Outbound Investments

OUTBOUND OUTBOUND INVESTMENTS – INVESTMENTS –

UNDER FEMA UNDER FEMA REGULATIONSREGULATIONS

-CS ASHISH PANDAYCS ASHISH PANDAY

[email protected]@gmail.com

04/10/23 http://corporateinnovator.blogspot.com/

2

AgendaAgenda

• Provisions of FEMA, Provisions of FEMA, 1999 and Applicable 1999 and Applicable RegulationsRegulations

• Types of Investments Types of Investments – Prohibited / – Prohibited / Regulated /Permitted Regulated /Permitted

• US$ 25,000 SchemeUS$ 25,000 Scheme

– JV/ WOSJV/ WOS– Investments by Investments by

EmployeesEmployees– Portfolio Portfolio

InvestmentsInvestments– Agricultural Agricultural

operations overseasoperations overseas


3

FEMA provisionsFEMA provisions• Overseas Investments is a Capital account Overseas Investments is a Capital account

transaction transaction • Hence prohibited unless permitted – generally Hence prohibited unless permitted – generally

or specifically - Section 6 or specifically - Section 6 • RBI empowered by Section 6(2) to specify RBI empowered by Section 6(2) to specify

permissible capital account transactions.permissible capital account transactions.• FEM (Permissible Capital account FEM (Permissible Capital account

transactions) Regulations issued in 2000. – transactions) Regulations issued in 2000. – Schedule I lists 11 capital account Schedule I lists 11 capital account transactions, of which ODI is # 1transactions, of which ODI is # 1

• Notif # 19 issued in 2000, replaced by Notif # Notif # 19 issued in 2000, replaced by Notif # 120 dated July 7, 2004, as amended.120 dated July 7, 2004, as amended.


4

Important DefinitionsImportant Definitions

• Foreign Security – Section 2(o) Foreign Security – Section 2(o) • Direct Investment outside India – Reg Direct Investment outside India – Reg

2(e)2(e)• Financial Commitment – Reg 2f)Financial Commitment – Reg 2f)• Indian Party - Reg 2(k)Indian Party - Reg 2(k)• Net worth - Reg 2(o)Net worth - Reg 2(o)• Real Estate Business - Reg 2(p)Real Estate Business - Reg 2(p)• JV / WOS - Reg 2(m)/ 2(q)JV / WOS - Reg 2(m)/ 2(q)• Host Country - Reg 2(j)Host Country - Reg 2(j)


5

Prohibited InvestmentsProhibited Investments• Reg 5 (2)Reg 5 (2)

– All “Indian Parties” prohibited from All “Indian Parties” prohibited from investment in a foreign entity investment in a foreign entity engaged in –engaged in –• Real estate BusinessReal estate Business• Banking BusinessBanking Business

• Reg 5(1) Reg 5(1) – All residents not to make direct All residents not to make direct

investment o/s India – except with investment o/s India – except with general / specific approvalgeneral / specific approval

• Reg. 3 of Notif 120Reg. 3 of Notif 120– All persons resident in India All persons resident in India

prohibited from issuing foreign prohibited from issuing foreign security – except with RBI approvalsecurity – except with RBI approval


6

General PermissionGeneral Permission• Reg 4 / Para A 4 Reg 4 / Para A 4 • General permission General permission

granted to residents forgranted to residents for– Purchase / acquisition of Purchase / acquisition of

foreign securities and sale foreign securities and sale thereofthereof• Out of funds held in RFC Out of funds held in RFC

accountaccount• As bonus shares on As bonus shares on

securities already held securities already held • Out of their Foreign Out of their Foreign

Currency Resources outside Currency Resources outside IndiaIndia

(when not permanently (when not permanently resident in India)resident in India)


7

Direct Investment o/s India Direct Investment o/s India – – Automatic Route - Reg 6Automatic Route - Reg 6

• Who can invest?Who can invest?– Company incorporated in IndiaCompany incorporated in India– Body created under Act of ParliamentBody created under Act of Parliament– Partnership firm regd under Indian Partnership ActPartnership firm regd under Indian Partnership Act– Other entity as notified by RBIOther entity as notified by RBI

• Effective 27/3/2006, proprietary / Effective 27/3/2006, proprietary / unregistered partnership firms which are star unregistered partnership firms which are star export houses are also permitted – subject to export houses are also permitted – subject to RBI approval – Form ODI – Conditions as per RBI approval – Form ODI – Conditions as per Annex to circular dt 27/3/2006Annex to circular dt 27/3/2006


8

Direct Investment o/s India Direct Investment o/s India – – Automatic Route - Reg 6Automatic Route - Reg 6

• Indian party permitted to make Indian party permitted to make investment in overseas JV/WOSinvestment in overseas JV/WOS

• To submit Form ODA to designated To submit Form ODA to designated branch of ADbranch of AD

• Limit: 200% of Net Worth as on date of Limit: 200% of Net Worth as on date of last B/slast B/s

• Ceiling NA for investments out of EEFC Ceiling NA for investments out of EEFC a/c or funds raised thru ADRs/GDRs.a/c or funds raised thru ADRs/GDRs.

• Investment in Nepal/ Bhutan only in INRInvestment in Nepal/ Bhutan only in INR• Investment in Pakistan not permitted Investment in Pakistan not permitted

under automatic routeunder automatic route


9

Direct Investment o/s India Direct Investment o/s India – – Automatic Route - Reg 6 – Contd.Automatic Route - Reg 6 – Contd.• Limit will include capital contribution in / loans Limit will include capital contribution in / loans

granted to JV/ WOS, and 50% of guarantees granted to JV/ WOS, and 50% of guarantees issued to / on behalf of JV/WOS.issued to / on behalf of JV/WOS.

• Conditions:Conditions:– Loan / Guarantee may be given only to an overseas Loan / Guarantee may be given only to an overseas

concern in which it has equity participation.concern in which it has equity participation.– Investor should not be on RBI’s caution list / list of Investor should not be on RBI’s caution list / list of

defaulters to banking system or under investigationdefaulters to banking system or under investigation– All transactions to be routed thru one branch of AD.All transactions to be routed thru one branch of AD.– For acquisition of existing foreign co. – share For acquisition of existing foreign co. – share

valuation required from Cat 1 Merchant Banker ( > valuation required from Cat 1 Merchant Banker ( > US$ 5 Mn), or CA/CPA (< US$ 5 Mn)US$ 5 Mn), or CA/CPA (< US$ 5 Mn)


10

Direct Investment o/s India Direct Investment o/s India – – Automatic Route - Reg 6 – Contd.Automatic Route - Reg 6 – Contd.

• Investment by swap of shares –Investment by swap of shares –– Valuation only by Cat 1 Merchant Valuation only by Cat 1 Merchant

Banker/approved investment banker Banker/approved investment banker from host countryfrom host country

– FIPB approval MUSTFIPB approval MUST

• Investment by a firm – shares in Investment by a firm – shares in JV/WOS may be held by individual JV/WOS may be held by individual partners if warranted by host partners if warranted by host country regulationscountry regulations


11

Direct Investment o/s India Direct Investment o/s India – – Automatic Route - Reg 6 – Contd.Automatic Route - Reg 6 – Contd.• Funding:Funding:

– Drawal of FX from ADDrawal of FX from AD– Capitalisation of Capitalisation of

export proceedsexport proceeds– Swap of sharesSwap of shares– Proceeds of ECB/ Proceeds of ECB/

FCCBFCCB– Balance in EEFC a/c*Balance in EEFC a/c*– Proceeds of ADR/ Proceeds of ADR/

GDR issue*GDR issue** * Limit of 200% NA, Limit of 200% NA,

except for investment except for investment in financial sectorin financial sector


12

Direct Investment o/s India Direct Investment o/s India – – Automatic Route - Reg 6 – Contd.Automatic Route - Reg 6 – Contd.• Capitalisation of export Capitalisation of export

proceedsproceeds– Dues from foreign entity Dues from foreign entity

towards exports, fees, towards exports, fees, royalties or other royalties or other entitlements – dues > 6 entitlements – dues > 6 months need prior RBI months need prior RBI approval for capitalisationapproval for capitalisation

– Software exporters can Software exporters can get 25% of value of get 25% of value of exports to overseas exports to overseas software co in form of software co in form of shares shares without entering without entering into JV agreements into JV agreements – – with with RBI approval.RBI approval.


13

Share Swap – Reg 8Share Swap – Reg 8

• Indian parties which have already made Indian parties which have already made ADR/GDR may acquire shares of FC in ADR/GDR may acquire shares of FC in same core activity under Scheme / same core activity under Scheme / guidelinesguidelines

• Conditions –Conditions –– ADR /GDR listed on any stock exchange o/s ADR /GDR listed on any stock exchange o/s

IndiaIndia– Max – higher of (a) US$ 100 Mn; (b) 10 times Max – higher of (a) US$ 100 Mn; (b) 10 times

export earnings in preceding financial year export earnings in preceding financial year (including automatic investments in same (including automatic investments in same financial year)financial year)


14

Share Swap – Reg 8Share Swap – Reg 8

– ADR/GDR issue for purpose of ADR/GDR issue for purpose of acquisition is backed by fresh equity acquisition is backed by fresh equity shares of Indian party.shares of Indian party.

– Holding in Indian entity does not exceed Holding in Indian entity does not exceed sectoral caps for FDIsectoral caps for FDI

– Valuation as per recommendation of Valuation as per recommendation of investment banker (for unlisted shares) investment banker (for unlisted shares) or current market cap based of last three or current market cap based of last three months average price on stock exchangemonths average price on stock exchange

– File ODG within 30 daysFile ODG within 30 days


15

GuaranteesGuarantees

• Till 27/3/06 – Only Till 27/3/06 – Only corporate corporate promoters promoters could offer guarantees could offer guarantees for JV/WOSfor JV/WOS

• Now – Now – all Indian entities all Indian entities may offer may offer any form of guarantee – corporate/ any form of guarantee – corporate/ personal /primary / collateral – by personal /primary / collateral – by promoter / group company / sister promoter / group company / sister concern / associate companiesconcern / associate companies


16

GuaranteesGuarantees - - Contd.Contd.

• Conditions:Conditions:– All financial commitments within All financial commitments within

prescribed ceiling (currently 200% of net prescribed ceiling (currently 200% of net worth of Indian party)worth of Indian party)

– No guarantee should be open ended – i.e. No guarantee should be open ended – i.e. max amount to be specified upfrontmax amount to be specified upfront

– To be reported to RBI in Form ODRTo be reported to RBI in Form ODR• Guarantees by Indian banks in favour of Guarantees by Indian banks in favour of

the JV/ WOS outside these limits, and the JV/ WOS outside these limits, and subject to usual prudential norms of subject to usual prudential norms of RBI.RBI.


17

Portfolio InvestmentsPortfolio Investments

• Corporates-Corporates-– Listed Indian co’s can invest in shares of Listed Indian co’s can invest in shares of

companies listed on recognised stock exchange companies listed on recognised stock exchange and which has at least 10% holding in an and which has at least 10% holding in an Indian listed companyIndian listed company

– Also permitted to invest in bonds / fixed income Also permitted to invest in bonds / fixed income securities of such companiessecurities of such companies

– Max – 25% of Indian co’s net worth Max – 25% of Indian co’s net worth

• Individuals-Individuals-– Same as corporates – except no monetary limitSame as corporates – except no monetary limit


18

Portfolio InvestmentsPortfolio Investments

• Mutual Funds-Mutual Funds-– Can invest in ADR /GDR of Indian co’s Can invest in ADR /GDR of Indian co’s

rated debt instruments and also in equity rated debt instruments and also in equity of overseas companies as specified for of overseas companies as specified for corporatescorporates

– Overall cap of US$ 1 billionOverall cap of US$ 1 billion– SEBI approval requiredSEBI approval required

• General permission in each of the General permission in each of the above cases for sale of securities so above cases for sale of securities so acquiredacquired


19

Financial Services Sectors-Financial Services Sectors- Additional Conditions for Indian Additional Conditions for Indian

party party

• Shd be regd with appropriate regulatory authorityShd be regd with appropriate regulatory authority• Shd have earned net profit during preceding 3 financial Shd have earned net profit during preceding 3 financial

yearsyears• Approval obtained from regulatory authorities in India Approval obtained from regulatory authorities in India

and abroadand abroad• Fulfilled prudential norms relating to capital adequacy Fulfilled prudential norms relating to capital adequacy

norms as prescribed by regulatory authoritynorms as prescribed by regulatory authority


20

Approval RouteApproval Route

• Cases not covered aboveCases not covered above• Apply in Form ODB to RBI – for same Apply in Form ODB to RBI – for same

core activity in exchange of ADR/GDR > core activity in exchange of ADR/GDR > $ 100 Mn / 10 times export earnings / $ 100 Mn / 10 times export earnings / for acquisition of shares a co o/s Indiafor acquisition of shares a co o/s India

• Apply in ODI in other cases.Apply in ODI in other cases.• RBI will examine prmia facie viability of RBI will examine prmia facie viability of

JV/WOS, and similar other points etcJV/WOS, and similar other points etc


21

Post investment changesPost investment changes

• JV/WOS may diversify its activities / JV/WOS may diversify its activities / set up step down subsidiaries / alter set up step down subsidiaries / alter shareholding patternshareholding pattern

• To be reported by JV/WOS to RBI To be reported by JV/WOS to RBI within 30 days from approval of within 30 days from approval of those decisions by the relevant those decisions by the relevant competent authoritycompetent authority

• To be mentioned in APRTo be mentioned in APR


22

Tender / bidding Tender / bidding acquisitionacquisition

• Reg 14 Reg 14 • Remittance of EMD / bid bond Remittance of EMD / bid bond

guarantee permittedguarantee permitted• Subsequent remittance also Subsequent remittance also

permittedpermitted


23

Obligations/Obligations/Rights Rights of of InvestorInvestor

• To receive share certificates / other To receive share certificates / other evidence of investmentevidence of investment

• Repatriate all dues receivable from Repatriate all dues receivable from foreign entityforeign entity

• Submit APR –Submit APR –As per Reg 15As per Reg 15

• May pledge shares to JV/WOS to an AD May pledge shares to JV/WOS to an AD in India for credit for Indian party / in India for credit for Indian party / JV/WOS – Reg 18JV/WOS – Reg 18

• Hedging of exchange risks of investmentHedging of exchange risks of investment


24

Disivestment from Disivestment from JV/WOSJV/WOS

• May transfer to another Indian party which complies May transfer to another Indian party which complies with conditions of Reg 6 or to a non residentwith conditions of Reg 6 or to a non resident

• Subject to conditions / requirements listedSubject to conditions / requirements listed• Indian listed companies may disinvest resulting in Indian listed companies may disinvest resulting in

write off of capital invested, subject to 10% of write off of capital invested, subject to 10% of previous year’s export realisation*previous year’s export realisation*

• To apply to RBI in other casesTo apply to RBI in other cases• * Effective 2732006, “write off” permitted in folowin * Effective 2732006, “write off” permitted in folowin

cases:cases:– JV/ WOS listed in overseas stock exchangeJV/ WOS listed in overseas stock exchange– Indian promoter listed and having net worth > Rs 100 crs.Indian promoter listed and having net worth > Rs 100 crs.– Indian promoter unlisted and investment < US$ 10 Mn.Indian promoter unlisted and investment < US$ 10 Mn.


25

Other investmentsOther investments• Acquire foreign securities as a gift Acquire foreign securities as a gift

from PROIfrom PROI• Acquire shares under cashless ESOSAcquire shares under cashless ESOS• By inheritance from PRII / PROIBy inheritance from PRII / PROI• Acquire shares under ESOPsAcquire shares under ESOPs• Qualification shares – 1% of paid up Qualification shares – 1% of paid up

capital (upto US$ 20,000)capital (upto US$ 20,000)• Rights shares – provided original Rights shares – provided original

holding as per prevailing lawholding as per prevailing law


26

Overseas BranchesOverseas Branches

• Remittance upto 10% / 5% of average Remittance upto 10% / 5% of average annual sales / income / turnover annual sales / income / turnover during last two accounting years for during last two accounting years for initial and recurring expenses of initial and recurring expenses of foreign branches.foreign branches.

• Before 21Before 21stst April, 2006 limit was 2% April, 2006 limit was 2% & 1% respectively.& 1% respectively.

• Other conditions as per circular 54 Other conditions as per circular 54 dated 29dated 29thth June, 2002. June, 2002.


27

US $ 25,000 SchemeUS $ 25,000 Scheme• An individual resident in India is permitted to remit An individual resident in India is permitted to remit

up to US $ 25,000 per calendar year up to US $ 25,000 per calendar year for any legal for any legal and lawful purpose and lawful purpose without obtaining prior without obtaining prior permission of RBI. The individual can use said facility permission of RBI. The individual can use said facility for any current or capital account transaction, for any current or capital account transaction, acquisition of any movable and/or immovable acquisition of any movable and/or immovable property or opening of a bank account outside India. property or opening of a bank account outside India.

• However, remittances cannot be made to Bhutan, However, remittances cannot be made to Bhutan, Nepal, Mauritius or Pakistan or countries identified Nepal, Mauritius or Pakistan or countries identified as "non co-operative countries and territories" by the as "non co-operative countries and territories" by the Financial Action Task Force. Currently, the countries Financial Action Task Force. Currently, the countries where investment cannot be made are Myanmar, where investment cannot be made are Myanmar, Nauru, Nigeria. The updated list can be seen at the Nauru, Nigeria. The updated list can be seen at the website of FATF - http://www.fatf-gaf website of FATF - http://www.fatf-gaf


28

Overseas Agricultural Overseas Agricultural OperationsOperations

• Indian company or a partnership Indian company or a partnership firm registered under the Indian firm registered under the Indian Partnership Act, 1932 are permitted Partnership Act, 1932 are permitted to undertake agricultural operations to undertake agricultural operations including purchase of land incidental including purchase of land incidental to such activity. Invto such activity. Inv2828estment can estment can be made either directly (through a be made either directly (through a branch) or through an overseas branch) or through an overseas subsidiary/joint venture.subsidiary/joint venture.


29

CS ASHISH PANDAYCS ASHISH PANDAY Ashish is an Investment Advisor, Member of the Institute of Company Ashish is an Investment Advisor, Member of the Institute of Company

Secretaries of India & Graduate In Economics. He is in capital markets & Secretaries of India & Graduate In Economics. He is in capital markets & Investment management practice and specializes in international equity and Investment management practice and specializes in international equity and debt securities offerings including IPOs, securities programmers, corporate debt securities offerings including IPOs, securities programmers, corporate bonds (both high-yield and investment grade) and asset-backed debt.bonds (both high-yield and investment grade) and asset-backed debt.

As well as acting for issuers, originators and underwriters on securities As well as acting for issuers, originators and underwriters on securities offerings, he also has experience Corporate Governance & Compliance offerings, he also has experience Corporate Governance & Compliance Management with a wide experience of Investor GrievanceManagement with a wide experience of Investor Grievance

Ashish Works includes advising:Ashish Works includes advising:– On a Right Issue with international offering of an Indian On a Right Issue with international offering of an Indian

telecommunications infrastructure company to be listed on the National telecommunications infrastructure company to be listed on the National Stock Exchange & Bombay Stock Exchange, (deal aborted)Stock Exchange & Bombay Stock Exchange, (deal aborted)

– On an Private placement of Equity to foreign venture capital funds of an On an Private placement of Equity to foreign venture capital funds of an Drug manufacturer Co listed on the Bombay Stock Exchange & National Drug manufacturer Co listed on the Bombay Stock Exchange & National Stock Exchange.Stock Exchange.

– Tripartite Foreign Joint Venture Incorporation & Framing Capital Tripartite Foreign Joint Venture Incorporation & Framing Capital Structure in Manufacturing sector Company in Indian Subcontinent.Structure in Manufacturing sector Company in Indian Subcontinent.

– Mondon Technologies on its proposed convertible Preference share & Mondon Technologies on its proposed convertible Preference share & Convertible Bond issueConvertible Bond issue


30

ThanksThanks

Outbound Investments

Documents

Transcript of Outbound Investments