WHAT IS OVERSEAS DIRECT INVESTMENT (ODI): HOW TO ESTABLISH A SUBSIDIARY OUTSIDE INDIA?

Definition of Subsidiary

A Subsidiary means a legal entity formed, registered, or incorporated in accordance with the laws and regulations of the country whose majority or entire capital is held by the holding or parent company. In case of ODI, the holding company will be in India and the subsidiary will be outside India.

Purpose:

The main purpose for establishing a subsidiary is to expand the business operations of a corporation and to tap new geographies and markets and acquire international clients while retaining the ownership of intellectual property in India which enables the parent company to control within the foreign companies and markets.

Procedure for Investment in Subsidiary Outside India:

1. Automatic Route

Criteria for Overseas Direct Investment Under Automatic Route

• The Indian party may extend loan / guarantee to an overseas party only in which it has equity participation.
• All financial commitments including guarantees are within the overall ceiling prescribed for overseas investment by the Indian party i.e. currently within 300/200 per cent of the net worth.
• As in the case of corporate guarantees, all guarantees are required to be reported to Reserve Bank, in Form ODI Part II.
• The Indian party should not be on the
  1. Reserve Bank's Exporters caution list
  2. list of defaulters to the banking system circulated by the RBI
  3. under investigation by any regulatory body

2. RBI Approval Route

Method of Funding

Investment or financial commitments in an overseas WOS may be funded out of one or more of the following sources:

1. Drawal of foreign exchange from an Authorized Dealer Bank (AD) in India.
2. Proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs).
3. Proceeds of foreign currency funds raised through American Depository Receipts (ADR's) and Global Depository Receipts (GDR's).

Compliances by Indian Party on Investment / Financial Commitment

Annual Filing under regulation 10 of Foreign Exchange Management Act 1999 (FEMA)

Penal provisions for Non-Filing of Reports

• In case India party has made delay in filing/submitting the requisite form, the same can be done by paying the Late Submission Fee (LSF) through the designated AD bank in accordance with regulation 11 of Overseas Investment (OI) Regulations.
• The LSF for delay in reporting of overseas investment related transactions shall be calculated as per the following matrix:

Additional compliances under Companies Act 2013:

I. Consolidated Financial Statements (MCA)

Requirement u/s 129(3)

Section 129(3) - A company that has one or more subsidiaries, it shall, in addition to financial statements provided u/s 129(2), prepare a consolidated financial statement of the company and of all the subsidiaries.

Presentation of Consolidated Financial Statements

A parent company shall present its consolidated financial statements in Annual General Meeting along with its standalone financial statements.

II. AOC-4 (CFS) u/s 137

Rule12(1): Filing of Consolidated Financial Statements with Registrar with Form AOC-4 CFS

III. MGT-7 u/s 92

Filing of Annual Return with Registrar with Form MGT-7.