Overseas Direct Investment (ODI) in the Financial Services Sector

What is ODI?

Overseas Direct Investment (ODI) refers to if any individual, resident individual or any Indian party making any kind of remittance outside India in any foreign entity by way of contributing to their capital and subscribing to the memorandum of association by purchasing the existing shares of the entity by market purchase, stock exchange, or a private placement. 

What is included in the Financial Service Sector?

The Financial Service Sector constitutes:

• Banking and Lending activities
• Insurance and reinsurance
• Asset management and investment advisory
• NBFC and fintech activities involving financial intermediation
• Capital market-related services.
   

Overview:

Overseas Direct Investment (ODI) in the financial services sector means that Indian entities can invest in or establish financial service businesses outside India. However, since financial services are highly regulated, such investments are allowed only if certain conditions laid down under the Foreign Exchange Management Act (FEMA) and by the RBI are fulfilled.

Only eligible Indian entities that meet the prescribed profitability and regulatory requirements can make ODI in this sector, ensuring that overseas financial investments are carried out in a controlled and compliant manner. Additionally, approval from the Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, or Reserve Bank of India may be required, depending on the activity.

Eligibility Conditions for Indian Entities:

An Indian entity engaged in business other than financial services proposing to make ODI in a foreign financial services entity must satisfy the following conditions:

• Profit Track Record: The Indian entity must have earned net profits in the immediately preceding three financial years. 
• Compliance with Prudential Norms: The entity should comply with applicable regulations and should not be a defaulter with banks or financial institutions.
• Bonafide Overseas Entity: The foreign entity must be engaged in genuine financial services and must be located in a country compliant with FATF (Financial Action Task Force) standards.
• Regulated Entity in India: The investing entity must be registered with and regulated by an Indian financial regulator, such as RBI, SEBI, IRDAI, or any other relevant authority. 

Automatic Route Vs  Approval Route:

1. Automatic Route: ODI is permitted under the automatic route if all eligibility conditions are fulfilled.
2. Approval Route: If any of the conditions are not met, prior approval from the Reserve Bank of India (RBI) is required.

Reporting and Compliance Requirements:

1. Indian entities proposing to make an ODI must comply with reporting requirements prescribed by the RBI.
2. Reporting is required to be made through the Authorised Dealer (AD) Bank prior to or at the time of making the investment, including remittance or creation of financial commitment.
3. Upon successful reporting, a Unique Identification Number (UIN) is generated for the foreign entity.
4. Any delay or non-compliance may attract Levy of Late Submission Fee (LSF) as per Foreign Exchange Management Act, 1999.

Key Restrictions:

• ODI is not permitted in countries identified as non-cooperative by FATF.
• The investment should not be structured only to bring money back to India or used for restricted arrangements.
• Individuals are generally not permitted to make ODI in financial services, except under specific regulatory approvals.

Conclusion:

ODI in the financial services sector allows Indian entities to grow their business outside India. However, since this sector is highly regulated, such investments must strictly follow FEMA and RBI rules. Careful planning, checking eligibility, and timely filing of required reports are important to ensure the investment is made smoothly and remains compliant.

FAQs:

Are individuals allowed to make ODI in financial services?

Resident individuals are not permitted to make Overseas Direct Investment (ODI) in a foreign entity engaged in financial services activity.

Can an NBFC invest in a foreign NBFC or lending company?

Yes. An RBI-registered NBFC can invest in a foreign lending or financial services entity only if it has a 3 year profit track record and it is compliant with RBI norms. In most cases, this is allowed under the automatic route. 

What about fintech companies?

• Pure technology or software fintech → ODI generally allowed like any other sector
• Fintech involved in lending, payments, or fund management → Treated as financial services and subject to stricter ODI conditions.

Can a newly incorporated Indian company make ODI in financial services?

No, because it will not meet the 3-year profit requirement.

Can profits from the foreign financial entity be repatriated to India?

Yes. Profits and dividends can be repatriated to India as per FEMA rules, subject to applicable taxes and reporting requirements.

Sakshi Shimpi
Author

Sakshi Shimpi is a CA Final student currently pursuing her articleship, with a keen interest in foreign exchange laws and cross-border transactions. She has gained practical exposure to matters relating to foreign investments, overseas direct investments (ODI), and regulatory reporting under the Reserve Bank of India (RBI) framework.

Through her work, she has developed a strong understanding of FEMA regulations and compliance requirements, assisting clients in navigating complex regulatory procedures. Sakshi is passionate about keeping up with global financial developments and aims to build deep expertise in cross-border investment advisory.