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Overseas Direct Investment

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Title: Overseas Direct Investment


1
Overseas Direct Investment July 9, 2011
2
Agenda
3
  • Routes of Investment
  • Automatic route
  • Approval Route
  • Funding Mechanism
  • Pledge of Shares of JV/WOS
  • Compliances and Valuation
  • Restructuring of Investments
  • Exit
  • Liberalised Remittance Scheme for Resident
    Individuals

Desai Diwanji
4
What is ODI?
5
  • Regulation 2(e) of Foreign Exchange Management
    (Transfer or Issue of any Foreign Security)
    (Amendment) Regulations, 2004, defines Direct
    Investment outside India as
  • Investment by way of contribution to the capital
    or subscription to the Memorandum of Association
    of a foreign entity,
  • Or
  • by way of purchase of existing shares of a
    foreign entity either by market purchase or
    private placement or through stock exchange.

ODI does not include portfolio investment
Desai Diwanji
6
Routes
7
  • No prior approval of RBI
  • Applicable to overseas investment by
  • Company
  • a body created under an Act of Parliament
  • Registered partnership firm making investment in
    JV / WOS abroad
  • Subject to conditions
  • Prior approval of RBI
  • Investment by all other entities inter-alia
  • proprietorship
  • unregistered partnership firm
  • trust
  • Society
  • Investment in
  • Real estate buisness
  • Banking business

Desai Diwanji
8
Automatic Route
9
  • Automatic approval for Financial Commitment
    upto 400 of Net Worth as of the last audited
    Balance Sheet
  • Net Worth Paid up capital free reserves
  • Computation of 400 to include
  • Contribution to capital
  • Loans
  • Guarantee issued to or on behalf of Fco

Permitted subject to investment in the Company
Desai Diwanji
10
  • Investment to be in bona fide business activity
  • Investee company not
  • on RBIs Exporters caution list
  • on list of defaulters to the banking system
    issued by RBI / CBIL / any other CIC
  • under investigation by any investigation/enforceme
    nt agency/ regulatory body
  • Investment routed through one branch of an AD
    bank category-I
  • Investor company has submitted up to date returns
    (APR) for all its existing ODIs

Investment through SPV also permitted
Desai Diwanji
11
Approval Route
12
  • Has to be a DGFT recognized Star Export House.
  • KYC (Know Your Customer) compliant and engaged in
    the proposed business
  • Proven track record i.e. overdue exports lt 10
    of the average export realization of preceding 3
    financial years.
  • Firm not on RBIs caution list/list of defaulters
    to the banking system or has come under adverse
    notice of ED or CBI
  • Investment outside India lt10 of the average of
    3 financial years export realization or 200 of
    the net owned funds of the firm, whichever is
    lower
  • Application in Form ODI

Desai Diwanji
13
  • Sectors
  • Manufacturing
  • Education
  • Hospital
  • Investment in the same sector
  • Conditions
  • Registered under the Indian Trust Act, 1882
  • Trust deed permits the proposed investment
    overseas
  • Proposed investment should be approved by the
    trustee/s
  • AD Bank satisfied that trust is KYC compliant
    and engaged in a bonafide activity
  • In existence at least for a period of 3 years
  • No adverse notice from any regulatory /
    enforcement agency like CBI, Directorate of
    Enforcement
  • Permissions/licensees for concerned activity
    obtained from relevant authority(s)

Desai Diwanji
14
  • Sectors
  • Manufacturing
  • Education
  • Hospital
  • Investment in the same sector
  • Conditions
  • Registered under the Societies Registration Act,
    1860
  • MoA and rules and regulations allows proposed
    investment
  • Approved by the governing body / council or a
    managing committee
  • AD Bank satisfied that trust is KYC compliant
    and engaged in a bonafide activity
  • In existence at least for a period of 3 years
  • No adverse notice from any regulatory /
    enforcement agency like CBI, Directorate of
    Enforcement
  • Permissions/licensees for concerned activity
    obtained from relevant authority(s)

Desai Diwanji
15
  • Viability of the Overseas company
  • Contribution to external trade and benefits to
    India
  • Financial position and buisness track record of
    Indian party and foreign entity
  • Experience of Indian party in same or related
    line

Desai Diwanji
16
Desai Diwanji
17
  • Investments in Financial sector entity permitted
    under automatic route subject to
  • Approval from concerned regulatory authority in
    India and abroad
  • Registered with appropriate regulatory authority
    in India
  • Earned net profit during last three years from
    Financial services sector
  • Fulfilled the prescribed prudential norms
    relating to capital adequacy

Is automatic route really automatic ?
Desai Diwanji
18
  • Downstream investment by JV also subject to these
    conditions
  • Unregulated Indian financial sector entities
    comply only if investing in financial sector
    activities overseas
  • Regulated Indian financial sector entities have
    to comply with above regulations for all
    investments
  • NBFCs making investment overseas need NOC from
    RBI

Desai Diwanji
19
Funding Mechanisms
20
Capitalisation of export receivables
Proceeds of ADR / GDR issue
Exchange of ADR/GDR
ECB proceeds
Rupee resources
FCCB proceeds
Proceeds of ADR / GDR issue
EEFC A/c balance
Share swap
400 ceiling doesnt apply
Desai Diwanji
21
  • Pledge of shares of overseas company permitted
    to
  • Indian Bank / public financial institution for
    loan for Indian party itself or for the JV/ WOS
    abroad.
  • Overseas Lender subject to
  • The lender being regulated and supervised as a
    bank
  • total financial commitments of the Indian party
    remaining within the limit stipulated by RBI for
    overseas investments

Desai Diwanji
22
Valuation and Compliances
23
Desai Diwanji
24
  • Receive share certificate / other documentary
    evidence within 6 months
  • Repatriate to India all dues receivable from
    foreign entity within 60 days
  • Submit APR to RBI in Form ODI Part III within 60
    days from date of expiry of the statutory period
    for finalisation of accounts in the host country
  • Intimate investment in a step down subsidiary /
    changes in the shareholding pattern /
    diversification of business within 30 days of
    approval of this decision by the competent
    authority of the JV / WOS
  • Submit details of disinvestment to the AD within
    30 days

Desai Diwanji
25
Restructuring of Investment
26
  • Indian Promoters of a WOS or having a minimum 51
    stake in foreign JV may write off capital or
    other receivables such as loans, royalty,
    technical knowhow fees and management fees even
    while the JV/WOS continues to operate as below
  • Listed Indian companies can write off 25
    -Automatic Route
  • Unlisted Indian Companies can write off 25 -
    Approval route
  • In both cases they need to submit
  • A certified copy of the balance sheet showing the
    loss in the overseas WOS/JV and
  • Projections for the next five years indicating
    benefit accruing by such write off /
    restructuring.
  • Restructuring to be reported to RBI within 30
    days

Desai Diwanji
27
Exit
28
  • Conditions for automatic route for disinvestment
  • No write off of investment
  • No outstanding dues such as dividend , royalty,
    technical know- how from JV / WOS
  • Sale after gt 1 full year of operations and APR
    for said year has been submitted
  • Indian party is not under investigation in India
  • Shares sold on a Stock Exchange or if unlisted,
    share price not less than value certified by
    CA/CPA based on latest audited balance sheet

Party to report divestment through AD within 30
days
Desai Diwanji
29
  • Automatic route for disinvestment if any of the
    following are satisfied
  • JV / WOS is listed overseas or
  • Indian party is listed and has a net worth gt Rs.
    100 crore or
  • Listed Indian party with net worth lt Rs. 100
    crore and Investment in JV/WOS is lt USD
    10Milion or
  • Unlisted Indian party and investment in JV / WOS
    ltUSD 10 million.

All other conditions of exit have to be met
Desai Diwanji
30
Liberalised Scheme of Remittance for Resident
Individuals
31
  • Resident Individuals may remit upto USD 200,000
    in any Financial year (April March) for
  • Permissible current and / or capital account
    transactions or combinations thereof
  • Immovable property
  • Shares
  • Debt Instruments
  • Any other asset outside India
  • Gift / donation
  • Objects of art
  • ESOPs
  • Mutual funds
  • Venture Capital Funds
  • Unrated debt securities
  • Promissory Notes etc
  • Repayment of loan taken as a non-resident

32
  • Funds cannot be untilised for
  • transactions not permitted under FEMA and this
    Scheme
  • remittances specifically prohibited under
    Schedule I or restricted under Schedule II of
    Current account transaction rules
  • Countries to which remittance is restricted
  • Bhutan
  • Nepal
  • Mauritius
  • Pakistan
  • Other territories as notified by RBI and FATF
  • No credit facilities to be given by Banks to
    undertake such remittances

33
  • Resident Individuals includes minors
  • Remittances can be consolidated in respect of
    family members
  • Pan number necessary for remittance under the
    scheme
  • Individuals can open and maintain a foreign
    currency account with a bank outside India
    without prior approval of RBI for making
    remittances under this scheme.
  • Outward remittance can also be in the form of a
    DD in the residents own name or the name of the
    beneficiary

34
Reasonable care has been taken to ensure that the
information contained herein is accurate in all
respects. However, this is not intended and
should not be considered to be legal advice. No
person should act on the basis of any information
contained in this presentation without
considering and seeking professional assistance
based on the facts and circumstances of their
case.
35
Regulations for Non Banking Financing Companies
36
  • Investment in non-financial sector not permitted
  • Investment in activities prohibited under FEMA
    or in sectoral funds not permitted
  • Investment permitted only in entities regulated
    by financial regulator in investment jurisdiction
  • Investment aggregate not exceeding 100 of NoF
  • Investment in single entity inluding subsidiary
    not to exceed 15 of the NoF
  • Single intermediate holding entity permitted
  • NBFC to maintain level of NoF prescribed by RBI
    even after overseas investment
  • Net non Performing Assets lt 5 of net advances
  • Earning profits for last 3 years, satisfactory
    performance in general

37
  • CRAR of deposit taking NBFC and NBFC-ND-SI post
    investment to be not to be less than prescribed
    RBI
  • CRAR of other NBFCs post investment to be not
    less than 10
  • Compliance with KYC norms
  • Annual certificate from statutory auditors
    submitted by NBFC with DNBS
  • Quarterly return by NBFC to DNBS and DSIM
  • Parent NBFC to obtain periodical reports/ audit
    reports about the business undertaken by overseas
    company and make available to RBI
  • Disclosure in balance sheet of overseas entity
    that the liability of the parent entity is
    limited to equity or fund based commitment

Approval can be withdrawn for non-compliance.
38
(No Transcript)
39
  • Investment upto 50 of Networth as at last
    audited balance sheet
  • Permitted in
  • Shares
  • Bonds / fixed income securities ( not below
    investment grade)
  • Issued by listed companies

Desai Diwanji
40
  • Indian entities (promoter, group or associate
    company) permitted to offer guarantee (corporate
    / personal / primary / collateral etc.) provided
  • Indian entity has equity participation in FCo
  • Percentage computed towards 400 ceiling
  • 50 of the amount of the performance guarantee
  • 100 of the amount for all other guarantees
  • No guarantee is 'open ended'
  • Time specified for completion of contract is the
    validity period of performance guarantee
  • Corporate Guarantee on behalf of First level down
    subsidiary is under Automatic Route (operating
    Company or SPV)
  • Corporate Guarantee to Second level or subsequent
    level subsidiary under Approval level subject to
    the Indian party holding atleast 51 or more
    directly or indirectly
  • Report in Form ODI-Part II to be submitted to RBI
  • RBI approval required for creating charge on
    immovable property / pledge of shares in favour
    of non-resident entity
  • Prior approval of RBI required before remitting
    funds in case on invocation of the performance
    guarantee results in breach of the 400 limit .

Desai Diwanji
41
Guarantee
Overseas SPV
FI/Bank
Equity
Loan
ICo
Equity
Target
ICo can give guarantee only for or on behalf of
WoS / JV in which it has equity participation
Desai Diwanji
42
  • Permitted to capitalise payments due towards
  • Exports
  • Fee
  • Royalties
  • Any other dues such as technical know-how,
    consultancy
  • RBI approval required for
  • Capitalisation of export proceeds which continue
    to be unrealized beyond prescribed period(6
    months)
  • Indian software companies to receive upto 25 of
    export value in form of shares of overseas
    company without JV agreement

Desai Diwanji
43
ICo sells OpCo shares to the Seller in exchange
for TargetCo shares
O/s Seller
ICo
OpCo
O/s TargetCo
  • Transaction requires prior approval of RBI and
    FIPB

Desai Diwanji
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