All about Overseas Direct Investment (ODI) under FEMA

In this era of globalization, Overseas Direct Investment (ODI) has become a buzzword. From the past few years, it has been observed that the trend of making investment in businesses overseas is increasing year by year. Many of the resident individuals and Indian Companies are investing / acquiring stake in the foreign entities. This article attempts to cover provisions under FEMA related to ODI.

Before moving to the eligibility and procedure, it is important to know meaning of following terms:

Autorised Dealer Banks: ODI can be made only through Authorised Dealer registered with RBI. The Indian party/ Resident Individual are required to route all transactions in respect of a particular overseas JV/WOS only through one branch of an Authorized Dealer. This branch would be the ‘designated Authorised Dealer’ in respect of that JV/WOS and all transactions and communications relating to the investment in that particular JV/WOS are to be reported only through this ‘designated’ branch of an Authorized Dealer.

In case the JV/WOS is being set up abroad by two or more Indian promoters, then all Indian promoters collectively called the Indian party and the Resident Individual, would be required to route all transactions in respect of that JV/WOS only through one ‘designated Authorised Dealer’. In case the Indian Party/ Resident Individual wants to switch over to another AD, an application by way of a letter may be made to the Reserve Bank after obtaining an NOC from the existing Authorized Dealer.

The Indian promoters are free to designate different branches of the same Authorised Dealer or branches of other Authorised Dealers for their separate JVs/WOSs. The only requirement is that regardless of the number of promoters, one JV/WOS will have only one ‘designated Authorised Dealer’ to route all its transactions.

Forms:

• ODI Part I form making Overseas Direct Investment
• ODI Part II for filing Annual Performance Report;
• ODI Part III for Disinvestment

Indian Party: 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”.

JV / WOS: “Joint Venture (JV)”/ “Wholly Owned Subsidiary (WOS)” means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party/Resident Indian makes a direct investment;

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. In case of WOS entire capital is held by the one or more Indian Party/Resident Indian.

Overseas Direct Investment (ODI):   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).

Permitted and Prohibited Sectors: An Indian Party can make overseas direct investment in any bonafide activity.

Real estate as defined in Notification No. FEMA 120/RB-2004 dated July 7, 2004 and banking business are the prohibited sectors for overseas direct investment. Real estate business means buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges.

However, Indian banks operating in India can set up JVs/WOSs abroad provided they obtain clearance under the Banking Regulation Act, 1949, from the Department of Banking Regulation (DBR), CO, RBI.

Resident Individual: As per Section 2(v) 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—

(a) for or on taking up employment outside India, or

(b) for carrying on outside India a business or vocation outside India, or

(c) 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—

(a) for or on taking up employment in India, or

(b) for carrying on in India a business or vocation in India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

(ii) any person or body corporate registered or incorporated in India,

(iii) an office, branch or agency in India owned or controlled by a person resident outside India,

(iv) an office, branch or agency outside India owned or controlled by a person resident in India;

It is important to bear in mind that Resident in India is different from Citizenship.

Limits for Indian Parties (IP) and Resident Individuals (RI):

IP can make ODI upto 400% of its Net worth as per its last audited balance sheet. However, Resident Individuals(RI) can invest up to their limit under Liberalized Remittance Scheme (LRS). Present limit is $250000 per year per RI.

One point is interesting to note here that in case ODI is made by Indian Company having any Holding or subsidiary Company, then that Indian Company can also utilize the unavailed net worth of its Indian Holding or Subsidiary Company subject of furnishing of letter of disclaimer for same by that Holding or Subsidiary Company in favour of Indian Company.

Procedure:

1. For ODI 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 JV/WOS abroad.Indian Parties / Resident Individuals are required to follow below mentioned procedure for ODI in WOS/JV:

• Filling form ODI Part I and getting it certified from Statutory Auditor. It is important to note that certification from Statutory Auditor is not required in case of RI.
• It is pertinent to note here that Valuation Report of JV/WOS is not required in case of ODI in new JV/WOS. However, AD Bank may ask for Valuation Report of subsequent investment or in case of investment in existing foreign entity.
• Submission of Form A2 of respective AD Bank along with above mentioned form ODI Part I;
• Part I contains details of the JV/WOS, Indian Parties/ Resident Individuals and the remittance/ other financial commitment of the overseas entity and shall be submitted:
• at the time of initial remittance.
• for reporting the remittance for supplementary investment and any other forms of financial commitment.

Subsequent remittances (or financial commitment) under the automatic route and remittances (or financial commitment) under the approval route should be made, only after receipt of auto generated e-mail from RBI confirming the UIN.

1. For valuation of shares, it is pertinent to note that in case of partial of full investment in existing foreign company where investment is more than $ 5 million or case of investment by way of swap of shares, valuation is to be done by Category I Merchant Banker registered with SEBI or by an Investment Banker / Merchant Banker registered with the appropriate of host country and in all other cases, by a Chartered Accountant or Certified Public Accountant.

2. For ODI under Approval route:

The applicant should approach their designated Authorized Dealer (AD) with the proposal which shall be submitted to Reserve Bank after due scrutiny and with the specific recommendations of the designated AD bank along with supporting documents (as mentioned below) to the following address:

The Chief General Manager,

Reserve Bank of India,

Foreign Exchange Department,

Overseas Investment Division,

Amar Building, 5th Floor,

Sir P. M. Road, Fort,

Mumbai 400001

For approval by Reserve Bank, following documents need to be submitted along with Section D and Section E of Form ODI – Part I by the designated Authorized Dealer:

a) A letter from the designated AD of the IP in a sealed cover mentioning the following details:

• • Transaction number generated by the OID application.
  • Brief details of the Indian entity.
  • Brief details of the overseas entity.
  • Background of the proposal, if any.
  • Brief details of the transaction.
  • Reason/s for seeking approval mentioning the extant FEMA provisions.
  • Observations of the designated AD bank with respect to the following:
  • Prima facie viability of the JV/ WOS outside India;
  • Contribution to external trade and other benefits which will accrue to India through such investment;
  • Financial position and business track record of the IP and the foreign entity;
  • Expertise and experience of the IP in the same or related line of activity of the JV/ WOS outside India.
  • Recommendations of the designated AD bank.

b) A letter from the IP addressed to the designated AD bank.

c) Board resolution for the proposed transaction/s.

d) Diagrammatic representation of the organisational structure indicating all the subsidiaries of the IP horizontally and vertically with their stake (direct & indirect) and status (whether operating company or SPV).

e) Incorporation certificate and the valuation certificate for the overseas entity (if applicable).

f) Other relevant documents properly numbered, indexed and flagged.

Post Investment compliances:

Indian Parties are required to file two forms with RBI every year for ODI:

• • Foreign Assets and Liabilities (FLA) on or before July 15 for ODI of preceding financial year;
  • Annual Performance Report (APR) in form ODI Part II on or before 31^st December for ODI of preceding financial year through AD Bank.

Whereas Resident Individuals are required to file APR every year as per point 2 above. They are not required to file FLA.

Indian Parties are also required to submit Share Certificates of its investment with designated AD Bank within 6 months of investment.

Disinvestment

Disinvestment from JV / WOS may be made by any of the following ways:

• • By transfer of shares to non-resident / resident;
  • By way of liquidation / merger / amalgamation of JV / WOS abroad.

♦ Now there arise two important questions with respect to disinvestment:

(a) Can an Indian Party disinvest from JV / WOS without write off?

Yes, the Indian Party may disinvest without write off under the automatic route subject to the following:

• • the sale is effected through a stock exchange where the shares of the overseas JV/ WOS are listed;
  • 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;

• • 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;
  • the Indian party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India; and
  • other terms and conditions prescribed under Regulation 16 of the Notification ibid.

♦ (b) Can an Indian Party disinvest from JV / WOS involving write off?

Yes, an Indian Party may disinvest, under the automatic route, involving write off in the under noted cases:

• • where the JV / WOS is listed in the overseas stock exchange;
  • where the Indian Party is listed on a stock exchange in India and has a net worth of not less than Rs.100 crore;
  • where the Indian Party is an unlisted company and the investment in the overseas JV / WOS does not exceed USD 10 million; and
  • where the Indian Party is a listed company with net worth of less than Rs.100 crore but investment in an overseas JV/WOS does not exceed USD 10 million.

Indian Parties are required to submit Form ODI Part 3 with AD Bank within 30 days of remittance along with following:

• • Proof of disinvestment;
  • Proof of remittance;
  • Share Valuation Report
  • Other documents as may be insisted by AD Bank.