Overseas Direct Investments (ODI)

Overseas Direct Investments (ODI)

Legal , Policy, Procedures, and requirements

[email protected] July 2013 1

Legal Provisions under FEMA

• Section 2 (e) :- Capital Account transaction definition as per Foreign Exchange Management Act,1999

• Section 6 (3) (a) :- transfer and issue of any foreign security by a person resident in India

• Section 47 (2) (a) :- power to make regulations • Notification No. FEMA 120/2004-RB / 7.7.2004 • A.P. Dir Circulars issued by RBI

19th July 2013 [email protected] 2

Other reference material

• Master Circular issued by RBI on 01.07.2013 No. 11/2013-2014 (Direct Investment by residents in Joint Venture (JV) / Wholly owned Subsidiary (WOS) abroad

• FAQs on Overseas Direct Investment issued by RBI

• www.rbi.org.in


http://www.rbi.org.in/

Overseas investments - references

• FEMA Notification No. 120/RB-2004 dated July 7, 2004

www.rbi.org.in

•Master Circular on Direct Investments

by residents in JV/WOS

abroad

• AP (DIR) series Circular issued from time to time

NotificationMaster Circular

AP (DIR series) Circulars

Website


Meaning

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 Association of a foreign entity, signifying a long-term interest in the overseas entity (setting up / acquiring a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS).


Points to be considered for ODI

• Investments can be made in new or existing entity.

• Indian entity can invest in any bonafide activity (except real estate other than development of township, construction of residential/ commercial premises, road or bridges). Also in case of financial service sector, certain additional conditions to be fulfilled.


Routes of Investment through ODI

Automatic RouteAn Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments. The Indian Party should approach an Authorized Dealer Category – I bank with an application in Form ODI and the prescribed enclosures / documents for effecting the remittances towards such investments.

Automatic RouteAn Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments. The Indian Party should approach an Authorized Dealer Category – I bank with an application in Form ODI and the prescribed enclosures / documents for effecting the remittances towards such investments.

Approval Route

Proposals not covered by the conditions under the automatic route require the prior approval of the Reserve Bank for which a specific application in form ODI with the documents prescribed therein is required to be made through the Authorized Dealer Category – I banks.

Approval Route

Proposals not covered by the conditions under the automatic route require the prior approval of the Reserve Bank for which a specific application in form ODI with the documents prescribed therein is required to be made through the Authorized Dealer Category – I banks.


Indian Party

Provided that when more than one such company, body or entity make an investment in the foreign entity , such companies or bodies or entities shall together constitute the INDIAN PARTY


A company incorporated in India

or a body created under an act of

Parliament.

A partnership firm registered under the Indian Partnership

Act, 1932

Any other entity in India as may be notified by the Reserve Bank.

Joint Venture

• 'Joint Venture (JV)' means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment;


Wholly Owned Subsidiary

• 'Wholly Owned Subsidiary (WOS)' means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country, whose entire capital is held by the Indian party;


'Financial Commitment'

• 'Financial commitment' means the amount of direct investment by way of contribution to equity and loan and 100 per cent of the amount of guarantees issued by an Indian party to or on behalf of its overseas Joint Venture Company or Wholly Owned Subsidiary


'Real Estate Business

• '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;


Sectors in which ODIs are allowed with prior RBI approval

• Real Estate Business• (Important to note the definition of Real

Estate Business)• Banking Business


Clarification

• An overseas entity, having direct or indirect equity participation by an Indian party, shall not offer financial products linked to Indian Rupee (e.g. non-deliverable trades involving foreign currency, rupee exchange rates, stock indices linked to Indian market, etc.) without the specific approval of the Reserve Bank. Any incidence of such product facilitation would be treated as a contravention of the extant FEMA regulations and would consequently attract action under the relevant provisions of FEMA, 1999


General Permission

• In terms of Regulation 4 of the Notification, general permission has been granted to persons residents in India for purchase / acquisition of securities in the following manner:

• (a) out of the funds held in RFC account; • (b) as bonus shares on existing holding of foreign currency

shares; and • (c) when not permanently resident in India, out of their

foreign currency resources outside India. • General permission is also available to sell the shares so

purchased or acquired under clause (a), (b) and (c).


Limit up to which Indian Party may make Financial Commitment(FC) in JV/WOS • FC should not exceed 400% of the net worth

of the Indian Party as on the date of the last audited balance sheet.

• Net worth means paid up capital and free reserves

• FC can be exceed 400% limit by the proceeds of ADR/GDR and out of the balances of EEFC.


• 100% of the amount of equity shares; • 100% of the amount of compulsorily and mandatorily convertible

preference shares; • 100% of the amount of other preference shares; • 100% of the amount of loan; • 100% of the amount of guarantee (other than performance

guarantee) issued by the Indian party; • 100% of the amount of bank guarantee issued by a resident bank on

behalf of JV or WOS of the Indian party provided the bank guarantee is backed by a counter guarantee / collateral by the Indian party.

• 50% of the amount of performance guarantee issued by the Indian party provided that the outflow on account of invocation of performance guarantee results in the breach of the limit of the financial commitment in force, prior permission of the Reserve Bank is to be obtained before executing remittance beyond the limit prescribed for the financial commitment.

• Foot note: Compulsorily Convertible Preference Shares (CCPS) shall be treated at par with equity shares.


Methods of Funding Overseas Investments

• drawal of foreign exchange from an AD bank in India; • capitalisation of exports; • swap of shares (valuation as mentioned in ); • proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs); • in exchange of ADRs/GDRs issued in accordance with the Scheme • for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from time to time by the Government of India; • balances held in EEFC account of the Indian party and • proceeds of foreign currency funds raised through ADR / GDR issues.


Other terms & Conditions

• Loan / Guarantee is allowed only where Indian party has Equity participation otherwise if Indian party has to extended loan or guarantee to foreign entity without equity participation, it will require RBI prior approval;

• Amount & period of the guarantee should be specified upfront;


• Note: Specific approval of the Reserve Bank will be required for creating charge on immovable / moveable property and other financial assets (except pledge of shares of overseas JV / WOS) of the Indian party / group companies in favour of a non-resident entity within the overall limit fixed (presently 400%) for the financial commitment subject to submission of a ‘No Objection’ by the Indian party and their group companies from their Indian lenders.


• The Indian party should not be on the Reserve Bank’s Exporters' caution list / list of defaulters to the banking system circulated by the Reserve Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information company as approved by the Reserve Bank or under investigation by any investigation / enforcement agency or regulatory body.

• All transactions relating to a JV / WOS should be routed through one branch of an Authorised Dealer bank to be designated by the Indian party.

• In cases of investment by way of swap of shares, irrespective of the amount, valuation of the shares will have to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of the Foreign Investment Promotion Board (FIPB) will also be a prerequisite for investment by swap of shares.


Valuation of shares

• In case of partial / full acquisition of an existing foreign company, where the investment is more than USD 5 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and, in all other cases by a Chartered Accountant or a Certified Public Accountant.


Reporting Requirement

• The Indian Party is required to report such acquisition, issue of guarantee (any exposure towards ODI) in form ODI to the AD Bank for submission to the Reserve Bank within a period of 30 days from the date of the transaction.


Approval Route – Factors considered for Approval

• Prima facie viability of the Joint Venture (JV)/ Wholly Owned Subsidiary (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 Indian party and the foreign entity.

• Expertise and experience of the Indian party in the same or related line of activity of the JV/WOS outside India.


Indian Party’s Obligations•Filling up of ODI Form to RBI, duly supported by certified board resolution, statutory auditors certificate and valuation report, through AD – I Bank •Receive share Certificate• Any other documents as an evidence of investment• Within six months of investments

• Submit Annual Performance Report of overseas entity to the Reserve Bank of India through AD Bank• Every year after annual accounts are prepared• 30 June every year (based on audited annual accounts) •Submit annual return on Foreign Liabilities and foreign Assets•15th July every year (through mail)

• Repatriate to India all dues viz. dividends, royalty, technical fees, etc.• Within 60 days of falling due.


Obligation on Indian Party Conti…..APR


An Indian party, which has set up / acquired a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) overseas in terms of the Regulations of the Notification ibid, shall submit, to the designated Authorised Dealer every year, an Annual Performance Report (APR) in Form ODI Part III in respect of each JV or WOS outside India and other reports or documents as may be specified by the Reserve Bank from time to time, on or before the 30th of June each year. The APR, so required to be submitted, has to be based on the latest audited annual accounts of the JV / WOS, unless specifically exempted by the Reserve Bank.Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the : a. The Statutory Auditors of the Indian party certify that ‘The un-audited Annual Performance Report (APR) may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS provided 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. Reporting requirements including submission of Annual Performance Report are also applicable for investors in unincorporated entities in the oil sector.

Obligation on Indian Party Conti…..FLA


Indian companies which have made overseas direct investments, shall submit an Annual return on Foreign Liabilities and Assets in the format as Prescribed by RBI (available in RBI’s website (www.rbi.org.in → Forms category → FEMA Forms) which can be duly filled-in, validated and sent by e-mail, by July 15 every year.Email id is :[email protected]

http://www.rbi.org.in/

mailto:[email protected]

ODI- Related Matters

Resident individuals are not permitted to set up company overseas

Proprietorship concerns and unregistered partnership firms are permitted to set up JV/WOS with prior approval of Reserve Bank

Registered Trusts and societies engaged in manufacturing/ educational/ hospital sector permitted for overseas investments with prior approval of Reserve Bank

All investments should have Unique Identification Number (UIN) from the Reserve Bank of India

Listed Indian companies are permitted to invest upto 50% of their net worth in shares/bonds/fixed income securities rated not below investment grade issued by listed overseas companies.

ODI by Financial SECTORRequirements to be fulfilled by the Indian Party

Financial Sector

Financial Sector

Indian Party has earned net profit

during the preceding three financial years

Registered with the regulatory authority

in India for conducting financial

activities

Has obtained approval from the

regulatory authorities

concerned both in India and abroad

Has fulfilled the prudential norms relating to capital

adequacy as prescribed by the

regulatory authority concerned in India


• INVESTMENT THROUGH SPECIAL PURPOSE VEHICLE (SPV) UNDER AUTOMATIC ROUTE

(i) Investments in JV/WOS abroad by Indian party through the medium of a Special Purpose Vehicle (SPV) are also permitted under the Automatic Route in terms of Regulation 6 of the Notification.

(ii) Setting up of an SPV under the Automatic Route is permitted for the purpose of making a investment in JV/WOS overseas

Automatic Route


• INVESTMENT THROUGH SPECIAL PURPOSE VEHICLE (SPV) UNDER AUTOMATIC ROUTE, CONTI…..

• Setting up of a step down SPV falls required approval of RBI

Approval Route


• OVERSEAS DIRECT INVESTMENT AS FINANCIAL TOOL:

• (a) Indian Parties are permitted to issue corporate guarantees on behalf of their first level step down operating JV /WOS set up by their JV / WOS operating as a Special Purpose Vehicle (SPV) under the Automatic Route, subject to the condition that the financial commitment of the Indian Party is within the extant limit for overseas direct investment. It has been decided that irrespective of whether the direct subsidiary is an operating company or a SPV, the Indian promoter entity may extend corporate guarantee on behalf of the first generation step down operating company under the Automatic Route, within the prevailing limit for overseas direct investment. Such guarantees will have to be reported to the Reserve Bank in Form ODI, as hitherto, through the designated AD Category – I bank concerned.

As in the case of corporate guarantees, all guarantees (including performance Guarantees and Bank Guarantees / SBLC) are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside India, and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time.

As in the case of corporate guarantees, all guarantees (including performance Guarantees and Bank Guarantees / SBLC) are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside India, and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time.


• (b) Further, the issuance of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries will be considered under the Approval Route, provided the Indian Party directly or indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued.

• (Note :The Indian party / entity may extend loan / guarantee only to an overseas JV / WOS in which it has equity participation.)

• Proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS may be considered by the Reserve Bank under the approval route.

OVERSEAS DIRECT INVESTMENT AS FINANCIAL TOOL CONTI......


• Pledge of Shares of JV/WOS

• RBI approval does not required

• An Indian party may pledge the shares of JV / WOS to an AD Category – I bank or a public financial institution in India for availing of any credit facility for itself or for the JV / WOS abroad in terms of Regulation 18 of the Notification. Indian party may also transfer by way of pledge, the shares held in overseas JV/WOS, to an overseas lender, provided the lender is regulated and supervised as a bank and the total financial commitments of the Indian party remain within the limit stipulated by the Reserve Bank for overseas investments, from time to time.


Hedging of Overseas Direct Investments

(1) Resident entities having overseas direct investments are permitted to hedge the foreign exchange rate risk arising out of such investments. AD Category - I banks may enter into forward / option contracts with resident entities who wish to hedge their overseas direct investments (in equity and loan), subject to verification of such exposure.

(2) If a hedge becomes naked in part or full owing to shrinking of the market value of the overseas direct investment, the hedge may continue to the original maturity. Rollovers on the due date are permitted up to the extent of market value as on that date.


• Capitalisation of exports and other dues • (1) Indian party is permitted to capitalise the payments due from the

foreign entity towards exports, fees, royalties or any other dues from the foreign entity for supply of technical know-how, consultancy, managerial and other services within the ceilings applicable. Capitalisation of export proceeds remaining unrealised beyond the prescribed period of realization will require prior approval of the Reserve Bank.

• (2) Indian software exporters are permitted to receive 25 per cent of the value of their exports to an overseas software start-up company in the form of shares without entering into Joint Venture Agreements, with prior approval of the Reserve Bank.


The obligations of the Indian party, which has made direct investment outside India

• An Indian Party will have to comply with the following: -• receive share certificates or any other documentary evidence

of investment in the foreign entity as an evidence of investment and submit the same to the designated AD within 6 months;

• repatriate to India, all dues receivable from the foreign entity, 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 outside India set up or acquired by the Indian party;


• 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

• 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.


What are the different modes of disinvestments from the JV / WOS abroad

• Disinvestment by the Indian party from its JV / WOS abroad may be by way of transfer / sale of equity shares to a non-resident / resident or by way of liquidation / merger / amalgamation of the JV / WOS abroad.


Can an Indian Party disinvest in case where write off is not involved

• Yes. The Indian Party can disinvest in cases where write off is not involved without prior approval from Reserve Bank subject to the following:

• the sale is to be 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;

• 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; and

• the Indian party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India.


In case of disinvestment of stake in overseas JV/WOS, can an Indian party disinvest with write

off of part of investment• Indian Party may disinvest without prior approval of the Reserve Bank, in

the under noted cases, where the amount repatriated on disinvestment is less than the amount of the original investment:

• i) in cases where the JV / WOS is listed in the overseas stock exchange; • ii) in cases where the Indian Party is listed on a stock exchange in India

and has a net worth of not less than Rs.100 crore; • iii) where the Indian Party is an unlisted company and the investment in

the overseas JV / WOS does not exceed USD 10 million and• iv) 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.


Whether restructuring of the balance sheet of the JV / WOS abroad involving write-off of

capital and receivables is allowed • Indian company which has set up WOS abroad or has at least 51% stake in

an overseas JV may write off capital (equity / preference shares) or other receivables (such as loans, royalty, technical knowhow fees and management fees in respect of the JV /WOS) even while such JV / WOS continue to function subject to the following:

• (i) Listed Indian companies are permitted to write off capital and other receivables up to 25% of the equity investment in the JV /WOS under the Automatic Route; and

• (ii) Unlisted companies are permitted to write off capital and other receivables up to 25% of the equity investment in the JV /WOS with prior approval of the Reserve Bank.


• The write-off / restructuring have to be reported to the Reserve Bank through the designated AD bank within 30 days of write-off / restructuring. The write-off / restructuring is subject to the condition that the Indian Party should submit the following documents for scrutiny along with the applications to the designated AD Category – I bank under the Automatic as well as the Approval Routes:

• a) A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party; and

• b) Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring.


Advantages of ODI over other mode of Investments outside India

• Under Liberalised Remittance scheme (LRS), maximum investment can be only upto US $ 200,000 per financial year by Resident Individuals for permitted current and capital account transactions including purchase of securities, but there is no such condition under ODI (400% condition apply).

• The investor can become subscriber to the memorandum of foreign entity in case of Overseas direct investment, but not in case of LRS scheme.


CA Deepender KumarDEEPENDER ANIL & ASSOCIATES101, E-36, Jawahar park, Laxmi Nagar, Delhi-110092Mob No: [email protected]

www.deepanilassociates.com

m

mailto:[email protected]

Overseas Direct Investments (ODI)

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