Q.1 What is direct investment outside India?
- Direct investment outside India means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity but does not include portfolio investment.
- Resident corporate entities and partnership firms registered under the Indian Partnership Act, 1932 are eligible to make investment abroad in Joint Ventures/ Wholly Owned Subsidiaries. Resident individuals may also invest abroad as detailed in Q.3.
- Resident individuals are permitted to make overseas portfolio investments without any limit in listed overseas companies that have at least 10% share in an Indian company listed in a recognized stock exchange in India as on 1st January of the year of investment.
- These guidelines have been notified by Reserve Bank of India in its Notification FEMA No.19 dated 3rdMay 2000 as amended from time to time which can be accessed at the Reserve Bank’s website
Q.5 Where can one get clarifications pertaining to the guidelines on overseas investment?
- Any clarification in respect of specific cases could be obtained from the Reserve Bank’s Central office at the following address:
Overseas Investment Division,
Exchange Control Department,
Central office,
Reserve Bank of India,
Mumbai 400001.
or
e-mail:
Q.6 Can overseas investment be made in any activity?
- An Indian company can make overseas investment in any activity (except those that are specifically prohibited) in which it has experience and expertise. However, for undertaking activities in the financial sector, certain additional conditions specified in Regulation 7 may be adhered to (Please refer to Q.9).
Q.7 What are the prohibited activities for overseas investment?
- Real estate sector and Banking are the prohibited sectors for overseas investment. However, Indian banks operating in India can set up JV/WOS abroad provided they obtain clearance under the Banking Regulation Act 1949.
Q.8. What exactly is covered under the term real estate business?
- Real estate business means buying and selling of real estate or trading in transferable development rights (TDRs) but does not include development of township, construction of residential/commercial premises, roads and bridges.
Q.9 Can an Indian company make investment in a JV/WOS abroad, which will be engaged in the financial services sector?
- Only an Indian Company engaged in financial sector activities can make investment in the financial services sector provided it fulfills the following norms besides complying with the parameters indicated at Answers to the Question Nos. 14 and 28.
- has earned net profit during the preceding three financial years from the financial services activities;
- is registered with the appropriate regulatory authority in India for conducting financial services activities;
- has a minimum net worth of Rs.15 crores as on the date of the last audited balance sheet; and
- has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.
Q.10 What are the permissible sources for funding overseas investment?
A. Funding for overseas investment could be made by one or more of the following sources:
- the balances held in Exchange Earners Foreign Currency account of the Indian party maintained with an authorised dealer,
- proceeds of ADR/GDR issues,
- market purchases of foreign exchange,
- share swap (refers to the acquisition of the shares of an overseas entity by way of exchange of the shares of the Indian entity).
- Capitalisation of exports, royalties, etc.
Q 11 Can a company capitalize the proceeds of the exports of plant & machinery to its overseas JV/WOS?
- Yes, capitalization of export proceeds is permitted subject to compliance of certain guidelines. i.e. the exports have not remained outstanding beyond the stipulated period of realisation etc.
Q.12 Which are the schemes under which an Indian Company can set up a Joint Venture or Wholly Owned Subsidiary abroad?
- Broadly there are two schemes under which one can set up a JV/WOS abroad, namely automatic route and normal route.
Q.13 What is the automatic route?
- Under the automatic route, a company does not require any prior approval from the regulatory authority for setting up a JV/WOS abroad.
Q.14 What are the criteria for investment to be made under the automatic route?
- The criteria for investment under the automatic route are as under:
- The total financial commitment of the Indian party in Joint Ventures/Wholly Owned Subsidiaries in any country other than Nepal, Bhutan and Pakistan is up to US$ 100 million or its equivalent in any one financial year or 100% of the net worth whichever is lower, and the investment is in a lawful activity permitted by a host country. The financial commitment in respect of Joint Ventures/Wholly Owned Subsidiaries in Myanmar and SAARC countries (other than Nepal, Bhutan and Pakistan) is up to US$ 150 million or its equivalent in any one financial year. (Please also see answer to Question No. 20).
- The Indian party is not on the Reserve Bank caution/defaulters list or under investigation by the Enforcement Directorate
- The Indian party routes all the transactions relating to the investment in a Joint Venture/Wholly Owned Subsidiary through only one branch of an authorised dealer to be designated by it.
- In respect of investments in non-core activities (refer Ques.15) the investing company has a proven track record.
Q.15 What is the limit for investment in Nepal or Bhutan under the automatic route?
- In respect of direct investment in Nepal or Bhutan, the total financial commitment is permitted up to Indian Rupees 700 crores in any one financial year.
Q.16 What is core activity?
- Core activity means activities carried by an Indian party, which constitutes at least 50% of its average turnover in the previous accounting year.
Q.17 What is financial commitment?
- Financial commitment means the amount of direct investment outside India by way of contribution to equity and loans and 50% of the amount of guarantee issued by an Indian party to or on behalf of its overseas JV/WOS.
Q.18 Can one extend loan or guarantee to an overseas entity without any equity participation in that entity?
- No. Loan and guarantee could be extended to an overseas entity only if there is already an equity participation by the Indian party in such entity.
Q.19 Is there any relaxation for making investment out of one’s own foreign exchange resources?
- Yes, the limit of US$ 100 million will not be applicable in case of investments made out of ADR/GDR proceeds and investments could be made up to the total amount raised out of the ADR/GDR proceeds.
Q.20 Can one make investment beyond the stipulated limit under the automatic route?
- Yes, a company can make investment beyond the stipulated limit after exhausting the available limit by obtaining a specific permission from Reserve Bank under a block allocation
Q.21 Are there any limit on the quantum of market purchases for funding overseas investments under the automatic route?
- Yes, market purchases together with capitalisation of exports or other entitlements is restricted up to 100% of the net worth of the investing company for investment proposed to be made under the automatic route.
Q.22 What is the concept of net worth?
- Net worth means paid-up capital and free-reserves of the Indian company.
- The company intending to make investment under automatic route is required to fill in the form ODA supported by documents listed therein, i.e., Board Resolution, Statutory Auditor’s certificate, Valuation report (in case of acquisition of an existing company) and approach an Authorised Dealer for making the investment.
- No, once the report of remittance in form ODR is received by the Reserve Bank through the designated Authorised Dealer, an identification number for that particular investment is issued for the purpose of future reference. Subsequent investment in the same project will be permitted to be made only after allotment of the identification number.
- Yes. Companies, which are under the investigation by the Enforcement Directorate or are in the Reserve Bank’s caution/defaulters list, are not eligible to make investment under the automatic route.
- Proposals not covered by the conditions under the automatic route require the prior clearance of the regulatory authority for which a specific application in form ODI is required to be made to the Reserve Bank of India.
- An application for direct investment in a JV/WOS may be made in form ODI to:
Overseas Investment Division,
Exchange Control Department,
Reserve Bank of India, Central Office,
Amar Building, Sir P.M.Road,
Mumbai 400 001.
Q.28 What are the parameters for considering proposals under the normal route?
- Requests under the normal route are considered by taking into account the prima facie viability of the proposal, business track record of the promoters, experience and expertise of the promoters, benefits to the country, etc.
- Proposals under the normal route are approved by the Special Committee on Indian Direct Investment Abroad, which consists of the representatives of the Ministry of Finance, Ministry of External Affairs and Ministry of Commerce of the Government of India and the Reserve Bank of India.
- Yes, requests for direct investment outside India in a JV/WOS by way of share swap arrangement are considered under the Normal Route.
- Yes, there is a specific scheme, which permits acquisition by an eligible entity of shares of a foreign company engaged in a similar activity in exchange of issue of its own ADR/GDRs to the latter on an automatic basis.
- The norms for investment under the ADR/GDR stock swap scheme are as follows:
- the Indian party has already made an ADR and/or GDR issue and such ADRs/GDRs are currently listed on any stock exchange outside India;
- such investment by the Indian party does not exceed the higher of the following amounts, namely: -
- amount equivalent of US$ 100 mn. or
- amount equivalent to 10 times the export earnings of the Indian party during the preceding financial year as reflected in its audited balance sheet, inclusive of all investments made under the automatic route in the same financial year.
- the ADR and/or GDR issue for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian party;
- the total holding in the Indian party by persons resident outside India in the expanded capital base, after the new ADR and/or GDR issue, does not exceed the sectoral cap prescribed under the relevant regulations for such investment;
- the valuation of the shares of the foreign company is made: -
- as per the recommendations of the Investment Banker if the shares are not listed on any stock exchange; or
- based on the current market capitalisation of the foreign company arrived at on the basis of monthly average price on any stock exchange abroad for the three months preceding the month in which the acquisition is committed and over and above, the premium, if any, as recommended by the Investment Banker in its due diligence report in other cases.
- An applicant company satisfying the above norms may make such investment on an automatic basis and subsequently report the same in form ODG to the Reserve Bank.
- Yes, such requests are considered by the Special Committee on case-to-case basis. Indian companies desirous of making such investment are required to submit an application in form ODB to Reserve Bank for the purpose.
- The company will have to make an application to the Reserve Bank of India in form ODI along with necessary documents under the Normal Route.
- Partnership firms engaged in providing professional services, such as chartered accountancy, legal practice and related services, information technology and entertainment software related services and medical and healthcare services are eligible for investment abroad on an automatic basis by filing form ODA with the AD without prior approval of the Reserve Bank up to an amount of US$ 1 million. Partnership firms, which do not conform to the above parameters, are required to obtain specific approval of the Reserve Bank by filing an application in form ODI (to the extent applicable).
- The investing firm will have to be the member of the respective all-India professional organisation / body and the investment amount should not exceed US$ 1 million. or its equivalent in one financial year.
- A partnership firm which fulfills the conditions stipulated under the automatic route may make the investment without prior approval and submit a report containing the following details through an authorised dealer with in 30 days of making such investments –
- Name and full address and registration of partnership.
- Full details of investment abroad.
- Date and amount of remittance/amount of capitalisation of fees/other entitlements due.
- Name and address of the foreign concern together with its line of activities.
- Identification number (if already allotted by the Reserve Bank)
- Partnership firms, which are not eligible under the Automatic Route, are required to make an application in form ODI to the Reserve Bank for necessary approval.
- It will be in order for individual partners to hold shares for and on behalf of the firm in overseas JV/WOS provided the entire funding for the investment is done by the firm and if the host country regulations or operational requirements warrant such holding.
- Indian parties which have majority share holding in a foreign entity abroad are required to seek specific approval of Reserve Bank of India for setting up of a second generation company in case:
- the foreign entity has been in operation for a period of less than two years; or
- the Indian party has not repatriated the amount of dividends, fees and royalties due to it from the foreign entity; or
- proceeds of exports to the foreign entity have not been realised in accordance with the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000; or
- additional capital contribution is required from India.
- The shares of a JV/WOS can be pledged as a security for availing fund based or non-fund based facility for the concerned entity or for the JV/WOS from an authorised dealer/ public financial institution in India.
- Disinvestment of holding in a JV/WOS abroad requires prior approval of the Reserve Bank of India for which the holder will have to submit an application furnishing the reasons /justifications for such disinvestment along with a Chartered Accountant’s valuation certificate, latest audited financial statements of the JV/WOS, Board Resolution approving the disinvestment and Chartered Accountant’s certificate regarding position of dues of the WOS and total amount to be received by parent company on disinvestment.
- An Indian Party will have to comply with the following: -
- receive share certificates or any other documentary evidence of investment in the foreign entity to the satisfaction of the Reserve Bank within six months, failing which an application for extension of time citing reasons for non-receipt will have to be made to the Reserve Bank.
- repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc., within 60 days of its falling due, or such further period as the Reserve Bank may permit.
- submit to the Reserve Bank every year within 60 days from the date of expiry of the statutory period as prescribed by the respective laws of the host country for finalisation of the audited accounts of the Joint Venture/Wholly Owned Subsidiary outside India an Annual Performance Report in form APR in respect of each Joint Venture or Wholly Owned Subsidiary outside India set up or acquired by the Indian party. This APR should inevitably be accompanied by
- Copies of FIRCs in support of inward remittances on account of dividend, royalty, etc.
- Audited Financial Statements of the overseas venture.
- CA’s certificate in support of realization of export proceeds.
- A note on the working of the JV/WOS during the previous year highlighting the ups and downs, reasons for non-performance, etc. in monetary terms. In case the promoter company is unable to submit APRs within the stipulated time, an application on the due date should be made to the Reserve Bank of India seeking extension, giving reasons for the same.