An Overseas Direct Investment (ODI) refers to investments made by a domestic firm in a foreign country to expand its operations.
From an Indian context, Overseas Direct Investment refers to investments outside India as a business strategy. ODI can be made in different forms depending on the company such as:
*ODI does not include portfolio investment.
Difference Between FDI and ODI
Foreign Direct Investment (FDI) is when a non-resident Indian invests in an Indian company. Outward Direct Investment (ODI) is when Indian resident companies invest in a wholly-owned subsidiary or a joint venture in a foreign country as part of a strategy to expand their business.
Routes of ODI From India
Direct investment outside India is governed by Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, as amended from time to time. Overseas Investment from India can be made through two routes:
i) Automatic Route and
ii) Approval Route.
Under the Automatic Route, an Indian Party does not require any prior approval from the central bank, the Reserve Bank of India (RBI), for making overseas direct investments in a JV/WOS abroad. All those proposals not covered by the conditions under the automatic route require prior approval of the RBI.
Who Can Invest Through the ODI Route?
An Indian Party can make ODI under the Automatic route in any bonafide activity. However, Indian parties are prohibited from making investments or financial commitments in a foreign entity engaged in real estate or banking business without the prior approval of the RBI.
For the above restrictions, real estate means buying and selling of real estate or dealing in Transferable Development Rights (TDRs), not including the development of townships, construction of residential or commercial premises, roads, or bridges.
An Indian Party is also not permitted to invest in an overseas entity, which offers financial products linked to the Indian Rupee (such as non-deliverable trades involving foreign currency, stock indices linked to the Indian market, rupee exchange rates, etc.), and need prior approval from the RBI.
Who Is an Indian Party?
Indian Party encompasses:
When more than one such company, body, or entity invests the foreign JV/WOS, such combination will also constitute an "Indian Party."
Furthermore, the Indian Party should not be on the following list:
Also, all transactions relating to the investment in a JV/WOS should be routed through only one branch of an authorized dealer designated by the Indian Party.
Investment Limit of an Indian Party:
Indian Party can make ODI up to 400% of its net worth (paid-up capital and free reserves) as per its last audited balance sheet.
Any Financial Commitment (FC) exceeding USD 1 billion (or its equivalent) in a financial year would require prior approval of the RBI even when the total FC of the Indian Party is within the eligible limit under the automatic route (i.e., within 400% of the net worth as per the last audited balance sheet.
The prescribed limit will not be applicable if the investment is made out of balance held in the EEFC account (Exchange Earner's Foreign Currency Account) of the Indian Party or out of funds raised through the issue of ADRs/GDRs (American Depository Receipts/ Global Depository Receipts).
The total financial commitment of the Indian Party in all the JV/WOS comprise of the following:
* Investors need prior approval from RBI before transferring remittance beyond the limit prescribed for the financial commitment.
Can Resident Indians Make Investment Through ODI Route?
Resident Indians can make overseas investments, including purchase of securities and also setting up/acquisition of JV/WOS up to the limit prescribed by the RBI from time to time, per financial year under the Liberalised Remittance Scheme (LRS). Currently, LRS comes with a maximum cap of $250,000 a year per person.
Why Is the RBI Warning People About ODI Transfers?
RBI regulates ODI made by Indian entities and resident individuals in joint ventures and wholly-owned subsidiaries outside India pursuant to Foreign Exchange Management Regulations, 2004.
Recently, RBI has been sending queries and notices to several domestic entities, including companies and large family offices, seeking the status of unutilized money remitted abroad through the ODI route.
The remitted funds parked in foreign countries in financial assets including liquid funds by these firms could be a violation of ODI guidelines. Under the general permission, the remitted funds must be used for a specific business purpose. In this case, the firms would need to explain the retention of the remitted money in liquid funds.
As per the rule, any Indian Party that plans to make an ODI needs to approach a designated authorized dealer (AD) for investing along with duly signed ODI form, along with supporting documents like Board Resolution, Statutory Auditor Certificate, and many other documents to essentially satisfy the bonafide business test.
The investment can be processed once the AD Bank examines and approves the documents according to the regulatory guidelines. A Unique Identification Number (UNI) will be generated for the particular JV/WOS before the remittance. The UNI can be used for further remittances/ investments in the JV/WOS.
Mutual funds are another concern of RBI. Investment in mutual funds abroad is that only entities registered as non-banking financial companies (NBFC) can invest the outward remittances in foreign securities. This means funds transferred via the ODI route cannot be used for investments in mutual funds abroad.
Resident individuals can remit money outside India under the Liberalised Remittance Scheme (LRS) which has a maximum cap of $250,000 per year per person. The funds remitted under LRS can be used for investing in foreign securities, travel expenses, or sending money to Non-resident Indians (NRI) abroad.
The low limit under the LRS is allegedly making more individuals route the remittances through their family offices via the ODI route because the cap for an entity sending money through the ODI route is $1 billion per year or 400% of the net worth.
However, the ODI route is for large companies, corporates, or trusts that need to send large amounts of money out of India for business purposes. Sending money from India abroad through ODI to avoid the LRS limit is a violation of the ODI guidelines.
ODI From India Dips 68% To USD 754 Million in February 2022
ODI is also called outward foreign direct investment or direct investment abroad. The appetite for foreign investment was picking up and many Indian investors and companies were investing/acquiring stakes in numerous foreign companies.
However, following the restrictions by the RBI, coupled with the global economic crisis, investments have dropped. According to the RBI data on Outward Foreign Direct Investment, investment for the month of February 2022 (USD 753.61 Million) has dropped by 68% compared to February 2021 (USD 2284.61 Million).
*RBI said the data is provisional and is subject to change based on reporting by banks.
An increase in ODI can also be seen as a sign of a country's investment competitiveness, higher growth prospects in foreign markets, and a maturing domestic economy.
The Covid-19 pandemic has been widely cited as one of the reasons for not utilizing the money sent through the ODI route. Several deals didn't get through due to the second wave of Covid and people didn't want to lose interest in the money, hence have invested in products like liquid funds abroad. And maybe awaiting the right business opportunity to invest the money.
In conclusion, for ODI-related investment opportunities, we recommend consulting with a tax advisor. To keep yourself abreast with the latest guidelines pertaining to ODI, the Reserve Bank of India has issued detailed guidelines vide Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time, which can be accessed at RBI's website.
A Master Direction that has consolidated instructions on rules and regulations framed by the Reserve Bank under various Acts including banking issues and foreign exchange transactions and is available at the 'Notification' Section on RBI's website.
Abound, a comprehensive super-app tailored for Non-Resident Indians (NRIs), has successfully secured $10 million in funding from the Times of India Group. This investment aims to bolster the app's remittance services, providing a more streamlined and cost-effective solution for expats.Nishkaam Mehta, the CEO of Abound, expressed in a press release on Monday that the primary objective of the app is to alleviate the complexities and high costs associated with traditional financial services for expats. He further emphasized that this borderless super-app is designed to cater to the distinct financial needs of Indian expats across various regions, enabling them to transcend geographical limitations and live their lives to the fullest.According to World Bank estimates from the previous year, remittances witnessed a 5% growth in 2022, reaching a staggering $626 billion. These transfers serve as a crucial financial lifeline for individuals sending money back home to their loved ones. Furthermore, with approximately 1.4 billion adults still without bank accounts, the need for innovative money transfer solutions is more pressing than ever.Abound, a venture of the Times of India Group and previously known as Times Club, is specifically crafted for Indian expatriates residing in the U.S. The app allows users to transfer funds to India without the hassle of long wait times or transfer fees. In addition to this, membership on the platform comes with a host of benefits including cash-linked and loyalty rewards, curated content, and access to both online and offline commerce. As more NRIs seek innovative financial management solutions, Abound positions itself as the ultimate all-in-one platform with features such as:Daily Shopping Rewards: Recognizing the significance of everyday spending for Indian expats, Abound offers a plethora of daily shopping rewards and cashback offers, enabling users to maximize their purchases.Exclusive Offers Across Categories: Abound provides its users with exclusive deals and offers across a wide range of categories, from groceries and entertainment to shopping and travel, thereby enhancing their lifestyle experiences.To commemorate the launch of its remittance feature, Abound is introducing a limited-time promotion for early adopters, offering an exchange rate of $1=₹83 for money transfers to India.Join the NRI community in ushering in a new era of financial management with Abound. The app is readily available for download on both Android and iOS devices, ensuring easy access and a seamless user experience.
US Dollar's Current State as a CurrencyThe United States dollar has been the dominant currency in the world for decades, and its importance is reflected in its widespread use in international trade and investment. Despite facing several challenges over the past few years, the dollar remains a popular currency for global transactions.One of the main reasons for the US dollar's popularity is its perceived stability and strength. The US economy is one of the largest and most diversified in the world, with a stable political system and strong institutions. As a result, the US dollar is often considered a safe haven currency, particularly in times of economic uncertainty.However, the US dollar has also faced several challenges in recent years, including a high debt-to-GDP ratio, trade tensions with other countries, and a changing global economic landscape. These factors have led some to question whether the US dollar will continue to hold up against other currencies over the next few years.Forecast for the US Dollar Against Other CurrenciesJPMorgan's PerspectiveJPMorgan, one of the world's leading financial institutions, believes that the US dollar is likely to maintain its strength against other currencies over the next 1-2 years. According to a report by the bank, currency volatility is expected to remain high in the near term, which could lead to fluctuations in exchange rates. However, the report notes that the relative strength of the US economy compared to other major economies is likely to keep the US dollar strong.The report highlights several factors that could contribute to the strength of the US dollar, including the Federal Reserve's commitment to maintaining a stable inflation rate and ongoing fiscal stimulus measures by the US government. JPMorgan also notes that the US dollar's status as the world's reserve currency gives it a significant advantage in global trade and investment.Forbes' PredictionsWhile JPMorgan is optimistic about the US dollar's prospects, Forbes has a more mixed view. The business magazine predicts that the US dollar may weaken against the Indian rupee over the next year, citing factors such as the US-China trade war and a rising Indian economy. However, Forbes notes that the Philippine peso and Mexican peso are likely to remain relatively stable against the US dollar, given the strength of their respective economies.Forbes also points out that the US dollar's status as the world's reserve currency has been in decline in recent years. While the US dollar is still the most widely held currency in the world, its share of global reserves has been decreasing in recent years, partly due to the rise of emerging market economies. This trend could have significant implications for the US dollar's role in global trade and investment in the long term.Investing.com's PerspectiveInvesting.com, a leading financial news and analysis website, takes a different view of the US dollar's prospects. The website argues that the US dollar is unlikely to collapse, despite concerns over the country's debt levels and other economic challenges. The report notes that the US dollar remains the world's most widely held currency and is likely to remain so for the foreseeable future.Investing.com also points out that the US dollar has several advantages over other currencies, including its liquidity and the depth of the US financial markets. The website notes that the US dollar's strength is not solely dependent on the performance of the US economy, but also on factors such as geopolitical developments and the policies of other major central banks.Importance of Staying InformedRegardless of the outcome, it's important for those involved in international trade and investment to stay informed about the latest developments in currency markets and to consider the potential risks and opportunities associated with different currencies.For example, individuals and businesses that frequently transfer money across borders may want to monitor exchange rates and fees to ensure that they are getting the best deal.To see today's best exchange rates and providers for sending money online, use CompareRemit's online comparison tool today!
The Reserve Bank of India (RBI) recently announced that it will be promoting the use of the Indian Rupee (INR) for international trade transactions. This move is expected to have significant impacts on both the Indian and American economies.According to a report by Times Now News, 18 countries have already agreed to trade in INR, including Japan, the UAE, the UK, and Switzerland. The Hindu Business Line reports that the RBI has granted approvals for rupee trade in 60 cases involving 18 countries. This is a significant development for India, as it reduces its dependence on the US dollar for international trade transactions.One of the potential impacts of this move is that it will boost the value of the INR. Since there will be an increased demand for INR in international markets, its value is expected to rise. This will make imports cheaper for India, as it will not have to pay as much for goods and services denominated in foreign currencies. Additionally, it will make Indian exports more competitive, as foreign buyers will be able to purchase goods and services using INR, without having to first convert their currencies to US dollars.Another potential impact of this move is that it could reduce the demand for the US dollar in international markets. As more countries start using other currencies, such as the INR, for international trade, the demand for the US dollar may decrease. This could lead to a decline in the value of the US dollar, which would have implications for the US economy.The US dollar has long been the dominant currency for international trade transactions, and any shift away from it could have significant impacts on the global economy. In particular, the US economy could be affected if the value of the US dollar declines, as this could lead to higher inflation and lower purchasing power for Americans. It could also lead to a decrease in the demand for US Treasury bonds, which could make it more difficult for the US government to finance its debt.However, it is worth noting that the shift towards using the INR for international trade is still in its early stages, and it remains to be seen how significant its impact will be. Additionally, the US dollar is likely to remain a dominant currency for the foreseeable future, given its widespread use and the stability of the US economy.Overall, the RBI's move to promote the use of the INR for international trade transactions is a significant development for India. It has the potential to boost the value of the INR and make Indian exports more competitive, while reducing India's dependence on the US dollar. However, it also has potential implications for the US economy, particularly if the value of the US dollar declines as a result.To compare current USD to INR rates, use our online comparison tool and compare exchange rates, fees, and more when sending money overseas from the US to India.
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