CA Pratik Anand
With the advent of Globalization, more and more Indians are interested in doing business outside India. They want to set-up a branch office or a subsidiary abroad. There are multiple benefits of doing so such as cost reduction because they save on import duty, ease of doing business, building an international brand etc.
We are often asked this question whether an Indian Residents can set-up a Company abroad?
Let us first look at the ways in which an Indian Resident can remit the money for investment outside India.
1) Liberalised Remittance scheme (LRS)
As per this Scheme, resident individuals may remit up to USD 125,000 per financial year for any permitted capital and current account transactions or a combination of both.
a) What are some of the capital account transactions permitted under the scheme?
Q. Can remittances be made to acquire Joint Ventures abroad?
A. With effect from August 05, 2013, this Scheme, can be used by Resident individuals to set up Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) outside India for bonafide business activities within the limit of USD 125,000 subject to the terms & conditions stipulated in FEMA Notification No.263.
Fema Notification 263:
Acquisition or Setting up of a JV or WOS abroad by resident individual
A resident individual (single or in association with another resident individual or with an ‘Indian Party’ as defined in this Notification) satisfying the criteria as per Schedule V of this Notification, may make overseas direct investment in the equity shares and compulsorily convertible preference shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India.”
Conditions to be followed are:
1. Resident individual is prohibited from making direct investment in a JV or WOS abroad which is engaged in the real estate business or banking business or in the business of financial services activity.
2. The JV or WOS abroad shall be engaged in bonafide business activity.
3. Resident individual is prohibited from making direct investment in a JV / WOS [set up or acquired abroad individually or in association with other resident individual and / or with an Indian party] located in the countries identified by the Financial Action Task Force (FATF) as “non co-operative countries and territories” as available on FATF website www.fatf-gafi.org or as notified by the Reserve Bank.
4. The resident individual shall not be on the Reserve Bank’s Exporters Caution List or List of defaulters to the banking system or under investigation by any investigation / enforcement agency or regulatory body.
5. At the time of investments, the permissible ceiling shall be within the overall ceiling prescribed for the resident individual under Liberalised Remittance Scheme as prescribed by the Reserve Bank from time to time.
[Explanation: The investment made out of the balances held in EEFC / RFC account shall also be restricted to the limit prescribed under LRS.]
6. The JV or WOS, to be acquired / set up by a resident individual under this Schedule, shall be an operating entity only and no step down subsidiary is allowed to be acquired or set up by the JV or WOS.
7. For the purpose of making investment under this Schedule, the valuation shall be as per Regulation 6(6)(a) of this Notification.
8. The financial commitment by a resident individual to / on behalf of the JV or WOS, other than the overseas direct investments as defined under Regulation 2(e) read with Regulation 20A of this Notification, is prohibited.
9. ‘Indian party’ means 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 making investment in a Joint Venture or Wholly Owned Subsidiary abroad, and includes any other entity in India as may be notified by the Reserve Bank.
Provided that when more than one such company, body or entity make an investment in the foreign entity, all such companies or bodies or entities shall together constitute the ‘Indian party’
Therefore, It is clear that Resident Individuals can remit money outside India for setting up either a joint venture or a wholly owned subsidiary abroad under the LRS.
Points to be noted:
Recently, the RBI has permitted the purchase of immovable property abroad under the LRS. Therefore, a person can now not only set-up a Company abroad but also purchase an immovable property abroad for setting up the office of such a business under the LRS within a total limit of USD 125000 per financial year.
2) Overseas Direct Investment
The Second way by which Residents can set-up business abroad is by way of Overseas Direct Investment.
This can be understood by reading the definition of Overseas Direct Investment on the RBI Website which is as follows:
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).
It means that direct investment outside India is either by way subscribing to the capital of a New Company set-up outside India or by purchase of shares of an existing Company outside India.
Here also the entity to be set-up will be either a Joint venture or a wholly owned Subsidiary.
Q. Mention the ways in which Overseas Direct Investment outside India can be made.
A . Direct Investment outside India can be made either by way of the Automatic Route or the Approval Route.
Q- Who can make investment under the Automatic route?
Q. – Can overseas direct investment be made in any activity?
A. An Indian Party can make overseas direct investment in any bonafide activity (except those that are specifically prohibited. However, for undertaking activities in the financial services sector, certain additional conditions as specified in Regulation 7 of the Notification ibid should be adhered to.
Q. –What are the prohibited activities for overseas direct investment?
Q. What are the limits and requirements for overseas direct investment to be made under the Automatic Route?
A. The criteria for overseas direct investment under the Automatic Route are as under:
Q. What is the procedure to be followed by an Indian party to make overseas direct investment in a JV/WOS under the Automatic Route?
A. The Indian Party intending to make overseas direct investment under the automatic route is required to fill up form ODI duly supported by the documents listed therein, i.e., certified copy of the Board Resolution, Statutory Auditors certificate and Valuation report (in case of acquisition of an existing company) and approach an Authorized Dealer (designated Authorized Dealer) for making the investment/remittance.
Therefore, to summarise the Investment outside India under the automatic route can be made to set-up a new company abroad (JV or WOS). This can only be done by an Indian Company set-up under the Companies Act’1956 or a registered partnership firm or a Body Corporate set-up by an Act of Parliament.
Points To remember:
The Chief General Manager
Reserve Bank of India
Foreign Exchange Department
Overseas Investment Division
Amar Building, 5th Floor
Mumbai 400 001
After Establishment Obligations
A. An Indian Party will have to comply with the following: –
i. 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;
ii. repatriate to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical fees etc.;
iii. 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;
iv. 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
v. 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.
Is it mandatory to furnish Annual Performance Reports (APR) of the overseas JV/WOS based on its audited financial statements?
A. Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the Annual Performance Report (APR) may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS provided:
a. The Statutory Auditors of the Indian party certifies that ‘The un-audited annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS’ and
b. That the un-audited annual accounts of the JV / WOS has been adopted and ratified by the Board of the Indian party.
What are the penalties for non-submission of Annual Performance Reports (APRs)?
Delayed submission/ non-submission of APRs entail penal measures, as prescribed under FEMA 1999, against the defaulting Indian Party.
Points to remember:
(The author is a CA in practice at Delhi and for any queries and assistances on the above especially APR and return of Foreign Assets & Liabilities can be contacted at: E-mail: email@example.com or on Mobile: +91-9953199493.)