Why in the news ?

• The proposed Outward Direct Investment (ODI) policy may contain provisions to make it easy for many Indian firms, envisioning ambitious plans to transform themselves into multi­national companies (MNC), to go global and expand.

More on news

• Approval requirements and other norms would be simplified in a manner that would encourage ‘internationalisation’ of Indian companies.
• However, sources, privy to the developments, also said the ODI policy was expected to tighten regulations to prevent round-­tripping structures, where funds are routed by India­based companies into a newly formed or existing overseas subsidiary and then brought back to India to circumvent regulations here.
• They said the Reserve Bank of India (RBI) and the Finance Ministry (tax department) were concerned about such structures.
• According to India Brand Equity Foundation (IBEF), “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.”
• Currently, the jurisdiction over ODI is mainly with the RBI, and the concerned law here is the Foreign Exchange Management Act.
• As per the current norms, if a holding company is used to make an investment, it may qualify as a core investment company/ non­banking financial company, and therefore, not allowed to invest in non­financial services outside India.
• Also, if the overseas business goes bankrupt, approvals are required for depletion in value of more than 25%.
• As per Finance Ministry data, India’s ODI rose 56.1% year-­on-­year from $6.8 billion in 2014­15 to $10.6 billion in 2015-­16, and further up by 39.37% to $14.8 billion in 2016­17.
• Top ten ODI destination countries in FY’15, FY’16 and FY’17 included Mauritius, Singapore, the U.S., the UAE and the Netherlands.
• 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 Singapore, the U.S., the UAE , Netherlands and the Mauritius.

Outward Direct Investment (ODI)

• 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.
• Employing outward direct investment is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad.

Source

·         The Hindu, Investopedia.