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Indian Direct Investment in JVs/ WOS Abroad
EC. CO. PCD. No. -15.02.76
- dated 12th July 2002
As you are aware, Foreign
Exchange Management Act, 1999 has become effective from June 1, 2000. In terms
of Section 6 of the Act, Reserve Bank has been empowered to specify, in
consultation with the Central Government, the classes of permissible capital
account transactions and the limit up to which foreign exchange shall be
admissible for such transactions. Section 6(3) of the Act provides the Reserve
Bank with the powers to prohibit, restrict or regulate various transactions
referred to in the sub-clauses of the said sub-section, by making regulations.
2.
This master circular consolidates directions contained in the under noted
circulars as on July 1, 2002:
a)
AP (DIR Series) Circular No.3 dated June 22, 2000
b)
AP (DIR Series) Circular No.13 dated September 14, 2000
c)
AP (DIR Series) Circular No.32 dated April 28, 2001
d)
AP (DIR Series) Circular No.16 dated December 15, 2001
e)
AP (DIR Series) Circular No.18 dated December 18, 2001
f)
AP (DIR Series) Circular No.23 dated February 19, 2002
g)
AP (DIR Series) Circular No.27 dated March 2, 2002
h)
AP (DIR Series) Circular No.43 dated April 30, 2002
i)
AP (DIR Series) Circular No.51 dated June 24, 2002
These directions read with
AD (MA Series) Circular No.11 dated May 16, 2000 issued on the eve of the Act
coming into force form the basis of the current guidelines on overseas
investment in JVs/WOS abroad by Indian parties.
PART
� I
Section
A - General
A.1
Introduction
Overseas investments in
Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) have been recognized as
important avenues for promoting global business by Indian entrepreneurs in terms
of foreign exchange earnings like dividend, royalty, technical know-how fee and
other entitlements on such investments. They are also a major source of
increased exports of plant and machinery and goods from India. Joint ventures
have also been 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.
In keeping with the spirit
of liberalisation, which has become the hallmark of economic policy in general,
and Exchange Control regulations in particular, Reserve Bank has been
progressively relaxing its rules and simplifying the procedures both for current
account as well as capital account transactions.
A.2
Statutory basis
Section 6 of the Foreign
Exchange Management Act provides powers to Reserve Bank to specify, in
consultation with the Central Government the classes of permissible Capital
Account transactions and limits upto which exchange is admissible for such
transactions. Section 6(3) of the aforesaid Act provides powers to Reserve Bank
to prohibit, restrict or regulate various transactions referred to in the
sub-clauses of that sub-section, by making Regulations.
In exercise of the above powers, Reserve Bank has
issued Foreign Exchange Management (Transfer or issue of any Foreign Security)
Regulations, 2000 vide Notification No. FEMA 19/RB-2000 dated 3rd May 2000(as amended vide Notification
No. FEMA 40/RB-2001 dated 2nd March 2001, FEMA 48/ � RB 2002 dated
and FEMA 49/2002-RB both Jan. 1, 2002, FEMA 53/2002 �RB dated March 1,2002 and
FEMA 55/ RB dated March 7, 2002)(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.
A.3
Prohibitions
Indian parties are
prohibited from making investment in a foreign entity engaged in real estate
business or banking business.
A.4
General Permission
(i)
In terms of Regulation 4 of the Notification, general permission has been
granted to residents for purchase/acquisition of securities and sale of
shares/securities so acquired -
(a) out of funds held in RFC account; and
(b) as bonus shares on existing holding of
foreign currency shares.
(ii)
General permission has also been granted to a person resident in India
for purchase of securities out of their foreign currency resources outside India
as also for sale of securities so acquired.
Section
B - Direct Investment outside India
B.1
Automatic Route
In terms of Regulation 6 of
the Notification, any Indian party has been permitted to make investment in
overseas joint venture/wholly owned subsidiary by submitting form ODA, duly
completed to a designated branch of an authorised dealer, upto the amounts
mentioned below:
(a)
US$100 mn. or its equivalent in any one financial year.
(b)
Indian Rupees upto Rs.350 crores in Nepal and Bhutan in any one financial
year.
(c)
Units located in SEZs are allowed to make overseas investments out of
their balances in the foreign currency account. The ceiling applicable to other
units under the automatic route will not be applicable to the investments by
units located in SEZs. Such investments by SEZ units would be subject to an
overall annual cap of US $ 500 mn.
The above ceiling will
include contribution to the capital of the overseas JV/ WOS, loan granted to the
JV/ WOS, and 50% of guarantees issued to or on behalf of the JV/ WOS. Such
investments are subject to the following conditions:
a)
This general permission does not include investment proposals, which
envisage setting up a holding company, or a special purpose vehicle abroad,
which would in turn, set up one or more step down subsidiaries as operating
units. Such investment proposals through two-tier structure would require prior
approval of the Reserve Bank.
b)
The investment should be in a foreign entity engaged in the same core
activity [as defined in clause (d) of Regulation 2] carried on by the Indian
company;
c)
The Indian party should not be on the Reserve Bank�s caution list or
under investigation by the Enforcement Directorate or defaulters to the banking
system in India and whose names appear in the defaulters list published /
circulated by the Reserve Bank.
d)
All transactions relating to a joint venture/wholly owned subsidiary
should be routed through a branch of an authorised dealer to be designated by
the Indian party.
B.2
Method of Funding
Investment in an overseas
JV/WOS may be funded out of one or more of the following sources: -
i)
Balances held in EEFC account of the Indian party;
ii)
Drawal of foreign exchange including capitalisation of exports from an
authorised dealer in India upto the extent of 50 per cent of the Indian
party�s net worth as on the date of the last audited balance sheet;
iii)
Utilisation of proceeds of foreign currency funds raised through ADR/GDR
issues.
Where the investment is
entirely funded out of balances in EEFC account and/or out of proceeds of ADR/GDR
issues the condition that investment should be in the same core activity as
stipulated in Regulation 6 of the Notification will not be applicable. However,
when such investments are in the financial sector they will be subject to
compliance of Regulation 7 of the Notification ibid.
B.3
Investment out of funds raised through ADR/ GDR issues
An Indian party is
permitted to make direct investment without any monetary limit out of funds
raised through ADRs/GDRs in terms of Regulation No.6 (6) of the Notification.
B.4
Investment under swap or exchange of shares arrangement
In terms of Regulation 8 of
the Notification, Indian parties engaged in any activity who have already made
an ADR/GDR issue, may acquire shares of foreign companies engaged in the same
core 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
thereunder from time to time by the Central Government, subject to compliance
with the following conditions:
a.
ADRs/ GDRs are listed on any stock exchange outside India;
b.
such investment by the Indian Party does not exceed the higher of the
following amounts, namely: -
i. amount equivalent of US$
100 mn. or
ii.
amount equivalent to 10 times the export earnings of the Indian Party
during the preceding financial year as reflected in its audited balance sheet.
For the purpose of reckoning the limit, the investments already made under
Regulation 6 in the same financial year are to be included.
c.
the ADR and/ or GDR issue for the purpose of acquisition is backed by
underlying fresh equity shares issued by the Indian Party;
d.
the total holding in the Indian Party 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;
e.
valuation of the shares of the foreign company, shall be
i.
as per the recommendations of the Investment Banker if the shares are not
listed on any stock exchange; or
ii.
based on the current market capitalization 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.
The Indian party is
required to report such acquisition in form ODG to the Reserve Bank within a
period of 30 days from the date of the transaction.
B. 5
Investment Abroad by a firm in India
In terms of Regulation 17B
of the Notification, partnership firms registered under the Indian Partnership
Act, 1932 engaged in the field of chartered accountancy, legal practice and
related services, information technology and entertainment software related
services and medical and health care services are permitted to make investment
in foreign concerns abroad engaged in similar activity without prior approval
provided -
a.
such investment does not exceed US$ 1 (one) million or its equivalent in
one financial year,
b.
the investing firm is a member of the respective All India professional
organization/body; and
c.
a report containing (i) name, full address, registration and membership
particulars of the investing firm, (ii) full details of investment abroad, (iii)
date and amount of remittance/amount of capitalization of fees/other
entitlements due to the investing firm, (iv) name and address of the foreign
concern together with its line of activity, (v) identification number, if
already allotted by the Reserve Bank, is submitted to the Reserve Bank through
the authorised dealer within 30 days of making such investments.
B.6
Approval of Reserve Bank
In all other cases of
direct investment abroad which are not covered under the previous paragraphs
including investment by Partnership firms not eligible under the automatic
route. And investment under swap or exchange of shares other than covered under
B.4 above, Reserve Bank�s prior approval would be required. For this purpose,
applications together with documents should be made in
a)
Form ODB if the investment is for acquiring shares of foreign company
engaged in the same core activity in exchange of ADR/ GDRs issued to the latter
in excess of US$ 100.00 millions Or ten times the export earnings (whichever is
higher)/ Block Allocation.
b)
Form ODI in all other cases.
Reserve Bank, inter alia,
would take into account following factors while considering such applications:
a)
Prima facie viability of the Joint Venture/Wholly Owned Subsidiary
outside India;
b)
Contribution to external trade and other benefits, which will accrue to
India through such investment;
c)
Financial position and business track record of the Indian Party and the
foreign entity;
d)
Expertise and experience of the Indian Party in the same or related line
of activity of the Joint Venture or Wholly Owned Subsidiary outside India.
B.7 Block Allocation
An Indian party with proven
track record, which has exhausted the permissible limit outlined in Paragraph
B.1 may make an application in form ODB along with necessary documents to the
Reserve Bank for Block Allocation of foreign exchange for overseas investments.
Such applications shall be approved by the Reserve Bank, subject to such terms
and conditions as considered necessary after taking into account the factors
outlined in Paragraph B.6 above.
B.8 Investment in the
Financial Services Sector
In terms of Regulation 7 of
the Notification, an Indian party seeking to make investment in an entity
engaged in the financial sector should also fulfill the following additional
conditions:
(i)
be registered with the appropriate regulatory authority in India for
conducting the financial sector activities;
(ii)
earned net profit during the preceding three financial years from the
financial services activities;
(iii)
has a minimum net worth of Rs.15 crores as on the date of the last
audited balance sheet; and
(iv)
fulfilled the prudential norms relating to capital adequacy as prescribed
by the concerned regulatory authority in India
B.9 Capitalisation of
exports and other dues
a)
Indian parties are also permitted to capitalise the payments due from the
foreign entity towards exports made to it, fees, royalties or any other payments
due from the foreign entity within the ceilings applicable. Export proceeds
remaining unrealised beyond a period of six months from the date of export will
require the prior approval of Reserve Bank before capitalisation.
b)
Indian software exporters are permitted to receive 25 per cent of the
value of their exports to an overseas software company in the form shares
without entering into Joint Venture Agreements with the approval of the Reserve
Bank.
B.10
Post investment changes/additional investment in existing JVs/WOS
In terms of Regulation 13
of the Notification, an Indian party before giving consent to the decisions
relating to
a)
undertaking any activity other than the activity in which the foreign
entity was engaged/ or proposed to be engaged at the time of investment by the
Indian party; or
b)
participation in the capital of another foreign entity; or
c)
alteration of the company�s capital structure, authorised or issued, or
its shareholding pattern. is required to obtain the prior permission of Reserve
Bank if it holds 50% or more of the paid-up capital of the foreign entity and
(i) the foreign entity has been in
operation for a period of less than two years; or
(ii) the Indian Party has not repatriated
the amount of dividends, fees and royalties due to it from the foreign entity;
or
(iii) proceeds of exports to the foreign
entity have not been realised in accordance with the Foreign Exchange Management
(Export of Goods and Services) Regulations, 2000; or
(iv)
additional capital contribution will be required from India; or
(v)
the percentage of equity shareholding of the Indian Party in the foreign
entity is being reduced otherwise than in pursuance of the laws of the host
country. The above restrictions are not applicable in case the investment in the
foreign entity is made entirely out of the balances held in the Indian party�s
EEFC account balances and/ or out of the foreign currency resources raised by
way ADR/ GDR issue.
B.11
Acquisition of a foreign company through bidding or tender procedure
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 authorised dealer in accordance with the provisions of
Regulation 14 of the Notification.
B.12
Obligations of Indian Party
An Indian party which has
made direct investment abroad is under obligation to:
(a) receive shares 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 Reserve Bank, in
accordance with the provisions specified in Regulation 15 of the Notification.
B.13
Transfer by way of sale of shares of a JV/ WOS
Sale of shares of JV/WOS
abroad held by an Indian party would require prior approval of Reserve Bank.
B.14
Pledge of Shares
An Indian party may pledge
the shares of JV/ WOS to an authorised dealer or a financial institution in
India for availing of any credit facility for itself or for the JV/ WOS abroad
in terms of Regulation 17 of the Notification.
Section
C: Investment in Foreign Securities other than by way of Direct Investment
C.1
Permission for purchase/acquisition of foreign securities in certain
cases
General permission has been
granted to a person resident in India who is an individual �
a)
to acquire foreign securities as a gift from any person resident outside
India; or
b)
to acquire shares under Cashless Employees Stock Option Scheme issued by
a company outside India, provided it does not involve any remittance from India,
or
c)
to acquire shares by way of inheritance from a person whether resident in
or outside India;
d)
to purchase equity shares offered by a foreign company 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 is not less than 51 per cent provided (a) such shares are issued
at a concessional price and (b) the amount of consideration for purchase of
shares does not exceed US$ 20,000 or its equivalent in any one calendar year.
Concession in the price of shares being offered may be borne by the foreign
company issuing shares or by its branch / subsidiary or the company in India in
which the foreign equity holding is not less than 51 per cent. Authorised
dealers are permitted to allow remittances for purchase of shares by eligible
persons under this provision.
e)
In all other cases, which are 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
Transfer 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, 2000 or Rules or Regulations made thereunder are allowed to be
pledged for obtaining credit facilities in India from an authorised dealer.
C.3
Prior permission of Reserve Bank in certain cases
Reserve Bank would consider
applications from residents for acquisition of foreign securities, if it
represents �
a)
qualification shares for becoming a director of a company outside India
b)
rights shares provided the consideration for acquisition does not exceed
US$ 10,000 in a block of five calendar years.
c)
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 US 10,000 or
its equivalent per employee in a block of five calendar years; the shares so
acquired do not exceed 5% of the paid-up capital of the Joint Venture or Wholly
Owned Subsidiary 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.
d)
purchase of foreign securities under ADR/GDR linked stock option schemes
by resident employees of Indian software companies including working directors
provided purchase consideration does not exceed US$ 50,000 or its equivalent in
a block of five calendar years.
C.4
Investment by Mutual Funds
Reserve Bank may on
application permit Mutual Funds in India to purchase foreign securities, subject
to such terms and conditions as may be stipulated.
PART
II
Operational
Instructions to Authorised Dealers
A.1
Designating branches
Authorised dealers may
designate select branches at different centers to undertake foreign exchange
transactions in connection with overseas direct investment under Regulation 6 or
17B of the Notification.
Investments under
Regulations 6 and 17B
Authorised dealers may allow investments upto the
permissible limits on receipt of application in form ODA in triplicate together
with form A-2, duly filled in, from the Indian party/parties making investments
in a JV/WOS abroad subject to their complying with the conditions specified in
Regulation 6 or 17B of Notification FEMA No.19/RB-2000 dated 3rd May
2000 as applicable. [Investment in financial services should however comply with
additional norms stipulated at Regulation 7 ibid.] In case of investments by a
registered partnership firm under Regulation 17B, authorised dealers may satisfy
themselves that the firm is a member of their respective all India professional
organisation/body [e.g. Institute of Chartered Accountants of India (ICAI) for
Chartered Accountants; National Association of Software and Service Companies (NASSCOM);
Electronics Export and Computer Software Promotion Council (ESC) for software
firms; Indian Medical Council (IMC) for medical firms and Bar Council of India
or respective State Bar Councils for legal firms, etc.]. Before allowing the
remittance authorised dealers are required to ensure that the necessary
documents, as prescribed in form ODA, have been submitted. Form ODA and other
documents need not be submitted to the Reserve Bank.
A.2
General procedural instructions
(i)
Immediately after effecting the remittance, the authorised dealers are
required to forward a report on remittance in the revised form ODR, in duplicate
(format enclosed) to the Chief General Manager, Exchange Control Department
(Overseas Investment Division), 3rd floor, Amar Building., Mumbai -
400001. Authorised Dealers may ensure that the remittances on account of
investments by Partnership firm are reported with the superscription
�Remittance by partnership firm under Regulation 17B�, in form ODR. In cases
where the investment is being made jointly by more than one Indian party, form
ODA is required to be signed jointly by all the investing parties and submitted
to the designated branch of the Authorised Dealer Authorised dealer may forward
to the Reserve Bank a consolidated form ODR indicating details of each party.
The same procedure may be followed where the investment is made out of the
proceeds of ADR/ GDR issues of Indian party in terms of Regulation 6(6) of the
Notification.
(ii)
Clause (vi) of sub-regulation (2) of Regulation 6 provides that all
transactions relating to investment in a JV/WOS are to be routed through only
one designated branch of an authorised dealer designated by the Indian party.
For proper follow-up, the authorised dealers are required to maintain party-wise
record in respect of each JV/WOS separately.
(iii)
Authorised Dealers may allow remittance towards loan to the JV/WOS and/or
issue guarantee to/on behalf of the JV/WOS abroad.
A.3
Investments under Regulation 11
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 ODA to the
designated branch of authorised dealer. Such investments by way of
capitalisation are also to be reckoned while computing the cap of 50 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
authorised dealers 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 ODR. Capitalisation of export proceeds or other entitlements
which are overdue would require prior approval of RBI for which the Indian
parties should file an application in form ODI to RBI for consideration.
A.4
Allotment of Identification Number
On receipt of the form ODR
from the authorised dealers, the Reserve Bank will allot an unique
identification number to each JV or WOS abroad, which is required to be quoted
in all the future correspondence by the Authorised Dealer or the Indian party
with the Reserve Bank. Authorised Dealers may allow additional investment in an
existing overseas concern set up by an Indian party, in terms of Regulation 6 or
17B only after the Reserve Bank has allotted necessary identification number to
the overseas project.
A.5
Investments under Regulation 9
In terms of Regulation 9, in certain cases investment
in JV/WOS requires prior approval of the Reserve Bank. Authorised Dealers may
allow remittances under these specific approvals granted by Reserve Bank and
report the same to the Chief General Manager, Exchange Control Department,
Central Office, Overseas Investment Division, Amar Building (3rd floor), Mumbai 400 001 in the form ODR.
A.6
Further, in terms of
Regulation 9(A), Indian parties are eligible for block allocation of foreign
exchange upto a specified limit under a specific approval obtained from the
Reserve Bank. Authorised Dealer may allow remittances for overseas investment by
Indian parties on the basis of such approvals issued by Reserve Bank, subject to
the terms and conditions stipulated therein. While allowing remittances in
respect of individual overseas concerns under the scheme of block allocation,
Authorised Dealers may obtain necessary information in form ODA and forward the
same to the Reserve Bank after superscription �Remittance under Block
Allocation Approval No._________ dated _________ along with the report of
remittance in form ODR.
A.7
Investments by Partnership firms under Regulation 17A
In terms of Regulation 17A, partnership firms not
eligible under Regulation 17B may make overseas investment by obtaining the
specific approval of the Reserve Bank. Authorised Dealer may allow remittances
for overseas investments by registered partnership firms in accordance with such
approvals granted by the Reserve Bank and report the same to the Chief General
Manager, Exchange Control Department, Central Office, Overseas Investment
Division, Amar Building (3rd floor),
Mumbai 400001 in form ODR with a superscription �Remittance by partnership
firm under Regulation 17A�.
A.8
Remittance towards Earnest Money Deposit or Issue of Bid Bond Guarantee
(i)
In terms of Regulation 14 of the Notification Authorised Dealers 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, Authorised Dealers
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, Exchange Control Department, Central Office, Overseas
Investment Division, Amar Building (3rd floor),
Mumbai 400 001 in form ODR. Authorised Dealers 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).
(ii)
In cases where an Indian party, after being successful in the bid/tender
decides not to proceed further with the investment, Authorised Dealers should
submit details of remittance allowed towards EMD/invoked bid bond guarantee in
form ODR to the Chief General Manager, Exchange Control Department, Central
Office, Overseas Investment Division, Amar Building (3rd floor), Mumbai 400001.
Notification
No. FEMA 19 / RB-2000 dated 3rd May
2000
(As
amended vide Notification Nos. FEMA 40/RB-2001 dated 2nd March 2001, FEMA 48/� RB 2002
Jan. 1, 2002, FEMA 49/-2002-RB Jan. 1, 2002, FEMA 53/2002 �RB dated March
1,2002 FEMA 55/ RB dated March 7, 2002)
In
exercise of the powers conferred by clause (a) of sub-section (3) of section 6
and section 47 of the Foreign Exchange Management Act 1999, (42 of 1999), the
Reserve Bank of India makes the following regulations relating to transfer or
issue of any foreign security by a person resident in India, namely:
1.
Short title and commencement
i)
These Regulations may be called the Foreign Exchange Management (Transfer
or issue of any foreign security) Regulations, 2000.
ii)
They shall come in force on the 1st day
of June 2000.
2.
Definitions
In these Regulations,
unless the context otherwise requires:
a)
�Act� means Foreign Exchange Management Act, 1999, (42 of 1999):
b)
�authorised dealer� means a person authorised as an authorised dealer
under sub section (1) of section 10 of the Act;
c)
�American Depository Receipt� (ADR) means a security issued by a bank
or a depository in United States of America (USA) against underlying rupee
shares of a company incorporated in India;
d)
�Core Activity� means activity carried on by an Indian entity which
constitutes at least 50% of its average turnover in the previous accounting
year;
e)
�Direct investment outside India� means investment by way of
contribution to the capital or subscription to the Memorandum of Association of
a foreign entity, but does not include portfolio investment or investment
through stock exchange or by private placement in that entity;
f)
�Financial commitment� means the amount of direct investment by way
of contribution to equity and loan and 50 per cent of the amount of guarantees
issued by an Indian party to or on behalf of its overseas Joint Venture Company
or Wholly Owned Subsidiary;
g)
�Foreign Currency Convertible Bond� (FCCB) means a bond issued by an
Indian company expressed in foreign currency, and the principal and interest in
respect of which is payable in foreign currency;
h)
�Form� means the form annexed to these Regulations;
i)
�Global Depository Receipt� (GDR) means a security issued by a bank
or a depository outside India against underlying rupee shares of a company
incorporated in India;
j)
�Host country� means the country in which the foreign entity
receiving the direct investment from an Indian party is registered or
incorporated;
k)
�Indian party� means a company incorporated in India or body created
under an Act of Parliament, making investment in a Joint Venture or Wholly Owned
Subsidiary abroad, and includes any other entity in India as may be notified by
Reserve Bank: -
Provided
that when more than one such company incorporated or bodies under an Act of
Parliament, makes a direct investment in the foreign entity, all such companies
or bodies together shall constitute the �Indian party�;
l)
�Investment banker� means an Investment banker registered with the
Securities and Exchange Commission in USA, or the Financial Services Authority
in UK, or appropriate regulatory authority in Germany, France, Singapore or
Japan;
m)
�Joint Venture (JV)� means a foreign entity formed, registered or
incorporated in accordance with the laws and regulations of the host country in
which the Indian party makes a direct investment;
n)
�Mutual Fund� means a Mutual Fund referred to in clause (23D) of
section 10 of the Income tax Act, 1961;
o)
�Net worth� means paid up capital and free reserves;
p)
�Real estate business� means buying and selling of real estate or
trading in transferable development rights (TDRs) but does not include
development of townships, construction of residential/commercial premises, roads
or bridges;
q)
�Wholly Owned Subsidiary (WOS)� means a foreign entity formed,
registered or incorporated in accordance with the laws and regulations of the
host country, whose entire capital is held by the Indian party;
r)
Words and expressions used but not defined in these Regulations shall
have the meanings respectively assigned to them in the Act.
3.
Prohibition on issue or transfer of foreign security
Save as otherwise provided
in the Act or rules or regulations made or directions issued thereunder, no
person resident in India shall issue or transfer any foreign security;
Provided that the Reserve Bank may, on
application made to it, permit any person resident in India to issue or transfer
any foreign security.
4.
Purchase and sale of foreign security by a person resident in India
A person resident in India
a)
may purchase a foreign security out of funds held in Resident Foreign
Currency (RFC) account maintained in accordance with the Foreign Exchange
Management (Foreign Currency Accounts) Regulations, 2000;
b)
may acquire bonus shares on the foreign securities held in accordance
with the provisions of the Act or rules or regulations made thereunder;
c)
when not permanently resident in India, may purchase a foreign security
from out of his foreign currency resources outside India;
d)
may sell the foreign security purchased or acquired under clauses (a),
(b) or (c).
Explanation:
For the purpose of this clause, �not permanently resident� means a
person resident in India for employment of a specified duration (irrespective
of length thereof) or for a specific job or assignment, the duration of which
does not exceed three years.
Part
I
Direct
Investment outside India
5.
Prohibition on Direct Investment outside India
Save as otherwise provided
in the Act, rules or regulations made or directions issued thereunder, or with
prior approval of Reserve Bank,
(1)
no person resident in India shall make any direct investment outside
India; and
(2)
no Indian party shall make any direct investment in a foreign entity
engaged in real estate business or banking business.
6.
Permission for Direct Investment in certain cases
(1)
Subject to the conditions specified in sub-regulation (2), an Indian
party may make direct investment in a Joint Venture or Wholly Owned Subsidiary
outside India.
(2)
(i)
Total financial commitment of the Indian party in Joint Ventures/Wholly
Owned Subsidiaries shall not exceed US$ 100 million or its equivalent in any
financial year, except investment in Nepal, Bhutan and Pakistan;
Provided that
in respect of commitment in Joint Ventures / Wholly Owned Subsidiaries in
Myanmar and SAARC countries (other than Nepal, Bhutan and Pakistan), the ceiling
shall be increased by US$ 25 million or its equivalent in any one financial
year, in respect of such commitment;
Provided further that
the ceiling of US $ 100 million shall not apply to financial commitment by a
unit located in a Special Economic Zone where the investment is made out of the
balances held in EEFC account, maintained in accordance with the Foreign
Exchange Management (Foreign currency accounts by a Person resident in India)
Regulations, 2000, as amended from time to time.
(ii)
In respect of direct investment in Nepal or Bhutan, in Indian rupees the
total financial commitment shall not exceed Indian Rupees 350 crores in any one
financial year;
(iii)
The direct investment is made in a foreign entity engaged in the same
core activity carried on by the Indian party;
(iv)
The Indian Party is not on the Reserve Bank�s caution list or under
investigation by the Enforcement Directorate;
(v) The Indian Party routes all transactions relating
to the investment in a Joint Venture/Wholly Owned Subsidiary through only one
branch of an authorised dealer to be designated by it.
Explanation: The
Indian Party may designate different branches of authorised dealers for
different Joint Ventures/Wholly Owned Subsidiaries outside India.
(vii)
The Indian Party submits form ODA, duly completed, to the designated
branch of an authorised dealer for onward transmission to Reserve bank
(3)
Investment under this Regulation may be funded out of one or more of the
following sources, namely: -
i)
out of balance held in the Exchange Earners Foreign Currency account of
the Indian party maintained with an authorised dealer in accordance with
Regulation 4 of Foreign Exchange Management (Foreign Currency Accounts)
Regulations, 2000;
ii)
drawal of foreign exchange from an authorised dealer in India not
exceeding 50 per cent of the net-worth of the Indian Party as on the date of
last audited balance sheet;
iii)
utilisation of the amount raised by issue of ADRs/ GDRs by the Indian
Party; Provided that where the investment is entirely funded out of the source
mentioned in clause (i), the conditions specified in clause (iii) of
sub-regulation (2) shall not apply.
(4)
For the purpose of reckoning net worth of an Indian party, the net worth
of its holding company (which holds at least 51% stake in the Indian Party) or
its subsidiary company (in which the Indian party holds at least 51% stake) may
be taken into account provided such holding company or, as the case may be,
subsidiary company, has not availed of the facility of direct investment abroad
during the relevant block of three years and has furnished a letter of
disclaimer in favour of the Indian Party.
(5)
An Indian Party may extend a loan or a guarantee to or on behalf of the
Joint Venture/Wholly Owned Subsidiary abroad, within the permissible financial
commitment, provided that the Indian Party has made investment by way of
contribution to the equity capital of the Joint Venture.
(6)
An Indian Party may make direct investment without any limit in any
foreign security out of the proceeds of its international offering of shares
through the mechanism of ADR and/or GDR.
(7)
(a)
For the purpose of investment under this Regulation by way of remittance
from India, valuation of shares of the company outside India shall be made
(i)
where the investment is more than US $ 5 (Five) million, by a Category I
Merchant Banker registered with the Securities and Exchange Board of India (SEBI)
or an Investment Banker /Merchant banker outside India registered with the
appropriate regulatory authority in the host country; and
(ii) in all other cases by a Chartered Accountant or a
Certified Public accountant.
(b)
For the purposes of investments under this Regulation by acquisition of
shares of an existing company outside India where the consideration is to be
paid fully or partly by issue of the India party�s shares, the valuation of
shares of the company outside India shall in all cases, be carried out by a
Category I Merchant Banker registered with the Securities and Exchange Board of
India (SEBI) or an Investment Banker /Merchant banker outside India registered
with the appropriate regulatory authority in the host country.
Provided
that:
a)
the ADR/ GDR issue has been made 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 Central Government;
b)
the Indian Party files with Reserve Bank, in form ODA full details of the
investment made, within 30 days of such investment.
7.
Investment in Financial Services Sector
Subject to the Regulations
in Part I, an Indian party engaged in the financial services activities, may
make investment in an entity outside India also engaged in financial services
activities: -
Provided that the Indian party �
(i)
has earned net profit during the preceding three financial years from the
financial services activities;
(ii)
is registered with the appropriate regulatory authority in India for
conducting the financial services activities;
(iii)
has a minimum net worth of Rs.15 crores as on the date of the last
audited balance sheet; and
(iv)
has fulfilled the prudential norms relating to capital adequacy as
prescribed by the concerned regulatory authority in India.
8.
Investment in a foreign security by swap or exchange of shares of an
Indian company
(1)
An Indian Party may acquire shares of a foreign company, engaged in the
same core 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 thereunder from time to time by the Central Government;
Provided
that
a.
the Indian Party has already made an ADR and / or GDR issue and that such
ADRs/GDRs are currently listed on any stock exchange outside India;
b.
such investment by the Indian Party does not exceed the higher of the
following amounts, namely: -
i) amount equivalent of US$ 100 mn., or
ii)
amount equivalent to 10 times the export earnings of the Indian Party
during the preceding financial year as reflected in its audited balance-sheet,
inclusive of all investments made under Regulations in Part I, including under
(i) of this clause, in the same financial year,
c.
the ADR and/or GDR issue for the purpose of acquisition is backed by
underlying fresh equity shares issued by the Indian Party;
d.
the total holding in the Indian Party 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;
e.
the valuation of the shares of the foreign company is made, -
i)
as per the recommendations of the Investment Banker if the shares are not
listed on any stock exchange; or
ii)
based on the current market capitalization 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.�
(2)
Within 30 days from the date of issue of ADRs and/or GDRs in exchange for
acquisition of shares of the foreign company under sub-regulation (1), the
Indian Party shall submit a report in form ODG to the Reserve Bank.
9.
Approval of Reserve Bank in certain cases
(1)
An Indian Party, which does not satisfy the eligibility norms under
Regulations 6 or 7 or 8, may apply to the Reserve Bank for approval.
(2)
Application for direct investment in Joint Venture/Wholly Owned
Subsidiary outside India, or by way of exchange for shares of a foreign company,
shall be made in Form ODI, or in Form ODB, respectively.
(2A) An
application made under sub regulation (2) in form ODI
(a)
for the purpose of investment by way of remittance from India, shall be
accompanied by the valuation of shares of the company outside India made
(i)
where the investment is more than US $ 5 (Five) million, by a Category I
Merchant Banker registered with the Securities and Exchange Board of India (SEBI)
or an Investment Banker /Merchant banker outside India registered with the
appropriate regulatory authority in the host country; and
(ii) in all other cases by a Chartered Accountant or a
Certified Public accountant.
(b)
For the purposes of investments under this Regulation by acquisition of
shares of an existing company outside India where the consideration is to be
paid fully or partly by issue of the India party�s shares, the valuation of
shares of the company outside India shall in all cases, be carried out by a
Category I Merchant Banker registered with the Securities and Exchange Board of
India (SEBI) or an Investment Banker /Merchant banker outside India registered
with the appropriate regulatory authority in the host country.
(3)
Reserve Bank may, inter alia, take into account following factors while
considering the application made under sub-regulation (2):
a) Prima facie viability of the
Joint Venture/Wholly Owned Subsidiary outside India;
b)
Contribution to external trade and other benefits which will accrue to
India through such investment;
c)
Financial position and business track record of the Indian Party and the
foreign entity;
d)
Expertise and experience of the Indian Party in the same or related line
of activity of the Joint Venture or Wholly Owned Subsidiary outside India.
9A.
Block allocation by Reserve Bank
1.
Reserve Bank may, on application made to it, approve, subject to such
terms and conditions as considered necessary, a block allocation of foreign
exchange to an Indian Party which has exhausted the limit available to it under
sub-regulation (2) of Regulation 6.
2.
For considering the application made under sub-regulation (1), the
Reserve Bank may take into account the factors mentioned in sub-regulation (3)
of Regulation 9.
10.
Unique Identification Number
Reserve bank will allot an
unique Identification Number for each Joint Venture or Wholly Owned Subsidiary
outside India and the Indian Party shall quote such number in all its
communications and reports to the Reserve Bank and the authorised dealer.
11.
Method of Investment by capitalisation
An Indian Party may also
make direct investment outside India in accordance with the Regulations in Part
I by way of capitalisation in full or part of the amount due to the Indian Party
from the foreign entity as follows:
(i)
payment for export of plant, machinery, equipment and other
goods/software to the foreign entity;
(ii)
fees, royalties, commissions or other entitlements of the Indian Party
due from the foreign entity for the supply of technical know-how, consultancy,
managerial or other services: -
Provided that where the export proceeds have
remained unrealised beyond a period of six months from the date of export, such
proceeds shall not be capitalised without the prior permission of Reserve Bank.
12.
Export of Goods towards Equity
(1)
An Indian Party exporting goods/ software/ plant and machinery from India
towards equity contribution in a Joint Venture or Wholly Owned Subsidiary
outside India shall declare it on GR/ SDF/ SOFTEX form, as the case may be,
which shall be superscribed as �Exports against equity participation in the
JV/WOS abroad�, and also quoting Identification Number, if already allotted by
Reserve Bank.
(2)
Notwithstanding anything contained in Regulation 11 of the Foreign
Exchange Management (Export of Goods and Services) Regulations, 2000, the Indian
Party shall, within 15 days of effecting the shipment of the goods, submit to
the Reserve Bank a custom certified copy of the invoice through the branch of an
authorised dealer designated by it.
(3)
An Indian Party capitalising exports under Regulation 11 shall, within
six months from the date of export, or any further time as allowed by Reserve
Bank, submit to Reserve Bank copy/ ies of the share certificate/s or any
document issued by the Joint Venture or Wholly Owned Subsidiary outside India to
the satisfaction of Reserve Bank evidencing the investment from the Indian Party
together with the duplicate of GR/ SDF/ SOFTEX form through the branch of an
authorised dealer designated by it.
13.
Submission of Information to Reserve Bank
(1)
Where the Indian Party holds 50% or more of the paid-up capital of the
foreign entity and
(i) the foreign entity has been in
operation for a period of less than two years; or
(ii) the Indian Party has not repatriated
the amount of dividends, fees and royalties due to it from the foreign entity;
or
(iii)
proceeds of exports to the foreign entity have not been realised in
accordance with the Foreign Exchange Management (Export of Goods and Services)
Regulations, 2000, or
(iv) additional capital contribution will be
required from India; or
(v)
the percentage of equity shareholding of the Indian Party in the foreign
entity is being reduced otherwise than in pursuance of the laws of the host
country, the Indian Party shall not consent to the decision relating to the
following subject matters, without prior approval of the Reserve Bank �
a)
undertaking any activity other than the activity in which the foreign
entity was engaged/or proposed to be engaged at the time of investment by the
Indian party; or
b) participation in the capital of another foreign
entity; or
c)
alteration of the company�s capital structure, authorised or issued, or
its shareholding pattern.
(2)
The restriction contained in sub-regulation (1) shall not apply where the
investment in the foreign entity is entirely made out of balances held in
Exchange Earners Foreign Currency account of the Indian Party and/or out of
foreign currency resources raised by the Indian Party through ADR/ GDR issue.
14. Acquisition of a
foreign company through bidding or tender procedure
(1)
On being approached by an Indian Party, which is eligible under the
Regulations in Part I to make investment outside India, an authorised dealer may
allow remittance towards earnest money deposit or issue a bid bond guarantee on
its behalf for participation in bidding or tender procedure for acquisition of a
company incorporated outside India,
(2)
On the Indian Party winning the bid,
(i)
the authorised dealer may allow further remittances towards acquisition
of the foreign company, subject to the ceilings specified in Regulation 6; and
(ii)
the Indian Party shall submit through the authorised dealer concerned a
report to the Reserve Bank in form ODA within 30 days of effecting the final
remittance.
(3)
For participation in bidding or tender procedure for acquisition of a
company incorporated outside India which does not fall within the provisions of
sub-regulation (1), the Reserve Bank may, on application in Form ODI, allow
remittance of foreign exchange towards earnest money deposit or permit the
authorised dealer in India to issue a bid bond guarantee, subject to such terms
and conditions as Reserve Bank may stipulate.
(4)
In case the Indian Party is successful in the bid but the terms and
conditions of acquisition of a company outside India are, -
(a)
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 Party shall submit application in form ODI to Reserve Bank for
obtaining approval for the foreign direct investment in the manner specified in
Regulation 9, or
(b)
in conformity with the provisions of the Regulations in Part I or are
same as those for which approval under sub-regulation (3) was obtained, the
Indian Party shall submit a report to the Reserve Bank, giving details of the
remittances made, within 30 days of effecting the final remittance.
15.
Obligations of the Indian Party
An Indian Party which has
acquired foreign security in terms of the Regulations in Part I shall �
(i)
receive share certificates or any other document as an evidence of
investment in the foreign entity to the satisfaction of the Reserve Bank within
six months, or such further period as Reserve Bank may permit, from the date of
effecting remittance or the date on which the amount to be capitalised became
due to the Indian Party or the date on which the amount due was allowed to be
capitalised;
(ii)
repatriate to India, all dues receivable from the foreign entity, like
dividend, royalty, technical fees etc., within 60 days of its falling due, or
such further period as the Reserve Bank may permit;
(iii)
submit to the Reserve Bank every year within 60 days from the date of
expiry of the statutory period as prescribed by the respective laws of the host
country for finalisation of the audited accounts of the Joint Venture/Wholly
Owned Subsidiary outside India or such further period as may be allowed by
Reserve Bank, an annual performance report in form APR in respect of each Joint
Venture or Wholly Owned Subsidiary outside India set up or acquired by the
Indian Party and other reports or documents as may be stipulated by the Reserve
Bank.
16.
Transfer by way of sale of shares of a JV/WOS
Save as otherwise provided
in the Act or rules or regulations made or directions issued thereunder or with
the permission of the Reserve Bank, no Indian Party shall transfer by way of
sale to any person whether resident in India or outside India, any share or
security held by him in a Joint Venture or Wholly Owned Subsidiary outside
India.
17.
Pledge of Shares of Joint Ventures and Wholly Owned Subsidiaries
An Indian Party may
transfer, by way of pledge, shares held in a Joint Venture or Wholly Owned
Subsidiary outside India as a security for availing of fund based or non-fund
based facilities for itself or for the Joint Venture or Wholly Owned Subsidiary
from an authorised dealer or a public financial institution in India.
Part
IA
Investments
abroad by a firm in India
17A.
Investments abroad by a firm in India
(1)
A firm in India registered under the Indian Partnership Act, 1932, may
apply to the Reserve Bank for permission to invest abroad to the extent and in
the manner specified in Part I.
(2)
Reserve Bank may, after taking into account the factors specified in sub
regulation (3) of Regulation 9, grant permission subject to such terms and
conditions as are considered necessary.
17B.
Investments by partnership firm without prior approval of Reserve Bank
(1)
A partnership firm registered under the Indian Partnership Act, 1932
which is engaged in providing professional services specified in the Schedule,
may make investment in foreign concerns engaged in similar activity, by way of
remittance from India and/or capitalization of fees/other entitlements due to it
from such foreign concerns
Provided that:
-
a.
such investments do not exceed US$ 1 (one) million or its equivalent in
one financial year,
b.
the investing firm is a member of the respective All India professional
organization/body; and
c.
a report containing (i) name, full address, registration and membership
particulars of the investing firm, (ii) full details of investment abroad, (iii)
date and amount of remittance/amount of capitalisation of fees/other
entitlements due to the investing firm, (iv) name and address of the foreign
concern together with its line of activity, (v) identification number, if
already allotted by the Reserve Bank, is submitted to the Reserve Bank through
the authorised dealer within 30 days of making such investments.�
17C.
Investment by Proprietary Concern
A proprietary concern in
India may apply to the Reserve Bank in form ODB for general permission valid for
a period of one year to accept shares of a company outside India in lieu of due
to it for professional services rendered by the said company
Provided that:
(a)
the value of shares accepted from each company outside India shall not
exceed fifty per cent of the fees receivable by the Indian party from that
company; and
(b)
the Indian concern�s shareholding in any one company outside India by
virtue of shares accepted as aforesaid shall not exceed ten per cent of the paid
up capital of the company outside India, whose shares are accepted.
Part
II
Investments
in Foreign Securities other than by way of Direct Investment
18.
Prohibition on issue of foreign security by a person resident in India.
(1)
Save as otherwise provided in the Act or in sub-regulation (2), no person
resident in India shall issue or transfer a foreign security.
19.
Permission for purchase /acquisition of foreign securities in certain
cases
(1)
A person resident in India being an individual may acquire foreign
securities: -
i) by way of gift from a
person resident outside India; or
ii)
issued by a company incorporated outside India under Cashless Employees
Stock Option Scheme: -
Provided it does not involve any remittance
from India, or
iii) by way of inheritance from a
person whether resident in or outside India.
(2)
A person resident in India, being an individual, who is an employee or a
director of Indian office or branch of a foreign company or of a subsidiary in
India of a foreign company or of an Indian company in which foreign equity
holding is not less than 51 per cent, may purchase the equity shares offered by
the said foreign company: -
Provided
that �
a) the shares are offered at a
concessional price; and
b)
the consideration for purchase does not exceed U.S.$ 20,000 or its
equivalent, in any one calendar year.
(3)
An authorised dealer may allow the remittance by the person eligible to
purchase the shares in terms of sub-regulation (2): -
Provided that the conditions
specified in that sub-regulation are fulfilled.
20.
Transfer of a foreign security by a person resident in India
A person resident in India,
who has acquired or holds foreign securities in accordance with the provisions
of the Act, rules or regulations made thereunder, may transfer them by way of
pledge for obtaining fund based or non-fund based facilities in India from an
authorised dealer.
21.
Prior Permission from Reserve Bank in certain cases
(1)
Reserve Bank, on an application, may permit a person resident in India to
acquire foreign securities: -
a)
being the minimum number of qualification shares issued by a company
incorporated outside India for holding a post of a director in the company;
b)
by way of right shares issued by a company incorporated outside India: -
Provided that
the consideration for acquisition of such shares does not exceed US $ 10,000 in
a block of five calendar years:
Further provided that
the right shares are being issued by virtue of holding shares in accordance with
the provisions of the law for the time being in force;
c)
by way of purchase by the employees/directors of an Indian promoter
company of shares of a Joint Venture or Wholly Owned Subsidiary outside India of
the Indian promoter company, in the field of software: -
Provided
that �
(i)
the consideration for purchase does not exceed US 10,000 or its
equivalent per employee in a block of five calendar years,
(ii)
the shares so acquired do not exceed 5% of the paid-up capital of the
Joint Venture or Wholly Owned Subsidiary outside India, and
(iii)
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.
(2)
Reserve Bank may, on an application made to it by the Indian software
company allow its resident employees (including working directors) to purchase
foreign securities under the ADR/ GDR linked stock option schemes: -
Provided that the consideration
for purchase does not exceed US $ 50,000/- or its equivalent in a block of five
calendar years.
22.
Investment by Mutual Funds
Reserve Bank may, on
application, permit a Mutual Fund, to purchase foreign securities subject to
such terms and conditions as it may stipulate.
Schedule
(See
Regulation 17B)
List
of professional services provided by Registered partnership firms eligible for
investment abroad without prior approval of the Reserve Bank
1.
Chartered Accountancy
2.
Legal practice and related services
3.
Information Technology and Entertainment Software related services
4.
Medical and healthcare services
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