Context:
Indian companies investing funds abroad through Overseas Direct Investments (ODIs) are facing heightened scrutiny from banks, which are increasingly questioning the business rationale, viability, and end-use of funds.
Regulatory Background:
- A company can invest up to four times its net worth in ODIs.
- The move comes amid a dramatic 96% fall in net foreign direct investment (FDI) in 2024-25, partly due to increased outward investment and repatriation by foreign investors.
- Since mid-2022, regulations allow companies more freedom to write off unviable overseas investments, prompting banks to adopt a cautious approach.
Overseas Direct Investment (ODI)
Overseas Direct Investment (ODI) is when Indian companies or individuals invest in businesses outside India. This can be done in two main ways – by setting up a Joint Venture (JV) with a foreign partner or by creating a Wholly-Owned Subsidiary (WOS) in another country.
Purpose – To expand their operations, access new markets, benefit from resources, or diversify risks.
For example – An Indian car company opens a factory in another country to take advantage of lower labour costs. However, sectors like real estate and banking are not allowed for ODI.
How to Make ODI?
1. Automatic Route
- No need to ask RBI for permission.
- The company just needs to submit required documents to an Authorised Dealer Category-I Bank.
- If investing in financial services, approval from Indian and host country regulators is needed.
- Company must meet certain basic eligibility rules.
2. Approval Route
- For cases that don’t qualify under the automatic route.
- Apply through your Authorised Dealer Category-I Bank.
- The bank checks documents and then sends the request to RBI for approval.
