A. INTRODUCTION:
Direct Investment outside India means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, by setting up a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS).
Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 regulate acquisition and transfer of a foreign security by a person resident in India i.e. investment (or financial commitment) by Indian entities in overseas joint ventures and wholly owned subsidiaries as also investment by a person resident in India in shares and securities issued outside India. Overseas Investment can be made under two routes viz. (i) Automatic Route and (ii) Approval Route.
B. PERSONS ELIGIBLE TO MAKE INVESTMENTS OUTSIDE INDIA:
1. Resident Individuals: a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include –
a. a person who has gone out of India or who stays outside India, in either case –
- for or on taking up employment outside India, or
- for carrying on outside India a business or vocation outside India, or
- for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period
b. Indian Party: means
- a company incorporated in India or a body created under an Act of Parliament or
- a partnership firm registered under the Indian Partnership Act, 1932, or
- a Limited Liability Partnership (LLP), registered under the Limited Liability Partnership Act, 2008 (6 of 2009), and
- includes any other entity in India as may be notified by the Reserve Bank.
making investment in a Joint Venture or Wholly Owned Subsidiary abroad.
Provided that when more than one such company, body or entity make an investment in the foreign entity, all such companies or bodies or entities shall together constitute the “Indian Party”.
c. Proprietorship concern and unregistered partnership firm.
d. A Trust registered under the Indian Trust Act, 1882.
e. A society registered under the Societies Registration Act, 1860
The provisions relating to investments by Resident Individuals and Indian Party are different and we have in this article dealt with the requirements to be complied with by both of them.
C. OVERSEAS INVESTMENTS BY RESIDENT INDIVIDUAL:
A Resident Individual can make overseas investments as per the provisions of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 and in accordance with the limits and other provisions set out under Liberalized Remittance Scheme.
1. General Permission: General permission has been granted to persons residents in India for purchase/acquisition of securities in the following manner:
a. out of the funds held in RFC account;
b. as bonus shares on existing holding of foreign currency shares; and
c. When not permanently resident in India, out of their foreign currency resources outside India.
2. Limit: All resident Individuals are permitted to make current and capital account transactions including purchase of securities and also setting up/acquisition of JV/WOS overseas upto the limit prescribed by the RBI from time to time, per financial year under the Liberalised Remittance Scheme (LRS) (currently USD 2,50,000 per Financial Year).
3. Permissible Transactions: The following are the permissible transactions:
a. Opening of foreign currency account abroad with a bank
b. purchase of property abroad
c. acquisition and holding shares of both listed and unlisted overseas company or debt instruments; acquisition of qualification shares of an overseas company for holding the post of Director; acquisition of shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration; investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes;
d. setting up Wholly Owned Subsidiaries and Joint Ventures (with effect from August 05, 2013) outside India for bonafide business subject to the terms & conditions stipulated in Notification No FEMA.263/ RB-2013 dated March 5, 2013;
e. extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives as defined in Companies Act, 2013.
4. Non-Permissible Transactions: The remittance facility is not available for the following:
a. Purchase of lottery tickets/sweep stakes, prescribed magazines, etc.
b. Remittance from India for margins or margin calls to overseas exchanges / overseas counterparty.
c. Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.
d. Remittance for trading in foreign exchange abroad.
e. Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force (FATF) as “non- cooperative countries and territories”, from time to time.
f. Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks
5. Acquisition of foreign securities by way of gift or inheritance: A person resident in India being an individual may acquire foreign securities by way of gift or inheritance from person resident outside India or issued by a company incorporated outside India under cashless employee stock option scheme provided it does not involve any remittance from India.
6. Purchase of equity shares offered by a foreign company under its ESOP Schemes: A person resident in India being an individual who is an employee/ director of Indian office/ branch of a foreign entity/ subsidiary of foreign entity in India/ Indian company in which foreign entity has direct/ indirect equity holding, may accept shares offered by such foreign entity provided that the shares under ESOP scheme are offered by the issuing company globally on uniform basis and an annual return is submitted by the Indian company to RBI through AD Bank giving details of remittance/ beneficiary.
7. Issue of shares in lieu of professional services or remuneration: A resident individual may acquire shares of foreign entity in part/full consideration of professional services rendered to the foreign company or in lieu of director’s remuneration provided the limit of acquiring shares in terms of the value shall be within the LRS limit in force at the time of acquisition or else permission from RBI shall be required.
8. The resident individual making investments abroad shall file an application in Form ODI along with Form A2 with AD Bank. The resident individual seeking to make the remittance through LRS should furnish Form A2 to AD Bank.
9. It is mandatory for the resident individual to provide his/her Permanent Account Number (PAN) to make remittance under the Scheme.
10. The resident individual is not required to repatriate the funds or income generated out of investments made under the Scheme. Investor can retain, reinvest the income earned on the investments.
D. OVERSEAS INVESTMENTS BY INDIAN PARTY:
Indian Party has been permitted to make investment/financial commitment abroad in the form of setting up JV/WOS .Further, the Indian Party should not be on the Reserve Bank’s Exporters’ caution list / list of defaulters to the banking system circulated by the Reserve Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information company as approved by the Reserve Bank or under investigation by any investigation / enforcement agency or regulatory body.Further,all transactions relating to a JV / WOS routed through one branch of an AD bank.
1. Definitions: Some of the important definitions are as follows:
a. “Financial Commitment”: Shall comprise of the following:
i. 100% of the amount of equity shares and/or Compulsorily Convertible Preference Shares (CCPS);
ii. 100% of the amount of other preference shares;
iii. 100% of the amount of loan;
iv. 100% of the amount of guarantee (other than performance guarantee) issued by the Indian Party;
v. 100% of the amount of bank guarantee issued by a resident bank on behalf of JV or WOS of the Indian Party provided the bank guarantee is backed by a counter guarantee / collateral by the Indian Party.
vi. 50% of the amount of performance guarantee issued by the Indian Party provided that if the outflow on account of invocation of performance guarantee results in the breach of the limit of the financial commitment in force, prior permission of the Reserve Bank is to be obtained before executing remittance beyond the limit prescribed for the financial commitment
b. “Joint Venture (JV)” means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian Party makes a direct investment.It may be noted that no specific % of investment is specified for regarding a foreign entity as JV, therefore, even nominal investment may result in foreign entity being regarded as JV.
c. “Wholly Owned Subsidiary (WOS)” means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country, whose entire capital is held by the Indian Party.
2. Prohibitions:
a. Indian Parties are prohibited from making investment or financial commitment in foreign entity engaged in real estate or banking business, without the prior approval of the Reserve Bank.
b. An overseas entity, having direct or indirect equity participation by an Indian Party, shall not offer financial products linked to Indian Rupee without the specific approval of the Reserve Bank.
c. Investments / financial commitments in Nepal are permitted only in Indian Rupees.
d. Investments / financial commitments in Bhutan are permitted in Indian Rupees as well as in freely convertible currencies.
e. Investments / financial commitments in Pakistan by Indian Parties are permissible under the approval route.
f. Investments / financial commitments by an Indian Party are not permitted in an overseas entity located in the countries identified by the Financial Action Task Force (FATF) as “non co-operative countries and territories” as per list available on FATF website.
3. Method of Funding: Investments in overseas JV/WOS may be funded out of one or more of the following sources:
a. drawal of foreign exchange from an AD bank in India.
b. capitalisation of exports.
c. swap of shares, where valuation of the shares will have to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.
d. proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs)
e. in exchange of ADRs/GDRs issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from time to time by the Government of India
f. balances held in EEFC account of the Indian Party
g. proceeds of foreign currency funds raised through ADR / GDR issues.
4. Investments Under Automatic Route:
a. Limits: The total financial commitment of the Indian Party in all WOS abroad should not exceed 400 % of the net worth of the Indian Party as on the date of last audited balance sheet. However any financial commitment exceeding USD $ 1 billion in a financial year would require prior approval of the Reserve Bank even when the total financial commitment of the Indian Party is within the eligible limit under the automatic route.
b. In case of partial / full acquisition of an existing foreign company, where the investment is more than USD 5 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and, in all other cases by a Chartered Accountant or a Certified Public Accountant.
c. Overseas Direct Investment in Financial Services Sector: The following conditions need to be satisfied by Indian Party:
i. registered with the regulatory authority in India for conducting the financial sector activities.
ii. has earned net profit during the preceding three financial years from the financial services activities;
iii. has obtained approval from the regulatory authorities concerned both in India and abroad for venturing into such financial sector activity; and
iv. has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.
d. Investment in equity of companies registered overseas / rated debt instruments:
i. Listed Indian companies are permitted to invest up to 50 per cent of their net worth as on the date of the last audited balance sheet in shares and bonds/fixed income securities, rated not below investment grade by accredited / registered credit rating agencies, issued by listed overseas companies.
ii. Indian Mutual Funds registered with SEBI are permitted to invest within an overall cap of USD 7 billion.
iii. A limited number of qualified Indian Mutual Funds, are permitted to invest cumulatively up to USD 1 billion in overseas Exchange Traded Funds as may be permitted by SEBI.
iv. Domestic Venture Capital Funds / Alternative Investment Funds registered with SEBI may invest in equity and equity linked instruments of off-shore Venture Capital Undertakings, subject to an overall limit of USD 500 million.
5. Investments Under Approval Route:
a. Prior approval of the Reserve Bank would be required in all other cases of direct investment (or financial commitment) abroad.
b. Reserve Bank would, inter alia, take into account the following factors while considering such applications:
i. Prima facie viability of the JV / WOS outside India.
ii. Contribution to external trade and other benefits which will accrue to India through such investment/ financial commitment.
iii. Financial position and business track record of the Indian Party and the foreign entity; and
iv. Expertise and experience of the Indian Party in the same or related line of activity as of the JV / WOS outside India.
c. Investments by proprietorship concerns and unregistered partnership firms: is permitted under approval route subject to following terms and conditions:
i. It is classified as ‘Status Holder’ as per Foreign Trade Policy issued by Ministry of commerce and industry.
ii. It has proven track record, i.e., the export outstanding does not exceed 10% of the average export realization of the preceding three years and a consistently high export performance;
iii. The proprietorship concern / unregistered partnership firm in India has not come under the adverse notice of any Government agency;
iv. The amount of proposed investment or financial commitment outside India does not exceed 10 per cent of the average of last three years’ export realization or 200 per cent of the net owned funds of the proprietorship concern/ unregistered partnership firm in India, whichever is lower.
d. Investments by Registered Trusts and Societies: Engaged in manufacturing/ educational/ hospital sector are allowed to make investment (or financial commitment) in the same sector(s) in a JV/WOS outside India, with the prior approval of the Reserve Bank. The trust and the society should meet the eligibility criteria as laid down in the RBI Regulations.
E. REPORTING REQUIREMENTS:
The following are the reporting requirements:
1. Application for Investment: The Indian Party/Resident Individual intending to make overseas direct investment under the automatic route/approval route is required to fill up Form ODI duly supported by the documents listed therein and submit the form in physical to AD Bank.
2. Annual Filing: The following are the annual reporting to be made by Indian Parties/Resident Individual:
a. Annual Performance Report: to be filed in Form ODI PART III on or before 31st December every year.
b. Return on Foreign Liabilities and Assets: Annual return to be filed online by all Indian Companies which have received FDI and/or made FDI abroad (i.e. overseas investment) in the previous year(s) including the current year by 15th July every year.
F. OTHER OBLIGATIONS OF INDIAN PARTY/ RESIDENT INDIVIDUAL:
1. Receive share certificates or any other document as an evidence of investment in the foreign entity to the satisfaction of the Reserve Bank within six months from the date of effecting remittance or the date on which the amount to be capitalized became due to the Indian Party or the date on which the amount due was allowed to be capitalized.
2. Repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc., within 60 days.
3. If JV/WOS set up by Indian Party/Resident Individual diversify its activities/ set up step down subsidiary/ alter shareholding pattern should report to RBI through AD within 30 days of the approval of such decisions.
Authors: Anita Dugar, Senior Associate; Nisha Jhawar, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) anitadugar@samistilegal.in (ii) nisha@rna-cs.co.in.
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