Firstly we need to understand the concept of Investment outside India in brief then we will be able to understand the meaning of Disinvestment.
Indian Party may invest outside India 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 or 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.
Who all will be consider as Indian Party:
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”.
Apart from Indian party as mentioned above various other Persons can be eligible to Make Investments Outside India which includes Resident Individuals, Proprietorship concern and unregistered partnership firm, Trust registered under the Indian Trust Act, 1882, Society registered under the Societies Registration Act, 1860
Through this Articles we will be discussing some major points that needs to be keep in mind by the Indian Party while opting for Disinvestment in its JV/WOS:-
Disinvestment by the Indian party from its JV / WOS abroad may be by way of transfer / sale of equity shares to a non-resident / resident or by way of liquidation / merger / amalgamation of the JV / WOS abroad.
Generally Indian Party opt for sale of shares which can be done in a following manner:-
I. Disinvestment by Indian Party without write off:
Indian Party may disinvest without write off under the automatic route subject to the following:
(i) the sale is effected through a stock exchange where the shares of the overseas JV/ WOS are listed;
(ii) if the shares are not listed on the stock exchange and the shares are disinvested by a private arrangement, the share price is not less than the value certified by a Chartered Accountant / Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the JV / WOS;
(iii) the Indian Party does not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and / or export proceeds from the JV or WOS;
(iv) the overseas concern has been in operation for at least one full year and the Annual Performance Report together with the audited accounts for that year has been submitted to the Reserve Bank;
(v) the Indian party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India
(vi)Other terms and conditions prescribed under ODI Regulations
II. Disinvestment by Indian Party with write off:
Indian Party may disinvest with write off under the automatic route subject to the following:
(i) where the JV / WOS is listed in the overseas stock exchange;
(ii) where the Indian Party is listed on a stock exchange in India and has a net worth of not less than Rs.100 crore;
(iii) where the Indian Party is an unlisted company and the investment in the overseas JV / WOS does not exceed USD 10 million; and
(iv) where the Indian Party is a listed company with net worth of less than 100 crore but investment in an overseas JV/WOS does not exceed USD 10 million.
(v) All other conditions as applicable in Disinvestment without write off shall mutatis mutandis apply for Disinvestment with write off.
Note: If an Indian Party does not satisfy the criteria / conditions mentioned above, it should obtain prior approval from RBI for undertaking divestment in its overseas WOS / JV.
III. Writing off: The Indian Party can write-off the following investments / dues from the foreign entity: –
(i) Equity share capital.
(ii) Preference share capital.
(iii) Loans given.
(v) Technical knowhow fees.
(vi) Management fees.
Indian Party may write off Capital or Other Receivables within permissible limit which are as follows:
-Listed Indian companies are permitted to write off capital and other receivables up to 25% of the equity investment in the JV /WOS under the Automatic Route; and
-Unlisted companies are permitted to write off capital and other receivables up to 25% of the equity investment in the JV /WOS with prior approval of the Reserve Bank.
IV. Compliances followed by the Indian Party: Reporting of Part III of Form ODI to AD Bank within 30 days of disinvestment.
The write-off / restructuring have to be reported to the Reserve Bank through the designated AD bank within 30 days of write-off / restructuring. The write-off / restructuring is subject to the condition that the Indian Party should submit the following documents for scrutiny along with the applications to the designated AD Category – I bank under the Automatic as well as the Approval Routes:-
(i) A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party; and
(ii) Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring.
V. Sale proceeds: 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 Regional office of the Reserve Bank through the designated authorized dealer.