The Globalization of Business has become a very essential feature for any economy in the past decades. India opened its doors for globalization and liberalization in 1991. The Industrial Policy was the turning point to the Indian Economy aiming at goal of making the economy more market- and service-oriented and expanding the role of private and foreign investment. Though there were foreign transactions before this, it was merely to conserve our foreign exchange reserve.Until 1991, India’s economic integration with the rest of the world was very limited. Exports were only the predominant way of expanding business abroad. However the export promotion strategies had restrictions on cash outflows. Post the industrial revolution policy in 1991, it substantially changed the foreign investmentpolicies of the country which led foreign investments to enter Indian territory. More importantly it also made Indians eligible to set up business abroad or make an investment abroad as the case may be. 


Subsequent to the liberalization policies, business houses across industries realized the necessity to increase their share in the world market not only by exporting their products but also by acquiring overseas assets and establishing their presence abroad (i.e. an overseas establishment). This meant that business had to be set up outside India in order to ensure their presence in the concerned markets. This requirement, paved the way to formulate regulations to make investments abroad.

Accordingly, the policy for outward capital flows has evolved.The policy on Indian investments overseas was first liberalized in 1992 to meet the need to provide Indian industry access to new markets and technologies with a view to increase their competitiveness globally and help the country’s export efforts.. Under this policy, an Automatic Route for overseas investments was introduced and cash remittances were allowed for the first time with restrictions on the total value. Later, the introduction of FEMA (Foreign Exchange Management Act) in the year 2000 changed the entire perspective on foreign exchange particularly those relating to investment abroad.



According to the Reserve Bank of India, Overseas Direct Investment means investments, either under the Automatic Route or the Approval Route-

  • by way of contribution to the capital or subscription to the Memorandum of a foreign entity or
  • by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, signifying a long-term interest in the foreign entity (JV or WOS). This is different from portfolio investment


Some of the major overseas investments by Indian companies that would help understand the ODI are:


  • Indian conglomerate, Reliance Industries Ltd (RIL), is going to invest US$ 25 million in Israel-based Jerusalem Innovation Incubator (JII), which will focus on start-ups working in the field of big data, analytics, Internet of Things and other similar areas.
  • Adani Enterprises Ltd has announced the final approval of the company’s board to proceed with the US$ 16.5 billion worth Carmichael mine and rail projects in Central Queensland, Australia, which would be one of the largest single infrastructure and job creating developments in Australia’s recent history.
  • Sun Pharmaceutical Industries Ltd, India’s largest drug maker, has entered into an agreement with Switzerland-based Novartis AG, to acquire the latter’s branded cancer drug Odomzo for around US$ 175 million.
  • WNS Global Services, the Mumbai-based business process management company, has announced its plans of acquiring Denali Sourcing Services, a US-based business process outsourcing company, for US$ 40 million.
  • AurobindoPharma has bought Portugal based Generis Farmaceutica SA, a generic drug company, for EUR 135 million (US$ 146.67 million).



Section 6 of the Foreign Exchange Management Act, 1999 provides powers to the Reserve Bank of India in consultation with the Government of India to specify, the classes of permissible capital account transactions and limits up to which foreign exchange is admissible.

Section 6(3) of the aforesaid Act provides powers to the Reserve Bank to prohibit, restrict or regulate various transactions referred to in the sub-clauses of that sub-section, by making Regulations.

In exercise of the above powers conferred under the Act, the Reserve Bank seeks to regulate acquisition and transfer of a foreign security by a person resident in India i.e.


  • investment (or financial commitment) by Indian entities in overseas joint ventures and wholly owned subsidiaries as also investment by a person resident in India in shares and securities issued outside India.
  • Overseas Investment (or financial commitment) can be made under two routes viz.
  • Automatic Route and
  • Approval Route or Government Route



Legal Entities permitted to make investments:

  • company incorporated in India or a body created under an Act of Parliament
  • Limited Liability Partnership (LLP), registered under the Limited Liability Partnership Act, 2008
  • partnership firm registered under the Indian Partnership Act, 1932,
  • any other entity in India as may be notified by the Reserve Bank

These entities are collectively referred to as Indian Party/s henceforth in this Article




With respect to ODI investment, there are few investment which is prohibited. They are-

1. Indian Parties are prohibited from making investment (or financial commitment) in a foreign entity engaged in real estate (meaning buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges) or banking business, without the prior approval of the Reserve Bank.

2. An overseas entity, having direct or indirect equity participation by an Indian Party, shall not offer financial products linked to Indian Rupee (e.g. non-deliverable trades involving foreign currency, rupee exchange rates, stock indices linked to Indian market, etc.) without the specific approval of the Reserve Bank. Any incidence of such product facilitation would be treated as a contravention of the extant FEMA regulations and would consequently attract action under the relevant provisions of FEMA, 1999.



With respect to the Automatic Route, the following regulations shall constitute the procedure for Overseas Direct Investment-


  • In terms of Regulation 6 of the Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time, an Indian Party has been permitted to make investment / undertake financial commitment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), as per the ceiling prescribed by the Reserve Bank from time to time. However,
  • With effect from July 03, 2014, any financial commitment (FC) upto USD 1 (one) billion shall only come under the automatic approval. The eligible limit of investment under the automatic route is 400% of the net worth of the Indian Party as per the last audited balance sheet.
  • any financial commitment (FC) exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank 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).
  • For the purpose of making investment / undertaking financial commitment in overseas Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS), the Indian Party should approach an Authorised Dealer Category – I bank with an application in Form ODI (Master Document on Reporting) and prescribed enclosures / documents for effecting such remittances.
  • The investments/financial commitments are subject to the following conditions:
  • The Indian Party/entity may extend loan/guarantee only to an overseas JV/WOS in which it has equity participation.


For any proposals from the Indian Party for undertaking financial commitment without equity contribution in JV/WOS may be considered by the Reserve Bank under the approval route.


  • The Indian Party should not be on the Reserve Bank’s Exporters’ caution list / list of defaulters to the banking system circulated by the Reserve Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information company as approved by the Reserve Bank or under investigation by any investigation / enforcement agency or regulatory body.
  • All transactions relating to a JV / WOS should be routed through one branch of an Authorised Dealer bank to be designated by the Indian Party.
  • In case of partial / full acquisition of an existing foreign company, where the investment is more than USD 5 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and, in all other cases by a Chartered Accountant or a Certified Public Accountant.
  • In cases of investment by way of swap of shares, irrespective of the amount, valuation of the shares will have to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.
  • In case of investment in overseas JV / WOS abroad by a registered Partnership firm, where the entire funding for such investment is done by the firm, it will be in order for individual partners to hold shares for and on behalf of the firm in the overseas JV / WOS if the host country regulations or operational requirements warrant such holdings.
  • An Indian Party may acquire shares of a foreign company engaged in a bonafide business activity, in exchange of ADRs/GDRs issued to the latter in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued there under from time to time by the Government of India.




  • Unlike Automatic Route, the Reserve Bank has prescribed Investment which cannot be made under Automatic Route and specifically required approval of the Reserve Bank of India. The prescribed regulation are-
  • Prior approval of the Reserve Bank would be required in all other cases of direct investment (or financial commitment) abroad. For this purpose, application together with necessary documents should be submitted in Form ODI through their Authorised Dealer Category – I banks with their specific recommendation.
  • The designated AD before forwarding the proposal should submit the Form ODI in the on-line OID application under approval route and the transaction number generated by the application should be mentioned in the letter.
  • In case the proposal is approved, the AD bank should effect the remittance under advice to Reserve Bank so that the UIN (Unique Identification Number) is allotted.
  • Some other proposals which require prior approval of Reserve Bank of India are:
  • Overseas Investments in the energy and natural resources sector exceeding the prescribed limit of the net worth of the Indian companies as on the date of the last audited balance sheet.
  • Investments in Overseas Unincorporated entities in the oil sector by resident corporates exceeding the prescribed limit of their net worth as on the date of the last audited balance sheet, provided the proposal has been approved by the competent authority and is duly supported by a certified copy of the Board Resolution approving such investment.


However, Navaratna Public Sector Undertakings, ONGC Videsh Ltd and Oil India Ltd are allowed to invest in overseas unincorporated / incorporated entities in oil sector (i.e. for exploration and drilling for oil and natural gas, etc.), which are duly approved by the Government of India, without any limits, under the automatic route.

  • Overseas Investments by proprietorship concerns and unregistered partnership firms satisfying certain eligibility criteria
  • Investments by Registered Trusts / Societies (satisfying certain eligibility criteria) engaged in the manufacturing / educational / hospital sector in the same sector in a JV / WOS outside India.
  • Corporate guarantee by the Indian Party to second and subsequent level of Step Down Subsidiary (SDS);
  • All other forms of guarantee which is offered by the Indian Party to its first and subsequent level of SDS;
  • Restructuring of the balance sheet of JV/WOS involving write-off of capital and receivables in the books of listed/ unlisted Indian Company satisfying certain eligibility criteria mentioned under Regulation 16A of notification
  • Capitalization of export proceeds remaining unrealized beyond the prescribed period of realization will require the prior approval of the Reserve Bank; and
  • Proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS may be considered by the Reserve Bank under the approval route based on the business requirement of the Indian Party and legal requirement of the host country in which JV/WOS is located.
  • Reserve Bank would, inter alia, take into account the following factors while considering such applications:
  • Prima facie viability of the JV / WOS outside India;
  • Contribution to external trade and other benefits which will accrue to India through such investment (or financial commitment);
  • Financial position and business track record of the Indian Party and the foreign entity; and
  • Expertise and experience of the Indian Party in the same or related line of activity as of the JV / WOS outside India.



Apart from the regulatory approvals and compliance’s in relation to Overseas Investment, most important is to choose the location of business/ investment outside India. Few of the major issues are related to


Geographical Location of the business

  • Infrastructure (ports, airports, storage, specific storage types – such as cold-storage, secure storage)
  • Access (transportation of goods, materials and personnel)
  • Relevance to supply-chain : raw material sourcing, processing, dispatch of finished produce)
  • Availability of talent pool for productions (labour), services and management


Economic aspects

  • Ease of doing business : entering, establishing, restructuring and closing the business, visa availability
  • Cost of doing business : return on investment computations vis-à-vis comparable locations
  • Laws relating to labour
  • Laws relating to taxation : investment allowances, subsidies, distribution of profits, repatriation of profits, withholding taxes, existence of double-taxation avoidance agreements, information sharing requirements such as FATCA, TRC,etc.


Political Aspects

  • Friendly country, MFN status
  • Long-standing and established legislative precedents with companies going through regulatory recourse
  • Their relations with nearing countries and neighbours and your country


Social Aspects

  • Trade bodies, interaction between commercial entities of both nations
  • Expatriate-friendliness of the nation for relocating key employee personnel.


Technological aspects

  • Intellectual property protection: create, maintain and extract IP at the location or provision thereof from another location to the nation with free entry and egress.
  • Power, communication, telecom – availability, quality and cost.

Issues like infrastructure, geography, time zone, political considerations/conditions, safety of investments, economic policy and stability of the country, culture and language have a critical bearing on the strategy for globalization. Value systems and institutions are also becoming increasingly important from a long term perspective, in order to have the support of stakeholders. Ultimately, any chosen business strategy has to be executed within the parameters of legal and regulatory compliance’s. At the same time it is necessary to factor in global tax costs and plan to the possible extent within the framework of law.

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November 12, 2020


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