Indian Direct Investment in JVs/WOS abroad(Part: 2)
[RBI Master Circular No.2/2003-2004 dated July 1, 2003]

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, prior approval of the Reserve Bank would be required. For this purpose, applications together with documents should be made in :

• 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 USD 100 mn. or ten times the export earnings (whichever is higher)/Block Allocation / for acquisition of shares of a company outside India, in lieu of fees due to it for professional services rendered to the said company.

• Form ODI in all other cases.

Reserve Bank, inter alia, would take into account following factors while considering such applications:

1. Prima facie viability of the Joint Venture/Wholly Owned Subsidiary outside India;

2. Contribution to external trade and other benefits which will accrue to India through such investment;

3. Financial position and business track record of the Indian Party and the foreign entity;

4. 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.

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:

1. be registered with the appropriate regulatory authority in India for conducting the financial sector activities;

2. has earned a net profit during the preceding three financial years from the financial services activities;

3. has a minimum net worth of Rs.15 crores as on the date of the last audited balance sheet; and

4. fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.

Indian parties are also permitted to capitalise the payments due from the foreign entity towards exports made to it, fees, royalties or any other entitlements due from the foreign entity for supplying technical know-how, consultancy, managerial and other services 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.

Indian software exporters are permitted to receive 25 per cent of the value of their exports to an overseas software company in the form of shares without entering into Joint Venture Agreements, with the approval of the Reserve Bank.

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 the Indian party reporting to the Reserve Bank, the details of such decisions taken by the JV/WOS within 30 days of the approval of those decisions by the competent authority concerned of such JV/WOS in terms of local laws of the host country, and, include the same in the Annual Performance Report required to be forwarded annually to the Reserve Bank.

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.

An Indian party which has made direct investment abroad is under obligation to (a) receive share certificates 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.

An Indian party may transfer by way of sale to another Indian party, which complies with the provisions of Regulation 6/Regulation 17B of the FEMA Notification 19/RB-2000 dated May 3, 2000 or to a person resident outside India, any share or security held by it in a joint venture or wholly owned subsidiary outside India subject to the conditions and reporting requirements indicated in A-9 of Part II of this circular.

Indian listed companies are however, permitted to disinvest in a JV/WOS abroad even in cases where such disinvestment may result in a write-off of the capital invested to the extent of 10% of their previous year’s export realisation.

An Indian party, which does not satisfy the conditions laid down, and proposals which seek "write off" of the investment, shall have to apply to the Reserve Bank for prior permission.

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.

Resident entities having overseas direct investments are permitted to hedge the exchange risk arising out of such investments. Authorised Dealers may enter into forward/option contracts with residents who wish to hedge their overseas direct investments (in equity and loan), subject to verification of such exposure and provided further that the contracts are completed by delivery or rolled over on the due date.

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 upto the extent of market value as on that date.

General permission has been granted to a person resident in India who is an individual -

1. to acquire foreign securities as a gift from any person resident outside India; or

2. 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

3. to acquire shares by way of inheritance from a person whether resident in or outside India;

4. 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 Authorised dealers are permitted to allow remittances for purchase of shares by eligible persons under this provision.

5. 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

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 authorised dealer.

Residents are permitted to acquire foreign securities, if it represents –

1. qualification shares for becoming a director of a company outside India provided does not exceed 1% of the paid up capital of the overseas company and the consideration for acquisition does not exceed USD 20,000 in a calendar Year.

2. rights shares provided that the right shares are being issued by virtue of holding shares in accordance with the provisions of law for the time being in force.

3. purchase of shares of a JV/WOS abroad of the Indian promoter company by the employees/directors of an 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% 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.

4. 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 USD 50,000 or its equivalent in a block of five calendar years.

Note: Part II of the Master Circular relate to guidelines regarding internal operational procedures to be followed by Authorised Dealers. This is omitted since it is not relevant for public information.

[Source: RBI Master Circular referred above]