Overseas direct investment is fall under Capital account transaction specified under sec.6 of the FEMA, 1999. Indian parties are prohibited from making investment in foreign entities engaged in real estate (excluding development of township, construction of residential/commercial premises, road or bridges) or banking business with out prior permission of the RBI. General permission granted to for purchase/acquisition of securities out of funds in RFC a/c, as bonus shares or when not permanently resident in India, out of foreign currency resources outside India. General permission is also available to sell the shares so acquired.
Automatic Route:
1. Indian party is permitted to invest in overseas JV/WOS to the extent not exceeding 400% of net worth of Indian Party. India party includes Company; body incorporated under the Act of Parliament & Firm registered under the partnership Act, 1932 but excludes individuals.
2. This ceiling (400%) will not be applicable when investment is made out of EEFC A/c. The Indian party has to approach AD category I bank with Form ODI with necessary enclosures for effecting remittances towards investment.
3. The above said ceiling will include contribution to Capital, granting of loans and 100% guarantees issued to or on behalf of JV/WOS. The investments are subject following conditions:
a. The Indian party may extend loan / guarantee only ot an overseas enterprise in which it has equity participation. Guarantee may be corporate / personal, primary / collateral, by promoter company/ group company/sister concern or associate company in India provided that –
i. All financial commitments including guarantee should not exceed 400 % of net worth as per latest audited balance sheet.
ii. No guarantee should be open ended i.e. the amount and period of the guarantee should be specified upfront.
iii. In case of corporate guarantees, all guarantees should be reported to RBI in Form ODI part II and guarantees should be within the prudential norms issued by RBI from time to time.
Note: Specific approval of the RBI is required for creating charge on immovable property and pledge of shares of the Indian parent/group companies in favour of non-resident entity.
b. The Indian party should not be in RBI exporters Caution list / List of defaulters circulated by RBI/CIBIL/ or any other regulatory agency.
c. All transactions should be routed through the branch of AD Bank to be designated by Indian Party.
d. Where investment is more than USD 5 million, valuation of shares shall be made by Category I Merchant Banker registered with SEBI/an Investment Banker/Merchant banker registered with appropriate regulatory authority of the host country. In all other cases by a CA or CPA.
e. In case of swap of shares, irrespective of the amount, valuation of shares shall be made by Category I Merchant Banker registered with SEBI/an Investment Banker registered with appropriate regulatory authority of the host country and approval of FIPB is pre-requisite.
f. In case of investment by Registered Partnership firms, individual partners may hold shares for & on behalf of the firm if the regulations of the host country warrant such holding.
g. An Indian party may acquire shares of foreign company engaged in the bonafied business activity in exchange of ADR/GDR in accordance to the FCCB scheme and Guidelines of Govt. of India.
4 Form ODI has to be filed through AD Bank within 30 days of transaction.
5 Investment through Special Purpose Vehicle (SPV) is permitted through automatic route provided Indian party is not RBI’s caution list/List of defaulters or under investigation by Directorate of Enforcement.
Investment in unincorporated entities overseas under automatic route:
1. Investment in unincorporated entity in oil sector by Navaratna PSU, ONGC, Oil India Ltd may be permitted by AD Category I Bank without any limit subject to the approval by competent authority.
2. Other companies can invest in oil sector up to 400% of net worth under automatic route subject to the approval fo the competent authority. In excess of above said limit attracts prior approval of the RBI.
3. Indian companies are also permitted to participate in consortium with other international operators to construct & maintain sub-marine cable system on co-ownership basis under automatic route provided it has obtained necessary license from the Dept. of Telecom to establish, install, operate & maintain International Long Distance Services.
Method of Funding:
a. Drawal of Foreign exchange from AD Bank in India
b. Capitalisation of exports
c. Swap of shares
d. Proceeds of ECB/FCCB
e. In exchange of ADR/GDR (as per scheme & guidelines) – (ceiling of 400% not applicable)
f. Balance held in EEFC accountproceeds of funds raised through ADR/GDR – (ceiling of 400% not applicable)
General permission is granted for acquisition of shares in the following manner –
- Out of funds held in RFC a/c
- As bonus shares
- When not permanently resident in India, out of foreign currency resources outside India.
Capitalisation of exports:
a. Capitalization of exports, fees, royalties or other dues for supply of technical knowhow, consultancy, managerial & other services is permitted within the ceiling limit. Capitalization of export proceeds remaining unrealized beyond the prescribed period of realization will require the prior approval of the RBI.
b. Software companies are permitted to receive 25% of value of export to an overseas start-up company in the form of shares with entering into JV agreements, with the prior approval of the RBI.
Investment in Financial sector:
Indian company which engaged in financial sector can invest in entity outside India provided –
- It has registered with regulatory authority in India
- Has earned a net profit in 3 financial years from financial activity
- Has obtained approvals form regulatory authorities in India & abroad
- Has fulfilled the capital adequacy prudential norms prescribed the regulatory authorities in India
Other Invcestments:
Listed Indian companies may invest upto 50% of net worth as per latest audited balance sheet in shares & bonds/fixed income securities rated not below investment grade by accredited / registered credit rating agencies, issued by listed overseas companies.
Mutual Finds registered with SEBI can invest within the overall cap of USD 7 million in ADR/GDR, equity of listed overseas entity, initial or follow of offering of listed oveaseas entity, foreign debt securities, Govt. securities, short term deposites and money market instruments rated not below investment grade etc.
Domestic venture capital funds registered with SEBI may invest in equity or equity linked instruments of off-shore venture capital undertaking, subject to the overall limit of USD 500 million.
Overseas investment by proprietorship concern:
Proprietorship concerns and unregistered partnership firms are allowed to set up JV/WOS with the prior approval of the RBI subject to satisfying certain eligibility criteria. Such investments aresubject following conditions:
a. The Partnership/proprietorship firm is a DGFT recognized Star Export House.
b. Exporter has proven track record i.e overdue exports does not exceed 10% of average export realization of preceeding 3 financial years.
c. Exporter not coming under RBI’s caution list/list of defaulter/adverse notice by Directorate Enforcement.
d. Amount of investment does not exceed 10% of average export realization in 3 financial year or 2005 of net owned funds, whichever is lower.
Obligations of Indian party:
An Indian party made which has made direct investment abroad is under obligation to –
a. Receive share certificate or other document as an evident of investment
b. Repatriate to India the dues receivable from foreign entity
c. Submit the documents/Annual performance report to RBI in accordance with the provisions of Regulation 15 of the Notification.
Transfer by way of sale of shares of JV/WOS:
Indian parties may also disinvest without prior approval of the RBI, in any of the under noted categories:
- JV/WOS is listed in overseas stock exchange
- Indian listed promoted company is listed in Indian stock exchange and its net worth is of not less than Rs.100 crore and
- Where Indian Promoter Company is unlisted, investment in overseas venture does not exceed USD 10 million.
The disinvestment is subject to following conditions –
a. The sale does not result in any write-off of the investment made
b. The sale is effected through stock exchange where shares of the JV/WOS is listed
c. If shares are not listed and disinvestment is through private arrangement, sale price shall not be less than the value certified by a CA/CPA as the fair value of the shares of JV/WOS based on latest audited balance sheet.
d. The Indian party does not have any outstanding dues by way of dividend, technical know-how fee, royalty, consultancy, commission or other entitlements and / or export proceeds from the JV/WOS.
e. The overseas concern is in operation for at least one full year and Annual performance report along with audited accounts for that year has been submitted to RBI.
f. The Indian party is not under investigation by CBI/DoE/SEBI/IRDA or any other regulatory authority in India.
An Indian party which does not comply any of the above mentioned conditions, should obtain prior approval of the RBI.
The details of disinvestment should be filed with RBI through AD Category I bank within 30 days of disinvestment.
OTHER INVESTMENTS IN FOREIGN SECURITIES:
General permission has been granted to a person resident in India who is an individual –
- Acquisition by way of gift from person resident outside India
- Acquisition under cashless ESOP scheme by a company outside India.
- Acquisition by way of inheritance
- Acquisition of shares offered by a foreign company under ESOP scheme, if he is an employee/director of Indian office/branch of a foreign company or subsidiary in india of a foreign company or an Indian company in which foreign holding, either direct or through holding company /SPV, is not less than 51%.
A person resident in India may transfer by way of sale the shares acquired as stated above provided that the proceeds thereof are repatriated immediately on receipt thereof and in case not later than 90 days of sale of such securities.
Foreign companies are permitted to repurchase the shares issued under ESOP scheme provided shares were issued under rules/regulations of FEMA, 1999 and shares are repurchased in terms of initial offer document and Annual return submitted through AD Category I bank.
General Permission in certain case:
Residents are permitted to acquire a foreign security, if it represents –
a. Qualification shares provided it should not exceed 1% of paid up capital of the overseas company and consideration for the same shall not exceed USD 20,000 in a calendar year.
b. Right shares in accordance with the provisions of the law for the time being in force.
c. Purchase of shares of JV/WOS of the Indian promoter company engaged in software field, by its employees/directors, where consideration does not exceed USD 5,000 or equivalent per employee in a block of 5 years; the shares so acquired shall not exceed 5% of paid-up capital of JV/WOS and the % of shares held by the promoter along with the shares acquired by the employees is not less than the % of shares held by the promoter company prior to such allotment.
d. Purchase of securities under ADR/GDR schemes by the resident employees of the Indian company in knowledge based sectors, including working directors provided purchase consideration does not exceed USD 50,000 or its equivalent in a block of 5 years.
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