Overseas Direct Investment
Presented by Nishit Parikh
Mumbai | Pune | Hyderabad | New Delhi | Bangalore
Agenda
Index
1
Introduction to Overseas Direct Investment (ODI)
2
Routes of investments and Important Concepts
3
Other Important aspects for ODI
4
Investment by resident Individual
5
Liberalized Remittance Scheme (LRS)
6
Setting up Branch office or Representative office abroad
7
Case studies
2
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Introduction
Introduction
Importance of ODI

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
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Introduction
ODI Statistics
Total
amount in billions US Dollar
16
14
12
10
8
6
Total
4
2
0
Updated till 28th Feb, 2012 – Source – www.rbi.org.in
5
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
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
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Introduction
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
7
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Routes of investments and Important Concepts
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Routes of investment
Possible Routes for Investment
Automatic Route

Approval Route
Overseas JV/WOS to be engaged in bonafide business
activity except real estate and banking



Specific application to RBI with necessary documents in
Form ODI through the AD (Category I Bank) along with
additional conditions
prescribed supporting and documents
Indian party not on RBI’s Exporters’ Caution List/list of

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
100% of net worth as on last audited Balance Sheet

Financial position and business track record of the
Indian party and foreign entity
Submission of Form Annual Performance Report in respect

Expertise and experience of the Indian party in the
same or related line of activity of the JV/WOS outside
India
SEBI etc.

Cases not covered under Automatic route
Investment in Financial Sector should comply with
defaulters/under investigation by an Authority such as ED,


Overall ceiling of financial commitment in all JV/WOS is
of all its overseas investment
9
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Key conditions
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?
10
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Routes of investment
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
11
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Important concepts
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
12
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Important concepts
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
13
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Important Concepts
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%)
Investment in Overseas LLP is allowed ?
14
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Important Concepts
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
15
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Important Concepts
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?
16
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Important Concepts
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
17
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Other Important aspects
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Type of investment
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)
19
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Valuation requirement
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
20
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Special Purpose Vehicle
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
21
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Funding ODI
Modes of Funding Overseas Direct Investment
MARKET PURCHASE
BALANCE IN RFC ACCOUNT
CAPITALIZATION OF EXPORT
DUES
FUNDING
MODES
IN EXCHANGE OF ADR/GDR
SWAP OF SHARES
PROCEEDS OF ECB/FCCB
BALANCE IN EEFC ACCOUNT
22
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Special Purpose Vehicle
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
23
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
To Do for Indian party
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
24
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Changes in JV/WOS
Post Investment Changes

JV/WOS may diversify its activity

Set up step down subsidiaries

Alter the shareholding pattern in Overseas company
Indian party is required to report these transaction within 30 days of the decision to RBI
25
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Step by step
Compliances
Step I
Step 2
Step 3
Step 4
Step 5
Other
• 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
• Filing of share certificates with AD within 6 months
• Post investment changes needs to be reported within 30 days
26
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Sale of shares
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
27
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Sale of shares
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
IF IT DOES NOT SATISFY ANY OF THE ABOVE CONDITION THEN RBI APPROVAL REQUIRED
28
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
JV/WOS in losses
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
29
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Individual Investments
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
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
IF IT DOES NOT SATISFY ANY OF THE ABOVE CONDITION THEN RBI APPROVAL REQUIRED
31
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Individual Investments
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
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Liberalised Remittance Scheme
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
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
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Liberalised Remittance Scheme
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
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Liberalised Remittance Scheme
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
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Setting up A Branch/Representative Office
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
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
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Setting up A Branch/Representative Office
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
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Case Studies
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Case Study - 1
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
I Co. Pvt. Ltd
(I Co)
incorporated in UK under Automatic route

Management of I Co. decides to convert company into LLP
WOS
F Co.
(Company in UK)
CAN THE LLP CONTINUE TO HOLD INVESTMENT IN F CO.?
41
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Case Study - 2
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
I Co. Pvt. Ltd
(I Co)
conditions of merger

Existing investment as a percentage of new net worth of merged
WOS
I Co. is more than 100%
F Co.
(Company in BVI)
DISINVESTMENT TO THAT EXTENT IS NECESSARY?
42
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Case Study - 3
Non Filing of Form APR

I Co. Is a company incorporated under Companies
I Co. Pvt. Ltd
(I Co)
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
UK Co.
(Company
in UK)
US Inc.
(Company
in US)
SG Pte.
(Company
in
Singapore)
WHETHER I CO. SHOULD TAKE APPROVAL OR AUTOMATIC ROUTE FOR INVESTMENT ?
43
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Case Study - 4
Newly Set-up Indian Company

I Co. is a company incorporated under Companies Act,
I Co. Pvt. Ltd
(I Co.)
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
WOS
F Co.
(Company in UK)
WHETHER PERMISSIBLE OR NOT?
44
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Case Study - 5
Using Net Worth of Holding or Subsidiary

I Co. is a company incorporated under Companies Act,
I Co. Pvt. Ltd.
(I Co)
1956

I Co. has 51% shares in B Pvt. Ltd.

I Co. proposes to invest in F Co. (which is a WOS) a
55%
company incorporated in UK

As on the date of net worth of I Co. INR 50 cr and net
B Pvt. Ltd.
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
F Co.
(Company in UK)
TOTAL NET WORTH (I CO. AND B PVT. LTD.) TO BE CONSIDERED?
45
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Case Study - 6
Gift of Shares

Mr. A is resident in India working with MNC

Mr. B who is working with the same MNC
Foreign Company
Mr. B
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
Mr. A
30
WHETHER THIS WILL ALLOWED OR NOT ?
46
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
Case Study - 7
Resident to Resident Transfer of Shares

I Co. and H Co. are Indian companies
H Co.
I Co.

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
WOS
Proposed
WOS
another H Co.
F Co.
WHETHER THIS WILL ALLOWED OR NOT ?
47
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
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]
Copyright © 2014 All Rights Reserved | Sudit K. Parekh & Co. | Chartered Accountants
www.skpgroup.com | [email protected]