Strategic Alliance of ICSI Professional Chapter 9, 10
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NATURE & SCOPE OF STRATEGIC ALLIANCES
Q. What is Strategic Alliance?
In an independent world every company is required to work in cooperation with others if
it wants to compete in the global market. The global market place has spawned new
strategic approaches in many industries.
Alliances are used to enter new markets, access new technologies and achieve economies
of scale faster and cheaper than any other acquisition method. Alliances between
companies have become a crucial weapon in the battle for competitive advantage. A
strategic Alliance is an excellent vehicle for two companies to work together profitably.
Establishing and managing winning alliances, starts with the crucial process of picking the
right partner and creating realistic expectations on both sides. At the inception of the
alliance, the intent of both parties must be clearly established.
Any arrangement or agreement under which two or more firms cooperate in order to
achieve certain commercial objectives is referred to as strategic alliance.
A true strategic alliance is a written arrangement between two companies that
complement each other in a particular identified area. It is not a partnership, and neither
company has legal power to control or obligate the other. Instead it is the commitment by
the two companies to provide capabilities or cross servicing in certain identified areas.
By properly utilizing a strategic alliance, companies can expand their product and service
offerings substantially, without the usual corresponding investment in staff, equipment
Strategic alliances have objectives similar to those of conventional acquisitions but such
alliances can prove to be less expensive than acquisition, if they are structured properly.
This is because if two or more companies pool their resources they can secure their joint
objectives more easily and economically.
Q. What are the characteristics of Strategic Alliance?
1. The two or more firms that unite to pursue a set of agreed goals remain
independent subsequent to the formation of an alliance.
2. The partner firms share the benefits of the alliance and control over the
performance of assigned tasks.
3. The partner firms contribute on a continuing basis in one or more key strategic
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Q. Why there is a Need for Alliances?
1. Satisfy customer demands.
2. Share R&D costs.
3. Fill knowledge gaps.
4. Make scale economies.
5. Jump market barriers.
6. Speed product introduction.
7. Pre‐empt competitive threats.
8. Use excess capacity.
9. Cut exit costs.
Q. What are the Advantages of Strategic Alliances?
Alliances allow accompany to:
1. Rapidly move to a decisively seize opportunities before they disappear;
2. Respond more quickly to change;
3. Adapt with greater flexibility;
4. Increase a company’s market share;
5. Gain access to a new market or beat others to that market;
6. Quickly shore up internal weaknesses;
7. Gain a new skill or area of competence.
Q. What are the Types of Strategic Alliances?
1. Management Contract:
A management contract is an arrangement under which operational control of an
enterprise is vested by contract in a separate enterprise which performs the
necessary managerial functions in return for a fee. A management contract can
involve a wide range of functions, such as technical operation of a production
facility, management of personnel, accounting, marketing services and training.
Franchising is a network of interdependent business relationships that allows a
number of people to share:
• A brand identification
• A successful method of doing business
• A proven marketing and distribution system
In short, franchising is a strategic alliance between groups of people who have
specific relationships and responsibilities with a common goal to dominate
markets, i.e., to get and keep more customers than their competitors.
3. Supply or Purchase Agreement:
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4. Marketing or distribution agreement:
5. Joint venture:
A joint venture (JV) is a business agreement in which the parties agree to develop,
for a finite time, a new entity and new assets by contributing equity. They exercise
control over the enterprise and consequently share revenues, expenses and assets.
There are other types of companies such as JV limited by guarantee, joint ventures
limited by guarantee with partners holding shares.
6. Agreement to provide technical services:
7. Licensing of know‐how, technology, design or patent.
Q. Advantages of Strategic Alliances?
A business strategic alliance is also means to an end, not just an end in itself. Strategic
alliances often take place between firms of different industries and of varied sizes, for
vertical or horizontal links, consolidation of positions or any of the following:
1. Gain a means of Distribution in International market.
2. Overcome Legal or Regulatory Barriers.
4. Avoiding competition.
5. Focus on New Products and Restructuring.
6. Sharing the financial risk.
7. Achieving synergy and competitive advantage.
Q. What are the Preliminary steps required for an Alliance?
Developing qualitative &
Developing a list of
Obtaining internal aprovals
Final pre‐deal evaluation of
all relevant information
Negotiating the deal
Managing the legal process
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The important steps necessary for good alliance creation and management are:
1. Developing qualitative & quantitative partner criteria:
The organizational culture and norms should be analysed, personnel functions
should be analysed and the proposed criteria of partner to be selected should be
2. Developing qualitative & quantitative partner criteria:
It is essential that the partner analysis is proactive and not reactive. A list of
prospective partners should be prepared.
3. Partner selection:
While selecting a partner, companies must list the prospective standards against
which they can measure the merits of a prospective partner, the most important
being the 3 C’s of successful alliances namely:
• What is your partner’s strategy?
• How manageable are differences in corporate cultures?
• How much compatibility exists among management practices and
• How do you and your prospective partner compare with respect to
financial strength, risk orientation, dividend policies, reinvestment,
debt‐equity ratios, currency management, etc.?
• How compatibles are policies on ethics and health, safety and
• What is a potential partner’s alliance record?
• Have you checked for complementary strengths?
• Has a multi‐functional team scrutinized the capabilities?
• Is compatibility interfering with a rigorous analysis?
• Is the potential partner’s management stable and coherent?
• How does reality accord with a potential partner’s own projection of
• Does the alliance fall within a core business or product line of the
• Determine how difficult it would be for a potential partner to
withdraw from the alliance.
4. Partner Analysis:
This can be done by asking some important questions like:
• Whether the relationship meets the mission statement goals?
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• Whether is the strategic potential for the company resulting from a
• Is there another partner in the industry that would be a better prospect?
• What is the risk exposure for the company, arising out of the relationship in
terms of knowledge transfer?
5. Obtaining internal approvals:
The policies should be completely unambiguous and clear internal approvals
should be obtained from the CEO and top advisory personnel to avoid
6. Creating an implementation plan:
Alliances conceived entirely by the planning and corporate departments without
the active participation of the operational managers, who will ultimately have
responsibility for the implementation of projects are bound to fail. It is therefore
essential that the operating managers are involved in at least the later stage of the
7. Final pre‐deal evaluation of all relevant information:
8. Negotiating the deal:
9. Managing the legal process
Q. What are the various factors potentially conducive to successful
1. Partnership should be based on an optimum balance of business strength and
ownership amongst partners.
2. The partners to alliance should bring in complementary skills, and capabilities to
3. Conflict of interest by virtue of market overlap should be minimal and avoided as
far as possible.
4. A degree of autonomy, strong leadership, continual commitment among partners.
5. Alliance should be capable of building trust and confidence among partners.
6. Sensitive and empathetic approach to be followed while dealing with divergence of
management styles and corporate culture.
Q. What is Cross Cultural Alliance?
It is the interaction of people from different backgrounds in business world. Cross culture
is a vital issue in international business, as the success of international trade depends
upon the smooth interaction of employees from different cultures and regions. A growing
number of companies are consequently devoting substantial resources toward training
their employees to interact effectively with those of companies in other cultures in an
effort to foment a positive cross‐cultural experience.
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In a global economy with shifting labour markets, work migrates to wherever quality, cost
and efficiency can be managed so as to derive better return on capital and time invested.
When an organization decides to enter the international market place, there are certain
strategic management capabilities that must be modified and introduced into the
corporate culture for the venture to be successful. Cross cultural ventures can reap
enormous benefits for companies.
The national culture, in which an organization operates, is to some extent influence the
type of culture and style of work, organisations adopt. The perceived threat of
concentration and nationalism is a potential barrier to international alliances, M&A etc.
Differences in cultures have clear implications not only for the negotiation of alliance in
terms of understanding how issues are perceived by the other party and presentation of
type and sources of information that re more congruent with their culture but also joint
formulation of future business strategies.
PLANNING CROSS CULTURAL ALLIANCE:
1. Both parties need to first appreciate and understand the different views and
2. Cultural awareness and language skills are important aspects in negotiating and
working within international partnerships and alliances.
3. The managers selected should be trained to become experts in the extra
complications caused by cultural dissimilarities.
4. There are sub cultures within many country cultures. So, it is important to verify
that there are cultural assumptions that are being made for the alliance, have been
modified for the particular sub cultural characteristics.
5. Cross cultural competition for labour and technology is impacting every company
that does business internationally and cross cultural alliances must adapt as well.
6. The key skills of managers involved in building cross‐cultural alliance must be the
ability to work in ambiguous, unfamiliar, cross‐functional and trans‐cultural
Q. What are the key obstacles to the success of Cross‐Cultural
1. Coping with increased complexity;
2. Aligning differing orientations;
3. Short term vs. long term focus;
4. Strategy vs. operations;
5. Cultural integration.
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Q. What are the factors to be kept in mind while managing an
Managing an alliance is relatively new art. Finding the right mix of management
ingredients for success can be quite daunting. Certain key factors are:
1. Mutual Trust:
2. An ability to compromise
3. Favourable business condition
4. Alliance autonomy
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FOREIGN COLLABORATIONS AND JOINT VENTURES
• Industrialization is a major objective of developing countries as a means to the
attainment of higher levels of economic well‐being of people.
• Advancement of science and technology provides the stimulus to achieve faster
• It is the intent and objective of the Government of India to attract and promote
foreign direct investment in order to supplement domestic capital, technology and
skills, for accelerated economic growth.
• Foreign Direct Investment, as distinguished from portfolio investment, has the
connotation of establishing a lasting interest in an enterprise that is resident in an
economy other than that of the investor.
• The Government has put in place a policy framework on Foreign Direct Investment,
which is transparent, predictable and easily comprehensible.
Foreign Direct Investment means “cross border investment made by a resident in one
economy in an enterprise in another economy, with the objective of establishing a lasting
interest in the investee economy.
FDI is also described as “investment into the business of a country by a company in
another country”. Mostly the investment is into production by either buying a company
in the target country or by expanding operations of an existing business in that country”.
Such investments can take place for many reasons, including to take advantage of
cheaper wages, special investment privileges (e.g. tax exemptions) offered by the country.
1. A non‐resident entity (other than a citizen of Pakistan or an entity incorporated in
Pakistan) can invest in India, subject to the FDI Policy.
2. A citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India
under the FDI Policy, only under the Government route.
3. NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are
permitted to invest in the capital of Indian companies on repatriation basis, subject
to the condition that the amount of consideration for such investment shall be paid
only by way of inward remittance in free foreign exchange through normal banking
Q. What do you understand by FDI?
Q. Who can invest in India?
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4. OCBs (Overseas corporate bodies) have been derecognized as a class of Investors
in India with effect from September 16, 2003. Erstwhile OCBs which are
incorporated outside India and are not under the adverse notice of RBI can make
fresh investments under FDI Policy as incorporated non‐resident entities, with the
prior approval of Government of India if the investment is through Government
route; and with the prior approval of RBI if the investment is through Automatic
5. FII (Foreign Institutional Investor):
• An FII may invest in the capital of an Indian Company under the Portfolio
Investment Scheme which limits the individual holding of an FII to 10% of the
capital of the company and the aggregate limit for FII investment to 24% of the
capital of the company.
• The Indian company which has issued shares to FIIs under the FDI Policy for
which the payment has been received directly into company’s account should
report these figures separately under item no. 5 of Form FC‐GPR (Annex‐1‐A)
(Post‐issue pattern of shareholding) so that the details could be suitably
reconciled for statistical/monitoring purposes.
• A daily statement in respect of all transactions (except derivative trade) have to
be submitted by the custodian bank in floppy / soft copy in the prescribed
format directly to RBI to monitor the overall ceiling/sectoral cap/statutory
6. No person other than registered FII/NRI as per Schedules II and III of Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations of FEMA 1999, can invest/trade in capital of Indian Companies in
the Indian Stock Exchanges directly i.e. through brokers like a Person Resident in
7. A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to
100% of the capital of an Indian Venture Capital Undertaking (IVCU) and may also
set up a domestic asset management company to manage the fund. All such
investments can be made under the automatic route in terms of Schedule 6 to
Notification No. FEMA 20. A SEBI registered FVCI can also invest in a domestic
venture capital fund registered under the SEBI (Venture Capital Fund) Regulations,
1996. Such investments would also be subject to the extant FEMA regulations and
extant FDI policy including sectoral caps, etc. SEBI registered FVCIs are also allowed
to invest under the FDI Scheme, as non‐resident entities, in other companies,
subject to FDI Policy and FEMA regulations.
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Types of Instruments
Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible
debentures and fully, compulsorily and mandatorily convertible preference shares
subject to pricing guidelines/regulation norms prescribed under FEMA Regulations. The
price/ conversion formula of convertible capital instruments should be determined
upfront at the time of issue of the instruments.
Other types of Preference shares/Debentures i.e. non‐convertible, optionally
convertible or partially convertible for issue of which funds have been received on or
after May 1, 2001 are considered as debt. Accordingly, all norms applicable for ECBs
relating to eligible borrowers, recognized lenders, amount and maturity, end‐use
stipulations, etc. shall apply.
The inward remittances received by the Indian company vide issuance of DRs and FCCBs
are treated as FDI and counted towards FDI.
Issue of shares by Indian Companies under FCCB/ADR/GDR
(i). Indian companies can raise foreign currency resources abroad through the issue of
FCCB/DR (ADRs/GDRs), in accordance with the Scheme for issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism)
Scheme, 1993 and guidelines issued by the Government of India there‐under from
time to time.
(ii). A company can issue ADRs / GDRs if it is eligible to issue shares to person resident
outside India under the FDI Policy. However, an Indian listed company, which is not
eligible to raise funds from the Indian Capital Market including a company which has
been restrained from accessing the securities market by the Securities and Exchange
Board of India (SEBI) will not be eligible to issue ADRs/GDRs.
(iii). Unlisted companies, which have not yet accessed the ADR/GDR route for raising
capital in the international market, would require prior or simultaneous listing in the
domestic market, while seeking to issue such overseas instruments. Unlisted
companies, which have already issued ADRs/GDRs in the international market, have
to list in the domestic market on making profit or within three years of such issue of
ADRs/GDRs, whichever is earlier.
(iv). There are no end‐use restrictions except for a ban on deployment / investment of
such funds in real estate or the stock market. There is no monetary limit up to which
an Indian company can raise ADRs / GDRs.
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(v). The ADR/GDR proceeds can be utilized for first stage acquisition of shares in the
disinvestment process of Public Sector Undertakings / Enterprises and also in the
mandatory second stage offer to the public in view of their strategic importance.
(vi). Voting rights on shares issued under the Scheme shall be as per the provisions of
Companies Act, 1956 and in a manner in which restrictions on voting rights imposed
on ADR‐/GDR issues shall be consistent with the Company Law provisions. Voting
rights in the case of banking companies will continue to be in terms of the provisions
of the Banking Regulation Act, 1949 and the instructions issued by the Reserve Bank
from time to time, as applicable to all shareholders exercising voting rights.
(vii). The pricing of ADR/GDR issues should be made at a price determined under the
provisions of the Scheme of issue of Foreign Currency Convertible Bonds and
Ordinary Shares (through Depository Receipt Mechanism) Scheme. 1993 and
guidelines issued by the Government of India and directions issued by the Reserve
Bank, from time to time.
Eligibility of FDI in Resident Entities
FDI IN AN INDIAN COMPANY
Indian companies including those which are micro and small enterprises can issue capital
FDI IN PARTNERSHIP FIRM/PROPRIETARY CONCERN
(i) A Non‐Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India
can invest by way of contribution to the capital of a firm or a proprietary concern in
India on non‐repatriation basis provided;
(a) Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account
maintained with Authorized Dealers/Authorized banks.
(b) The firm or proprietary concern is not engaged in any agricultural/plantation or
real estate business or print media sector.
(c) Amount invested shall not be eligible for repatriation outside India.
(ii) Investments with repatriation benefits: NRIs/PIO may seek prior permission of
Reserve Bank for investment in sole proprietorship concerns/partnership firms with
repatriation benefits. The application will be decided in consultation with the
Government of India.
(iii)Investment by non‐residents other than NRIs/PIO: A person resident outside India
other than NRIs/PIO may make an application and seek prior approval of Reserve Bank
for making investment by way of contribution to the capital of a firm or a
proprietorship concern or any association of persons in India. The application will be
decided in consultation with the Government of India.
(iv)Restrictions: An NRI or PIO is not allowed to invest in a firm or proprietorship concern
engaged in any agricultural/plantation activity or real estate business (i.e. dealing in
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land and immovable property with a view to earning profit or earning income there
from) or engaged in Print Media.
FDI IN TRUSTS
FDI in Trusts other than Venture Capital Fund (VCF) is not permitted.
FDI IN LIMITED LIABILITY PARTNERSHIPS (LLPS):
FDI in LLPs is permitted, subject to the following conditions:
(a) FDI will be allowed, through the Government approval route, only in LLPs operating in
sectors/activities where 100% FDI is allowed, through the automatic route and there
are no FDI‐linked performance conditions (such as 'Non Banking Finance Companies'
or 'Development of Townships, Housing, Built‐up infrastructure and Construction‐
development projects' etc.).
(b) LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print
media or real estate business.
(c) An Indian company, having FDI, will be permitted to make downstream investment in
an LLP only if both‐the company, as well as the LLP‐ are operating in sectors where
100% FDI is allowed, through the automatic route and there are no FDI‐linked
(d) LLPs with FDI will not be eligible to make any downstream investments.
(e) Foreign Capital participation in LLPs will be allowed only by way of cash consideration,
received by inward remittance, through normal banking channels or by debit to
NRE/FCNR account of the person concerned, maintained with an authorized
(f) Investment in LLPs by Foreign Portfolio Investors (FPIs) and Foreign Venture Capital
Investors (FVCIs) will not be permitted. LLPs will also not be permitted to avail External
Commercial Borrowings (ECBs).
(g) In case the LLP with FDI has a body corporate that is a designated partner or
nominates an individual to act as a designated partner in accordance with the
provisions of Section 7 of the LLP Act, 2008, such a body corporate should only be a
company registered in India under the Companies Act, 1956 and not any other body,
such as an LLP or a trust.
(h) For such LLPs, the designated partner "resident in India", as defined under the
'Explanation' to Section 7(1) of the LLP Act, 2008, would also have to satisfy the
definition of "person resident in India", as prescribed under Section 2(v)(i) of the
Foreign Exchange Management Act, 1999
(i) The designated partners will be responsible for compliance with all the above
conditions and also liable for all penalties imposed on the LLP for their contravention,
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(j) Conversion of a company with FDI, into an LLP, will be allowed only if the above
stipulations (except clause 3.2.5(e) which would be optional in case of a company) are
met and with the prior approval of FIPB/Government.
PROHIBITION ON INVESTMENT IN INDIA
FDI is prohibited in:
(a) Lottery Business including Government/private lottery, online lotteries, etc.
(b) Gambling and Betting including casinos etc.
(c) Chit funds
(d) Nidhi company
(e) Trading in Transferable Development Rights (TDRs)
(f) Real Estate Business or Construction of Farm Houses
(g) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
(h) Activities/sectors not open to private sector investment e.g. Atomic Energy and
Railway Transport (other than Mass Rapid Transport Systems).
Foreign technology collaboration in any form including licensing for franchise, trademark,
brand name, management contract is also prohibited for Lottery Business and Gambling
and Betting activities.
CONDITIONS ON ISSUE/TRANSFER OF SHARES
The capital instruments should be issued within 180 days from the date of receipt of the
inward remittance or by debit to the NRE/FCNR (B) account of the nonresident investor.
In case, the capital instruments are not issued within 180 days from the date of receipt of
the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of
consideration so received should be refunded immediately to the non‐resident investor
by outward remittance through normal banking channels or by credit to the NRE/FCNR (B)
account, as the case may be. Non‐compliance with the above provision would be
reckoned as a contravention under FEMA and would attract penal provisions.
In exceptional cases, refund of the amount of consideration outstanding beyond a period
of 180 days from the date of receipt may be considered by the RBI, on the merits of the
Issue price of shares
Issue price of shares to persons resident outside India under the FDI Policy, shall be on the
basis of SEBI guidelines in case of listed companies. In case of unlisted companies,
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valuation of shares has to be done by a Chartered Accountant in accordance with the
guidelines issued by the erstwhile Controller of Capital Issues (CCI).
Foreign Currency Account
Indian companies which are eligible to issue shares to persons resident outside India
under the FDI Policy may be allowed to retain the share subscription amount in a Foreign
Currency Account, with the prior approval of RBI.
TRANSFER OF SHARES AND CONVERTIBLE DEBENTURES
(i) Subject to FDI sectoral policy, foreign investors can also invest in Indian companies by
purchasing/acquiring existing shares from Indian shareholders or from other non‐
resident shareholders. General permission has been granted to nonresidents/NRIs for
acquisition of shares by way of transfer subject to the following:
(a) A person resident outside India (other than NRI and erstwhile OCB) may
transfer by way of sale or gift, the shares or convertible debentures to any
person resident outside India (including NRIs). (PROI to PROI)
(b) NRIs may transfer by way of sale or gift the shares or convertible debentures
held by them to another NRI. (NRI to NRI)
(c) A person resident outside India can transfer any security to a person resident in
India by way of gift. (PROI to PRII)
(d) A person resident outside India can sell the shares and convertible debentures
of an Indian company on a recognized Stock Exchange in India through a stock
broker registered with stock exchange or a merchant banker registered with
(e) A person resident in India can transfer by way of sale, shares/convertible
debentures (including transfer of subscriber‘s shares), of an Indian company in
sectors other than financial services sectors under private arrangement to a
person resident outside India, subject to the specified guidelines. (PRII to PROI)
(f) General permission is also available for transfer of shares/convertible
debentures, by way of sale under private arrangement by a person resident
outside India to a person resident in India, subject to the specified
guidelines.(PROI to PRII)
(g) The above General Permission also covers transfer by a resident to a
nonresident of shares/convertible debentures of an Indian company, engaged
in an activity earlier covered under the Government Route but now falling
under Automatic Route, as well as transfer of shares by a non‐resident to an
Indian company under buyback and/or capital reduction scheme of the
company. However, this General Permission is not available in case of transfer
of shares/debentures, from a Resident to a Non‐Resident/Non‐Resident Indian,
of an entity engaged in any activity in the financial services sector (i.e. Banks,
NBFCs, ARCs, CICs, Insurance, infrastructure companies in the securities market
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such as Stock Exchanges, Clearing Corporations, and Depositories, Commodity
(h) The Form FC‐TRS should be submitted to the AD Category‐I Bank, within 60
days from the date of receipt of the amount of consideration. The onus of
submission of the Form FC‐TRS within the given timeframe would be on the
transferor/transferee, resident in India.
(ii) The sale consideration in respect of equity instruments purchased by a person
resident outside India, remitted into India through normal banking channels, shall be
subjected to a Know Your Customer (KYC) check by the remittance receiving AD
Category – I bank at the time of receipt of funds. In case, the remittance receiving AD
Category – I bank is different from the AD Category – I bank handling the transfer
transaction, the KYC check should be carried out by the remittance receiving bank and
the KYC report be submitted by the customer to the AD Category – I bank carrying out
the transaction along with the Form FC–TRS.
(iii)AD Category – I banks have been given general permission to open Escrow account
and Special account of non‐resident corporate for open offers/exit offers and delisting
of shares. The relevant SEBI (SAST) Regulations or any other applicable SEBI
Regulations/provisions of the Companies Act, 1956 will be applicable.
PRIOR PERMISSION of RBI in certain cases for transfer of capital instruments
(i) The following instances of transfer of capital instruments from resident to non
residents by way of sale require prior approval of RBI:
(a) Transfer of capital instruments of an Indian company engaged in financial
services sector (i.e. Banks, NBFCs, Asset Reconstruction Companies, CICs,
Insurance companies, infrastructure companies in the securities market such as
Stock Exchanges, Clearing Corporations, and Depositories, Commodity
(b) Transactions which attract the provisions of SEBI (Substantial Acquisition of
Shares & Takeovers) Regulations, 1997.
(c) The activity of the Indian company whose capital instruments are being
transferred falls outside the automatic route and the approval of the FIPB has
been obtained for the said transfer.
(d) The transfer is to take place at a price which falls outside the pricing guidelines
specified by the Reserve Bank from time to time.
(e) Transfer of capital instruments where the non‐resident acquirer proposes
deferment of payment of the amount of consideration, prior approval of the
Reserve Bank would be required, as hitherto. Further, in case approval is
granted for a transaction, the same should be reported in Form FC‐TRS, to an
AD Category – I bank for necessary due diligence, within 60 days from the date
of receipt of the full and final amount of consideration. The link office of the AD
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Category‐I Bank will consolidate such Form FC‐TRS details and report the same
to the Central Office of RBI.
(ii) The transfer of capital instruments of companies engaged in sectors falling under the
Government Route from residents to non‐residents by way of sale or otherwise
requires Government approval followed by permission from RBI.
(iii)A person resident in India, who intends to transfer any capital instrument, by way of
gift to a person resident outside India, has to obtain prior approval from Reserve
CONVERSION OF ECB/LUMPSUM FEE/ROYALTY INTO EQUITY
(i) Indian companies have been granted general permission for conversion of External
Commercial Borrowings (ECB) (excluding those deemed as ECB) in convertible foreign
currency into shares/preference shares, subject to the following conditions and
(a) The activity of the company is covered under the Automatic Route for FDI or
the company has obtained Government approval for foreign equity in the
(b) The foreign equity after conversion of ECB into equity is within the sectoral
cap, if any;
(c) Pricing of shares is as per SEBI regulations or erstwhile CCI guidelines in the case
of listed or unlisted companies respectively;
(d) Compliance with the requirements prescribed under any other statute and
regulation in force; and
(e) The conversion facility is available for ECBs availed under the Automatic or
Government Route and is applicable to ECBs, due for payment or not, as well as
secured/unsecured loans availed from non‐resident collaborators.
(ii) General permission is also available for issue of shares/preference shares against lump
sum technical know‐how fee, royalty, under automatic route or SIA/FIPB route,
subject to pricing guidelines of SEBI/CCI and compliance with applicable tax laws.
REMITTANCE AND REPATRIATION
Remittance of sale proceeds:
Sale proceeds of shares and securities and their remittance is remittance of assets
governed by The Foreign Exchange Management (Remittance of Assets) Regulations
2000 under FEMA.
AD Category – I bank can allow the remittance of sale proceeds of a security (net of
applicable taxes) to the seller of shares resident outside India, provided the security has
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been held on repatriation basis, the sale of security has been made in accordance with
the prescribed guidelines and NOC/tax clearance certificate from the Income Tax
Department has been produced.
Remittance on winding up/liquidation of Companies
AD Category – I banks have been allowed to remit winding up proceeds of companies in
India, which are under liquidation, subject to payment of applicable taxes. Liquidation
may be subject to any order issued by the court winding up the company or the official
liquidator in case of voluntary winding up under the provisions of the Companies Act,
1956. AD Category – I banks shall allow the remittance provided the applicant submits:
(a) No objection or Tax clearance certificate from Income Tax Department for the
(b) Auditor's certificate confirming that all liabilities in India have been either fully
paid or adequately provided for.
(c) Auditor's certificate to the effect that the winding up is in accordance with the
provisions of the Companies Act, 1956.
(d) In case of winding up otherwise than by a court, an auditor's certificate to the
effect that there are no legal proceedings pending in any court in India against the
applicant or the company under liquidation and there is no legal impediment in
permitting the remittance.
Repatriation of Dividend
Dividends are freely repatriable without any restrictions (net after Tax deduction at
source or Dividend Distribution Tax, if any, as the case may be). The repatriation is
governed by the provisions of the Foreign Exchange Management (Current Account
Transactions) Rules, 2000, as amended from time to time.
Repatriation of Interest
Interest on fully, mandatorily and compulsorily convertible debentures is also freely
repatriable without any restrictions (net of applicable taxes). The repatriation is governed
by the provisions of the Foreign Exchange Management (Current Account Transactions)
Rules, 2000, as amended from time to time.
ACQUISITION OF SHARES UNDER SCHEME OF
Mergers/demergers/ amalgamations of companies in India are usually governed by an
order issued by a competent Court on the basis of the Scheme submitted by the
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companies undergoing merger/demerger/amalgamation.‐ Once the scheme of merger or
demerger or amalgamation of two or more Indian companies has been approved by a
Court in India, the transferee company or new company is allowed to issue shares to the
shareholders of the transferor company resident outside India, subject to the conditions
(i). the percentage of shareholding of persons resident outside India in the transferee
or new company does not exceed the sectoral cap, and
(ii).the transferor company or the transferee or the new company is not engaged in
activities which are prohibited under the FDI policy.
ISSUE OF SHARES UNDER EMPLOYEES STOCK OPTION SCHEME
(i). Listed Indian companies are allowed to issue shares under the Employees Stock
Option Scheme (ESOPs), to its employees or employees of its joint venture or wholly
owned subsidiary abroad, who are resident outside India. ESOPs can be issued to
citizens of Bangladesh & Pakistan with the prior approval of FIPB. Shares under
ESOPs can be issued directly or through a Trust, subject to the condition that:
(a).The scheme has been drawn in terms of relevant regulations issued by the SEBI,
(b).The face value of the shares to be allotted under the scheme to the non‐
resident employees does not exceed 5 per cent of the paid‐up capital of the
(ii).Unlisted companies have to follow the provisions of the Companies Act, 1956. The
Indian company can issue ESOPs to employees who are resident outside India. ESOPs
can be issued to the citizens of Bangladesh/Pakistan with the prior approval of the
(iii). The issuing company is required to report (plain paper reporting) the details of
granting of stock options under the scheme to non‐resident employees to the
Regional Office concerned of the Reserve Bank and thereafter the details of issue of
shares subsequent to the exercise of such stock options within 30 days from the date
of issue of shares in Form FC‐GPR.
PROCEDURE FOR FOREIGN DIRECT INVESTMENT
Foreign Direct Investment in India is governed by FDI Policy issued by the Government of
India and Foreign Exchange Management Act, 1999 and Rules and Regulation made
thereunder. Foreign Direct Investments (FDI) can be made under two routes—Automatic
Route and Government Route.
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RBI has given permission to Indian Companies to accept investment under AUTOMATIC
route without obtaining prior approval from Reserve Bank of India. However, investors
will have to file the required document with the concerned Regional Office of the RBI
within 30 days after issue of shares to foreign investors.
Levels of Approvals for cases under the GOVERNMENT Route:
(<=1200cr FIPB+CG, >1200cr CCEA)
• The Minister of Finance who is in‐charge of FIPB would consider the
recommendations of FIPB on proposals with total foreign equity inflow of and
below 1200 crore.
• The recommendations of FIPB on proposals with total foreign equity inflow of
more than 1200 crore would be placed for consideration of CCEA (Cabinet
Committee on Economic Affairs).
• The CCEA would also consider the proposals which may be referred to it by the
FIPB/ the Minister of Finance (in‐charge of FIPB).
Companies may NOT REQUIRE FRESH prior approval of the Government i.e. Minister in‐
charge of FIPB/CCEA for bringing in additional foreign investment into the same entity, in
the following cases:
• Cases of entities whose activities had earlier required prior approval of
FIPB/CCFI/CCEA and who had, accordingly, earlier obtained prior approval of
FIPB/CCFI/CCEA for their initial foreign investment but subsequently such
activities/sectors have been placed under automatic route;
• Cases of entities whose activities had sectoral caps earlier and who had,
accordingly, earlier obtained prior approval of FIPB/CCFI/CCEA for their initial
foreign investment but subsequently such caps were removed/increased and the
activities placed under the automatic route; provided that such additional
investment alongwith the initial/original investment does not exceed the sectoral
• The cases of additional foreign investment into the same entity where prior
approval of FIPB/CCFI/CCEA had been obtained earlier for the initial/original
foreign investment due to requirements of Press Note 18/1998 or Press Note 1 of
2005 and prior approval of the Government under the FDI policy is not required for
any other reason/purpose.
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FOREIGN DIRECT INVESTMENT REPORTING
REPORTING OF INFLOW (ARF to RO <= 30 Days of Receipt)
An Indian company receiving investment from outside India for issuing shares/convertible
debentures/preference shares under the FDI Scheme, should report the details of the
amount of consideration to the Regional Office concerned of the Reserve Bank not later
than 30 days from the date of receipt in the Advance Reporting Form.
Indian companies are required to report the details of the receipt of the amount of
consideration for issue of shares/convertible debentures, through an AD Category – I
bank, together with a copy/ies of the FIRC/s (Foreign Inward Remittance Certificate)
evidencing the receipt of the remittance along with the KYC report on the non‐resident
investor from the overseas bank remitting the amount. The report would be
acknowledged by the Regional Office concerned, which will allot a Unique Identification
Number (UIN) for the amount reported.
REPORTING OF ISSUE OF SHARES (FCGPR <= 30 days of issue)
(CS Cert., MB/CA Cert., RoR, AR)
(i). After issue of shares (including bonus and shares issued on rights basis and shares
issued under ESOP)/fully, mandatorily and compulsorily convertible debentures/fully,
mandatorily and compulsorily convertible preference shares, the Indian company has
to file Form FC‐GPR, not later than 30 days from the date of issue of shares.
(ii).Form FC‐GPR has to be duly filled up and signed by Managing
Director/Director/Secretary of the Company and submitted to the Authorized Dealer
of the company, who will forward it to the Reserve Bank. The following documents
have to be submitted along with the form:
(a). A certificate from the Company Secretary of the company certifying that:
A. all the requirements of the Companies Act, 1956 have been complied
B. terms and conditions of the Government’s approval, if any, have been
C. the company is eligible to issue shares under these Regulations; and
D. the company has all original certificates issued by authorized dealers in
India evidencing receipt of amount of consideration.
(For companies with paid up capital with less than Rs.5 crore, the above
mentioned certificate can be given by a practicing company secretary.)
(b). A certificate from SEBI registered Merchant Banker or Chartered Accountant
indicating the manner of arriving at the price of the shares issued to the
persons resident outside India.
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(c). The report of receipt of consideration as well as Form FC‐GPR have to be
submitted by the AD Category‐I bank to the Regional Office concerned of the
Reserve Bank under whose jurisdiction the registered office of the company is
(d). Annual Return on Foreign Liabilities and Assets should be filed on an annual
basis by the Indian company, directly with the Reserve Bank. This is an annual
return to be submitted by 31st
of July (15th of July as per FDI circular 2014) every year,
pertaining to all investments by way of direct/portfolio
investments/reinvested earnings/other capital in the Indian company made
during the previous years (i.e. the information submitted by 15th July will
pertain to all the investments made in the previous years up to March 31).
The details of the investments to be reported would include all foreign
investments made into the company which is outstanding as on the balance
sheet date. The details of overseas investments in the company both under
direct/portfolio investment may be separately indicated.
(e). Issue of bonus/rights shares or stock options to persons resident outside
India directly or on amalgamation/merger/demerger with an existing Indian
company, as well as issue of shares on conversion of ECB/royalty/lumpsum
technical know‐how fee/import of capital goods by units in SEZs, has to be
reported in Form FC‐GPR.
REPORTING OF TRANSFER OF SHARES (FCTRS <= 60 Days of consideration)
Reporting of transfer of shares between residents and non‐residents and vice versa is to
be done in Form FC‐TRS. The Form FC‐TRS should be submitted to the AD Category – I
bank, within 60 days from the date of receipt of the amount of consideration. The onus
of submission of the Form FC‐TRS within the given timeframe would be on the
transferor/transferee, resident in India. The AD Category – I bank, would forward the
same to its link office. The link office would consolidate the Form FC‐TRS and submit a
monthly report to the Reserve Bank.
REPORTING OF NON‐CASH
Details of issue of shares against conversion of ECB has to be reported to the Regional
Office concerned of the RBI, as indicated below:
In case of FULL CONVERSION of ECB into equity, the company shall report the conversion
in Form FC‐GPR to the Regional Office concerned of the Reserve Bank as well as in Form
ECB‐2 to the Department of Statistics and Information Management (DSIM), Reserve Bank
of India, Bandra‐Kurla Complex, Mumbai – 400 051, within seven working days from the
close of month to which it relates. The words "ECB wholly converted to equity" shall be
clearly indicated on top of the Form ECB‐2. Once reported, filing of Form ECB‐2 in the
subsequent months is not necessary.
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In case of PARTIAL CONVERSION of ECB, the company shall report the converted portion
in Form FC‐GPR to the Regional Office concerned as well as in Form ECB‐2 clearly
differentiating the converted portion from the non‐converted portion. The words "ECB
partially converted to equity" shall be indicated on top of the Form ECB‐2. In the
subsequent months, the outstanding balance of ECB shall be reported in Form ECB‐2 to
REPORTING OF FCCB/ADR/GDR ISSUES (DR to RBI <= 30 Days of closing)
(DRQUARTERLY to RBI <= 15 Days of close of Quarter)
The Indian company issuing ADRs/GDRs has to furnish to the Reserve Bank, full details of
such issue in the FORM DR, within 30 days from the date of closing of the issue.
The company should also furnish a quarterly return in the FORM DRQUARTERLY, to the
Reserve Bank within 15 days of the close of the calendar quarter. The quarterly return
has to be submitted till the entire amount raised through ADR/GDR mechanism is either
repatriated to India or utilized abroad as per the extant Reserve Bank guidelines.
CONSEQUENCES OF VIOLATION
FDI is a capital account transaction and thus any violation of FDI regulations are covered
by the penal provisions of the FEMA. Reserve Bank of India administers the FEMA and
Directorate of Enforcement under the Ministry of Finance is the authority for the
enforcement of FEMA. The Directorate takes up investigation in any contravention of
PENALTIES (3times, 2lac, 5000)
If a person violates/contravenes any FDI Regulations, by way of breach/non
adherence/noncompliance/contravention of any rule, regulation, notification, press note,
press release, circular, direction or order issued in exercise of the powers under FEMA or
contravenes any conditions subject to which an authorization is issued by the
Government of India/FIPB/Reserve Bank of India, he shall, upon adjudication, be liable to
(i) a penalty up to THRICE the sum involved in such contraventions where such
amount is quantifiable, or
(ii) up to TWO LAKH Rupees where the amount is not quantifiable,
(iii)and where such contraventions is a CONTINUING one, further penalty which may
extend to five thousand Rupees for every day after the first day during which the
Where a person committing a contravention of any provisions of this Act or of any rule,
direction or order made there under is a COMPANY (company means any Body corporate
and includes a firm or other association of individuals as defined in the Companies Act),
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every person who, at the time the contravention was committed, was in charge of, and
was responsible to, the company for the conduct of the business of the company as well
as the company, shall be deemed to be guilty of the contravention and shall be liable to
be proceeded against and punished accordingly.
Any Adjudicating Authority adjudging any contraventions may, if he thinks fit in addition
to any penalty which he may impose for such contravention direct that any currency,
security or any other money or property in respect of which the contravention has taken
place shall be confiscated to the Central Government.
ADJUDICATION AND APPEALS
(i). For the purpose of adjudication of any contravention of FEMA, the Ministry of Finance
as per the provisions contained in the Foreign Exchange Management (Adjudication
Proceedings and Appeal) Rules, 2000 appoints officers of the Central Government as
the Adjudicating Authorities for holding an enquiry in the manner prescribed. A
reasonable opportunity has to be given to the person alleged to have committed
contraventions against whom a complaint has been made for being heard before
imposing any penalty.
(ii).The Central Government may appoint as per the provisions contained in the Foreign
Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000, an
Appellate Authority/ Appellate Tribunal to hear appeals against the orders of the
• Under the Foreign Exchange (Compounding Proceedings) Rules 2000, the Central
Government may appoint ‘Compounding Authority’ an officer either from
Enforcement Directorate or Reserve Bank of India for any person contravening any
provisions of the FEMA.
• The Compounding Authorities are authorized to compound the amount involved in the
contravention to the Act made by the person.
• No contravention shall be compounded unless the amount involved in such
contravention is quantifiable.
• Any second or subsequent contravention committed after the expiry of a period of
three years from the date on which the contravention was previously compounded
shall be deemed to be a first contravention.
• The Compounding Authority shall pass an order of compounding after affording an
opportunity of being heard to all the concerns as expeditiously and not later than 180
days from the date of application made to the Compounding Authority.
• Compounding Authority shall issue order specifying the provisions of the Act or of the
rules, directions, requisitions or orders made there under in respect of which
contravention has taken place along with details of the alleged contraventions.
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FOREIGN TECHNOLOGY AGREEMENTS
Foreign technology agreements are permitted in any industry to promote technological
dynamism in Indian industry. Following two types of payments can be made in respect of
foreign technical collaborations:
1) Lump sum payment
2) Royalty based on sales
Following are the two ways for the aforesaid payments:
1. Automatic approval route
2. Government approval route
AUTOMATIC APPROVAL ROUTE
Under automatic approval route, remittance of lump sum payment up to US $ 2 million
and remittance of royalty up to 5% on local sales and up to 8% on exports sales can be
made. In such cases, an application in Form FT (RBI) shall be submitted to the concerned
Regional office of RBI. It may be noted that no fees is payable on such application. On
receipt of the application, RBI will automatically grant approval within 2 weeks of the
submission of application.
GOVERNMENT APPROVAL ROUTE
Where a proposal for foreign technology agreement does not meet the parameters of
automatic approval route an application shall be made to the Central Government for its
approval. The Central Government may grant the approval based on merits of the case
within 6 weeks of making the application.
The aforesaid application shall be made‐in a composite form FC‐IL to Secretariat of
Industrial Assistance (SIA), Department of Industrial Policy and Promotion, Ministry of
Industry, Udyog Bhawan, New Delhi. It may be noted that no fees is payable on such
application. While submitting application, applicant shall submit information whether
there was any previous financial or technical collaboration in the same or allied field. If so,
details thereof and justification for proposing new venture/technical collaboration shall
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FOREIGN COLLABORATIONS AND JOINT VENTURES
One of the most common forms of organisational strategic business relationship
proliferating the world over is the joint venture. The joint ventures utilize a separate
business entity to conduct the specified business activities. The use of a separate entity
allows the parties to limit the liabilities associated with the relationship.
More precisely, a joint venture is required in order for the parties to avail themselves of
incentives and concessions offered under any local foreign investment programs.
In essence, a joint venture arrangement consists of an agreement between two or more
parties to combine, in a specific way, a certain kind or amount of their resources in order
to manufacture, produce or sell a product or to render a service and share in a specified
manner the profits that result and the risks that occur.
The rationale for joint venture varies from case to case according to the strategic business
objectives and capacity of the individual partners, as well as external factors. They are
often the means of acquiring raw materials, production facilities, technology or know‐
how. Most often, however, they are the means of expanding into new markets. Market
access may, for instance, depend on linking up with established distribution channels or
operating under a brand name already well recognised in the market place. The risks of
operating in an unfamiliar jurisdiction, can be daunting, but the management of these
risks can be enhanced by a joint venture with a compatible local partner familiar with
local business practices, processes, procedures, laws and customs.
Foreign investment policies of many countries require or at least favour a minimum level
of local participation. In some of the jurisdictions, foreign investors are required to
allocate a pre‐ordinated minimum share of the joint venture equity to the host
government. A foreign investor can easily assess the real rate of return at the
establishment stage of the venture. If, however, subsequent inputs of technology,
services and capital by each of the partners are not based on impartial, arm‘s length
market based calculations, the equilibrium of the Joint Venture is likely to become skewed
and provide fertile ground for later differences.
A joint venture is an association of two or more individuals or business entities who
combine and pool their respective expertise, financial resources, skills, experience, and
knowledge in the furtherance of a particular project or undertaking. Joint Ventures are
generally created for a single activity or project, and may have a limited time span. Joint
Venture agreements, commonly referred to as a “JV”, are typically formed either by
individuals, business entities, corporations or partnerships. The contributions to the joint
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ventures are either in the form of money [capital], services, or physical asset(s), i.e.
equipment or intellectual property [software, patents], etc., or a combination of all.
MODES OF JOINT VENTURE
There are two fundamental types of joint venture, i.e., Equity Joint Venture and
Contractual Joint Venture. Their description is as follows:
Equity Joint Venture
The equity joint venture is an arrangement whereby a separate legal entity is created in
accordance with the agreement of two or more parties. The parties undertake to provide
money or other resources as their contribution to the assets or other capital of that legal
entity. The entity is generally established as a limited liability company and is distinct from
either of the parties which participate in its creation. The newly created company, thus,
becomes the owner of the resources contributed by the parties to the joint venture
arrangement. Each of the parties in turn becomes the owner of the company having
equity in the company.
The parties to a joint venture agreement agree on purposes and functions of the newly
created entity, the proportion of capital contribution by each party and the share of each
party in the profits of the company and on other matters such as its management,
operation, duration and termination.
Contractual Joint Venture
The contractual joint venture might be used where the establishment of a separate legal
entity is not needed or the creation of such a separate legal entity is not feasible in view
of one or the other reasons. The contractual joint venture agreement can be entered into
in situations where the project involves a narrow task or a limited activity or is for a
limited term or where the laws of the host country do not permit the ownership of
property by foreign citizens. For the purposes of contractual joint venture, the
relationship between parties is set forth in the contract or agreement concluded between
Whether one or more of the legal methods are used in the establishment of the joint
venture company to carry out its operations is always based on the negotiations between
the parties, the results of which reflect in the joint venture agreement entered into
between the parties. The licensing agreement, know‐how agreement, technical services
or technical assistance agreement, franchise agreement and agreement covering all other
commercial matters might even form annexes to the main joint venture agreement. They
can be signed once the joint venture company is established.
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FACTORS TO BE KEPT IN MIND WHILE DRAFTING A JOINT VENTURE
1. Capability of the collaborator and the requirements of the party are clearly indicated.
2. Clear definitions of technical terms are given.
3. Specify if the product shall be manufactured/sold on exclusive or non‐exclusive basis.
4. Terms and conditions regarding nature of technical know‐how, disclosure of drawings,
specifications and other documents, furnishing of technical information in respect of
processes with flow char6 etc., plant outlay list of equipment, machinery and tool with
specification have to be provided.
5. Provisions for making available the engineers and/or skilled workers of the
collaborator on payment of expenses relating to their stay per diem etc. are given.
6. Details regarding specification and quality of the product to be manufactured are
7. Quality control and trademarks to be used are also specified.
8. The rate of royalty, mode of calculation and payment etc. Also, make provision as to
who will bear the taxes/cess on such payments.
9. Use of information and industrial property rights should also be provided for in the
10.A clause on force majeure should be included.
11.A clause that the collaborating company has to train the personnel of Indian company
within a specified period should be incorporated. The clause should also specify the
terms and conditions of such assistance, place of training, period of training and fees
12.A comprehensive clause on arbitration containing a clear provision as to the kind of
arbitrator and place of arbitration should be included.
13.There should be provision in the agreement for payment of interest on delayed
IMPORTANT CLAUSES IN COLLABORATION AGREEMENTS
The collaboration agreement should generally contain the following comprehensive
1. In case of agreement for provision of Technical Know‐How:
(a) definition and characteristics of the subject‐matter of the know‐how;
(b) the mode collaborator;
(c) performance guarantee in regard to the achievement of the required qualities,
standard of the product, quantities to be produced and minimum standard of
performance with suitable indemnity clause;
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(d) conferring of licence or patent right for the technical know‐how and the
product to be manufactured;
(e) mode and method of payment i.e. whether a lump‐sum or by way of royalty or
(f) who would own the future improvements in the technology by the transferee
made by the transferor of the technology;
2. In case of agreement for a Joint Venture:
(a) since in India a foreign‐ company is not allowed(except in exceptional
circumstances) to hold more than 51% shares in any company in India, care must
be taken to provide for the equity participation by the foreign company under a
joint venture agreement; the agreement should also provide for the type of share
capital and the mode of payment for acquiring the shares;
(b) the constitution of the Board of Directors with election, number of directors and
the powers of the Board; ‐‐who will run the management of the company, and pre‐
emption rights on the shares of the company.
(c) the mode of declaration and distribution of the dividends;
(d) the area of marketing of the products;
(e) restriction on any change in the ownership ratio; other provisions as incorporated
under an agreement for supply of technical know‐how.
RESTRICTIVE CLAUSES UNDER FOREIGN COLLABRATION/JOINT
These are non government methods used by companies to strengthen their position in a
market. They hamper international trade and coincide with public interest of the country.
KINDS OF RESTRICTIVE PRACTTCES
1. Restrictions after expiration of Industrial Property Rights or Loss of Secrecy of
Technical Know ‐ how: Once the term of patent expires than the invention covered
under it enters into public domain and can be used by anybody without obligation.
Therefore any future payments, permission... etc shall be invalid after expiration and
the imposition of the same will constitute to be restrictive practice.
2. Restrictions after expiration of agreements: use of such clause in technology transfer
oblige the company to pay royalties during entire duration of manufacture of product
or application of the process involved without specifying any time limit and sometimes
even after expiration of agreement.
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3. Restriction on research and Development: these involve limitations on the research
and development policies of the company acquiring it. It restricts the recipient to do is
own research and development programs and covers such provisions which are in
direct competition with the Research and Development activities of the supplying
4. Non‐Compliance Clause: restrictions on freedom of technology acquiring company to
enter into arrangements to use or purchase the competing technologies or products
not furnished or designated by the company supplying technology. It also obliges the
recipient company not to manufacturer sell competing products or not to acquire
5. Tying Arrangements: Requires the licensee to obtain raw materials, spare parts, and
intermediate products for use only from the licensor or its nominees. It preserves the
exclusive right to supply necessary‐processed or semi‐processed inputs, to maintain
quality control, and to expand their profit margin. They result in monopoly leading to
6. Export Restrictions: restrict export to certain markets and requirement for prior
permission for export. Classified into following three categories:
(a) Direct Restrictions: it's basically complete restriction, on one or more specified
goods or to one or more specified countries or a export quota.
(b) Indirect restrictions: in it prior permission of the supplier is required to export
the goods manufactured by the imported technology. These cover wide range
(c) Implied restrictions: generally relate to MNCs. They have a control over their
subsidiaries and affiliates abroad, in this manner they affect market restrictions
quite easily. Such restrictions can be summarized as follows:
(i). Totally or partially block potential export possibilities.
(ii).Prevent the acquisition of market skills resulting in continued
dependency on few MNCs.
7. Price fixing: Supplier Company reserves the right to fix the sale or resale price. Price
fixing may also involve horizontal price cartels between several technological
8. Restrictions on Field of Use, Volume or Territory: Supplier Company can restrict the
use of technology or some uses of technology for self exploitation or exploitation of
third parties. They consist of minimum production requirements or maximum output.
9. Grant‐back Provisions: It provides for technical information and improvements to the
supplier. They oblige the recipient company to transfer to the supplier of technology
free of cost any invention or improvement made in the imported technology.
10.Exclusive sales and Representation Arrangements: prohibits the recipient company to
organize its own distribution system.
11.Use of Quality Control: Really important when involves trade mark or service mark.
They are generally involved in the licensing of trade marks. Inclusion of this clause can
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be justified on the grounds that if the product bears a trademark the quality standard
may be necessary to maintain goodwill with respect to the product.
12.Restrictions on Publicity: it obliges the recipient company to spend a minimum
amount or to undertake a certain quality of advertisement. Justified where it hampers
the goodwill of supplier. It provides that restrictions can be imposed in those cases
where the publicity carries the name, trademark or other identifying items.
OVERSEAS INVESTMENT BY INDIAN ENTITY
Direct investment outside India in Joint venture/ Wholly owned subsidiary:
An India party shall not make any direct investment in foreign entity engaged in Real
estate or Banking business.
A PRI can make any direct investment outside India only with prior approval of RBI.
However, if the following conditions are satisfied, then RBI approval is not required:
1. Total financial commitment of Indian party in JV/WOS shall not exceed 400% of its net
worth as per the last audited Balance sheet. However, the ceiling on investment in
JVNVOS is not applicable to investment made out of balance in EEFC A/c (Exchange
Earners‘ Foreign Currency account) and out of proceed of ADR/GDR
2. The direct investment is made in the overseas JV/WOS engage in bonafide business
3. The Indian party is not @n the RBI's caution list or under investigation by enforcement
4. The Indian party routes all transaction relating to investment in JV/WOS through only
one branch of an AD to be designated by it. However, the Indian party may designate
different branches for different JV/WOS outside India; and
5. The Indian party shall submit Form ODI to the designated branch of an authorized
dealer for onwards transmission to RBI.
******RBI/2013‐14/180 A. P. (DIR Series) Circular No.23 To reduce the existing limit of
400 per cent of the net worth of the Indian Party to 100 per cent of its net worth under the
The criteria for direct investment under the Automatic Route are as under:
1. The Indian Party can invest up to 100% of its net worth (as per the last audited Balance
Sheet) in JV / WOS for any bonafide activity permitted as per the law of the host
country. The ceiling of 100% of net worth will not be applicable where the investment
GOVIND KUMAR MISHRA +91‐9911677371 firstname.lastname@example.org www.goacademy.in 100
is made out of balances held in the EEFC account of the Indian party or out of funds
raised through ADRs/GDRs; Further, if the source of funding is through availing ECB,
the permissible limit is 400% of the networth of the Indian Party.
2. The Indian Party is not on the Reserve Bank’s exporters' caution list / list of defaulters
to the banking system published/ circulated by the Credit Information Bureau of India
Ltd. (CIBIL) /RBI or any other credit information company as approved by the Reserve
Bank or under investigation by the Directorate of Enforcement or any investigative
agency or regulatory authority; and
3. The Indian Party routes all the transactions relating to the investment in a JV/WOS
through only one branch of an authorised dealer to be designated by the Indian Party.
4. No prior registration with the Reserve Bank is necessary for making direct investments
under the automatic route. After the report of the first remittance / investment in
Form ODI is received by the Reserve Bank, a Unique Identification Number (UIN) for
that particular JV/WOS will be issued for the purpose of taking on record the overseas
direct investment with the objective of maintaining a database for monitoring the
outflows/inflows in respect of the overseas entities. Subsequent investments in the
same project can be made only after allotment of the UIN.
Investment in foreign security other than by way of direct investment‐:
ACQUISITION OF FOREIGN SECURITY BY PRI: General permission has been granted to
persons (individual) resident in India for purchase / acquisition of securities as under:
(a) Out of funds held in the RFC account;
(b) As bonus shares on existing holding of foreign currency shares;
(c) When not permanently resident in India, from the foreign currency resources
ACQUISITION OF FOREIGN SECURITY BY AN INDIVIDUAL PRI
Resident individuals can acquire/sell foreign securities without prior approval in the
following cases: ‐
(a) as a gift from a person resident outside India;
(b) by way of ESOPs issued by a company incorporated outside India under Cashless
Employees Stock Option Scheme which does not involve any remittance from
(c) by way of ESOPs issued to an employee or a director of Indian office or branch of a
foreign company or of a subsidiary in India of a foreign company or of an Indian
company irrespective of the percentage of the direct or indirect equity stake in the
(d) as inheritance from a person whether resident in or outside India;
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(e) by purchase of foreign securities out of funds held in the Resident Foreign Currency
Account maintained in accordance with the Foreign Exchange Management
(Foreign Currency Account) Regulations, 2000; and
(f) by way of bonus/rights shares on the foreign securities already held by them.
INVESTMENT IN QUALIFICATION SHARES: A PRI, being an individual, can acquire foreign
security as qualification shares issued by company incorporated outside India for holding
the post of director of company to the extent prescribed as per the law of the host
country, where the company is located.
ACQUISITION OF RIGHT SHARES:
A resident individual may acquire foreign securities by way of rights shares issued by a
company incorporated outside India provided the existing shares were held in accordance
with the provisions of FEMA.
INVESTMENT BY RESIDENT INDIVIDUAL IN FOREIGN SHARES, OTHER ASSETS ETC.
A resident Indian can remit up to USD75,000/‐ per financial year under the Liberalised
Remittance Scheme (LRS), for permitted current and capital account transactions
including purchase of securities.