With the aim to diversify the business abroad, avail the opportunity given by the overseas market, in order to make full utilization of full capacity, branding, and many more reasons to inspire the entities to go overseas, invest and set up an entity outside the jurisdiction.
Further, it’s not only benefits the investing entities, but it’s helps the county also in the form of better promote economic co-operation with the host countries, branding of a country as investor, transfer of technology and skill, sharing of results of R&D. generation of employment, utilisation of raw material available in India vis-a-vis in the host country and much more.
Therefore, making investment by a Resident Individual in the shares of a Company incorporated outside India is also one of the emerging avenues in the current regime.
The Reserve Bank of India (RBI) has permitted Resident Individual to make an investment in the equity shares or CCPs of Companies incorporated outside India i.e. Overseas Direct Investment (ODI) subject to certain stipulated conditions.
In simple, if we define ODI, it means 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).
The author has put his best efforts to explain the provisions of investments to be made by a Resident Individual through the below mentioned FAQs:
Q: Who is a Resident Individual (RI) under FEMA?
A: RI is defined in Sec 2(v) 2 of FEMA, 1999.
“Person Resident in India” means-
(i) 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) a person who has come to or stays in India, in either case, otherwise than-
for or on taking up employment in India, or
for carrying on in India a business or vocation in India, or
for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.
In simple, ‘Person Resident of India’ means and includes persons of India except who are staying abroad either for work, business or other purpose and foreign national who come to India or stay in India for employment, carrying out business or other purpose.
Q: Is RI allowed to make investment in shares by forming Wholly Owned Subsidiary (WOS) or acquire shares of any existing Company (Joint Venture) outside India?
For Ex: Mr. A resident in India desire to make investment in the equity shares of a start up in US?
A: Mr. A, a RI (single or through in association with another resident individual or with an “Indian Party”) are allowed to make an overseas direct investment in equity shares or CCPs of a WOS/JV outside India.
Q: How much amount can be invested by RI in WOS/JV abroad?
A: A RI can invest upto 2,50,000 USD per Financial Year in JV/WOS abroad under the Liberalized Remittance Scheme.
Q: In which sector/areas investment can be made by the RI in WOS/JV abroad?
A: A JV or WOS shall be engaged in bona-fide business activity only. Except to 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: What are the reporting requirement after making investment by RI? Does the investment in shares require any approval from RBI?
A: A RI need to report RBI in Form ODI Part-I within 30 days from the date of making investment (remittance) in WOS/JV abroad. Further, no prior approval is required from the RBI for making investment in JV/WOS abroad under the automatic route.
Q: Can a loan be granted by the RI to WOS/JV Company?
A: No, only investment in Equity Shares and CCPs is allowed.
Q: Is the valuation required before making the investment in WOS/JV abroad?
A: Yes, valuation is required from the practicing Chartered Accountant (CA) or CPA. In case investment is more than USD 5 million, valuation is mandatorily required from Category-I Merchant Banker in India or Investment Banker outside India.
Q: What need to be taken care by RI after making the investment?
A: A RI has to take care of the below followings points after making the investment are as:
(i) Share Certificate or proof of investment shall be submitted with the Authorised Dealer Bank (AD Bank) (through which the funds were invested) within six months from the date of investment.
(ii) In case of any change in the business activity or alteration in the shareholding pattern shall be reported to RBI within 30 days from the date of approval by the competent authority (BODs) of the WOS/JV.
(iii) Annual Performance Report shall be submitted with the RBI on or before 31st December every year.
iv) Annual Return on Foreign Assets & Liabilities (FLA) shall be filed on or before 15th July every year.
v) All dues receivables such as Royalty, Dividend etc shall be repatriated within 60 days of its falling due.
Q: What are the provisions of disinvestment (selling shares of the WOS/JV)?
A: The provisions for disinvestment are as under:
(i) RI, who has acquired / set up a JV or WOS may disinvest (partially or fully) by way of transfer / sale or by way of liquidation / merger of the JV or WOS.
(ii) Disinvestment shall be allowed after one year from the date of making first remittance for setting up or acquiring the JV or WOS abroad.
(iii) disinvestment proceeds shall be repatriated to India immediately and in any case not later than 60 days from the date of disinvestment.
(iv) No write off shall be allowed in case of disinvestment.