An Indian company can invest in any activity in which it has experience and competence (excluding those that are expressly barred). When engaging in financial sector operations, certain additional conditions established in Regulation may be observed.
Foreign investment is prohibited in the real estate and banking industries. However, provided they obtain authorisation under the Banking Regulation Act 1949, Indian banks operating in India can form joint ventures or wholly owned subsidiaries (JV/WOS) in other countries.
Only an Indian financial services business that meets the following standards is allowed to invest in the financial services sector:
- has made a profit from financial services activities in the previous three financial years;
- is registered with the appropriate regulatory authority in India for conducting financial services activities;
- has obtained approval from the regulatory authorities concerned both in India and abroad for venturing into such financial sector activity;
- has met the prudential capital adequacy norms as prescribed by the concerned regulatory authority.
Under the Automatic Route, the following criteria for overseas direct investment/financial commitment apply:
- The Indian Party is not on the Reserve Bank’s 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 bureau;
- The Indian Party routes all transactions related to a WOS investment through a single branch of an approved dealer (AD bank) that the Indian Party designates.
“Financial commitment” refers to an Indian Party’s direct investments outside of India, which include:
- contributions to equity shares of its WOS abroad;
- loans to its WOS abroad;
- 100% of the amount of corporate guarantee issued on behalf of its overseas WOS;
- 100% of the amount of bank guarantees; and
- 50% of the amount of performance guarantee issued on behalf of its overseas WOS.
Procedure to be followed under the Automatic Route:
The Indian Party wishing to make an overseas direct investment through the automatic route must first complete form ODI online through AD bank, which must be accompanied by the documents listed therein, such as a certified copy of the Board Resolution, a Statutory Auditors certificate, and a valuation report (in the case of an existing company) that meets the valuation norms, before approaching an Authorized Dealer (designated Authorized Dealer) for the investment/remittance.