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Investment By Residents Outside India

SAHU & ASSOCIATES: Procedure for Foreign Investment from India

First of all what is direct investment outside India ?

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 a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, signifying a long-term interest in the foreign entity (JV or WOS).

Direct investments by residents abroad are being allowed, in terms of clause (a) of sub-section (3) of section 6 of the Foreign Exchange Management Act, 1999, (42 of 1999) read with Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004.

What are the areas in which investment is allowed ?

As per FEMA (Foreign Exchange Management Act), General permission has been granted to persons (individual) resident in India for purchase / acquisition of securities as under:

a) Out of funds held in the RFC account;
b) As bonus shares on existing holding of foreign currency shares;
c) When not permanently resident in India, from the foreign currency resources outside India.

General permission is also available to sell the shares so purchased or acquired.

A resident Indian can remit, up to the limit prescribed by the Reserve Bank from time to time, per financial year under the Liberalised Remittance Scheme (LRS) as well (its elaborated below)

Although general permission is given for investment but there are few sectors in which investment is prohibited, without prior approval of the Reserve Bank.The sectors are:

1. Real estate (meaning 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)
2. Banking business (Indian banks operating in India can set up JVs/WOSs abroad provided they obtain relevant clearances)

Other points to be noted here:

- Investments / financial commitments in Nepal are permitted only in Indian Rupees.
- Investments / financial commitments in Bhutan are permitted in Indian Rupees as well as in freely convertible currencies.
- Investments / financial commitments in Pakistan by Indian Parties are permissible under the approval route.

How to invest outside India and what are the routes for investment ?

Investment outside India can happen either under “Automatic Route or Approval Route”. Lets elaborate the same:

1. Automatic Route:

Under this route an Indian party does not require any approval of RBI (Reserve Bank of India) for investment outside india. For investments which are under prescribed limit of RBI, they can directly approach bank (Authorized Dealer Category – I Bank) with an application in Form – ODI and relevant supports for remitting the funds.

Under this route an Indian Party can invest in either of the following:

a. Equity Share Capital
b. Preference Shares
c. Loan
d. Guarantee
e. Bank guarantee issued by a resident bank on behalf of JV (Joint Venture)/WOS (Wholly Owned Subsidiary)of Indian Party

All the above investments under automatic rules are subject to satisfaction of certain terms and conditions. These conditions are produced below of better understanding of investment under automatic route:

a. The Indian Party / entity may extend loan / guarantee only to an overseas JV / WOS in which it has equity participation (subject to certain terms and conditions). Other proposals can be submitted only under approval route.
b. The Indian Party should not be on the Reserve Bank’s Exporters' caution list / list of defaulters.
c. 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.
d. 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 either

i. Category I Merchant Banker registered with SEBI, or
ii. an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country;

in all other cases valuation of the shares of the company shall be made by by a Chartered Accountant or a Certified Public Accountant.

e. 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. Also, in this case additional approval may be required.
f. In case of investment in overseas JV / WOS abroad by a registered Partnership firm, where the entire funding for such investment is done by the firm, it will be in order for individual partners to hold shares for and on behalf of the firm.
g. An Indian Party may acquire shares of a foreign company engaged in a bonafide business activity, in exchange of ADRs/GDRs issued to the latter in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares, subject to relevant terms and conditions.
h. Investment / financial commitment in in Nepal is permitted only in Indian Rupees, in Bhutan in Indian Rupee and other freely convertible currency (like USD), in Pakistan only under Approval route. Also investment / financial commitments are not permitted in the countries identified by the Financial Action Task Force (FATF) as “non co-operative countries and territories”.

i. Apart from the above there are other conditions provided under FEMA for different types of investors, investments and industries/sectors.

Investment (or financial commitment) in an overseas JV / WOS may be funded out of one or more of the following source:

a. Drawal of foreign exchange from an AD bank in India
b. Capitalisation of exports;
c. Swap of shares
d. Proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs)
e. In exchange of ADRs/GDRs
f. Balances held in EEFC account
g. Proceeds of foreign currency funds raised through ADR / GDR issues

2. Approval Route:

Proposals not covered by the conditions under the automatic route are covered under Approval Route.

Prior approval of the Reserve Bank would be required in all other cases of direct investment (or financial commitment) abroad. For this purpose, application together with necessary documents should be submitted in Form ODI through their Authorised Dealer Category – I banks.

While reviewing any proposal under approval route RBI would take in consideration following factors:

a. Prima facie viability of the JV / WOS outside India
b. Contribution to external trade and other benefits which will accrue to India through such investment (or financial commitment)
c. Financial position and business track record of the Indian Party and the foreign entity
d. Expertise and experience of the Indian Party in the same or related line of activity as of the JV / WOS outside India.

Can an proprietorships and partnership invest outside India ?

Yes, they can invest outside India subject to certain terms and conditions.

For considering the proposal of overseas direct investment (or financial commitment), by a proprietorship concern / unregistered partnership firm in India, by the Reserve Bank under the approval route, following conditions should be satisfied:

a. The proprietorship concern / unregistered partnership firm in India is classified as ‘Status Holder’ as per the Foreign Trade Policy issued by the Ministry of Commerce and Industry, Govt. of India from time to time;
b. The proprietorship concern / unregistered partnership firm in India has a proven track record.
c. The Authorised Dealer bank is satisfied that they are KYC compliant, engaged in the proposed business and has turnover as indicated;
d. The proprietorship concern / unregistered partnership firm in India has not come under the adverse notice of any Government agency and does not appear in the exporters' caution list of the Reserve Bank or in the banking system
e. The amount of proposed investment (or financial commitment) outside India does not exceed 10 per cent of the average of last three years’ export

For making the investment of for financial commitment an application in form ODI should be made to Reserve Bank of India, through the AD Category - I bank. Bank will review the documents and then forward the same to RBI.

Can an individual invest outside India in his personal capacity ?

A resident individual can also make overseas direct investment in the equity shares and compulsorily convertible preference in his /her personal capacity subject to certain terms and conditions. The limit of overseas direct investment by the resident individual shall be within the overall limit prescribed by the Reserve Bank of India under the provisions of Liberalised Remittance Scheme, as prescribed by the Reserve Bank from time to time.

What will be the obligations of the Indian party, which has made direct investment outside India?

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

a. receive share certificates or any other documentary evidence of investment in the foreign JV / WOS as an evidence of investment and submit the same to the designated AD within 6 months
b. repatriate to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical fees etc.
c. submit to RBI through the designated Authorized Dealer, an Annual Performance Report
d. 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
e. In case of any disinvestment, sale proceeds of shares/securities shall be repatriated to India.

Disclaimer:

The information contained in this article is for general information purposes only. While the article endeavours to keep the information up to date and correct, there is no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the content of the article.



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Investment By Residents Outside India