Investments made abroad under the ODI route under scrutiny of enforcement agencies
What is Overseas Direct Investment (ODI)?
1. 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.
2. Limits are prescribed for investments(e.g., up to 400% of a company’s net worth).
3. ODI investments are subject to the Rules provided in Foreign Exchange (Overseas Investment) Rules, 2022.
Why are ODI investments under the scrutiny of the Enforcement Directorate?
1. Bona Fide Business Requirement:
Under FEMA, ODI transactions must be for genuine business purposes. Investments that are structured primarily for personal benefit (for example, to bypass domestic investment restrictions or to channel funds abroad without establishing a bona fide business activity) can be flagged as non‑compliant. This means if the intended use of funds or the nature of the investment isn’t clearly tied to a legitimate business strategy, the transaction might be challenged.
2. Regulatory and Documentation Burdens:
Compliance under FEMA requires that all ODI transactions are executed through approved banking channels, with all required documentation, disclosures, and reporting in place. Any lapse-such as incomplete documentation, inadequate disclosures, or failure to meet procedural requirements-can lead to enforcement actions, including ED notices, penalties, or even forced unwinding of the investment.
3. Investment Limits and Structural Constraints:The ODI route is subject to limits based on the net worth of the Indian entity, and the structure of the investment must not create abusive multi‑layered arrangements (often referred to as “round tripping”).
Conclusion:
Recent trends suggest that enforcement agencies like the ED are increasingly scrutinizing ODI transactions-even those carried out through formal banking channels-if they suspect that the investments are used to shift funds abroad without a clear business rationale. This heightened scrutiny means that even minor deviations from FEMA norms can lead to notices or penalties.
