How to make outbound investment from india financing & compliance

HOW TO MAKE OUTBOUND INVESTMENT

(c) iPleaders Research Division

With Financing Options and

Compliance Procedure

Relevant laws


Companies Act (for certain corporate matters)

FEMA and RBI Regulations (for foreign exchange, outbound investment and procedural aspects of remittances)

SEBI Regulations(if listed Indian companies are involved in or related to the transaction)

Financing Options for Overseas Investment


• Automatic Route• ADR/GDR Automatic Route• ADR/GDR Swap Route• Normal Route


Automatic Route Indian corporations have been permitted to invest in

overseas JV/WOS to the extent of 400% of their net worth.

Investment through the medium of Special Purpose Vehicle (SPV) is also permitted.

The investing company is required to take prior approval from the RBI in the event of the said company having been declared a ‘defaulter’ company by the RBI.

Note: Definition of Joint Venture Means a foreign concern formed, registered or incorporated in a foreign

country in accordance with the laws and regulations of that country and in which investment has been made by an Indian entity. (Notification No.FEMA 3 /2000-RB dated 3rd May 2000)


ADR/GDR Automatic RouteIndian companies can freely utilize up to 100% of

ADR/GDR proceeds for overseas investments without any limit under the automatic route subject to post facto report to the Reserve Bank.

ADR/GDR Swap Route Indian company can automatically swap its fresh

issue of ADRs/ GDRs for overseas acquisitions in the same core activity

Subsequent reporting to RBI.


Normal RouteProposals not covered under the above routes are

considered by the Special Committee on Overseas investments headed by the RBI Deputy Governor, with members from the Ministries of Finance, Commerce, External Affairs and the RBI. This is case specific.

The application for direct investment in joint venture/ wholly owned subsidiary outside India or by way of exchange of shares of a foreign company, shall be made in form ODI or in form ODB respectively, to Exchange Control Department of the RBI.

Advantages to the Investor in ADR/GDR Route


Advantages to Investors GDRs/ADRs are designated in foreign currency which is more

acceptable to global investors. Global investors/holders of GDRs/ADRs do not need to be

registered with the Securities and Exchange Board of India (the "SEBI").

The identity of GDR/ADR holders is kept confidential since they are freely transferable and in the records of the Issuer Company, the name of the Overseas Depository appears as Registered Owner of shares.

Quick settlement of GDRs/ADRs due to the existence of international systems like, Euroclear and Cedel in Europe and the Depository Trust Company in the U.S

Exchange Control Regulations

Direct Investment in an Overseas JV/WOS An Indian party (i.e. corporation) is permitted to

invest in a JV/WOS not exceeding 400% of its net worth (as of the date of the last audited balance sheet), either directly or through a Special Purpose Vehicle (SPV)

Note: The ceiling of 400% includes: contribution to the capital of the overseas JV/WOS; loan granted to the JV/WOS; and 100% of guarantees issued to, or on behalf of

JV/WOS.


Conditions imposed by RBI on guarantees


There are certain conditions imposed by the RBI regulations for issuance of guarantees.

Indian entity may extend loan/guarantee to an overseas concern only in which it has equity participation;

no “open-ended” guarantees (i.e. the amount of the guarantee should be specified up front); and

corporate guarantees are required to be reported to the RBI.

Ceiling Exemptions


The ceiling will not be applicable where, Investment is made out of Exchange Earner

Foreign Currency (EEFC) Account (see next slide for more details on the account); or

Investment out of proceeds of ADR/GDR.

Exchange Earner Foreign Currency Account (EEFC)


An Indian party (i.e. corporation or individuals) may open an EEFC account in a form of non-interest bearing current account to keep foreign exchange earned in the currency received.

Foreign exchange earners are allowed to credit up to 100% of their foreign exchange earning to their EEFC account.

No credit facilities, either fund based or non-fund based shall be permitted to obtain against security of balances held in EEFC.

Manner of remittance


Under RBI regulations, there is mandatory requirement of effecting remittances towards investment in an overseas JV/WOS through one branch of an Authorized Dealer Bank.(An Authorised Dealer is any bank designated by RBI to undertake business transaction of remittance of money in outward investment. For List of Banks authorised, see : http://www.rbi.org.in/commonman/English/Scripts/AuthorizedDealers.aspx)

Remittance has to be made from a Resident Foreign Currency Account.

Guarantees


Scope of guarantee enlarged under the Automatic Route

Indian companies may offer the following forms of guarantee:

Corporate or personal Primary or CollateralTo be given by the promoter company (group

company, sister concern or associate company in India)

No guarantee is ‘open ended’ i.e the amount of the guarantee should be specified upfront

All guarantees to be reported to the RBI

Investment by Cash or Equivalent


Partial/Full acquisition of an existing foreign company, where the investment is more than USD $5,000,000 (Five Million Dollars), a valuation of the shares of the company is required to be undertaken by an investment banker/merchant banker registered with SEBI or an investment banker/merchant banker outside India, registered with the appropriate regulatory authority in a target company’s country.

If the investment is less than USD $5,000,000 (Five Million Dollars), valuation by a chartered accountant or a certified public accountant shall suffice.

PINTU

If its a new foreign company (either a JV or a WOS), then is a valuation required? Please indicate the answer here. Thanks!Valuation is required when the investment crosses 5 million, irrespective of the fact that the foreign company is new of old.Note that i've mentioned 'existing' foreign company.

Investment by Equity Swap


Acquisition by way of swap of equity shares of overseas company in consideration for the shares of an Indian company would require RBI & FIPB approval in India (it will also be subject to Chinese foreign exchange and companies law as shares of an overseas company will be sold to Chinese company);

Such share swap requires valuation of the shares to be undertaken by a merchant banker registered with SEBI; or investment banker/merchant banker outside India registered with the appropriate authority (irrespective of the amount).

Method of Funding


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

Withdrawal of foreign exchange from an authorized dealer in India;

Through a loan or guarantee to, or on behalf of, the JV; Utilization of proceeds of External Commercial

Borrowings and/or Foreign Currency Convertible Bonds.

(We shall be happy to provide detailed procedure for the funding methods upon request)

Abhyu

Could you indicate very briefly the procedural requirements for this method - about 2-5 lines? Is there any form or procedure to be followed for withdrawing? From what I know offhand, there are 3 categories of Authorized Dealers. Can this be done from any of the categories of Authorised Dealers?

Method of Funding (Continued)


Permitted to acquire shares of an overseas company by capitalizing amounts receivable from the overseas company against export of goods and services, royalties, commissions, or any other entitlements due from foreign entity for supplying technical know-how, consultancy, managerial, and other services – (within the applicable ceiling).

(This will amount to payment towards capital in kind and will be subject to Chinese law permitting the same. In respect of minimum capitalisation of a Chinese company, Chinese law requires a certain initial cash contribution. Second, valuation of the commitment will be independently done in Chinese law. Please refer to Chinese law slides for this.)

Export proceeds remaining unrealized beyond a period of 6 months from date of export will require the prior approval of RBI before capitalization.

PINTU

You mean when export proceeds which have not been paid by someone else (3rd party) and which are required to be channelised to the foreign subsidiary? I can't understand the intent or purpose of this provision, can u find a small simplified explanation for this provision?Hypothetical situation: VIBGYOR might enter into an arrangement where it provides the technology to the JV and Royalty is to be paid to VIBGYOR. Now this is technology export and royalty or technology know-how fees or consultancy fees would be paid. VIBGYOR can decide to route these proceed back into the JV. These export proceeds have to be realised withing 6 month. Same is the situation if the royalty is to received from any other 3rd party.

Listed Companies


Investments in equity of overseas companies listed on stock exchange & rated debt instruments For listed Indian corporations, the investment cannot exceed

35% of its net worth.

For individuals, per limits & conditions specified in the Liberalized Remittance Scheme.

PINTU

If an unlisted public company or a private company invest, then what is the limit? Is it still 400%?YES

Approval of RBI


Prior approval of the RBI would be required in cases that do not fall under Automatic Route for direct investment abroad.

CONSIDERATIONS FOR APPROVAL RBI shall take into account the following factors: Prima facie viability of the JV/WOS outside India;

Contribution to external trade and other benefits which will accrue to India through such investment;

Financial position and business track record of the Indian party and the foreign entity; and

Expertise and experience of the Indian party in the same or related line of activity of the JV/WOS outside India.

Post Investment Changes/Additional Investment In Existing JV/WOS


A JV/WOS set up by an Indian party as per the regulation may undertake the following on reporting to RBI: Diversify activities Set up step down subsidiary Alter the shareholding pattern Disinvest, where the Indian party is an unlisted

company and the investment in overseas venture does not exceed USD $10,000,000 (Ten Million Dollars)

Raising Finance by Pledging Shares


Pledge shares of the JV/WOS to a domestic or foreign lender to avail any credit facility for itself or for the JV/WOS (within financial limit/ceiling stipulated by RBI for overseas investment, from time to time)

Hedging of overseas direct investments (in equity and loan) by entering into forward/option contracts with Authorized Dealers Bank in India, subject to verification of such exposure by Authorized Dealers Bank through onward reporting to RBI.

Export of Goods and Services


General guidelines for exports under RBI rules.Manner of receipt and payment

The amount representing full export value of the goods exported is required to be received through an Authorized Dealer Bank in the following manner:

Bank draft, wire transfer, bankers or personal checks;

Payment out of funds held in an FCNR/NRE account maintained by buyer;

International credit cards of the buyer.

Setting Up Branches/Representative Offices Abroad And Acquisitions Of Immovable Property For Overseas Representative Offices


This is relevant if a Representative Office is set up in China. Chinese law places numerous restrictions on the activities that can be undertaken by a foreign company having a representative office. Please refer to the Representative Office slide for details.

For setting up branch/representative overseas offices, remittances towards initial expenses up to 15% of the average annual sales/income during the last two financial years or up to 25% of the net worth, whichever is higher is allowed.

For recurring expenses, remittances up to 10% of the annual sales/income during the previous two financial years is allowed for normal business operations of the office/branch or representative office outside.

PINTU

This refers to acquisition of property for representative offices only or even for the JV or WOS as well?only representative office....because if the jv or a wos is being set up it would not be an Indian entity...it would be a Chinese company governed by Chinese Law


Conditions - the overseas branch/representative office should not create any financial liabilities, contingent or otherwise, for the head office in India and also not invest surplus funds without prior approval of RBI. Any funds rendered surplus should be repatriated to India.

Details of bank account opened in the overseas country should be promptly reported to Authorized Dealer Bank.

Financing through Raising External Commercial Borrowings (ECB)


ECB refers to commercial loans (in form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments) availed from non-resident lenders with minimum averages maturity of three years.

Various restrictions are imposed by RBI on raising funds through the External Commercial Borrowings (ECB) route. They are mentioned in detail in the slides that follow.

ECB Policy (Contd…)


The salient features of the regulations are as follows: Eligible Borrowers: Companies registered under

the Indian Companies Act, 1956 are eligible to raise ECB.

Recognized Lenders: Borrowers can raise ECB from internationally recognized sources such as

international banks; international capital markets;

ECB Policy Recognized Lenders (Contd…)


multilateral financial institutions;

export credit agencies;

suppliers of equipment;

foreign collaborates; and

foreign equity holders.

ECB Policy Amount & Maturity (Contd…)


Amount & Maturity Terms: The maximum amount of ECB, which a corporate

can raise, is capped at US$ 500 million per financial year. ECB up to US$ 20 million in a financial year must have a minimum average maturity of three years. ECB above US$ 20 million and up to US$ 500 million per year must have a minimum average maturity of five years.

Company Law Considerations


An Indian Public Limited Company that acquires a foreign company by issuing its shares as consideration, it requires: Special Resolution by the shareholders of the Indian

company to permit such issue.

If investment by an Indian company in the foreign company exceeds 60% of the paid up share capital and free reserves, or 10% of free reserve, it requires: Special Resolution to be passed under Section 372A

of the Indian Companies Act, 1956.

Securities Law Consideration


• If the Indian company is listed on any stock exchange in India and is issuing its shares to the shareholders of the foreign company as consideration for acquiring shares of the foreign company, then it will need to comply with the guidelines for preferential allotment under SEBI (Disclosure & Investor Protection) Guidelines.

• Pricing for Preferential Allotment – not less than average of the weekly high and low of the closing prices of the shares quoted on stock exchange during the 26 weeks.

• Lock in – 1 year from date of allotment

(The above act will also be subject to Chinese law permitting a WOS or a subsidiary to hold shares in the holding company)

Requirements for Normal Route


Key Requirements under Form ODI (reqd. for automatic and approval route):

Financial particulars of the Indian party namely - foreign exchange earnings excluding equity

exports to JV/WOS - Net profit - Paid-up capital - Net worth of Indian company/ group company Details of existing JVs/WOSs of the party or any

group company Purpose of Investment

Requirements (contd…)


Particulars of the JV/WOS Proposed capital structure Details of funding to be done by the Indian party Certification by a CA

Procedure of obtaining approval of the RBI


Details of the JV/WOS, Indian parties, and financing patterns of the JV

Report of RemittancesAnnual Performance Report of the overseas entitySection D of the PART I is critical as it contains the

details of the ownership structure as well as the financial aspects

The details of the shareholding pattern and how much is the stake of the foreign entities.

Services upon request


Detailed procedure on how Indian holding company can give guarantee or raise loan in order to raise finance for its Chinese subsidiary

How an Indian company may acquire an existing Chinese company by purchasing its assets or its shares (in terms of benefits under applicable treaty

and host country’s tax law)(this will include details of Chinese M&A and Competition law)


Team iPleaders

Ramanuj Mukherjee

Abhyudaya Agarwal

Prateek Mohapatra

With special thanks to Prateek

THANK YOU

How to make outbound investment from india financing & compliance

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