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Investment in foreign company

Jyoti Malik (ACCOUNTANT) (2644 Points)

09 February 2010

What is the procesure /requirement for a Pvt Ltd company who wants to make investment in foreign company?

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Ratan Deep Saxena (Asstt Manager (Accounts & Finance)) (2998 Points)
Replied 09 February 2010

Dear Jyoti,

Please find the Below list of FAQ's in respect of investment outside india for your ready reference:

Direct Investment by Residents in Joint Venture (JV)/Wholly Owned Subsidiaries (WOS) abroad

Q.1. Where are the guidelines pertaining to overseas investment available?

A. The guidelines have been notified by Reserve Bank of India vide Notification No. FEMA 120 dated July 7, 2004, as amended from time to time, which can be accessed at the Reserve Bank’s website fema.rbi.org.in. A Master Circular entitled Indian Direct Investment in JV/WOS Abroad dated July 1, 2004, which is a compendium of all notifications/circulars incorporating the developments, till that date, is also available at the website rbi.org.in.

Q.2. Where can one get clarifications pertaining to the guidelines on overseas investment?

A. Please see answer to Q. 1 above. Any clarification in respect of cases not covered by the instructions, may be obtained, giving full details of the case from the Reserve Bank’s Central Office at the following address:

Reserve Bank of India
Foreign Exchange Department
Overseas Investment Division
Central Office
Amar Building, 3rd Floor
Mumbai 400 001

e-mail: oid @ rbi.org.in

Q.3. What is direct investment outside India?

A. Direct investment outside India means investment by way of contribution to the capital or subscripttion to the Memorandum of Association of a foreign entity, signifying a long term interest (setting up a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS)) in the overseas entity and thus does not include portfolio investment.

Q.4. Does the definition as given in Q.3. mean that one cannot acquire an existing company either partially or wholly?

A. No. An eligible entity is free to acquire either a partial stake (JV) or the entire equity (WOS) in an already existing company, provided the valuation is as per the laid down norms. (Please refer answer to Q.16).

Q.5. Who is eligible to make overseas direct investment?

A. Resident corporate entities and partnership firms registered under the Indian Partnership Act, 1932 (Indian Party) are eligible to make direct investment abroad in JVs/ WOSs.

Q.6. Can overseas direct investment be made in any activity?

A. An Indian Party can make overseas direct investment in any bonafide activity (except those that are specifically prohibited). However, for undertaking activities in the financial sector, certain additional conditions specified in Regulation 7 should be adhered to. (Please refer answer to Q.26).

Q.7. What are the prohibited activities for overseas direct investment?

A. Real estate and Banking are the prohibited sectors for overseas direct investment. However, Indian banks operating in India can set up JVs/WOSs abroad provided they obtain clearance under the Banking Regulation Act 1949, from DBOD, RBI, CO.

Q.8. What exactly is covered under the term real estate business?

A. Real estate business means buying and selling of real estate or trading in transferable development rights (TDRs) but does not include development of township, construction of residential/commercial premises, roads and bridges.

Q.9. What are the schemes under which an eligible entity can set up a JV or WOS abroad?

A. Broadly there are two schemes under which an Indian Party can set up a JV/WOS abroad, namely the Automatic Route and the Normal Route.

Q.10. What is the Automatic Route?

A. Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for setting up a JV/WOS abroad (in case of investment in the financial sector, however, prior approval is required from the concerned regulatory authority both in India and abroad).

Q.11. What are the criteria for direct investment to be made under the Automatic Route?

A. The criteria for direct investment under the Automatic Route are as under:

the total ‘financial commitment’ of the Indian Party in JVs/WOSs in any country other than Nepal, Bhutan and Pakistan is up to 100% of its net worth and the investment is in a lawful activity permitted by the host country;
the Indian Party is not on the Reserve Bank’s exporters caution list / list of defaulters to the banking system published/ circulated by the Credit Information Bureau of India Ltd. (CIBIL)/RBI or under investigation by the Enforcement Directorate or any investigative agency or regulatory authority;
the Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an authorised dealer to be designated by it.

Q.12. What is ‘financial commitment’?

A. Financial commitment means the amount of direct investment outside India by way of contribution to equity and loans and 50% of the amount of guarantee issued by an Indian Party to or on behalf of its overseas JV/WOS.

Q.13. What is the limit for direct investment in Nepal or Bhutan under the Automatic Route?

A. In respect of direct investment in Nepal or Bhutan, the total financial commitment is upto the net worth of the Indian Party in INR.

Q. 14. Can direct investment upto the net worth be made on an annual basis?

A. No, the networth is the overall ceiling for overseas direct investment. Any fresh overseas investment can be made only on the basis of accretion to the networth.

Q.15. What is the procedure to be followed by an eligible entity to make direct investment in a JV/WOS under the Automatic Route?

A. The eligible Indian Party intending to make a direct investment under the automatic route is required to fill in the form ODA supported by documents listed therein, i.e., certified copy of the Board Resolution, Statutory Auditors certificate, Valuation report (in case of acquisition of an existing company) as per the valuation norms listed in answer to Q.16 and approach an Authorised Dealer (designated Authorised Dealer) for making the investment/remittance.

Q.16. What are these valuation norms referred to in Q. 4 and 15?

A. Where the investment is more than USD five million, the valuation has to be done by a Category I Merchant Banker registered with Securities and Exchange Board of India (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/Certified Public Accountant. However, in the case of investment by acquisition of shares where the consideration is to be paid fully or partly by issue of the Indian Party’s shares (swap), in all cases, the valuation will have to be done by a Category I Merchant Banker registered with Securities and Exchange Board of India (SEBI) or an Investment Banker/Merchant Banker outside India registered with the appropriate regulatory authority in the host country.

Q.17. Where does one find Form ODA ?

A. Form ODA as also other relevant forms pertaining to overseas direct investment are available under Forms at the website fema.rbi.org.in.

Q.18. What is the concept of a ‘designated Authorised Dealer’? Can there be more than one ‘designated Authorised Dealer’ for the same JV/WOS in case the JV/WOS has more than one Indian promoter?

A. The Indian party is to route all transactions in respect of one particular overseas JV/WOS through only one branch of an Authorized Dealer. This branch would be the ‘designated Authorised Dealer’ in respect of that JV/WOS and all transactions relating to the investment in that particular JV/WOS are to be reported only through this ‘designated’ branch of an Authorized Dealer. In case the JV/WOS is being set up abroad by two or more Indian promoters, then all Indian promoters would collectively be called the Indian party who would be required to report all transactions in respect of that JV/WOS only through one ‘designated Authorised Dealer’.

Q.19. What about if one Indian promoter has more than one JV in either the same country or in different countries?

A. The Indian promoters are free to designate different branches of the same Authorised Dealer or different branches of different Authorised Dealers for their separate JVs/WOSs. The only requirement is that regardless of the number of promoters, one JV/WOS will have only one ‘designated Authorsied Dealer’ to report all its transactions.

Q.20. Can one change the ‘designated Authorized Dealer’?

A. Yes. An application by way of a letter may be made to the concerned Regional Office of the Reserve Bank.

Q.21. Whether any prior registration with the Reserve Bank is necessary for direct investments under the Automatic Route?

A. No prior registration with the Reserve Bank is necessary for direct investments under the automatic route. After the report of remittance/investment in form ODR is received by the Reserve Bank, from the designated Authorised Dealer, an identification number for that particular JV/WOS will be issued for the purpose of taking on record the overseas direct investment with the objective of maintaining a database for monitoring the outflows/inflows in respect of the overseas entities. Subsequent investments in the same project can be made only after allotment of the identification number.

Q.22. Does the allotment of an identification number by the Reserve Bank for direct investments under the automatic route constitute an approval from the Reserve Bank?

A. No. The allotment of the identification number does not constitute an approval from the Reserve Bank for the investment made/to be made in the JV/WOS. The issue of an identification number only signifies the taking on record of the investment for maintaining the database.

Q.23. Is there any prohibition for direct investment under the Automatic Route?

A. Yes. Indian Parties which are under investigation by the Enforcement Directorate/other investigative agencies/regulatory authorities, or are on the Reserve Bank’s exporters caution list or are included in the list of defaulters to the banking system in India published/circulated by CIBIL/RBI are not eligible to make investment under the automatic route.

Q. 24. What is the Normal route? What is the procedure to be followed for investment proposed to be made under Normal Route?

A. Proposals not covered by the conditions under the automatic route require the prior clearance of the Reserve Bank for which a specific application in form ODI with the documents prescribed therein is required to be made to :

Reserve Bank of India
Foreign Exchange Department
Overseas Investment Division
Central Office
Amar Building, 3rd Floor
Mumbai 400 001.

Q.25. What are the parameters for considering proposals under the normal route?

A Requests under the normal route are considered by taking into account inter alia the prima facie viability of the proposal, business track record of the promoters, experience and expertise of the promoters, benefits to the country, etc.

Q.26. Can an Indian company make investment in a JV/WOS abroad in the financial services sector?

A. Only an Indian Company engaged in financial sector activities can make investment in the financial services sector provided it fulfills the following additional norms :

has earned net profit during the preceding three financial years from the financial services activities;
is registered with the appropriate regulatory authority in India for conducting financial services activities;
has obtained approval for undertaking such activities from the concerned regulatory authorities both in India and abroad before venturing into such activity;
has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.

Q.27. What are the permissible sources for funding overseas direct investment?

A. Funding for overseas direct investment can be made by one or more of the following sources:

the balances held in Exchange Earners Foreign Currency account of the Indian Party maintained with an authorised dealer;
proceeds of ADR/GDR issues;
market purchases of foreign exchange;
share swap (refers to the acquisition of the shares of an overseas entity by way of exchange of the shares of the Indian entity);
capitalisation of exports, royalties, etc.;
proceeds of ECBs/FCCBs raised abroad.

For the purpose of reckoning net worth of an Indian party, the net worth of its holding company (which holds at least 51% stake in the Indian Party) or its subsidiary company (in which the Indian party holds at least 51% stake) may be taken into account to the extent not availed of by the holding company or the subsidiary independently and has furnished a letter of disclaimer in favour of the Indian Party. However, this facility is not available to partnership firms. Also the partnership firm’s networth can not be taken into account by an incorporated entity.

Q.28. Can an Indian Party capitalize the proceeds of the exports to its overseas JV/WOS?

A. Yes, capitalization of export proceeds by an Indian Party, to its overseas JV/WOS, is permitted under the automatic route provided the export proceeds have not remained unrealised beyond a period of six months from the date of export. Such proceeds shall not be capitalized without the prior permission of the Reserve Bank.

Q.29. Can an Indian Party extend loan or guarantee to an overseas entity without any equity participation in that entity?

A. No. Loan and guarantee can be extended to an overseas entity only if there is already an equity participation by way of direct investment.

Q.30. Can an Indian Company make direct investment in an overseas concern by way of share swap?

A. Yes, requests for direct investment outside India in a JV/WOS by way of share swap arrangement can be made under the automatic route provided the valuation norms prescribed i.e. valuation of the shares is done by a category I Merchant Banker registered with the Securities and Exchange Board of India (SEBI) or an Investment Banker/Merchant Banker outside India registered with the appropriate Regulatory Authority in the host country, are satisfied. Investors may also please note that all share swap transactions require prior approval of the Foreign Investment Promotion Board for the inward leg of the investment.

Q. 31. What are the schemes for overseas direct investment by partnership firms?

A. Partnership firms registered under the Indian Partnership Act 1932 can make overseas direct investments subject to the same terms and conditions as applicable to corporate entities.

Q.32. Can the partners hold shares of the overseas concerns for and on behalf of the firm?

A. It will be in order for individual partners to hold shares for and on behalf of the firm in an overseas JV/WOS, only if the host country regulations or operational requirements warrant such holding. However, the funding for the overseas JV/WOS has to be made by the firm.

Q.33. Are there any restrictions for setting up of a second generation company? Can such step down subsidiaries be set up under the Automatic Route?

A. There are no restrictions on entities having JVs/WOSs abroad setting up second generation companies (step-down subsidiaries) within the overall limits applicable for investments under the Automatic Route. However, companies wishing to set up step-down subsidiaries to undertake financial sector activities will have to comply with the additional requirements for direct investment in the financial sector.

Q.34. Can an Indian Party have a JV/WOS through a Special Purpose Vehicle (SPV) under the Automatic Route?

A. Yes. Direct investment through the medium of a SPV is permitted under the Automatic Route.

Q.35. Can an Indian Party directly fund such step-subsidiaries?

A. Where the JV/WOS has been established through a SPV all funding to the operating subsidiary should be routed through the SPV only. However, in the case of guarantees to be given to the step down subsidiary these can be given directly by the Indian Party provided such exposures are within the permissible financial commitment of the Indian Party.

Q.36. Can the shares of a JV/WOS abroad be pledged for the purpose of financial assistance?

A. The shares of a JV/WOS can be pledged as a security for availing fund based or non-fund based facility for the concerned entity or for the JV/WOS from an authorised dealer/ public financial institution in India.

Q.37. What are the obligations of the Indian party, which has made direct investment outside India?

A. An Indian Party will have to comply with the following: -

receive share certificates or any other documentary evidence of investment in the foreign entity to the satisfaction of the Reserve Bank within six months, failing which an application for extension of time citing reasons for non-receipt will have to be made to the Reserve Bank.
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 period as the Reserve Bank may permit.
submit to the Reserve Bank every year, within 60 days from the date of expiry of the statutory period, as prescribed by the respective laws of the host country for finalisation of the audited accounts of the JV/WOS outside India, an Annual Performance Report in form APR in respect of each JV or WOS outside India set up or acquired by the Indian party. This APR should inevitably be accompanied by :
1. copies of FIRCs in support of inward remittances on account of dividend, royalty, etc.;
2. audited Financial Statements of the overseas venture;
3. certificate from a chartered accountant in support of realization of export proceeds;
4. a note on the working of the JV/WOS during the previous year highlighting the ups and downs, reasons for non-performance, etc. in monetary terms.

In case the promoter company is unable to submit APRs within the stipulated time, an application on the due date should be made to the Reserve Bank of India seeking extension, giving reasons for the same.

Q.38. What are the penalties for non-submission of APRs?

A. Reserve Bank takes a serious view of delayed submission/non-submission of such reports and can take such measures, as prescribed under FEMA 1999, against the delinquent Indian Party as it deems fit.

Q.39. Is prior permission of the Reserve Bank required for disinvestment of existing holding in a JV/WOS?

A. No prior approval of the Reserve Bank is required for disinvestment, either by way of sale to another Indian Party (which is eligible to make such investments under the Automatic Route) or to a person resident outside India, provided ,

the disinvestment does not result in a write-off (however, listed Indian companies have been permitted a write-off of capital upto 10% of the previous years export realization);
the overseas concern has repatriated all its dues;
the overseas concern has been in operation for at least one year and has submitted upto date APR with the prescribed documents;
the Indian Party is not under investigation by any investigative/ regulatory authority;
the sale is to be effected through a stock exchange where the shares of the overseas JV or WOS are listed;
if the shares are not listed on the stock exchange, and the disinvestment is by private arrangement, the sale price of the share is not less than the value certified by a Chartered Accountant/Certified Public Accountant/Category I Merchant Banker registered with SEBI.

The above conditions are applicable even when an Indian Party wants to windup/close its existing JV/WOS.

Q.40. What is the procedure to be followed for such disinvestment and what are the documents to be submitted for disinvestment of existing holding in a JV/WOS?

A. The Indian Party may apply for disinvestment to the designated Authorized Dealer/Reserve Bank (in case the proposal is not eligible to be considered by the Authorized Dealer) with the following documents/information :

letter giving the reasons for the disinvestment;
latest Annual Performance Report on the working of the JV/WOS;
certified true copy of the Board Resolution approving the disinvestment and indicating the amount of disinvestment approved;
letter of offer from the purchaser;
consent letter from the partners in case of disinvestment of share in a JV abroad;
valuation certificate on the value of shares of the JV/WOS;
certificate from a Chartered Accountant certifying that no dues are outstanding to the Indian party or indicating the details of dues, if any, from the JV/WOS to the Indian party.

Q.41. Can a resident individual in India acquire/sell foreign securities without prior approval of the Reserve Bank?

A. Resident individuals can acquire/sell foreign securities without prior approval in the following cases: -

as a gift from a person outside India;
by way of ESOPs issued by a company incorporated outside India under Cashless Employees Stock Option Scheme which does not involve any remittance from India;
by way of ESOPs issued to an employee or a director of Indian office or branch of a foreign company or of a subsidiary in India of a foreign company or of an Indian company in which foreign equity holding is not less than 51 per cent;
by inheritance from a person whether resident in or outside India;
by purchase of foreign securities out of funds held in the Resident Foreign Currency Account maintained in accordance with the Foreign Exchange Management (Foreign Currency Account) Regulations, 2000;
by way of bonus/rights shares on the foreign securities already held by them;
by way of shares in listed overseas companies that have at least a 10% share in an Indian company listed on a recognized stock exchange in India as on 1st January of the year of investment;
by way of rated debt securities issued by companies as at vii.

Q. 42. Can Indian corporates invest overseas other than by way of direct investment?

A. Yes. Listed Indian Companies can invest upto 25 % of the net worth in overseas companies, listed on a recognized stock exchange, that have at least 10% share in an Indian company listed on a recognized stock exchange in India as on 1st January of the year of investment or by way of rated debt securities issued by the same companies. However, this 10 % holding should be a direct holding and not through a subsidiary or a SPV.

Q.43. Are there any other provisions by which an individual can acquire shares of a foreign company?

A Yes, resident individuals can make investments in foreign securities upto USD 25000/ per annum provided the investments are in accordance with AP (DIR Series) Circular No.64. dated February 4, 2004. The restriction at item vii of answer to Q. 41 will not apply. Such investment could also be made in shares of JV/WOS set up abroad by Indian companies, provided there is a foreign exchange outgo; subject to reporting requirements prescribed in the said circular.

Q.44. Can a resident individual acquire shares of a foreign company in his capacity as director?

A Yes, Reserve Bank has given general permission to a resident individual to acquire foreign securities to the extent of the minimum number of qualification shares required to be held for holding the post of Director provided such shares do not exceed 1% of the paid-up capital of the company and the amount to be remitted for such shares does not exceed USD 20,000/ in a calendar year.

Q.45. Can a resident individual subscribe to the rights issue of shares held by him?

A. Yes, a resident individual may acquire foreign securities by way of rights shares issued by a company incorporated outside India provided the existing shares were held in accordance with the provisions of the law.

Q.46. Are there any relaxations for individual employees/directors of an Indian company engaged in the field of software for acquisition of shares in their JV/WOS abroad?

A Yes, Reserve Bank on an application, will permit the individual employees/directors of an Indian promoter company engaged in the field of software for acquisition of shares of a JV/WOS abroad provided :

the consideration for purchase does not exceed USD 10,000/ or its equivalent per employee in a block of five calendar years;
the shares acquired by all the employees/directors do not exceed 5% of the paid-up capital of the Joint Venture or Wholly Owned Subsidiary outside India, and
after allotment of such shares, the percentage of shares held by the Indian promoter company, together with shares allotted to its employees is not less than the percentage of shares held by the Indian promoter company prior to such allotment.

Further, Reserve Bank may also on an application, made to it, by an Indian company engaged in the field of software allow its resident employees (including working directors) to purchase foreign securities under the ADR/GDR linked stock option scheme provided the consideration for purchase does not exceed USD 50,000/ or its equivalent in a block of five calendar years.

regards,

ratan

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