Preface / Backdrop
In recent times, many individuals are exploring investments outside India by way of investing in existing companies’ set-up in developed or emerging countries. Also, a lot of Indian start-ups are setting-up or wish to set-up entities in offshore jurisdiction for various advantages such as raising funds overseas or attracting global investors, etc. The Founders / Entrepreneurs as well as employee communities are desirous to understand whether it is possible to acquire stake / shares of foreign companies while continuing to be residents of India. Employees of MNCs / big corporate houses are also offered to participate in various employee incentive initiatives such as ESOPs, stock appreciation rights, etc, giving them feel of ownership in the company.
Having said that, one should be aware of the relevant rules and regulations for investing outside India i.e. permissible or not permissible, since a violation could have serious concerns on the Individual.
Let us understand few basic nuances of overseas investment by resident individuals in layman terms.
First of all, any overseas investments by an Individual should be subject to exchange control regulations i.e. governed by rules and regulations prescribed by the Reserve Bank of India (RBI). An Indian resident is permitted to acquire / invest in securities of an offshore company either under (i) Overseas Direct Investment route (‘ODI’); or (ii) Liberalised Remittance Scheme (‘LRS’)
Let’s nail them down one by one –
Overseas Direct Investment (ODI)
ODI means investments 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’).
ODI can either be under (i) the Automatic Route or (ii) the Approval Route,
Under ODI route, Resident Individuals are allowed to make investment in equity shares and compulsorily convertible preference shares of JV / WOS outside India, subject to overall limit prescribed by RBI under the LRS provisions. Resident individuals can acquire/sell foreign securities under automatic route (i.e. without prior approval) in the following cases: –
1. as a gift or inheritance from a person resident outside India;
2. by way of Stock options
- by purchase of foreign securities out of funds held in the Resident Foreign Currency Account; and
1. by way of bonus/rights shares on the foreign securities already held by them.
Indian residents can purchase / acquire foreign securities from: (a) funds held in the Resident Foreign Currency Account (RFC) account; or (b) When not permanently resident in India, from the foreign currency resources outside India.
Further, Resident individuals are allowed under General Permission to acquire shares of a foreign entity in part / full consideration of
- professional services rendered to the foreign entity OR
- in lieu of Director’s remuneration.
The limit of acquiring such shares in terms of value shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition.
Sale / disinvestment of shares by way of transfer / sale / liquidation / merger of JV / WOS is permitted, subject to conditions inter alia obtaining a valuation report and repatriation of funds within 60 days. No write-off allowed.
Liberalised Remittance Scheme (‘LRS’)
Now it is important to understand the LRS route and what is the ceiling limit prescribed under LRS which is applicable for ODI by Individuals. RBI has prescribed that a resident Indian can remit, up to the USD 250,000 per FY under the LRS, for permitted current and capital account transactions including purchase of securities and also setting up / acquisition of JV /WOS overseas.
The permissible capital account transactions by an Individual under LRS inter alia includes –
- making investments abroad – acquisition and holding shares of both listed and unlisted overseas company or debt instruments;
- acquisition of qualification shares of an overseas company for holding the post of Director;
- acquisition of shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration;
- investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes;
- setting up Wholly Owned Subsidiaries and Joint Ventures (with effect from August 05, 2013) outside India for bonafide business;
- extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives as defined in Companies Act, 2013.
The below table provides historical LRS limits, for ease of reference:
| Date | Feb 4, 2004 | Dec 20, 2006 | May 8, 2007 | Sep 26, 2007 | Aug 14, 2013 | Jun 3, 2014 | May 26, 2015 |
| LRS Limit (USD) | 25,000 | 50,000 | 1,00,000 | 2,00,000 | 75,000 | 1,25,000 | 2,50,000 |
Having said all the above, it may be noted that overseas direct investment is permitted only in companies with bona fide activity, further, investment in real estate*, banking business are the prohibited sectors.
The individual will have to designate a branch of an Authorised Dealer (‘AD’) through which all the remittances under the LRS will be made. The resident individual seeking to make the remittance should furnish Form A2 for purchase of foreign exchange under LRS.
Obligation of Resident Individual
An Indian Party will have to comply with the following: –
- receive share certificates or any other documentary evidence of investment in the foreign JV / WOS as evidence of investment and submit the same to the designated AD within 6 months;
- repatriate to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical fees etc.;
- 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 .
- 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. These are also to be included in the relevant Annual Performance Report; and
- in case of disinvestment, sale proceeds of shares/securities shall be repatriated to India within 90 days of receipt and documentary evidence to this effect shall be submitted to the Reserve Bank through the designated Authorised Dealer.
Taxation
Indian resident individuals are typically subject to tax in India on their global income. Thus, any dividend / interest income received from investment in foreign companies should be subject to tax as Income from other sources in India as per slab rates (highest rate is 30%). Further, capital gains should be subject to tax based on period of holding i.e. long term (>24 months) – 20% and short term (<=24 months), at slab rates. The above are base rates and should be increased by applicable surcharge and cess.
Separately, the Individual is required to disclose the foreign assets in its tax return in the prescribed form.
Key takeaways
Importantly, one should keep in mind
- the LRS ceiling limit (USD 250,000) and permissible investments;
- Further, disclosure and reporting requirements both under Income-tax and FEMA laws to be complied with; and
- income-tax treatment for income arising from the foreign assets.
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