TaxTMI 
TaxTMI 
Master Circular on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad
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.... is furnished in the Appendix. This Master Circular may be referred to for general guidance. The Authorised Persons and the Authorised Dealer Category - I banks may refer to respective circulars/ notifications for detailed information, if so needed. 3. This Master Circular is being updated from time to time as and when the fresh instructions are issued. The date up to which the Master Circular has been updated is suitably indicated. Yours faithfully, (K. Pandey) 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 investm....
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....nd skill, sharing of results of R&D, access to wider global market, promotion of brand image, generation of employment and utilisation of raw materials available in India and in the host country are other significant benefits arising out of such overseas investments (or financial commitment). They are also important drivers of foreign trade through increased exports of plant and machinery and goods and services from India and also a source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments (or financial commitment). (2) In keeping with the spirit of liberalisation, which has become the hallmark of economic policy in general, and Foreign Exchange regulations in particular, the Reserve Bank has been progressively relaxing the rules and 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 a....
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....) when not permanently resident in India, out of their foreign currency resources outside India. General permission is also available to sell the shares so purchased or acquired. Section B - Direct Investment (or financial commitment) Outside India B.1 Automatic Route (1) In terms of Regulation 6 of the Notification, an Indian party has been permitted to make investment / undertake financial commitment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), as per the ceiling prescribed by the Reserve Bank from time to time. An Indian party means a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932 or a Limited Liability Partnership (LLP) incorporated under the Limited Liability Partnership Act, 2008 making investment in a Joint Venture or Wholly Owned Subsidiary abroad. With effect from July 03, 2014, the limit of Overseas Direct Investments (ODI)/ Financial Commitment (FC) to be undertaken by an Indian Party under the automatic route has been restored to the limit prevailing, as per the extant FEMA provisions, prior to August 14, 2013. It has, however, been de....
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....orporate or personal (including the personal guarantee by the indirect resident individual promoters of the Indian Party)/ primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India provided that: i) All the financial commitments, including all forms of guarantees and creation of charge are within the overall ceiling prescribed for the Indian party. ii) No guarantee should be 'open ended' i.e. the amount and period of the guarantee should be specified upfront. In the case of performance guarantee, time specified for the completion of the contract shall be the validity period of the related performance guarantee. iii) In cases where invocation of the performance guarantees breach the ceiling for the financial commitment, the Indian Party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation. iv) As in the case of corporate guarantees, all guarantees (including performance guarantees and Bank Guarantees / SBLC) are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks i....
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.... GDR issued for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian party; (iii) The total holding in the Indian entity 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 under FDI; (iv) Valuation of the shares of the foreign company shall be (a) as per the recommendations of the Investment Banker if the shares are not listed on any recognized stock exchange; or (b) 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. (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 / financial commitments in Nepal are permitted only in I....
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....ment (or financial commitment). (ii) Setting up of an SPV under the Automatic Route is permitted for the purpose of making investment (or financial commitment) in JV/WOS overseas. B.2 Investment (or financial commitment) in unincorporated entities overseas in oil sector under the Automatic Route (1) Investments (or financial commitment) in unincorporated / incorporated entities overseas in the oil sector (i.e. for exploration and drilling for oil and natural gas, etc.) by Navaratna PSUs, ONGC Videsh Ltd (OVL) and Oil India Ltd (OIL) may be permitted by AD Category - I banks, without any limit, provided such investments are approved by the competent authority. (2) Other Indian companies are also permitted under the Automatic Route to invest in unincorporated entities overseas in the oil sector up to the limit prescribed provided the proposal has been approved by the competent authority and is duly supported by certified copy of the Board resolution approving such investment. Investment in excess of the prescribed limit shall require prior approval of the Reserve Bank. (3) Indian companies are also permitted to participate in a consortium with other international opera....
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....dia (para A.4 above) B.4 Capitalisation of exports and other dues (1) Indian party is permitted to capitalise the payments due from the foreign entity towards exports, fees, royalties or any other dues from the foreign entity for supply of technical know-how, consultancy, managerial and other services within the ceilings applicable. Capitalisation of export proceeds remaining unrealised beyond the prescribed period of realization will require prior approval of the Reserve Bank. (2) Indian software exporters are permitted to receive 25 per cent of the value of their exports to an overseas software start-up company in the form of shares without entering into Joint Venture Agreements, with prior approval of the Reserve Bank. B.5 Investments (or financial commitment) in Financial Services Sector (1) In terms of Regulation 7 of the Notification, an Indian party seeking to make investment (or financial commitment) in an entity outside India, which is engaged in the financial sector, should fulfill the following additional conditions: (i) be registered with the regulatory authority in India for conducting the financial sector activities; (ii) has earned ne....
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.... grade. The repos should not, however, involve any borrowing of funds by mutual funds; vii) government securities where the countries are rated not below investment grade; viii) derivatives traded on recognized stock exchanges overseas only for hedging and portfolio balancing with underlying as securities; ix) short-term deposits with banks overseas where the issuer is rated not below investment grade; and x) units / securities issued by overseas Mutual Funds or Unit Trusts registered with overseas regulators and investing in (a) aforesaid securities, (b) Real Estate Investment Trusts (REITS) listed on recognized stock exchanges overseas, or (c) unlisted overseas securities (not exceeding 10 per cent of their net assets). (2) A limited number of qualified Indian Mutual Funds, are permitted to invest cumulatively up to USD 1 billion in overseas Exchange Traded Funds as may be permitted by SEBI. (3) Domestic Venture Capital Funds / Alternative Investment Funds^3 registered with SEBI may invest in equity and equity linked instruments of off-shore Venture Capital Undertakings, subject to an overall limit of USD 500 million. Accordingly, Mutu....
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....has a proven track record, i.e., the export outstanding does not exceed 10% of the average export realisation of the preceding three years and a consistently high export performance; (c) The Authorised Dealer bank is satisfied that the proprietorship concern / unregistered partnership firm in India is KYC (Know Your Customer) compliant, engaged in the proposed business and has turnover as indicated; (d) The proprietorship concern / unregistered partnership firm in India has not come under the adverse notice of any Government agency like the Directorate of Enforcement, Central Bureau of Investigation, Income Tax Department, etc. and does not appear in the exporters' caution list of the Reserve Bank or in the list of defaulters to the banking system in India; and (e) The amount of proposed investment (or financial commitment) outside India does not exceed 10 per cent of the average of last three years' export realisation or 200 per cent of the net owned funds of the proprietorship concern / unregistered partnership firm in India, whichever is lower. (2) An application in form ODI may be made to the Chief General Manager, Reserve Bank of India, Foreig....
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....ration, the AD Category - I bank should ensure that the special license / permission has been obtained by the applicant in case the activities require special license / permission either from the Ministry of Home Affairs, Government of India or from the relevant local authority, as the case may be. B.11 Post investment changes / additional investment (or financial commitment) in existing JV / WOS A JV / WOS set up by the Indian party as per the Regulations may diversify its activities / set up step down subsidiary / alter the shareholding pattern in the overseas entity (subject to compliance of Regulation 7 of the Notification in the case of financial services sector companies). The Indian party should report to the Reserve Bank through the AD Category - I bank, the details of such decisions within 30 days of the approval of those decisions by the competent authority of the JV / WOS concerned in terms of local laws of the host country and include the same in the Annual Performance Report (APR - Part III of Form ODI) required to be forwarded to the AD Category-I bank. B.12 Restructuring of the balance sheet of the overseas entity involving write off of capital and receivabl....
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....ed to monitor the receipt of such documents and satisfy themselves about the bonafides of the documents. A certificate to this effect should be submitted by the designated AD category - I bank to the Reserve Bank along with the APR (Part III of Form ODI). (2) Reporting requirements including submission of Annual Performance Report are also applicable for investors in unincorporated entities in the oil sector. (3) Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the Annual Performance Report (APR) may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS provided: a. The Statutory Auditors of the Indian party certify that 'The un-audited annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS' and b. That the un-audited annual accounts of the JV / WOS has been adopted and ratified by the Board of the Indian party. B.15 Transfer by way of sale of shares of a JV / WOS (1) An Indian Party, without prior approval of the Reserve Bank, may transfer by way of sale to another Indian Party which complies with the provisions of ....
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....ct 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 laid down above for undertaking any disinvestment in its JV/WOS abroad, shall have to apply to the Reserve Bank for prior permission. ^5B.17 Pledge of Shares of Joint Venture (JV), Wholly Owned Subsidiary (WOS) and Step down Subsidiary (SDS) An Indian Party may create charge, by way of pledge, on the shares of Joint Venture (JV) or Wholly Owned Subsidiary (WOS) or Step Down Subsidiary (SDS) outside India as a security in favour of an Authorized Dealer or a public financial institution in India or an overseas lender, for availing of fund based or non-fund based facility for itself (i.e. the Indian party) or for its JV / WOS / SDS whose shares have been pledged, or for any other JV / WOS / SDS of the Indian party subject to the terms and conditions prescribed under Regulation 18 of the Notification and A.P. (DIR Series) Circular No.54 dated December 29, 2014. B.18 Hedging of Overseas Direct Investments (1) Resident entities having overseas direct investments (or financial commitment) are permitted to hedge the foreign exchange rate risk arising ....
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.... however, the above conditions are not met, the Indian party shall obtain prior approval of the Reserve Bank for rollover / renewal of the existing guarantee through the designated AD bank. ^6 B.21 Creation of charge on domestic and foreign assets (1) An Indian party may create charge (by way of mortgage, pledge, hypothecation or otherwise) on its assets [including the assets of its group company, sister concern or associate company in India, promoter and / or director] in favour of an overseas lender as security for availing of the fund based and/or non-fund based facility for its Joint Venture (JV) or Wholly Owned Subsidiary (WOS) or Step Down Subsidiary (SDS) outside India subject to the terms and conditions prescribed under Regulation 18A of the Notification and A.P. (DIR Series) Circular No.54 dated December 29, 2014. (2) An Indian party may create charge (by way of mortgage, pledge, hypothecation or otherwise) on the assets of its overseas JV or WOS or SDS in favour of an AD bank in India as security for availing of the fund based and/or non-fund based facility for itself or its JV or WOS or SDS outside India subject to the terms and conditions prescribed under Regul....
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....eturn is submitted through the AD Category - I bank giving details of remittances / beneficiaries, etc. (4) In all other cases, not covered by general or special permission, approval of the Reserve Bank is required to be obtained before acquisition of a foreign security. C.2 Pledge of a foreign security by a person resident in India The shares acquired by persons resident in India in accordance with the provisions of Foreign Exchange Management Act, 1999 or Rules or Regulations made thereunder are allowed to be pledged for obtaining credit facilities in India from an AD Category - I bank / Public Financial Institution. C.3 General permission in certain cases Residents are permitted to acquire a foreign security, if it represents - (a) qualification shares for becoming a director of a company outside India to the extent prescribed as per the law of the host country where the company is located provided it does not exceed the limit prescribed for the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition; (b) part / full consideration of professional services rendered to the foreign company or in lieu of....
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....d be routed through the same branch of the AD Category - I bank that has been designated by the Indian investor for the investment (or financial commitment). 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 required to maintain party-wise record in respect of each JV/ WOS. 2. Investments under Regulation 6 of Notification No. FEMA 120/2004-RB dated July 7, 2004 AD Category - I banks may allow investments (or financial commitment) up to the permissible limits on receipt of application in form ODI together with form A-2, duly filled in, from the Indian party(ies) making investments (or financial commitment) in a JV/WOS abroad subject to their complying with the conditions specified in Regulation 6 of Notification FEMA No.120/RB-2004 dated July 7, 2004, as amended from time to time. Investment (or financial commitment) in financial services should also comply with....
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....al 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 (or financial commitment) under the approval route would continue to be submitted to the Reserve Bank in physical form as hitherto, in addition to the on-line reporting of Part I as contemplated above, for approval purposes. d) In case of disinvestment / closure / winding up / voluntary liquidation....
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....lso, 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 (or financial commitment) by way of capitalisation are also to be reckoned while computing the limit of financial commitment 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 (or financial commitment) in an existing overseas concern set up by an Indian party, in ....
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....d bond guarantee on their behalf for participation in bidding or tender procedure for acquisition of a company 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, Centra....
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....afide business activity. 3. Resident individual is prohibited from making direct investment in a JV / WOS [set up or acquired abroad individually or in association with other resident individual and / or with an Indian party] located in the countries identified by the Financial Action Task Force (FATF) as "non co-operative countries and territories" as available on FATF website www.fatf-gafi.org or as notified by the Reserve Bank. 4. The resident individual shall not be on the Reserve Bank's Exporters Caution List or List of defaulters to the banking system or under investigation by any investigation / enforcement agency or regulatory body. 5. At the time of investments, the permissible ceiling shall be within the overall ceiling prescribed for the resident individual as prescribed by the Reserve Bank from time to time. [Explanation: The investment made out of the balances held in EEFC / RFC account shall also be restricted to the limit prescribed under LRS.] 6. The JV or WOS, to be acquired / set up by a resident individual under this Schedule, shall be an operating entity only and no step down subsidiary is allowed to be acquired or se....
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....es/Wholly Owned Subsidiaries Abroad Notifications (published in the official gazette by the Government of India on various dates) Sl. No. Notification No. Date 1. FEMA.120/RB-2004 July 07, 2004 2. FEMA.132/2005-RB March 31, 2005 3. FEMA.135/2005-RB May 17, 2005 4. FEMA.139/2005-RB August 11, 2005 5. FEMA.150/2006-RB August 21, 2006 6. FEMA.164/2007-RB October 9, 2007 7. FEMA.173/2007-RB December 19, 2007 8. FEMA.180/2008-RB September 5, 2008 9. FEMA.181/2008-RB October 1, 2008 10. FEMA.184/2009-RB January 20, 2009 11. FEMA.188/2009-RB February 03, 2009 12. FEMA.196/2009-RB July 28, 2009 13. FEMA.225/2012-RB March 07, 2012 14. FEMA.231/2012-RB May 30, 2012 15. FEMA.249/RB-2012 November 22, 2012 16. FEMA.263/RB-2013 March 05, 2013 17. FEMA.271/RB-2013 March 19, 2013 18. FEMA.277/2013-RB May 08, 2013 19. FEMA.283/RB-2013 August 14, 2013 20. FEMA.299/RB-2014 March 24, 2014 21. FEMA.314/RB-2014 July 03, 2014 22. FEMA.322/2014-RB October 14, 2014 23 FEMA.325/RB-2014 Novemb....