OVERSEAS DIRECT INVESTMENT 29 th December 2018 WIRC of ICAI By: CA Manoj Shah
Overseas Direct Investments (ODI)
Significance of ODI Promoting global business by Indian entrepreneurs. Promote economic and business co-operation between India and other countries. Transfer of technology and skill, share R & D. Access to global market and promote brand image. Increase in exports of Plant & Machinery and goods and services Source of Foreign Exchange Earnings dividend, royalty, technical know-how and other entitlements. 3
Statutory Basis Section 6(3)(a) of FEMA, 1999 read with FEM (Permissible Capital Account Transactions), Regulations, 2000. FEMA Notification No. 120 Master Direction AP (DIR Series) Circulars issued by RBI from time to time FAQs on ODI released by RBI (as updated from time to time) FAQs on Liberalised Remittance Scheme applicable for resident individuals. 4
What is Overseas Direct Investment ODI- Investment by an Indian party, either under Automatic or Approval route, by way of contribution to capital or subscription to the MOA of foreign entity or by way of purchase of existing shares of foreign entity either by Investment through stock exchange; or Private placement; or Market purchase; or But does not include Portfolio Investment. 5
Financial Commitment Financial Commitment means the amount of direct investments outside India by an Indian party - By way of contribution to equity shares or CCPS of the JV/WOS abroad Contribution to the JV/WOS as preference shares (for reporting to be treated as loan) As loan to its JV/WOS abroad 100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS and 50% of the amount of performance guarantee issued on behalf of its overseas JV/WOS 6
Financial Commitment (Contd ) 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 counter guarantee / collateral by the Indian party (Rollover of guarantee is subject to compliance of conditions else will need prior RBI approval). Creation of charge (pledge/mortgage/hypothecation) on the movable / immovable property or other financial assets Indian party / its group concern (Note: the amount and period of guarantee should be specified upfront). 7
Issue of Guarantees Indian Party can give guarantees on behalf of - Its JV/WOS [Reg 5(b)(i) of FEMA 8]; and First Level Step Down operating Co [Reg 5(b)(ii) of FEMA 8]; Second and subsequent level step down sub (only corporate guarantee allowed under approval route and Indian Party must hold at least 51% stake indirectly) AD banks can give guarantee on behalf of JV/WOS of Indian Party [Reg 5(b)(i) of FEMA 8] And not on behalf of first and subsequent level SDS Compounding Order in case of GRT Jewellers CA No. 4136/2016 dated 22 nd December 2016 8
Eligible Investor An Indian Party who is A company incorporated in India; or A body created under act of Parliament: or A partnership firm registered under the Indian Partnership Act, 1932 Limited Liability Partnership incorporated under LLP Act, 2008 (permitted vide Circular No. 131 dated 19.05.2014/FEMA 299 dated 24.03.2014) Resident Individual is not included in definition of Indian Party. However, has been allowed to make ODI (FEMA Notification No. 263 dated 05.08.2013) 9
Eligible Investor (Contd ) Special Cases (primarily under approval route) Proprietary Firm Trust / Society Un-incorporated Entities 10
Routes Automatic Route Approval Route 11
Automatic Route No prior RBI approval required for making direct investment in JV/WOS abroad. Overseas JV/WOS to be engaged in bonafide business. Investment in Financial sector should comply additional conditions Indian party not on RBIs Exporters Caution list/list of defaulters/under investigation by an Authority such as ED, SEBI etc. Submission of Form Annual Performance Report in respect of all overseas investments. Real estate business & banking not permissible 12
Approval Route Proposals which require prior Approval are as follows: ODI in the energy and natural resources sector exceeding the prescribed limit of the net worth Investments in Overseas Unincorporated entities in the oil sector by resident corporates exceeding the prescribed limit of their net worth. However, Navaratna Public Sector Undertakings, ONGC Videsh Ltd and Oil India Ltd are allowed to invest in overseas unincorporated / incorporated entities in oil sector (i.e. for exploration and drilling for oil and natural gas, etc.), which are duly approved by the Government of India, without any limits, under the automatic route; 13
Approval Route ODI by proprietorship concerns and unregistered partnership firms satisfying certain eligibility criteria; Investments by Registered Trusts / Societies (satisfying certain eligibility criteria) engaged in the manufacturing / educational / hospital sector in the same sector in a JV / WOS outside India; Corporate guarantee by the Indian Party to second and subsequent level of Step Down Subsidiary (SDS); All other forms of guarantee which is offered by the Indian Party to its first and subsequent level of SDS; Restructuring of the balance sheet of JV/WOS involving write-off of capital and receivables in the books of listed/ unlisted Indian Company satisfying certain eligibility criteria mentioned under Regulation 16A of notification ibid; 14
Approval Route (Contd ) Capitalization of export proceeds remaining unrealized beyond the prescribed period of realization will require the prior approval of the Reserve Bank; and Proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS. 15
Approval Route (Contd ) Specific application to RBI with necessary documents in Form ODI through AD Bank. RBI would consider following factors: Prima facie viability of JV/WOS outside India Contribution to external trade and other benefits which will accrue through such investment. Financial position and business track record of Indian Party and foreign Entity, and Expertise and experience of the Indian party in the same and related line of activity of the JV/WOS outside India. 16
Overseas Investment Resident Individuals ODI route introduced by FEMA 263 dated 05.08.2013 for resident individuals Investment can be made only in Equity and CCPS. JV/WOS to be engaged in bonafide business activities except real estate / banking / financial services ODI in non-co-operative countries and territories as per FATF not permitted. Resident individual not to be on RBI cautions list/defaulters list 17
Overseas Investment Resident Individuals (Contd ) Limit of investment in JV/WOS as per LRS limit (currently USD 2,50,000 per annum). Investment made by EEFC/RFC account also included in prescribed LRS limit JV/WOS to be operating company No step down subsidiary to be acquired or set up by JV/WOS Valuation rules as applicable to ODI by companies will have to be followed. Disinvestment shall be allowed only after one year from date of making investment. Reporting and Post investment conditions write off not permitted in cases of disinvestments. 18
ODI in Financial Services Sector 19 Indian company in Financial Service Sectors can make investment in JV/WOS abroad in the financial services sector only if: It has earned net profit during three preceding financial years from financial services sector It is registered with appropriate regulatory authority in India It has obtained approval for undertaking such activities Has fulfilled the prudential norms relating to capital adequacy Commodities Trading is also considered as Financial Service Activity.
ODI - Core Investment Companies RBI DNBS Notification No. DNBS (PD) CC. No. 311/03.10.001/2012-13 dated 6 th December 2012 CICs desirous of making investment in Financial Service Sector (FS) are required to obtain and hold Certificate of Registration and comply with CIC framework for prior RBI approval (applies even to exempted CICs) Exempted CICs making overseas investment in non FS sector do not require registration or prior DNBS approval. Only reporting within 30 days to be done. 20
Modes of Funding - ODI Proceeds raised through ADR/GDR Balance in EEFC account Drawal of foreign exchange from AD bank Funding Modes Swap of shares Capitalizatio n of export dues In exchange of ADR / GDR Proceeds of ECB/FCCB 21
Compliances Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 22 Board Resolution for Investment in overseas entity Valuation of shares only if it is acquisition of existing company Reporting in Form ODI within 30 days from the remittance RBI will allot UIN for investment in entity. Second remittance to the JV/WOS cannot be made unless UIN for the first remittance is received. Filing of share certificate with AD bank within 6 months Post investment changes need to be reported within 30 days
Valuation Requirement In case of ODI in an existing company outside India, the valuation of shares shall be made Where the investment is more than USR 5 million, by Category I SEBI Registered Merchant Banker or an Investment Banker/Merchant Banker outside India registered with appropriate regulatory authority in the host country. In all other cases, by a Chartered Accountant or a Certified Public Accountant The limit of USD 5 million shall be considered qua remittance. 23
24 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 RBI approval if: Sale does not result in write off of investment Sale is through stock exchange In case of non listed entity, transfer is not happening at price less than determined by CPA/CA No outstanding dues from overseas entity Overseas entity is in operation for a period of more than one year and has filed APR Indian party is not under investigation by CBI/ED/SEBI/ERDA or any other regulatory authority.
Transfer of shares of JV/WOS - Write Off An Indian Party may transfer by way of sale to another Indian Party where disinvestment is less than the investment amount and: where the JV/WOS is listed overseas 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 with net worth less than INR 100 crore but investment does not exceed USD 10 million. 25
Restructuring of Balance sheet of JV/WOS 26 Write off of capital (equity/preference shares) and other receivables such as loans, royalty, technical fee etc. upto 25% of equity investment in JV/WOS 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 within 30 days to RBI 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.
Certain Issues in Overseas Direct Investment (ODI)- non compliance may result in contravention FEMA NOTIFICATION NO. 120 Investment in foreign entities engaged in real estate business (mere buying and selling) or banking without obtaining prior RBI approval not permitted [Regulation 5(2)]. Investment in loan or guarantee without first investing in equity capital of the overseas entity without prior RBI approval [Regulation 6(4)(i)]. Post 2012 investment in CCPS is treated at par with equity investment [Regulation 6(4)(v) and A.P.(DIR Series) Circular No. 96 dated March 28, 2012]. Investment made by Indian Party which is under RBI s caution list / defaulters list or is under investigation of any agency [Regulation 6(2)(iii)]- it needs to be removed from these adverse list. 27
Certain Issues ODI (Contd ) Routing of transactions pertaining to a particular JV/WOS through different Authorised Dealer (AD) Banks [Regulation 6(2)(v)]. Issue of corporate guarantee to second generation or subsequent level step down without prior approval. However, in such case Indian Party should indirectly hold 51% or more stake in overseas subsidiary for which guarantee is to be given [Regulation 6(4)(ii)]. Capitalization of export proceeds remaining unrealized beyond prescribed period of realization without obtaining prior RBI approval [Regulation 11(1)]. Overseas investment by proprietorship concern or an unregistered partnership firm without prior RBI approval. [Regulation 19A] Overseas investment by registered trusts and societies engaged in manufacturing/educational/hospital sector without prior RBI approval. The investment shall be made in the same sector [Regulation 19A]. 28
Certain Issues ODI (Contd ) Restructuring of balance sheet of JV/WOS involving write off of capital and other receivables by an unlisted Indian company up to 25% of equity investment in JV/WOS without RBI approval. Indian party shall hold at least 51% stake in the overseas entity [Regulation 16A(3)] Failure to repatriate all dues receivable from overseas entity like dividend, royalty, technical fees etc. within 60 days of the date of falling due [Regulation 15(ii)]. Receipt of shares of step down subsidiary on account of liquidation of JV/WOS without reporting in Part I of Form ODI. 29
Certain Issues ODI (Contd ) Failure to comply with following reporting requirements will be contravention: Non Filing of Form ODI within 30 days of date of making remittance overseas for obtaining UIN [Regulation 10]. Making subsequent remittance under ODI without obtaining UIN Non Filing of Annual Performance Report (APR) based on audited financial statements of JV/WOS every year before 31 st December [Regulation 15(iii)]. Non Filing of Annual Return on Foreign Liabilities and Assets every year before 15 July. Non receipt of share certificate or any other evidence of overseas investment and non submission of the same with RBI within six months from date of making investment [Regulation 15(i)]. 30
Certain Issues ODI (Contd ) Non reporting of post investment changes such as diversification of activities of JV/WOS abroad or setting up SDS or alteration in shareholding pattern To be reported within 30 days of approval of such changes in Section B of Form ODI Part I and the same to be included in APR [Regulation 13]. 31
Gift Transactions Gift of foreign security is a Capital A/c Transaction having following implications: Donor Donee Remarks NR R Permissible Reg 22(1)(i) of 120 R R Not covered by general permission R NR Not covered by general permission Inheritance of foreign security: Donor Donee Remarks NR R Permissible Reg 22(1)(iii) of 120 R R Permissible Reg 22(1)(iii) of 120 R NR Not covered by general permission 32
Investments other than ODI by individuals A resident individual may acquire shares of foreign entity in part/full consideration of the professional services rendered to foreign entity or in lieu of director s remuneration under LRS limits. Qualification Shares for becoming director of a company outside India as per law of host country under LRS limits. Allowed to acquire shares under cashless Employees Stock Option Plan (ESOP) issued by a company outside India, provided it does not involve any remittance from India; 33
Bonafide Business Activity Overseas JV/WOS must be engaged in bonafide business activity [Regulation 6(2)(ii)]. Therefore, activity of overseas JV/WOS making investment back in India i.e. FDI from ODI requires prior RBI approval. While granting approval RBI may take into account business synergy and business consolidation or such other genuine reasons depending upon facts of the case. 34
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