Direct Investment by Residents in JV & WOS Abroad under FEMA-In Brief

The Date of 24th July of 1991 is taken as a turning point in the history of the Industrial Development of India as this was the day when New Reform Policy was announced by the Government by passing it in the parliament which initialed the phase of liberalization in Indian Economy.

As we all know that the liberalization of a economy means to keep the door open for the foreign investors and business entities to trade here either in incorporated way (by Wholly owned subsidiary or Joint venture) or by unincorporated way (by making Liaison office, Branch Office, Place of Profit or Project Office) [in dept details are given in FDI (Foreign Direct Investment) policy of India announced by DIPP (Department of Industrial Policy or Promotion)]

On the one hand where liberalization in India was allowing foreign corporate entities to enter into Indian Market by establish business entity, on the other hand it equally allowed Indian Resident to invest in corporate bodies incorporated outside India, the live example of it is Tata Group as around 60% share of its total revenue comes from their overseas corporate entities.

Now the Indian Residents were also allowed to enter in the foreign market by establish their business entity either in the form of WOS (Wholly owned subsidiary : a company whose entire paid up share capital is held by principal Indian company) or JV (Joint Venture : equity participation in a foreign company along with local partner)

Lets focus on the opportunity available with Indian Resident to establish their business entity abroad. In terms of Regulation, there transactions can be defined as follows:

First : as here dealing in foreign exchange is involved Foreign Exchange Management Act 1999 will be applicable.

Second : as per section 2(e) of FEMA: any transaction which alter Assets or Liabilities outside India by Indian Resident OR transaction stated in section 6(3) of FEMA are Capital Account Transactions. And Section 6(3)(a) specifically contains ‘transfer or issue of any foreign security by a person resident in India’

Third : as per section 47(2)(a) of FEMA: Reserve Bank of India (RBI) can issue REGULATION for allowing the limit of Foreign Exchange amount which can be dealt in transaction contained in section 6. And RBI has already prescribed regulation in this regard, which is ‘FOREIGN EXCHANGE MANAGEMENT (TRANSFER OR ISSUE OF ANY FOREIGN SECURITY) REGULATIONS 2004’.

Hence on the basis of first, second and third we can conclude that An Indian Company who wants to establish a business entity abroad has to fulfill conditions contains in FOREIGN EXCHANGE MANAGEMENT (TRANSFER OR ISSUE OF ANY FOREIGN SECURITY) REGULATIONS 2004, section 6(3) and other circulars issued by RBI in this behalf, which at least I found very hectic, boring and confusing…J….so the easiest way is to read Master Circular issued by RBI on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad, where RBI has consolidated itself all applicable act, sections, regulation, order, circulars and provision at one place related with this subject….

And for your convenience I hereby produce the Excerpts of this Master Circular which are as follow:

All foreign industries are broadly divided into three categories

I  Prohibited (no investment can be done)

II  Automatic Route (no prior approval is required)

III  Government Route (Reserve Bank prior approval is required before investment)

I  Prohibited : Indian Resident cannot invest real estate business or in a foreign company/entity which is engaged in this field.

II Automatic Route : without taking any prior permission from Reserve Bank of India (RBI), an Indian Company, body corporate constituted by passing legislation in parliament or partnership firm registered under Partnership Act 1932 (hereinafter referred as Indian Entity) EXCEPT INDIVIDUAL can invest in a foreign company if following conditions are satisfied:

1) Maximum investment limit is four times of net worth of Indian Entity (400% of paid up capital PLUS free reserves of a foreign entity)

2) Such limit of 400% includes remittance in the form of capital, loan and guarantee in investing entity

3) Indian entity should have a sound financial status and its name should not be on the Reserve Bank’s Exporters' caution list / list of defaulters or Credit Information Bureau (India) Ltd. (CIBIL)  

4)  All transactions relating with a WOS/JV should be routed via one branch of a Bank. (one WOS/JV one bank one branch for making easy for RBI to track transaction)

5) If Indian Entity invest in an existing Foreign Entity more than USD 5 Million than shares of such Foreign Entity should be valued by Category 1 Merchant banker.

6) But In cases of investment by way of swap of shares, irrespective of the amount, valuation of the shares will have to be made by a Category I Merchant Banker.

7) When a Registered Partnership Firm is making investment abroad than its individual partners will hold shares of foreign entity on behalf of their Firm.

8) An Indian Entity may acquire shares of a foreign company in exchange of ADRs/GDRs (American Depository Receipt or Global Depository Receipt issued by Indian company in abroad) when following conditions are satisfied:

a.  ADRs/GDRs are listed on any stock exchange outside India

b.  issued for the purpose of acquisition is backed by underlying fresh equity shares

c.  Valuation of foreign Company’s share is done by Investment Banker if not listed otherwise current market value.             

d.  Non Residents’ holding of Indian shares after the new ADR and/or GDR issue, does not exceed the sectoral cap prescribed under the relevant regulations for such investment under FDI;

9) Investment in Nepal can be done only in Indian Rupees (not in any other currency)

10) Investment in Bhutan can be in Indian Rupees as well as freely convertible currency 

If all above mentioned conditioned are satisfied than no prior permission is required to be taken from RBI only a intimation is sent to RBI within 30 days of such Transaction via Form ODI.   

III Government Route

1) If any of the condition mentioned in automatic rout is not fulfilled than prior permission of Reserve Bank is required before making investment in foreign entity.

2) Prior permission of Government is required always before investment in Pakistan.

3) Proprietorship Concerns and Unregistered Partnership Firms which are recognized star exporters with a consistently high export performance are allowed to set up JVs / WOS outside India with the prior approval of the Reserve Bank subject to satisfying certain eligibility criteria as laid down by RBI.  

For this purpose, application together with necessary documents should be submitted in Form ODI through an Authorised Dealer Category – I banks

Method of Funding : Investment in an overseas JV / WOS may be funded out of one or more of the following sources:

i) drawal of foreign exchange from an AD bank in India;

ii) capitalisation of exports;

iii) swap of shares

iv) proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs);

v) in exchange of ADRs/GDRs;

vi) balances held in EEFC account of the Indian party; and

vii) proceeds of foreign currency funds raised through ADR / GDR issues.

And at the end I would like to mentioned that I have incorporated only important aspects of the master circular as the circular was very wide (and beyond my perceiving power as well J) but cordial thanks for giving your time in reading it please express ur opinion if you like it..

Regards

USHA