Setting up subsidiary outside India

With the advent of Globalization, more and more Indian companies are interested in doing business outside India. They want to set-up a branch office or a subsidiary abroad. There are multiple benefits of doing so such as cost reduction because they save on import duty, ease of doing business, building an international brand etc.

Overseas investment in wholly owned subsidiaries or joint ventures has been recognized as important avenues for promoting global business by Indian entrepreneurs.

Broadly there are two routesunder which one can set up a WOS abroad, namely automatic route and approval route. Under the automatic route, a company does not require any prior approval from the regulatory authority for setting up a WOS abroad.

While other proposals / activities not covered by conditions under automatic route would require prior approval of the Reserve Bank.

Permissible sources for Funding ODI:

I. Overseas Investment under Automatic Route

Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments in a Wholly Owned Subsidiary (WOS) abroad. The Indian Party should approach an Authorized Dealer Category – I bank for effecting the remittances towards such investments.

“Indian Party” is any or combination of the following:

• A company incorporated in India
• A body created under an Act of Parliament
• A partnership firm registered under the Indian Partnership Act, 1932
• A limited liability partnership incorporated under the Limited Liability Partnership Act, 2008, and includes any other entity in India as may be notified by the Reserve Bank.

(It should be noted that individuals are not allowed to invest under the Automatic Route).

Activities permitted for overseas investment

An Indian company can make overseas investment in any activity (except those that are specifically prohibited) in which it has experience and expertise. However, for undertaking activities in the financial sector, certain additional conditions specified in Regulation 7 may be adhered to.

Real estate sector and Banking are the prohibited sectors for overseas investment. However, Indian banks operating in India can set up JV/WOS abroad provided they obtain clearance under the Banking Regulation Act 1949.

Only an Indian Company engaged in financial sector activities can make investment in the financial services sector provided it fulfills the following norms:

i. has earned net profit during the preceding three financial years from the financial services activities;

ii. is registered with the appropriate regulatory authority in India for conducting financial services activities;

iii. has obtained approval from the regulatory authorities concerned both in India and abroad for venturing into such financial sector activity;

iv. has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.

The criteria for overseas direct investment/ financial commitment under the Automatic Route are as under:

i. The Indian Party can invest up to 400% of its net worth (as per the last audited Balance Sheet) in WOS for any bonafide activity permitted as per the law of the host countrysubject to prior RBI approval for limit exceeding USD 1 Billion per FY;

ii. The Indian Party is not on the Reserve Bank’s exporters’ caution list / list of defaulters to the banking system published/ circulated by the Credit Information Bureau of India Ltd. (CIBIL) / RBI or any other credit information company as approved by the Reserve Bank or under investigation by the Directorate of Enforcement or any investigative agency or regulatory authority; and

iii. The Indian Party routes all the transactions relating to the investment in a WOS through only one branch of an authorized dealer (bank) to be designated by the Indian Party.

“Financial commitment” means the amount of direct investments outside India by an Indian Party and includes –

i. by way of contribution to equity shares of the WOS abroad;

ii. as loans to its WOS abroad;

iii. 100% of the amount of corporate guarantee issued on behalf of its overseas WOS;

iv. 100% of the amount of bank guarantees; and

v. 50% of the amount of performance guarantee issued on behalf of its overseas WOS.

Procedure to be followed under the Automatic Route

The Indian Party intending to make overseas direct investment under the automatic route is required to fill up form ODIonline through AD bankduly supported by the documents listed therein, i.e., certified copy of the Board Resolution, Statutory Auditors certificate and Valuation report (in case of acquisition of an existing company) as per the valuation norms and approach an Authorized Dealer (designated Authorized Dealer) for making the investment/remittance.

II. Overseas Investment under RBI Approval Route

Proposals not covered by the conditions under the automatic route require prior approval of the Reserve Bank for which a specific application in Form ODI with the documents prescribed therein is required to be made through the Authorized Dealer Category – I banks.

Reserve Bank shall take into account the following factors while considering such applications:

a) Prima facie viability of the WOS outside India;

b) Contribution to external trade and other benefits which will accrue to India through such investment;

c) Financial position and business track record of the Indian Party and the foreign entity; and

d) Expertise and experience of the Indian Party in the same or related line of activity as of the WOS outside India.

With a view to enabling recognized star exporters with a proven track record and a consistently high export performance to reap the benefits of globalization and liberalization, proprietorship concerns and unregistered partnership firms are allowed to set up WOS outside India with the prior approval of the Reserve Bank subject to satisfying certain eligibility criteria.

An application in form ODI may be made to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Overseas Investment Division, Central Office, Amar Building, 5th Floor, Fort, Mumbai 400 001, through their bank.

Registered Trusts and Societies engaged in manufacturing / educational / hospital sector are allowed to make investment in the same sector(s) in a WOS outside India, with the prior approval of the Reserve Bank.

Compliances by Indian Party

• On Investment/ Financial Commitment:

1. Filing Form ODI along with:

• Certified copy of Board Resolution for investment
• Statutory Auditor’s Certificate
• Valuation report for the value of shares

2. Obtain UIN through AD bank – required for all investments

3. Post investment, ensure receipt of share certificates or any other document as evidence and submit within six months to AD bank.

4. Report the details of the decisions taken by a WOS regarding diversification of its activities /setting up of step down subsidiaries/alteration in its share holding pattern within 30 days of the approval of those decisions by the competent authority concerned of such WOS in terms of the local laws of the host country.

• During Investment:
  • On changes in investment report to RBI through AD bank within 30 days of approval by competent authority of WOS
  • Repatriate to India all dues viz. dividends, royalty, technical fees, etc. within 60 days of falling due.
• Annual Filing:
  • Annual Performance Report (APR) in Part II of Form ODI by 31^st December every year
  • Annual Return on Foreign Assets & Liabilities (FLA) by 15th July every year

Where the law of the host country does not mandatorily require auditing of the books of accounts of WOS, the Annual Performance Report (APR) may be submitted by the Indian Party based on the un-audited annual accounts of the WOS provided:

a) Statutory Auditors of the Indian Party certify that law of the host country does not mandatorily require auditing of the books of accounts of WOS and the figures in the APR are as per the un-audited accounts of the overseas WOS and

b) That the un-audited annual accounts of the WOS has been adopted and ratified by the Board of the Indian party.

About the Author

Author is Neeraj Bhagat, FCA helping foreign companies in setting up and closure of business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. He is also founder of Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm established in the year 1997 with its head office at New Delhi.