Key Compliances in Investing Abroad | Vinita Bahri-Mehra


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Issues to be aware of when considering an investment in the Indian market, including entity structure, forms of investment, and securities laws.

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Key Compliances in Investing Abroad | Vinita Bahri-Mehra

  1. 1. Key Compliances In Investing Abroad Presented by Vinita Bahri-Mehra, Esq.
  2. 2. Introduction – Key Compliances Under: <ul><li>Laws of India </li></ul><ul><li>Laws of United States </li></ul>
  3. 3. Laws Of India – Outbound Investments <ul><li>Key Legislations </li></ul><ul><ul><li>Companies Act </li></ul></ul><ul><ul><li>Income Tax Act </li></ul></ul><ul><ul><li>Stamp Duty Legislations </li></ul></ul><ul><ul><li>SEBI Guidelines </li></ul></ul><ul><ul><li>Takeover Code </li></ul></ul><ul><ul><li>Exchange Control Regulations </li></ul></ul><ul><ul><li>(under FEMA & RBI rules) </li></ul></ul>
  4. 4. Exchange Control Regulations <ul><li>Direct Investment in an Overseas JV/WOS </li></ul><ul><ul><li>An Indian party (i.e. corporation) is permitted to invest in a JV/WOS not exceeding 400% of its net worth (as of the date of the last audited balance sheet), either directly or through a Special Purpose Vehicle (SPV). </li></ul></ul><ul><ul><li>For a registered partnership, investment not exceeding 200% of its net worth. </li></ul></ul>
  5. 5. <ul><ul><li>The ceiling includes (i) contribution to the capital of the overseas JV/WOS; (ii) loan granted to the JV/WOS; and (iii) 100% of guarantees issued to, or on behalf of JV/WOS. </li></ul></ul><ul><ul><li>There are certain conditions imposed by the RBI regulations for issuance of guarantees. </li></ul></ul><ul><ul><li>Such as, (i) Indian entity may extend loan/guarantee to an overseas concern only in which it has equity participation; (ii) no “open-ended” guarantees (i.e. the amount of the guarantee should be specified up front); and (iii) corporate guarantees are required to be reported to the RBI. </li></ul></ul>
  6. 6. <ul><ul><li>The ceiling will not be applicable where, (i) investment is made out of EEFC A/C; or (ii) investment out of proceeds of ADR/GDR. </li></ul></ul><ul><ul><li>Mandatory requirement of effecting remittances towards investment in an overseas JV/WOS through one branch of an Authorized Dealer Bank. </li></ul></ul>
  7. 7. Investment By Cash Or Equivalent <ul><li>Partial/Full acquisition of an existing foreign company, where the investment is more than USD $5,000,000 (Five Million Dollars), a valuation of the shares of the company is required to be undertaken by an investment banker/merchant banker registered with SEBI or an investment banker/merchant banker outside India, registered with the appropriate regulatory authority in a target company ’s country. </li></ul>
  8. 8. Investment By Cash Or Equivalent, cont. <ul><li>If the investment is less than USD $5,000,000 (Five Million Dollars), valuation by a chartered accountant or a certified public accountant shall suffice. </li></ul>
  9. 9. Investment By Equity Swap <ul><li>Acquisition by way of swap of equity shares of overseas company in consideration for the shares of an Indian company would require RBI & FIPB approval; </li></ul><ul><li>Such share swap requires valuation of the shares to be undertaken by a merchant banker registered with SEBI; or investment banker/merchant banker outside India registered with the appropriate authority (irrespective of the amount). </li></ul>
  10. 10. Investment - Partnership <ul><li>For a registered partnership firm, where funding for such overseas investment is done by a firm, the individual partners are required to hold shares for, and on behalf of, the firm in overseas JV/WOS and not in individual capacity. </li></ul>
  11. 11. Method Of Funding <ul><li>Investment in an overseas JV/WOS may be funded out of one or more of the following sources: </li></ul><ul><ul><li>Withdrawal of foreign exchange from an authorized dealer in India; </li></ul></ul><ul><ul><li>Through a loan or guarantee to, or on behalf of, the JV; </li></ul></ul><ul><ul><li>Utilization of proceeds of External Commercial Borrowings and/or Foreign Currency Convertible Bonds. </li></ul></ul>
  12. 12. Method Of Funding, cont. <ul><li>Permitted to acquire shares of an overseas company by capitalizing amounts receivable from the overseas company against export of goods and services, royalties, commissions, or any other entitlements due from foreign entity for supplying technical know-how, consultancy, managerial, and other services – (within the applicable ceiling). </li></ul><ul><li>Export proceeds remaining unrealized beyond a period of 6 months from date of export will require the prior approval of RBI before capitalization. </li></ul>
  13. 13. Separate Regulations For: <ul><li>Investment in overseas entity engaged in financial services sector . </li></ul><ul><ul><li>Be registered with the appropriate regulatory authority in India for conducting financial sector services. </li></ul></ul><ul><ul><li>Mandatory net profit earnings. </li></ul></ul><ul><ul><li>Approval for investment. </li></ul></ul><ul><ul><li>Fulfilled norms relating to capital adequacy as prescribed. </li></ul></ul>
  14. 14. <ul><li>Investments in equity of overseas companies listed on stock exchange & rated debt instruments. </li></ul><ul><ul><li>For listed Indian corporations, the investment cannot exceed 35% of its net worth. </li></ul></ul><ul><ul><li>For individuals, per limits & conditions specified in the Liberalized Remittance Scheme. </li></ul></ul>
  15. 15. <ul><ul><li>For mutual funds registered with SEBI, aggregate ceiling of USD $4,000,000,000 (Four Billion Dollars). </li></ul></ul><ul><ul><li>For domestic venture capital funds, registered with SEBI, may invest in equity and equity linked instruments of off-shore Venture Capital undertakings subject to an overall limit of USD $5,000,000 (Five Million Dollars). </li></ul></ul><ul><ul><li>Mutual Funds & Venture Capital Funds desirous of availing this facility need to approach SEBI for necessary permission. </li></ul></ul>
  16. 16. Approval Of RBI <ul><li>Prior approval of the RBI would be required in cases that do not fall under Automatic Route for direct investment abroad. </li></ul><ul><li>CONSIDERATIONS FOR APPROVAL – RBI shall take into account the following factors: (i) Prima facie viability of the JV/WOS outside India; (ii) contribution to external trade and other benefits which will accrue to India through such investment: (iii) Financial position and business track record of the Indian party and the foreign entity; and (iv) expertise and experience of the Indian party in the same or related line of activity of the JV/WOS outside India. </li></ul>
  17. 17. Post Investment Changes/Additional Investment In Existing JV/WOS <ul><li>A JV/WOS set up by an Indian party as per the regulation may undertake the following on reporting to RBI: </li></ul><ul><ul><li>Diversify activities </li></ul></ul><ul><ul><li>Set up step down subsidiary </li></ul></ul><ul><ul><li>Alter the shareholding pattern </li></ul></ul><ul><ul><li>Disinvest, where the Indian party is an unlisted company and the investment in overseas venture does not exceed USD $10,000,000 (Ten Million Dollars) </li></ul></ul>
  18. 18. <ul><ul><li>Pledge shares of the JV/WOS to a domestic or foreign lender to avail any credit facility for itself or for the JV/WOS (within financial limit/ceiling stipulated by RBI for overseas investment, from time to time) </li></ul></ul><ul><ul><li>Hedging of overseas direct investments (in equity and loan) by entering into forward/option contracts with Authorized Dealers Bank in India, subject to verification of such exposure by Authorized Dealers Bank through onward reporting to RBI. </li></ul></ul>
  19. 19. Other Investments In Foreign Securities <ul><li>General permission has been granted by RBI to a person residing in India who is an individual – </li></ul><ul><ul><li>To acquire foreign securities as a gift from any person; </li></ul></ul><ul><ul><li>To acquire shares under a Cashless Employees Stock Option Scheme issued by a company outside India, provided it does not involve any remittance from India; </li></ul></ul><ul><ul><li>To acquire shares by way of inheritance; </li></ul></ul>
  20. 20. <ul><ul><li>To purchase equity shares offered by a foreign company under its ESOP scheme, if he is an employee or a director of an Indian office or branch of a foreign company, or, of a subsidiary in which foreign equity holding, either directly or through a holding company/SPV, is, (i) not less than 51% ; (ii) shares under the ESOP scheme are offered by foreign company on uniform basis; and (iii) a report is submitted by Indian company to RB I giving details of remittances/beneficiaries, etc. </li></ul></ul>
  21. 21. Export Of Goods & Services <ul><li>General guidelines for exports under RBI rules. </li></ul><ul><ul><li>Manner of receipt and payment </li></ul></ul><ul><ul><ul><li>The amount representing full export value of the goods exported is required to be received through an Authorized Dealer Bank in the following manner: </li></ul></ul></ul><ul><ul><ul><li>Bank draft, wire transfer, bankers or personal checks; </li></ul></ul></ul><ul><ul><ul><li>Payment out of funds held in an FCNR/NRE account maintained by buyer; </li></ul></ul></ul><ul><ul><ul><li>International credit cards of the buyer. </li></ul></ul></ul>
  22. 22. <ul><ul><li>Exchange Earner Foreign Currency Account (EEFC). </li></ul></ul><ul><ul><ul><li>An Indian party (i.e. corporation or individuals) may open an EEFC account in a form of non-interest bearing current account to keep foreign exchange earned in the currency received. </li></ul></ul></ul><ul><ul><ul><li>No credit facilities, either fund based or non-fund based shall be permitted to obtain against security of balances held in EEFC. </li></ul></ul></ul><ul><ul><ul><li>Foreign exchange earners are allowed to credit up to 100% of their foreign exchange earning to their EEFC account. </li></ul></ul></ul>
  23. 23. <ul><ul><li>Advance payment against exports. </li></ul></ul><ul><ul><ul><li>An exporter receiving advance payment from a buyer outside India is under the obligation to ensure that goods or services are exported within one year from date of receipt of advance payment. </li></ul></ul></ul><ul><ul><ul><li>If exporter is unable to fulfill its export obligation within one year, then no remittance toward refund of unutilized portion of advance payment shall be made, without prior approval of RBI. </li></ul></ul></ul>
  24. 24. <ul><ul><li>Operating/Hiring of warehouses abroad. </li></ul></ul><ul><ul><ul><li>Authorized Dealers Bank through RBI could consider applications and grant permission for opening/hiring warehouses abroad, subject to: (i) exporters outstanding does not exceed 5% of exports made in previous financial year; (ii) exporter has a minimum export turnover of USD $100,000 (One hundred thousand dollars) during the previous financial year; and (iii) all transactions are routed through the designated branch of the Authorized Dealer Bank. </li></ul></ul></ul><ul><ul><ul><li>Permission granted generally for a period of one year and renewal may be considered by RBI. </li></ul></ul></ul>
  25. 25. Setting Up Branches/Representative Offices Abroad And Acquisitions Of Immovable Property For Overseas Offices <ul><li>For setting up branch/representative overseas offices, remittances towards initial expenses up to 15% of the average annual sales/income during the last two financial years or up to 25% of the net worth, whichever is higher is allowed. </li></ul><ul><li>For recurring expenses, remittances up to 10% of the annual sales/income during the previous two financial years is allowed for normal business operations of the office/branch or representative office outside. </li></ul>
  26. 26. <ul><li>Conditions - the overseas branch/representative office should not create any financial liabilities, contingent or otherwise, for the head office in India and also not invest surplus funds without prior approval of RBI. Any funds rendered surplus should be repatriated to India. </li></ul><ul><li>Details of bank account opened in the overseas country should be promptly reported to Authorized Dealer Bank. </li></ul>
  27. 27. External Commercial Borrowings (ECB)policy <ul><li>New restrictions are imposed by RBI on raising funds through the External Commercial Borrowings (ECB) route. It appears that RBI ’s clampdown on ECB is to prevent Rupee appreciation and therefore the restrictions could be in force for a short term. </li></ul><ul><li>General ECB Regulations. These guidelines apply to all eligible borrowers and are subject to the following modifications: </li></ul>
  28. 28. <ul><li>Per RBI ’s regulations, ECB refers to commercial loans (in form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments) availed from non-resident lenders with minimum averages maturity of three years. The salient features of the regulations are as follows: </li></ul><ul><ul><li>Eligible Borrowers: Corporations registered under the Indian Companies Act, 1958 are eligible to raise ECB. </li></ul></ul>
  29. 29. <ul><ul><li>Recognized Lenders: Borrowers can raise ECB from internationally recognized sources such as (a) international banks; (b) international capital markets; (c) multilateral financial institutions; (d) export credit agencies; (e) suppliers of equipment; (f) foreign collaborates; and (g) foreign equity holders. </li></ul></ul>
  30. 30. <ul><li>A “foreign equity holder” to be eligible as a “recognized lender” under the ECB route would require minimum holding of equity in the borrower company as follows: (a) for ECB up to US $5 million-minimum equity of 25% held directly by the lender; and (b) for ECB more than US$ million-minimum equity of 25% held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB not exceeding four times of the direct foreign equity holding). </li></ul>
  31. 31. <ul><ul><li>Amount & Maturity Terms: The maximum amount of ECB, which a corporate can raise, is capped at US$ 500 million per financial year. ECB up to US$ 20 million in a financial year must have a minimum average maturity of three years. ECB above US$ 20 million and up to US$ 500 million per year must have a minimum average maturity of five years. </li></ul></ul>
  32. 32. <ul><ul><li>All-in-Cost Ceilings: The All-in-Cost ceilings are reviewed from time to time by RBI. Presently, the following All-in-Cost ceilings are applicable for: (a) average maturity period of 3 to 5 years – 150 basis points, over 6 month LIBOR; and (b) average maturity period of more than 5 years – 250 basis points, over 6 month LIBOR. </li></ul></ul>
  33. 33. <ul><ul><li>End-uses: Utilization of ECB is not permitted for all uses. ECB can be raised only for certain permissible end uses, such as for investments (such as import of capital goods, new projects, modernization/expansion of existing production units) in real-industrial sectors, including small and medium enterprises (SME) and infrastructure sector in India. End uses of ECB for on lending or investment in capital market, working capital, general corporate purposes and repayment of existing rupee loans are not permitted. </li></ul></ul>
  34. 34. <ul><ul><li>Guarantees: Issuance of guarantee, standby letter of credit, and letter of undertaking and so on by Banks relating to ECB is not permitted. </li></ul></ul>
  35. 35. <ul><ul><li>Approvals: ECB can be accessed under two routes, viz., (a) Automatic Route (i.e. does not require any prior RBI approval); and (b) Approval Route (i.e. prior RBI approval required). </li></ul></ul><ul><ul><ul><li>ECB for investment in real sector-industrial sector and in accordance with the parameters outlined above fall under the Automatic Route. Any ECB beyond the parameters laid down above would fall under the Approval Route. </li></ul></ul></ul>
  36. 36. <ul><li>Keeping in mind the current macroeconomic situation in India, RBI has modified the ECB regulations as follows: </li></ul><ul><ul><li>ECB more than US$ 20 million per borrower Company per financial year is permitted only for foreign currency expenditure for permissible end uses of ECB. Accordingly, borrowers raising ECB more than US$ 20 million shall keep the ECB proceeds overseas for use as foreign currency and shall not remit the funds to India. </li></ul></ul>
  37. 37. <ul><ul><li>ECB up to US$ 20 million per borrower Company per financial year is permitted only for foreign currency expenditures for permissible end uses and these funds shall be kept overseas and not be remitted to India. </li></ul></ul><ul><ul><li>Borrowers proposing to avail ECB for Rupee expenditure for permissible end uses would require prior approval of the RBI under the approval route and will be allowed to raise ECB only up to US$ 20 Million. However, such funds shall continue to be kept overseas until actual requirement and expenditure in India. </li></ul></ul>
  38. 38. Miscellaneous Remittances From India <ul><li>Authorized dealers are allowed to release foreign exchange to person residents in India for various current capital account transactions (non-trade & trade related). </li></ul><ul><li>Certain limits are imposed for release of foreign exchange transactions related to non-trade current account transaction. For example, foreign exchange for undertaking business travel or attending a conference or for specialized training is limited to $25,000 per person, under automatic approval. </li></ul>
  39. 39. Miscellaneous Remittances From India <ul><li>Liberalized Remittance Scheme of US$ 200,000. </li></ul><ul><ul><li>For any current capital account transaction (trade related), Authorized Dealers shall allow residents to remit up to US$ 200,000 under the scheme. </li></ul></ul>
  40. 40. <ul><li>Advance Remittance – Import of Services </li></ul><ul><ul><li>Authorized Dealers Bank may allow residents to give advance remittance for import of services. </li></ul></ul><ul><ul><li>Where the amount exceeds US$ 100,000 (One Hundred Thousand Dollars) or its equivalent, a guarantee from a bank of international repute situated outside India or a guarantee from an authorized dealer bank in India, if such a guarantee is issued against the counter-guarantee of a bank of international repute should be obtained from the overseas beneficiary. </li></ul></ul>
  41. 41. <ul><li>Issuance of Guarantee – Import of Services </li></ul><ul><ul><li>Authorized Dealer Bank is allowed to issue guarantee on behalf of customers (i.e. residents of India), importing services, provided: </li></ul></ul><ul><ul><ul><li>The guarantee amount does not exceed US$ 100,000; </li></ul></ul></ul><ul><ul><ul><li>Is satisfied about the bonafides of the transaction; and </li></ul></ul></ul><ul><ul><ul><li>The guarantee is to secure a direct contractual liability arising out of a contract between a resident and a non-resident. </li></ul></ul></ul>
  42. 42. Company Law Considerations <ul><li>An Indian Public Limited Company that acquires a foreign company by issuing its shares as consideration, it requires: </li></ul><ul><ul><li>Special Resolution by the shareholders of the Indian company to permit such issue. </li></ul></ul><ul><li>If investment by an Indian company in the foreign company exceeds 60% of the paid up share capital and free reserves, or 10% of free reserve, it requires: </li></ul><ul><ul><li>Special Resolution to be passed under Section 372A of the Indian Companies Act, 1956. </li></ul></ul>
  43. 43. <ul><li>Merger of an Indian Company into a foreign company not envisage by Indian Company Act, 1956. </li></ul><ul><li>Corporate Law provisions, such as rules/provisions regarding buyback, board meeting for approval adoption, dividends payment mechanism, etc. also need to be taken into consideration. </li></ul>
  44. 44. Securities Law Consideration <ul><li>SEBI (Disclosure and Investor Protection) Guidelines 2000. </li></ul><ul><ul><li>If the Indian company is listed on any stock exchange in India and is issuing its shares to the shareholders of the foreign company as consideration for acquiring shares of the foreign company, then it will need to comply with the guidelines for preferential allotment under SEBI (Disclosure & Investor Protection) guidelines. </li></ul></ul>
  45. 45. <ul><ul><ul><li>Pricing for Preferential Allotment – not less than average of the weekly high and low of the closing prices of the shares quoted on stock exchange during the 26 weeks. </li></ul></ul></ul><ul><ul><ul><li>Lock in – 1 year from date of allotment </li></ul></ul></ul>
  46. 46. Securities Law Consideration <ul><li>SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. </li></ul><ul><ul><li>Regulate takeovers of listed companies in India. </li></ul></ul><ul><ul><li>Implications – regulations require a foreign acquirer of a foreign target company, whether acting alone or in conjunction with others, to make an open offer in India, if as a result of the overseas acquisition of the foreign target company, there is a change in “control” of an Indian company listed on an Indian stock exchange. </li></ul></ul>
  47. 47. Outbound Investment- Key Structuring Issues <ul><li>Entity structuring </li></ul><ul><ul><li>Choice of Entity for foreign operations </li></ul></ul><ul><li>Structuring of international acquisition </li></ul><ul><ul><li>Asset purchase vs. share purchase (in terms of benefits under applicable treaty and host country ’s tax law) </li></ul></ul><ul><ul><li>Acquisition financing </li></ul></ul>
  48. 48. <ul><li>International holding structures. </li></ul><ul><ul><li>Direct holding vs. intermediate holding (i.e. use of SPV). </li></ul></ul><ul><ul><li>Choice of jurisdiction for holding company (tax-haven jurisdiction) e.g. Maruitus, Singapore, Cyprus, Netherlands, Poland, Hungary, Barbados (all have absence of taxing LOB clause in tax treaties with US and NIL withholding tax incidence under India and US treaty). </li></ul></ul>
  49. 49. <ul><li>Post acquisition structuring and objectives. </li></ul><ul><ul><li>Legal and business model integration with large group. </li></ul></ul><ul><ul><li>Objectives for profit generation and future investments. </li></ul></ul>
  50. 50. Laws of USA Inbound Investments <ul><li>Key reporting requirements and legislation. </li></ul><ul><ul><li>Hart-Scott-Rodino Antitrust Improvement Act </li></ul></ul><ul><ul><li>International Investment to Trade Services Survey Act </li></ul></ul><ul><ul><li>Agriculture Foreign Investment Disclosure Act </li></ul></ul><ul><ul><li>National Security Review (Exxon-Florio) Act </li></ul></ul><ul><ul><li>Foreign Assets Control Regulation (pursuant to Trading With the Enemy Act) </li></ul></ul><ul><ul><li>Buy American Act </li></ul></ul><ul><ul><li>USA Patriot Act </li></ul></ul>
  51. 51. General Restrictions – Ownership Limits In Sensitive & Highly Regulated Sector <ul><li>US Federal Laws restrict the percentage of foreign ownership in certain sectors considered particularly sensitive and highly regulated. </li></ul><ul><li>Some restrictions may be avoided by incorporating a US subsidiary. Usually the laws will look to the nationality of the owners or the nationality of management, or both, in order to determine whether even a U.S. subsidiary may be utilized for the investment. </li></ul>
  52. 52. <ul><li>Some of the sensitive and highly regulated sectors are: </li></ul><ul><ul><li>Aviation </li></ul></ul><ul><ul><ul><li>Aircraft may be registered by US citizens or permanent residents, partnership in which all partners are US citizens or companies in which 75% of stock is controlled by US citizens. </li></ul></ul></ul><ul><ul><ul><li>Foreign corporations organized and doing business under laws of the US may be able to register the aircraft if it is based or primarily used in the US. </li></ul></ul></ul>
  53. 53. <ul><ul><li>Banking </li></ul></ul><ul><ul><ul><li>Require US Federal Reserve Board approval. </li></ul></ul></ul><ul><ul><ul><li>All directors of a national bank must ordinarily be US citizens. </li></ul></ul></ul><ul><ul><ul><li>If operating (subject to license approval) as a branch or agency of a foreign affiliated bank, then subject to extensive regulation and supervision. </li></ul></ul></ul>
  54. 54. <ul><ul><li>Insurance </li></ul></ul><ul><ul><ul><li>Some states have US citizenship and residency requirements for directors of insurance companies. </li></ul></ul></ul><ul><ul><ul><li>Approval from State Insurance Commission. </li></ul></ul></ul><ul><ul><li>Power Generation & Utility Service </li></ul></ul><ul><ul><ul><li>Atomic Energy Act prohibits foreign ownership or control of nuclear power facilities. </li></ul></ul></ul>
  55. 55. <ul><ul><li>Communications & Broadcasting </li></ul></ul><ul><ul><ul><li>Review process under Telecommunication Act of 1996, foreign corporations or partnerships may not be denied license under An equity and public interest standard. </li></ul></ul></ul><ul><ul><li>Real Estate </li></ul></ul>
  56. 56. Key Legislations & Reporting Requirements <ul><li>Hart-Scott-Rodino Antitrust Improvement Act, 1976 ( “Act”) </li></ul><ul><ul><li>Under the Act, foreign individuals or entities seeking to acquire a US entity through merger or purchase, must report the acquisition to the Federal Trade Commission where the transaction will “substantially affect commerce” . </li></ul></ul>
  57. 57. <ul><ul><li>Transactions meeting this standard are interpreted to include (among other definitions), to include any transaction in which amount of acquired assets exceeds US$ 15,000,000 (Fifteen Million Dollars) or where transaction results in foreign ownership of 15% or more of the voting securities of a US entity with annual net sales or total assets in excess of US$ 10,000,000 ( Ten Million Dollars). </li></ul></ul><ul><ul><li>Extensive and stringent reporting requirements. </li></ul></ul>
  58. 58. <ul><li>International Investment & Trade in Services Survey Act, 1976 ( “Act”) </li></ul><ul><ul><li>Establishment of a new US business enterprise or foreign acquisition of 10% or more of the voting securities of any US entity, either directly or through a US affiliate, are required to be reported to the Bureau of Economic Analysis (BEA) of the US Department of Commerce within 45 days after the direct investment occurs. </li></ul></ul>
  59. 59. <ul><ul><li>“ US affiliate” is defined as a business enterprise located in the US, that is directly or indirectly controlled by a foreign person or entity with an ownership interest of 10% or more. </li></ul></ul><ul><ul><li>An exemption from reporting could be claimed if the new US affiliate has no more than US$ 3,000,000 (Three Million Dollars) in total assets and owns less than 200 acres of land immediately after being established or acquired. </li></ul></ul>
  60. 60. <ul><ul><li>Other exemption from reporting exists for certain types of investment. For example, real estate held exclusively for personal use and not as a business for profit. </li></ul></ul>
  61. 61. <ul><li>Agricultural Foreign Investment Disclosure Act, 1976 ( “Act”) </li></ul><ul><ul><li>Act requires foreign person acquiring or transferring an interest in US agricultural land to file a report with the Agriculture Stabilization & Conservation Service within 90 (Ninety) days of such acquisition or transfer. </li></ul></ul>
  62. 62. <ul><li>National Security Review (Exon-Florio) Act, 1950 ( “Act”) </li></ul><ul><ul><li>Act authorizes the President, following a review by committee on foreign investment in the US ( “CIFUS”), to block an acquisition of a US business by a foreign person or entity if the acquisition threatens to impair the “national security” of the US. </li></ul></ul><ul><ul><li>Exon-Florio law does not define “national security” , but lists factors that could be considered by CIFUS. </li></ul></ul>
  63. 63. <ul><ul><li>In most instances, the ruling under Exon-Florio is technically voluntary. Any transactions not reasonably related to US “national security” is exempted filing. </li></ul></ul>
  64. 64. <ul><li>USA Patriot Act, 2001 </li></ul><ul><ul><li>The act expands the power of certain law enforcement officials to counter terrorism both in the US and abroad. </li></ul></ul><ul><ul><li>As a result, when seeking to engage in various financial transactions in the US, foreign investors, including their families and associates must now expect to be more forthcoming with information regarding such matters as ownership statistics and non-affiliation with certain individuals and organizations deemed to be adverse to national security. </li></ul></ul>
  65. 65. <ul><li>Buy America Act </li></ul><ul><ul><li>Under this Act, subject to exception, only articles, materials and supplies produced in the US may be acquired by the federal government for public use. </li></ul></ul><ul><ul><li>In construction contracts with the federal government, contractors of supplies may only use US-produced goods </li></ul></ul><ul><ul><li>Exceptions – (i) desired items are not manufactured or produced in sufficient and reasonably quantity and quality; (ii) domestic prices are unreasonably high; and (iii) materials used by federal government outside US. </li></ul></ul>
  66. 66. <ul><li>Foreign Assets Control Regulation Act </li></ul><ul><ul><li>Certain US investments and other transactions with persons of listed countries require licenses from US Treasury Department. </li></ul></ul><ul><ul><li>Countries presently on the list include Cuba, Iran, Iraq, Libya, North Korea & Sudan. </li></ul></ul><ul><ul><li>So be aware of not investing in the US through companies or partnerships formed in the listed countries. </li></ul></ul>
  67. 67. <ul><li>Disclosure of Ownership in Tax Reports </li></ul><ul><ul><li>Federal and state taxation authorities require information about foreign ownership or control as part of the tax return process. </li></ul></ul>
  68. 68. <ul><ul><li>Any US corporation that is owned directly or indirectly at least 25% in voting power or value by a foreign person or any foreign corporation engaged in a US trade or business (through, for example, an unincorporated branch/representative office) must file a report /form annually with the Internal Revenue Service ( “IRS”), if they have any sales or purchase of property, rents, or royalties, commissions, interest or insurance premiums paid or received, or loans or borrowings. </li></ul></ul>
  69. 69. Penalties & Fines <ul><li>Failure to adhere to reporting requirements proposed in the above-mentioned Acts or failure to comply with provisions of the Acts noted results in hefty PENALTIES and may include imprisonment and fines for willful failure by individuals or corporate officers. </li></ul>
  70. 70. Conclusion <ul><li>US traditionally welcomes foreign investment. </li></ul><ul><ul><li>This attitude is reflected in the relative absence of restrictions compared to those imposed by other countries. </li></ul></ul><ul><li>A non US person can usually establish a US subsidiary or branch without substantial control or review by any federal, state or local governmental authority in the US. Very few sector exceptions, as discussed above, where limits are imposed. </li></ul>
  71. 71. <ul><li>Foreign owned US enterprises may freely remit US profits abroad and its owners may freely repatriate their equity and debt capital investment, subject to payments of withholding tax. </li></ul><ul><li>Foreign exchange controls are generally absent. </li></ul>
  72. 72. <ul><li>BOTTOM LINE: Although there are various compliances and reporting requirements (on a case-to-case basis) under the key acts mentioned, these should be viewed as exception to general overriding rule that foreign investment has traditionally been welcome in the US . </li></ul>
  73. 73. Thank You! <ul><li>Vinita Bahri-Mehra, Esq. </li></ul><ul><li>International Law and Business </li></ul><ul><li>Kegler, Brown, Hill & Ritter Co., L.P.A. </li></ul><ul><li>Suite 1800, 65 East State Street </li></ul><ul><li>Columbus, Ohio 43215 </li></ul><ul><li>Direct Dial: (614) 255-5508 </li></ul><ul><li>Fax: (614) 464-2634 </li></ul><ul><li>Email: [email_address] </li></ul><ul><li> </li></ul>