Overseas Direct Investment

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Overseas Direct Investment July 9, 2011
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Agenda
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• Routes of Investment
• Automatic route
• Approval Route
• Funding Mechanism
• Pledge of Shares of JV/WOS
• Compliances and Valuation
• Restructuring of Investments
• Exit
• Liberalised Remittance Scheme for Resident
  Individuals

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What is ODI?
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• Regulation 2(e) of Foreign Exchange Management
  (Transfer or Issue of any Foreign Security)
  (Amendment) Regulations, 2004, defines Direct
  Investment outside India as
• Investment by way of contribution to the capital
  or subscription to the Memorandum of Association
  of a foreign entity,
• Or
• by way of purchase of existing shares of a
  foreign entity either by market purchase or
  private placement or through stock exchange.

ODI does not include portfolio investment
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Routes
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• No prior approval of RBI
• Applicable to overseas investment by
• Company
• a body created under an Act of Parliament
• Registered partnership firm making investment in
  JV / WOS abroad
• Subject to conditions

• Prior approval of RBI
• Investment by all other entities inter-alia
• proprietorship
• unregistered partnership firm
• trust
• Society
• Investment in
• Real estate buisness
• Banking business

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Automatic Route
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• Automatic approval for Financial Commitment
  upto 400 of Net Worth as of the last audited
  Balance Sheet

• Net Worth Paid up capital free reserves

• Computation of 400 to include
• Contribution to capital
• Loans
• Guarantee issued to or on behalf of Fco

Permitted subject to investment in the Company
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• Investment to be in bona fide business activity
  
• Investee company not
• on RBIs Exporters caution list
• on list of defaulters to the banking system
  issued by RBI / CBIL / any other CIC
• under investigation by any investigation/enforceme
  nt agency/ regulatory body
• Investment routed through one branch of an AD
  bank category-I
• Investor company has submitted up to date returns
  (APR) for all its existing ODIs

Investment through SPV also permitted
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Approval Route
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• Has to be a DGFT recognized Star Export House.
• KYC (Know Your Customer) compliant and engaged in
  the proposed business
• Proven track record i.e. overdue exports lt 10
  of the average export realization of preceding 3
  financial years.
• Firm not on RBIs caution list/list of defaulters
  to the banking system or has come under adverse
  notice of ED or CBI
• Investment outside India lt10 of the average of
  3 financial years export realization or 200 of
  the net owned funds of the firm, whichever is
  lower
• Application in Form ODI

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• Sectors
• Manufacturing
• Education
• Hospital
• Investment in the same sector
• Conditions
• Registered under the Indian Trust Act, 1882
• Trust deed permits the proposed investment
  overseas
• Proposed investment should be approved by the
  trustee/s
• AD Bank satisfied that trust is KYC compliant
  and engaged in a bonafide activity
• In existence at least for a period of 3 years
• No adverse notice from any regulatory /
  enforcement agency like CBI, Directorate of
  Enforcement
• Permissions/licensees for concerned activity
  obtained from relevant authority(s)

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• Sectors
• Manufacturing
• Education
• Hospital
• Investment in the same sector
• Conditions
• Registered under the Societies Registration Act,
  1860
• MoA and rules and regulations allows proposed
  investment
• Approved by the governing body / council or a
  managing committee
• AD Bank satisfied that trust is KYC compliant
  and engaged in a bonafide activity
• In existence at least for a period of 3 years
• No adverse notice from any regulatory /
  enforcement agency like CBI, Directorate of
  Enforcement
• Permissions/licensees for concerned activity
  obtained from relevant authority(s)

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• Viability of the Overseas company
• Contribution to external trade and benefits to
  India
• Financial position and buisness track record of
  Indian party and foreign entity
• Experience of Indian party in same or related
  line

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• Investments in Financial sector entity permitted
  under automatic route subject to
• Approval from concerned regulatory authority in
  India and abroad
• Registered with appropriate regulatory authority
  in India
• Earned net profit during last three years from
  Financial services sector
• Fulfilled the prescribed prudential norms
  relating to capital adequacy

Is automatic route really automatic ?
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• Downstream investment by JV also subject to these
  conditions
• Unregulated Indian financial sector entities
  comply only if investing in financial sector
  activities overseas
• Regulated Indian financial sector entities have
  to comply with above regulations for all
  investments
• NBFCs making investment overseas need NOC from
  RBI

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Funding Mechanisms
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Capitalisation of export receivables
Proceeds of ADR / GDR issue
Exchange of ADR/GDR
ECB proceeds
Rupee resources
FCCB proceeds
Proceeds of ADR / GDR issue
EEFC A/c balance
Share swap
400 ceiling doesnt apply
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• Pledge of shares of overseas company permitted
  to
• Indian Bank / public financial institution for
  loan for Indian party itself or for the JV/ WOS
  abroad.
• Overseas Lender subject to
• The lender being regulated and supervised as a
  bank
• total financial commitments of the Indian party
  remaining within the limit stipulated by RBI for
  overseas investments

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Valuation and Compliances
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• Receive share certificate / other documentary
  evidence within 6 months
• Repatriate to India all dues receivable from
  foreign entity within 60 days
• Submit APR to RBI in Form ODI Part III within 60
  days from date of expiry of the statutory period
  for finalisation of accounts in the host country
• Intimate investment in a step down subsidiary /
  changes in the shareholding pattern /
  diversification of business within 30 days of
  approval of this decision by the competent
  authority of the JV / WOS
• Submit details of disinvestment to the AD within
  30 days

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Restructuring of Investment
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• Indian Promoters of a WOS or having a minimum 51
  stake in foreign JV may write off capital or
  other receivables such as loans, royalty,
  technical knowhow fees and management fees even
  while the JV/WOS continues to operate as below
• Listed Indian companies can write off 25
  -Automatic Route
• Unlisted Indian Companies can write off 25 -
  Approval route
• In both cases they need to submit
• A certified copy of the balance sheet showing the
  loss in the overseas WOS/JV and
• Projections for the next five years indicating
  benefit accruing by such write off /
  restructuring.
• Restructuring to be reported to RBI within 30
  days

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Exit
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• Conditions for automatic route for disinvestment
  
• No write off of investment
• No outstanding dues such as dividend , royalty,
  technical know- how from JV / WOS
• Sale after gt 1 full year of operations and APR
  for said year has been submitted
• Indian party is not under investigation in India
• Shares sold on a Stock Exchange or if unlisted,
  share price not less than value certified by
  CA/CPA based on latest audited balance sheet

Party to report divestment through AD within 30
days
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• Automatic route for disinvestment if any of the
  following are satisfied
• JV / WOS is listed overseas or
• Indian party is listed and has a net worth gt Rs.
  100 crore or
• Listed Indian party with net worth lt Rs. 100
  crore and Investment in JV/WOS is lt USD
  10Milion or
• Unlisted Indian party and investment in JV / WOS
  ltUSD 10 million.

All other conditions of exit have to be met
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Liberalised Scheme of Remittance for Resident
Individuals
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• Resident Individuals may remit upto USD 200,000
  in any Financial year (April March) for
• Permissible current and / or capital account
  transactions or combinations thereof
• Immovable property
• Shares
• Debt Instruments
• Any other asset outside India
• Gift / donation
• Objects of art
• ESOPs
• Mutual funds
• Venture Capital Funds
• Unrated debt securities
• Promissory Notes etc
• Repayment of loan taken as a non-resident

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• Funds cannot be untilised for
• transactions not permitted under FEMA and this
  Scheme
• remittances specifically prohibited under
  Schedule I or restricted under Schedule II of
  Current account transaction rules
• Countries to which remittance is restricted
• Bhutan
• Nepal
• Mauritius
• Pakistan
• Other territories as notified by RBI and FATF
• No credit facilities to be given by Banks to
  undertake such remittances

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• Resident Individuals includes minors
• Remittances can be consolidated in respect of
  family members
• Pan number necessary for remittance under the
  scheme
• Individuals can open and maintain a foreign
  currency account with a bank outside India
  without prior approval of RBI for making
  remittances under this scheme.
• Outward remittance can also be in the form of a
  DD in the residents own name or the name of the
  beneficiary

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Reasonable care has been taken to ensure that the
information contained herein is accurate in all
respects. However, this is not intended and
should not be considered to be legal advice. No
person should act on the basis of any information
contained in this presentation without
considering and seeking professional assistance
based on the facts and circumstances of their
case.
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Regulations for Non Banking Financing Companies
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• Investment in non-financial sector not permitted
• Investment in activities prohibited under FEMA
  or in sectoral funds not permitted
• Investment permitted only in entities regulated
  by financial regulator in investment jurisdiction
• Investment aggregate not exceeding 100 of NoF
• Investment in single entity inluding subsidiary
  not to exceed 15 of the NoF
• Single intermediate holding entity permitted
• NBFC to maintain level of NoF prescribed by RBI
  even after overseas investment
• Net non Performing Assets lt 5 of net advances
• Earning profits for last 3 years, satisfactory
  performance in general

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• CRAR of deposit taking NBFC and NBFC-ND-SI post
  investment to be not to be less than prescribed
  RBI
• CRAR of other NBFCs post investment to be not
  less than 10
• Compliance with KYC norms
• Annual certificate from statutory auditors
  submitted by NBFC with DNBS
• Quarterly return by NBFC to DNBS and DSIM
• Parent NBFC to obtain periodical reports/ audit
  reports about the business undertaken by overseas
  company and make available to RBI
• Disclosure in balance sheet of overseas entity
  that the liability of the parent entity is
  limited to equity or fund based commitment

Approval can be withdrawn for non-compliance.
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• Investment upto 50 of Networth as at last
  audited balance sheet
• Permitted in
• Shares
• Bonds / fixed income securities ( not below
  investment grade)
• Issued by listed companies

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• Indian entities (promoter, group or associate
  company) permitted to offer guarantee (corporate
  / personal / primary / collateral etc.) provided
• Indian entity has equity participation in FCo
• Percentage computed towards 400 ceiling
• 50 of the amount of the performance guarantee
• 100 of the amount for all other guarantees
• No guarantee is 'open ended'
• Time specified for completion of contract is the
  validity period of performance guarantee
• Corporate Guarantee on behalf of First level down
  subsidiary is under Automatic Route (operating
  Company or SPV)
• Corporate Guarantee to Second level or subsequent
  level subsidiary under Approval level subject to
  the Indian party holding atleast 51 or more
  directly or indirectly
• Report in Form ODI-Part II to be submitted to RBI

• RBI approval required for creating charge on
  immovable property / pledge of shares in favour
  of non-resident entity
• Prior approval of RBI required before remitting
  funds in case on invocation of the performance
  guarantee results in breach of the 400 limit .

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Guarantee
Overseas SPV
FI/Bank
Equity
Loan
ICo
Equity
Target
ICo can give guarantee only for or on behalf of
WoS / JV in which it has equity participation
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• Permitted to capitalise payments due towards
• Exports
• Fee
• Royalties
• Any other dues such as technical know-how,
  consultancy
• RBI approval required for
• Capitalisation of export proceeds which continue
  to be unrealized beyond prescribed period(6
  months)
• Indian software companies to receive upto 25 of
  export value in form of shares of overseas
  company without JV agreement

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ICo sells OpCo shares to the Seller in exchange
for TargetCo shares
O/s Seller
ICo
OpCo
O/s TargetCo

• Transaction requires prior approval of RBI and
  FIPB

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