Easier norms may help Indian firms go global

Easier norms may help Indian firms go global

Context

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 multi-national companies (MNC), to go global and expand.

Tightening of round tripping provisions

ODI policy also expected to tighten regulations to prevent round-tripping structures.

Meaning: 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.

Importance of Mergers and Acquisition for Indian firms  

• 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

Jurisdiction of ODI: RBI

Concerned law: Foreign Exchange Management Act

‘Some irritants’

• There are some irritants in the current (ODI) norms
• 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%

Top ten ODI destination

• 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.

An interesting fact

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.