Investment in foreign company is regulated under Foreign Exchange Management Act, 1999. Typically, investment in foreign entities, also known as Overseas Investment, is as follows:

  • Direct Investment
  • Portfolio Investment

Direct Investment

It means investment outside India in a mode, which signifies a long-term interest in the foreign entity. It may take form of contribution to the capital or subscription to the Memorandum of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange. There is generally an intention of control of management of investee companies. Such investment may fall either under Automatic Route or Approval Route.

( Prohibited activity : An Indian party can make Overseas Direct Investment in any bonafide activity except following:

  • Real Estate Business, whichmeans 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 )

 

  1. Automatic Route:

Under it, no prior approval of RBI/ Government is required. One is required to approach  an AD Category-I Bank in Form ODI (online) along with required documents and following guidelines have to be followed:

  1. By Indian Party (other than Resident Individuals) :

Indian Party includes Companies, Registered Partnership Firm (a partner can also hold shares, for and on behalf of Firm, of JV/WOS, if funding is made entirely by Firm and law of host country permits the same), Body created under any Act of Parliament or any entity notified by RBI.

  • No limit of investment, if made out of funds in an EEFC A/c or out of funds raised through ADRs/ GDRs
  • In other cases, the financial commitment in JV/WOS should be upto lower of USD 1 billion and 400% of net worth of Indian Party
  • Also, the net worth limit prescribed by host country shall be applied.
  1. By Resident Individuals: 
    • A Person resident in India can make Direct Investment in Foreign securities without prior approval of RBI under Liberalized Remittance scheme upto USD 125,000.
    • In addition, they are given a general permission to purchase / acquire equity/ CCPS of a Foreign Company if acquired
  • under the ADR/GDR linked stock option scheme for employee/ director of Indian company, but within prescribed limits (USD 50,000 in block of 5 years).
  • Purchase of shares upto 5% of paid-up capital of JV/ WOS overseas by employees/ directors of Indian Company engaged in software (upto USD 10,000 in a block of 5 years)
  • Purchase of minimum qualification shares to become director upto 1% of paid-up capital of JV/ WOS overseas (upto USD 7,500)
  • The Indian party should not be on caution list/ defaulter’s list/ under investigation of RBI, Credit Information Bureau of India Ltd. (CIBIL) or any other banking/ investigating agency.
  1. Authorised Dealer: 
    • Indian Party is required to route all the transactions relating to the investment in a JV/WOS through only one branch of an authorized dealer to be designated by the Indian Party.
    • Even when there are more than one Indian promoters/ investors for a particular overseas investment in JV/WOS, they shall be collectively regarded as one Indian Party, therefore would be required to route all transactions through only one branch of AD Category-I Bank.
    • If an Indian Party wants to change the AD, then it has to obtain an NOC from existing AD and apply to RBI for the same
    • For different JV/WOS of one Indian Party, there may be designated different ADs.
  1. Pricing guidelines: 
    • Where the investment is more than USD 5 million, share valuation of the company has to be done 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
    •  In all other cases, valuation should be done by a CA/ CPA.
  1. Exception to Automatic Route: Investment in Pakistan is under approval route.
  1. After reporting in Form ODI: A Unique Identification Number (UIN) for that particular JV/WOS is generated automatically and instantaneously. Subsequent investments in the same JV / WOS can be made only after allotment of the UIN. Also, reporting in Form ODI within 30 days from transaction.

 

  1. Approval Route: 

Investment proposals that are not covered under Automatic Route and that are not prohibited, are covered under Approval Route, and therefore require prior approval of RBI. The Form ODI should be duly filled in and necessary documents should be duly attached. The eligible Indian Party, AD requirement and Pricing Guidelines are same as stated above.

Registered societies and trusts engaged in specific sector are allowed to invest overseas in same sector with the approval of RBI.

  1. Source of Funds permissible for Overseas Direct Investment:

    • Drawal of foreign exchange from an AD bank in India.
    • Swap of shares :This is generally under automatic route, if pricing guidelines are met, however, the inward leg transaction require approval of FIPB
    • Capitalization of exports and other dues and entitlements.
    • Proceeds of External Commercial Borrowings / Foreign Currency Convertible Bonds.
    • 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 by Government of India in the matter.
    • Balances held in EEFC A/c of the Indian Party maintained with an AD.
    • Proceeds of foreign currency funds raised through ADR / GDR issues.
    • Conversion of Loan to equity /CCPS.This is also allowed under automatic route.

  1. Obligations for Indian Party after makinent:

    • Share Certificates must be received and submitted to AD within 6 months of investment
    • All dues to be received from such foreign entity, like dividend, royalty etc., must be repatriated to India
    • An Annual Performance Report in Part III of Form ODI should be submitted to RBI.
    • Where the above report is on the basis of un-audited Financial Statements of the entity because law of that county does not require auditing, then the Statutory Auditor of Indian Party should state that it gives true and fair view and the same is adopted.
    • Major Decisions taken by such Foreign JV/WOS should be informed to RBI within 30 days from approval of such decision. Also, Annual Performance Report should contain particulars for the same.
    • For a decision of restructuring, a listed Indian Company (under Automatic route) and an unlisted Indian Company (under Approval route) may write off capital or other receivables upto 25 % of equity investment in WOS/ JV with at least 51% stake. Same should be reported as above and in addition a certified copy of balance sheet and projection of next 5 years profit should be submitted.
    • In case of disinvestment, sale proceeds should be repatriated to India within 90 days of receipt thereof.

 

Other than Direct Investment (or Portfolio Investment)

Investment which is made for the purpose of financial gain, and sometimes for speculation. There is no intention of long term investment or control over the management of a foreign company. This is a volatile investment, and there can be a quick withdrawal of Portfolio investment unlike Direct Investment.

  • Automatic Route:

    • An Indian Party may extend loan/ guarantee to an overseas JV/WOS in which it has equity participation.
    • Listed Indian companies are permitted to invest up to 50% of their net worth in (i) shares and (ii) bonds / fixed income securities, rated not below investment grade issued by listed overseas companies.

  • Approval Route: 

Financial commitment without equity participation is considered under approval route. Preference shares also get covered under loan but not CCPS. Also, any other Portfolio investment other than above shall be under approval route.

In this case also one is required to seek approval by submitting Form ODI with the AD Category-I Bank who shall forward it to RBI. RBI shall analyze the viability of JV/ WOS, track record of Indian Party and various other aspects of transaction. Sources of Funds and other reporting requirements will remain same as above.

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