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TMI BlogMaster Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad (Updated as on June 24, 2021)X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment notifications. 2. Within the contours of the Regulations, Reserve Bank of India also issues directions to Authorised Persons under Section 11 of the Foreign Exchange Management Act (FEMA), 1999. These directions lay down the modalities as to how the foreign exchange business has to be conducted by the Authorised Persons with their customers/ constituents with a view to implementing the regulations framed. 3. Instructions issued on Direct Investment by Residents in Joint Venture (JV)/ Wholly Owned Subsidiary (WOS) Abroad have been compiled in this Master Direction. The list of underlying circulars/ notifications which form the basis of this Master Direction is furnished in the Appendix. Reporting instructions can be found in Master Direction on Reporting (Master Direction No. 18 dated January 1, 2016) 4. It may be noted that, whenever necessary, Reserve Bank shall issue directions to Authorised Persons through A.P. (DIR Series) Circulars in regard to any change in the Regulations or the manner in which relative transactions are to be conducted by the Authorised Persons with their customers/ constituents. The Master Direction issued herewith shall be amended suitably simult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission for purchase/ acquisition of foreign securities in certain cases C.2 Pledge of a foreign security by a person resident in India C.3 General permission in certain cases C.4 Acquiring the shares of SWIFT by a resident bank C.5 Issue of Indian Depository Receipts C.6 Maintenance of Collateral by FIIS for Transactions in Derivative Segment - Opening of Demat Accounts by Clearing Corporations and Clearing Members Operational Instructions to Authorised Dealer Banks 1 Designated branches 2 Investments under Regulation 6 of Notification No. FEMA 120/2004-RB dated July 7, 2004 3 General procedural instructions 4 Investments (or financial commitment) under Regulation 11 of Notification No. FEMA.120/2004-RB dated July 7, 2004 5 Allotment of Unique Identification Number (UIN) 6 Investment by way of share swap 7 Investments (or financial commitment) under Regulation 9 of Notification No. FEMA.120/2004-RB dated July 7, 2004 8 Purchase of foreign securities under ADR / GDR linked Stock Option Scheme 9 Remittance towards Earnest Money Deposit or Issue of Bid Bond Guarantee 10 Transfer by way of sale of shares of a JV / WOS outside India 11 Verification of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation seeks to regulate acquisition and transfer of a foreign security by a person resident in India i.e. investment (or financial commitment) by Indian entities in overseas joint ventures and wholly owned subsidiaries as also investment by a person resident in India in shares and securities issued outside India. Overseas Investment (or financial commitment) can be made under two routes viz. (i) Automatic Route outlined in paragraph B.1 and (ii) Approval Route outlined in paragraph B.8. A.3 Definitions In these Regulations, unless the context otherwise requires: (a) "Act" means Foreign Exchange Management Act, 1999 (42 of 1999); (b) "Authorised Dealer" means a person authorised as an authorised dealer under sub-section (1) of section 10 of the Act; (ba) "Alternative Investment Fund" means a fund as defined under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012; (c) "American Depository Receipt (ADR)" means a security issued by a bank or a depository in United States of America (USA) against underlying rupee shares of a company incorporated in India; (d) "Core Activity" means an activity carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship Act, 2008 (6 of 2009), making investment in a Joint Venture or Wholly Owned Subsidiary abroad, and includes any other entity in India as may be notified by the Reserve Bank: Provided that when more than one such company, body or entity make an investment in the foreign entity, all such companies or bodies or entities shall together constitute the "Indian Party"; (l) "Investment Banker" means an investment banker registered with the Securities and Exchange Commission in USA, or the Financial Services Authority in UK, or appropriate regulatory authority in Germany, France, Singapore or Japan; (m) "Joint Venture (JV)" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian Party makes a direct investment; (n) "Mutual Fund" means a Mutual Fund referred to in clause (23D) of section 10 of the Income-tax Act, 1961; (o) "Net Worth" means paid up capital and free reserves; (p) "Real estate business" means buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of township ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity participation by an Indian Party, shall not offer financial products linked to Indian Rupee (e.g. non-deliverable trades involving foreign currency, rupee exchange rates, stock indices linked to Indian market, etc.) without the specific approval of the Reserve Bank. Any incidence of such product facilitation would be treated as a contravention of the extant FEMA regulations and would consequently attract action under the relevant provisions of FEMA, 1999. A.5 General Permission General permission has been granted to persons residents in India for purchase / acquisition of securities in the following manner: * out of the funds held in RFC account; * as bonus shares on existing holding of foreign currency shares; and * when not permanently resident in India, out of their foreign currency resources outside India. General permission is also available to sell the shares so purchased or acquired. Section B - Direct Investment (or financial commitment) outside India B.1 Automatic Route (1) In terms of Regulation 6 of the Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time, an Indian Party has been permitted to make investment / undertake f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company without equity participation by the Indian Party. Indian entities may offer any form of guarantee - corporate or personal (including the personal guarantee by the indirect resident individual promoters of the Indian Party)/ primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India provided that: * All the financial commitments, including all forms of guarantees and creation of charge are within the overall ceiling prescribed for the Indian Party. * No guarantee should be 'open ended' i.e. the amount and period 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 guarantee breaches the ceiling for the financial commitment, the Indian Party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation. * In terms of Regulation 5 (b) of Notification No. FEMA 8/2000-RB dated May 3, 2000, an authorised dealer in India may also give a Bank guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange Management (Non-debt Instruments) Rules, 2019 dated October 17, 2019 as amended from time to time. f) In case of investment in overseas JV / WOS abroad by a registered Partnership firm, where the entire funding for such investment is done by the firm, it will be in order for individual partners to hold shares for and on behalf of the firm in the overseas JV / WOS if the host country regulations or operational requirements warrant such holdings. g) An Indian Party may acquire shares of a foreign company engaged in a bonafide business activity, in exchange of ADRs/GDRs issued to the latter in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued there under from time to time by the Government of India, provided: (i) ADRs/GDRs are listed on any stock exchange outside India; (ii) The ADR and/or GDR issued for the purpose of acquisition is backed by underlying fresh equity 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / WOS (a) Indian Parties are permitted to issue corporate guarantees on behalf of their first level step down operating JV /WOS set up by their JV / WOS operating as either an operating unit or as a Special Purpose Vehicle (SPV) under the Automatic Route, subject to the condition that the financial commitment of the Indian Party is within the extant limit. Such guarantees will have to be reported to the Reserve Bank in Form ODI, as hitherto, through the designated AD Category - I bank concerned. (b) Further, the issuance of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries will be considered under the Approval Route, provided the Indian Party indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued. B.2 Investment (or financial commitment) in unincorporated/ incorporated entities overseas in oil sector under the Automatic Route (1) Investments (or financial commitment) 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 (OI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of (vi) and (vii) above, the limit of financial commitment vis-à-vis the net worth will not apply. However, all investments (or financial commitment) made in the financial sector will be subject to compliance with Regulation 7 of the Notification ibid, irrespective of the method of funding. (2) General permission has been granted to persons resident in India for purchase/ acquisition of securities in the following manner: (i) out of funds held in RFC account; (ii) as bonus shares on existing holding of foreign currency shares; and (iii) when not permanently resident in India, out of their foreign currency resources outside India (para A.4 above) B.5 Capitalisation of exports and other dues (1) Indian Party is permitted to capitalise the payments due from the foreign entity towards exports, fees, royalties or any other dues from the foreign entity for supply of technical know-how, consultancy, managerial and other services within the ceilings applicable. Capitalisation of export proceeds remaining unrealised beyond the prescribed period of realization will require prior approval of the Reserve Bank. (2) Indian software exporters are permitted to receive 25 per cent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial and follow on public offerings for listing at recognized stock exchanges overseas; iv) foreign debt securities in the countries with fully convertible currencies, short- term as well as long-term debt instruments with rating not below investment grade by accredited/registered credit agencies; v) money market instruments rated not below investment grade; vi) repos in the form of investment, where the counter party is rated not below investment grade. The repos should not, however, involve any borrowing of funds by mutual funds; vii) government securities where the countries are rated not below investment grade; viii) derivatives traded on recognized stock exchanges overseas only for hedging and portfolio balancing with underlying as securities; ix) short-term deposits with banks overseas where the issuer is rated not below investment grade; and x) units / securities issued by overseas Mutual Funds or Unit Trusts registered with overseas regulators and investing in (a) aforesaid securities, (b) Real Estate Investment Trusts (REITS) listed on recognized stock exchanges overseas, or (c) unlisted overseas securities (not exceeding 10 per cent of their net assets). Investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew the changes in the definition / classification of the exporters as per the Foreign Trade Policy of the Ministry of Commerce and Industry, issued from time to time, the following revised terms and conditions are required to be complied with for considering the proposal of overseas direct investment (or financial commitment), by a proprietorship concern / unregistered partnership firm in India, by the Reserve Bank under the approval route: * The proprietorship concern / unregistered partnership firm in India is classified as 'Status Holder' as per the Foreign Trade Policy issued by the Ministry of Commerce and Industry, Govt. of India from time to time; * The proprietorship concern / unregistered partnership firm in India has a proven track record, i.e., the export outstanding does not exceed 10% of the average export realisation of the preceding three years and a consistently high export performance; * The Authorised Dealer bank is satisfied that the proprietorship concern / unregistered partnership firm in India is KYC (Know Your Customer) compliant, engaged in the proposed business and has turnover as indicated; * The proprietorship concern / unregistered partnership f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant local authority, as the case may be. (3) An application in form ODI may be made 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, through the AD Category - I bank. AD Category - I banks may forward the application to the Reserve Bank, after ensuring the above terms and conditions along with their comments and recommendations, for consideration. B.11 Post investment changes / additional investment (or financial commitment) in existing JV / WOS A JV / WOS set up by the Indian Party as per the Regulations may diversify its activities / set up step down subsidiary / alter the shareholding pattern in the overseas entity (subject to compliance of Regulation 7 of the Notification ibid, in the case of financial services sector companies). The Indian Party should report to the Reserve Bank through the AD Category - I bank, the details of such decisions within 30 days of the approval of those decisions by the competent authority of the JV / WOS concerned in terms of local laws of the host country and include the same in the Annual Performance Report (APR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alised became due to the Indian Party or the date on which the amount due was allowed to be capitalised; (ii) 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 period as the Reserve Bank may permit: and (iii) submit to the Reserve Bank, through the designated Authorised Dealer, every year on or before December 31, an Annual Performance Report (APR) in Part II of Form ODI in respect of each JV or WOS outside India, and other reports or documents as may be prescribed by the Reserve Bank from time to time. The APR, so required to be submitted, has to be based on the audited annual accounts of the JV/WOS for the preceding year, unless specifically exempted by the Reserve Bank. AD Category - I bank is required to monitor the receipt of such documents and satisfy itself about the bonafides of the documents. It is further advised that - a. the online OID application has been suitably modified to enable the nodal office of the AD bank to view the outstanding position of all the APRs pertaining to an applicant including for those JV / WOS for which it is not the designated AD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India. The Annual Return on FLA is available on the RBI website (www.rbi.org.in → Forms category → FEMA Forms) which can be duly filled-in, validated and sent by e-mail, by July 15 every year. B.15 Transfer by way of sale of shares of a JV / WOS (1) An Indian Party, without prior approval of the Reserve Bank, may transfer by way of sale to another Indian Party which complies with the provisions of Regulation 6 of FEMA Notification 120/RB-2004 dated July 7, 2004 as amended from time to time, or to a person resident outside India, any share or security held by it in a JV or WOS outside India subject to the following conditions: * the sale does not result in any write off of the investment (or financial commitment) made. * the sale is effected through a stock exchange where the shares of the overseas JV/ WOS are listed; * 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its JV / WOS / SDS whose shares have been pledged, or for any other JV / WOS / SDS of the Indian Party subject to the terms and conditions prescribed under Regulation 18 of the Notification and A.P. (DIR Series) Circular No.54 dated December 29, 2014. B.18 Rollover of guarantees (1) It has been decided not to treat / reckon the renewal / rollover of an existing / original guarantee, which is part of the total financial commitment of the Indian Party in terms of Regulation 6 of the Notification ibid, as a fresh financial commitment, provided that: * the existing / original guarantee was issued in terms of the then extant / prevailing FEMA guidelines; * there is no change in the end use of the guarantee, i.e. the facilities availed by the JV / WOS / Step Down Subsidiary; * there is no change in any of the terms & conditions, including the amount of the guarantee except the validity period; * the reporting of the rolled over guarantee would be done in Form ODI - Part I; and * if the Indian Party is under investigation by any investigation / enforcement agency or regulatory body, the concerned agency / body shall be kept informed about the same. (2) In case, however, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to verification of such exposure. (2) If a hedge becomes naked in part or full owing to shrinking of the market value of the overseas direct investment (or financial commitment), the hedge may continue to the original maturity. Rollovers on the due date are permitted up to the extent of market value as on that date. B.22 Opening of Foreign Currency Account abroad by an Indian Party In terms of the provisions contained in Regulation 5 (D) of [Foreign Exchange Management (Foreign Currency Accounts by a resident in India) Regulations, 2015}-Notification No. FEMA.10(R)/2015-RB dt January 21, 2016, as amended from time to time, an Indian party may open, hold and maintain Foreign Currency Account (FCA) abroad for the purpose of making overseas direct investments subject to the following terms and conditions: I. The Indian party is eligible for making overseas direct investment in terms of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 as amended from time to time II. The host country regulations stipulate that the investment into the country is required to be routed through a designated account. III. The account shall be opened, held and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted by the Indian company to the Reserve Bank through the AD Category - I bank giving details of remittances / beneficiaries, etc. (2) 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 any case not later than 90 days from the date of sale of such securities. (3) Foreign companies are permitted to repurchase the shares issued to residents in India under any ESOP Scheme provided (i) the shares were issued in accordance with the Rules / Regulations framed under Foreign Exchange Management Act, 1999, (ii) the shares are being repurchased in terms of the initial offer document, and (iii) an annual return is submitted through the AD Category - I bank giving details of remittances / beneficiaries, etc. (4) In all other cases, not covered by general or special permission, approval of the Reserve Bank is required to be obtained before acquisition of a foreign security. C.2 Pledge of a foreign security by a person resident in India The shares acquired by persons resident in India in accordance with the provisions of Foreign Exchange Management Act, 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquiring the shares of SWIFT by a resident bank A bank in India, being licensed by the Reserve Bank under the provisions of the Banking Regulation Act, 1949, may acquire the shares of Society for Worldwide Interbank Financial Telecommunication (SWIFT) as per the by-laws of SWIFT, provided the bank has been permitted by the Reserve Bank for admission to the 'SWIFT User's Group in India' as member. C.5 Issue of Indian Depository Receipts (IDRs) Eligible companies resident outside India may issue Indian Depository Receipts (IDRs) through a Domestic Depository. The permission has been granted subject to compliance with the Companies (Issue of Depository Receipts) Rules, 2004 and subsequent amendments made thereto and the SEBI (DIP) Guidelines, 2000, as amended from time to time. In case of raising of funds through issuance of IDRs by financial/banking companies having presence in India, either through a branch or subsidiary, the approval of the sectoral regulator(s) should be obtained before the issuance of IDRs. C.6 Maintenance of collateral by FIIs for transactions in derivative segment- opening of demat accounts by Clearing Corporations and Clearing Members SEBI approved cleari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian Party (ies)/ Resident Individual (RI) making investments (or financial commitment) in a JV/WOS abroad subject to their complying with the conditions specified in Regulation 6 of Notification FEMA No.120/RB-2004 dated July 7, 2004, as amended from time to time. Investment (or financial commitment) in financial services should also comply with the norms stipulated at Regulation 7 of Notification FEMA No.120/RB-2004 dated July 7, 2004, as amended from time to time. While forwarding the report of remittance in respect of investment (or financial commitment) in financial services sector, AD Category - I banks may certify that prior approvals from the Regulatory Authorities concerned in India and abroad have been obtained. Before allowing the remittance (or financial commitment), AD Category - I banks are required to ensure that the necessary documents, as prescribed in form ODI, have been submitted and found to be in order. Explanation: AD banks may note that an additional timeline of 15 days is made available to them for reporting of investments/ financial commitments by their constituents to RBI in the OID application (other than first remittance, which requires to be reported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o generated e-mail from RBI confirming the UIN. (3) In cases where the investment (or financial commitment) is being made jointly by more than one Indian Party, Reserve Bank would allot only one Unique Identification Number to the overseas JV/ WOS. (4) 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, 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 (or financial commitment) 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 (or financial commitment) 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulation 9, investment (or financial commitment) in JV / WOS in certain cases requires the prior approval of the Reserve Bank. AD Category - I banks may allow remittances under these specific approvals granted by the Reserve Bank and report the same to the Chief General Manager, Foreign Exchange Department, Central Office, Overseas Investment Division, Amar Building, 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 for purchase of foreign securities in the knowledge based sector under the ADR / GDR linked ESOPs, up to the ceiling as stipulated by the Reserve Bank from time to time 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 (or financial commitment) under Regulation 6 of the Notification ibid, allow remittance towards Earnest Money Deposit (EMD) to the extent eligible after obtaining Form A2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to monitor the receipt of such documents and satisfy themselves about the bonafides of the documents so received. 12. Opening of Foreign Currency Account abroad by an Indian Party Wherever, the host country Regulations stipulate that the investments (or financial commitment) 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 (or financial commitment) subject to certain terms and conditions stipulated under A.P. (DIR Series) Circular No. 101 dated April 02, 2012. APPENDIX List of Notifications/ Circulars consolidated in the Master Directions on Direct Investment in Joint Ventures/ Wholly Owned Subsidiaries Abroad Notifications (published in the official gazette by the Government of India on various dates) 1. Notification No. FEMA 120/2004-RB July 7, 2004 2. Notification No. FEMA 132/2005-RB March 31, 2005 3. Notification No. FEMA 135/2005-RB May 17, 2005 4. Notification No. FEMA 150/2006-RB August 21,2006 5. Notification No. FEMA 164/2007-RB October 9, 2007 6. Notification No. FEMA 173/2007-RB December ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. A.P (DIR Series) Circular No. 5 July 22, 2009 26. A.P. (DIR Series) Circular No. 36 February 24, 2010 27. A.P (DIR Series) Circular No. 45 April 1, 2010 28. A.P (DIR Series) Circular No. 69 May 27, 2011 29. A.P (DIR Series) Circular No. 73 June 29, 2011 30. A.P (DIR Series) Circular No. 96 March 28, 2012 31. A.P (DIR Series) Circular No. 97 March 28, 2012 32. A.P (DIR Series) Circular No. 101 April 2, 2012 33. A.P (DIR Series) Circular No. 131 May 31, 2012 34. A.P (DIR Series) Circular No. 133 June 20, 2012 35. A.P. (DIR Series) Circular No.15 August 21, 2012 36. A.P (DIR Series) Circular No. 25 September 7, 2012 37. A.P. (DIR Series) Circular No. 29 September 12, 2012 38. A.P (DIR Series) Circular No. 99 April 23, 2013 39. A.P (DIR Series) Circular No. 100 April 25, 2013 40. A.P (DIR Series) Circular No. 8 July 11, 2013 41. A.P (DIR Series) Circular No. 23 August 14, 2013 42. A.P (DIR Series) Circular No. 24 August 14, 2013 43. A.P (DIR Series) Circular No. 41 September 10, 2013 44. A.P. (DIR Series) Circular No. 83 January 3, 2014 45. A.P (DIR Series) Circular No. 131 May 19, 2014 46. A.P. (DIR Series) Circular No. 1 July 3, 2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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