Overseas Direct Investments (ODI)
Legal , Policy, Procedures, and
requirements
19th July 2013
deepanilassociates@gmail.com
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
deepanilassociates@gmail.com
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
19th July 2013
deepanilassociates@gmail.com
3
Overseas investments - references
• FEMA Notification
No. 120/RB-2004
dated July 7,
2004
Notification
AP (DIR
series)
• AP (DIR) series Circulars
Circular issued from
time to time
19th July 2013
Master
Circular
•Master Circular on
Direct Investments
by residents
in JV/WOS
abroad
Website
deepanilassociates@gmail.com
www.rbi.org.in
4
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).
19th July 2013
deepanilassociates@gmail.com
5
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.
19th July 2013
deepanilassociates@gmail.com
6
Routes of Investment through ODI
Automatic Route
Approval Route
An 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.
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.
19th July 2013
deepanilassociates@gmail.com
7
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.
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
19th July 2013
deepanilassociates@gmail.com
8
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;
19th July 2013
deepanilassociates@gmail.com
9
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;
19th July 2013
deepanilassociates@gmail.com
10
'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
19th July 2013
deepanilassociates@gmail.com
11
'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;
19th July 2013
deepanilassociates@gmail.com
12
Sectors in which ODIs are allowed
with prior RBI approval
• Real Estate Business
• (Important to note the definition of Real
Estate Business)
• Banking Business
19th July 2013
deepanilassociates@gmail.com
13
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. nondeliverable 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
19th July 2013
deepanilassociates@gmail.com
14
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).
19th July 2013
deepanilassociates@gmail.com
15
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.
19th July 2013
deepanilassociates@gmail.com
16
• 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.
19th July 2013
deepanilassociates@gmail.com
17
Methods of Funding Overseas
Investments
•
•
•
•
•
•
•
•
19th July 2013
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.
deepanilassociates@gmail.com
18
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;
19th July 2013
deepanilassociates@gmail.com
19
• 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.
19th July 2013
deepanilassociates@gmail.com
20
• 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.
19th July 2013
deepanilassociates@gmail.com
21
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.
19th July 2013
deepanilassociates@gmail.com
22
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.
19th July 2013
deepanilassociates@gmail.com
23
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.
19th July 2013
deepanilassociates@gmail.com
24
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.
19th July 2013
deepanilassociates@gmail.com
25
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.
19th July 2013
deepanilassociates@gmail.com
26
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 :fla@rbi.org.in
19th July 2013
deepanilassociates@gmail.com
27
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 SECTOR
Requirements to be fulfilled by the Indian Party
Registered with the
regulatory authority
in India for
conducting financial
activities
Indian Party has
earned net profit
during the
preceding three
financial years
Has obtained
approval from the
regulatory
authorities
concerned both in
India and abroad
19th July 2013
Financial
Sector
Has fulfilled the
prudential norms
relating to capital
adequacy as
prescribed by the
regulatory authority
concerned in India
deepanilassociates@gmail.com
29
• INVESTMENT THROUGH SPECIAL PURPOSE
VEHICLE (SPV) UNDER AUTOMATIC ROUTE
(i)
(ii)
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.
Automatic Route
Indian
party
Setting up of an SPV under the Automatic
Route is permitted for the purpose of making
a investment in JV/WOS overseas
SPV
Operating
Entity
19th July 2013
deepanilassociates@gmail.com
30
• INVESTMENT THROUGH SPECIAL
PURPOSE VEHICLE (SPV) UNDER
AUTOMATIC ROUTE, CONTI…..
• Setting up of a step down
SPV falls required approval
of RBI
Approval Route
Indian
party
SPV
SPV
19th July 2013
deepanilassociates@gmail.com
31
•
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.
19th July 2013
deepanilassociates@gmail.com
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.
32
OVERSEAS DIRECT INVESTMENT AS
FINANCIAL TOOL CONTI......
• (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.
19th July 2013
deepanilassociates@gmail.com
33
• 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.
19th July 2013
deepanilassociates@gmail.com
34
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.
19th July 2013
deepanilassociates@gmail.com
35
• 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.
19th July 2013
deepanilassociates@gmail.com
36
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;
19th July 2013
deepanilassociates@gmail.com
37
• 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.
19th July 2013
deepanilassociates@gmail.com
38
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.
19th July 2013
deepanilassociates@gmail.com
39
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;
19th July 2013
deepanilassociates@gmail.com
40
• 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.
19th July 2013
deepanilassociates@gmail.com
41
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.
19th July 2013
deepanilassociates@gmail.com
42
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.
19th July 2013
deepanilassociates@gmail.com
43
• 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.
19th July 2013
deepanilassociates@gmail.com
44
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.
19th July 2013
deepanilassociates@gmail.com
45
CA Deepender Kumar
DEEPENDER ANIL &
ASSOCIATES
101, E-36, Jawahar park,
Laxmi Nagar, Delhi-110092
Mob No: 9910099584
deepanilassociates@gmail.com
www.deepanilassociates.com
m