TMI BlogMaster Circular on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad (Amended up to May 06, 2015)X X X X Extracts X X X X X X X X Extracts X X X X ..... rlying circulars / notifications is furnished in the Appendix. 3. This Master Circular is issued with a sunset clause of one year. This circular will stand withdrawn on July 01, 2015 and be replaced by an updated Master Circular on the subject. Yours faithfully, (A. K. Pandey) Chief General Manager INDEX Section A - General A.1 Introduction A.2 Statutory basis A.3 Prohibitions A.4 General Permission Section B - Direct Investment Outside India B.1 Automatic Route B.2 Investment in unincorporated entities overseas under the Automatic Route B.3 Method of Funding B.4 Capitalisation of exports and other dues B.5 Investments in Financial Services Sector B.6 Investment in Equity of Companies Registered Overseas / Rated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... que Identification Number (UIN) 6 Investment by way of share swap 7 Investments under Regulation 9 of Notification No. FEMA.120/2004-RB 2004 8 Purchase of foreign securities under ADR / GDR linked Stock Option Scheme 9 Remittance towards Earnest Money Deposit or Issue of Bid Bond Guarantee 10 Transfer by way of sale of shares of a JV / WOS outside India 11 Verification of evidence of investment 12 Opening of Foreign Currency Account abroad by an Indian party Annex - A Annex - B Annex - C ANNEX - D Appendix PART - I Section A - General A.1 Introduction (1) Overseas investments (or financial commitment) in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) have been recognised as important avenues for promoting global business by Indian entrepreneurs. Joint Ventures are pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outlined in paragraph B.7. A.3 Prohibitions Indian parties are prohibited from making investment (or financial commitment) in a foreign entity engaged in real estate (meaning 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) or banking business, without the prior approval of the Reserve Bank. 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, rupee exchange 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 extant FEMA regulations and would consequently attract action under the relevant provisions of FEMA, 1999. A.4 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: out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf of JV or WOS of the Indian party provided the bank guarantee is 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 Bank is 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. (4) The investments/financial commitments are subject to the following conditions: a) The Indian party / entity may extend loan / guarantee only to an overseas JV / WOS in which it has equity participation. Proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS may be considered by the Reserve Bank under the approval route. AD banks may forward the proposals from their constituents after ensuring that the laws of the host country permit incorporation of a company without equity participation by the Indian party. Indian entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares 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. f) In case of investment in overseas JV / WOS abroad by a registered Partnership firm, where the entire funding for such investment is done by the firm, it will be in order for individual partners to hold shares for and on behalf of the firm in the overseas JV / WOS if the host country regulations or operational requirements warrant such holdings. g) An Indian party may acquire shares of a foreign company engaged in a bonafide business activity, in exchange of ADRs/GDRs issued to the latter 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 there under from time to time by the Government of India, provided: (i) ADRs/GDRs are listed on any stock exchange outside India; (ii) The ADR and/or GDR issued for the purpose of acquisition is backed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - I bank concerned. (b) Further, the issuance of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries will be considered under the Approval Route, provided the Indian Party indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued. B.1.2 Investment (or financial commitment) through Special Purpose Vehicle (SPV) under Automatic Route (i) Investments (or financial commitment) in JV/WOS abroad by Indian parties through the medium of a Special Purpose Vehicle (SPV) are also permitted under the Automatic Route in terms of Regulation 6 of the Notification, subject to the conditions that the Indian party is not included in the Reserve Bank's caution list or is under investigation by the Directorate of Enforcement or included in the list of defaulters to the banking system circulated by the Reserve Bank/any other Credit Information company as approved by the Reserve Bank. Indian parties whose names appear in the Defaulters' list require prior approval of the Reserve Bank for the investment (or financial commitment). (ii) Setting up of an SPV under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. In respect of (vi) and (vii) above, the limit of financial commitment vis- -vis the net worth will not apply. However, all investments (or financial commitment) made in the financial sector will be subject to compliance with Regulation 7 of the Notification, irrespective of the method of funding. (2) General permission has been granted to persons resident in India for purchase / acquisition of securities in the following manner: (i) out of funds held in RFC account; (ii) as bonus shares on existing holding of foreign currency shares; and (iii) when not permanently resident in India, out of their foreign currency resources outside India (para A.4 above) B.4 Capitalisation of exports and other dues (1) Indian party is permitted to capitalise the payments due from the foreign entity t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of the last audited balance sheet in (i) shares and (ii) bonds / fixed income securities, rated not below investment grade by accredited / registered credit rating agencies, issued by listed overseas companies. (ii) Investment by Mutual Funds Indian Mutual Funds registered with SEBI are permitted to invest within an overall cap of USD 7 billion in: i) ADRs / GDRs of the Indian and foreign companies; ii) equity of overseas companies listed on recognised stock exchanges overseas ; iii) initial and follow on public offerings for listing at recognized stock exchanges overseas; iv) foreign debt securities in the countries with fully convertible currencies, short- term as well as long-term debt instruments with rating not below investment grade by accredited/registered credit agencies; v) money market instruments rated not below investment grade; vi) repos in the form of investment, where the counterparty is rated not below investment grade. The repos should not, however, involve any borrowing of funds by mutual funds; vii) government securities where the countries are rated notbelow investment grade; viii) derivatives traded on recognized stock exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cations from their constituents to the Reserve Bank as per the laid down procedure. B.9 Overseas Investments by Proprietorship Concerns (1) Keeping in view the changes in the definition / classification of the exporters as per the Foreign Trade Policy of the Ministry of Commerce and Industry, issued from time to time, the following revised terms and conditions are required to be complied with for considering the proposal of overseas direct investment (or financial commitment), by a proprietorship concern / unregistered partnership firm in India, by the Reserve Bank under the approval route: The proprietorship concern / unregistered partnership firm in India is classified as Status Holder as per the Foreign Trade Policy issued by the Ministry of Commerce and Industry, Govt. of India from time to time; The proprietorship concern / unregistered partnership firm in India has a proven track record, i.e., the export outstanding does not exceed 10% of the average export realisation of the preceding three years and a consistently high export performance; The Authorised Dealer bank is satisfied that the proprietorship concern / unregistered partnership firm in India is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nforcement agency like the Directorate of Enforcement, Central Bureau of Investigation (CBI), etc. (b) Society i) The Society should be registered under the Societies Registration Act, 1860. ii) The Memorandum of Association and rules and regulations permit the Society to make the proposed investment which should also be approved by the governing body / council or a managing / executive committee. iii) The AD Category - I bank is satisfied that the Society is KYC (Know Your Customer) compliant and is engaged in a bonafide activity; iv) The Society has been in existence at least for a period of three years; v) The Society has not come under the adverse notice of any Regulatory / Enforcement agency like the Directorate of Enforcement, CBI etc. In addition to the registration, the AD Category - I bank should ensure that the special license / permission has been obtained by the applicant in case the activities require special license / permission either from the Ministry of Home Affairs, Government of India or from the relevant local authority, as the case may be. B.11 Post investment changes / additional investment (or financial commitment) in existing JV / WO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany through bidding and tender procedure and also make subsequent remittances through an AD Category - I bank, in accordance with the provisions of Regulation 14 of the Notification. B.14 Obligations of Indian Party (1) An Indian party which has made direct investment abroad is under obligation to (a) receive share certificate or any other document as an evidence of investment, (b) repatriate to India the dues receivable from foreign entity, and (c) submit the documents / Annual Performance Report to the Reserve Bank, in accordance with the provisions specified in Regulation 15 of the Notification. The share certificate or any other document as evidence of investment has to be submitted to and retained by the designated AD Category - I bank, who is required to monitor the receipt of such documents and satisfy themselves about the bonafides of the documents. A certificate to this effect should be submitted by the designated AD category - I bank to the Reserve Bank along with the APR (Part III of Form ODI). (2) Reporting requirements including submission of Annual Performance Report are also applicable for investors in unincorporated entities in the oil sector. (3) Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under noted cases where the amount repatriated after disinvestment is less than the original amount invested: in case where the JV / WOS is listed in the overseas stock exchange; in cases where the Indian Party is listed on a stock exchange in India and has a net worth of not less than ₹ 100 crore; where the Indian Party is an unlisted company and the investment (or financial commitment) in the overseas venture does not exceed USD 10 million. and where the Indian Party is a listed company with net worth of less than ₹ 100 crore but investment (or financial commitment) in an overseas JV/WOS does not exceed USD 10 million. (2) Such disinvestments shall be subject to the conditions listed at B.15 items (ii) to (vi) and B 15.2. (3) An Indian Party, which does not satisfy the conditions laid down above for undertaking any disinvestment in its JV/WOS abroad, shall have to apply to the Reserve Bank for prior permission. B.17 Pledge of Shares of Joint Venture (JV), Wholly Owned Subsidiary (WOS) and Step down Subsidiary (SDS) An Indian Party may create charge, by way of pledge, on the shares of Joint Venture (JV) or Wholly Owned Subsidiary (WOS) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing / original guarantee was issued in terms of the then extant / prevailing FEMA guidelines; there is no change in the end use of the guarantee, i.e. the facilities availed by the JV / WOS / Step Down Subsidiary; there is no change in any of the terms conditions, including the amount of the guarantee except the validity period; the reporting of the rolled over guarantee would be done as a fresh financial commitment in Part II of Form ODI, as hitherto; and if the Indian party is under investigation by any investigation / enforcement agency or regulatory body, the concerned agency / body shall be kept informed about the same. (2) In case, however, the above conditions are not met, the Indian party shall obtain prior approval of the Reserve Bank for rollover / renewal of the existing guarantee through the designated AD bank. B.21 Creation of charge on domestic and foreign assets (1) An Indian party may create charge (by way of mortgage, pledge, hypothecation or otherwise) on its assets [including the assets of its group company, sister concern or associate company in India, promoter and / or director] in favour of an overseas lender as security for availing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / beneficiaries, etc. (2) A person resident in India may transfer by way of sale the shares acquired as stated above provided that the proceeds thereof are repatriated immediately on receipt thereof and in any case not later than 90 days from the date of sale of such securities. (3) Foreign companies are permitted to repurchase the shares issued to residents in India under any ESOP Scheme provided (i) the shares were issued in accordance with the Rules / Regulations framed under Foreign Exchange Management Act, 1999, (ii) the shares are being repurchased in terms of the initial offer document, and (iii) an annual return is submitted through the AD Category - I bank giving details of remittances / beneficiaries, etc. (4) In all other cases, not covered by general or special permission, approval of the Reserve Bank is required to be obtained before acquisition of a foreign security. C.2 Pledge of a foreign security by a person resident in India The shares acquired by persons resident in India in accordance with the provisions of Foreign Exchange Management Act, 1999 or Rules or Regulations made thereunder are allowed to be pledged for obtaining credit facilities in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal Instructions to Authorised Dealer Banks 1. Designated branches An eligible Indian party making investment (or financial commitment) in a Joint Venture (JV) / Wholly Owned Subsidiary (WOS) outside India is required to route all its transactions relating to the investment (or financial commitment) through one branch of an AD Category - I bank designated by it in terms of clause (v) of sub regulation 2 of Regulation 6 of the Notification. All communication from the Indian parties, to the Reserve Bank, relating to the investment (or financial commitment) outside India should be routed through the same branch of the AD Category - I bank that has been designated by the Indian investor for the investment (or financial commitment). The designated AD Category - I bank while forwarding the request from their customers to the Reserve Bank, should also forward its comments / recommendations on the request. However, the Indian party may designate different AD Category - I banks / branches of AD Category - I banks for different JV / WOS outside India . For proper follow up, the AD Category - I bank is required to maintain party-wise record in respect of each JV/ WOS. 2. Investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dentification Number (UIN), acknowledgment of remittance/s (or financial commitment) and filing of the Annual Performance Reports (APRs) and easy accessibility to data at the AD level for reference purposes. a) Initially, Part I (Sections A to D), II and III of form ODI should be filed on-line in the Overseas Investment Application for allotment of UIN, reporting of subsequent remittances (or financial commitment), filing of APRs, etc. AD Category -I banks would continue to receive the ODI forms in physical form, as stipulated in the A. P. (DIR Series) Circular No. 68 dated June 1, 2007 , which should be preserved, UIN wise, for onward submission to the Reserve Bank, if specifically required. Transactions in respect of Mutual Funds, Portfolio Investment Scheme (PIS) and Employees Stock Options Scheme (ESOPS) are also required to be reported on-line in the Overseas Investment Application. b) The on-line reporting would be required to be made by the Centralized Unit/Nodal Office of AD Category - I banks. The Overseas Investment Application is hosted on the Reserve Bank's Secured Internet Website (SIW) https://secweb.rbi.org.in and a link has been made available for accessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ittances towards the loan/issue of guarantee to/on behalf of the overseas JV/WOS. 4. Investments (or financial commitment) under Regulation 11 of Notification No. FEMA.120/2004-RB dated July 7, 2004 In terms of Regulation 11 of the Notification, Indian parties are permitted to make direct investment (or financial commitment) in JV / WOS abroad by way of capitalisation of exports or other dues/entitlements like royalties, technical know-how fees, consultancy fees, etc. In such cases also, the Indian party is required to submit details of the capitalisation in form ODI to the designated branch of the AD Category - I bank. Such investments (or financial commitment) by way of capitalisation are also to be reckoned while computing the limit of financial commitment prescribed in terms of Regulation 6. Further, in cases where the export proceeds are being capitalised in accordance with the provisions of Regulation 11, the AD Category - I banks are required to obtain a custom certified copy of the invoice as required under Regulation 12(2) and forward it to the Reserve Bank together with the revised form ODI. Capitalisation of export proceeds or other entitlements, which are overdu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the issuing company has followed the relevant guidelines of SEBI / Government. 9. Remittance towards Earnest Money Deposit or Issue of Bid Bond Guarantee (i) In terms of Regulation 14 of the Notification, AD Category - I banks may, on being approached by an Indian party which is eligible for investment (or financial commitment) under Regulation 6, allow remittance towards Earnest Money Deposit (EMD) to the extent eligible after obtaining Form A2 duly filled in or may issue bid bond guarantee on their behalf for participation in bidding or tender procedure for acquisition of a company incorporated outside India. On winning the bid, AD banks may remit the acquisition value after obtaining Form A2 duly filled in and report such remittance (including the amount initially remitted towards EMD) to the Chief General Manager, Foreign Exchange Department, Central Office, Overseas Investment Division, Amar Building, 5th floor, Mumbai 400 001 in form ODI. AD Category - I banks, while permitting remittance towards EMD should advise the Indian party that in case they are not successful in the bid, they should ensure that the amount remitted is repatriated in accordance with Foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Circular No. 101 dated April 02, 2012. Annex - D Schedule V [Please See Para B.19 of this Master Circular and Regulation 20A of the Notification] A. Overseas Direct Investments by Resident Individuals Resident individual is prohibited from making direct investment in a JV or WOS abroad which is engaged in the real estate business or banking business or in the business of financial services activity. The JV or WOS abroad shall be engaged in bonafide business activity. Resident individual is prohibited from making direct investment in a JV / WOS [set up or acquired abroad individually or in association with other resident individual and / or with an Indian party] located in the countries identified by the Financial Action Task Force (FATF) as non co-operative countries and territories as available on FATF website www.fatf-gafi.org or as notified by the Reserve Bank. The resident individual shall not be on the Reserve Bank s Exporters Caution List or List of defaulters to the banking system or under investigation by any investigation / enforcement agency or regulatory body. At the time of investments, the permissible ceiling shall be within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t up or acquired a JV or WOS under the provisions of this Schedule. The disinvestment by the resident individual may be reported by the designated AD to the Reserve Bank in Form ODI Part IV within 30 days of receipt of disinvestment proceeds. Appendix List of Circulars/Notifications consolidated in the Master Circular On Direct Investment in Joint Ventures/ Wholly Owned Subsidiaries Abroad Notifications (published in the official gazette by the Government of India on various dates) Sl. No. Notification No. Date 1. FEMA.120/RB-2004 July 07, 2004 2. FEMA.132/2005-RB March 31, 2005 3. FEMA.135/2005-RB May 17, 2005 4. FEMA.139/2005-RB August 11, 2005 5. FEMA.150/2006-RB August 21, 2006 6. FEMA.164/2007-RB October 9, 2007 7. FEMA.173/2007-RB Decembe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2006 8. AP (DIR Series) Circular No.6 September 06, 2006 9. AP (DIR Series) Circular No. 11 November 16, 2006 10. AP (DIR Series) Circular No. 41 April 20, 2007 11. AP (DIR Series) Circular No. 49 April 30, 2007 12. AP (DIR Series) Circular No. 50 May 04, 2007 13. AP (DIR Series) Circular No.53 May 08, 2007 14. AP (DIR Series) Circular No.68 June 01, 2007 15. AP (DIR Series) Circular No. 72 June 08, 2007 16. AP (DIR Series) Circular No.75 June 14, 2007 17. AP (DIR Series) Circular No.76 June 19, 2007 18. AP (DIR Series) Circular No. 11 September 26, 2007 19. AP (DIR Seri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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