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Overseas Direct Investment
Presented by Nishit Parikh
Agenda
Index
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Introduction to Overseas Direct Investment (ODI) 1
Routes of investments and Important Concepts 2
Setting up Branch office or Representative office abroad 6
Other Important aspects for ODI 3
Investment by resident Individual 4
Case studies 7
Liberalized Remittance Scheme (LRS) 5
Introduction
Introduction
Importance of ODI
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A trend analysis shows that the level of outward FDI from India has increased manifold since
1999-2000
Scale of overseas investment by domestic companies has also expanded as India was placed
second in 2010 only after China in terms of average size of net purchase deals
Major investment from India is in manufacturing and service sector
ODI allows Indian business houses to expand their business across the globe
India is among the top 5 counties whose domestic enterprises are becoming transnational
corporations
Boost the economic co-operation between India and other countries
Creating Brand image overseas
4
Introduction
ODI Statistics
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0
2
4
6
8
10
12
14
16
Total
Total
amount in billions US Dollar
Updated till 28th Feb, 2012 – Source – www.rbi.org.in
Introduction
Governing Law
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Section 6(3)(a) of FEMA, 1999 read with FEM(Permissible capital Account Transactions), Regulations, 2000
FEM (Transfer or issue of any Foreign security) Regulations, 2000 popularly referred as (FEMA 120)
AP(DIR Series) Circulars issued by RBI from time to time
FAQ on Overseas Direct Investment released by RBI (as updated from time to time)
FAQ on Liberalized Remittance Scheme – Applicable for resident Individuals
6
Meaning of Overseas Direct Investment
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Investment by an Indian Party by way of contribution to the capital or subscription to the MOA of
a foreign entity or by way of purchase of existing shares of a foreign entity by
Investment through stock exchange; or
Private placement in that entity; or
Market purchase; or
Investment in a Joint Venture or Wholly Owned Subsidiary abroad.
But does not include Portfolio Investment
SHARES INCLUDES EQUITY AS WELL AS PREFERENCE SHARES
Introduction
7
Routes of investments and Important Concepts
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Possible Routes for Investment
Cases not covered under Automatic route
Specific application to RBI with necessary documents in
Form ODI through the AD (Category I Bank) along with
prescribed supporting and documents
RBI would inter alia consider the following factors:
Prima facie viability of JV/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 foreign entity
Expertise and experience of the Indian party in the same or related line of activity of the JV/WOS outside India
Overseas JV/WOS to be engaged in bonafide business
activity except real estate and banking
Investment in Financial Sector should comply with
additional conditions
Indian party not on RBI’s Exporters’ Caution List/list of
defaulters/under investigation by an Authority such as ED,
SEBI etc.
Overall ceiling of financial commitment in all JV/WOS is
100% of net worth as on last audited Balance Sheet
Submission of Form Annual Performance Report in respect
of all its overseas investment
Automatic Route Approval Route
Routes of investment
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Conditions for Indian Parties in Financial Services
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Registered with appropriate regulatory authority in India
Earned net profit during the preceding three financial years from the financial services activities
Approval from the regulatory authorities concerned both in India and abroad
Compliance with prudential norms relating to capital adequacy norms as prescribed by the concerned
regulatory authority in India
WHAT IS THE MEANING OF FINANCIAL SERVICES?
Key conditions
10
Other Points
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Investment in Pakistan is allowed under approval route only
Investment in Nepal is to be made only in INR
Initially investment in Bhutan was allowed in INR, however, vide AP (DIR Series) Circular, 9 of 2005 investment
in freely convertible currencies also allowed
Routes of investment
11
Eligible Investor
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An Indian Party who is
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
Any other entity in India as may be notified by the Reserve Bank
Resident Individual
Special cases (primarily under approval Route)
Proprietary Firm
Trust / Society
Un-incorporated Entities
Important concepts
12
Investment by Proprietary Concern
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Investment by proprietary firm/unregistered partnership firms is allowed under approval route
provided:
Proprietary firm/unregistered partnership firm is recognised Star export House
Having proven track records i.e. Export outstanding does not exceed 10% of average export
realisation of past three years
Consistently high export performance track record
Exporter has not come under adverse notice of any Government agency
The amount of investment does not exceed 10% of the average of three years export
realisation or 200% of the net owed funds of the firm, whichever is lower
Important concepts
13
Definition WOS/JV
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Wholly Owed Subsidiary means
A foreign entity formed, registered or incorporated in accordance with laws of host country
Who’s entire capital is held by the Indian party
Joint Venture means
A foreign entity formed, registered or incorporated in accordance with laws of host country
In which Indian party holds shares (less than 100%)
Important Concepts
14
Investment in Overseas LLP is allowed ?
Financial Commitment
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Financial Commitment means the amount of direct investments outside India by an Indian party
By way of contribution to equity shares of the JV/ WOS abroad ;
As loans to its JV/WOS abroad;
100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS;
50% of the amount of performance guarantee issued on behalf of its overseas JV/ WOS;
Bank guarantee/standby letter of credit issued by a resident bank on behalf of an overseas JV/WOS of
the Indian party, which is backed by a counter guarantee/ collateral by the Indian party; and
Guarantee given on behalf of the first step down subsidiary
Important Concepts
15
Net Worth
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Net Worth = Paid-up Capital + Free Reserves
Definition of free reserve
Not defined under FEMA 120
Definition of free reserve of NBFC regulations to be considered?
Definition of free reserve as per companies act to be looked at?
Important Concepts
16
Net Worth
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Net Worth = Paid-up Capital + Free Reserves
For calculation of Net worth of the Indian party following to be considered:
Net worth of the Indian Investing company based on the last audited balance sheet
Net worth of its Indian Holding Company which holds at least 51% stake therein subject to letter of
disclaimer*
Net worth of its Indian Subsidiary Company – holding of at least 51% and subject to letter of disclaimer*
*THIS FACILITY IS NOT AVAILABLE FOR PARTNERSHIP FIRMS
Important Concepts
17
Other Important aspects
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Type of Instruments for investment
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Overseas investment can be in the form of :
Equity Shares
Preference Shares
Convertible will be treated at part with equity
Non-convertible are treated as debt
Debentures
Guarantee
It should not be open ended
In can be given on behalf of step down subsidiary (only for first level)
Type of investment
19
Acquisition of Existing Companies
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Indian party can make Overseas Direct Investment by acquiring overseas existing companies
Valuation of shares of overseas entity is required
Where investment exceeds USD 5 million – Valuation from Category I merchant banker registered in
India or outside India with appropriate authorities
Where investment is less than USD 5 million – Valuation from Indian CA or CPA of the overseas country
allowed
In case of investment in WOS by Indian promoter at premium or discount
Valuation requirement
20
Investment Through SPV
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Overseas Direct Investment by Indian party is allowed through SPV provided
The Indian company should not be on the:
RBI’s caution list
list of defaulters to the banking system
COMPANIES ACT, 2013 PROVIDES THAT INVESTMENT UP TO TWO LAYERS IS ALLOWED
Special Purpose Vehicle
21
Modes of Funding Overseas Direct Investment
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FUNDING MODES
CAPITALIZATION OF EXPORT DUES
MARKET PURCHASE
PROCEEDS OF ECB/FCCB IN EXCHANGE OF ADR/GDR
BALANCE IN EEFC ACCOUNT
SWAP OF SHARES BALANCE IN RFC ACCOUNT
Funding ODI
22
Investment by capitalization
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Overseas Direct Investment by Indian party is allowed by way of capitalisation of export dues,
royalty, fees, commission and other entitlements
Provided the said dues are not outstanding for a period prescribed under the regulations
In case the dues are outstanding for a period more than prescribed under the relevant
regulations, then RBI approval would be necessary
Special Purpose Vehicle
23
Obligations of Indian Party
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To remit funds from one branch of the AD for the particular Overseas Direct Investment
Receive share certificates or any other document as an evidence of investment within 6 months
from the date of remittance or such further date as the RBI may permit
Repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical
fees etc. within 60 days of its falling due, or such further date as the RBI may permit
Submit the APR on or before 30th June based on the latest audited financials of JV/WOS
If audit is not mandatory in the overseas country a certificate from statutory auditor is necessary
Annual Return on Foreign Liabilities and Assets needs to be filed on or before 15th July every year
To Do for Indian party
24
Post Investment Changes
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JV/WOS may diversify its activity
Set up step down subsidiaries
Alter the shareholding pattern in Overseas company
Changes in JV/WOS
25
Indian party is required to report these transaction within 30 days of the decision to RBI
Compliances
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Step I •Board Resolution for Investment in Overseas entity
Step 2 •Valuation of shares only if it is acquisition of existing company
Step 3 •Reporting in Form ODI within 30 days from the remittance
Step 4 •RBI will allot UIN for investment in entity
Step 5 • Filing of share certificates with AD within 6 months
Other •Post investment changes needs to be reported within 30 days
Step by step
26
Transfer of Shares of JV/WOS – No Write-off
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An Indian Party may transfer by way of sale to another Indian Party who complies with the provision
of Regulation 6, or to a person resident outside India without prior approval of the RBI, in under
noted category:
Sale does not result in write off of investment
Sale is through the stock exchange
In case not listed entity, transfer is not happening at prices less than determined by CPA or CA
No outstanding dues from overseas entity
Overseas entity is in operation for a period more than one year and has filed APR form
Indian party is not under investigation by CBI/ED/SEBI/IRDA or any other regulatory authority in India
IF IT DOES NOT SATISFY ANY OF THE ABOVE CONDITION THEN RBI APPROVAL REQUIRED
Sale of shares
27
Transfer of Shares of JV/WOS – Write Off
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An Indian Party may transfer by way of sale to another Indian Party without prior approval of the RBI
where disinvestment value is less than the investment amount and
In case JV/WOS is listed overseas
In case where Indian party is listed on stock exchange in India and has net worth less than INR 100 crore
Where Indian party is not listed and investment is less than USD 10 million
Where Indian party is listed company with net worth less than INR 100 crore but investment is does not exceed
USD 10 million
IF IT DOES NOT SATISFY ANY OF THE ABOVE CONDITION THEN RBI APPROVAL REQUIRED
Sale of shares
28
Restructuring of investment
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Write off capital (equity/preference shares) and other receivables such as loans, royalty, technical
fee etc up to 25% of equity investment of Indian party is allowed under Automatic route
provided :
Indian party is listed and has set up WOS or holds 51% shares in JV
Copy of balance sheet showing loss in overseas JV/WOS and projections for next five years indicating benefits
accruing to Indian party is submitted to AD
This needs to be reported to RBI within 30 days
In case of unlisted Indian party holding more than 51% shares, write off to the extent of 25% of equity
investment is allowed under Approval route
JV/WOS in losses
29
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Individual Investments
General Permissions
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By way of gift of foreign securities from person resident outside India
Under cashless ESOP scheme issued by company outside India
By way of inheritance (from resident in India or outside India)
Qualification shares for becoming directors of foreign company
Resident Individual can invest in shares (i.e. in case of setting up) of foreign company under LRS
subject to:
Investment up to USD 75000 in one Financial Year
The overseas entity cannot invest/set up a step-down subsidiary;
Form ODI to be submitted within 30 days
A lock-in period of one year from the date of first remittance is prescribed before divestment by the
resident individual and no write off will be allowed
IF IT DOES NOT SATISFY ANY OF THE ABOVE CONDITION THEN RBI APPROVAL REQUIRED
Individual Investments
31
Obligations
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Individual can transfer the shares acquired as mentioned in the earlier slide
Sale proceeds needs to be repatriated within 90 days from the date of sale
Resident Individual can pledge these shares for obtaining credit facility
Individual Investments
32
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Liberalised Remittance Scheme
An Overview
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Introduced in February 2004 as step towards liberalisation of foreign exchange facility for resident Individuals
Available to all Resident individuals (RI) including minors
Resident Individual can remit overseas up to USD 75000 per FY for any permissible current/capital account transactions or combination of both
The limit of USD 75000 is over and above the permissible current account transaction limit (except gift and donation)
Resident Individual can acquire shares or any other asset outside India without prior approval of RBI
Immovable property (directly or indirectly) not allowed from 14th August 2013
Payment for acquisition of shares under ESOP is permitted under LRS
LIMIT HAS BEEN RECENTLY REDUCED FROM USD 200,000 TO USD 75,000
Liberalised Remittance Scheme
34
An Overview
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Resident Individual can open, hold and maintain foreign currency accounts with a bank outside India for remittances under the scheme without the prior approval of RBI
Remittances inter alia not permitted for
Remittance directly or indirectly to Bhutan, Nepal, Mauritius or Pakistan;
Remittances to specified non-cooperative countries/territories or those identified by the Financial Action Task Force as non-co-operative countries or territories
Liberalised Remittance Scheme
35
Peculiar Issues
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Incorporation of Company/Entity Aboard
As per section 6 of FEMA, any person can acquire foreign securities
Many individuals had formed companies abroad
FAQ 3 issued in 2010 which had prohibited formation of company
5th August, 2013 – Resident Individuals are permitted to form companies overseas
Acquisition of Immovable Property
Till 14th August 2013, acquisition of immovable property abroad was allowed
Effective 14th August 2013, this has been prohibited
Liberalised Remittance Scheme
36
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Setting up A Branch/Representative Office
Overseas Offices
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Opening of Branch Office (BO) or Representative Office (RO) overseas is allowed
AD banks in India are permitted to remit funds for
Initial Expenses
Remittance up to fifteen per cent of the average annual sales/income or turnover during the last two financial years or up to twenty-five per cent of the net worth, whichever is higher
Recurring Expenses
Remittance up to ten per cent of the average annual sales/income or turnover during the last two financial years
Setting up A Branch/Representative Office
38
Conditions
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BO/RO should be conducting normal business activities of the Indian company
Overseas branch shall not enter into any contract or agreement in contravention of the FEMA Act, rules or regulations
Overseas office (trading/non-trading)/branch should not create any financial liabilities, contingent or otherwise, for the head office in India and also not invest surplus funds abroad without prior approval of the Reserve Bank
Any funds rendered surplus should be repatriated to India
Audited financials of BO/RO needs to be submitted to AD bank
IS FORM OBR NECESSARY AT THE TIME OF SETTING UP THE BO/RO?
Setting up A Branch/Representative Office
39
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Case Studies
Company Converting to LLP
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I Co. Is a company incorporated under Companies Act, 1956
I Co. has invested in F Co (which is a WOS) a company
incorporated in UK under Automatic route
Management of I Co. decides to convert company into LLP
I Co. Pvt. Ltd (I Co)
F Co. (Company in UK)
WOS
CAN THE LLP CONTINUE TO HOLD INVESTMENT IN F CO.?
Case Study - 1
41
Indian Company Merges with Another Indian Company
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I Co. has existing investment in BVI Co.
I Co. got merged with other Indian company
Earlier preference shares got replaced by debentures as per the
conditions of merger
Existing investment as a percentage of new net worth of merged
I Co. is more than 100%
I Co. Pvt. Ltd (I Co)
F Co. (Company in BVI)
WOS
DISINVESTMENT TO THAT EXTENT IS NECESSARY?
Case Study - 2
42
Non Filing of Form APR
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I Co. Is a company incorporated under Companies
Act, 1956
I Co. invested in JV/WOS in UK, US and Singapore
I Co. has not filed Form APR for investment in UK
for last two years
I Co. propose to invest further in US entity
WHETHER I CO. SHOULD TAKE APPROVAL OR AUTOMATIC ROUTE FOR INVESTMENT ?
I Co. Pvt. Ltd (I Co)
SG Pte. (Company
in Singapore)
US Inc. (Company
in US)
UK Co. (Company
in UK)
Case Study - 3
43
Newly Set-up Indian Company
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I Co. is a company incorporated under Companies Act,
1956 on 1st April, 2014
I Co. proposes to set up F Co. (which will be a WOS) a
company incorporated in UK under Automatic route by
June 2014
I Co. Pvt. Ltd (I Co.)
F Co. (Company in UK)
WOS
Case Study - 4
WHETHER PERMISSIBLE OR NOT?
44
Using Net Worth of Holding or Subsidiary
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I Co. is a company incorporated under Companies Act,
1956
I Co. has 51% shares in B Pvt. Ltd.
I Co. proposes to invest in F Co. (which is a WOS) a
company incorporated in UK
As on the date of net worth of I Co. INR 50 cr and net
worth of B Ltd. is INR -60 crores: OR
As on the date of net worth of I Co. INR -50 cr and net
worth of B Ltd. is INR 100 crores
TOTAL NET WORTH (I CO. AND B PVT. LTD.) TO BE CONSIDERED?
I Co. Pvt. Ltd. (I Co)
B Pvt. Ltd.
55%
F Co. (Company in UK)
Case Study - 5
45
Gift of Shares
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Mr. A is resident in India working with MNC
Mr. B who is working with the same MNC
but with its US company
Mr. A was granted 30 shares of group entity
as ESOP at a price of USD 1 each
Mr. B paid on behalf of Mr. A the said USD
30
WHETHER THIS WILL ALLOWED OR NOT ?
Mr. B Foreign Company
Mr. A
Case Study - 6
46
Resident to Resident Transfer of Shares
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I Co. and H Co. are Indian companies
I Co. has existing investment in F Co.
I Co. sold shares of F Co. to H Co.
I Co. received consideration in INR from
another H Co.
WHETHER THIS WILL ALLOWED OR NOT ?
I Co.
F Co.
H Co.
WOS Proposed WOS
Case Study - 7
47
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