Overseas Direct Investment

July 9, 2011

Agenda

Routes of Investment

Automatic route

Approval Route

Funding Mechanism

Pledge of Shares of JV/WOS

Compliances and Valuation

Restructuring of Investments

Exit

Liberalised Remittance Scheme for Resident Individuals

Agenda

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What is ODI?

• Regulation 2(e) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004, defines Direct Investment outside India as

• Investment by way of contribution to the capital or subscription to the Memorandum of Association 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.

ODI does not include portfolio investment

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Routes

• No prior approval of RBI• Applicable to overseas investment by:

• Company• a body created under an Act of Parliament• Registered partnership firm making investment in

JV / WOS abroad • Subject to conditions

• Prior approval of RBI• Investment by all other entities inter-alia:

• proprietorship• unregistered partnership firm • trust; • Society

• Investment in • Real estate buisness• Banking business

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Automatic Route

• Automatic approval for “Financial Commitment” upto 400% of Net Worth

as of the last audited Balance Sheet

• Net Worth = Paid up capital + free reserves

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Permitted subject to investment in the Company

• Computation of 400% to include: • Contribution to capital• Loans • Guarantee issued to or on behalf of Fco

• Investment to be in bona fide business activity

• Investee company not

• on RBI’s Exporters’ caution list

• on list of defaulters to the banking system issued by RBI / CBIL / any other

CIC

• under investigation by any investigation/enforcement agency/ regulatory body

• Investment routed through one branch of an AD bank category-I

• Investor company has submitted up to date returns (APR) for all its existing ODIs

Investment through SPV also permitted

Automatic Route for ODI - Conditions

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Approval Route

• Has to be a DGFT recognized Star Export House.

• KYC (Know Your Customer) compliant and engaged in the proposed business

• Proven track record i.e. overdue exports < 10 % of the average export realization of preceding 3 financial years.

• Firm not on RBI’s caution list/list of defaulters to the banking system or has come under adverse notice of ED or CBI

• Investment outside India <10 % of the average of 3 financial years export realization or 200 % of the net owned funds of the firm, whichever is lower

• Application in Form ODI

Proprietorships / Unregistered Partnerships

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• Sectors – • Manufacturing • Education• Hospital

• Investment in the same sector

• Conditions:

• Registered under the Indian Trust Act, 1882 • Trust deed permits the proposed investment overseas • Proposed investment should be approved by the trustee/s • AD Bank satisfied that trust is KYC compliant and engaged in a bonafide

activity• In existence at least for a period of 3 years • No adverse notice from any regulatory / enforcement agency like CBI,

Directorate of Enforcement• Permissions/licensees for concerned activity obtained from relevant

authority(s)

Registered Trust

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• Sectors – • Manufacturing • Education• Hospital

• Investment in the same sector

• Conditions

• Registered under the Societies Registration Act, 1860• MoA and rules and regulations allows proposed investment• Approved by the governing body / council or a managing committee • AD Bank satisfied that trust is KYC compliant and engaged in a bonafide

activity• In existence at least for a period of 3 years • No adverse notice from any regulatory / enforcement agency like CBI,

Directorate of Enforcement• Permissions/licensees for concerned activity obtained from relevant

authority(s)

Registered Society

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• Viability of the Overseas company

• Contribution to external trade and benefits to India

• Financial position and buisness track record of Indian party and foreign entity

• Experience of Indian party in same or related line

RBI Considerations for Approval

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Country Specific Conditions

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Investments in Financial sector entity permitted under automatic route subject to :

• Approval from concerned regulatory authority in India and abroad

• Registered with appropriate regulatory authority in India

• Earned net profit during last three years from Financial services sector

• Fulfilled the prescribed prudential norms relating to capital adequacy

Is automatic

route really automatic

?

Automatic Route for ODI (Financial Services) - Conditions

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• Downstream investment by JV also subject to these conditions

• Unregulated Indian financial sector entities – comply only if investing in financial

sector activities overseas

• Regulated Indian financial sector entities – have to comply with above

regulations for all investments

• NBFC’s making investment overseas need NOC from RBI

Automatic Route for ODI (Financial Services) - Conditions

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Funding Mechanisms

Share swap

ECB proceeds

EEFC A/c balance

Capitalisation of export

receivables

Rupee resources

Proceeds of ADR / GDR

issue

Proceeds of ADR / GDR

issue

Exchange of ADR/GDR

FCCB proceeds

400% ceiling doesn’t apply

Funding Mechanism

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Pledge of shares of overseas company permitted to:

• Indian Bank / public financial institution for loan for Indian party itself or for the JV/ WOS abroad.

• Overseas Lender subject to:

• The lender being regulated and supervised as a bank

• total financial commitments of the Indian party remaining within

the limit stipulated by RBI for overseas investments

Pledge of Shares of JV/WOS

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Valuation and Compliances

Valuation Norms

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• Receive share certificate / other documentary evidence within 6 months

• Repatriate to India all dues receivable from foreign entity within 60 days

• Submit APR to RBI in Form ODI Part III within 60 days from date of expiry of

the statutory period for finalisation of accounts in the host country

• Intimate investment in a step down subsidiary / changes in the shareholding

pattern / diversification of business within 30 days of approval of this decision

by the competent authority of the JV / WOS

• Submit details of disinvestment to the AD within 30 days

Post Investment Compliance Obligations

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Restructuring of Investment

• Indian Promoters of a WOS or having a minimum 51% stake in foreign JV may write off capital or other receivables such as loans, royalty, technical knowhow fees and management fees even while the JV/WOS continues to operate as below

• Listed Indian companies can write off 25% -Automatic Route• Unlisted Indian Companies can write off 25% - Approval route

• In both cases they need to submit:• A certified copy of the balance sheet showing the loss in the overseas

WOS/JV; and • Projections for the next five years indicating benefit accruing by such

write off / restructuring.

• Restructuring to be reported to RBI within 30 days

Restructuring - Writing off Capital and other receivables

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Exit

Conditions for automatic route for disinvestment :

• No write off of investment

• No outstanding dues such as dividend , royalty, technical know- how from

JV / WOS

• Sale after > 1 full year of operations and APR for said year has been

submitted

• Indian party is not under investigation in India

• Shares sold on a Stock Exchange or if unlisted, share price not less than

value certified by CA/CPA based on latest audited balance sheet

Exit from JV / WOS

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Party to report divestment through AD within 30 days

Automatic route for disinvestment if any of the following are satisfied:

• JV / WOS is listed overseas; or

• Indian party is listed and has a net worth > Rs. 100 crore; or

• Listed Indian party with net worth < Rs. 100 crore and Investment in JV/WOS is

< USD 10Milion; or

• Unlisted Indian party and investment in JV / WOS <USD 10 million.

Exit from JV/WOS Involving write off of capital

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All other conditions of exit have to be met

Liberalised Scheme of Remittance for Resident Individuals

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Resident Individuals may remit upto USD 200,000 in any Financial year (April – March)

for:

• Permissible current and / or capital account transactions or combinations thereof

• Immovable property

• Shares

• Debt Instruments

• Any other asset outside India

• Gift / donation

• Objects of art

• ESOP’s

• Mutual funds

• Venture Capital Funds

• Unrated debt securities

• Promissory Notes etc

• Repayment of loan taken as a non-resident

Liberalised Remittance Scheme

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• Funds cannot be untilised for:

• transactions not permitted under FEMA and this Scheme

• remittances specifically prohibited under Schedule I or restricted under Schedule II of Current account transaction rules

• Countries to which remittance is restricted:

• Bhutan

• Nepal

• Mauritius

• Pakistan

• Other territories as notified by RBI and FATF

• No credit facilities to be given by Banks to undertake such remittances

Liberalised Remittance Scheme

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• Resident Individuals includes minors

• Remittances can be consolidated in respect of family members

• Pan number necessary for remittance under the scheme

• Individuals can open and maintain a foreign currency account with a bank outside India without prior approval of RBI for making remittances under this scheme.

• Outward remittance can also be in the form of a DD in the residents own name or the name of the beneficiary

Liberalised Remittance Scheme

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Reasonable care has been taken to ensure that the information contained herein is accurate in all respects. However, this is not intended and should not be considered to be legal advice. No person should act on the basis of any information contained in this presentation without considering and seeking professional assistance based on the facts and circumstances of their case.

Regulations for Non Banking Financing Companies

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• Investment in non-financial sector not permitted

• Investment in activities prohibited under FEMA or in sectoral funds not permitted

• Investment permitted only in entities regulated by financial regulator in investment

jurisdiction

• Investment aggregate not exceeding 100% of NoF

• Investment in single entity inluding subsidiary not to exceed 15% of the NoF

• Single intermediate holding entity permitted

• NBFC to maintain level of NoF prescribed by RBI even after overseas investment

• Net non Performing Assets < 5% of net advances

• Earning profits for last 3 years, satisfactory performance in general

General Conditions for NBFC

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• CRAR of deposit taking NBFC and NBFC-ND-SI post investment to be not to be

less than prescribed RBI

• CRAR of other NBFC’s post investment to be not less than 10%

• Compliance with KYC norms

• Annual certificate from statutory auditors submitted by NBFC with DNBS

• Quarterly return by NBFC to DNBS and DSIM

• Parent NBFC to obtain periodical reports/ audit reports about the business

undertaken by overseas company and make available to RBI

• Disclosure in balance sheet of overseas entity that the liability of the parent entity

is limited to equity or fund based commitment

General Conditions for NBFC

Approval can be withdrawn for non-compliance.

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Specific Conditions

• Investment upto 50% of Networth as at last audited balance sheet

• Permitted in:

• Shares

• Bonds / fixed income securities ( not below investment grade)

• Issued by listed companies

Portfolio Investment – Listed Indian Companies

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• Indian entities (promoter, group or associate company) permitted to offer guarantee (corporate / personal / primary / collateral etc.) provided:

• Indian entity has equity participation in FCo

• Percentage computed towards 400% ceiling:

• 50 % of the amount of the performance guarantee

• 100% of the amount for all other guarantees

• No guarantee is 'open ended'

• Time specified for completion of contract is the validity period of performance guarantee

• Corporate Guarantee on behalf of First level down subsidiary is under Automatic Route (operating Company or SPV)

• Corporate Guarantee to Second level or subsequent level subsidiary under Approval level subject to the Indian party holding atleast 51% or more directly or indirectly

• Report in Form ODI-Part II to be submitted to RBI

•RBI approval required for creating charge on immovable property / pledge of shares in favour of non-resident entity

• Prior approval of RBI required before remitting funds in case on invocation of the performance guarantee results in breach of the 400% limit .

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Guarantees

Target

ICoOverseas

SPV

Equity

Loan FI/BankEquity

Guarantee

ICo can give guarantee only for or on behalf of WoS / JV in which it has equity participation

Extending Guarantee

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• Permitted to capitalise payments due towards:

• Exports

• Fee

• Royalties

• Any other dues such as technical know-how, consultancy

• RBI approval required for:

• Capitalisation of export proceeds which continue to be unrealized beyond prescribed period(6 months)

• Indian software companies to receive upto 25% of export value in form of shares of overseas company without JV agreement

Capitalisation of Exports

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Transaction requires prior approval of RBI and FIPB

OpCo O/s TargetCo

O/s Seller

ICo sells OpCo shares to the Seller in exchange for TargetCo shares

ICo

Share Swap

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