Manish Singh
(Advocate)
05 April 2008
The liberalisation and streamlining of procedures regarding investment abroad was undertaken in 1995 besides previous efforts. The guidelines of 1995 provided for a detailed framework by transferring the work relating to overseas investment from Ministry of Commerce to Reserve Bank of India (RBI), which became the nodal agency for administering the overseas investment policy . This provided a single window system for overseas investment approvals. Since then, all proposals for direct investment abroad are being made to and processed by the Reserve Bank of India (RBI). Also, these guidelines aimed at providing transparency in the framework of overseas investment policy with the following basic objectives :-
To provide a framework for Indian industry and business to access global networks;
To ensure that trade and investment flows, though determined by commercial interests, are consistent with the macroeconomic and balance of payment compulsions of the country, particularly in terms of the magnitude of the capital flows;
To give liberal access to Indian business for technology-sourcing or resource-seeking or market-seeking;
To indicate that there is a change in the approach of the Government, from one of regulator or controller to one of facilitator;
To encourage the Indian industry to adopt a spirit of self-regulation and collective effort in order to improve its image abroad.
Subsequently, in 2000, introduction of FEMA (Foreign Exchange Management Act) changed the entire perspective on foreign exchange particularly those relating to investment abroad. It changed the emphasis from exchange regulation to exchange management. It aimed to facilitate external trade and payments as well as to promote an orderly development and maintenance of foreign exchange market in India.
Over the years, the liberalisation measures for overseas investment by Indian companies has continued. The measures so undertaken in the fiscal year 2003-04 are as follows :-
The listed Indian companies are permitted to invest abroad in those foreign companies:- (a) which are listed on a recognized stock exchange; and (b) which have a shareholding of at least 10% in an Indian company which is listed on a recognized stock exchange in India (as on 1 st January of the year of the investment). As per these guidelines, such investment shall not exceed 25% of the Indian company's net worth, as on the date of latest audited balance sheet.
The resident individuals are also permitted to invest in the overseas companies (as indicated above) without any monetary limit.
The Indian corporates or registered partnership firms are allowed to investment in entities abroad up to 200% of their net worth. Along with it, the prevailing monetary ceiling of US$ 100 million (US$ 10 million for partnership firms ) has been removed.
The Indian corporates or registered partnership firms are allowed to undertake agricultural activities either directly or through an overseas branch.
For investment abroad in the financial sector, the stipulation of minimum net worth of Rs.15 crores for Indian companies engaged in financial sector activities in India has been removed.
Further liberalisation measures introduced in the fiscal year 2005-06 are as follows:-
Guarantees:- The scope of guarantee has been enlarged under the Automatic Route. Earlier, only promoter corporates were permitted to offer guarantees on behalf of their wholly owned subsidiaries (WOSs) or joint ventures (JVs), under the automatic route, and issue of personal, collateral and third party guarantees required prior approval of the Reserve Bank of India (RBI). Now this procedure has been simplified such that the Indian entities may offer any forms of guarantee, namely, corporate or personal/ primary or collateral/ guarantee by the promoter company/ guarantee by group company, sister concern or associate company in India, provided that:-
All "financial commitments" including all forms of guarantees are within the overall prescribed ceiling for overseas investment of the Indian party i.e. currently within 200% of the net worth of the investing company;
No guarantee is 'open ended' i.e. the amount of the guarantee should be specified upfront; and
As in the case of corporate guarantees, all guarantees are required to be reported to Reserve Bank of India (RBI), in Form ODR.
Disinvestment:- In order to enable companies to have operational flexibility according to their commercial judgment, the Automatic route of disinvestment has been further liberalized. All disinvestments that involve a 'write-off' that is, where the amount repatriated on disinvestment is less than the amount of the original investment, need prior approval of the Reserve Bank of India (RBI). The Indian companies are permitted to disinvest without prior approval of the Reserve Bank of India (RBI) in the following categories: -
Where the JV/WOS is listed in the overseas stock exchange;
Where the Indian promoter company is listed on a stock exchange in India and has a net worth of less than Rs.100 crore;
Where the Indian promoter is an unlisted company and the investment in overseas venture does not exceed US$ 10 million.
The Indian party is required to submit the details of disinvestment through its designated Authorised Dealer Bank within 30 days from the date of disinvestment.
Proprietorship concerns:- As per the earlier guidelines, only a company incorporated in India or body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act,1932 or any other entity as may be notified by the Reserve Bank of India (RBI) is eligible to invest in a JV/WOS abroad. But now it has been decided to allow proprietary or unregistered partnership firms to set up a JV/WOS outside India with prior approval of Reserve Bank of India. Such firms may submit an application in Form ODI to the Chief General Manager in the Overseas Investment Division of the Foreign Exchange Department of Reserve Bank, through their Authorised Dealer Bank, if they satisfy the following eligibility criteria's:-
The partnership or proprietorship firm is a DGFT(Directorate General of Foreign Trade) recognised Star Export House (export exceeding Rs.15 crore per annum);
The Authorised dealer bank is satisfied that the exporter is:- KYC (Know Your Customer) complaint; is engaged in the proposed business; and has a turnover as indicated;
The exporter has proven track record, that is, export outstanding does not exceed 10% of the average export realisation of preceding three years;
The exporter has not come under adverse notice of any Government agency like Enforcement Directorate, CBI (Central Bureau of Investigation) and does not appear in the exporters' caution list of the Reserve Bank of India (RBI) or in the list of defaulters to the banking system in India;
The amount of investment outside India does not exceed 10% of the average of three year export realisation or 200% of the net worth funds of the firm, whichever is lower.
