Overseas Direct Investments Pp t

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Overseas Direct Investments (ODI)

Legal , Policy, Procedures, andrequirements

[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

Notification MasterCircular

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 JointVenture (JV) or a Wholly Owned Subsidiary

(WOS).




Points to be considered for ODI

• Investments can be made in new or existingentity.

• Indian entity can invest in any bonafideactivity (except real estate other thandevelopment of township, construction ofresidential/ commercial premises, road or

bridges). Also in case of financial servicesector, certain additional conditions to befulfilled.




Routes of Investment through ODI

Automatic RouteAn Indian Party does not require

any prior approval from theReserve 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 theconditions under the automatic

route require the prior approval of

the Reserve Bank for which a

specific application in form ODI

with the documents prescribedtherein 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 createdunder an act of

Parliament.

A partnership firm

registered under the

Indian PartnershipAct, 1932

Any other entity in

India as may be

notified by theReserve 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 partymakes 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 entirecapital 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 Indianparty 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, rupeeexchange 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 extantFEMA 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 lastaudited 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 guaranteeis 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 Bankis 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 equityparticipation, 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 onimmovable / 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 Indianparty 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 thecompany 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 aperiod 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 suchinvestment.

• Financial position and business track record ofthe Indian party and the foreign entity.

• Expertise and experience of the Indian party inthe same or related line of activity of the JV/WOSoutside 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]


mailto:[email protected]













ODI- Related Matters

Resident individuals are not permitted to set up companyoverseas

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 overseascompanies.



ODI by Financial SECTOR

Requirements to be fulfilled by the Indian Party

Financial

Sector

Indian Party has

earned net profit

during the

preceding three financial years

Registered with the

regulatory authority

in India for

conducting financialactivities

Has obtained

approval from theregulatory

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 PurposeVehicle (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

OperatingEntity

SPV

Indianparty




SPV

SPV

Indianparty

• INVESTMENT THROUGH SPECIAL

PURPOSE VEHICLE (SPV) UNDER

AUTOMATIC ROUTE, CONTI…..

• Setting up of a step downSPV falls required approval

of RBI

Approval Route






• (b) Further, the issuance of corporate guarantee on behalf of

second generation or subsequent level step down operatingsubsidiaries will be considered under the Approval Route, providedthe Indian Party directly or indirectly holds 51 per cent or morestake in the overseas subsidiary for which such guarantee isintended to be issued.

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

• Proposals from the Indian party for undertaking financialcommitment without equity contribution in JV / WOS may beconsidered 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 anAD Category – I bank or a public financial institution inIndia for availing of any credit facility for itself or for theJV / WOS abroad in terms of Regulation 18 of theNotification. Indian party may also transfer by way ofpledge, the shares held in overseas JV/WOS, to anoverseas lender, provided the lender is regulated andsupervised as a bank and the total financial

commitments of the Indian party remain within the limitstipulated by the Reserve Bank for overseasinvestments, from time to time.




Hedging of Overseas Direct Investments

(1) Resident entities having overseas direct investments arepermitted to hedge the foreign exchange rate risk arising outof such investments. AD Category - I banks may enter intoforward / option contracts with resident entities who wish tohedge 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 toshrinking of the market value of the overseas directinvestment, the hedge may continue to the original maturity.

Rollovers on the due date are permitted up to the extent ofmarket 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 fromthe 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 Reportin 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 patternwithin 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 tothe Reserve Bank; and

• the Indian party is not under investigation by

CBI / DoE/ SEBI / IRDA or any other regulatoryauthority in India.


In case of disinvestment of stake in overseas



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 USD10 million.


Whether restructuring of the balance sheet of



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 otherreceivables 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.


f f



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 ResidentIndividuals for permitted current and capital

account transactions including purchase ofsecurities, but there is no such conditionunder ODI (400% condition apply).

• The investor can become subscriber to thememorandum of foreign entity in case ofOverseas direct investment, but not in caseof LRS scheme.




CA Deepender Kumar

DEEPENDER ANIL &

ASSOCIATES

101, E-36, Jawahar park,

Laxmi Nagar, Delhi-110092

Mob No: 9910099584

[email protected]

www.deepanilassociates.com



Documents

Overseas Direct Investments Pp t