RBI/2010-11/ 5
Master Circular No.05/2010-11
July 01, 2010
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
FEMA Notification 120/RB-2004 dated July 7, 2004, (GSR 757 (E) dated
November 19, 2004), viz. Foreign Exchange Management (Transfer or Issue of Any
Foreign Security) Regulations, 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This circular will stand withdrawn on July 01, 2011 and be replaced by an
updated Master Circular on the subject.
Yours faithfully
(G. Jaganmohan Rao)
Chief General Manager
INDEX
PART - I
Section A – General
A.1 Introduction
(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 and services 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 the
rules and simplifying the procedures both for current account as well as capital
account transactions.
A.2 Statutory basis
(1) Section 6 of the Foreign Exchange Management Act, 1999 provides
powers to the Reserve Bank to specify, in consultation with the Government of
India the classes of permissible capital account transactions and limits up to
which foreign 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
supersession 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, 20041. 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. Overseas Investment can be made
under two routes viz. (i) Automatic Route outlined in paragraph B.1 and
(ii) Approval Route outlined in paragraph B.7.
A.3 Prohibitions
Indian parties are prohibited from making investment in a foreign entity
engaged in real estate (meaning buying and selling of real estate or trading in
Transferable Development Rights (TDRs) but does not include development of
townships, construction of residential/commercial premises, roads or bridges) or
banking business, without the prior approval of the Reserve Bank.
A.4 General Permission
In terms of Regulation 4 of the Notification, general permission has been
granted to persons residents in India for purchase / acquisition of securities
in the following manner :
- out 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
Section B - Direct Investment Outside India
B.1 Automatic Route
(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 worth2
of the Indian party, i.e. a company incorporated in India or a body created
under an Act of Parliament or a partnership firm registered under the Indian
Partnership Act, 1932, making investment in a JV/WOS abroad and includes any
other entity in India excluding individuals as may be notified by the Reserve
Bank 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 (Annex A) and prescribed enclosures / documents for
effecting remittances towards such investments.
(3) The above ceiling 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 party / entity may extend loan / guarantee only to
an overseas concern 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 as on the date of the
last audited balance sheet of the Indian party;
ii) No guarantee is 'open ended' i.e. the amount and period of the guarantee
should be specified upfront; and
iii) As in the case of corporate guarantees, all guarantees are required to be
reported to the 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 the Reserve Bank (DBOD) 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 / MerchantBanker 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 made by a Category I Merchant
Banker registered with SEBI or an Investment Banker outside India registered
with the appropriate regulatory authority in the host country. Approval of
the Foreign Investment Promotion Board (FIPB) will also be a prerequisite for
investment by swap of shares.
f) In case of investment in overseas JV / WOS abroad by a registered
Partnership firm, where entire funding for such investment is done by the firm,
it will be in order for individual partners to hold shares for and on behalf of
the firm in the overseas JV / WOS if the host country regulations or operational
requirements warrant such holdings.
g) An Indian party may acquire shares of a foreign company engaged in a
bonafide business activity, in exchange of ADRs/GDRs issued to the latter in
accordance with the Scheme for issue of Foreign Currency Convertible Bonds and
Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the
guidelines issued there under from time to time by the Government of India,
provided:
(i) ADRs/GDRs are listed on any stock exchange outside India;
(ii) The ADR and/or GDR 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 submitting 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.
B.1.1 Investment through Special Purpose Vehicle (SPV) under
Automatic Route
(i) Investments in JV/WOS abroad by Indian parties through the medium of a
Special Purpose Vehicle (SPV) are also permitted under the Automatic Route in
terms of Regulation 6 of the Notification, subject to the conditions that the
Indian party is not included in the Reserve Bank's caution list or is under
investigation bythe Directorate of Enforcement or included in the list of
defaulters to the banking system circulated by the Reserve Bank/any other Credit
Information company as approved by the Reserve Bank. Indian parties whose names
appear in the Defaulters' list require prior approval of the Reserve Bank for
the investment.
(ii) Setting up of an SPV under the Automatic Route is permitted for
the purpose of making a investment in JV/WOS overseas.
B.2 Investment in unincorporated entities overseas under the
Automatic Route
(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.
(3) Indian companies are also permitted to participate in a consortium with
other international operators to construct and maintain submarine cable systems
on co-ownership basis under the automatic route. Accordingly, AD Category - I
banks may allow remittances by Indian companies for overseas direct investment,
after ensuring that the Indian company has obtained necessary licence from the
Department of Telecommunication, Ministry of Telecommunication & Information
Technology, Government of India to establish, install, operate and maintain
International Long Distance Services and also by obtaining a certified copy of
the Board Resolution approving such investment.
Accordingly, these transactions may be reported by the Indian entities
investing in the consortium to the AD Category - I banks in form ODI for
enabling on-line submission of the same by the AD Category –I banks to the
Reserve Bank for allotment of Unique Identification Number.
B.3 Method of Funding
(1) Investment in an overseas JV / WOS may be funded out of one or more of
the following sources:
- drawal of foreign exchange from an AD bank in India;
- capitalisation of exports;
- swap of shares (valuation as mentioned in para B.1 (e) above);
- proceeds of External Commercial Borrowings (ECBs) / Foreign Currency
Convertible Bonds (FCCBs);
- in exchange of ADRs/GDRs issued in accordance with the Scheme for issue
of Foreign Currency Convertible Bonds and Ordinar Shares (through Depository
Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from
time to time by the Government of India;
- balances held in EEFC account of the Indian party; and
- proceeds of foreign currency funds raised through ADR / GDR issues.
In respect of (vi) and (vii) above, the ceiling of 400 per cent of the net
worth will not apply. However, in respect of investments in the financial
sector, they will be subject to compliance with Regulation 7 of the Notification
ibid, irrespective of the method of funding.
(2) General permission has been granted to persons resident in India for
purchase / acquisition of securities in the following manner :
(i) out of funds held in RFC account;
(ii) as bonus shares on existing holding of foreign currency shares; and
(iii) when not permanently resident in India, out of their
foreign currency resources outside India (para A.4 above)
B.4 Capitalisation of exports and other dues
(1) Indian party is permitted to capitalise the payments
due from the foreign entity 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.
B. 5. Investments in Financial Services Sector
(1) In terms of Regulation 7 of the Notification, an Indian party
seeking to make investment in an entity outside India, which is engaged in the
financial sector, should fulfill the following additional conditions:
(i). be registered with the regulatory authority in India for conducting the
financial sector activities;
(ii). has earned net profit during the preceding three financial years from the
financial services activities;
(iii) has obtained approval from the regulatory authorities concerned both in
India and abroad for venturing into such financial sector activity; and
(iv). has fulfilled the prudential norms relating to capital adequacy as
prescribed by the concerned regulatory authority in India.
(2) Any additional investment by an existing JV/WOS or its step
down subsidiary in the 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.
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. 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
(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 of USD 7 billion in :
i) ADRs / GDRs of the Indian and foreign companies;
ii) equity of overseas companies listed on recognised stock exchanges
overseas ;
iii) initial and follow on public offerings for listing at recognized stock
exchanges overseas;
iv) foreign debt securities in the countries with fully
convertible currencies, short- term as well as long-term debt instruments with
rating not below investment grade by accredited/registered credit agencies;
v) money market instruments rated not below investment grade;
vi) repos in the form of investment, where the counterparty is
rated not below investment grade. The repos should not, however, involve any
borrowing of funds by mutual funds;
vii) government securities where the countries are rated notbelow
investment grade;
viii) derivatives traded on recognized stock exchanges overseasonly 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
necessarypermission.
(4). General permission is available to the above categories of investors for
sale of securities so acquired.
B.7 Approval of the Reserve Bank
(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.
B.8 Investments in energy and natural resources sector
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. AD Category - I banks may forward such
applications from their constituents to the Reserve Bank as per the laid down
procedure.
B.9 Overseas Investments by Proprietorship Concerns
(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 JVs / WOS outside India
with the 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 and is engaged in the proposed business and meets the
requirement as indicated at i) above.
iii) Exporter has proven track record i.e. overdue exports do 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 Directorate of Enforcement, 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.
B.10 Overseas investment by Registered Trust / Society
Registered Trusts and Societies engaged in manufacturing / educational /
hospital sector are allowed to make investment in the same sector(s) in a JV/WOS
outside India, with the prior approval of the Reserve Bank. Trusts / Societies
satisfying the eligibility criteria, as indicated 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.
Eligibility 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;
iv) The AD Category – I bank is satisfied that the Trust is KYC (Know Your
Customer) compliant and is engaged in a bonafide activity;
v) The Trust has been in existence at least for a period of three
years;
vi) The Trust has not come under the adverse notice of any Regulatory /
Enforcement agency like the Directorate of Enforcement, Central Bureau of
Investigation (CBI), etc.
(b) Society
i) The Society should be registered under the Societies
Registration Act, 1860.
ii) The Memorandum of Association and rules and regulations permit the
Society to make the proposed investment which should also be approved by the
governing body / council or a managing / executive committee.
iii) The AD Category - I bank is satisfied that the Society is KYC (Know
Your Customer) compliant and is engaged in a bonafide activity;
iv) The Society has been in existence at least for a period of three
years;
v) The Society has not come under the adverse notice of any Regulatory /
Enforcement agency like the Directorate of Enforcement, CBI etc.
In addition to the registration, the AD Category – I bank should ensure that
the special license / permission has been obtained by the applicant in case the
activities require special license / permission either from the Ministry of Home
Affairs, Government of India or from the relevant local authority, as the case
may be.
B.11 Post investment changes / additional investment in existing JV
/ WOS
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.
B.12 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 AD Category - I bank, in accordance
with the provisions of Regulation 14 of the Notification.
B.13 Obligations of Indian Entity
(1) An Indian party which has made direct investment abroad is under
obligation to (a) receive share certificate or any other document as an evidence
of investment, (b) repatriate to India the dues receivable from foreign entity,
and (c) submit the documents / Annual Performance Report to the Reserve Bank, in
accordance with the provisions specified in Regulation 15 of the Notification.
The share certificate or any other document as evidence of investment has to be
submitted to and retained by the designated AD Category - I bank, who is
required to monitor the receipt of such documents and satisfy themselves about
the bonafides of the documents. A certificate to this effect should be
submitted by the designated AD category – I bank to the Reserve Bank alongwith
the APR (Part III of Form ODI).
(2) Reporting requirements including submission of Annual Performance
Report are also applicable for investors in unincorporated entities in the oil
sector.
B.14 Transfer by way of sale of shares of a JV /
WOS
(1) Indian parties may also disinvest without prior approval of
the Reserve Bank, in any of 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; and
- where the Indian Promoter is an unlisted company and the investment in
the overseas venture does not exceed USD 10 million.
(2) The disinvestment shall be subject to the following
conditions:
(i) the sale does not result in any write-off of the investment
made;
(ii) the sale is effected through a stock exchange where the shares of the
overseas JV/ WOS are listed;
(iii) 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 based on the latest audited financial statements of the JV /
WOS;
(iv) the Indian party does not have any outstanding dues by way of
dividend, technical know-how fees, royalty, consultancy, commission or other
entitlements and / or export proceeds from the JV or WOS;
(v) the overseas concern has been in operation for at least one full year
and the Annual Performance Report together with the audited accounts for that
year has been submitted to the Reserve Bank;
(vi) the Indian party is not under investigation by CBI / DoE/ 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.
B.15 Pledge of Shares of JV/WOS
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 party 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 party
remain within the limit stipulated by the Reserve Bank for overseas investments,
from time to time.
B.16 Hedging of Overseas Direct Investments
(1) Resident entities having overseas direct investments are permitted
to hedge the foreign exchange rate risk arising out of such investments.
AD Category - I 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.
SECTION C - Other Investments in Foreign Securities
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 –
- to acquire foreign securities as a gift from any person resident outside
India;
- to acquire shares under cashless Employees Stock Option Programme (ESOP)
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 a uniform basis, and
(iii) an Annual Return (Annex B) 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.
- In all other cases, not covered by general or special permission,
approval of the Reserve Bank is required to be obtained before acquisition
of a foreign security.
C.2 Pledge of a foreign security by a person
resident in India
The shares acquired by persons resident in India in accordance with the
provisions of Foreign Exchange Management Act, 1999 or Rules or Regulations made
thereunder are allowed to be pledged for obtaining credit facilities in India
from an AD Category – I bank / Public Financial Institution.
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
- 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.
PART - II
Operational Instructions to Authorised Dealer Banks
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.
2. Investments under Regulation 6 of Notification No.
FEMA 120/2004-RB dated July 7, 2004
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 prior 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.
3 General procedural instructions
(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 - 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
(2) 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.
(3) With effect from March 2, 2010 on-line reporting of the ODI
forms has been operationalised in a phased manner. The new system would enable
on-line generation of the Unique Identification Number (UIN), acknowledgment of
remittance/s and filing of the Annual Performance Reports (APRs) and easy
accessibility to data at the AD level for reference purposes.
a) Initially, Part I (Sections A to D), II and III of form ODI should
be filed on-line in the Overseas Investment Application for allotment of UIN,
reporting of subsequent remittances, filing of APRs, etc. AD Category –I banks
would continue to receive the ODI forms in physical form, as stipulated in the
A. P. (DIR Series) Circular No. 68 dated June 1, 2007,
which should be preserved, UIN wise, for onward submission to the Reserve Bank,
if specifically required. Transactions in respect of Mutual Funds,
Portfolio Investment Scheme (PIS) and Employees Stock
Options Scheme (ESOPS) are also required to be reported on-line in the
Overseas Investment Application.
b) The on-line reporting would be required to be made by the Centralized
Unit/Nodal Office of AD Category - I banks. The Overseas Investment Application
is hosted on the Reserve Bank's Secured Internet Website (SIW) https://secweb.rbi.org.in
and a link has been made available for accessing the Application on the main
page of the website. AD Category – I banks would be responsible for the validity
of the information reported on-line.
c) The application for overseas investment under the approval route
would continue to be submitted to the Reserve Bank in physical form as hitherto,
in addition to the on-line reporting of Part I as contemplated above, for
approval purposes.
d) 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 continue to 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.
e) As per the new reporting system, AD Category – I banks
would be able generate the UIN on-line under the automatic route. However,
subsequent remittances under the automatic route and remittances under the
approval route should be made and reported on-line in Part II, only after
receipt of the letter, confirming the UIN from the Reserve Bank.
(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 file on-line 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.
4. Investments under Regulation 11 of Notification No. FEMA
120/2004-RB dated July 7, 2004
In terms of Regulation 11 of the Notification, Indian parties are permitted
to make direct investment 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 the 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.
5. Allotment of Unique Identification Number (UIN)
The Unique Identification Number allotted to each JV or WOS abroad, 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.
6. Investment by way of share swap
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
the 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.
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
the 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
AD Category – I banks may make remittances up to 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.
9. Remittance towards Earnest Money Deposit or Issue of
Bid Bond Guarantee
(i) In terms of Regulation 14 of the
Notification, AD Category – I banks may, on being approached by an Indian party
which is eligible for investment 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.
10. Transfer by way of sale of shares of a JV / WOS
outside India
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.
11. Verification of evidence of investment
The share certificates or any other document as evidence of investment, where
share certificates are not issued shall, henceforth, be submitted to and
retained by the designated AD Category –I bank, who would be required to monitor
the receipt of such documents and satisfy themselves about the bonafides of the
documents so received. A certificate to this effect should be submitted by the
designated AD Category –I bank to the Reserve Bank along with the APR (Part III
of Form ODI).
1 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, Notification No. FEMA 164/2007-RB
dated 9th October 2007, Notification No. FEMA173/2007-RB dated 19th December
2007, Notification No.
FEMA 180/2008-RB dated 5th September 2008, Notification No.
FEMA181/2008-RB dated 1st October 2008 and Notification No. FEMA196/2009-RB
dated 30th September 2009 (hereinafter referred to as ‘the Notification’)
2 networth means paid up
capital and free reserves