Investing abroad was always a great avenue for investment
as an option whether by Individuals or by Indian entities from quite a long
time. Basically from the late 90’s the Overseas Direct investment provided the
real muscle to the Indian industry sector as Many companies formed the Joint
Venture’s and invested abroad to diversify their portfolio.
But RBI Laid a Notification
No.FEMA19/RB-2000 dated 3rd May 2000 and subsequent amendments thereto, issued Foreign Exchange
Management (Transfer or Issue of any Foreign Security) Regulations, 2004 vide Notification
No. FEMA.120/RB-2004 dated July 7, 2004.
Notification War which was then started created a
Regulatory Regime to control the Joint ventures abroad and Wholly Owned Subsidiary
and Direct investment overseas by Indian as also investment by a person
resident in India in shares and securities issued outside India. Overseas
Investment (or financial commitment) can be made under two routes viz. (i)
Automatic Route (ii) Approval Route .
Now there are few Restrictions on investing in to abroad
and one is investment in to Foreign entity is prohibited under the Real estate
avenue also Transferable Development rights or trading in Real estate which
includes buying and selling in real estate is covered under the same or Banking business which points out the
Prior approval of RBI is required for the same.
An overseas entity, having direct or indirect equity
participation by an Indian party, shall not offer financial products linked to Indian
Rupee and doing the same will attract the strict penalties from RBI
contraventions provisions applicable thereto.
Basic things allowed as per Reserve Banks general rules,
Regulation 4 of the Notification and which includes permissible grants available
to Indian residents to purchase and acquire securities under following methods
which are as follows:-
(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.
Now let’s discuss about the Automatic Route investment in
Direct Overseas market as financial Commitment or Investment and for the same
few points must be considered covering the entire gamut of Automatic route
which are as follows:-
As per 14th Aug year 2013 notification says that
financial commitment(FC) 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).
Indian party can approach AD (Authorised Dealer for the
same and apply under an application in Form ODI (Annex A) and prescribed
enclosures / documents for effecting remittances towards such investments /
financial commitments.
The total Financial Commitment (FC) must not increase the
following which are as follows:-
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.
Financial Commitments by Indian Party for Direct Overseas
investment must comply with certain prospective guidelines points of RBI which
are as follows:-
1. The Indian party / entity may extend loan / guarantee
only to an overseas JV / WOS in which it has equity participation but without
equity participation require Approval route to be followed under RBI for the
same.
2. Indian entities may offer any form of guarantee -
corporate or personal (including the personal guarantee by the indirect
resident individual promoters of the Indian Party)/ primary or collateral /
guarantee by the promoter company / guarantee by group company, sister concern
or associate company in India provided that:
a. No open ended guarantee amount and time of guarantee
must be specified upfront.
b. In cases where invocation of the performance
guarantees breach the ceiling for the financial commitment, the Indian Party
shall seek the prior approval of the Reserve Bank before remitting funds from
India.
c. In case of Corporate Guarantees or SBLC etc then must
be reported under FORM ODI PART 2 and all prudential norms of RBI Department of Banking Operations and Development.
d. 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).
e. All transactions of JV/WOS must be handled from one
Branch of AD of RBI.
f. In case of partial or 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 is
required.
Many other
provisions applicable not construed here few main points which are of utmost
importance are as follows only under the
Automatic Route:-
1. Issue of guarantee by an Indian Party to step down
subsidiary of JV / WOS which points out that, 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.
2.
Investment
(or financial commitment) through Special Purpose Vehicle (SPV) under Automatic
Route consider that but as a caution to the same RBI directed that such Indian
party must not comes under investigation by the Directorate of Enforcement or
included in the list of defaulters to the banking system circulated by the
Reserve Bank/any other Credit Information company as approved by the Reserve
Bank.
3. Few sectors require approval and hence the Investment
(or financial commitment) in unincorporated entities overseas in oil sector
under the Automatic Route require approval from competent authority as in the
case of Navaratna PSUs, ONGC Videsh Ltd (OVL) and Oil India Ltd (OIL) may be
permitted by AD Category.
4.
Indian
companies are also permitted to participate in a consortium with other
international operators to construct and maintain submarine cable systems on
co-ownership basis under the automatic route. Accordingly, AD Category.
5.
Indian Party can go for capitalization of exports and other dues and Indian party
can 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.
6. Regulation 7 of the Notification, an Indian party
seeking to make investment (or financial commitment) in an entity outside
India, which is engaged in the financial sector can go for the same complying the following set of
standards :-
a. Financial sector must be a registered
entity and must be allowed to be in financial services engagements.
b. has earned net profit during the
preceding three financial years from the financial services activities.
c. has obtained approval from the
regulatory authorities concerned both in India and abroad for venturing into
such financial sector activity.
d. taken all due considerations for the
prudential norms relating to capital adequacy as prescribed by the concerned
regulatory authority in In
Approval Route of Investment in Overseas Markets via JV
or WOS with the Reserve Bank of India
Guidelines follow:-
(1) 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.
(2) Reserve Bank would, inter alia, take into account the
following factors while considering such applications:
(a) Prima facie viability report of the JV / WOS outside India;
(b) Contribution of Indian party 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 for the same and
(d) Expertise and experience of the Indian party in the
same or related line of activity as of the JV / WOS outside India.
Checklist of fillings to the RBI by Indian Party for JV
or WOS as follows:-
Following are the filing requirements in ODI:
a. Form ODI Part I – Application for making overseas
direct investments under the approval route.
b. Form ODI Part II – Reporting of remittances to be
submitted by the AD Category Bank to RBI.
c. Form ODI Part III – Annual Performance Report (APR) –
To be submitted, certified by Statutory Auditors of the Indian party, through
the designated AD Category– I bank every year by June 30th as long, as the JV /
WOS is in existence.
d. Form ODI Part IV – To be submitted for reporting the
closure/ disinvestment/ voluntary liquidation, winding up of the JV/WOS abroad.
e. Annual Return on Foreign Liabilities and Assets – All
the Indian Parties having ODI have to file the FLA return every year by July.
Funding of Joint venture and wholly owned subsidiary by
Indian Party Require few methods to be followed as per RBI guidelines and these
regulations are as follows:-
1. Within 400% of the net worth as per the last audited
balance sheet
2. Out of balance held in the Exchange Earners Foreign
Currency account of the Indian Party maintained with the Authorised Dealer.
Provided that the ceiling of 100% of net worth shall not
apply where the investment is made out of balances held in its EEFC account,
maintained in accordance with the aforesaid regulations.
3. Drawal of foreign exchange from an authorised dealer
in India which shall not exceed 100% of the net worth of the Indian Party as on
the date of last audited balance sheet.
4. For the purpose of 100% of the net worth as per the
last audited balance sheet of the India, the following shall be reckoned:
(a) cash remittance by market purchase
(b) capitalisation of export proceeds and other dues and
entitlements;
(c) 100% of the amount of guarantees issued by the Indian
party to or on behalf of the overseas JV/WOS;
(d) utilisation of the amount raised by issue of
ADRs/GDRs by the Indian party;
(e) External Commercial Borrowing in conformity with
other parameters of the ECB guidelines;
(f) Swap of shares;
(g) ADR/GDR Stock Swap subject to the valuation norms and
sectoral cap;
(h) 50% of the value of performance guarantee issued by
Indian party to or on behalf of the overseas JV/WOS;
5. 100% of the
value of the bank guarantees 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.
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