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TMI BlogMaster Circular on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) AbroadX X X X Extracts X X X X X X X X Extracts X X X X ..... a sunset clause of one year. This circular will stand withdrawn on July 01, 2014 and be replaced by an updated Master Circular on the subject. Yours faithfully, (C. D. Srinivasan) Chief General Manager INDEX Section A General A.1 Introduction A.2 Statutory basis A.3 Prohibitions A.4 General Permission Section B - Direct Investment Outside India B.1 Automatic Route B.2 Investment in unincorporated entities overseas under the Automatic Route B.3 Method of Funding B.4 Capitalisation of exports and other dues B.5 Investments in Financial Services Sector B.6 Investment in Equity of Companies Registered Overseas / Rated Debt Instruments B.7 Approval of the Reserve Bank B.8 Investments in energy and natural resources sector B.9 Overseas Investments by Proprietorship Concerns B.10 Overseas investment by Registered Trust / Society B.11 Post investment changes / additional investment in existing JV / WOS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... image, generation of employment and utilisation of raw materials available in India and in the host country are other significant benefits arising out of such overseas investments. They are also important drivers of foreign trade through increased exports of plant and machinery and goods and services from India and also a source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments. (2) In keeping with the spirit of liberalisation, which has become the hallmark of economic policy in general, and Foreign Exchange regulations in particular, the Reserve Bank has been progressively relaxing the rules and simplifying the procedures both for current account as well as capital account transactions. A.2 Statutory basis (1) Section 6 of the Foreign Exchange Management Act, 1999 provides powers to the Reserve Bank to specify, in consultation with the Government of India the classes of permissible capital account transactions and limits up to which foreign exchange is admissible for such transactions. Section 6(3) of the aforesaid Act provides powers to the Reserve Bank to prohibit, restrict or regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Automatic Route (1) In terms of Regulation 6 of the Notification, an Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not exceeding 400 per cent of the net worth as on the date of last audited balance sheet of the Indian party, i.e. 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, making investment in a JV/WOS abroad and includes any other entity in India excluding individuals as may be notified by the Reserve Bank. (2) The ceiling of 400 per cent of net worth will not be applicable where the investment is made out of balances held in Exchange Earners' Foreign Currency account of the Indian party or out of funds raised through ADRs/GDRs. The Indian party should approach an Authorised Dealer Category - I bank with an application in Form ODI (Annex A) and prescribed enclosures / documents for effecting remittances towards such investments. (3) The total financial commitment of the Indian party, in all the Joint Ventures / Wholly Owned Subsidiaries put together, shall not exceed 400% of the net worth of the Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of the guarantee should be specified upfront. In the case of performance guarantee, time specified for the completion of the contract shall be the validity period of the related performance guarantee. In cases where invocation of the performance guarantees breach the ceiling for the financial exposure of 400 per cent of the net worth of the Indian Party, the Indian Party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation. As in the case of corporate guarantees, all guarantees (including performance guarantees and Bank Guarantees / SBLC) are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside India, and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time . Note: Specific approval of the Reserve Bank will be required for creating charge on immovable / moveable property and other financial assets (except pledge of shares of overseas JV / WOS) of the Indian party / group companies in favour of a non-resident entity within the overall limit fixed (presently 400%) for the financial co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y shares issued by the Indian party; (iii) The total holding in the Indian entity by persons resident outside India in the expanded capital base, after the new ADR and/or GDR issue, does not exceed the sectoral cap prescribed under the relevant regulations for such investment under FDI; (iv) Valuation of the shares of the foreign company shall be (a) as per the recommendations of the Investment Banker if the shares are not listed on any recognized stock exchange; or (b) based on the current market capitalisation of the foreign company arrived at on the basis of monthly average price on any stock exchange abroad for the three months preceding the month in which the acquisition is committed and over and above, the premium, if any, as recommended by the Investment Banker in its due diligence report in other cases. (5) The Indian Party is required to report such acquisition in form ODI to the AD Bank for submission to the Reserve Bank within a period of 30 days from the date of the transaction. Note: Investments in Nepal are permitted only in Indian Rupees. Investments in Bhutan are permitted in Indian Rupees as well as in freely convertible currencies. All dues receivabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Automatic Route (1) Investments in unincorporated / incorporated entities overseas in the oil sector (i.e. for exploration and drilling for oil and natural gas, etc.) by Navaratna PSUs, ONGC Videsh Ltd (OVL) and Oil India Ltd (OIL) may be permitted by AD Category - I banks, without any limit, provided such investments are approved by the competent authority. (2) Other Indian companies are also permitted under the Automatic Route to invest in unincorporated entities overseas in the oil sector up to 400 per cent of their net worth provided the proposal has been approved by the competent authority and is duly supported by certified copy of the Board resolution approving such investment. Investment in excess of 400 per cent of the net worth of an Indian company shall require prior approval of the Reserve Bank. (3) 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 - I banks may allow remittances by Indian companies for overseas direct investment, after ensuring that the Indian company has obtained nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed period of realization will require prior approval of the Reserve Bank. (2) Indian software exporters are permitted to receive 25 per cent of the value of their exports to an overseas software start-up company in the form of shares without entering into Joint Venture Agreements, with prior approval of the Reserve Bank. B.5 Investments in Financial Services Sector (1) In terms of Regulation 7 of the Notification, an Indian party seeking to make investment in an entity outside India, which is engaged in the financial sector, should fulfill the following additional conditions: (i) be registered with the regulatory authority in India for conducting the financial sector activities; (ii) has earned net profit during the preceding three financial years from the financial services activities; (iii) has obtained approval from the regulatory authorities concerned both in India and abroad for venturing into such financial sector activity; and (iv) has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India. (2) Any additional investment by an existing JV/WOS or its step down subsidiary in the financial servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts (REITS) listed on recognized stock exchanges overseas, or (c) unlisted overseas securities (not exceeding 10 per cent of their net assets). (2) A limited number of qualified Indian Mutual Funds, are permitted to invest cumulatively up to USD 1 billion in overseas Exchange Traded Funds as may be permitted by SEBI. (3) Domestic Venture Capital Funds registered with SEBI may invest in equity and equity linked instruments of off-shore Venture Capital Undertakings, subject to an overall limit of USD 500 million. Accordingly, Mutual Funds / Venture Capital Funds desirous of availing of this facility may approach SEBI for necessary permission. (4) General permission is available to the above categories of investors for sale of securities so acquired. B.7 Approval of the Reserve Bank (1) Prior approval of the Reserve Bank would be required in all other cases of direct investment abroad. For this purpose, application together with necessary documents should be submitted in Form ODI through their Authorised Dealer Category I banks. (2) Reserve Bank would, inter alia, take into account the following factors while considering such applications: Prima facie viability of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he list of defaulters to the banking system in India. v) The amount of investment outside India does not exceed 10 per cent of the average export realization of the preceding three financial years or 200 per cent of the net owned funds of the firm, whichever is lower. B.10 Overseas investment by Registered Trust / Society Registered Trusts and Societies engaged in manufacturing / educational / hospital sector are allowed to make investment in the same sector(s) in a JV/WOS outside India, with the prior approval of the Reserve Bank. Trusts / Societies satisfying the eligibility criteria, as indicated below, may submit the application/s in Form ODI-Part I, through their AD Category - I bank/s, to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Overseas Investment Division, Central Office, Amar Building, 5th Floor, Fort, Mumbai 400 001, for consideration. Eligibility Criteria: (a) Trust i) The Trust should be registered under the Indian Trust Act, 1882; ii) The Trust deed permits the proposed investment overseas; iii) The proposed investment should be approved by the trustee/s; iv) The AD Category I bank is satisfied that the Trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uity / preference shares) or other receivables, such as, loans, royalty, technical knowhow fees and management fees in respect of the JV /WOS, even while such JV /WOS continues to function as under: Listed Indian companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV /WOS under the Automatic Route; and Unlisted companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV /WOS under the Approval Route. The write-off / restructuring have to be reported to the Reserve Bank through the designated AD Category-I bank within 30 days of write-off/ restructuring. The write-off / restructuring is subject to the condition that the Indian Party should submit the following documents for scrutiny along with the applications to the designated AD Category I bank under the Automatic as well as the Approval Routes: a) A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party; and b) Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the investment made. (ii) the sale is effected through a stock exchange where the shares of the overseas JV/ WOS are listed; (iii) if the shares are not listed on the stock exchange and the shares are disinvested by a private arrangement, the share price is not less than the value certified by a Chartered Accountant / Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the JV / WOS; (iv) the Indian party does not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and / or export proceeds from the JV or WOS; (v) the overseas concern has been in operation for at least one full year and the Annual Performance Report together with the audited accounts for that year has been submitted to the Reserve Bank; (vi) the Indian party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India. (2) The Indian party is required to submit details of such disinvestment through its designated AD category-I bank within 30 days from the date of disinvestment. B.16 Transfer by way of sale of shares of a JV / WOS involv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain cases (1) General permission has been granted to a person resident in India who is an individual to acquire foreign securities as a gift from any person resident outside India; to acquire shares under cashless Employees Stock Option Programme (ESOP) issued by a company outside India, provided it does not involve any remittance from India; to acquire shares by way of inheritance from a person whether resident in or outside India; to purchase equity shares offered by a foreign company under its ESOP Schemes, if he is an employee, or, a director of an Indian office or branch of a foreign company, or, of a subsidiary in India of a foreign company, or, an Indian company in which foreign equity holding, either direct or through a holding company/Special Purpose Vehicle (SPV) irrespective of the percentage of the direct or indirect equity stake in the Indian company. AD Category I banks are permitted to allow remittances for purchase of shares by eligible persons under this provision irrespective of the method of operationalisation of the scheme i.e where the shares under the scheme are offered directly by the issuing company or indirectly through a trust / a Spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights shares are being issued by virtue of holding shares in accordance with the provisions of law for the time being in force; purchase of shares of a JV / WOS abroad of the Indian promoter company by the employees/directors of Indian promoter company which is engaged in the field of software where the consideration for purchase does not exceed USD 10,000 or its equivalent per employee in a block of five calendar years; the shares so acquired do not exceed 5 per cent of the paid-up capital of the JV / WOS outside India; and after allotment of such shares, the percentage of shares held by the Indian promoter company, together with shares allotted to its employees is not less than the percentage of shares held by the Indian promoter company prior to such allotment; and purchase of foreign securities under ADR / GDR linked stock option schemes by resident employees of Indian companies in the knowledge based sectors, including working directors provided purchase consideration does not exceed USD 50,000 or its equivalent in a block of five calendar years. PART - II Operational Instructions to Authorised Dealer Banks 1. Designated branches An eligible Indian party m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on D Funding for JV / WOS Section E Declaration by the Indian Party (to be retained by AD Category I bank) Section F - Certificate by the Statutory Auditors of the Indian Party (to be retained by AD Category I bank) Part II - Reporting of Remittances Part III - Annual Performance Report (APR) Part IV Report on Closure/Disinvestment/Voluntary Liquidation/Winding up of JV / WOS (2) The revised form is only a rationalisation and simplification of the reporting procedure and there is no change or dilution in the existing eligibility criteria / documentation / limits. (3) With effect from March 2, 2010 on-line reporting of the ODI forms has been operationalised in a phased manner. The system enables on-line generation of the Unique Identification Number (UIN), acknowledgment of remittance/s and filing of the Annual Performance Reports (APRs) and easy accessibility to data at the AD level for reference purposes. a) Initially, Part I (Sections A to D), II and III of form ODI should be filed on-line in the Overseas Investment Application for allotment of UIN, reporting of subsequent remittances, filing of APRs, etc. AD Category I banks would continue to receive the O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rve Bank would allot only one Unique Identification Number to the overseas project. (5) AD Category I banks should allow remittance towards loan to the JV / WOS and / or issue guarantee to / on behalf of the JV / WOS abroad only after ensuring that the Indian party has an equity stake in the JV / WOS. However, as has been stated at para B 1 (3) (a) above, wherever the laws of the host country permit incorporation of a company without equity participation by the Indian party, AD banks may obtain prior approval from the Reserve Bank before allowing the remittances towards the loan/issue of guarantee to/on behalf of the overseas JV/WOS. 4. Investments under Regulation 11 of Notification No. FEMA.120/2004-RB dated July 7, 2004 In terms of Regulation 11 of the Notification, Indian parties are permitted to make direct investment in JV / WOS abroad by way of capitalisation of exports or other dues/entitlements like royalties, technical know-how fees, consultancy fees, etc. In such cases also, the Indian party is required to submit details of the capitalisation in form ODI to the designated branch of the AD Category I bank. Such investments by way of capitalisation are also t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5th floor, Mumbai 400 001 in form ODI. 8. Purchase of foreign securities under ADR / GDR linked Stock Option Scheme AD Category I banks may make remittances up to USD 50,000 or its equivalent in a block of five calendar years, without the prior approval of the Reserve Bank, for purchase of foreign securities in the knowledge based sector under the ADR / GDR linked ESOPs, after satisfying that the issuing company has followed the relevant guidelines of SEBI / Government. 9. Remittance towards Earnest Money Deposit or Issue of Bid Bond Guarantee (i)In terms of Regulation 14 of the Notification, AD Category I banks may, on being approached by an Indian party which is eligible for investment under Regulation 6, allow remittance towards Earnest Money Deposit (EMD) to the extent eligible after obtaining Form A2 duly filled in or may issue bid bond guarantee on their behalf for participation in bidding or tender procedure for acquisition of a company incorporated outside India. On winning the bid, AD banks may remit the acquisition value after obtaining Form A2 duly filled in and report such remittance (including the amount initially remitted towards EMD) to the Chief Gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulate that the investments into the country are required to be routed through a designated account, an Indian party is allowed to open, hold and maintain Foreign Currency Account (FCA) abroad for the purpose of overseas direct investments subject to certain terms and conditions stipulated under A.P. (DIR Series) Circular No. 101 dated April 02, 2012. Appendix List of Circulars/Notifications consolidated in the Master Circular Direct Investment in Joint Ventures/ Wholly Owned Subsidiaries Abroad Notifications Sl. No. Notification No. Date 1. FEMA.120/2004-RB July 07, 2004 2. FEMA.132/2005-RB March 31, 2005 3. FEMA.135/2005-RB May 17, 2005 4. FEMA.139/2005-RB August 11, 2005 5. FEMA.150/2006-RB August 21, 2006 6. FEMA.164/2007-RB October 9, 2007 7. FEMA.173/2007-RB December 19, 2007 8. FEMA.180/2008-RB September 5, 2008 9. FEMA.181/2008-RB October 1, 2008 10. FEMA.196/2009-RB July 28, 2009 11. FEMA.225/2012-R ..... X X X X Extracts X X X X X X X X Extracts X X X X
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