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Overseas Direct Investments …AN ANALYSIS



Guidelines : Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 have been notified by RBI vide Notification No. FEMA 120/RB-2004, dated July 07, 2004.

Clarifications: Clarifications can be obtained from, The Chief General Manager RBI, Foreign Exchange Department, Overseas Investment Division, Central Office, Amar Building, 5th Floor, Mumbai- 400001

 General Permission:
(I) General Permission is available for purchase or acquisition of Securities Outside India.

(II)(a) General Permission is available to individuals who are residents in India. General Permission is not available to other than individuals.

(III) Investments should be (a) Out of funds as available in RFC account. (b) Out of foreign currency resources as available Outside India, when not permanently resident in India.

(IV) Investments should be maximum USD 2,50,000 per Financial Year under Liberalized Remittance Scheme (LRS) by individual as resident in India.

(V) Not Permanent Resident includes a person resident in India for employment for specified period or for specific job or assignment not exceeding 3 years.

What ODIs Includes:
(I) Investments through contribution to capital or subscription to Memorandum of Association of foreign entity for setting up or acquiring a Joint Venture (JV) or
(II) Wholly Owned Subsidiary (WOS).

Acquisition of An Existing Company:
(I) Eligible Indian Entity can acquire the partial stake through JV or 100% stake through WOS.
(II) However, Valuation can be made in accordance with prescribed norms applicable in India.

Permitted Activities: 
(I) Eligible Indian entity can invest in bonafide activity except specifically prohibited &
(II) Also certain additional conditions shall be complied for Financial Service Sector.

Eligibility:
A Company as incorporated in India
(I) A Body as created under Act of Parliament
(II) A Registered Partnership Firm
(III) An Entity as notified by RBI

Prohibited Activities:
(I) Real Estate Activities & Banking Business outside India.
(II) However, Indian banks as operating in India can set up JVs or WOSs outside India
with approval from RBI.
Notification is yet to issue for 2,50,000 USD instead of 1,25,000 USD

Real Estate Business:
(I) Buying & Selling of real estate or trading in Transferable Development Rights (TDRs)
(II) However, It does not include:
(a) Development of Township
(b) Construction of Residential & Commercial premises or Roads & Bridges

Automatic Route :
(I) Where eligible Indian entity does not require any approval from RBI for ODIs in JV or WOS.
(II) Where eligible Indian entity will be required to approach AD-I bank with application in Form ODI and to enclose prescribed enclosures & documents for remittances.
(III) However, Permission will be required from regulatory authority in India & Outside India both for ODIs in financial Service Sector.

Limits Under Automatic Route:
(I) Maximum 400% against Net Worth of Eligible Indian Entity for ODIs in JV or WOS for bonafide activity.
(II) However, Ceiling of 400% against Net Worth shall not be required where ODIs are to be made:
(a) Out of balance as available in EEFC account.
(b) Out of funds as raised through ADRs or GDRs.
(c) Henceforth eligible Indian entity shall be permitted for ODIs 400% against Net Worth.
(d) Out of balance as available in EEFC account.
(e) Out of funds as raised through ADRs or GDRs.
(IV) Eligible Indian entity is not permitted where listed in RBI Caution list or defaulter in CIBIL or under investigation of DOE.
(V) Eligible Indian entity will be required to route all transactions through one branch of AD- I Bank.
(VI) Net worth Includes
(a) Net worth = Paid up Capital + Free Reserves
(b) Paid up Capital = Equity shares + Preference Shares

Procedure Under Automatic Route: Eligible Indian entity will be required to submit a Form ODI along with needed documents:
(a) Certified Copy of Board Resolution
(b) Statutory Auditor Certificate & Valuation report, where acquisition of existing company is taking place.

Submission of Application Form: (I) Form ODI is available as Annexure to Master Circular on Direct Investment by Residents in Joint Venture (JV)/Wholly Owned Subsidiary (WOS) outside India.
(II) AD-I bank will be required to be submitted online, Part I, II & III of Form ODI in Overseas Investment Application with RBI.
(a)For allotment of UIN.
(b) For reporting of subsequent remittances.
(c) For filing of APRs etc.
(III) Eligible Indian entity shall be required to submit the Form ODI physically to AD-I Bank.

Computation of Financial Commitment: ODIs in JV or WOS + Loans to JV or WOS + 100% amount of Corporate Guarantee issued for JV or WOS + 50% Amount of Performance Guarantee issued for JV or WOS.

Valuation of Acquisition of Existing Company:
(I) ODIs exceeding USD 5 Million.
(a) Share valuation will be made by Registered Merchant Banker of SEBI or
(b) By Investment Banker or Merchant Banker Registered Outside India.
(II) ODIs shall not exceed USD 5 Million * Share valuation shall be made by CA or CPA.
(III) ODIs through Swap of Shares.
(a) Share valuation shall be made by SEBI registered Merchant Banker in India or
(b) By Investment Banker or Merchant Banker registered Outside India.

Creation of Charge:
(I) Permission from RBI shall be required for creating a charge on immovable properties &
(II) Also for pledge of shares of Indian Parent or Group Companies.

Pakistan & Nepal & Bhutan
(I) ODIs in Pakistan
* ODIs are not permitted in Pakistan.

(II) ODIs in Nepal
*ODIs in Nepal are permitted in rupees.

(III) ODIs in Bhutan
*ODIs in Bhutan are permitted in rupees & freely Convertible Currencies both.



Designated Authorized Dealer - I Bank for Single JV or WOS:
(I) Eligible Indian entity is required to route all transactions through one branch of AD-I Bank.

(II) Moreover one branch of AD-I bank is required to route all transactions where two or more eligible Indian Entities invested in same JV or WOS.

(III) Change of AD-I bank is permitted with permission from RBI.

Concept of Designated Authorised Dealer:
(I) Concept of One Designated Authorised Dealer-I bank shall be obeyed for each JV or WOS.
(II) Henceforth Separate Designated Authorised Dealer-I bank shall be needed for each JV or WOS.


Concept of UIN & Prior Registration with RBI:
(I) Eligible Indian entity is not required to obtain a registration with RBI for ODIs under automatic route.
(II) RBI is required to allot a Unique Identification Number (UIN) after receipt of report of first remittance in Form ODI.
(III) Subsequent ODIs shall be made in same project after allotment of UIN.
(IV) UIN shall be quoted in each communication to RBI & AD-I bank.

Utility of UIN: (I) Allotment of UIN does not constitute an approval from RBI for ODIs in JV or WOS.
(II) UIN will be needed to connect with Inflow & Outflow under automatic route available for ODIs.

ODIs Under Approval Route: Approval from RBI will be needed for certain ODIs
(I) ODIs in energy & natural resources sector exceeding limit i.e. 400%.
(II) ODIs in Unincorporated entities which are engaged in oil sector exceeding limit i.e. 400%.
(III) ODIs by Proprietorship Concerns & Unregistered partnership firm.
(IV) ODIs by Registered Trusts or Societies which are engaged in manufacturing or educational or hospital sector.
(V) ODIs by LLPs.

Parameters for Consideration Under Approval Route: Prima facie viability of JV or WOS Outside India:
(I) Likely contribution to foreign trade & other benefits to India.
(II)(a) Financial position & business track record of eligible Indian entity &
(b) Also of eligible foreign entity.
(III) Experience & Expertise of eligible Indian entity in same or similar line of activity of JV or WOS outside India.

ODIs in Financial Service Sector : Indian company engaged in financial service sector can make ODIs in JV or WOS outside India in financial service sector subject to satisfaction of certain conditions:
(I) Should have earned net profits in preceding 3 financial years from the financial service sector
(II) Should be registered with appropriate regulatory authority in India for conducting the financial service activities
(III) Should have obtained the approvals from appropriate regulatory authorities in India & outside India before venturing into financial activity
(IV) Should have fulfilled the prudential norms relating to capital adequacy as prescribed by regulatory concerned in India

 Permissible Sources for Funding the ODIs:
(I) Withdrawal of foreign exchange from an AD - I bank in India
(II) Swap of Shares.
(III) Capitalization of exports and other dues and entitlements.
(IV) Proceeds of External Commercial Borrowings (ECBs) or Foreign Currency Convertible Bonds (FCCBs).
(V) In exchange of ADRs or GDRs as issued in accordance with scheme for issue of Foreign Currency Convertible Bonds (FCCBs) and Ordinary shares (Through Depository Receipt Mechanism) Scheme, 1993.
(VI) Balance as available in EEFC account.
(VII) Proceeds of foreign Currency funds as raised through ADRs or GDRs.

Note: Ceiling of 400% is not applicable for ODIs out of EEFC or ADRs or GDRs.


Utilization of Net worth of Subsidiary or Holding Company:
(I) Eligible Indian Entity is permitted to utilize net worth of Indian Subsidiary or Holding company.
(II) However, Indian subsidiary or holding company is required to furnish a letter of disclaimer in favour of eligible Indian entity where limit is not independently availed.
(III)(a) This facility is not available to partnership firms &
(b) Also partnership firm net worth can not be utilized by incorporated entity.
(IV) Concept of holding & subsidiary company shall be recognized where minimum 51% holding exists.

Capitalization of Exports Receivable etc. as ODIs in JV or WOS:
(I) Eligible Indian entity is permitted to capitalise the receivables from foreign entity against exports or fees or royalties or any other dues for supply of technical know-how or consultancy or managerial or other services with in limit i.e. 400%.
(II) However, permission from RBI shall be obtained where export proceeds remain unrealized beyond prescribed period of realization i.e. 6 months.
(III) Moreover Indian software exporters shall be permitted to receive the shares of overseas star-up software company without entering into JV with permission from RBI Loan or Guarantee to Entity Outside India.
Eligible Indian entity will not be permitted to provide the loans or guarantees where limit i.e. 400% already completed.

ODIs through Share Swap
(I) ODIs in JV or WOS is permitted by way of share swap arrangement under automatic route with in prescribed valuation norms.
(II) Permission from Foreign Investment Promotion Board (FIPB) is required for inward investment by way of share swap arrangement.



ODIs in JV or WOS by Partnership Firm: Registered partnership firm is permitted for ODIs in JV or WOS, subject to terms and conditions as applicable to corporate entities.

ODIs in Name of Partner:
(I) Individual partner is permitted to hold the shares on behalf of partnership firm in JV or WOS outside India.

(II) However, Rules & Regulations of Host Country shall permit share holding in name of individual partners.

Setting Up Step Down Subsidiaries:
(I) Eligible Indian Entity is permitted to setup step down subsidiaries commonly known as second generation operating companies with in overall limit as applicable for investments under automatic limit i.e. 400%.
(II) Step down subsidiaries is permitted where JVs or WOSs already exists outside India.
(III) However, additional requirements are needed for setting up step down subsidiaries in financial services sector.

JV or WOS through SPV: JV or WOS can be Set-Up through special purpose Vehicle (SPV) under automatic route.

Funding for Step down Subsidiaries:
(I) Eligible Indian Entity is permitted to fund step down subsidiaries directly.
(II) However, funding will be routed through SPV where step down subsidiary as established through SPV.
(III) Eligible Indian entity is permitted to provide a guarantee directly with in permissible financial exposures where first level step down subsidiary as operating through SPV.

Pledging of Shares of JV or WOS as Security against Loans: Eligible Indian entity is permitted to pledge the shares of JV or WOS as security against loans for own purpose or for JV or WOS from a bank in India with in total permissible limit for investments outside India i.e. 400%.

Legal Obligations:
(I) Eligible Indian Entity is required to do certain things:
(a) To receive share certificates or any other documentary evidence of investment in JV or
WOS outside India & Also to submit to designated AD - I Bank.
(b) To repatriate to India, all dues receivable from foreign JV or WOS i.e. dividend & royalty & technical fees etc.
(c) To Submit, an Annual Performance Report (APR) for each JV or WOS to RBI through designated AD – I bank.
(d) To report the details to RBI through designated AD - I bank as relating to diversification of activities or setting up of step down subsidiaries or alteration in share holding pattern with in 30 days of approval.
(e) To repatriate to India sale proceeds of shares or securities with in 90 days from sale & also to submit documentary evidence through designated AD- I bank to RBI.
(II) Submission of Annual Return of Foreign Liabilities & Assets by July 15 of every year vide Circular No. 45, dated March 15, 2011.



Penalty for Non Submission of Annual Performance Reports (APRs):
(I) Eligible Indian party shall be liable to pay a penalty for delay submission or non submission of APRs.
(II) Eligible Indian party shall be required to submit the APRs to RBI through AD - I bank in Form ODI part III for each JV or WOS after finalization of audit of accounts in host Country.

Acquire & Sale of Foreign Securities without Approval from RBI by Resident Individual
* Resident individual be permitted in certain cases
(I) Acquisition under gift from resident outside India.
(II) Acquisition under cashless ESOP.
(III) Acquisition under inheritance from resident outside India.
(IV) Acquisition through funds available in RFCA in India.
(V) Acquisition as bonus or right shares.

ODIs other than in JV or WOS:
(I) Listed Indian Companies shall be permitted to invest maximum 50% of Net Worth in listed foreign companies outside India or
(II) In rated Debt Securities issued by listed Foreign Companies outside India.

Acquisition of Qualification Shares:
(I) Resident individual shall be permitted to acquire the qualification shares to become director outside India with in minimum limit as prescribed in host country.
(II) However, maximum investments shall be with in limit as prescribed under LRS i.e. USD 2.50Lac per financial year.

Acquisition of Right Shares by Resident Individual:
(I) Resident Individual is permitted to acquire the right shares issued by company as incorporated outside India.
(II) However original shares shall be held in accordance to provision of FEMA, 1999.

Acquisition of Shares in JV or WOS by Employees or Directors of Indian Promoter Company Engaged in Field of Software in India : General permission shall be granted for acquisition of shares subject to satisfactions of certain terms & conditions:
(I) That Consideration shall not to exceed the ceiling as stipulated by RBI.
(II) That Maximum permitted shares shall not to exceed by 5% of Paid up Capital of JV or WOS.

Indian Mutual Funds: Indian Mutual Funds are permitted to invest under head ODIs in certain securities
(I) ADRs or GDRs of Indian or Foreign Companies.
(II) Equity shares of foreign listed companies.
(III) Rated foreign debt securities.
(IV) Reputed money market investments.
(V) Reputed Govt Securities.
(VI) Listed derivatives for hedging & portfolio balancing alongwith underlying as securities.
(VII) Rated short term deposits with banks.
(VIII) Units or Securities as issued by foreign mutual funds.



Domestic Venture Capital Funds:  SEBI registered domestic Venture Capital Funds shall be permitted to invest in equity & equity linked instruments of foreign VCFs.

Agriculture
(I) Indian companies & Registered Partnership firms shall be permitted to undertake agricultural operations including purchase of land as required either directly or through their office outside India.
(II)(a) These Companies & partnership firm be eligible to invest in ODIs &
(b) Also with in overall limit i.e. 400%.
(III) Valuation of land be certified by approved valuer registered with appropriate valuation
authority in host country.

Acquisition of Foreign Company through Bidding or Tender Procedure: 
(I) Eligible Indian entity shall be permitted to invest in ODIs through bidding or tender procedure.
(II)(a) AD- I bank shall be permitted to allow a remittance for earnest money deposit or
(b) To issue a bid bond guarantee for participation in bidding or tender.

Hedging
(I) Eligible Indian entity is permitted to hedge against foreign exchange rate risk.
(II) AD - I bank is permitted to enter into forward or option contract with eligible Indian entity subject to verification of exposure.
(III)(a) AD - I bank is permitted to allow a cancellation of forward contract &
(b) Also permitted to allow 50% rebooking against cancelled contract.
(IV) Hedging is permitted till original maturity period where market value of ODIs shrink after hedging.
(V) Rollover at market value is permitted on due date.

 Performance Guarantee in Favour of JV or WOS
(I) Eligible Indian entity is permitted to issue a Performance guarantee in favour of JV or WOS.
(II) Only 50% amount of Performance guarantee shall be considered for computation of limit for ODI i.e. 400%.
(III) Validity period for Performance guarantee shall be equivalent to time as specified for completion of contract.
(IV) Eligible Indian entity shall require prior approval from RBI for remitting funds from India where invocation of Performance guarantee cross the limit for ODIs i.e. 400%.

 Corporate Guarantee on Behalf of Step down Subsidiary
(I) Eligible Indian entity shall be permitted to issue corporate guarantee on behalf of step down subsidiary commonly known as Second Generation Subsidiary under approval route of RBI.
(II) However eligible Indian entity should hold minimum 51% stake either directly or indirectly in step down subsidiary.


Modes for Disinvestments from JV or WOS
(I) Disinvestments will be through a transfer or sale of equity shares to non - resident or resident of Indian by way of liquidation or merger or amalgamation of JV or WOS.
(II) Disinvestments shall be permitted without approval from RBI to another an eligible Indian entity.
(III) Disinvestments shall be permitted to non-resident of India subject to satisfaction of certain conditions.
(a) That sale should not be a result in any write-off of investments.
(b) That sale should be made through stock exchange where shares of JV or WOS are listed.
(c) That sale should not be lower than value as certified by CA or CPA where shares of JV or WOS not listed.
(d) That eligible Indian entity should not have any outstanding from JV or WOS i.e. dividend or fee for technical know How or royalty or Consultancy or commission or other entitlements or export proceeds.
(e) That JV or WOS should have worked for minimum 1 year & also APR filed with RBI.
(f) That Indian eligible party should not be under investigation by CBI or DOE or SEBI or IRDA or any other authority in India.


Writing-Off of Capital & other Receivables in JV or WOS - Eligible Indian entity is permitted to write off the capital i.e. equity shares or preference shares or other receivables i.e. loans & royalty & technical know how fees & management fee relating to JV or WOS subject to satisfaction of certain terms & conditions:

(I)(a) That Listed Indian Company is permitted to write-off the capital & other receivables maximum for 25% of equity investments in JV or WOS under automatic route &

(b) Also Unlisted Indian company shall be permitted under approval route.
(II) (a) That Eligible Indian Entity will be required to report to RBI relating to write-off with in 30 days &
(b) Also to submit certain documents for scrutiny under both automatic & approval routes.

Setting up of Office or Branch or Representative Office (RO) Outside India
(I) Remittances for Initial Expenses Registered partnership firm & domestic company shall be permitted to establish a trading or non trading office or branch or RO outside India under automatic route for conducting normal business activities subject to satisfactions of certain terms & conditions:
(a) That Maximum remittance for initial expenses should not exceed 15% of Average Annual Sales or Incomes or Turnover during last 2 Financial Years or
(b) 25% of net worth whichever is higher.
(c) However, no restriction will be applied where remittances are made out of funds as available in EEFC account.
(II) Remittances for Recurring Expenses Maximum Remittance for recurring expenses should not exceed 10% of Average Annual Sales or Incomes or Turnover during last 2 Financial Years subject to satisfaction of certain terms & conditions:
(a) That branch or office or RO shall be established for conducting normal business activities outside India.
(b) That branch or office or RO shall not be entered in contract or agreement in contravention of Act or Rules or Regulations.
(c) That trading or non trading office or branch or RO shall not create any liabilities whether contingent or otherwise for Head Office in India & also shall not invest the surplus outside India without approval from RBI.
(d) That surplus shall be repatriated to India.
(e) However, no restriction shall be applied where remittances are made out of funds as available in EEFC account.
(III) Details of bank account opened outside India shall be reported to AD - I bank in India.
(IV) AD - I bank shall be permitted to allow the remittances for purchase of immovable property outside  India for business & residential purpose of staff with in limits prescribed for initial or recurring expenses i.e. 15% or 10 % respectively.
(V) Remittances by Software Exporter.
(a) Office or branch of software exporter is permitted to repatriate 100% value of each
 off-site contract or
(b) Permitted to repatriate, a minimum of 30% & balance 70% can be utilized for contract related expenses including expenses of office or branch outside India.
(VI) Remittances from On-Site Contracts.
Profits from On-site contracts shall be repatriated to India after completion.
(VII) Audited yearly statement showing receipts & expenses under off-site & on-site contracts outside India shall be sent to AD -I bank in India.


Regulations for Opening or Holding or Maintaining of Foreign Currency Account outside India : Eligible Indian entity shall be permitted to open or hold or maintain of Foreign Currency Account (FCA) Outside India for ODIs purpose subject to satisfactions of certain terms & conditions:
(I) That Indian entity shall be eligible for ODIs in accordance to Notification No. FEMA 120/RB - 2004, dated July 07, 2004.
(II) That host country shall require the investments through designated account.
(III) That FCA shall be opened & held & maintained in accordance to regulation of host country.
(IV) That remittance to FCA shall be utilised for ODIs in JV or WOS.
(V) That amount received in FCA by way of dividend or other entitlements shall be repatriated to India with in 30 days.
(VI) That eligible Indian entity should submit the details of debits & credits in FCA on yearly basis to AD -I bank along with certificate from Statutory Auditors in India relating to certification for maintenance of FCA in accordance to Rules & Regulations in India & host country.
(VII) FCA shall be closed with in 30 days from date of disinvestment from JV or WOS.

Acquisition of Shares of Foreign Company against Professional Services
(I)(a) Resident individual shall be permitted to acquire the shares of foreign company against part or full consideration of professional services rendered or
(b) In lieu of Director Remuneration.

(II) However, Value of Shares shall be with in prescribed limit under head Liberalized Remittance Scheme (LRS) i.e. USD 2.5 Lac per financial year.

(III)These changes are made vide Circular No. 97, dated March 28, 2012.

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This blog is Created by CA Anil Kumar Jain.