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Overseas Direct Investment

Presented by Nishit Parikh

Agenda

Index

Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants 2

Introduction to Overseas Direct Investment (ODI) 1

Routes of investments and Important Concepts 2

Setting up Branch office or Representative office abroad 6

Other Important aspects for ODI 3

Investment by resident Individual 4

Case studies 7

Liberalized Remittance Scheme (LRS) 5

Introduction

Introduction

Importance of ODI

Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants

A trend analysis shows that the level of outward FDI from India has increased manifold since

1999-2000

Scale of overseas investment by domestic companies has also expanded as India was placed

second in 2010 only after China in terms of average size of net purchase deals

Major investment from India is in manufacturing and service sector

ODI allows Indian business houses to expand their business across the globe

India is among the top 5 counties whose domestic enterprises are becoming transnational

corporations

Boost the economic co-operation between India and other countries

Creating Brand image overseas

4

Introduction

ODI Statistics


0

2

4

6

8

10

12

14

16

Total

Total

amount in billions US Dollar

Updated till 28th Feb, 2012 – Source – www.rbi.org.in

Introduction

Governing Law


Section 6(3)(a) of FEMA, 1999 read with FEM(Permissible capital Account Transactions), Regulations, 2000

FEM (Transfer or issue of any Foreign security) Regulations, 2000 popularly referred as (FEMA 120)

AP(DIR Series) Circulars issued by RBI from time to time

FAQ on Overseas Direct Investment released by RBI (as updated from time to time)

FAQ on Liberalized Remittance Scheme – Applicable for resident Individuals

6

Meaning of Overseas Direct Investment


Investment by an Indian Party by way of contribution to the capital or subscription to the MOA of

a foreign entity or by way of purchase of existing shares of a foreign entity by

Investment through stock exchange; or

Private placement in that entity; or

Market purchase; or

Investment in a Joint Venture or Wholly Owned Subsidiary abroad.

But does not include Portfolio Investment

SHARES INCLUDES EQUITY AS WELL AS PREFERENCE SHARES

Introduction

7

Routes of investments and Important Concepts


Possible Routes for Investment

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

RBI would inter alia consider the following factors:

Prima facie viability of JV/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 foreign entity

Expertise and experience of the Indian party in the same or related line of activity of the JV/WOS outside India

Overseas JV/WOS to be engaged in bonafide business

activity except real estate and banking

Investment in Financial Sector should comply with

additional conditions

Indian party not on RBI’s Exporters’ Caution List/list of

defaulters/under investigation by an Authority such as ED,

SEBI etc.

Overall ceiling of financial commitment in all JV/WOS is

100% of net worth as on last audited Balance Sheet

Submission of Form Annual Performance Report in respect

of all its overseas investment

Automatic Route Approval Route

Routes of investment


Conditions for Indian Parties in Financial Services


Registered with appropriate regulatory authority in India

Earned net profit during the preceding three financial years from the financial services activities

Approval from the regulatory authorities concerned both in India and abroad

Compliance with prudential norms relating to capital adequacy norms as prescribed by the concerned

regulatory authority in India

WHAT IS THE MEANING OF FINANCIAL SERVICES?

Key conditions

10

Other Points


Investment in Pakistan is allowed under approval route only

Investment in Nepal is to be made only in INR

Initially investment in Bhutan was allowed in INR, however, vide AP (DIR Series) Circular, 9 of 2005 investment

in freely convertible currencies also allowed

Routes of investment

11

Eligible Investor


An Indian Party who is

A company incorporated in India; or

A body created under an Act of Parliament: or

A partnership firm registered under the Indian Partnership Act, 1932

Any other entity in India as may be notified by the Reserve Bank

Resident Individual

Special cases (primarily under approval Route)

Proprietary Firm

Trust / Society

Un-incorporated Entities

Important concepts

12

Investment by Proprietary Concern


Investment by proprietary firm/unregistered partnership firms is allowed under approval route

provided:

Proprietary firm/unregistered partnership firm is recognised Star export House

Having proven track records i.e. Export outstanding does not exceed 10% of average export

realisation of past three years

Consistently high export performance track record

Exporter has not come under adverse notice of any Government agency

The amount of investment does not exceed 10% of the average of three years export

realisation or 200% of the net owed funds of the firm, whichever is lower

Important concepts

13

Definition WOS/JV


Wholly Owed Subsidiary means

A foreign entity formed, registered or incorporated in accordance with laws of host country

Who’s entire capital is held by the Indian party

Joint Venture means

A foreign entity formed, registered or incorporated in accordance with laws of host country

In which Indian party holds shares (less than 100%)

Important Concepts

14

Investment in Overseas LLP is allowed ?

Financial Commitment


Financial Commitment means the amount of direct investments outside India by an Indian party

By way of contribution to equity shares of the JV/ WOS abroad ;

As loans to its JV/WOS abroad;

100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS;

50% of the amount of performance guarantee issued on behalf of its overseas JV/ WOS;

Bank guarantee/standby letter of credit 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; and

Guarantee given on behalf of the first step down subsidiary

Important Concepts

15

Net Worth


Net Worth = Paid-up Capital + Free Reserves

Definition of free reserve

Not defined under FEMA 120

Definition of free reserve of NBFC regulations to be considered?

Definition of free reserve as per companies act to be looked at?

Important Concepts

16

Net Worth


Net Worth = Paid-up Capital + Free Reserves

For calculation of Net worth of the Indian party following to be considered:

Net worth of the Indian Investing company based on the last audited balance sheet

Net worth of its Indian Holding Company which holds at least 51% stake therein subject to letter of

disclaimer*

Net worth of its Indian Subsidiary Company – holding of at least 51% and subject to letter of disclaimer*

*THIS FACILITY IS NOT AVAILABLE FOR PARTNERSHIP FIRMS

Important Concepts

17

Other Important aspects


Type of Instruments for investment


Overseas investment can be in the form of :

Equity Shares

Preference Shares

Convertible will be treated at part with equity

Non-convertible are treated as debt

Debentures

Guarantee

It should not be open ended

In can be given on behalf of step down subsidiary (only for first level)

Type of investment

19

Acquisition of Existing Companies


Indian party can make Overseas Direct Investment by acquiring overseas existing companies

Valuation of shares of overseas entity is required

Where investment exceeds USD 5 million – Valuation from Category I merchant banker registered in

India or outside India with appropriate authorities

Where investment is less than USD 5 million – Valuation from Indian CA or CPA of the overseas country

allowed

In case of investment in WOS by Indian promoter at premium or discount

Valuation requirement

20

Investment Through SPV


Overseas Direct Investment by Indian party is allowed through SPV provided

The Indian company should not be on the:

RBI’s caution list

list of defaulters to the banking system

COMPANIES ACT, 2013 PROVIDES THAT INVESTMENT UP TO TWO LAYERS IS ALLOWED

Special Purpose Vehicle

21

Modes of Funding Overseas Direct Investment


FUNDING MODES

CAPITALIZATION OF EXPORT DUES

MARKET PURCHASE

PROCEEDS OF ECB/FCCB IN EXCHANGE OF ADR/GDR

BALANCE IN EEFC ACCOUNT

SWAP OF SHARES BALANCE IN RFC ACCOUNT

Funding ODI

22

Investment by capitalization


Overseas Direct Investment by Indian party is allowed by way of capitalisation of export dues,

royalty, fees, commission and other entitlements

Provided the said dues are not outstanding for a period prescribed under the regulations

In case the dues are outstanding for a period more than prescribed under the relevant

regulations, then RBI approval would be necessary

Special Purpose Vehicle

23

Obligations of Indian Party


To remit funds from one branch of the AD for the particular Overseas Direct Investment

Receive share certificates or any other document as an evidence of investment within 6 months

from the date of remittance or such further date as the RBI may permit

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 date as the RBI may permit

Submit the APR on or before 30th June based on the latest audited financials of JV/WOS

If audit is not mandatory in the overseas country a certificate from statutory auditor is necessary

Annual Return on Foreign Liabilities and Assets needs to be filed on or before 15th July every year

To Do for Indian party

24

Post Investment Changes


JV/WOS may diversify its activity

Set up step down subsidiaries

Alter the shareholding pattern in Overseas company

Changes in JV/WOS

25

Indian party is required to report these transaction within 30 days of the decision to RBI

Compliances


Step I •Board Resolution for Investment in Overseas entity

Step 2 •Valuation of shares only if it is acquisition of existing company

Step 3 •Reporting in Form ODI within 30 days from the remittance

Step 4 •RBI will allot UIN for investment in entity

Step 5 • Filing of share certificates with AD within 6 months

Other •Post investment changes needs to be reported within 30 days

Step by step

26

Transfer of Shares of JV/WOS – No Write-off


An Indian Party may transfer by way of sale to another Indian Party who complies with the provision

of Regulation 6, or to a person resident outside India without prior approval of the RBI, in under

noted category:

Sale does not result in write off of investment

Sale is through the stock exchange

In case not listed entity, transfer is not happening at prices less than determined by CPA or CA

No outstanding dues from overseas entity

Overseas entity is in operation for a period more than one year and has filed APR form

Indian party is not under investigation by CBI/ED/SEBI/IRDA or any other regulatory authority in India

IF IT DOES NOT SATISFY ANY OF THE ABOVE CONDITION THEN RBI APPROVAL REQUIRED

Sale of shares

27

Transfer of Shares of JV/WOS – Write Off


An Indian Party may transfer by way of sale to another Indian Party without prior approval of the RBI

where disinvestment value is less than the investment amount and

In case JV/WOS is listed overseas

In case where Indian party is listed on stock exchange in India and has net worth less than INR 100 crore

Where Indian party is not listed and investment is less than USD 10 million

Where Indian party is listed company with net worth less than INR 100 crore but investment is does not exceed

USD 10 million


Sale of shares

28

Restructuring of investment


Write off capital (equity/preference shares) and other receivables such as loans, royalty, technical

fee etc up to 25% of equity investment of Indian party is allowed under Automatic route

provided :

Indian party is listed and has set up WOS or holds 51% shares in JV

Copy of balance sheet showing loss in overseas JV/WOS and projections for next five years indicating benefits

accruing to Indian party is submitted to AD

This needs to be reported to RBI within 30 days

In case of unlisted Indian party holding more than 51% shares, write off to the extent of 25% of equity

investment is allowed under Approval route

JV/WOS in losses

29


Individual Investments

General Permissions


By way of gift of foreign securities from person resident outside India

Under cashless ESOP scheme issued by company outside India

By way of inheritance (from resident in India or outside India)

Qualification shares for becoming directors of foreign company

Resident Individual can invest in shares (i.e. in case of setting up) of foreign company under LRS

subject to:

Investment up to USD 75000 in one Financial Year

The overseas entity cannot invest/set up a step-down subsidiary;

Form ODI to be submitted within 30 days

A lock-in period of one year from the date of first remittance is prescribed before divestment by the

resident individual and no write off will be allowed



31

Obligations


Individual can transfer the shares acquired as mentioned in the earlier slide

Sale proceeds needs to be repatriated within 90 days from the date of sale

Resident Individual can pledge these shares for obtaining credit facility


32


Liberalised Remittance Scheme

An Overview


Introduced in February 2004 as step towards liberalisation of foreign exchange facility for resident Individuals

Available to all Resident individuals (RI) including minors

Resident Individual can remit overseas up to USD 75000 per FY for any permissible current/capital account transactions or combination of both

The limit of USD 75000 is over and above the permissible current account transaction limit (except gift and donation)

Resident Individual can acquire shares or any other asset outside India without prior approval of RBI

Immovable property (directly or indirectly) not allowed from 14th August 2013

Payment for acquisition of shares under ESOP is permitted under LRS

LIMIT HAS BEEN RECENTLY REDUCED FROM USD 200,000 TO USD 75,000


34

An Overview


Resident Individual can open, hold and maintain foreign currency accounts with a bank outside India for remittances under the scheme without the prior approval of RBI

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


35

Peculiar Issues


Incorporation of Company/Entity Aboard

As per section 6 of FEMA, any person can acquire foreign securities

Many individuals had formed companies abroad

FAQ 3 issued in 2010 which had prohibited formation of company

5th August, 2013 – Resident Individuals are permitted to form companies overseas

Acquisition of Immovable Property

Till 14th August 2013, acquisition of immovable property abroad was allowed

Effective 14th August 2013, this has been prohibited


36


Setting up A Branch/Representative Office

Overseas Offices


Opening of Branch Office (BO) or Representative Office (RO) overseas is allowed

AD banks in India are permitted to remit funds for

Initial Expenses

Remittance up to fifteen per cent of the average annual sales/income or turnover during the last two financial years or up to twenty-five per cent of the net worth, whichever is higher

Recurring Expenses

Remittance up to ten per cent of the average annual sales/income or turnover during the last two financial years


38

Conditions


BO/RO should be conducting normal business activities of the Indian company

Overseas branch shall not enter into any contract or agreement in contravention of the FEMA Act, rules or regulations

Overseas office (trading/non-trading)/branch should not create any financial liabilities, contingent or otherwise, for the head office in India and also not invest surplus funds abroad without prior approval of the Reserve Bank

Any funds rendered surplus should be repatriated to India

Audited financials of BO/RO needs to be submitted to AD bank

IS FORM OBR NECESSARY AT THE TIME OF SETTING UP THE BO/RO?


39


Case Studies

Company Converting to LLP


I Co. Is a company incorporated under Companies Act, 1956

I Co. has invested in F Co (which is a WOS) a company

incorporated in UK under Automatic route

Management of I Co. decides to convert company into LLP

I Co. Pvt. Ltd (I Co)

F Co. (Company in UK)

WOS

CAN THE LLP CONTINUE TO HOLD INVESTMENT IN F CO.?

Case Study - 1

41

Indian Company Merges with Another Indian Company


I Co. has existing investment in BVI Co.

I Co. got merged with other Indian company

Earlier preference shares got replaced by debentures as per the

conditions of merger

Existing investment as a percentage of new net worth of merged

I Co. is more than 100%


F Co. (Company in BVI)

WOS

DISINVESTMENT TO THAT EXTENT IS NECESSARY?

Case Study - 2

42

Non Filing of Form APR


I Co. Is a company incorporated under Companies

Act, 1956

I Co. invested in JV/WOS in UK, US and Singapore

I Co. has not filed Form APR for investment in UK

for last two years

I Co. propose to invest further in US entity

WHETHER I CO. SHOULD TAKE APPROVAL OR AUTOMATIC ROUTE FOR INVESTMENT ?


SG Pte. (Company

in Singapore)

US Inc. (Company

in US)

UK Co. (Company

in UK)

Case Study - 3

43

Newly Set-up Indian Company


I Co. is a company incorporated under Companies Act,

1956 on 1st April, 2014

I Co. proposes to set up F Co. (which will be a WOS) a

company incorporated in UK under Automatic route by

June 2014

I Co. Pvt. Ltd (I Co.)


WOS

Case Study - 4

WHETHER PERMISSIBLE OR NOT?

44

Using Net Worth of Holding or Subsidiary


I Co. is a company incorporated under Companies Act,

1956

I Co. has 51% shares in B Pvt. Ltd.

I Co. proposes to invest in F Co. (which is a WOS) a

company incorporated in UK

As on the date of net worth of I Co. INR 50 cr and net

worth of B Ltd. is INR -60 crores: OR

As on the date of net worth of I Co. INR -50 cr and net

worth of B Ltd. is INR 100 crores

TOTAL NET WORTH (I CO. AND B PVT. LTD.) TO BE CONSIDERED?

I Co. Pvt. Ltd. (I Co)

B Pvt. Ltd.

55%


Case Study - 5

45

Gift of Shares


Mr. A is resident in India working with MNC

Mr. B who is working with the same MNC

but with its US company

Mr. A was granted 30 shares of group entity

as ESOP at a price of USD 1 each

Mr. B paid on behalf of Mr. A the said USD

30

WHETHER THIS WILL ALLOWED OR NOT ?

Mr. B Foreign Company

Mr. A

Case Study - 6

46

Resident to Resident Transfer of Shares


I Co. and H Co. are Indian companies

I Co. has existing investment in F Co.

I Co. sold shares of F Co. to H Co.

I Co. received consideration in INR from

another H Co.

WHETHER THIS WILL ALLOWED OR NOT ?

I Co.

F Co.

H Co.

WOS Proposed WOS

Case Study - 7

47

www.skpgroup.com | [email protected]

Mumbai Ballard House

Adi Marzban Path Ballard Estate

Mumbai 400 001 T: +91 22 6617 8000/01

Pune

VEN Business Centre Baner Pashan Link Road

Pune 411 021 T: +91 20 6720 3800

Hyderabad

6-3-249/3/1 SSK Building Ranga Raju Lane

Road No 1, Banjara Hills Hyderabad 500 034

T : +91 40 2338 6912/13

New Delhi B/376 Nirman Vihar New Delhi 110 092

T: + 91 11 2242 8454/55

Bangalore 312/313 Barton Centre

M. G. Road Bangalore 560 001

www.suditkparekh.com [email protected]


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