RBI/2008-09/14
Master
Circular No. 01/2008-09
July 1, 2008
To,
All Banks Authorised to Deal in Foreign Exchange
Madam
/ Sir,
Master Circular on Direct Investment by Residents
in Joint Venture (JV)/
Wholly Owned Subsidiary (WOS) abroad
Direct
investments by residents in Joint Venture (JV) and Wholly Owned Subsidiary (WOS)
abroad are being allowed, in terms of clause (a) of sub-section (3) of section
6 of the Foreign Exchange Management Act 1999, (42 of 1999) read with Notification
No. GSR 757 (E) dated November 19, 2004 and FEMA
Notification 120/RB-2004 dated July 7, 2004, as amended from time to time.
2. This Master Circular consolidates the existing instructions
on the subject of "Direct Investment by Residents in Joint Venture (JV)
/ Wholly Owned Subsidiary (WOS) abroad' at one place. The list of underlying
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 This circular will stand withdrawn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, 2009 and be replaced by an updated Master Circular on the subject.
Yours
faithfully,
(Salim Gangadharan)
Chief
General Manager-in-Charge
PART - I
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Section
A – General
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A.1
Introduction
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(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.
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A.2
Statutory basis
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(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 17th May 2005, Notification No. FEMA 139/2005-RB
dated 11th August 2005, Notification No. FEMA 150/2006-RB dated 21st August 2006 and Notification No. FEMA 164/2007-RB dated 9th 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.
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A.3
Prohibitions
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Indian parties are prohibited from making
investment in a foreign entity engaged in real estate (as defined in Regulation
2(p) of the Notification) or banking business, without the prior approval of Reserve
Bank.
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A.4 General Permission
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In terms of Regulation 4 of the Notification,
general permission has been granted to residents for purchase / acquisition of
securities in the following manner
- out
of funds held in RFC account;
- as bonus
shares on existing holding of foreign currency shares; and
- 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.
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B.1
Automatic Route
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(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
iii) As in the case of corporate
guarantees, all guarantees are required to be reported to Reserve Bank, in Form
ODI-Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside
India, would be outside this ceiling and would be subject to prudential norms
issued by Reserve Bank from time to time.
Note: Specific approval of the Reserve Bank will be required for creating charge on
immovable property and pledge of shares of the Indian parent/ group companies
in favour of a non- resident entity.
b)
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.
c).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.
d).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 the company 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.
e).In
cases of investment by way of swap of shares, irrespective of the amount, valuation
of the shares will have to be 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 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.
Note: Investments in Nepal are permitted only in Indian rupees. Investments in Bhutan
are permitted in Indian Rupees as well as in freely convertible currencies. All
dues receivable on investments made in freely convertible currencies, as well
as their sale / winding up proceeds are required to be repatriated to India in
freely convertible currencies only. The automatic route facility is not available
for investment in Pakistan.
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B.2
Investment in Unincorporated entities Overseas in oil sector under the Automatic
Route
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(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.
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B.3
Method of Funding
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(1). Investment in an overseas JV / WOS
may be funded out of one or more of the following sources: -
i)drawal of foreign exchange
from an AD Bank in India;
ii) capitalisation
of exports;
iii) swap
of shares (valuation as mentioned in para B.1 (e) above);
iv) utilisation
of proceeds of External Commercial
Borrowings
(ECBs) / Foreign Currency Convertible Bonds (FCCBs);
v)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
there under from time to time by the Central Government
vi)
balances held in EEFC account of the Indian party; and
vii) utilisation of proceeds of foreign currency
funds raised through ADR / GDR issues.
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)
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B.4
Capitalisation of exports and other dues
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(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.
(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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B. 5. Investments in
Financial Services Sector
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(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:
- be
registered with the appropriate regulatory authority in India for conducting the
financial sector activities;
- have
earned net profit during the preceding three financial years from the financial
services activities;
- have obtained approval
for investment in financial sector activities abroad from regulatory authorities
concerned in India and abroad; and
- 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.
(3).
Regulated entities in the financial sector making investments in any activity
overseas are required to comply with the above guidelines.
It is clarified that unregulated entities in the financial services sector in
India may invest in non financial sector activities subject to compliance with
the provisions of Regulation 6 of the Notification. It is further clarified that
trading in Commodities Exchanges overseas and setting up JV/WOS for trading in
overseas exchanges will be reckoned as financial services activity and require
clearance from the Forward Markets Commission. |
B.
6 Investment in Equity of
Companies Registered Overseas / Rated Debt Instruments
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(1)
(i) Portfolio Investments by listed Indian companies
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.
(ii) Investment by Mutual Funds
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.
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B.7
Approval of the Reserve Bank
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(1). Prior approval of the Reserve Bank
would be required in all other cases of direct investment abroad. For this purpose,
application together with necessary documents should be submitted in Form ODI through their Authorised Dealer Category – I banks.
(2). Reserve Bank, would inter
alia, take into account the following factors while considering such applications:
- Prima facie viability of the JV / WOS outside India;
- Contribution
to external trade and other benefits which will accrue to India through such investment;
- Financial
position and business track record of the Indian party and the foreign entity;
and
- Expertise and experience of the Indian party
in the same or related line of activity of the JV / WOS outside India.
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B.8
Investments in energy and natural resources sector
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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.
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B.9
Overseas Investments by Proprietorship Concerns
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- (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 5th 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.
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B. 10 Overseas investment by
Registered Trust / Society
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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, 5th Floor, Fort, Mumbai 400
001, for consideration.
Eligibilty Criteria :
(a) Trust
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.
(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 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.
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B. 11
Post investment changes / additional investment in existing JV / WOS
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- 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.
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B.12
Acquisition of a foreign company through bidding or tender procedure
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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.
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B.13
Obligations of Indian Entity
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(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.
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B.14
Transfer by way of sale of shares of a JV / WOS
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(1). Indian parties may also disinvest without
prior approval of the Reserve Bank, in the under noted categories:
- in case where the JV / WOS is listed in the
overseas stock exchange;
- 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;
- 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:
- the
sale is affected 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 nased on the lateset
audited financial statements of the JV / WOS;
- 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;
- 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.
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B.15 Pledge of
Shares of JV/WOS
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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.
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B.16 Hedging
of Overseas Direct Investments
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(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.
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C.1
Permission for purchase/ acquisition of foreign securities in certain cases
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General permission has been granted to a
person resident in India who is an individual -
- to acquire
foreign securities as a gift from any person resident outside India;
- to acquire shares under Cashless
Employees Stock Option Scheme issued by a company outside India, provided it does
not involve any remittance from India;
- to acquire shares by way of inheritance from a person whether
resident in or outside India;
- 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.
- 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.
- 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.
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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 India from an AD Category – I bank / Public Financial Institution.
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C.3 General permission
in certain cases
|
Residents are permitted to acquire a foreign
security, if it represents –
- 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;
- rights shares provided that the rights shares are being
issued by virtue of holding shares in accordance with the provisions of law for
the time being in force;
- purchase
of shares of a JV / WOS abroad of the Indian promoter company by the employees/directors
of Indian promoter company which is engaged in the field of software where the
consideration for purchase does not exceed USD 10,000 or its equivalent per employee
in a block of five calendar years; the shares so acquired do not exceed 5 per
cent of the paid-up capital of the JV / WOS outside India; and after allotment
of such shares, the percentage of shares held by the Indian promoter company,
together with shares allotted to its employees is not less than the percentage
of shares held by the Indian promoter company prior to such allotment; and
d. purchase of foreign securities under ADR / GDR linked stock option schemes by
resident employees of Indian companies in the knowledge based sectors, including
working directors provided purchase consideration does not exceed USD 50,000 or
its equivalent in a block of five calendar years.
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PART
- II
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Operational
Instructions to Authorised Dealer Banks
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1.Designated
branches
|
An eligible Indian party making investment
in a Joint Venture (JV) / Wholly Owned Subsidiary (WOS) outside India is required
to route all its transactions relating to the investment 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 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. 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.
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2.
Investments under Regulation 6 of Notification No. FEMA 120/2004-RB dated July
7, 2004
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AD Category – I banks may allow investments
up to the permissible limits on receipt of application in form ODI together with
form A-2, duly filled in, from the Indian party(ies) making investments in a JV/WOS
abroad subject to their complying with the conditions specified in Regulation
6 of Notification FEMA No.120/RB-2004 dated July 7, 2004 as amended from time
to time. Investment in financial services should also comply with the norms stipulated
at Regulation 7 of the Notification ibid. While forwarding the report of remittance
in respect of investment in financial services sector, AD Category – I banks may certify that approvals from the Regulatory Authorities
concerned in India and abroad have been obtained. Before allowing the remittance
AD Category – I banks are required to ensure that the necessary documents, as
prescribed in form ODI, have been submitted and found to be in order.
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3.General
procedural instructions
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(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.
c)
In case of disinvestment / closure / winding up / voluntary liquidation under
the Automatic Route, in terms of A.
P. (Dir Series) Circular No. 29 dated March 27, 2006,
a report should be submitted by the designated AD Category - I bank, in Part IV
of form ODI. In all other cases of disinvestment, an application along with the
necessary supporting documents should be submitted to the Reserve Bank as per
the existing procedure.
(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.
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4.
Investments under Regulation 11 of Notification No. FEMA 120/2004-RB dated
July 7, 2004 |
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.
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5.
Allotment of Unique Identification Number (UIN)
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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.
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6.
Investment by way of share swap
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In the case of investment by way of share
swap, AD Category – I banks are additionally required to submit to the Reserve
Bank the details of transactions such as number of shares received / allotted,
premium paid / received, brokerage paid / received etc., and also confirmation
to the effect that the inward leg of transaction has been approved by FIPB and
the valuation has been done as per laid-down procedure and that the overseas company’s
shares are issued / transferred in the name of the Indian investing company. AD
Category – I bank may also obtain an undertaking from the applicants to the effect
that future sale / transfer of shares so acquired by Non-Residents in the Indian
company shall be in accordance with the provisions of Notification No. FEMA 20/2000-RB
dated May 3, 2000 as amended from time to time.
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7.
Investments under Regulation 9 of Notification No. FEMA 120/2004-RB dated
July 7, 2004 |
In terms of Regulation 9, investment in
JV / WOS in certain cases requires prior approval of the Reserve Bank. AD Category
– I banks may allow remittances under these specific approvals granted by the
Reserve Bank and report the same to the Chief General Manager, Foreign Exchange
Department, Central Office, Overseas Investment Division, Amar Building, 5th floor,
Mumbai 400 001 in form ODI. |
8.
Purchase of foreign securities under ADR / GDR linked Stock Option Scheme
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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.
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9.
Remittance towards Earnest Money Deposit or Issue of Bid Bond Guarantee
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(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 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 Exchange Management
(Realisation, Repatriation & Surrender of Foreign Exchange) Regulations, 2000
(cf. Notification No. FEMA 9/2000-RB dated 3rd May 2000) as amended
from time to time
(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, 5th 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.
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10. Transfer by way of sale of shares
of a JV / WOS outside India
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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.
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