Outward Direct Investment (ODI) policy

What is Outward Direct Investment?
An outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country. This can take the form of a green field investment, a merger/acquisition or expansion of an existing foreign facility.
What is the need of ODI Policy?
  • The proposed ODI policy may contain provisions to make it easy for many Indian firms, envisioning ambitious plans to transform themselves into Multi-National Companies (MNC), to go global and expand.
  • The ODI policy is expected to tighten regulations to prevent round-tripping structures, where funds are routed by India-based companies into a newly formed or existing overseas subsidiary and then brought back to India to circumvent regulations here.
  • Currently, the jurisdiction over ODI is mainly with the RBI, and the concerned law here is the Foreign Exchange Management Act.
How is this going to help?
  • Indian firms invest in foreign shores primarily through Mergers and Acquisition (M&A) transactions.
  • With rising M&A activity, companies will get direct access to newer and more extensive markets, and better technologies, which would enable them to increase their customer base and achieve a global reach.
  • Scheme of Investment Promotion (SIP): The SIP aims to make India among the top 10 most preferred FDI destinations in the world and among the top 50 in the ranking of countries by the World Bank on ‘Ease of Doing Business Index.’ Its objective is also to improve investor confidence to boost investment and economic growth.
ODI in different countries
  • Top ten ODI destination countries in FY’15, FY’16 and FY’17 included Mauritius, Singapore, the U.S., the UAE, the Netherlands, the U.K, Switzerland, Russia, Jersey and British Virgin Islands. Cumulatively, these nations were the beneficiaries of 84% or more of India’s ODI during each of those financial years.
  • The IBEF said ODI is being channeled into Mauritius, Singapore, British Virgin Islands, and the Netherlands mainly because these countries provide higher tax benefits.
  • Interestingly, this composition of ODI destination countries more or less mirrored the top sources of foreign direct investment inflows into India in the same period including, Mauritius, Singapore, Japan, the U.S., U.K., the UAE, the Netherlands, Germany, Cyprus and France.
Some irritants in present ODI
  • If a holding company is used to make an investment, it may qualify as a core investment company/ non-banking financial company, and therefore, not allowed to invest in non-financial services outside India
  • Also, if the overseas business goes bankrupt, approvals are required for depletion in value of more than 25%
Way forward
Approval requirements and other norms should be simplified in a manner that would encourage ‘internationalization’ of Indian companies.

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