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Overseas Direct Investments (ODI)
Legal , Policy, Procedures, andrequirements
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Legal Provisions under FEMA
• Section 2 (e) :- Capital Account transaction
definition as per Foreign Exchange
Management Act,1999
• Section 6 (3) (a) :- transfer and issue of any
foreign security by a person resident in India
• Section 47 (2) (a) :- power to make regulations
• Notification No. FEMA 120/2004-RB / 7.7.2004
• A.P. Dir Circulars issued by RBI
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Other reference material
• Master Circular issued by RBI on 01.07.2013
No. 11/2013-2014 (Direct Investment by
residents in Joint Venture (JV) / Wholly owned
Subsidiary (WOS) abroad
• FAQs on Overseas Direct Investment issued by
RBI
• www.rbi.org.in
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Overseas investments - references
• FEMA Notification
No. 120/RB-2004
dated July 7,
2004
www.rbi.org.in
•Master Circular on
Direct Investments
by residents
in JV/WOS
abroad
• AP (DIR) series
Circular issued from
time to time
Notification MasterCircular
AP (DIR
series)
Circulars
Website
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Meaning
Direct investment outside India means
investments, either under the Automatic Route
or the Approval Route, by way of contribution
to the capital or subscription to the
Memorandum of Association of a foreign
entity, signifying a long-term interest in the
overseas entity (setting up / acquiring a JointVenture (JV) or a Wholly Owned Subsidiary
(WOS).
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Points to be considered for ODI
• Investments can be made in new or existingentity.
• Indian entity can invest in any bonafideactivity (except real estate other thandevelopment of township, construction ofresidential/ commercial premises, road or
bridges). Also in case of financial servicesector, certain additional conditions to befulfilled.
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Routes of Investment through ODI
Automatic RouteAn Indian Party does not require
any prior approval from theReserve Bank for making
overseas direct investments. The
Indian Party should approach an
Authorized Dealer Category – I
bank with an application in Form
ODI and the prescribed
enclosures / documents for
effecting the remittances
towards such investments.
Approval Route
Proposals not covered by theconditions under the automatic
route require the prior approval of
the Reserve Bank for which a
specific application in form ODI
with the documents prescribedtherein is required to be made
through the Authorized Dealer
Category – I banks.
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Indian Party
Provided that when more than one such company, body or entity make an
investment in the foreign entity , such companies or bodies or entities shall
together constitute the INDIAN PARTY
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A company
incorporated in India
or a body createdunder an act of
Parliament.
A partnership firm
registered under the
Indian PartnershipAct, 1932
Any other entity in
India as may be
notified by theReserve Bank.
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Joint Venture
• 'Joint Venture (JV)' means a foreign entity
formed, registered or incorporated in
accordance with the laws and regulations of
the host country in which the Indian partymakes a direct investment;
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Wholly Owned Subsidiary
• 'Wholly Owned Subsidiary (WOS)' means a
foreign entity formed, registered or
incorporated in accordance with the laws and
regulations of the host country, whose entirecapital is held by the Indian party;
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'Financial Commitment'
• 'Financial commitment' means the amount of
direct investment by way of contribution to
equity and loan and 100 per cent of the
amount of guarantees issued by an Indianparty to or on behalf of its overseas Joint
Venture Company or Wholly Owned
Subsidiary
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'Real Estate Business
• 'Real estate business' means buying and
selling of real estate or trading in Transferable
Development Rights (TDRs) but does not
include development of townships,construction of residential/commercial
premises, roads or bridges;
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Sectors in which ODIs are allowed
with prior RBI approval
• Real Estate Business
• (Important to note the definition of Real
Estate Business)
• Banking Business
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Clarification
• An overseas entity, having direct or indirect equity
participation by an Indian party, shall not offer
financial products linked to Indian Rupee (e.g. non-
deliverable trades involving foreign currency, rupeeexchange rates, stock indices linked to Indian market,
etc.) without the specific approval of the Reserve
Bank. Any incidence of such product facilitation
would be treated as a contravention of the extantFEMA regulations and would consequently attract
action under the relevant provisions of FEMA, 1999
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General Permission
• In terms of Regulation 4 of the Notification, general
permission has been granted to persons residents in India for
purchase / acquisition of securities in the following manner:
• (a) out of the funds held in RFC account;
• (b) as bonus shares on existing holding of foreign currency
shares; and
• (c) when not permanently resident in India, out of their
foreign currency resources outside India.
• General permission is also available to sell the shares so
purchased or acquired under clause (a), (b) and (c).
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Limit up to which Indian Party may
make Financial Commitment(FC) in
JV/WOS
• FC should not exceed 400% of the net worth
of the Indian Party as on the date of the lastaudited balance sheet.
• Net worth means paid up capital and free
reserves• FC can be exceed 400% limit by the proceeds
of ADR/GDR and out of the balances of EEFC.
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• 100% of the amount of equity shares;
• 100% of the amount of compulsorily and mandatorily convertible
preference shares;
•100% of the amount of other preference shares;
• 100% of the amount of loan;
• 100% of the amount of guarantee (other than performance
guarantee) issued by the Indian party;
• 100% of the amount of bank guarantee issued by a resident bank on
behalf of JV or WOS of the Indian party provided the bank guaranteeis backed by a counter guarantee / collateral by the Indian party.
• 50% of the amount of performance guarantee issued by the Indian
party provided that the outflow on account of invocation of
performance guarantee results in the breach of the limit of the
financial commitment in force, prior permission of the Reserve Bankis to be obtained before executing remittance beyond the limit
prescribed for the financial commitment.
• Foot note: Compulsorily Convertible Preference Shares (CCPS) shall
be treated at par with equity shares.
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Methods of Funding Overseas
Investments• drawal of foreign exchange from an AD bank in India;
• capitalisation of exports;
• swap of shares (valuation as mentioned in );
• proceeds of External Commercial Borrowings (ECBs) / Foreign
Currency Convertible Bonds (FCCBs);• in exchange of ADRs/GDRs issued in accordance with the Scheme
• for issue of Foreign Currency Convertible Bonds and Ordinary
Shares (through Depository Receipt Mechanism) Scheme, 1993,
and the guidelines issued thereunder from time to time by the
Government of India;
• balances held in EEFC account of the Indian party and
• proceeds of foreign currency funds raised through ADR / GDR
issues.
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Other terms & Conditions
• Loan / Guarantee is allowed only where Indian
party has Equity participation otherwise if
Indian party has to extended loan or
guarantee to foreign entity without equityparticipation, it will require RBI prior approval ;
• Amount & period of the guarantee should be
specified upfront;
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• Note: Specific approval of the Reserve Bank
will be required for creating charge onimmovable / moveable property and other
financial assets (except pledge of shares of
overseas JV / WOS) of the Indian party / group
companies in favour of a non-resident entity
within the overall limit fixed (presently 400%)
for the financial commitment subject to
submission of a ‘No Objection’ by the Indianparty and their group companies from their
Indian lenders.
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• The Indian party should not be on the Reserve Bank’s Exporters' caution
list / list of defaulters to the banking system circulated by the Reserve
Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit
information company as approved by the Reserve Bank or under
investigation by any investigation / enforcement agency or regulatory
body.
• All transactions relating to a JV / WOS should be routed through one
branch of an Authorised Dealer bank to be designated by the Indian party.
• In cases of investment by way of swap of shares, irrespective of the
amount, valuation of the shares will have to be made by a Category I
Merchant Banker registered with SEBI or an Investment Banker outside
India registered with the appropriate regulatory authority in the host
country. Approval of the Foreign Investment Promotion Board (FIPB) will
also be a prerequisite for investment by swap of shares.
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Valuation of shares
• In case of partial / full acquisition of an existing
foreign company, where the investment is more than
USD 5 million, valuation of the shares of thecompany shall be made by a Category I Merchant
Banker registered with SEBI or an Investment Banker
/ Merchant Banker outside India registered with the
appropriate regulatory authority in the host country;
and, in all other cases by a Chartered Accountant or a
Certified Public Accountant.
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Reporting Requirement
• The Indian Party is required to report such
acquisition, issue of guarantee (any exposure
towards ODI) in form ODI to the AD Bank for
submission to the Reserve Bank within aperiod of 30 days from the date of the
transaction.
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Approval Route – Factors considered
for Approval
• Prima facie viability of the Joint Venture (JV)/Wholly Owned Subsidiary (WOS) Outside India.
• Contribution to external trade and other benefits
which will accrue to India through suchinvestment.
• Financial position and business track record ofthe Indian party and the foreign entity.
• Expertise and experience of the Indian party inthe same or related line of activity of the JV/WOSoutside India.
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Indian Party’s Obligations
•Filling up of ODI Form to RBI, duly supported by certified
board resolution, statutory auditors certificate and valuation
report, through AD – I Bank•Receive share Certificate
• Any other documents as an evidence of investment
• Within six months of investments
• Submit Annual Performance Report of overseas entity to
the Reserve Bank of India through AD Bank
• Every year after annual accounts are prepared• 30 June every year (based on audited annual accounts)
•Submit annual return on Foreign Liabilities and foreign
Assets
•15th July every year (through mail)
• Repatriate to India all dues viz. dividends, royalty, technical
fees, etc.
• Within 60 days of falling due.
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Obligation on Indian Party Conti…..
APR
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An Indian party, which has set up / acquired a Joint Venture (JV) or Wholly Owned Subsidiary (WOS)overseas in terms of the Regulations of the Notification ibid , shall submit, to the designated Authorised
Dealer every year, an Annual Performance Report (APR) in Form ODI Part III in respect of each JV or WOS
outside India and other reports or documents as may be specified by the Reserve Bank from time to time,
on or before the 30th of June each year. The APR, so required to be submitted, has to be based on the
latest audited annual accounts of the JV / WOS, unless specifically exempted by the Reserve Bank.
Where the law of the host country does not mandatorily require auditing of the books of accounts of JV /
WOS, the :a. The Statutory Auditors of the Indian party certify that ‘The un-audited Annual Performance Report
(APR) may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS
provided annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS’
and
b. That the un-audited annual accounts of the JV / WOS has been adopted and ratified by the Board of the
Indian party.Reporting requirements including submission of Annual Performance Report are also applicable for
investors in unincorporated entities in the oil sector.
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Obligation on Indian Party Conti…..
FLA
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Indian companies which have made overseas direct investments, shall
submit an Annual return on Foreign Liabilities and Assets in the format as
Prescribed by RBI (available in RBI’s website (www.rbi.org.in → Forms
category → FEMA Forms) which can be duly filled-in, validated and sent
by e-mail, by July 15 every year.
Email id is :[email protected]
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ODI- Related Matters
Resident individuals are not permitted to set up companyoverseas
Proprietorship concerns and unregistered partnership firms
are permitted to set up JV/WOS with prior approval of
Reserve Bank
Registered Trusts and societies engaged in manufacturing/
educational/ hospital sector permitted for overseas
investments with prior approval of Reserve Bank
All investments should have Unique Identification Number
(UIN) from the Reserve Bank of India
Listed Indian companies are permitted to invest upto 50% of
their net worth in shares/bonds/fixed income securities rated
not below investment grade issued by listed overseascompanies.
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ODI by Financial SECTOR
Requirements to be fulfilled by the Indian Party
Financial
Sector
Indian Party has
earned net profit
during the
preceding three financial years
Registered with the
regulatory authority
in India for
conducting financialactivities
Has obtained
approval from theregulatory
authorities
concerned both in
India and abroad
Has fulfilled the
prudential norms
relating to capital
adequacy as
prescribed by the
regulatory authority
concerned in India
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• INVESTMENT THROUGH SPECIAL PURPOSE
VEHICLE (SPV) UNDER AUTOMATIC ROUTE (i) Investments in JV/WOS abroad by Indian party
through the medium of a Special PurposeVehicle (SPV) are also permitted under the
Automatic Route in terms of Regulation 6 of the
Notification.
(ii) Setting up of an SPV under the Automatic
Route is permitted for the purpose of making
a investment in JV/WOS overseas
Automatic Route
OperatingEntity
SPV
Indianparty
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SPV
SPV
Indianparty
• INVESTMENT THROUGH SPECIAL
PURPOSE VEHICLE (SPV) UNDER
AUTOMATIC ROUTE, CONTI…..
• Setting up of a step downSPV falls required approval
of RBI
Approval Route
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• (b) Further, the issuance of corporate guarantee on behalf of
second generation or subsequent level step down operatingsubsidiaries will be considered under the Approval Route, providedthe Indian Party directly or indirectly holds 51 per cent or morestake in the overseas subsidiary for which such guarantee isintended to be issued.
• (Note :The Indian party / entity may extend loan / guarantee only toan overseas JV / WOS in which it has equity participation.)
• Proposals from the Indian party for undertaking financialcommitment without equity contribution in JV / WOS may beconsidered by the Reserve Bank under the approval route.
OVERSEAS DIRECT INVESTMENT AS
FINANCIAL TOOL CONTI......
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• Pledge of Shares of JV/WOS
•
RBI approval does not required
• An Indian party may pledge the shares of JV / WOS to anAD Category – I bank or a public financial institution inIndia for availing of any credit facility for itself or for theJV / WOS abroad in terms of Regulation 18 of theNotification. Indian party may also transfer by way ofpledge, the shares held in overseas JV/WOS, to anoverseas lender, provided the lender is regulated andsupervised as a bank and the total financial
commitments of the Indian party remain within the limitstipulated by the Reserve Bank for overseasinvestments, from time to time.
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Hedging of Overseas Direct Investments
(1) Resident entities having overseas direct investments arepermitted to hedge the foreign exchange rate risk arising outof such investments. AD Category - I banks may enter intoforward / option contracts with resident entities who wish tohedge their overseas direct investments (in equity and loan),
subject to verification of such exposure.
(2) If a hedge becomes naked in part or full owing toshrinking of the market value of the overseas directinvestment, the hedge may continue to the original maturity.
Rollovers on the due date are permitted up to the extent ofmarket value as on that date.
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• Capitalisation of exports and other dues• (1) Indian party is permitted to capitalise the payments due from the
foreign entity towards exports, fees, royalties or any other dues fromthe foreign entity for supply of technical know-how, consultancy,
managerial and other services within the ceilings applicable.
Capitalisation of export proceeds remaining unrealised beyond the
prescribed period of realization will require prior approval of the
Reserve Bank.• (2) Indian software exporters are permitted to receive 25 per cent of
the value of their exports to an overseas software start-up company
in the form of shares without entering into Joint Venture Agreements,
with prior approval of the Reserve Bank.
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The obligations of the Indian party, which has
made direct investment outside India
• An Indian Party will have to comply with the following: -
• receive share certificates or any other documentary evidence
of investment in the foreign entity as an evidence of
investment and submit the same to the designated AD within
6 months;
• repatriate to India, all dues receivable from the foreign entity,
like dividend, royalty, technical fees etc.;
• submit to the Reserve Bank through the designated
Authorized Dealer, every year, an Annual Performance Reportin Part III of Form ODI in respect of each JV or WOS outside
India set up or acquired by the Indian party;
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• report the details of the decisions taken by a JV/WOS
regarding diversification of its activities /setting up of step
down subsidiaries/alteration in its share holding patternwithin 30 days of the approval of those decisions by the
competent authority concerned of such JV/WOS in terms of
the local laws of the host country. These are also to be
included in the relevant Annual Performance Report; and
• in case of disinvestment, sale proceeds of shares/securities
shall be repatriated to India immediately on receipt thereof
and in any case not later than 90 days from the date of sale of
the shares /securities and documentary evidence to this effect
shall be submitted to the Reserve Bank through the
designated Authorised Dealer.
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What are the different modes of disinvestments
from the JV / WOS abroad
• Disinvestment by the Indian party from its JV /
WOS abroad may be by way of transfer / sale
of equity shares to a non-resident / resident
or by way of liquidation / merger /amalgamation of the JV / WOS abroad.
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Can an Indian Party disinvest in case where write
off is not involved
• Yes. The Indian Party can disinvest in cases where write off is not involved
without prior approval from Reserve Bank subject to the following:
• the sale is to be effected through a stock exchange where the shares of
the overseas JV/ WOS are listed;
• if the shares are not listed on the stock exchange and the shares are
disinvested by a private arrangement, the share price is not less than the
value certified by a Chartered Accountant / Certified Public Accountant as
the fair value of the shares based on the latest audited financial
statements of the JV / WOS;
• the Indian Party does not have any outstanding dues by way of dividend,
technical know-how fees, royalty, consultancy, commission or other
entitlements and / or export proceeds from the JV or WOS;
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• the overseas concern has been in operation
for at least one full year and the Annual
Performance Report together with the audited
accounts for that year has been submitted tothe Reserve Bank; and
• the Indian party is not under investigation by
CBI / DoE/ SEBI / IRDA or any other regulatoryauthority in India.
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In case of disinvestment of stake in overseas
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In case of disinvestment of stake in overseas
JV/WOS, can an Indian party disinvest with write
off of part of investment• Indian Party may disinvest without prior approval of the Reserve Bank, in
the under noted cases, where the amount repatriated on disinvestment is
less than the amount of the original investment:
• i) in cases where the JV / WOS is listed in the overseas stock exchange;
• ii) in cases where the Indian Party is listed on a stock exchange in India and
has a net worth of not less than Rs.100 crore;
• iii) where the Indian Party is an unlisted company and the investment in
the overseas JV / WOS does not exceed USD 10 million and
• iv) where the Indian Party is a listed company with net worth of less than
Rs.100 crore but investment in an overseas JV/WOS does not exceed USD10 million.
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Whether restructuring of the balance sheet of
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Whether restructuring of the balance sheet of
the JV / WOS abroad involving write-off of
capital and receivables is allowed• Indian company which has set up WOS abroad or has at least 51% stake in
an overseas JV may write off capital (equity / preference shares) or other
receivables (such as loans, royalty, technical knowhow fees and
management fees in respect of the JV /WOS) even while such JV / WOS
continue to function subject to the following:
• (i) Listed Indian companies are permitted to write off capital and otherreceivables up to 25% of the equity investment in the JV /WOS under the
Automatic Route; and
• (ii) Unlisted companies are permitted to write off capital and other
receivables up to 25% of the equity investment in the JV /WOS with prior
approval of the Reserve Bank.
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• The write-off / restructuring have to be reported to the Reserve Bank
through the designated AD bank within 30 days of write-off /
restructuring. The write-off / restructuring is subject to the condition that
the Indian Party should submit the following documents for scrutiny along
with the applications to the designated AD Category – I bank under the
Automatic as well as the Approval Routes:• a) A certified copy of the balance sheet showing the loss in the overseas
WOS/JV set up by the Indian Party; and
• b) Projections for the next five years indicating benefit accruing to the
Indian company consequent to such write off / restructuring.
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f f
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Advantages of ODI over other mode of
Investments outside India
• Under Liberalised Remittance scheme (LRS),maximum investment can be only upto US $200,000 per financial year by ResidentIndividuals for permitted current and capital
account transactions including purchase ofsecurities, but there is no such conditionunder ODI (400% condition apply).
• The investor can become subscriber to thememorandum of foreign entity in case ofOverseas direct investment, but not in caseof LRS scheme.
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