INBOUND & OUTBOUND INVESTMENTS

BC SHETTY & CO. Chartered Accountants

INBOUND AND OUTBOUND INVESTMENTS

FEMA, 1999 was enacted with the objective of facilitating external trade and payments

and for promoting the ‘orderly development’ and ‘maintenance of foreign exchange

markets in India’. This interaction between countries lead to Foreign Investments.

The key regulators are the central government and RBI who control the Department of

Industrial Policy & Promotion (DIPP), Foreign Investment Promotion Board (FIPB) and the

foreign exchange department

Kinds of Investment

• Automatic Route – no prior approval from the RBI/ Government (100% FDI permitted,

Agriculture & animal husbandry, Almost all forms of manufacturing and service

industries, Mining, Coal & lignite.

• Electricity generation, transmission, distribution & trading Industries.

• Approval Route- prior approval of the FIPB required (no separate RBI approval

Mode of Investment

• Greenfield : Setting up a new JV/ WOS (fresh issue of shares/ ADR/ GDR)

• Brownfield: Relating to existing investments/ business activities

Foreign Investment into an Indian company

• Ease of access to debt and equity capital

• Tax Haven/ Black listed Countries

• Treaty network

• Cost of setting up and administration

• Other non-tax considerations like political stability, banking facility etc.

• Corporate tax rate in SPV jurisdiction

• Taxation of dividend/ interest Withholding tax on dividend/ interest Capital gain tax on

transfer of

• investments/ shareholding

• Thin Cap rules

• Limitation on Benefit clauses

SPV CONSIDERATIONS

• Equity Shares

• Compulsorily Convertible Preference Shares

• Compulsorily Convertible Debentures

• External Commercial Borrowings

• Optionally Convertible Preference Shares

• Optionally Convertible Debentures

FUNDING OPTIONS

• Equity Shares

• Simplest mode for funding

• • No end use restrictions

• Compulsorily Convertible Preference Shares

• Preference Shares have to be compulsorily redeemed/ converted within 20 years

• Only fully and mandatorily Convertible Preference Shares are construed as part of equity

and considered as FDI

Compulsorily Convertible Debentures

• Only Fully and Mandatorily Convertible Debentures are construed as part of equity

• and considered as FDI

• All other forms of debentures construed on par with ECB

• No time limit for conversion prescribed

FUNDING OPTIONS

External Commercial Borrowings

• ECB means overseas foreign currency borrowings by Indian companies

• Automatic route/ approval route

•

FUNDING OPTIONS- CLASSIFICATION

FUNDING OPTIONS

FUNDING INSTRUMENTS EXCHANGE CONTROL

INCOME TAX

Equity Shares EQUITY EQUITY

CCPS EQUITY EQUITY

CCD EQUITY DEBT

RPS/ OCPS DEBT EQUITY

ECB/ Loans/ Debt/ OCD/ PCD DEBT DEBT

Instrument Mode Jurisdiction Effective Tax Cost

Decision Making

Equity(Revenue)

Dividend Any 40%

Equity(Capital) Capital Gains Cyprus/Singapore/ Mauritius/

0%

Debt(Revenue) Interest Cyprus/Singapore/ Mauritius/

5%

Debt(Capital) Repayment Any 0%

Technical Services/ Royalty

Technology fees to JV Partner

Any Treaty Rate/ 25%

REPATRIATION OF FUNDS- ANALYSIS

• Buy-back of shares by domestic unlisted companies taxable at 20%

• Tax will be levied on the company buy-back shares on ‘Net Consideration’

• Net Consideration = Buy-back consideration Less Consideration received on allotment of

shares

Buy-Back Of Shares after June 1, 2013

PARTICULARS INR in CRORES

Share Capital 100

Free Reserves 400

Shareholders Funds 500

• Calculation of total foreign investment in a company : direct + indirect

• In case the investing Indian company is owned or controlled by ‘non resident entities’,

the entire

• investment by such company into the target would be considered as indirect foreign

investment

• Downstream investments by such companies are to be notified to SIA/ FIPB

DOWNSTREAM INVESTMENTS

FDI Policy – Trading Sector

FIPB approval

Applicable for FDI > 51%

Subject to Conditions

Retailing is allowed, Retail Trading is regulated

B2C e-commerce prohibited for FDI

Wholesale/ Cash &Carry Trading

• 100% FDI permitted under Automatic Route

• Restriction on Sales to group companies, in

excess of 25%

Multi Brand Retail

• 51% FDI permitted with

FIPB approval

• Local Sourcing NormsApplicable

Single Brand Retail

• 100% FDI permitted with

• Local Sourcing Norms

Wholesale Trading

Eligible Customers•

•

•

•

Sales tax/ VAT registration/ service tax/ excise duty registration holders

Trade license holders

Permits/ license, etc. from Government Authorities

Certificate of incorporation or society registration or trust registrationSales to Group

Companies• Wholesale trading to group companies not to exceed 25% of the total

turnover of thewholesale venture

Meaning of ‘group company’ not specified

•

Single Brand Retail Trading

Key Aspects • Up to 100% FDI with Government Approval –

Increased from 51% earlier

• Single Brand products only

• Sold internationally under same brand

• Products to be branded during manufacturing

• The investor should be the brand owner

Local Sourcing • 30% mandatory sourcing of the value of goods purchased

from India, preferably from MSME (does not apply in case

the FDI is capped to 51%)ChangesNotified

• Sourcing

− From anywhere in India (preferably small industries*)

− Base of purchase cost (not turnover)

• Exclusive License/ Franchisee can also be Investor

Multi Brand Retail Trading

• 51% FDI Cap with Government approval

Back-end Infrastructure

• US$ 100 mn minimum capitalization

• Processing, manufacturing,

distribution• 50% investment in back-end

infrastructure within 3 years

• Design improvement, quality

control, packaging• Stores only in select States and Cities • Logistics, storage, ware-

house,

agriculture marketing infrastructure …..

• 30% procurement from small enterprises• Compliance – averaged in first 5 years, then

annual • Land cost and rentals – Excluded

Swap of Shares – Some Issues

Pure Swap

Resultant Structure

Original structure and transaction steps

ICo

ICo

Equity

Issue of shares Equit

yIndia

Outside India

Issue of shares

Foreign HoldCo

Foreign HoldCo

F Sub Co

F Sub Co

I Co acquires the shares of F Sub Co and issue

of its own shares to Foreign Hold Co

Swap of Shares – Some Issues

Reverse Pure Swap

Resultant Structure

Original structure and transaction steps

Hold Co

Sub Co

Hold Co

Sub Co

Issue of shares

EquityIndia

Outside India Issue

of shares

Equity

F Co

F Co

Hold Co acquires the shares of F Co in exchange of

issue of shares of Sub Co to F Co

PORTFOLIO OF INVESTMENTS

• Listed Indians Companies are permitted to make portfolio investments

outside India

• Such investments cannot be more than 50% of its net-worth as on the

date of the last audited balance sheet

• Such investments could be in shares and bonds/ fixed income

securities, rated not below investment grade by accredited/

registered credit rating agencies, issued by overseas listed

companies

• Hence, investments in offshore mutual funds, private equity funds,

hedge funds is not permissible

India Tax Implications

Broad Framework for Investing

Equity + Debt

Equity Debt

Equity/ Debt ?Equit

y

Equity/ Debt ?Deb

t

Equity/ Debt ?Equity + Debt

I Co

F Co

I Co

F Co

I Co

F Co

Underlying Tax Credit

• An indirect credit granted for the tax levied on the profits ofthe company out of which the dividends have been paid

Meaning

• Avoidance of economic double taxation of profitdistributions

Purpose

• Where dividends pass through a chain of companies, the creditmay also be given for the tax levied on the profits of each company in the chain (e.g. Mauritius)

In some cases this is limited to a number of levels,

or “tiers”. Such relief may be given either under a

tax treaty or inaccordance with unilateral provisions

GeneralApproac

h •

•

Options for Investing

Option 1

Option 2

Option 3

India Co

AHC

SPV

Operating Cos

India Co

SPV

Operating Cos

India Co

Operating Cos

CONTACT US

• Mr. Sathya Hegde - BBM, FCA, CPA- Partner BC SHETTY & CO._______________________________________________________Ph.:- +919945179868

Email:- sathyahegde@bcshettyco.com

Address:- # 137, B/w 4th and 5th Main,

• MES College Road,15th cross, Malleshwaram,

• Bangalore – 560003

THANK YOU.