Q 1. What is direct investment outside India?
Ans: Direct investment outside India means investments, either under the Automatic Route or the Approval Route, by way of contribution to the capital or 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).
Q 2. Whether Resident Individual can setup a Company abroad?
Ans: Yes. RBI allowed Resident Individual to set up a Company abroad by inserting Regulation 20A to Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations 2004 (Notification No. FEMA 120/RB-2004 dated July 7, 2004) vide Notification No. FEMA.263/RB-2013 dated 05.03.2013
Q 3. What is JV?
Ans: A foreign entity is termed as JV of the Indian Party/Resident Indian when there are other foreign promoters holding the stake along with the Indian Party/Resident Indian.
Q 4. What is WOS?
Ans: A foreign entity is termed as WOS of the Indian Party/Resident Indian when theentire capital is held by the one or more Indian Party/Resident Indian.
Q 5. How much amount can be invested by RI in WOS/JV abroad?
Ans: A resident can invest upto 2,50,000 USD per Financial Year in JV/WOS abroad under the Liberalized Remittance Scheme.
Q 6. Is a company eligible to make overseas direct investment under the Automatic Route? Who is an “Indian Party”?
Ans: An Indian Party is eligible to make overseas direct investment under the Automatic Route. An Indian Party is 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) incorporated under the LLP Act, 2008 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”.
Q 7. What are the permissible sources for funding overseas direct investment?
Ans: Funding for overseas direct investment can be made by one or more of the following sources:
i. Drawal of foreign exchange from an AD bank in India.
ii. Swap of shares (refers to the acquisition of the shares of an overseas JV / WOS by way of exchange of the shares of the Indian party).
iii. Capitalization of exports and other dues and entitlements.
iv. Proceeds of External Commercial Borrowings / Foreign Currency Convertible Bonds.
v. 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 by Government of India in the matter.
vi. Balances held in Exchange Earners Foreign Currency account of the Indian Party maintained with an Authorized Dealer.
vii. Proceeds of foreign currency funds raised through ADR / GDR issues.
Q 8. What is ‘financial commitment’?
Ans: Financial commitment means the amount of direct investments outside India by an Indian Party –
i. by way of contribution to equity shares or CCPS of the JV / WOS abroad
ii. contribution to the JV / WOS as preference shares (for reporting purpose to be treated as loan)
iii. as loans to its the JV / WOS abroad
iv. 100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS and
v. 50% of the amount of performance guarantee issued on behalf of its overseas JV/WOS.
vi. bank guarantee/standby letter of credit issued by a resident bank on behalf of an overseas JV / WOS of the Indian party, which is backed by a counter guarantee / collateral by the Indian party
vii. amount of fund/ non fund based credit facility availed by creation of charge (pledge / mortgage / hypothecation) on the movable / immovable property or other financial assets of the Indian party / its group companies
(Note: The amount and period of the guarantee should be specified upfront).
Q 9. In which sector/areas investment can be made by the RI in WOS/JV abroad?
Ans: A JV or WOS shall be engaged in bona-fide business activity only.
The following activities can be carried out only after approval from appropriate authority9s)
> real estate,
> banking and financial services business.
Investment can be made in all the sectors subject to stipulated conditions, if any, of the host country.
Q 10. What are the limits and requirements for overseas direct investment to be made under the Automatic Route?
Ans: The criteria for overseas direct investment under the Automatic Route are as under:
> The Indian Party can invest up to the 400% of its net worth (as per the last audited Balance Sheet) in JV / WOS for any bona fide activity permitted as per the law of the host country.
> With effect from July 03, 2014, it has been decided that any financial commitment (FC) exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank even when the total FC of the Indian Party is within the eligible limit under the automatic route (i.e., within 400% of the net worth as per the last audited balance sheet).
> 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
> The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an authorised dealer to be designated by the Indian Party.
Q 11. Is prior registration with the Reserve Bank necessary for direct investments under the Automatic Route?
Ans: Per se no prior registration with the Reserve Bank is necessary for making direct investments under the automatic route. After the online report of the first remittance / investment in Form ODI for a JV / WOS in terms of A.P. (DIR Series) Circular No.62 dated April 13, 2016, a Unique Identification Number (UIN) for that particular JV/WOS is generated automatically and instantaneously. Subsequent investments in the same JV / WOS can be made only after allotment of the UIN.
Q 12. What are the obligations of the Indian party, which has made direct investment outside India?
Ans: An Indian Party will have to comply with the following: –
a. 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;
b. repatriate to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical fees etc.;
c. submit to the Reserve Bank through the designated Authorized Dealer, every year, an Annual Performance Report in Part III of Form ODI in respect of each JV or WOS outside India set up or acquired by the Indian party.
d. 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 the approval of those decisions by the competent authority concerned of such JV/WOS in terms of the local laws of the host country. These are also to be included in the relevant Annual Performance Report; and
e. 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 Authorised Dealer.
Shrinath Bhat- Practicing Company Secretary- +91 8971408308 – [email protected]
Disclaimer: The Views expressed are solely of the Author and the contents of this article is to share the Knowledge on subject matter. Expert advice should be sought for your specific circumstances.