Overseas Direct Investments (ODIs) From India

1. ‘Advantages’ of the ODIs

(i) Increases in the exports of plant, machinery, goods and Services from India

(ii) Increases in foreign exchange earnings through receipt of dividend, royalty and technical Known how fee

2. ‘Guidelines’ for the ODIs

• Guidelines’ for the ODIs are available through followings Regulations, notifications etc.

(i) Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 are notified by the RBI vide Notification No. FEMA 120/RB-2004, dated July 07, 2004

(ii) Notification FEMA No. 19 dated May 03, 2000

(iii) (a) This notification is to regulate the acquisition and transfer of foreign Security by resident in India i.e. investment by Indian entity (corporates entities) in Joint Ventures (JVs) and Wholly Owned Subsidiaries (WOS) Outside India

(b) And also the ODIs by the ‘resident individuals’ in shares and Securities through the Liberalized Remittance Scheme (LRS).

(a) Master Directions and circulars on the ODIs by the ‘resident individuals’ in JVs or WOS

(b) FAQs as available at rbi.org.in

3. ‘Address’ for the Clarification’s on the ODIs

• The Chief General Manager the RBI, Foreign Exchange Department, Overseas Investment Division, Central Office Amar Building, 5th Floor, Mumbai- 400001

4. ‘Automatic’ Routes for the ‘Resident Individuals’ under the LRS and others

(i) ODIs are permitted up to USD 2,50,000 ‘per’ person ‘per’ financial year under the LRS

(ii) Out of funds as held in RFC account as maintained in India ‘without’ any limit

(iii) Acquiring bonus shares against holding of foreign currency shares ‘without’ any limit

(iv) Out of foreign currency resources as existed ‘Outside’ India by a person ‘not’ permanently resident in India

5. The ODIs Includes and ‘Not’ Includes

(i) The ODIs includes investments through contribution to capital or subscription to Memorandum and Article of Association (M and A) of foreign entity for setting up or acquiring a JVs or WOS

(ii) The ODIs ‘not’ includes Portfolio investments by a listed company where up to 50% of net worth is invested in listed shares or rated debt securities Outside India

6. Acquisition of the ‘Existing’ Company Outside India

(i) Indian entity is permitted to acquire the partial stake through JVs or 100% stake through WOS

(ii) However ‘valuation’ is to be made in accordance to the prescribed norms as applicable in India

7. ‘Permitted’ Activities  

(i) Indian entity is permitted to invest in bonafide activity except those are ‘specifically’ prohibited

(ii) And also the ‘additional’ Conditions are to be compliance for the financial Service Sector

8. ‘Not’ Permitted (Prohibited) Activities

(i) Real estate activities and Banking Business Outside India

(ii) However Indian banks are permitted to set up JVs or WOS Outside India with the ‘approval’ from the RBI under the Banking Regulation Act, 1949

9. Indian ‘Entity’ to Include

(i) A Company as incorporated in India

(ii) A body as ‘specifically’ created under Act of the Parliament in India for this purpose

(iii) A ‘Registered’ Partnership Firm

(iv) A LLP

(v) An Entity as to be notified by the RBI for this purpose

10. Permitted and ‘Non’ Permitted Real Estate Activities

(i) Trading as Buying/Selling of real estate and trading in Transferable Development Rights (TDRs) are ‘not’ permitted

(ii) Development of Township out of India is permitted

(iii) Construction of Residential and Commercial premises or Roads and Bridges outside India is permitted

11. Permitted under the ‘Automatic’ Routes

(i) An Indian entity is ‘not’ required any approval from the RBI for ODIs in JVs or WOS

(ii) However ‘approval’ is required from regulatory authority in India and ‘Outside’ India ‘both’ for the ODIs in financial Service Sector

12. Permitted ‘Limits’ under the ‘Automatic’ Route

(i) The ODIs is permitted up to 400% of the ‘net worth’ of eligible Indian entity in JVs or WOS for the bonafide activities

(ii) However limit up to 400% of the ‘net worth’ is not required where the ODIs is to be made out of the balances as available in EEFC account

(a) Henceforth Indian entity is permitted for the ODIs up to 400%

Plus (+)

(b) Out of balance as available in EEFC account

Plus (+)

(c) Out of funds as raised through ADRs or GDRs

(iii) Indian entity is ‘not’ permitted where the Indian entity is listed in the RBI Caution list or defaulter list in CIBIL or under investigation of DOE

(iv) Indian entity is required to route all transactions through 1 branch of AD- I Bank only

(v) Net worth to Include

(a) Net worth = Paid up Capital + ‘Free’ Reserves

(b) Paid up Capital = Equity shares + Preference Shares

13. Procedure for the ODIs under ‘Automatic’ Route

• Indian entity is required to submit a form ODI along with following documents

(a) Certified copy of the Board Resolution

(b) Statutory Auditor Certificate

(c) Valuation report is required where acquisition of the ‘existing’ company is desired

14. Submission of the Form ODI

(i) Form ODI is available as Annex to Master Direction on Direct Investment in JVs/ WOS ‘outside’ India

(ii) AD-I bank is required to submit part I and II and III of form ODI on the ODI investment application with the RBI

(a) For allotment of the UIN

(b) For reporting of the ‘subsequent’ remittances

(c) For filing of the APRs

(iii) Indian entity is to continue to submit the form ODI physically and online ‘both’ to the AD-I bank

15. Computation for the ‘Financial’ Commitments against the ODIs

• The ODIs in JVs or WOS + Loans to JVs or WOS + 100% amount of ‘corporate’ guarantee as issued for JVs or WOS + 50% amount of ‘performance’ guarantee as issued for JVs or WOS should ‘not’ exceed 400% of the net worth

16. ‘Valuation’ Norms for Acquisition of the ‘Existing’ Company Outside India

(i) Where the ODIs is exceeding USD 5 Million

(a) Share valuation is to be made by SEBI registered Merchant Banker in India

(b) Or by Investment Banker or registered Merchant Banker ‘Outside’ India

(ii) Where the ODIs is ‘not’ exceeding USD 5 Million

• •  Share valuation is to be made by a CA or CPA

(iii) Where the ODIs is through Swap of the Shares

(a) Share valuation is to be made by SEBI registered Merchant Banker in India

(b) Or by Investment Banker or registered Merchant Banker ‘Outside’ India

17. ‘Creation of Charge’ on Immovable Properties and Other Financial Assets

(i) Permission from the RBI is required for creating a charge on the ‘immovable’ properties

(ii) And also for pledge of shares of Indian parent or group Companies

18. The ODIs in ‘Pakistan’, Nepal and Bhutan

(i) The ODIs in Pakistan

• • The ODIs are ‘not’ permitted in Pakistan under the ‘automatic’ route

(ii) The ODIs in Nepal

• • The ODIs are permitted in Nepal in rupees (INR) under the ‘automatic’ route

(iii) The ODIs in Bhutan

• • The ODIs in Bhutan is permitted in rupees (INR) and freely ‘Convertible’ Currencies both under the ‘automatic’ route

19. Designated Authorized Dealer – I Bank for the ‘Single’ JV or WOS

(i) Indian entity is required to route all transactions through one branch of AD-I bank only

(ii) Moreover ‘one’ branch of AD-I bank is required to route all transactions where two or more Indian entities are investing in the ‘same’ JV or WOS

(iii) Change of AD-I bank is permitted with the permission from the RBI and ‘after’ obtaining NOC from the existing AD-I bank

20. Designated Authorized Dealer-I bank for the ‘Multiple’ JVs or WOSs

(i) Concept of ‘one’ designated authorized dealer -I bank is to be obeyed for ‘one’ JV or WOS

(ii) Henceforth ‘separate’ designated authorized dealer-I bank is required for the ‘multiple’ JVs or WOSs

21. UIN and ‘Prior’ Registration with the RBI

(i) Indian entity is ‘not’ required to obtain ‘prior’ registration with the RBI for the ODIs under the ‘automatic’ route

(ii) However the RBI is required to allot a Unique Identification Number (UIN) ‘after’ receipt of the ‘first’ remittance.

(iii) ‘Subsequent’ the ODIs are ‘not’ permitted in ‘same’ project without allotment of UIN by the RBI

(iv) UIN is be quoted in ‘each’ communication to the AD-I bank

22. Utility of the UIN

(i) Allotment of UIN is ‘not’ constitute an approval from the RBI for the ODIs in any JV or WOS

(ii) UIN is only needed to connect with Inflow and Outflow under the ‘automatic’ route as available for the ODIs

23. The ODIs Under ‘Approval’ Route

• Approval from the RBI is required in following cases of the ODIs

(i) Where the ODIs are in energy and natural resources sector and also ODI is exceeding the limit i.e. 400%

(ii) Where the ODIs are to be made by the proprietorship concerns or by the ‘Unregistered’ partnership firm

(iii) Where the ODIs are to be made by the ‘registered’ trusts or societies as engaged in manufacturing, education or hospital sector

24. Parameters for decision Under the ‘Approval’ Route

• Prima facie viability of the JV or WOS should be existed as following

(i) ODI should be benefited for the ‘foreign’ trade and ‘other’ benefits to the India

(ii) The ‘Financial’ position and business track record of Indian entity and the foreign entity should be sound and strong

(iii) Experience and Expertise of the Indian entity in same or similar line of activity of the JVs or WOS should be sound and strong

25. The ODIs in ‘Financial’ Service Sector

• Indian entity as engaged in the financial service sector are permitted for the ODIs in JVs or WOS in the financial service sector only subject to satisfaction of the following conditions

(i) Indian entity should have earned ‘net’ profits in preceding ‘3’ financial years from the financial service activities in India

(ii) Indian entity should be registered with the appropriate regulatory authority for conducting the financial service activities in India

(iii) Indian entity should have obtained the approvals from appropriate regulatory authorities in India and ‘Outside’ India both before making ODI in financial services activities.

(iv) Indian entity should have fulfilled the prudential norms for the capital adequacy as prescribed by the regulatory authorities in India

26. Permissible ‘Sources’ for Funding of the ODIs with in limit up to 400%â

(i) Out of the withdrawals from an AD – I bank in India

(ii) Out of the swap of shares

(iii) Out of the exports receivables and other dues and entitlements

(iv) Out of the proceeds of the External Commercial Borrowings (ECBs) or Foreign Currency Convertible Bonds (FCCBs)

(v) Out of the proceed of ADR or GDR as issued in accordance with scheme for issue of Foreign Currency Convertible Bonds (FCCBs) and Ordinary shares (Through Depository Receipt Mechanism) Scheme, 1993

(vi) Out of the Balance as available in EEFC account

* Permitted up to 400% plus (+) proceeds out of the EEFC, ADRs or GDRs

27. Utilization of the ‘Net’ worth of Subsidiary or Holding Company

(i) Indian entity is permitted to utilize ‘net’ worth of Indian Subsidiary or holding Company

(ii) However Indian subsidiary or holding company is required to furnish a letter of disclaimer in favor of Indian entity where net worth limit ‘not’ independently availed by the subsidiary or holding company.

(iii) This facility is ‘not’ available to the partnership firms and also partnership firm’s ‘net’ worth is ‘not’ to be utilized by any incorporated entity

(iv) Concept of holding or subsidiary company is to be recognized where shareholding is exceeding the 50%

28. ‘Capitalization’ of the Exports Receivable ‘etc.’ as the ODIs in JVs or WOS

(i) Indian entity is permitted to capitalize the receivables from a foreign entity against exports, fees, royalties or any ‘other’ dues for supply of technical know-how, Consultancy, managerial or ‘other’ services up to 400%

(ii) However separate permission from the RBI is to be obtained where export proceeds remain unrealized beyond prescribed period of realization like ‘6’ months

(iii) Moreover Indian ‘software’ exporters are also ‘additionally’ permitted to receive up to 25% shares of value of their exports against overseas star-up software company ‘without’ entering into JVs but with permission from the RBI ‘beyond’ 400%

29. Compulsorily ‘Convertible’ Preference Shares (CCPS)

• Indian entity is permitted to invest in CCPS up to 400%

30. The ODIs through ‘Share Swap’

• The ODIs in JV or WOS is permitted by way of share swap arrangement under the ‘automatic’ route but with the prescribed valuation norms.

31. The ODIs in JV or WOS by a ‘Partnership’ Firm

• ‘Registered’ partnership firm is permitted for the ODIs in JV or WOS subject to satisfaction of the terms and Conditions as applicable to the corporate entity like up to 400% and other prevailing conditions

32. The ODIs in Name of a ‘Partner’

(i) Individual partner is permitted to hold the shares on behalf of partnership firm in JV or WOS Outside India

(ii) However rules and regulations of the ‘host Country’ should also to permit shareholding in the name of an individual partner

33. Setting Up ‘Step Down’ Subsidiary

(i) Indian entity is permitted to set-up a step down subsidiary commonly known as second generation operating company with in limit up to 400%

(ii) Step down subsidiary is only permitted where JV or WOS is ‘already’ existed Outside India

(iii) However ‘additional’ requirements are needed for setting up a step down subsidiary in the ‘financial’ services activities

34. JV or WOS through a Special Purpose Vehicle (SPV)

• JV or WOS is permitted to be Set-Up through a SPV under the ‘automatic’ route

35. ‘Funding’ for the Step down Subsidiary

(i) Indian entity is permitted to fund step down subsidiary directly

(ii) However funding is to be routed through SPV where step down subsidiary is established through SPV

(iii) Indian entity is permitted to provide a guarantee directly with in permissible financial exposures up to 400% where first level step down subsidiary is operating through a SPV

36. Pledging of Shares of JV or WOS as ‘Security against Loans’

• Indian entity is permitted to pledge the shares of JV or WOS as security against loans for ‘own’ purpose or for JV or WOS from a bank in India or Outside India with in ‘total’ permissible limit up to 400%

37. Legal ‘Obligations’ for the Indian entity

(i) Indian entity is mandatory required to do the following actions

(a)To receive the share certificates or any ‘other’ documentary evidence for the investments in JV or WOS and also to submit to the AD – I bank

(b) To repatriate to India the ‘all’ dues receivable from JV or WOS like dividend and royalty and technical fees ‘etc’.

(c) To Submit to the RBI through designated AD – I bank an Annual Performance Report (APR) for each JV or WOS

(d) To report the details to the RBI through designated AD – I bank for diversification of the activities or setting up of a step down subsidiary or alteration in share holding pattern with in ‘30’ days of the diversification or alteration

(e) To repatriate to India the sales proceeds of shares or securities with in ‘90’ days from the sale and also to submit the documentary evidences to the RBI through designated AD- I bank

(ii) Submission of Foreign Liabilities and Assets (FLA) return annually up to July 15 of every year with the ‘unaudited’ or audited financial statements.

38. Penalty for the ‘Non’ Submission of APR

(i) Indian entity is liable to pay a penalty for delay submission or ‘non’ submission of the APR

(ii) Indian entity is required to submit the APR to the RBI through AD – I bank in form  ODI part ‘III’ for each JV or WOS ‘after’ finalization of audit of accounts in the ‘host Country’

39. Acquire and Sale of Foreign Securities ‘without’ Approval from the RBI by the ‘Resident Individual’

• Resident individual is permitted in the following cases

(i) Acquisition under gift from the resident ‘outside’ India

(ii) Acquisition under the Cashless ESOP

(iii) Acquisition under the inheritance from the resident ‘outside’ India

(iv) Acquisition through funds available in the RFCA as maintained in a bank in India

(v) Acquisition as bonus or right shares with in the up to 400%

40. The ODIs ‘other than’ in JV or WOS

(i) A ‘listed’ Indian Company in India is permitted to invest up to 50% of the ‘net’ worth in a ‘listed’ foreign companies ‘outside’ India

(ii) Or in rated debt Securities as issued by the ‘listed’ foreign Company outside India ‘over and above’ up to 400%

41. Acquisition of the ‘Qualification’ Shares by a ‘Resident’ individual as the ODI under the LRS

(i) A ‘Resident individual’ is permitted to acquire the qualification shares to become a director in host country ‘outside’ India.

(ii) However ‘maximum’ investments are to be made up to USD 5 Lac under the LRS ‘per’ financial year. Hence is ‘not’ permitted ‘separately’ again under the ODIs up to 400%

42. Acquisition of Right Shares by a ‘Resident Individual’ as the ODI under the LRS

(i)  A ‘resident individual’ is permitted to acquire the right shares as issued by company as incorporated outside India up to USD 2.5 Lac ‘per’ financial year

(b) However ‘original’ shares are to be held in accordance to provision of the FEMA, 1999

43. Acquisition of Shares in JV or WOS by the Employees or Directors of Indian Promoter Company as ‘Engaged in the Field of Software’ in India

• These employees and directors are permitted for acquisition of the shares subject to satisfactions of the following terms and conditions:-

(i) That Consideration ‘not’ to be exceed the limit for the ODI up to 400%

(ii) That Maximum permitted shares are ‘not’ to exceed beyond 5% of paid up capital of the JV or WOS

44. The ODIs by Indian ‘Mutual Fund’

• Indian Mutual funds are permitted to invest under the ODI in the following Securities

(i) ADR or GDR of a Indian Company

(ii) Equity shares of the foreign ‘listed’ company outside India

(iii) Rated foreign debt securities

(iv) Reputed money ‘market’ investment

(v) Reputed foreign ‘Govt.’ securities

(vi) ‘Listed’ derivatives for the hedging and portfolio balancing along with underlying as securities

(vii) Rated short term deposits with the banks

(viii) Units or Securities as issued by foreign mutual funds

45. The ODIs by ‘Domestic’ Venture Capital Fund (VCF)

• SEBI registered ‘domestic’ venture capital fund is permitted to invest in equity and equity linked instruments of the ‘foreign’ VCF

46. The ODI in ‘Agriculture’

(i) Indian entity is permitted to undertake agricultural operations including purchase of land directly or through their office ‘outside’ India

(ii) However Indian entity is permitted to invest up to 400%

(iii) Valuation of land is to be certified by an approved valuer as registered with the appropriate valuation authority in the ‘host country’

47. ‘Acquisition’ of a Foreign Company through  Bidding or Tender Procedure

(i) Indian entity is permitted to invest in the ODI through bidding or tender procedure

(ii) AD- I bank is permitted to allow a remittance for earnest money or to issue a bid bond guarantee for participation in a bid or tender

48. ‘Hedging’ for the ODIs

(i) Indian entity is permitted to hedge against the foreign exchange rate risk

(ii) AD – I bank is permitted to enter into forward or option contract with the Indian entity subject to verification of the exposure

(iii) The ODI is to include direct investment in equity and loan in JV or WOS.

(iv) Hedging is permitted till original maturity period where market value of the ODI is shrinking ‘after’ the hedging

(v) Rollover of the hedging is permitted on due date at the market rate.

49. ‘Performance’ Guarantee in Favour of JV or WOS

(i) Indian entity is permitted to issue a performance guarantee in favour of JV or

(ii) However only 50% amount of performance guarantee is to be considered for computation of limit up to 400%

(iii) Validity period for the performance guarantee is equivalent to time as specified for the completion of contract

(iv) Indian entity is required a prior ‘approval’ from the RBI for remitting funds from India where invocation of the performance guarantee is crossing up to 400%.

50. ‘Corporate’ Guarantee on Behalf of the Step down Subsidiary

(i) Indian entity is permitted to issue a corporate guarantee on behalf of step down subsidiary commonly known as second generation subsidiary under the ‘approval’ route.

(ii) However Indian entity should hold 51% stake directly or indirectly in step down subsidiary

51. ‘Disinvestment’ from JV or WOS ‘Without’ Write Off

(i) Disinvestment is permitted through a transfer or sale of equity shares to a ‘non’ resident or a resident of India by way of liquidation, merger or amalgamation of the JV or WOS

(ii) Disinvestment is permitted to another an Indian entity ‘without’ approval from the RBI

(iii) Disinvestment is permitted to a non-resident of India subject to satisfaction of the followings terms and conditions

(a) Sale should not be a result of any write-off of the investments

(b) Sale should be made through stock exchange where shares of JV or WOS is listed

(c) Sale should ‘not’ be lower than value as certified by CA or CPA where shares of JV or WOS is ‘not’ listed

(d) Indian entity should ‘not’ have any outstanding from JV or WOS i.e. dividend or fee for technical know-how, royalty, Consultancy, commission, any ‘other’ entitlement or export proceed

(e) JV or WOS should have worked for minimum 1 year and also APR has already been filed with the RBI

(f) Indian entity should ‘not’ be under investigation by CBI, DOE, SEBI, IRDA or any ‘other’ authority in India.

52. ‘Disinvestments’ from JV or WOS ‘With’ Write off

• Indian Entity is permitted to disinvest under automatic route, ‘with’ write off subject to satisfaction of the followings terms and conditions

(a) JV or WOS is ‘listed’ on a stock exchange Outside India

(b) Indian Entity is ‘listed’ company on stock exchange in India and also has a net worth is  ‘not’ exceeding Rs.100 crore

(c) Indian Entity is ‘unlisted’ company and also investment in overseas JV or WOS is ‘not’ exceeding USD 10 million

(d) Indian Entity is ‘listed’ company and also has a net worth ‘not’ exceeding Rs.100 crore but investment in overseas JV or WOS is also ‘not’ exceeding USD 10 million.

53. ‘Write-Off’ of the Capital and other Receivables in JV or WOS

•  Indian entity is permitted to write-off of the capital i.e. equity shares, preference shares or ‘other’ receivables i.e. loans, royalty, technical know-how fees and management fee relating to JV or WOS beside that such JV or WOS continue to function subject to satisfaction of the followings terms and conditions

(i) The ‘listed’ Indian company is permitted to write-off of the capital and ‘other’ receivables up to 25% of equity investments in JV or WOS under the ‘automatic’ route and also ‘unlisted’ Indian company is permitted under the ‘approval’ route

(ii) Indian entity is required to report to the RBI through AD Bank relating for write-off with in ‘30’ days and also to submit certain documents for scrutiny under automatic and approval ‘both’ routes

54. ‘Acquisition’ of the Shares of Foreign Company against Professional Services

(i) ‘Resident individual’ is permitted to acquire the shares of foreign company against part or full consideration of professional services rendered or in lieu of Director Remuneration

(ii) However value of shares is to be up to USD 5 Lac per financial year under the LRS.

55. ‘Approval’ from the RBI

• Approval from the RBI is required where the ODI is ‘exceeding’ USD 1 billion in a ‘financial’ year per Indian entity beside the total ODI is with in limit i.e. up to 400% .

*****

Disclaimer : The contents of this presentation are solely for informational purpose. Neither this presentation nor the information contained herein constitutes a contract or will form the basis of a contract.  The material contained in this presentation does not constitute/substitute professional advice that may be required before acting on any matter. While every care has been taken in the preparation of this presentation to ensure its accuracy at the time of publication, Satish Agarwal assumes no responsibility for any errors which despite all precautions, may be found herein. In no event shall we be liable for direct or indirect or consequential damages, if any, arising out of or in any way connected with the use of this presentation or the information contained herein.

(Author can be reached at email address [email protected] or on Mobile No. 9811081957)