Business Setup Abroad

Any business transaction that involves persons or firms of more than one country is described as Overseas Business. The first policy governing Overseas Direct Investment was in the form of guidelines issued in 1969. These guidelines defined the extent of participation of Indian companies in projects abroad and were subsequently revised and liberalized from time to time. They aim at providing transparency in the framework of overseas investments. The most important legislation was the Foreign Exchange Management Act (FEMA) which changed the entire perspective on foreign exchange particularly those relating to investment abroad. It changed the emphasis from exchange regulation to exchange management.


Indian companies can directly invest outside India by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity, signifying a long term interest in the overseas entity. It involves setting up a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS) abroad. Under the guidelines, all applications for grant of approval for setting up joint ventures/wholly owned subsidiaries are to be made and processed by the Reserve Bank of India.


In order to make their investments abroad, Indian companies need funds to meet their various capital requirements; to make equity participation in overseas ventures as well as to acquire foreign companies or businesses. Under the Foreign Exchange Management Act (FEMA) and the various notifications issued by the Reserve Bank of Indiatherein, the investments in overseas JVs/WOSs may be funded out of one or more of the following sources:-


  • withdrawal of foreign exchange from an authorised dealer;
  • ¬†capitalisation of exports and other dues;
  • external commercial borrowings and
  • foreign currency convertible bonds raised abroad as well as through American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).

The following criteria has been laid down by the reserve Bank of India for Overseas Direct Investment under the Automatic Route are as under:


  • The Indian Party can invest up to 400% of its net worth (as per the last audited Balance Sheet) in JV / WOS for any bonafide activity permitted as per the law of the host country. The ceiling of 400% of net worth will not be applicable where the investment is made out of balances held in the EEFC account of the Indian party or out of funds raised through ADRs/GDRs;
  • The Indian Party is not on the Reserve Bank‚Äôs exporters' caution list / list of defaulters to the banking system published/ circulated by the Credit Information Bureau of India Ltd. (CIBIL) /RBI or any other credit information company as approved by the Reserve Bank or under investigation by the Directorate of Enforcement or any investigative agency or regulatory authority; and
The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an authorised dealer to be designated by the Indian Party.


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