TaxTMI 
TaxTMI 
Master Circular on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad
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....is circular will stand withdrawn on July 01, 2014 and be replaced by an updated Master Circular on the subject. Yours faithfully, (C. D. Srinivasan) Chief General Manager INDEX Section A - General A.1 Introduction A.2 Statutory basis A.3 Prohibitions A.4 General Permission Section B - Direct Investment Outside India B.1 Automatic Route B.2 Investment in unincorporated entities overseas under the Automatic Route B.3 Method of Funding B.4 Capitalisation of exports and other dues B.5 Investments in Financial Services Sector B.6 Investment in Equity of Companies Registered Overseas / Rated Debt Instruments B.7 Approval of the Reserve Bank B.8 Investments in energy and natural resources sector B.9 Overseas Investments by Proprietorship Concerns B.10 Overseas investment by Registered Trust / Society B.11 Post investment changes / additional investment in existing JV / WOS B.12 Restructuring of the balance sheet of the overseas entity involving write off of capital and receivables B.13 Acquisition of a foreign company through bidding or tender procedure B.14 Obligations of Indian Party B.15 Transfer by way of sale of shares of a JV / WOS B.16 ....
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....d simplifying the procedures both for current account as well as capital account transactions. A.2 Statutory basis (1) Section 6 of the Foreign Exchange Management Act, 1999 provides powers to the Reserve Bank to specify, in consultation with the Government of India the classes of permissible capital account transactions and limits up to which foreign exchange is admissible for such transactions. Section 6(3) of the aforesaid Act provides powers to the Reserve Bank to prohibit, restrict or regulate various transactions referred to in the sub-clauses of that sub-section, by making Regulations. (2) In exercise of the above powers conferred under the Act, the Reserve Bank has in supersession of the earlier Notification No.FEMA19/RB-2000 dated 3rd May 2000 and subsequent amendments thereto, issued Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 vide Notification No. FEMA.120/RB-2004 dated July 7, 2004. The Notification seeks to regulate acquisition and transfer of a foreign security by a person resident in India i.e. investment by Indian entities in overseas joint ventures and wholly owned subsidiaries as also investment by a person resident....
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....e Earners' Foreign Currency account of the Indian party or out of funds raised through ADRs/GDRs. The Indian party should approach an Authorised Dealer Category - I bank with an application in Form ODI (Annex A) and prescribed enclosures / documents for effecting remittances towards such investments. (3) The total financial commitment of the Indian party, in all the Joint Ventures / Wholly Owned Subsidiaries put together, shall not exceed 400% of the net worth of the Indian party as on the date of the last audited balance sheet. For the purpose of determining the 'total financial commitment' within the limit of 400% as specified above, the following shall be reckoned, namely: * 100% of the amount of equity shares; * 100% of the amount of compulsorily and mandatorily convertible preference shares; * 100% of the amount of other preference shares; * 100% of the amount of loan; * 100% of the amount of guarantee (other than performance guarantee) issued by the Indian party; * 100% of the amount of bank guarantee issued by a resident bank on behalf of JV or WOS of the Indian party provided the bank guarantee is backed by a counter guarantee / collateral by the Indian party. ....
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....ndia in favour of WOSs / JVs outside India, and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time. Note: Specific approval of the Reserve Bank will be required for creating charge on immovable / moveable property and other financial assets (except pledge of shares of overseas JV / WOS) of the Indian party / group companies in favour of a non-resident entity within the overall limit fixed (presently 400%) for the financial commitment subject to submission of a 'No Objection' by the Indian party and their group companies from their Indian lenders. b) The Indian party should not be on the Reserve Bank's Exporters' caution list / list of defaulters to the banking system circulated by the Reserve Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information company as approved by the Reserve Bank or under investigation by any investigation / enforcement agency or regulatory body. c) All transactions relating to a JV / WOS should be routed through one branch of an Authorised Dealer bank to be designated by the Indian party. d) In case of partial / full acquisition of an existing foreign company, where the investment is....
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....ny, as recommended by the Investment Banker in its due diligence report in other cases. (5) The Indian Party is required to report such acquisition in form ODI to the AD Bank for submission to the Reserve Bank within a period of 30 days from the date of the transaction. Note: Investments in Nepal are permitted only in Indian Rupees. Investments in Bhutan are permitted in Indian Rupees as well as in freely convertible currencies. All dues receivable on investments made in freely convertible currencies, as well as their sale / winding up proceeds are required to be repatriated to India in freely convertible currencies only. Investments in Pakistan by Indian Parties are permissible under the approval route. B.1.1 Issue of guarantee by an Indian Party to step down subsidiary of JV / WOS (a) Indian Parties are permitted to issue corporate guarantees on behalf of their first level step down operating JV /WOS set up by their JV / WOS operating as a Special Purpose Vehicle (SPV) under the Automatic Route, subject to the condition that the financial commitment of the Indian Party is within the extant limit for overseas direct investment. It has been decided that irrespective of whether ....
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.... Indian company shall require prior approval of the Reserve Bank. (3) Indian companies are also permitted to participate in a consortium with other international operators to construct and maintain submarine cable systems on co-ownership basis under the automatic route. Accordingly, AD Category - I banks may allow remittances by Indian companies for overseas direct investment, after ensuring that the Indian company has obtained necessary licence from the Department of Telecommunication, Ministry of Telecommunication & Information Technology, Government of India to establish, install, operate and maintain International Long Distance Services and also by obtaining a certified copy of the Board Resolution approving such investment. Accordingly, these transactions may be reported by the Indian parties investing in the consortium to the AD Category-I banks in Form ODI for enabling on-line submission of the same by the AD Category-I banks to the Reserve Bank for allotment of Unique Identification Number. B.3 Method of Funding (1) 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) ....
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....rvices activities; (iii) has obtained approval from the regulatory authorities concerned both in India and abroad for venturing into such financial sector activity; and (iv) has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India. (2) Any additional investment by an existing JV/WOS or its step down subsidiary in the financial services sector is also required to comply with the above conditions. (3) Regulated entities in the financial sector making investments in any activity overseas are required to comply with the above guidelines. Unregulated entities in the financial services sector in India may invest in non financial sector activities subject to compliance with the provisions of Regulation 6 of the Notification. Trading in Commodities Exchanges overseas and setting up JV/WOS for trading in overseas exchanges will be reckoned as financial services activity and require clearance from the Forward Markets Commission. B.6 Investment in Equity of Companies Registered Overseas / Rated Debt Instruments (1)(i) Portfolio Investments by listed Indian companies Listed Indian companies are permitted to invest up to....
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....l of the Reserve Bank would be required in all other cases of direct investment abroad. For this purpose, application together with necessary documents should be submitted in Form ODI through their Authorised Dealer Category - I banks. (2) Reserve Bank would, inter alia, take into account the following factors while considering such applications: * 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 as of the JV / WOS outside India. B.8 Investments in energy and natural resources sector Reserve Bank will consider applications for investment in JV/WOS overseas in the energy and natural resources sectors (e.g. oil, gas, coal and mineral ores) in excess of 400 per cent of the net worth of the Indian companies as on the date of the last audited balance sheet. AD Category - I banks may forward such applications from their constituents to the Reserve Bank as per the laid down procedure. B.9 Ove....
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....e, Amar Building, 5th Floor, Fort, Mumbai 400 001, for consideration. Eligibility Criteria: (a) Trust i) The Trust should be registered under the Indian Trust Act, 1882; ii) The Trust deed permits the proposed investment overseas; iii) The proposed investment should be approved by the trustee/s; iv) The AD Category - I bank is satisfied that the Trust is KYC (Know Your Customer) compliant and is engaged in a bonafide activity; v) The Trust has been in existence at least for a period of three years; vi) The Trust has not come under the adverse notice of any Regulatory / Enforcement agency like the Directorate of Enforcement, Central Bureau of Investigation (CBI), etc. (b) Society i) The Society should be registered under the Societies Registration Act, 1860. ii) The Memorandum of Association and rules and regulations permit the Society to make the proposed investment which should also be approved by the governing body / council or a managing / executive committee. iii) The AD Category - I bank is satisfied that the Society is KYC (Know Your Customer) compliant and is engaged in a bonafide activity; iv) The Society has been in existence at least for a period of three yea....
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....he designated AD Category -I bank under the Automatic as well as the Approval Routes: a) A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party; and b) Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring. B.13 Acquisition of a foreign company through bidding or tender procedure An Indian party may remit earnest money deposit or issue a bid bond guarantee for acquisition of a foreign company through bidding and tender procedure and also make subsequent remittances through an AD Category - I bank, in accordance with the provisions of Regulation 14 of the Notification. B.14 Obligations of Indian Party (1) An Indian party which has made direct investment abroad is under obligation to (a) receive share certificate or any other document as an evidence of investment, (b) repatriate to India the dues receivable from foreign entity, and (c) submit the documents / Annual Performance Report to the Reserve Bank, in accordance with the provisions specified in Regulation 15 of the Notification. The share certificate or any other document as evidence of investment....
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....t under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India. (2) The Indian party is required to submit details of such disinvestment through its designated AD category-I bank within 30 days from the date of disinvestment. B.16 Transfer by way of sale of shares of a JV / WOS involving Write off of the investment (1) Indian Party may disinvest, without prior approval of the Reserve Bank, in any of the under noted cases where the amount repatriated after disinvestment is less than the original amount invested: * in case where the JV / WOS is listed in the overseas stock exchange; * in cases where the Indian Party is listed on a stock exchange in India and has a net worth of not less than Rs.100 crore; * where the Indian Party is an unlisted company and the investment in the overseas venture does not exceed USD 10 million. and * where the Indian Party is a listed company with net worth of less than Rs.100 crore but investment in an overseas JV/WOS does not exceed USD 10 million. (2) Such disinvestments shall be subject to the conditions listed at B.15 items (ii) to (vi) and B 15.2. (3) An Indian Party, which does not satisfy the conditions l....
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..... AD Category - I banks are permitted to allow remittances for purchase of shares by eligible persons under this provision irrespective of the method of operationalisation of the scheme i.e where the shares under the scheme are offered directly by the issuing company or indirectly through a trust / a Special Purpose Vehicle (SPV) / step down subsidiary, provided (i) the shares under the ESOP Scheme are offered by the issuing company globally on a uniform basis, and (ii) an Annual Return (Annex B) is submitted by the Indian company to the Reserve Bank through the AD Category - I bank giving details of remittances / beneficiaries, etc. (2) A person resident in India may transfer by way of sale the shares acquired as stated above provided that the proceeds thereof are repatriated immediately on receipt thereof and in any case not later than 90 days from the date of sale of such securities. (3) Foreign companies are permitted to repurchase the shares issued to residents in India under any ESOP Scheme provided (i) the shares were issued in accordance with the Rules / Regulations framed under Foreign Exchange Management Act, 1999, (ii) the shares are being repurchased in terms of the i....
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....he knowledge based sectors, including working directors provided purchase consideration does not exceed USD 50,000 or its equivalent in a block of five calendar years. PART - II Operational Instructions to Authorised Dealer Banks 1. Designated branches An eligible Indian party making investment in a Joint Venture (JV) / Wholly Owned Subsidiary (WOS) outside India is required to route all its transactions relating to the investment through one branch of an AD Category - I bank designated by it in terms of clause (v) of sub regulation 2 of Regulation 6 of the Notification. All communication from the Indian parties, to the Reserve Bank, relating to the investment outside India should be routed through the same branch of the AD Category - I bank that has been designated by the Indian investor for the investment. The designated AD Category - I bank while forwarding the request from their customers to the Reserve Bank, should also forward its comments / recommendations on the request. However, the Indian party may designate different AD Category - I banks / branches of AD Category - I banks for different JV / WOS outside India. For proper follow up, the AD Category - I bank is requi....
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....ses. a) Initially, Part I (Sections A to D), II and III of form ODI should be filed on-line in the Overseas Investment Application for allotment of UIN, reporting of subsequent remittances, filing of APRs, etc. AD Category -I banks would continue to receive the ODI forms in physical form, as stipulated in the A. P. (DIR Series) Circular No. 68 dated June 1, 2007, which should be preserved, UIN wise, for onward submission to the Reserve Bank, if specifically required. Transactions in respect of Mutual Funds, Portfolio Investment Scheme (PIS) and Employees Stock Options Scheme (ESOPS) are also required to be reported on-line in the Overseas Investment Application. b) The on-line reporting would be required to be made by the Centralized Unit/Nodal Office of AD Category - I banks. The Overseas Investment Application is hosted on the Reserve Bank's Secured Internet Website (SIW) https://secweb.rbi.org.in and a link has been made available for accessing the Application on the main page of the website. AD Category - I banks would be responsible for the validity of the information reported on-line. c) The application for overseas investment under the approval route would continue to be ....
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....al know-how fees, consultancy fees, etc. In such cases also, the Indian party is required to submit details of the capitalisation in form ODI to the designated branch of the AD Category - I bank. Such investments by way of capitalisation are also to be reckoned while computing the cap of 400 per cent prescribed in terms of Regulation 6. Further, in cases where the export proceeds are being capitalised in accordance with the provisions of Regulation 11, the AD Category - I banks are required to obtain a custom certified copy of the invoice as required under Regulation 12(2) and forward it to the Reserve Bank together with the revised form ODI. Capitalisation of export proceeds or other entitlements, which are overdue, would require prior approval of the Reserve Bank for which the Indian parties should make an application in form ODI to the Reserve Bank for consideration. 5. Allotment of Unique Identification Number (UIN) The Unique Identification Number allotted to each JV or WOS abroad, is required to be quoted in all correspondence with the Reserve Bank. AD Category - I banks may allow additional investment in an existing overseas concern set up by an Indian party, in terms of R....
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....incorporated outside India. On winning the bid, AD banks may remit the acquisition value after obtaining Form A2 duly filled in and report such remittance (including the amount initially remitted towards EMD) to the Chief General Manager, Foreign Exchange Department, Central Office, Overseas Investment Division, Amar Building, 5th floor, Mumbai 400 001 in form ODI. AD Category - I banks, while permitting remittance towards EMD should advise the Indian party that in case they are not successful in the bid, they should ensure that the amount remitted is repatriated in accordance with Foreign Exchange Management (Realisation, Repatriation & Surrender of Foreign Exchange) Regulations, 2000 (cf. Notification No. FEMA 9/2000-RB dated 3rd May 2000), as amended from time to time (ii)In cases where an Indian party, after being successful in the bid / tender decides not to proceed further with the investment, AD banks should submit full details of remittance allowed towards EMD / invoked bid bond guarantee, to the Chief General Manager, Foreign Exchange Department, Central Office, Overseas Investment Division, Amar Building, 5th floor, Mumbai 400 001. (iii)In case the Indian party is succe....