Outbound Investments


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Outbound Investments

  1. 1. OUTBOUND INVESTMENTS – UNDER FEMA REGULATIONS <ul><li>CS ASHISH PANDAY </li></ul><ul><li>[email_address] </li></ul>
  2. 2. Agenda <ul><li>Provisions of FEMA, 1999 and Applicable Regulations </li></ul><ul><li>Types of Investments – Prohibited / Regulated /Permitted </li></ul><ul><li>US$ 25,000 Scheme </li></ul><ul><ul><li>JV/ WOS </li></ul></ul><ul><ul><li>Investments by Employees </li></ul></ul><ul><ul><li>Portfolio Investments </li></ul></ul><ul><ul><li>Agricultural operations overseas </li></ul></ul>
  3. 3. FEMA provisions <ul><li>Overseas Investments is a Capital account transaction </li></ul><ul><li>Hence prohibited unless permitted – generally or specifically - Section 6 </li></ul><ul><li>RBI empowered by Section 6(2) to specify permissible capital account transactions. </li></ul><ul><li>FEM (Permissible Capital account transactions) Regulations issued in 2000. – Schedule I lists 11 capital account transactions, of which ODI is # 1 </li></ul><ul><li>Notif # 19 issued in 2000, replaced by Notif # 120 dated July 7, 2004, as amended. </li></ul>
  4. 4. Important Definitions <ul><li>Foreign Security – Section 2(o) </li></ul><ul><li>Direct Investment outside India – Reg 2(e) </li></ul><ul><li>Financial Commitment – Reg 2f) </li></ul><ul><li>Indian Party - Reg 2(k) </li></ul><ul><li>Net worth - Reg 2(o) </li></ul><ul><li>Real Estate Business - Reg 2(p) </li></ul><ul><li>JV / WOS - Reg 2(m)/ 2(q) </li></ul><ul><li>Host Country - Reg 2(j) </li></ul>
  5. 5. Prohibited Investments <ul><li>Reg 5 (2) </li></ul><ul><ul><li>All “Indian Parties” prohibited from investment in a foreign entity engaged in – </li></ul></ul><ul><ul><ul><li>Real estate Business </li></ul></ul></ul><ul><ul><ul><li>Banking Business </li></ul></ul></ul><ul><li>Reg 5(1) </li></ul><ul><ul><li>All residents not to make direct investment o/s India – except with general / specific approval </li></ul></ul><ul><li>Reg. 3 of Notif 120 </li></ul><ul><ul><li>All persons resident in India prohibited from issuing foreign security – except with RBI approval </li></ul></ul>
  6. 6. General Permission <ul><li>Reg 4 / Para A 4 </li></ul><ul><li>General permission granted to residents for </li></ul><ul><ul><li>Purchase / acquisition of foreign securities and sale thereof </li></ul></ul><ul><ul><ul><li>Out of funds held in RFC account </li></ul></ul></ul><ul><ul><ul><li>As bonus shares on securities already held </li></ul></ul></ul><ul><ul><ul><li>Out of their Foreign Currency Resources outside India </li></ul></ul></ul><ul><ul><ul><li>(when not permanently resident in India) </li></ul></ul></ul>
  7. 7. Direct Investment o/s India – Automatic Route - Reg 6 <ul><li>Who can invest? </li></ul><ul><ul><li>Company incorporated in India </li></ul></ul><ul><ul><li>Body created under Act of Parliament </li></ul></ul><ul><ul><li>Partnership firm regd under Indian Partnership Act </li></ul></ul><ul><ul><li>Other entity as notified by RBI </li></ul></ul><ul><li>Effective 27/3/2006, proprietary / unregistered partnership firms which are star export houses are also permitted – subject to RBI approval – Form ODI – Conditions as per Annex to circular dt 27/3/2006 </li></ul>
  8. 8. Direct Investment o/s India – Automatic Route - Reg 6 <ul><li>Indian party permitted to make investment in overseas JV/WOS </li></ul><ul><li>To submit Form ODA to designated branch of AD </li></ul><ul><li>Limit: 200% of Net Worth as on date of last B/s </li></ul><ul><li>Ceiling NA for investments out of EEFC a/c or funds raised thru ADRs/GDRs. </li></ul><ul><li>Investment in Nepal/ Bhutan only in INR </li></ul><ul><li>Investment in Pakistan not permitted under automatic route </li></ul>
  9. 9. Direct Investment o/s India – Automatic Route - Reg 6 – Contd. <ul><li>Limit will include capital contribution in / loans granted to JV/ WOS, and 50% of guarantees issued to / on behalf of JV/WOS. </li></ul><ul><li>Conditions: </li></ul><ul><ul><li>Loan / Guarantee may be given only to an overseas concern in which it has equity participation. </li></ul></ul><ul><ul><li>Investor should not be on RBI’s caution list / list of defaulters to banking system or under investigation </li></ul></ul><ul><ul><li>All transactions to be routed thru one branch of AD. </li></ul></ul><ul><ul><li>For acquisition of existing foreign co. – share valuation required from Cat 1 Merchant Banker ( > US$ 5 Mn), or CA/CPA (< US$ 5 Mn) </li></ul></ul>
  10. 10. Direct Investment o/s India – Automatic Route - Reg 6 – Contd. <ul><li>Investment by swap of shares – </li></ul><ul><ul><li>Valuation only by Cat 1 Merchant Banker/approved investment banker from host country </li></ul></ul><ul><ul><li>FIPB approval MUST </li></ul></ul><ul><li>Investment by a firm – shares in JV/WOS may be held by individual partners if warranted by host country regulations </li></ul>
  11. 11. Direct Investment o/s India – Automatic Route - Reg 6 – Contd. <ul><li>Funding: </li></ul><ul><ul><li>Drawal of FX from AD </li></ul></ul><ul><ul><li>Capitalisation of export proceeds </li></ul></ul><ul><ul><li>Swap of shares </li></ul></ul><ul><ul><li>Proceeds of ECB/ FCCB </li></ul></ul><ul><ul><li>Balance in EEFC a/c* </li></ul></ul><ul><ul><li>Proceeds of ADR/ GDR issue* </li></ul></ul><ul><ul><ul><li>* Limit of 200% NA, except for investment in financial sector </li></ul></ul></ul>
  12. 12. Direct Investment o/s India – Automatic Route - Reg 6 – Contd. <ul><li>Capitalisation of export proceeds </li></ul><ul><ul><li>Dues from foreign entity towards exports, fees, royalties or other entitlements – dues > 6 months need prior RBI approval for capitalisation </li></ul></ul><ul><ul><li>Software exporters can get 25% of value of exports to overseas software co in form of shares without entering into JV agreements – with RBI approval. </li></ul></ul>
  13. 13. Share Swap – Reg 8 <ul><li>Indian parties which have already made ADR/GDR may acquire shares of FC in same core activity under Scheme / guidelines </li></ul><ul><li>Conditions – </li></ul><ul><ul><li>ADR /GDR listed on any stock exchange o/s India </li></ul></ul><ul><ul><li>Max – higher of (a) US$ 100 Mn; (b) 10 times export earnings in preceding financial year (including automatic investments in same financial year) </li></ul></ul>
  14. 14. Share Swap – Reg 8 <ul><ul><li>ADR/GDR issue for purpose of acquisition is backed by fresh equity shares of Indian party. </li></ul></ul><ul><ul><li>Holding in Indian entity does not exceed sectoral caps for FDI </li></ul></ul><ul><ul><li>Valuation as per recommendation of investment banker (for unlisted shares) or current market cap based of last three months average price on stock exchange </li></ul></ul><ul><ul><li>File ODG within 30 days </li></ul></ul>
  15. 15. Guarantees <ul><li>Till 27/3/06 – Only corporate promoters could offer guarantees for JV/WOS </li></ul><ul><li>Now – all Indian entities may offer any form of guarantee – corporate/ personal /primary / collateral – by promoter / group company / sister concern / associate companies </li></ul>
  16. 16. Guarantees - Contd. <ul><li>Conditions: </li></ul><ul><ul><li>All financial commitments within prescribed ceiling (currently 200% of net worth of Indian party) </li></ul></ul><ul><ul><li>No guarantee should be open ended – i.e. max amount to be specified upfront </li></ul></ul><ul><ul><li>To be reported to RBI in Form ODR </li></ul></ul><ul><li>Guarantees by Indian banks in favour of the JV/ WOS outside these limits, and subject to usual prudential norms of RBI. </li></ul>
  17. 17. Portfolio Investments <ul><li>Corporates- </li></ul><ul><ul><li>Listed Indian co’s can invest in shares of companies listed on recognised stock exchange and which has at least 10% holding in an Indian listed company </li></ul></ul><ul><ul><li>Also permitted to invest in bonds / fixed income securities of such companies </li></ul></ul><ul><ul><li>Max – 25% of Indian co’s net worth </li></ul></ul><ul><li>Individuals- </li></ul><ul><ul><li>Same as corporates – except no monetary limit </li></ul></ul>
  18. 18. Portfolio Investments <ul><li>Mutual Funds- </li></ul><ul><ul><li>Can invest in ADR /GDR of Indian co’s rated debt instruments and also in equity of overseas companies as specified for corporates </li></ul></ul><ul><ul><li>Overall cap of US$ 1 billion </li></ul></ul><ul><ul><li>SEBI approval required </li></ul></ul><ul><li>General permission in each of the above cases for sale of securities so acquired </li></ul>
  19. 19. Financial Services Sectors- Additional Conditions for Indian party <ul><li>Shd be regd with appropriate regulatory authority </li></ul><ul><li>Shd have earned net profit during preceding 3 financial years </li></ul><ul><li>Approval obtained from regulatory authorities in India and abroad </li></ul><ul><li>Fulfilled prudential norms relating to capital adequacy norms as prescribed by regulatory authority </li></ul>
  20. 20. Approval Route <ul><li>Cases not covered above </li></ul><ul><li>Apply in Form ODB to RBI – for same core activity in exchange of ADR/GDR > $ 100 Mn / 10 times export earnings / for acquisition of shares a co o/s India </li></ul><ul><li>Apply in ODI in other cases. </li></ul><ul><li>RBI will examine prmia facie viability of JV/WOS, and similar other points etc </li></ul>
  21. 21. Post investment changes <ul><li>JV/WOS may diversify its activities / set up step down subsidiaries / alter shareholding pattern </li></ul><ul><li>To be reported by JV/WOS to RBI within 30 days from approval of those decisions by the relevant competent authority </li></ul><ul><li>To be mentioned in APR </li></ul>
  22. 22. Tender / bidding acquisition <ul><li>Reg 14 </li></ul><ul><li>Remittance of EMD / bid bond guarantee permitted </li></ul><ul><li>Subsequent remittance also permitted </li></ul>
  23. 23. Obligations/ Rights of Investor <ul><li>To receive share certificates / other evidence of investment </li></ul><ul><li>Repatriate all dues receivable from foreign entity </li></ul><ul><li>Submit APR – </li></ul><ul><ul><li>As per Reg 15 </li></ul></ul><ul><li>May pledge shares to JV/WOS to an AD in India for credit for Indian party / JV/WOS – Reg 18 </li></ul><ul><li>Hedging of exchange risks of investment </li></ul>
  24. 24. Disivestment from JV/WOS <ul><li>May transfer to another Indian party which complies with conditions of Reg 6 or to a non resident </li></ul><ul><li>Subject to conditions / requirements listed </li></ul><ul><li>Indian listed companies may disinvest resulting in write off of capital invested, subject to 10% of previous year’s export realisation* </li></ul><ul><li>To apply to RBI in other cases </li></ul><ul><li>* Effective 2732006, “write off” permitted in folowin cases: </li></ul><ul><ul><li>JV/ WOS listed in overseas stock exchange </li></ul></ul><ul><ul><li>Indian promoter listed and having net worth > Rs 100 crs. </li></ul></ul><ul><ul><li>Indian promoter unlisted and investment < US$ 10 Mn. </li></ul></ul>
  25. 25. Other investments <ul><li>Acquire foreign securities as a gift from PROI </li></ul><ul><li>Acquire shares under cashless ESOS </li></ul><ul><li>By inheritance from PRII / PROI </li></ul><ul><li>Acquire shares under ESOPs </li></ul><ul><li>Qualification shares – 1% of paid up capital (upto US$ 20,000) </li></ul><ul><li>Rights shares – provided original holding as per prevailing law </li></ul>
  26. 26. Overseas Branches <ul><li>Remittance upto 10% / 5% of average annual sales / income / turnover during last two accounting years for initial and recurring expenses of foreign branches. </li></ul><ul><li>Before 21 st April, 2006 limit was 2% & 1% respectively. </li></ul><ul><li>Other conditions as per circular 54 dated 29 th June, 2002. </li></ul>
  27. 27. US $ 25,000 Scheme <ul><li>An individual resident in India is permitted to remit up to US $ 25,000 per calendar year for any legal and lawful purpose without obtaining prior permission of RBI. The individual can use said facility for any current or capital account transaction, acquisition of any movable and/or immovable property or opening of a bank account outside India. </li></ul><ul><li>However, remittances cannot be made to Bhutan, Nepal, Mauritius or Pakistan or countries identified as &quot;non co-operative countries and territories&quot; by the Financial Action Task Force. Currently, the countries where investment cannot be made are Myanmar, Nauru, Nigeria. The updated list can be seen at the website of FATF - http://www.fatf-gaf </li></ul>
  28. 28. Overseas Agricultural Operations <ul><li>Indian company or a partnership firm registered under the Indian Partnership Act, 1932 are permitted to undertake agricultural operations including purchase of land incidental to such activity. Inv estment can be made either directly (through a branch) or through an overseas subsidiary/joint venture. </li></ul>
  29. 29. CS ASHISH PANDAY <ul><li>Ashish is an Investment Advisor, Member of the Institute of Company Secretaries of India & Graduate In Economics. He is in capital markets & Investment management practice and specializes in international equity and debt securities offerings including IPOs, securities programmers, corporate bonds (both high-yield and investment grade) and asset-backed debt. </li></ul><ul><li>As well as acting for issuers, originators and underwriters on securities offerings, he also has experience Corporate Governance & Compliance Management with a wide experience of Investor Grievance </li></ul><ul><li>Ashish Works includes advising: </li></ul><ul><ul><li>On a Right Issue with international offering of an Indian telecommunications infrastructure company to be listed on the National Stock Exchange & Bombay Stock Exchange, (deal aborted)‏ </li></ul></ul><ul><ul><li>On an Private placement of Equity to foreign venture capital funds of an Drug manufacturer Co listed on the Bombay Stock Exchange & National Stock Exchange. </li></ul></ul><ul><ul><li>Tripartite Foreign Joint Venture Incorporation & Framing Capital Structure in Manufacturing sector Company in Indian Subcontinent. </li></ul></ul><ul><ul><li>Mondon Technologies on its proposed convertible Preference share & Convertible Bond issue </li></ul></ul>
  30. 30. Thanks