FOREIGN EXCHANGE MANAGEMENT ACT, 1999
OVERSEAS DIRECT INVESTMENTS BY RESIDENTS
Presented By :
Mukesh K. Bansal
FCA, ACS, Dip(IFRS)
CONTENTS
 INTRODUCTION
 OVERSEAS DIRECT INVESTMENT (ODI) TREND
 CASE STUDIES
 RBI CIRCULAR
INTRODUCTION
Meaning
Overseas Direct Investment (ODI) Overseas Direct Investment (ODI) means investments by way of contribution to the
capital or subscription to the Memorandum of Association of a foreign entity i.e. setting up a Joint Venture (JV) or a Wholly
Owned Subsidiary (WOS)) in foreign country.
Overseas Direct Investments (ODI) - General Statutory framework
Section 6 of FEMA 1999 - Capital Account Transactions
•
FEM (Transfer or Issue of any Foreign Security) Regulations, 2004 (‘FEMA 120’)
•
Master Circular on Outbound Investments dated 1 July 2015
•
AP (DIR Series) Circulars issued by RBI from time to time especially after the Master Circular
Portfolio Investments - Also relevant for Individuals:
•
Liberalized Remittance Scheme (‘LRS’) - Portfolio Investment Scheme (‘PIS’) (FEMA 1)
•
Master Circular on Miscellaneous Remittances dated 1 July 2015
•
FAQs issued by RBI (latest version on RBI website - 13 November 2013)
INTRODUCTION
Who can make Overseas Direct Investment (‘ODI’) outside India
An Indian Party who is:
•
a company incorporated in India; or
•
a body created under an Act of Parliament: or
•
LLPs – Registered under LLP Act, 2008
•
a partnership firm registered under the Indian Partnership Act, 1932
•
any other entity in India as may be notified by the Reserve Bank
An Individual – Person Resident In India
Special cases (primarily under approval Route)
•
Proprietary Firm
•
Trust / Society
•
Un-incorporated Entities
Note : When more than one such company, body or entity makes investment in the foreign JV / WOS, such combination will
also form an “Indian Party”.
ODI - TRENDS
Outward ODI ($ MN)
25,000
200%
20,000
150%
15,000
100%
10,000
50%
5,000
0%
0
-50%
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Outward FDI ($ mn)
2009-10
2010-11
2011-12
2012-13
2013-14
% Change
Financial Year
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
ODI ($ mn)
1,819
1,934
2,274
5,867
15,046
18,835
19,365
15,144
17,195
11,097
7,134
% Change
-
6%
18%
158%
156%
25%
3%
-22%
14%
-35%
-36%
Source: RBI
ODI - TRENDS
After moderate ODI investment between FY03 and FY04, ODI investments started gradually increasing owing to
the relaxations in overseas investment policy post 2004. ODI investment by India picked up significantly in FY07
and peaked in FY09 with investment of $ 19,365 million abroad.
The gradual increase in outward investments also coincided with the time of financial crisis which first hit in
2007. Also, the overall foreign exchange reserve position provided comfort to progressive relaxation of the
capital controls and simplification of the procedures for outbound investments from India. The year FY08 also
witnessed appreciation of the currency with average exchange rate at Rs 40.24/$.
The trend in India’s ODI was moderately affected in FY10; a rebound was seen in FY11. However, past two years
witnessed a decline in these investments from $ 17,195 million in FY11 to $ 11,097 million in FY12 to $ 7,134
million in FY13.
ODI - TRENDS
ODI is divided into three categories; equity, loans and guarantee issued. Most of the investments are made in
the form of guarantee issued followed by equity and lastly in the form of loans. In terms of flow of dollars out
of the country equity and debt would be relevant as a very small proportion of guarantees are invoked which
necessitate the flow of dollars.
Break up of FDI Investment by India ($ Million)
Table 1: Break up of FDI Investment by India
$ million
Share in total
(%)
Equity
7,007
23.9
Loans
3,208
11.0
Guarantee issued
19,079
65.1
Total investments
29,294
100.0
Component
Equity
24%
Guarantee
issued
65%
Loans
11%
ODI - TRENDS
Sectoral Distribution of ODI
Sectoral Break Up
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Transport, storage
and
communication
services
Manufacturing
Agriculture and
mining
Wholesale, retail
Financial,
trade, restaurants Insurance and
and hotels
business services
Equity
Loans
Construction
Guarantee Issued
Community, social
and personal
services
Miscellaneous
Electricity, gas and
water
OUTWARD FDI - TREND
Country Wise Distribution of ODI
9000
8000
7000
6000
Equity
5000
Loans
4000
Guarantee Issued
3000
Total
2000
Share in Total %
1000
0
Netherlands Singapore
British
Virgin
Islands
Mauritius
United United Arab United
States of
Emirates
Kingdom
America
Switzerland Azerbaijan
Cayman
Island
Hong Kong
Cyprus
Saudi Arabia
Belgium
Oman
Concluding Remarks :
•
Most of the investments made abroad are in the form of guarantees issued. Ultimately a very small proportion would be invoked. Hence, the equity
and debt components would be relevant from the point of view of outward flow of dollars.
•
FY07-FY11 period has been buoyant times for such investment, but there has been a slowdown since then. it decline in FY12 and FY13 and there ha
been a recovery in FY14.
•
Based on sectoral break up, highest investments are made in transport, storage & communication services followed manufacturing activities and
agriculture and mining.
INVESTMENT ROUTES
Overseas Direct
Investement (ODI)
General Permission
Automatic Route
Authorised Dealer
Approval Route
Prior approval of
RBI
Specifically prohibited activities – Real Estate and Banking Business
Real Estate Business means buying and selling of real estate or trading in Transferable Development Rights but
does not include development of townships, construction of residential/commercial premises, roads or bridges
ROUTES OF INVESTMENT
AUTOMATIC ROUTE
• Overseas JV/WOS to be engaged in bonafide business •
activity except real estate and banking
•
• Investment in Financial Sector should comply with
additional conditions
APPROVAL ROUTE
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.
• Indian party not on RBI’s Exporters’ Caution List/list of • RBI would inter alia consider the following factors:
defaulters/under investigation by an Authority such as
o Prima facie viability of JV/WOS outside India
ED, SEBI etc.
o Contribution to external trade and other
benefits which will accrue to India through such
• Overall ceiling of financial commitment in all JV/WOS

investment.
is 400% of net worth as on last audited Balance Sheet
• Submission of Form Annual Performance Report in
respect of all its overseas investment
o Financial position and business track record of
the Indian party and foreign entity.
o Expertise and experience of the Indian party in
the same or related line of activity of the
JV/WOS outside India.
ROUTES OF INVESTMENT
Automatic Route
An Indian party has been permitted to make investment / undertake financial commitment in overseas Joint
Ventures (JV) / Wholly Owned Subsidiaries (WOS), as per the ceiling prescribed by the Reserve Bank from
time to time.
With effect from July 03, 2014, the limit of Overseas Direct Investments (ODI)/ Financial Commitment (FC) to
be undertaken by an Indian Party under the automatic route has been restored up to the 400% of the net
worth as per the last audited balance sheet)
Any financial commitment exceeding USD 1 (one) billion (or its equivalent) in a financial year would require
prior approval of the Reserve Bank even when the total FC of the Indian Party is within the eligible limit
under the automatic route (i.e., within 400% of the net worth as per the last audited balance sheet)
CASE STUDY - 1
Case study - Calculation of 400%
Amount (Rs.)
Share holder funds
100
Loans and liabilities
200
Investments in XYZ USA (75% subsidiary)
100
Bank Guarantees from SBI on behalf of USA company for raising funds in USA
100
Corporate Guarantee for USA Company for raising funds in USA
100
Calculate Maximum investment Indian Company can make in other WOS/ JV abroad??
Case study – Answer
Amount (Rs.)
Net Worth (SH Funds)
100
Max Limit under ODI regulations
400
Existing Financial Commitments Investments in USA equity
100
Corporate/ BG/
200
Total existing FC
300
Maximum investments can be made
100
BG by AD MAY not hit the limit of 400% IF BG limit are not backed by counter guarantee
ROUTES OF INVESTMENT
Method of Funding :
•
Drawal of foreign exchange from an AD bank in India
•
Capitalisation of exports
•
Swap of shares
•
External Commercial Borrowings (ECBs)
•
Exchange/ proceeds of ADRs/GDRs
•
EEFC account of the Indian party
Capitalisation of exports and other dues:Indian party is permitted to capitalize 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 unrealized beyond the prescribed period of realization will require prior approval of
the Reserve Bank.
Indian software exporters are permitted to receive 25 % 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.
OVERSEAS DIRECT INVESTMENT
Obligations of Indian Party :
• Receive share certificate or any other document as an evidence of investment,
• Repatriate to India the dues receivable from foreign entity,
• Submit the Annual Performance Report/ Audited Financial Statements to the Reserve Bank
Restructuring of the overseas entity write off of capital and receivables :
• Indian Party have at least 51 per cent stake in an overseas JV,
• write off capital (equity / preference shares) or other receivables, such as, loans, royalty, technical knowhow
fees and management fees
• written off upto to 25% of Equity Investments
• Listed Indian companies under automatic route
• Unlisted companies under approval route
OVERSEAS DIRECT INVESTMENT
CASE STUDY – 2 : Restructuring of overseas investments
An Indian Company RG Pvt. Ltd is having 100% WOS in Italy, SG P Ltd, with an equity investments of INR 100
lacs, and Preference share capital of INR 50 lacs. Due to continuous losses faced by Italian Company, RG Pvt.
Ltd, need to restructuring exercise for Italian Company, to get additional interest free period from Italian
Lenders. One of the terms of Italian lenders is to write of 100% PSC by Indian Company. Advice Indian
Management before Lender proposal can be consented.
• Under approval route (PVT Company)
• Not to be allowed (Max is 25% of equity )
OVERSEAS DIRECT INVESTMENT
Transfer by way of sale of shares of a JV / WOS :
• The sale does not result in any write off of the investment (or financial commitment)
• The sale is effected through a stock exchange in case of listed WOS/JV
• Unlisted shares as per valuation by CA/ CPA
• Completion of One Year and filling of APR
Transfer by way of sale of shares of a JV / WOS involving Write off
Indian Party may disinvest, where the amount repatriated after disinvestment is less than the original amount
invested:
 JV / WOS is listed in the overseas stock exchange;
 Indian Party is listed on a stock exchange in India with net worth of Rs.100 crore;
 Unlisted Indian Party/ Other Listed Company- investment (or financial commitment) in the overseas
venture does not exceed USD 10 million.
otherwise shall have to apply to the Reserve Bank for prior permission.
OVERSEAS DIRECT INVESTMENT
Pledge of Shares of JV, WOS and Step down Subsidiary (SDS) :
An Indian Party may pledge, as a security in favour of
• an Authorized Dealer or
• a public financial institution in India or
• an overseas lender,
for availing of fund based or non-fund based facility for itself or for its JV / WOS / SDS or for
any other JV / WOS / SDS of the Indian party.
CASE STUDY
Case Study 3.
Deep Dive Limited has a joint venture in Chicago with a US Partner in which Deep Dive Limited holds 74%. Deep Dive
Limited is facing financial difficulties in India and wants to borrow from Indian banks to fund its business requirements
in India. One of the securities for raising this debt in India is the pledge of its entire 74% stake I the said joint venture.
The Indian bank need a legal opinion on the permissibility of this pledge. What will be your advice and opinion??
ROUTES OF INVESTMENT
FINANCIAL COMMITMNET includes :
The total financial commitment of the Indian party in all the Joint Ventures / Wholly Owned Subsidiaries shall comprise of
the following:
 100% of the amount of equity shares;
100% of the amount of preference shares; whether convertible or not
 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
21
PROCEDURE FOR ODI UNDER APPROVAL ROUTE
Plain paper application with Form ODI through AD Bank along with the following documents:
•
Report from the bankers of the Indian party in sealed or closed cover
•
Latest Annual Accounts of Indian company along with director’s report
•
If acquisition of existing foreign company following additional documents
• Copy of certificate of incorporation of foreign entity
• Latest Annual Accounts of foreign entity along with Director’s Report
• Valuation certificate for the shares of the foreign entity
•
Certified copy of the Board Resolution of Indian company
•
If investment is in Financial Service sector – Certificate from Statutory Auditors / independent practicing CA for
Compliance of the specified additional conditions
• Approval from concerned onshore and offshore regulatory authorities to be obtained
POSSIBLE ROUTES OF INVESTMENT
Investments without equity capital with financial commitments- Prior approval
• Any financial commitments for Overseas WOS/ JV, without any capital contributions required prior
permission from RBI
• Application with AD Bank
• AD Bank will do due diligence
• Certificate from AD Bank for host country regulation for non-requirements of Capital contribution.
Indian Party- Propertorship Firms/ Unregister Firms
Under Approval Route
Status Holder as per Foreign Trade Policy
Proven track records for export realization- export outstanding should be less than 10% of 3 year average
export realization.
Max Limit: LOWER OF 10% of ER three year average or 200% of net worth.
POSSIBLE ROUTES OF INVESTMENT
Professional Propertorship Firms:
• Share capital against professional fee
• Max upto 50% of fees receivable from each company
• Max 10% of share capital of overseas Company
Pledge of shares:
Pledge of overseas immovable assets
Pledge of Indian immovable assets for overseas JV
ODI by individual Resident in India
LRS for Resident Individuals
Investment in existing Company
Investments for set up new companies/ incorporation of Companies outside India
Portfolio Investments outside India
By Companies
• For Listed Companies: upto 50% of network as per Last ABS
• For Resident Individual: As per LRS (Currently USD 250000 PA)
POSSIBLE ROUTES OF INVESTMENT
By Individuals Under LRS
• ODI to set up or existing Companies
• Bonafide business activities and No SPV, No step down subsidiary allowed
• With in the limit of LRS (Upto USD 250000 PA)
• EEFC/ RFC balance inclusive in LRS limit
• To comply with valuation norms as per ODI scheme
• No write off allowed
• Disinvestment/ transfer allowed only ater one year minimum period
• Normal reporting requirements as per ODI reporting
25
REGULATIONS UNDER LRS

LRS available to all Resident individuals (RI) including minors (singularly or jointly)

RI can remit overseas up to USD 75,000 per financial year for any permissible current / capital account transaction.

RI can acquire and hold shares or any other asset outside India without prior approval of RBI using the LRS. (cannot acquire
immoveable property)

RI can open, hold and maintain foreign currency accounts with a bank outside India for remittances under the scheme without
the prior approval of RBI.

Income and sum remitted need not be brought back into India and can be reinvested overseas

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’
 Remittance by a resident individual for setting up a company abroad (post setting up by any other PROI, fresh issue or
acquisition of shares is fine)
CASE STUDY
 Case Study 4. Investments by resident Individuals
 XYZ India Private Limited is having a WOS, XYZ Japan, in Japan, having manufacturing facility.
During the year 2014-15, 20% of shares of XYZ Japan, were transferred to, Resident individuals, all
are the directors in Indian Company. At the end of March 2015, XYZ Japan, Board of directors has
sent a proposal to Indian Holding Company to set up another step down subsidiary in Japan, having
70% of ownership and remaining 30% by one of its main supplier.
• Resident individual investment
• No step down subsidiary
• RBI permission required
27

OTHER REGULATIONS FOR OUTBOUND INVESTMENTS
Mutual Funds
 Aggregate ceiling for overseas investment by Mutual Funds registered with SEBI is $7 bn
 A limited number of qualified Indian Mutual Funds are permitted to invest cumulatively upto $1 bn in Overseas
Exchange Traded Funds

Domestic Venture Capital Fund (‘DVCF’)
 SEBI registered DVCF may invest in equity and equity linked instruments of off-shore Venture Capital
Undertakings, subject to an overall limit of $500 mn
 Accordingly, DVCF desirous of availing of this facility may approach SEBI for necessary permission

Other cases
 Overseas listed portfolio investments (shares, etc) by listed Indian company (till 50% net-worth)
28

REGULATIONS FOR ODI BY REGISTERED TRUST / SOCIETY
Trust / Society, with prior approval from RBI, are allowed to set up JV / WOS outside India subject to following
conditions:
 engaged in manufacturing / educational / hospital sector
 Trust / Society should be registered under Indian Trust Act / Societies Registration Act
 Trust deed / MOA permits proposed investment
 Proposed investment approved by trustees / governing body of the Trust / Society
 AD is satisfied that the trust / society Is KYC compliant and engaged in bonafide activity
 Trust / Society has been in existence atleast for a period 3 years
 Not come under adverse notice of Regulatory / Enforcement agency like DoE / CBI etc.
THANK YOU
MUKESH K BANSAL,
B.COM. FCA, ACS, Dip(IFRS)
9540022533
Mukesh.bansal@biz2india.in