Legal Know-hows For Indian Startups Setting Up Business Overseas
Legal experts from NovoJuris show you the way
If you as a business setting up business outside of India, then not only do the legal requirements of that country becomes applicable, but quite a few of the Indian legislation and statutory requirements have to be kept in mind as well. In this post, we are focusing on the Overseas Direct Investment (ODI) governed by the Foreign Exchange Management Act, 1999 and the regulations there under.
A quick thumb rule to understand if you are reading foreign exchange related matters like this one (at a very very high level) is, if the foreign exchange is getting into India there are quite a few relaxations including valuation terms. Obviously, the country needs foreign exchange. However, when there is foreign exchange outflow from India, there are quite a few restrictions.
The Master Circular on Overseas Direct Investment issued on 1 July 2011 covers many of these aspects that we have captured below. You’ll find the is under the Notifications tab on RBI’s website. We would have loved to give a link to the right circular, but RBI website’s Terms of Service requires their prior permission .
Under the ODI Indian Entities can directly invest outside India by way of contribution to the capital or through subscription to the Memorandum of Association of the foreign entity, as this signifies long term interest in the overseas entity. In other words there are limited options available are through a Joint Venture (JV) or a wholly owned subsidiary (WOS).
A JV means a foreign concern formed, registered or incorporated in a foreign country in accordance with the laws and regulations of that country and in which investment has been made by an Indian entity. In a WOS scenario, the entire capital is owned by an Indian entity.
Legal Entities permitted to make investments:
- Company incorporated in India
- Body created under an Act of Parliament ( NTPC, Airport Authority of India)
- Partnership registered under the Partnership Act, 1932
- (and no, LLP or an individual is not permitted. See below for exceptions)
Legal entities permitted to open overseas branches
- A firm
- A company
- Body corporate registered and incorporated in India
- Proprietary concern
Obligations of Indian Entity:
The Indian party which has made direct investment abroad is under obligation to:
- Receive share certificate or any other document as evidence of investment.
- Repatriate to India the dues receivable from foreign entity.
- Submit the documents/ Annual Performance Report to the Reserve Bank through the AD Category- I Bank.
The nuances of reporting, compliances, application process is still arduous, but then if your startups market or business is outside of India, the logistics of getting out on foreign shores should not hold you back!
Disclaimer: This post is meant for information purposes only and is not a legal opinion.
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