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Indian Direct Investment in JVs/WOS abroad Introduction - Benefits Arising from Overseas investments in Joint Ventures (JV) Overseas investments in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) have been recognised 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. Section 6 of the Foreign Exchange Management Act provides powers to the 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 the 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 FEMA 19/RB-2000 dated 3rd May 2000 and subsequent notifications incorporating amendments. 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.(Paragraph A2) Prohibitions (Paragraph A3) Indian parties are prohibited from making investment in a foreign entity engaged in real estate business or banking business. General Permission (Paragraph A4) 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 -
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. Direct Investment outside India (Section B) In terms of Regulation 6 of the Notification, any Indian party has been permitted to make investment in an overseas joint venture/wholly owned subsidiary by submitting form ODA, duly completed to a designated branch of an authorised dealer, upto 100% of the net worth of the Indian party as on the date of the last audited balance sheet. Such investments in Nepal and Bhutan are permitted only in Indian rupees. However, the automatic route facility is not available for investment in Pakistan. 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:
Method of Funding (Paragraph B2) Investment in an overseas JV/WOS may be funded out of one or more of the following sources: -
However, when such investments are in the financial sector they will be subject to compliance of Regulation 7 of the Notification. Investment out of funds raised through ADR/GDR issues (Paragraph B3) 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. Investment under swap or exchange of shares arrangement (Paragraph B4) 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:
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. Investment Abroad by a firm in India (Paragraph B5) Partnership firms registered under the Indian Partnership Act, 1932 engaged in any bonafide business activity and having a good track record are permitted to make investment in overseas JV/WOS abroad by submitting form ODA to a designated branch of an authorised dealer provided such investment does not exceed 100% of the net worth of the firm, subject to the terms and conditions laid down in Regulation 6 of the Notification. Firms wishing to take up financial services activities would however, have to satisfy the additional requirements prescribed in Regulation 7 of the Notification. Subject to the firm being eligible for overseas investment and subject also to the condition that the 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 overseas JV/ WOS if the host country regulations or operational requirements warrant such holdings. Investment in Equity of Companies Registered Overseas / Rated Debt Instruments (Paragraph B6)
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