(1). Overseas investments 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 perceived as a medium of economic co-operation between India and other countries. Transfer of technology and skill, sharing of results of R&D, access to wider global market, promotion of brand image, generation of employment and utilisation of raw materials available in India and in the host country are other significant benefits arising out of such overseas investments. They are also important drivers of foreign trade through increased exports of plant and machinery and goods from India and also a source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments.

(2). In keeping with the spirit of liberalisation, which has become the hallmark of economic policy in general, and Foreign Exchange regulations in particular, the Reserve Bank has been progressively relaxing its rules and simplifying the procedures both for current account as well as capital account transactions.

(1). Section 6 of the Foreign Exchange Management Act, 1999 provides powers to the Reserve Bank to specify, in consultation with the Central Government the classes of permissible Capital Account transactions and limits up to which exchange is admissible for such transactions. Section 6(3) of the aforesaid Act provides powers to the Reserve Bank to prohibit, restrict or regulate various transactions referred to in the sub-clauses of that sub-section, by making Regulations.

(2). In exercise of the above powers, the Reserve Bank has in super session of earlier Notification No.FEMA19/RB-2000 dated 3rd May 2000 and amendments thereto, issued Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 vide Notification No. FEMA 120/RB-2004 dated July 7, 2004 (as amended vide Notification No. FEMA 132/2005-RB dated 31st March 2005, Notification No. FEMA 135/2005-RB dated 17^th May 2005, Notification No. FEMA 139/2005-RB dated 11^th August 2005, Notification No. FEMA 150/2006-RB dated 21^st August 2006 and Notification No. FEMA 164/2007-RB dated 9^th October 2007) (hereinafter referred to as ‘the Notification’). The Notification seeks to regulate acquisition and transfer of a foreign security by a person resident in India i.e. investment by Indian entities in overseas joint ventures and wholly owned subsidiaries as also investment by a person resident in India in shares and securities issued outside India.

In terms of Regulation 4 of the Notification, general permission has been granted to residents for purchase / acquisition of securities in the following manner

1. out of funds held in RFC account;
2. as bonus shares on existing holding of foreign currency shares; and
3. 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.

(1). In terms of Regulation 6 of the Notification, an Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not exceeding 400 per cent of the net worth of the Indian party as on the date of the last audited balance sheet.

(2). The ceiling of 400 per cent of net worth will not be applicable where the investment is made out of balances held in Exchange Earners' Foreign Currency account of the Indian party or out of funds raised through ADRs/GDRs. The Indian party should approach an Authorised Dealer Category - I bank with an application in Form ODI and prescribed enclosures / documents for effecting remittances towards such investments.

(3). Such overseas investments will include contribution to the capital of the overseas JV / WOS, loan granted to the JV / WOS, and 100 per cent of guarantees issued to or on behalf of the JV/WOS. The investments are subject to the following conditions:

a) The Indian entity may extend loan / guarantee to an overseas concern only in which it has equity participation. Indian entities may offer any form of guarantee - corporate or personal / primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India; provided that

i) All financial commitments including all forms of guarantees are within the overall ceiling prescribed for overseas investment by the Indian party i.e. currently within 400 per cent of the net worth of the Indian party,

ii) No guarantee is 'open ended' i.e. the amount of the guarantee should be specified upfront, and

f) In case of investment in overseas JV / WOS abroad by a registered Partnership firm, where 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) (i) Investments in JV/WOS abroad by Indian parties through the medium of a Special Purpose Vehicle (SPV) is also permitted under the Automatic Route subject to the conditions that the Indian party is not included in the Reserve Bank's Caution list or is under investigation by the Enforcement Directorate 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.

(ii) It is clarified that setting up of an SPV under the Automatic Route is permitted only for the purpose of investment in JV/WOS overseas.

h) 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 Central Government, provided:

(i) ADRs/GDRs are listed on any stock exchange outside India;

(ii) The ADR and/or GDR issue for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian party;

(iii) The total holding in the Indian entity by persons resident outside India in the expanded capital base, after the new ADR and/or GDR issue, does not exceed the sectoral cap prescribed under the relevant regulations for such investment under FDI;

(iv) Valuation of the shares of the foreign company shall be

(a) as per the recommendations of the Investment Banker if the shares are not listed on any recognized stock exchange; or

(b) based on the current market capitalisation of the foreign company arrived at on the basis of monthly average price on any stock exchange abroad for the three months preceding the month in which the acquisition is committed and over and above, the premium, if any, as recommended by the Investment Banker in its due diligence report in other cases.

(4). The Indian Party is required to report such acquisition in form ODI to the AD Bank for report to the Reserve Bank within a period of 30 days from the date of the transaction.

(1). Investments in unincorporated entities overseas in the oil sector (i.e. for exploration and drilling for oil and natural gas, etc.) by Navaratna PSUs, ONGC Videsh Ltd.(OVL) and Oil India Ltd.(OIL) may be permitted by AD Category - I banks, without any limit, provided such investments are approved by the competent authority.

(2). Other Indian companies are also permitted under the Automatic Route to invest in unincorporated entities overseas in the oil sector up to 400 per cent of its net worth provided the proposal has been approved by the competent authority and is duly supported by certified copy of the Board resolution approving such investment. Investment in excess of 400 per cent of the net worth of an Indian company shall require prior approval of the Reserve Bank.

In respect of vi) and vii) above, the ceiling of 400 per cent of net worth will not apply. However, in respect of investments in the financial sector, they will be subject to compliance of Regulation 7 of the Notification ibid, irrespective of the method of funding.

(2). General permission has been granted to residents 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)

(1). Indian parties are permitted to capitalise the payments due from the foreign entity towards exports, fees, royalties or any other dues from the 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.

(1). In terms of Regulation 7 of the Notification, an Indian party seeking to make investment in an entity engaged in the financial sector should fulfill the following additional conditions:

1. be registered with the appropriate regulatory authority in India for conducting the financial sector activities;

2. have earned net profit during the preceding three financial years from the financial services activities;
3. have obtained approval for investment in financial sector activities abroad from regulatory authorities concerned in India and abroad; and
4. have fulfilled the prudential norms relating to capital adequacy as prescribed by the regulatory authority concerned in India.

(2). A step down subsidiary of JV / WOS investing in a financial services sector is also required to comply with the above conditions.

Listed Indian companies are permitted to invest up to 50 per cent of their net worth as on the date 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.

Indian Mutual Funds registered with SEBI are permitted to invest within an overall cap 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 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 not below investment grade,

viii) derivatives traded on recognized stock exchanges overseas only for hedging and portfolio balancing with underlying as securities,

ix) short term deposits with banks overseas where the issuer is rated not below investment grade, and

x) units / securities issued by overseas Mutual Funds or Unit Trusts registered with overseas regulators and investing in (a) aforesaid securities, (b) Real Estate Investment Trusts (REITS) listed on recognized stock exchanges overseas, or (c) unlisted overseas securities (not exceeding 10 per cent of their net assets).

(2). A limited number of qualified Indian Mutual Funds are permitted to invest cumulatively up to USD 1 billion in overseas Exchange Traded Funds as may be permitted by SEBI.

(3). Domestic Venture Capital Funds registered with SEBI may invest in equity and equity linked instruments of off-shore Venture Capital Undertakings, subject to an overall limit of USD 500 million. Accordingly, Mutual Funds / Venture Capital Funds desirous of availing of this facility may approach SEBI for necessary permission.

(4). General permission is available to the above categories of investors for sale of securities so acquired.

(2). Reserve Bank, would inter alia, take into account the following factors while considering such applications:

1. Prima facie viability of the JV / WOS outside India;
2. Contribution to external trade and other benefits which will accrue to India through such investment;
3. Financial position and business track record of the Indian party and the foreign entity; and
4. Expertise and experience of the Indian party in the same or related line of activity of the JV / WOS outside India.

Reserve Bank will consider applications for investment in JV/WOS overseas in the energy and natural resources sectors (e.g. oil, gas, coal and mineral ores) in excess of 400 per cent of the net worth of the Indian companies as on the date of the last audited balance sheet. Accordingly AD Category - I banks may forward such applications from their constituents to the Reserve Bank as per the laid down procedure.

(1) With a view to enabling recognized star exporters with a proven track record and a consistently high export performance to reap the benefits of globalization and liberalization, proprietorship concerns and unregistered partnership firms are allowed to set up a JV / WOS outside India with prior approval of the Reserve Bank subject to satisfying certain eligibility criteria. An application in form ODI may be made to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Overseas Investment Division, Central Office, Amar Building 5 ^th Floor, Fort, Mumbai 400 001, through the AD Category - I bank. AD Category - I banks may forward the applications to the Reserve Bank along with their comments and recommendations, for consideration.

(2). Investments by established proprietorship or unregistered partnership exporter firms will be subject to the following conditions:

i) The Partnership / Proprietorship firm is a DGFT recognized Star Export House.

ii) The AD Category – I bank is satisfied that the exporter is KYC (Know Your Customer) compliant, is engaged in the proposed business and meets the requirement as indicated at i) above.

iii) Exporter has proven track record i.e. export outstanding does not exceed 10 per cent of the average export realization of preceding three financial years.

iv) The exporter has not come under adverse notice of any Government agency like Enforcement Directorate, CBI and does not appear in the exporters' caution list of the Reserve Bank or in the list of defaulters to the banking system in India.

v) The amount of investment outside India does not exceed 10 per cent of the average of three financial years export realization or 200 per cent of the net owned funds of the firm, whichever is lower.

Registered Trusts and Societies engaged in manufacturing / educational sector are allowed make investment in the same sector(s) in a Joint Venture or Wholly Owned Subsidiary outside India, with the prior approval of the Reserve Bank. Trusts / Societies satisfying the eligibility criteria as given below may submit the application/s in Form ODI-Part I, through their AD Category - I bank/s, to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Overseas Investment Division, Central Office, Amar Building, 5^th Floor, Fort, Mumbai 400 001, for consideration.

i) The Trust should be registered under the Indian Trust Act, 1882;

ii) The Trust deed permits the proposed investment overseas;

iii) The proposed investment should be approved by the trustee/s;

iii) The AD Category – I bank is satisfied that the Trust is KYC (Know Your Customer) compliant and is engaged in a bonafide activity;

iv) The Trust has been in existence at least for a period of three years;

v) The Trust has not come under the adverse notice of any Regulatory / Enforcement agency like the Directorate of Enforcement, CBI etc.

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 activities which 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, the ADCategory – I bank should ensure that such special license / permission has been obtained by the applicant.

A JV / WOS set up by the Indian party as per the Regulations may diversify its activities / set up step down subsidiary / alter the shareholding pattern in the overseas entity (subject to compliance of Regulation 7 of the Notification in the case of financial services sector companies). The Indian party should report to the Reserve Bank through the AD Category - I bank, the details of such decisions within 30 days of the approval of those decisions by the competent authority of the JV / WOS concerned in terms of local laws of the host country, and, include the same in the Annual Performance Report (APR—Part III of form ODI) required to be forwarded to the AD Category-I bank.

An Indian party may remit earnest money deposit or issue a bid bond guarantee for acquisition of a foreign company 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.

(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.

(2). Reporting requirements including submission of Annual Performance Report are also applicable for investors in unincorporated entities in the oil sector.

(1). Indian parties may also disinvest without prior approval of the Reserve Bank, in the under noted categories:

1. in case where the JV / WOS is listed in the overseas stock exchange;
2. in cases where the Indian promoter company is listed on a stock exchange in India and has a net worth of not less than Rs.100 crore;
3. where the investment of the Indian promoter company in the overseas venture does not exceed USD 10 million.

(2).The disinvestment shall be subject to the following conditions:

1. the sale is affected through a stock exchange where the shares of the overseas JV/ WOS are listed;
2. 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 nased on the lateset audited financial statements of the JV / WOS;
3. the overseas concern has been in operation for at least one full year an dteh Annula Performance Report together with the audited accounts for that year has been submitted to the Reserve Bank;
4. the Indian party is not under investigation by / CBI / ED/ SEBI / IRDA or any other regulatory authority in India.

The Indian entity is required to submit details of the disinvestment through its designated AD Category – I bank within 30 days from the date of disinvestment. An Indian party, which does not satisfy the conditions laid down, shall have to apply to the Reserve Bank for prior permission.

An Indian party may pledge the shares of JV / WOS to an AD Category – I bank or a public financial institution in India for availing of any credit facility for itself or for the JV / WOS abroad in terms of Regulation 18 of the Notification. Indian parties may also transfer by way of pledge, the shares held in overseas JV/WOS, to an overseas lender, provided the lender is regulated and supervised as a bank and the total financial commitments of the Indian parties remain within the limit stipulated by Reserve Bank for overseas investments, from time to time.

(1). Resident entities having overseas direct investments are permitted to hedge the exchange risk arising out of such investments. AD Banks may enter into forward / option contracts with resident entities who wish to hedge their overseas direct investments (in equity and loan), subject to verification of such exposure. Cancellation of such forward contracts may be permitted by AD Category - I banks and 50 per cent of such cancelled contracts may be allowed to be rebooked.

(2). If a hedge becomes naked in part or full owing to shrinking of the market value of the overseas direct investment, the hedge may continue to the original maturity. Rollovers on the due date are permitted up to the extent of market value as on that date.

General permission has been granted to a person resident in India who is an individual -

1. to acquire foreign securities as a gift from any person resident outside India;

2. to acquire shares under Cashless Employees Stock Option Scheme issued by a company outside India, provided it does not involve any remittance from India;

3. to acquire shares by way of inheritance from a person whether resident in or outside India;

4. to purchase equity shares offered by a foreign company under its ESOP Schemes if he is an employee, or, a director of an Indian office or branch of a foreign company, or, of a subsidiary in India of a foreign company, or, an Indian company in which foreign equity holding, either direct or through a holding company/Special Purpose Vehicle (SPV), is not less than 51 per cent. AD Category – I banks are permitted to allow remittances for purchase of shares by eligible persons under this provision irrespective of the method of operationalisation of the scheme i.e where the shares under the scheme are offered directly by the issuing company or indirectly through a trust / a Special Purpose Vehicle (SPV) / step down subsidiary, provided
   
   (i) the company issuing the shares effectively, directly or indirectly, holds in the Indian company, whose employees / directors are being offered shares, not less than 51 per cent of its equity,
   
   (ii) the shares under the ESOP Scheme are offered by the issuing company globally on uniform basis, and
   
   (iii) An Annual Return (Annex A, Part II, item 11) is submitted by the Indian company to the Reserve Bank through the AD Category – I bank giving details of remittances / beneficiaries, etc.

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.

5. 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.
   
6. f. 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.

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 India from an AD Category – I bank / Public Financial Institution.

Residents are permitted to acquire a foreign security, if it represents –

1. qualification shares for becoming a director of a company outside India provided it does not exceed 1 per cent of the paid up capital of the overseas company and the consideration for the acquisition does not exceed USD 20,000 in a calendar year;

(1). With effect from June 01, 2007, reporting system for overseas investment has been revised. All the earlier forms have been subsumed into one form viz. ODI, comprising of four parts:

Part I - which includes the following:
Section A – Details of the Indian Party
Section B – Details of Investment in New Project
Section C - Details of Investment in Existing Project
Section D – Funding for JV / WOS
Section E – Declaration by the Indian Party (to be retained by AD Category – I bank)
Section F - Certificate by the Statutory Auditors of the Indian Party (to be retained by AD Category – I bank)
Part II - Reporting of Remittances
Part III - Annual Performance Report (APR)
Part IV – Report on Closure / Disinvestment / Voluntary Liquidation / Winding up of JV / WOS

[Part IV is a new system introduced for reporting Closure / Disinvestment / Winding up / Voluntary Liquidation of the overseas JV / WOS under general permission]. The form can also be downloaded from Reserve Bank’s website www.rbi.org.in.

(2). It is reiterated that the revised form is only a rationalisation of the reporting procedure and there is no change or dilution in the existing eligibility criteria / documentation / limits. Eventually, these reports will be received on line by Reserve Bank.

(3). Accordingly, AD Category - I banks may take action as under:
a) In cases of Automatic Route – Parts I and II of form ODI should be submitted to The Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Overseas Investment Division, Amar Bldg. 5th floor, Sir P. M. Road, Fort, Mumbai 400001.

b) In case of Approval Route – Part I of form ODI, along with the supporting documents, is required to be submitted after scrutiny and with specific recommendations by the designated AD Category - I bank, at the address mentioned above. In case the proposal is approved, Part I will be returned by the Reserve Bank to the AD Category - I bank. After effecting the remittance, the AD Category – I bank should resubmit the same to the Reserve Bank along with Part II of form ODI.

(4). In cases where the investment is being made jointly by more than one Indian party, form ODI is required to be signed jointly by all the investing entities and submitted to the designated branch of the AD Category – I bank. AD Category – I banks should forward to the Reserve Bank a consolidated form ODI indicating details of each party. The same procedure should be followed where the investment is made out of the proceeds of ADR / GDR issues of an Indian party in terms of Regulation 6(5) of the Notification. The Reserve Bank would allot only one Unique Identification Number to the overseas project.

(5). AD Category – I banks should allow remittance towards loan to the JV / WOS and / or issue guarantee to / on behalf of the JV / WOS abroad only after ensuring that the Indian party has an equity stake in the JV / WOS.

In terms of Regulation 11, Indian parties are permitted to make direct investment 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 by way of capitalisation are also to be reckoned while computing the cap of 400 per cent 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 revised form ODI. Capitalisation of export proceeds or other entitlements, which are overdue, would require prior approval of the Reserve Bank for which the Indian parties should make an application in form ODI to the Reserve Bank for consideration.

On receipt of the form ODI from the AD Category – I bank, the Reserve Bank will allot a Unique Identification Number to each JV or WOS abroad, which is required to be quoted in all correspondence with the Reserve Bank. AD Category – I banks may allow additional investment in an existing overseas concern set up by an Indian party, in terms of Regulation 6 only after the Reserve Bank has allotted necessary Unique Identification Number to the overseas project.

AD Category – I banks may make remittances upto USD 50,000 or its equivalent in a block of five calendar years, without the prior approval of the Reserve Bank, for purchase of foreign securities in the knowledge based sector under the ADR / GDR linked ESOPs, after satisfying that the issuing company has followed the relevant guidelines of SEBI / Government.

(ii) In cases where an Indian party, after being successful in the bid / tender decides not to proceed further with the investment, AD banks should submit full details of remittance allowed towards EMD / invoked bid bond guarantee, to the Chief General Manager, Foreign Exchange Department, Central Office, Overseas Investment Division, Amar Building, 5^th floor, Mumbai 400 001.

(iii) In case the Indian party is successful in the bid, but the terms and conditions of acquisition of a company outside India are not in conformity with the provisions of Regulations in Part I, or different from those for which approval under sub-regulation (3) was obtained, the Indian entity should obtain approval from the Reserve Bank by submitting form ODI.

The Indian party should report details of the disinvestment through the AD Category – I bank within 30 days of disinvestment in Part IV of the Form ODI as indicated in para 3 (3) (c) above . 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.