CS Mohit Singh Kharayat

INTRODUCTION

With the aim to diversify the business abroad, avail the opportunity thrown by the overseas market, to make full utilization of full capacity, branding, and many more reasons inspire the entities to go overseas, invest and set up business over there and it not only benefits the investing entities, also the county in the form of better promote economic co-operation with the host countries, branding of a country as investor and much more.

In simple, terms if we define the Overseas Direct Investment, it mean investments done outside India by an Indian, by way of subscription to the Memorandum 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, signifying a long-term interest in the foreign entity (JV or WOS).

In this article, we have tried focus on the basic concepts that will enlighten about the basic concepts and basic provisions before making such Investment.

BASIC CONCEPTS

An investment outside India can be done by an Indian party or an individual or (single or in association with another resident individual or with an ‘Indian Party’).

1. Whereby an Indian party is defined as under:

A. a company incorporated in India; or

B. a body created under an Act of Parliament; or

C. a partnership firm registered under the Indian Partnership Act 1932; or

D. a Limited Liability Partnership (LLP) incorporated under the LLP Act, 2008; and

E. and any other entity in India as may be notified by the Reserve Bank.

* When more than one such company, body or entity makes investment in the foreign JV / WOS, such combination will also form an “Indian Party”.

2. Whereas, an individual is a natural person who is a person resident in India who is defined as under:

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-

i. for or on taking up employment outside India, or

ii. for carrying on outside India a business or vocation outside India, or

iii. for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

B. a person who has come to or stays in India, in either case, otherwise than-

i. for or on taking up employment in India, or

ii. for carrying on in India a business or vocation in India, or

iii. for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

RBI has made different provisions for Indian Party and for resident Individuals w.r.t. Overseas Direct Investments.

In first, we shall bring about the provisions made for Indian party than about the Resident Individual.

PROVISIONS FOR INDIAN PARTY

An Indian Party can make overseas direct investment in any bonafide activity, however, Real estate and banking business are the prohibited sectors for overseas direct investment. But, Indian banks operating in India can set up JVs/WOSs abroad provided they obtain clearance under the Banking Regulation Act, 1949, from the Department of Banking Regulation (DBR), CO and RBI.

Forms of entity that an Indian party can form for Overseas Direct Investment:

1. 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 by contributing in the finance, or providing technical know-how or by any other means, as mutually agreed.

2. 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.

Modes of Investment

A. Automatic Route: Under it an Indian Party does not require any prior approval from the RBI for making any overseas direct investments in a JV/WOS abroad. However, an Indian Party should approach an Authorized Dealer Category – I bank (Hereafter, referred as “AD bank”) with an application in Form ODI part-I along with the prescribed enclosures / documents for making such investments and the AD bank should report the relevant Form ODI in the online OID application and obtain UIN while executing the remittance and intimate to the Remitter which shall be used by him in all the future communication made with RBI.

Under the Automatic Route, an Indian Party can make overseas direct investment in the equity shares and compulsorily convertible preference shares (Compulsory Convertible Debentures are not specified) of WOS outside India without prior approval of the RBI subject to certain conditions and restrictions explained as follows:

1. The WOS abroad should be engaged in bonafide business activity.

2. 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.

3. Further, the above limit will not apply to direct investment in any foreign security out of the proceeds of its international offering of shares through the mechanism of ADR and/or GDR or out of balances held in EEFC account of the Indian party.

4. 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.

5. An Indian Party may extend a loan or a guarantee to or on behalf of the JV/WOS abroad provided that the Indian Party has made investment by way of contribution to the equity capital of the JV/WOS.

6. For the purpose of making investment, the valuation of shares of the company outside India shall be made by a Chartered Accountant or a Certified Public Accountant. However, if the amount is more than USD 5 million, the valuation of the shares 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.

7. The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an Authorised Dealer(AD) to be designated by the Indian Party.

B. Approval Route: If the conditions not fulfilled in Automatic route then the Indian Party shall seek prior approval of the RBI before making investment. Like Automatic root, the applicant should approach their designated Authorized Dealer (AD) with Form ODI along with the prescribed enclosures / documents for making such investments which shall then be submitted to RBI after due scrutiny by AD bank and with the specific recommendations of the designated AD bank along with supporting documents. The designated AD before forwarding the proposal should submit the Form ODI in the on-line OID application under approval route after which UIN will be given by RBI.

RBI before approval shall take into account the following factors:-

1. Prima facie viability of the JV/WOS outside India;

2. Contribution to external trade and other benefits which will accrue to India through such investment;

3. Financial position and business track record of the Indian Party and the foreign entity;

4. Expertise and experience of the Indian Party in the same or related line of activity of the JV or WOS outside India.

Manner of Funding

Investment in an overseas JV / WOS may be funded out of one or more of the following sources:

1. drawal of foreign exchange from an AD bank in India;

2. capitalization of exports;

3. swap of shares(Subject to approval of FIBP and valuation of the shares is done by a Category I Merchant Banker)

4. proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds(FCCBs);

5. 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;

6. balances held in EEFC account of the Indian party and

7. proceeds of foreign currency funds raised through ADR / GDR issues.

OVERSEAS DIRECT INVESTMENTS BY RESIDENT INDIVIDUALS

1. A resident individual (single or in association with another resident individual or with an ‘Indian Party’) may make overseas direct investment in the equity shares and compulsorily convertible preference shares of a JV or WOS outside India under the Liberalized Remittance Scheme.

2. Under this scheme, all resident individuals, including minors, are allowed to freely remit up to USD 125,000 per financial year.

3. The resident individual investors can retain and re-invest the income earned on investments made under the Scheme. The residents are not required to repatriate the funds or income generated out of investments made under the Scheme.

4. Formerly, there was ambiguity whether individual residents in India can form a new company outside India under the LRS. This issue was resolved by RBI by issuing Notification No. 263/2013 whereby individuals resident in India were permitted to form a company outside India under LRS within the limit prescribed thereunder. However, the reporting mechanism and valuation norms under ODI are also made applicable to such resident individuals.

OBLIGATIONS ON INDIAN ENTITIES AS WELL AS INDIVIDUALS MAKING FOREIGN DIRECT INVESTMENT

Reporting Compliances and obligations on Indian party

A. One Time

The Indian Company intending to make a direct investment under the automatic route is required to submit form ODI with the designated bank, duly supported by the documents listed therein such as,

1. Certified copy of the Board Resolution;

2. Statutory Auditors certificate; and

3. Valuation report

B. Recurring

1. Submit Annual Performance Report of overseas entity to the Reserve Bank of India through AD Bank

2. Submit annual return on foreign liabilities and foreign assets

3. Report the details of the decisions taken by a JV/WOS regarding diversification of its activities /setting up of step down subsidiaries/alteration in its share holding pattern within 30 days of such alteration.

C. Event Wise

1. receive share certificates or any other documentary evidence of investment in the foreign JV / WOS as an evidence of investment and submit the same to the designated AD within 6 months;

2. Repatriate to India all dues viz. dividends, royalty, technical fees, etc within 60days of falling due

3. In case of disinvestment, sale proceeds of shares/securities shall be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares /securities and documentary evidence to this effect shall be submitted to the Reserve Bank through the designated AD.

*Delayed submission/ non-submission of APRs entail penal measures, as prescribed under FEMA 1999, against the defaulting Indian Party.

(Author can be reached at +91- 8447879875 or on pcs.mohitsingh@outlook.com)

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