FEMA Provisions for offshore subsidaries

FEMA PROVISIONS:

AUTOMATIC ROUTE

In terms of Regulation 6 of the Notification, an Indian party has been permitted to make investment in an overseas joint venture (JV) / wholly owned subsidiary (WOS) by submitting form ODA, duly completed, to a designated branch of an authorized dealer bank, unto 200 per cent of the net worth of the Indian party as on the date of the last audited balance sheet. This ceiling will not be applicable where the investment is made out of balances held in Exchange Earners' Foreign Currency

OBLIGATION OF INDIAN ENTITY

An Indian entity which has made direct investment abroad is under obligation to (a) receive share certificate or any other document as an evidence of investment, (b) repatriate to India the dues receivable from foreign entity and (c) submit the documents / Annual Performance Report to the Reserve Bank, in accordance with the provisions specified in Regulation 15 of the Notification.

VALUATION

In case of partial / full acquisition of an existing foreign company, where the investment is more than USD 5.00 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and, in all other cases by a Chartered Accountant or a Certified Public Accountant. However, in cases of investment by way of swap of shares, in all cases irrespective of the amount, valuation of the shares will have to be by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of the Foreign Investment Promotion Board (FIPB) will also be a precondition.

POST INVESTMENT CHANGES/ADDITIONAL INVESTMENT IN EXISTING JV /WOS

A JV / WOS set up by the Indian entity as per the Regulations may diversify its activities / set up step down subsidiary / alter the shareholding pattern in the overseas entity subject to the Indian entity reporting to the Reserve Bank, the details of such decisions taken by the JV / WOS within 30 days of the approval of those decisions by the competent authority concerned of such JV / WOS in terms of local laws of the host country, and, include the same in the Annual Performance Report (APR) required to be forwarded annually to the Reserve Bank.

IMMEDIATELY AFTER REMITTANCE

Immediately after effecting the remittance, the AD banks are required to forward a report on remittance in the revised form ODR, in duplicate (format enclosed) to the Chief General Manager, Foreign Exchange Department, Overseas Investment Division, 3rd floor, Amar Building., Mumbai - 400 001. AD banks may ensure that the remittances on account of investments by a partnership firm / proprietorship firm are reported with the superscription “Remittance by partnership firm/ proprietorship firm". In cases where the investment is being made jointly by more than one Indian entity, form ODA is required to be signed jointly by all the investing entities and submitted to the designated branch of the AD bank. AD banks should forward to the Reserve Bank a consolidated form ODR indicating details of each party. The same procedure should be followed where the investment is made out of the proceeds of ADR / GDR issues of an Indian entity in terms of Regulation 6(5) of the Notification. The Reserve Bank would allot only one Unique Identification number to the overseas project.

ALLOTMENT OF UNIQUE IDENTIFICATION NUMBER

On receipt of the form ODR from the AD bank, the Reserve Bank will allot an unique identification number to each JV or WOS abroad, which is required to be quoted in all the future correspondence by the AD banks or the Indian entity with the Reserve Bank. AD banks may allow additional investment in an existing overseas concern set up by an Indian party, in terms of Regulation 6 only after the Reserve Bank has allotted necessary identification number to the overseas project

 

Summary of Master Circular on Investments by Residents in JV and WOS abroad

SECTION A

Objective of Circular:

Regulate acquisition and transfer of a foreign security by a person resident in India i.e. investment by Indian entities in overseas ‘joint ventures and wholly owned subsidiaries’ (said companies) as also investment by a person resident in India in shares and securities issued outside India.

Prohibition in investment

Indian parties are prohibited from making investment in a foreign entity engaged in real estate or banking business, without the prior approval of the RBI.

General Permission: A general permission is granted for purchase of securities as follows:

1.      Out of funds in RFC a/c

2.      As bonus shares issued on existing foreign holdings

3.      When not permanently resident in India, out of their foreign currency resources outside India.

SECTION B – DIRECT INVESTMENT OUTSIDE INDIA

Automatic Route (not applicable to investment in Pakistan):

1.      Ceiling: Investment to a max of 400% of net worth (as per last audited balance sheet) of company or person making investment. This ceiling is not applicable if investments are made out of EEFC a/c or out of funds raised from ADR’s and GDR’s. (Form ODI to be filed<30 days)

2.      Ceiling applies to:

a.      Investment as above in said companies

b.      Loan to said companies

c.       100% guarantee given on behalf of said companies.

3.      Conditions for Investments

a.      It should be within the ceiling as above.

b.      Amount and period of guarantee to be specified upfront.

c.       Corporate guarantees to be reported to RBI (Form ODI-Part II)

d.      Specific approval from RBI is required for charge on immovable property or pledge of parent company shares given in favour of foreign entity.

e.       Indian party’s name is not in specified lists (Exporter’s caution list, defaulter’s list, etc)

f.        Any transaction with said companies should be routed through a single branch of a bank.

g.      If investment > $ 5 million, shares to be valued by merchant banker/investment banker, etc

h.      If investment > $ 5 million, shares to be valued by CA or CPA.

i.        If investment is by way of share swap, valuation to be only by Merchant banker and FIPB approval to be obtained.

j.        If investment is made by Indian firm, the partners should hold such shares is regulations so require.

k.      Investment, also through SPV, is permitted subject to above ceiling and conditions.

4.      Acquisition of shares by issue of ADR’s and GDR’s to selling company:

a.      It should be issued according the specified scheme

b.      ADR and GDR should be listed on recognised stock exchange.

c.       Indian company should back the issue of ADR and GDR with underlying fresh equity shares.

d.      Number of ADR and GDR < Prescribed Sectoral cap as per FDI regulations.

e.       Valuation of shares:

                                      i.      Listed Shares: 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.

                                    ii.      Unlisted Shares: As per authorised merchant banker.

5.      Investment in unincorporated entities overseas in oil sector

a.      Approval by competent authority is required.

b.      No limit on investment by specified companies.

c.       Other companies are subject to that 400% ceiling.

6.      Method of funding:

Investment can be made out of the following sources:

a.      Foreign exchange from Indian bank

b.      Capitalisation of exports

c.       Share swap

d.      Proceeds of ECB / FCCB.

e.       Exchange of ADR’s / GDR’s as specified above.

f.        Out of balance in EEFC a/c (ceiling not applicable)

g.      Proceeds of funds raised through ADR/GDR (ceiling not applicable)

7.      Capitalisation of Export and other Dues:

a.      Dues that can be capitalised: Dues towards exports, fees, royalties, etc for supply of technical knowhow, consultancy, managerial and other services.

b.      Software Companies: Indian software exporters as permitted to receive 25% of export value to overseas start-up software company in the form of Shares without a JV agreement but with RBI permission.

8.      Approval of RBI

a.      Prior approval of RBI to be obtained.

b.      RBI would approve after considering certain parameters.

9.      Overseas Investment by Proprietorship or partnership firm

a.      Prior approval of RBI required.

b.      Following conditions to be fulfilled:

                                                  i.      Firm should be a DGFT recognised star export house.

                                                ii.      Bank should be satisfied that the firm is KYC compliant.

                                              iii.      Overdue Exports < 10% of avg export realisation for past 3 FY.’s

                                              iv.      Exporter was not given any adverse notice by CBI, etc.

                                                v.      Amount of Investment =< lower of (10% of avg export realisation for past 3 FY.’s or 200% of net owned funds of the firm)

10. Overseas investment by registered trust / society

a.      Trust deed / memorandum should permit such overseas investment

b.      Proposed investment should be approved by trustees / governing body.

c.       It should be KYC compliant

d.      It is been in existence for >= 3 years

e.       It has not received adverse notice from CBI, etc.

11. Post investment changes / additional investment in said companies

a.      The JV/WOS can diversify its activities or set up a subsidiary in overseas.

b.      The Indian entity should notify the same to RBI within 30 days.

12. Obligation of Indian entity

a.      It should receive the share certificate/other document as evidence of investment.

b.      It should repatriate to India, the dues receivable from foreign entity.

c.       It should submit documents/APR as per the regulation 15 of notification.

13. Transfer by way of sale of shares of JV/WOS by Indian entity

a.      Disinvestment can be made without prior approval of RBI if:

                                                              i.      JV/WOS is listed overseas, or

                                                            ii.      Indian entity is listed and net worth >= 100 crores, or

                                                          iii.      Indian entity is not listed and investment =< USD 10 Million.

b.      Conditions for disinvestment:

                                                              i.      Sale does not result in write off of investment made.

                                                            ii.      Sale is affected through a stock exchange where shares of JV/WOS is listed

                                                          iii.      In case of unlisted shares, the share price >= price as per CA, CPA ascertained as per latest audited balance sheet.

                                                          iv.      Dues to Indian entity by JV/WOS = 0

                                                            v.      JV/WOS has been in operation >= 1 year and APR is filed

                                                          vi.      Indian party is not under investigation by CBI, SEBI, etc.

14. Pledge of shares of JV/WOS by Indian entity

a.      Pledged with bank or PFI in India – Regulation 18 on notification to be complied.

b.      Pledged with overseas lender – Allowed if the lender is a regulated and well supervised bank and the total financial commitment of Indian entity is within the limit specified by RBI for overseas investment.

15. Hedging of overseas investment

a.      Hedging of forex risk is permitted subject to verification of exposure by bank.

b.      Cancellation is also permitted. However, 50% of such cancelled contracts may be allowed to be rebooked.

SECTION C – OTHER INVESTMENTS IN FOREIGN SECURITIES

1.      General permission for purchase of foreign securities by individuals who is a person resident in India:

The following transactions are allowed:

a.      To foreign securities as gift person resident outside India.

b.      To acquire shares:

                                                              i.      Under ESOP scheme issued by company outside India.

                                                            ii.      By way of inheritance from person resident outside India.

c.       To purchase equity shares offered by foreign company under ESOP based on certain criteria. Such shares can also be transferred provided the proceeds are remitted within 90 days from date of such sale.

d.      Foreign companies can repurchase shares issued under ESOP provided:

                                                              i.      Shares were issued as per FEMA regulations

                                                            ii.      The repurchase is as per initial offer document.

                                                          iii.      An Annual return is submitted through bank giving specified details.

e.       In any other case apart from above, individual should obtain permission of RBI.

2.      General permission for residents to acquire foreign securities:

Residents are permitted to acquire foreign securities if it represents:

a.      Qualification shares for becoming director provided:

                                                              i.      It is =< 1% of paid up share capital

                                                            ii.      Consideration paid =< USD 20,000.

b.      Right shares acquired by virtue of holding existing shares of the company.

c.       Purchase of shares by JV/WOS of an Indian Company engaged in field of software subject to ceiling on the purchase price and other conditions.

d.      Purchase of foreign securities under ADR/GDR linked stock options provided the consideration does not exceed USD 50,000.