary (WOS), a company entirely owned by you, offering full control over operations but potentially requiring a larger initial investment.
    • Acquisition of Existing Shares: Here, you purchase existing shares in a foreign company on a stock exchange. This approach allows you to gain a stake in an established company with a proven track record, potentially influencing its direction through shareholder voting rights. However, acquiring a significant ownership stake might require substantial capital and could be subject to approval from the existing shareholders or regulatory bodies.
  2. Portfolio Investment: This approach involves investing in financial instruments issued by foreign companies, enabling you to participate in their growth and potentially earn returns without directly owning the company. Here's some popular options which are available:
    • Stocks: By purchasing shares of foreign companies listed on international stock exchanges, you gain ownership and potentially benefit from their rising stock prices or dividend payouts. This approach offers diversification across different markets and sectors but carries inherent market risks associated with stock price fluctuations.
    • Bonds: You essentially loan money to foreign governments or corporations by purchasing their bonds. These bonds offer a fixed interest rate payout over a specific timeframe, providing a steadier income stream compared to stocks. However, bond returns are typically lower than potential stock market returns, and the creditworthiness of the issuer can impact the investment's security.
    • Mutual Funds: This option allows you to pool your investment capital with other investors and participate in a professionally managed portfolio that invests in a variety of foreign assets like stocks and bonds. Mutual funds offer diversification and ease of management but come with associated fees and may not always outperform the overall market.
  3. Investment in Immovable Property: This category encompasses purchasing land or buildings located outside of India. This can be for various purposes, including:
    • Residential Property: Owning a property abroad can serve as a vacation home, a potential rental income source, or a future retirement destination. However, factors like property taxes, maintenance costs, and currency fluctuations need to be considered.
    • Commercial Property: Investing in commercial real estate abroad, such as office buildings or retail spaces, can generate rental income from businesses operating in that location. However, this approach typically requires a significant upfront

FEMA-compliant ODI empowers Indian companies to:

  • Access new markets & customers for growth and brand recognition.
  • Gain a competitive edge through technology acquisition & economies of scale.
  • Secure critical resources and diversify risk across global markets.
  • Potentially boost profits and leverage tax advantages in some countries.
  • Careful planning, market research, and expert guidance are crucial for a successful ODI venture.

This strategic move under FEMA unlocks exciting possibilities for Indian companies to thrive on the world stage.

The Foreign Exchange Management Act known as (FEMA) regulates outbound investments in India to ensure financial stability and also manages foreign exchange reserves. regulatory framework define as follows:

Routes for Outbound Investment:

  • Automatic Route: This route allows for investments up to a certain limit without prior approval from the Reserve Bank of India (RBI). It's a streamlined process ideal for smaller investments.
    • Limits: The maximum amount for outbound investment varies depending on the type of investment and the investor (individual vs. company). For instance, the Liberalised Remittance Scheme (LRS) allows resident individuals to send up to USD 250,000 per year for overseas investments under the automatic route.
    • Criteria: The investment should be for a bonafide purpose (genuine business activity), and funds must be sourced from authorized channels within India.
  • Approval Route: Investments exceeding automatic route limits or not meeting specific criteria require prior approval from the RBI. This route involves a formal application process.
    • Process: Submit an application with supporting documents to the RBI through an authorized dealer bank. Documents may include project reports, financial statements, and KYC documents.
    • Approval Time: The approval timeframe can vary depending on the complexity of the investment and the RBI's scrutiny.

Reporting Your Outbound Investment (ODI) to FEMA: Simple Steps

Just made an ODI investment? Here's a quick guide on reporting it to FEMA, depending on how you made it happen:

Automatic Route (Small Investments):

  • Check with your bank - They might have their own reporting procedures, but it's usually simpler.

Approval Route (Large/Complex Investments):

  • You must report to the RBI (Reserve Bank of India).
  • What to report:
    • Type of investment (JV/WOS, etc.)
    • Location of the investment (country)
    • Investment amount (foreign currency)
    • Source of funds (where the money came from in India)

Tips for Easy Reporting:

  • Keep good records: Track investment details, funding sources, and supporting documents.
  • Ask a FEMA expert (optional): For complex cases, a financial advisor can ensure your report is complete and compliant.

Remember: Proper reporting keeps your ODI compliant with FEMA regulations. It's a simple step for a smooth investment journey!

Obtaining permission for overseas investment under FEMA depends on your investment size and complexity.

Automatic Route (Faster, Smaller Investments):

  1. Define your investment (type, purpose, amount) within the automatic route limit (check with your AD bank).
  2. Gather basic documents (KYC, financials, project report if needed).
  3. Approach an authorized dealer (AD) bank for processing.
  4. No separate RBI approval needed if compliant.

Approval Route (Larger, Complex Investments):

  1. Prepare similar documents as the automatic route.
  2. Submit a formal application through your AD bank.
  3. The application undergoes RBI scrutiny for compliance and potential risks.
  4. RBI issues approval or rejection with reasons.

For both routes: Consider consulting a FEMA specialist for a smoother process and ensure you stay updated on regulations through the RBI website.

Key Regulatory Considerations:

  • Purpose: The investment purpose should be legitimate and not for speculative activities.
  • Source of Funds: Funds used for outbound investment must come from authorized channels in India to prevent money laundering.
  • Sectoral Restrictions: Certain sectors might have limitations on outbound investments due to strategic considerations.
  • Tax Implications: Outbound investments may have tax implications in India and the host country. Consulting a tax advisor is recommended.

Here's a breakdown of the eligibility standards for outbound investment under FEMA (Foreign Exchange Management Act):

General Eligibility:

  • Resident Entity: The investor must be a resident entity in India. This can include:
    • Companies incorporated in India
    • Bodies created under an Act of Parliament
    • Registered partnership firms
    • Resident individuals
    • Legitimate Purpose: The investment purpose should be genuine and for a bonafide business activity. Speculative activities like gambling are not permitted.
    • Source of Funds: Funds used for the outbound investment must originate from authorized channels within India. This helps prevent money laundering.

Procedures for Outbound Investment (Approval Route):

  1. Gather Information: Understand the type of investment, purpose, and estimated amount.
  2. Choose Route: Determine if the automatic route applies or if RBI approval is required.
  3. Prepare Documentation: Collect necessary documents like project reports, financial statements, and KYC documents.
  4. Application through Bank: Submit the application with supporting documents to your authorized dealer bank.
  5. RBI Scrutiny: The RBI scrutinizes the application based on FEMA regulations.
  6. Approval/Rejection: The RBI conveys approval or rejection with any specific conditions.
  7. Investment Execution: Once approved, proceed with the investment following FEMA guidelines.

Reporting Requirements:

  • Investors may need to report outbound investments to the RBI depending on the type and value of the investment.
  • Specific reporting formats and timelines are mandated by the RBI.

Additional Considerations:

  • Tax Implications: Outbound investments may have tax implications in India and the host country. Consulting a tax advisor is recommended.
  • Foreign Exchange Fluctuations: Be mindful of currency exchange rate fluctuations that can impact your investment returns.
  • Professional Guidance: Consider seeking assistance from a Chartered Accountant or legal professional specializing in FEMA for complex transactions.
  • Application Form: A completed application form for outbound investment, typically provided by your authorized dealer (AD) bank.
  • KYC Documents: Documents establishing the identity and address of the Indian party. This may include a copy of the company's Certificate of Incorporation, a copy of the PAN card, and KYC documents of directors/promoters for companies. For individuals, it might involve passport copies, PAN cards, and address proof.
  • Project Report (if applicable): A detailed report outlining the proposed investment, including its purpose, feasibility, financial projections, and expected benefits. This document is usually required for complex investments or the approval route.
  • Financial Statements: Audited financial statements of the Indian party for a specific period (typically the latest two or three years). These demonstrate the financial health of the investor and their ability to support the investment.
  • Source of Funds Documentation: Documents proving the legitimacy of the funds used for the outbound investment. This could include bank statements, invoices, or other evidence showcasing authorized channels within India.

Additional Documents (Depending on Route and Investment Type):

Automatic Route:

  • Documents specific to the chosen business structure formed abroad (e.g., Partnership Deed for a firm, LLP Agreement for an LLP). However, these documents are not submitted for RBI approval under the automatic route, but rather used for establishing the entity in the host country.

Approval Route:

  • Joint Venture Agreement (JVA): A detailed agreement outlining the terms and conditions of the JV, including ownership structure, profit-sharing arrangements, management responsibilities, and dispute resolution mechanisms (required for JVs).
  • Feasibility Studies and Market Research Reports: These reports might be requested by the RBI to assess the viability and potential risks associated with the investment (for complex investments).
  • Technical Collaboration Agreements (if applicable): Agreements outlining the transfer of technology or technical know-how between the Indian party and the foreign entity (required for specific types of investments).

For Indian entities establishing an ODI under the FEMA automatic route, a streamlined documentation process exists, facilitating a quicker investment timeline. Here's a breakdown of the essential documents required, endorsed by your authorized dealer bank (AD bank):

  1. Board Resolution:
    • A formally approved copy of the board resolution passed by the Indian company's directors. This resolution should explicitly authorize the creation of the ODI and provide key details, including:
      • The purpose of the ODI establishment
      • The total investment amounts
      • The chosen structure for the ODI (Joint Venture, Wholly Owned Subsidiary, etc.)
  1. Statutory Auditor's Certificate:
    • A certificate issued by the company's statutory auditor, confirming its financial health and ability to support the ODI investment. This typically involves a review of the company's audited financial statements.
  2. Valuation Report (when applicable):
    • In specific instances, the automatic route might necessitate a valuation report prepared by a registered valuer. This report serves to assess the fair market value of any assets being contributed to the ODI, ensuring transparency and adherence to regulatory guidelines.
  3. Authorized Dealer Bank Involvement:
    • The investment/remittance process requires the involvement of an authorized dealer bank (AD bank). Your AD bank acts as a trusted intermediary, ensuring compliance with FEMA regulations and facilitating the transfer of funds for the ODI. Additionally, they will endorse the aforementioned documents, verifying their authenticity.

Additional Considerations for a Smooth Process:

  • While not mandatory under the automatic route, preparing a comprehensive project report outlining the ODI's business plan and projected financials can be highly beneficial. This report demonstrates the viability of the investment and strengthens your overall proposition.
  • Regularly consulting with your designated AD bank is recommended. They can provide the most up-to-date information on specific document requirements, as FEMA regulations can evolve over time.

By assembling these documents and collaborating with a reliable AD bank, you can ensure a streamlined and efficient process for establishing your ODI under the FEMA automatic route.

The valuation standards are: (Valuation Norms)

While FEMA doesn't prescribe a single valuation standard for ODIs under the automatic route, following generally accepted principles is crucial. These focus on fair market value, transparency, and FEMA compliance.

Consider using valuation standards set by the Institute of Chartered Accountants of India (ICAI) or SEBI (if applicable). For complex transactions, International Valuation Standards (IVS) might be relevant.

The specific standards depend on your ODI's assets (tangible, intangible, financial) and complexity. Consulting a registered valuer familiar with FEMA and valuation methods is highly recommended.

Article written  by 

Tamjeed Ahmad a Legal Intern at Corpzo

You may refer

FEMA Compliance