Good After Noon Everyone,
I have prepared a note on investment in JV/WOS abroad by Indian Party. This is updated one and taken into consideration master circular on direct investment outside India in JV/WOS as on 01.07.2011. A pdf copy of the same is also attached herewith.
You may also visit my blog for my articles and blogs at--
https://corporatelawsbycsrajeevnayak.blogspot.com/
Thanks & Regards
CS Rajeev Nayak
INVESTMENT IN JV/WOS ABROAD
By CS Rajeev Nayak
AUTOMATIC ROUTE
Investment in JV/WOS abroad by Indian Party:-
1. Investment upto 400% of NW as on date of latest audited balance sheet is allowed to invest by Indian party.
2. Indian party means all type of investor like company, body created under the Act of Parliament, Registered Partnership Firm and any other entity as may be notified by RBI. This includes all categories except Individuals, unregistered partnership Firm, Trust and Society.
3. For the purpose of limit of 400%, following will be reckoned:-
· Equity.
· Loan
· 100% of Guarantee except performance guarantee.
· 50% of performance Guarantee.
4. Loan/Guarantee can be given only when there is equity participation.
5. No guarantee shall be open ended.
6. In case of invocation of performance guarantee breaching the limit of 400%, Indian party will obtain prior approval of RBI before remitting funds with respect to such invocation.
7. Indian party should not be under the RBI Exporters” Caution list/ Defaulter to Banking System/Under investigation by ED or other regulatory agency.
8. All Transaction to one JV/WOS shall be routed through one branch of AD designated by Indian party.
Valuation in case of acquisition of existing foreign Company:-
|
Limit on Investment |
Valuation By |
|
More than USD 5 Million |
Category I Merchant Banker register with SEBI or investment Banker/Merchant Banker registered outside India in host country |
|
Upto USD 5 Million |
CA/CPA |
|
In case of investment by swap of shares |
ALL CASES BY:------ Category I Merchant Banker register with SEBI or investment Banker/Merchant Banker registered outside India in host country. Approval of FIPB will also be required. |
Acquisition of shares of foreign company in lieu of ADR/GDR:-
Conditions:-
1. ADR/GDR are listed on any STXs outside India.
2. ADR/GDR is backed by underlying fresh equity shares of Indian party.
3. Total holding of foreign entity in Indian Party in expanded capital base does not breach sectoral cap, if any.
4. Valuation of shares of foreign company shall be:-----
Ø Listed:-
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.
Ø Unlisted:--
as per the recommendations of the Investment Banker.
Reporting to RBI under Automatic Route:--
1. In case of initial remittance of funds towards formation of JV/WOS abroad as well as fully/partial acquisition of foreign company, reporting will be made in form ODI to RBI within 30 days of remittance through designated AD.
2. Any further remittance is also required to be intimated to RBI in form ODI within 30 days through designated AD.
3. Any change in shareholding pattern is also required to be intimated to RBI within 30 days through designated AD.
Issue of Guarantee by Indian Party in favour of step down subsi of JV/WOS:-
Automatic Route:-- On behalf of or in favour of first level step down operating JV/WOS
1. Indian party are allowed to issue the corporate guarantee on behalf of first level step down operating JV/WOS subject to the condition that the financial commitment of Indian party does not exceed the limit of 400%.
2. Reporting in ODI is required to RBI.
Approval Route:-- On behalf of or in favour of second or subsequent level step down operating JV/WOS:-
1. Will consider by RBI under approval route provided Indian party directly or indirectly holds 51% or more stake in the foreign company for which such guarantee is intended to be issued.
Investment through SPV:- Automatic Route
1. Setting up of JV/WOS through the medium of SPV are allowed under automatic route provided the Indian party is not under defaulter list/caution list etc.
2. Setting up SPV is permitted under automatic route for investment in JV/WOS.
Investment in unincorporated entity in Oil Sector – Automatic route
1. Investment by Navratna PSU/OVL/OIL:-- without any limit provided the investment is approved by competent authority .
2. Other Indian Company:- Upto 400% of NW provided:--
Ø the investment is approved by competent authority .
Ø supported by certified copy of BR approving such investment.
3. Investment breaching the limit of 400% require approval of RBI.
Investment in consortium with other international operators to construct and maintain submarine cable system on co ownership basis:- – Automatic route
1. Allowed under automatic route provided :-
Ø 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.
Ø supported by certified copy of BR approving such investment.
Ø Reporting is made in ODI.
Method of Funding for investment in JV/WOS:-
Funded out of one or more of the following sources:--
1. Drawl of forex from AD in India.
2. Capitalization of exports.
3. Swap of shares
4. Proceed of ECB/FCCB.
5. In exchange of ADR/GDR.
6. Balance in EEFC Account
7. Foreign currency raised through ADR/GDR.
In respect of EEFC Account and forex raised through ADR/GDR, limit of 400% will not apply.
Capitalization of exports and other dues:--
1. Indian party is allowed to capitalize the payment due from the foreign entity under automatic route with respect to the following:--
· Exports.
· Fees.
· Royalties.
· Any other dues for supply of technical knowhow, consultancy, managerial and other services.
2. Capitalization will be within the limit of 400%.
3. Capitalization of export proceeds remain unrealized beyond the prescribed period for realization (normally 6 months) will require prior approval of RBI.
4. 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.
Investment in Financial Service Sector:--
Indian Party seeking investment in financial sector outside India shall fulfill following additional conditions under automatic route;--
1. Indian party is registered with regulatory authorities in India for providing financial service activities.
2. Has earned net profit in preceding 3 FY from such financial service activities.
3. Fulfill the prudential norms relating to capital adequacy.
4. Obtained the approvals from regulatory authorities both India and abroad for venturing into such financial activities.
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.
APPROVAL ROUTE
1. In all other cases (i.e except as stated above), direct investment abroad requires the prior approval of RBI.
2. Application for the same along with necessary particulars shall be submitted in form ODI through AD.
3. 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 as of the JV / WOS outside India.
CASES FALLING UNDER THE APPROVAL ROUTE
I. Investment in excess of 400% of NW.
II. Guarantee on behalf of second level step down operating JV/WOS.
III. Acquisition of shares under SWAP Arrangement.
IV. Investment in Energy and natural resources sector in excess of 400% of NW.
V. Overseas Investment by proprietary concern and unregistered partnership firm:--
1. Proprietary concern and unregistered partnership firm are allowed to set up JV/WOS abroad with prior approval of RBI.
2. Eligibility criteria is as follows:-
· The Partnership / Proprietorship firm is a DGFT recognized Star Export House.
· 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.
· 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.
· 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.
· The amount of investment outside India does not exceed 10 per cent of the average export realization of the preceding three financial years or 200 per cent of the net owned funds of the firm, whichever is less.
3. For obtaining approval, 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.
4. AD may forward the applications to the Reserve Bank along with their comments and recommendations, for consideration.
VI. Overseas Investment by Trust/society.
Post Investment Changes/ Additional Investment in existing JV/WOS
1. The JV/WOS established abroad may diversify its activity/set up step down subsidiary/ alter shareholding pattern under the automatic route.
2. In case of financial services company, the condition for establishment of such JV/WOS is required to be complied with.
3. REPORTING:- The India party should report the details of such decision to the RBI within 30 days of approval for those decision by competent authority of JV/WOS abroad in terms of home country.
4. The details of the same should also be included in APR (part III of ODI).
Restructuring of Balance sheet of overseas JV/WOS involving write off of capital and receivables:--
1. Indian party (promoter) which has established WOS/ JV (atleast 51% stake) may write off the capital (equity and preferences) and other receivables such as loan, technical knowhow fees, royalty, management fees etc. in respect of such JV/WOS even if such entity is in function.
2. AUTOMATIC ROUTE:-- Indian Listed Company are allowed to write off the capital and other receivables upto 25% of equity investments in JV/WOS.
3. APPROVAL ROUTE:-- Unlisted Company are allowed to write off the capital and other receivables upto 25% of equity investments in JV/WOS.
4. REPORTING:- The write off should be reported to the RBI through AD within 30 days of the event.
5. The Indian party should submit the following documents for scrutiny along with application/reporting to AD both automatic as well as approval route:--
· Certified true copy of balance sheet of overseas JV/WOS.
· Projection for the next five years showing benefit accruing to the Indian Party consequent to such write off/restructuring.
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 in accordance with the provisions of Regulation 14 of the Notification.
Obligations of Indian Entity:-
Indian party making investment in JV/WOS abroad has the following obligations:--
1. Receive share certificates or other documents as evidence for investment within 6 months of remittance or capitalization of export or other dues.
2. Repatriate to India all the due receivable like dividend, royalty etc. from JV/WOS abroad within 60 days.
3. Submit to the RBI Annual Performance Report (APR i.e part III of ODI) within 3 months of closing of annual accounts of JV/WOS.
TRANSFER BY WAY OF SALE OF SHARES OF JV/WOS
Automatic Route
Case I- No write off the investment made
Indian Party may transfer the shares or other securities held in JV/WOS to another Indian Party who is eligible to make investment in JV/WOS abroad or any PROI under the automatic route, if following conditions are satisfied:--
1. The sale does not result in write off of the investment made.
2. The sale is effected through the STXs where the Overseas JV/WOS is listed.
3. If the shares is not listed, then the share price is not less than the value certified by CA/CPA as fair value of the shares based on the latest audited accounts of JV/WOS.
4. The Indian Party does not have any outstanding dues from JV/WOS abroad by way of dividend, royalty, commission, export proceeds etc.
5. The JV/WOS abroad has been in operation for one full year and the APR for the same is submitted to RBI along with audited accounts for that year.
6. The Indian party is not under the investigation by CBI/IRDA/SEBI etc.
REPORTING:-- Indian party is required to submit the details of such disinvestment through AD within 30 days from the date of Investment.
Case II- Involving write off the investment made
Indian party are allowed to disinvest in JV/WOS abroad under the automatic route in the following cases, if the amount repatriated after investment is less than the amount originally invested :--
1. Overseas JV/WOS is listed on overseas STXs.
2. Indian party is a listed company and net worth is not less than Rs. 100 Crores.
3. Indian party is a listed company with net worth less than Rs. 100 crores but the investment in overseas JV/WOS does not exceed USD 10 Million.
4. Indian party is an unlisted company and investment in overseas JV/WOS does not exceed USD 10 Million.
Conditions:-
The above disinvestment under the automatic route shall satisfied all the conditions and criteria as in case of disinvestment without write off of investment made except the condition 1 relating to sale does not result in disinvestment made. Reporting requirement as above is also required to be complied with.
Approval Route : --
An Indian party which does not the satisfied the conditions and criteria laid down for disinvestment in JV/WOS abroad is required to obtain the prior permission of RBI for disinvestment.
Pledge of shares of JV/WOS abroad:-
Pledge to AD Bank/ Public Financial institution (PFI) in India :- Indian Party may pledge the shares to AD Bank or PFI in India for availing any credit facility either for itself or for JV/WOS abroad.
Pledge to Overseas lender:- The Indian party may also by way of pledge the shares in JV/WOS abroad to overseas lender, if overseas lender is a bank and total financial commitment of Indian party in overseas JV/WOS is within the limit of 400% of NW.
Hedging of Overseas Direct Investments:-
Indian party having overseas investment is permitted to hedge the foreign exchange rate risk arising out of such investment.
CAclubindia
