Overseas Direct Investment & LRS: Complete Guide for Indians

Overseas Direct Investment (ODI) refers to investments made by Indian entities in a foreign country. In this form of investment, Indian companies and individuals can enter into a Joint Venture (JV) or have their Wholly-Owned Subsidiary (WOS) in a different country.

For instance, an Indian automobile manufacturer sets up a company in a new country to benefit from the low labour costs of that country. Sectors such as real estate and banking are prohibited from Overseas Direct Investment.

Benefits of ODI:

• ODI is made with the view to diversify the current businesses of an Indian entity outside the country
• They are recognised as important avenues for promoting the global reach of Indian entrepreneurs
• ODIs allow technology transfers, enables sharing of skills and results of R&D
• They serve as a bridge to the global market and enhance a company's image abroad
• ODIs are vital engines of foreign trade, through exports from India. They are a source of foreign exchange earnings by way of dividends, royalty, technical know-how fees and other entitlements.

Overseas Direct Investment

ODI can be achieved through two routes:-

Automatic route:

• In this mode, an Indian company does not need to seek approval from the RBI for making any overseas investment.
• However, the Indian entity needs to reach out to an Authorised Dealer Category-1 Bank with the prescribed documents for making such an investment.
• In case an Indian company is investing in the financial services sector, the regulatory authority in India and the host country need to give their nod of approval.
• Also, there are certain pre-requisites that the Indian company needs to comply with, to apply under the automatic route.

Approval route:

• Companies that do not comply with the required conditions under the automatic route will require the Reserve Bank of India's green signal
• Similar to the automatic route, the company will have to reach out to an Authorised Dealer Category-1 Bank (AD Bank) and apply with the required documents.

Following specific recommendations of the designated AD Bank and furnishing of the supporting documents, the AD Bank will submit the proposal to the Reserve Bank of India after due scrutiny.

Overseas Direct Investment by Resident Individuals

• Resident individuals can also go for an ODI by way of JV or WOS outside India, under the Liberalised Remittance Scheme (LRS)
• This scheme allows Resident Individuals, including minors, to freely remit up to US$ 250,000 per financial year
• Investors opting for this route should repatriate the income they've earned on the investments within 60 days, as per the FEMA guidelines. No write-off of the income is allowed
• RBI allows Resident Individuals to form a company outside India under the LRS, within dictated limits.

What is LRS?

The Liberalised Remittance Scheme (LRS) is part of the Foreign Exchange Management Act (FEMA) 1999 which lays down the guidelines for outward remittance from India. Under LRS, all resident individuals, including minors, are allowed to freely remit up to USD250,000 per financial year (April – March). This can be for any permissible current or capital account transaction, or a combination of both.

A few key things to keep in mind while remitting money abroad

• If you are a resident individual, you and your family (including minors) can remit up to USD250,000 per individual, per financial year.
• You cannot remit funds abroad for prohibited purposes like buying lotteries or banned magazines, amongst others.
• There is no restriction on the frequency or number of transactions during a financial year.

However, the total amount of foreign exchange remitted through all sources in India under LRS during the current FY should be within the LRS limit as specified by the Reserve Bank of India (RBI).

Benefits of remittance under LRS in India

The Liberalised Remittance Scheme enables residents of India to remit up to USD250,000 per financial year for the following purposes:

• As an Indian student, you can use the LRS to pay for your education expenses abroad, including tuition fees, accommodation, and other related costs. This gives you access to international learning environments.

• Meet your travel expenses, including airfare, accommodation and other travel-related costs, through the LRS. It's easier to use foreign currency for leisure travel, business trips, medical tourism and attending conferences or events abroad. You can also use the LRS for travelling for business, a conference or training; meeting medical expenses or a check-up abroad; going with a patient for medical treatment overseas or visiting any country except Nepal and Bhutan.

• Medical treatment: You can meet the cost of your medical treatment or procedures abroad, getting access to advanced healthcare facilities, specialised treatments, and consultations with international doctors.

• Family support: The LRS allows you to provide financial support for close relatives residing outside India, helping them meet their living expenses and ensuring their well-being.

• Going overseas to work

• Emigration

• Donations or gifts

• Any other current account transaction that does not fall under the definition of current account (FEMA 1999)

What is not permitted under the LRS?

You cannot use the LRS to send money:

• For any prohibited activities such as margin trading or the lottery

• To buy Foreign Currency Convertible Bonds issued by Indian companies in the overseas secondary market

• To trade in foreign exchange abroad.

• Directly or indirectly to individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the RBI to the banks.

• These types of transactions need to be reported under the LRS scheme. If you need to make any such transfers, please reach out to your branch for assistance.

In addition, there may be times when you cannot use the LRS to make capital account remittances directly or indirectly to countries identified by the Financial Action Task Force as 'Non co-operative countries and territories'.