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Establishing and growing a stable business highly depends on getting the right investment. Whether it is a Wholly Owned Subsidiary or a Joint Venture you are investing in, it is important to understand whether the transaction falls under the Foreign Direct Investment (FDI) or Overseas Direct Investment (ODI).
The difference between ODI vs FDI India is important as they are subject to entirely different sets of rules and regulations. Even small mistakes could create major errors that could lead to fines, delays, or other problems. This blog breaks down the differences between the two routes that will help you make the right decision.
ODI or Overseas Direct Investment is one where investment in a foreign entity is done by an Indian entity or a person by creating wholly owned subsidiary (WOS) or joint ventures.
The following laws apply to ODI:
ODI occurs when an Indian entity acquires at least 10% equity in a foreign entity or establishes a management control in a foreign company regardless of the equity percentage. Investments below 10% and without management control shall be considered as OPI i.e. Overseas Portfolio Investments which are governed by some other (relaxed) norms.
Under Automatic route, an Indian entity can invest up to 400% of its net worth in ODI through joint ventures or Wholly Owned Subsidiaries. Investments exceeding this limit will have to get the permission from RBI.
When a foreign entity or individual make an investment into an Indian entity, it is referred to as Foreign Direct Investment (FDI). The investment can be of different types based on the investment instrument used such as equities and compulsorily convertible instruments.
The rules and regulations that controls FDI includes the following: Foreign Exchange Management Act, 1999 (FEMA 1999); Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (FEMA NDT Rules); Consolidated FDI Policy; and Master Direction on FDI.
If a foreign individual or firm makes an investment in an Indian company utilizing investment instruments such as:
It is also important to note that non-convertible or optionally convertible instruments, such as debentures or redeemable preference stocks, are considered (External Commercial Borrowing) ECBs as per the Indian regulatory system.
It is critical to understand the difference as both types are regulated by different rules and regulations.
FDI flows through two primary foreign investment routes in India:
The applicable route depends on the sector and the foreign equity being acquired.
ODI and FDI both are very different routes. To understand them better here is a direct comparison table for the two routes:
| Feature | ODI (Overseas Direct Investment) | FDI (Foreign Direct Investment) |
|---|---|---|
| Direction of Capital | India → Overseas | Overseas → India |
| Who it concerns | Indian companies / residents investing abroad | Foreign companies / investors investing in India |
| Governing regulation | FEMA 1999, ODI Rules 2022 (RBI) | FEMA 1999, FDI Policy (DPIIT), FEMA (NDCT) Rules 2019 |
| Key approval body | Reserve Bank of India (RBI) / AD Bank | Concerned Administrative Ministry / DPIIT / RBI |
| Common route | Automatic Route; 100% of net worth for fresh ODI (reduced from 400% in 2013; 400% only applies to pre-2013 commitments or ECB-funded investments) | Automatic Route / Government Route |
| Typical instrument | Equity shares, compulsorily convertible instruments, loans | Equity, CCPS, CCDs, ECB |
| Annual reporting | Annual Performance Report (APR) – Form ODI-APR | FC-GPR, FC-TRS, FLA Return |
| Transfer pricing rules | Applicable on cross-border transactions | Applicable on cross-border transactions |
The route that applies to you depends on who is investing, in which direction and entity.
Here are the five most common structures and the route each one triggers:
Route: FDI
You (or your foreign holding company) are investing capital into a newly incorporated Indian Private Limited Company. That’s foreign money coming into India FDI. Your Indian company files Form FC-GPR with the RBI within 30 days from share allotment. In most sectors, prior approval is not required.
Route: ODI
An Indian operating company wants to open a subsidiary in Singapore, the UAE, or elsewhere. This is foreign money flowing from India and hence classified as Overseas Direct Investment (ODI). An Annual Performance Report (APR) must be filed every year thereafter.
Route: FDI (secondary transfer)
This isn’t a fresh investment; it’s a share transfer. A foreign buyer purchases equity from an Indian seller. Both parties need to ensure compliance. This transaction will need to be reported through Form FC-TRS within 60 days of either the transfer of capital instrument or the receipt/remittance of funds, whichever comes first.
Route: Both FDI and ODI, simultaneously
This is the most common structure in VC-backed and multinational setups. The Indian operating company’s investment up into the foreign holding company is ODI. The foreign holding company’s investment down into India is FDI. Both sets of rules apply, and both sets of filings are required.
Route: ODI (for existing overseas holdings)
Once you become a person resident in India under FEMA, your overseas shareholdings come under the ODI framework. You don’t need to sell or wind down your foreign company, but you do need to report it. Investments made before you became an Indian resident are generally old but must be disclosed to the RBI through your Authorised Dealer Bank.
Businesses often make mistakes in structuring that later affects the outcomes of the business. Here are some common mistakes while structuring that should be avoided:
When understanding FDI and ODI the difference is not just the direction in which the investment flows, but it also determines the laws that will apply to your structure. understanding the classification is important before funds move to avoid any penalties or late filings.
New businesses and entrepreneurs can struggle understanding the framework. This is where an expert guidance is needed. At Stratrich Consulting we have years of experience in guiding business to grow and gain stability. Connect with us today to give your business a better direction and stability.
