A Guide: How Indian Companies Can Invest in Foreign Startups Under ODI

ODI and other investments not only help Indian businesses grow in other parts of the world, but also allow them to get access to better technology, clients in international markets, and find more top talent abroad. To ensure compliance with Indian laws and regulations, companies must follow the rules set by the Reserve Bank of India (RBI) under the Overseas Direct Investment (ODI) framework. 

This guide explains everything you need to know about investment by Indian entities in foreign companies, especially startups, under the ODI rules. 

What is Overseas Direct Investment (ODI)?

Overseas Direct Investment (ODI) refers to when an Indian company, LLP, or resident individual in India invests in a foreign company or startup. This includes:

• Buying shares or holding a stake in the foreign entity,
• Setting up a subsidiary or joint venture outside India,
• Contributing to the capital of a foreign business.

On the other hand, Overseas Portfolio Investment refers to the investment that is not included under ODI. When it comes to ODI, the investment is made with the primary objective of owning or controlling a part of the foreign entity.

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Eligibility for Overseas Direct Investment

The following entities are eligible to make ODI in India:

• Indian companies
• LLPs
• Resident individuals
• Registered partnerships

Limits for Overseas Direct Investment

The Indian government places limits on how much an Indian company or individual can contribute to an investment abroad:

• Indian companies investing in foreign investments can invest up to 400% of their net worth (but not beyond this limit) as per their last audited balance sheet.
• Resident individuals can invest up to USD 250,000 per financial year under the Liberalised Remittance Scheme (LRS).

These rules ensure Indians and Indian companies can invest overseas while also making sure that they don't place themselves in financial risk while investing outside India.

Prohibited Sectors under Overseas Direct Investment in India

Though ODI allows Indian companies and residents to invest overseas, some sectors are prohibited by Indian law. Indian companies and individuals cannot invest overseas in sectors such as:

• Real estate business (buying or selling land abroad),
• Gambling activities,
• Financial sectors or investments that are related to the Indian Rupee (You will be required to gain the RBI's approval before the investment)

Step-by-Step Overseas Direct Investment Process

Follow these steps to complete the ODI process for your company:

Step 1: Company Approval

Get approval from the company’s board of directors. This includes passing a board resolution mentioning the investment in a foreign entity and the amount of investment.

Step 2: Business Valuation

To ensure compliance, the foreign company, whether a Joint Venture (JV) or Wholly Owned Subsidiary (WOS), must get a valuation done for ODI transactions by a registered valuer or merchant banker.

Step 3: File Form ODI

The company must file Form ODI - Part I to an Authorised Dealer (AD) Bank and submit relevant documents. Verify the documents by the AD bank to ensure compliance, especially for ODI under the automatic route.

Step 4: UIN (Unique Identification Number)

After the verification is complete, you will receive a Unique Identification Number (UIN) for the initial investments and outward remittances. This number will be used for transactions like foreign direct investment and reports related to the transactions.

Step 5: Ongoing Reporting

After the investment is made, the individual or company must:

• File Annual Performance Reports (APR) to the RBI,
• Submit reports on shares under the ODI,
• Keep proper financial records of the overseas entity.

Read Also: ⁠Disclosures and Penalties of Foreign Assets in Income Tax Return

Two Main Routes for Overseas Direct Investment in India

There are two main ways through which a company can invest abroad from India using its investment fund:

1. Automatic Route

• No prior RBI approval is required.
• The investment must be within the set limit and in permitted sectors.
• Most Indian companies use this route.

2. Approval Route

This requires RBI approval before investment. You need to do this when:

• Investing in financial sectors,
• Exceed the financial limit mentioned by the RBI,
• Done when the requirements of the automatic cannot be fulfilled.

If you cannot meet the requirements for the automatic route, you must submit a request for approval from your AD bank. If you require professional assistance for the process, you can reach out to the top tax consultant in Gurgaon today.

Required Documents for RBI Approval

If your ODI investment needs RBI approval, you’ll need to submit the following documents:

• Board resolution for the proposed overseas investment,
• Valuation report for the foreign startup or company,
• The latest audited financial statements of the Indian entity,
• Details of the organizational structure of the foreign entity (business plan, legal documents),
• Form ODI 
• Identity and PAN card details (for individuals),
• Reasons for seeking approval under FEMA compliance
• Certification of incorporation of the foreign entity

Your Authorised Dealer Bank will send these documents to the RBI. If you require professional assistance with the documents and submission, reach out to one of the top chartered accountant firms in Gurgaon.

Funding Options for Overseas Investment in India

Indian entities can fund their foreign investments using:

• Internal accruals – Profits earned and retained in the business.
• Loans or borrowings – From Indian banks or financial institutions.
• External Commercial Borrowings (ECBs) – Loans taken in foreign currency from outside India.
• Foreign exchange – Through an AD Bank.
• Liberalised Remittance Scheme (LRS) – For resident individuals, up to USD 250,000 per financial year.

The source of funding must be legal and permitted under the RBI and FEMA regulations. If any issues are found, then it may lead to a financial penalty or even legal prosecution.

Read More: Corporate Tax Filing Obligations for Foreign Companies in India

Final Thoughts

Making an investment in a foreign entity helps Indian businesses and individuals to grow and expand their business beyond their home country. With proper planning and by following the RBI’s ODI guidelines, Indian companies can safely and legally invest in foreign startups and companies without any worries. 

Whether you are a growing business or an individual investor, understanding the overseas investment rules and regulations is important to avoid compliance issues.