OUTBOUND INVESTMENTS

1
OUTBOUND INVESTMENTS UNDER FEMA REGULATIONS

• CS ASHISH PANDAY
• csashishpanday_at_gmail.com

2
Agenda

• Provisions of FEMA, 1999 and Applicable
  Regulations
• Types of Investments Prohibited / Regulated
  /Permitted
• US 25,000 Scheme

• JV/ WOS
• Investments by Employees
• Portfolio Investments
• Agricultural operations overseas

3
FEMA provisions

• Overseas Investments is a Capital account
  transaction
• Hence prohibited unless permitted generally or
  specifically - Section 6
• RBI empowered by Section 6(2) to specify
  permissible capital account transactions.
• FEM (Permissible Capital account transactions)
  Regulations issued in 2000. Schedule I lists 11
  capital account transactions, of which ODI is 1
• Notif 19 issued in 2000, replaced by Notif
  120 dated July 7, 2004, as amended.

4
Important Definitions

• Foreign Security Section 2(o)
• Direct Investment outside India Reg 2(e)
• Financial Commitment Reg 2f)
• Indian Party - Reg 2(k)
• Net worth - Reg 2(o)
• Real Estate Business - Reg 2(p)
• JV / WOS - Reg 2(m)/ 2(q)
• Host Country - Reg 2(j)

5
Prohibited Investments

• Reg 5 (2)
• All Indian Parties prohibited from investment
  in a foreign entity engaged in
• Real estate Business
• Banking Business
• Reg 5(1)
• All residents not to make direct investment o/s
  India except with general / specific approval
• Reg. 3 of Notif 120
• All persons resident in India prohibited from
  issuing foreign security except with RBI
  approval

6
General Permission

• Reg 4 / Para A 4
• General permission granted to residents for
• Purchase / acquisition of foreign securities and
  sale thereof
• Out of funds held in RFC account
• As bonus shares on securities already held
• Out of their Foreign Currency Resources outside
  India
• (when not permanently resident in India)

7
Direct Investment o/s India Automatic Route -
Reg 6

• Who can invest?
• Company incorporated in India
• Body created under Act of Parliament
• Partnership firm regd under Indian Partnership
  Act
• Other entity as notified by RBI
• Effective 27/3/2006, proprietary / unregistered
  partnership firms which are star export houses
  are also permitted subject to RBI approval
  Form ODI Conditions as per Annex to circular dt
  27/3/2006

8
Direct Investment o/s India Automatic Route -
Reg 6

• Indian party permitted to make investment in
  overseas JV/WOS
• To submit Form ODA to designated branch of AD
• Limit 200 of Net Worth as on date of last B/s
• Ceiling NA for investments out of EEFC a/c or
  funds raised thru ADRs/GDRs.
• Investment in Nepal/ Bhutan only in INR
• Investment in Pakistan not permitted under
  automatic route

9
Direct Investment o/s India Automatic Route -
Reg 6 Contd.

• Limit will include capital contribution in /
  loans granted to JV/ WOS, and 50 of guarantees
  issued to / on behalf of JV/WOS.
• Conditions
• Loan / Guarantee may be given only to an overseas
  concern in which it has equity participation.
• Investor should not be on RBIs caution list /
  list of defaulters to banking system or under
  investigation
• All transactions to be routed thru one branch of
  AD.
• For acquisition of existing foreign co. share
  valuation required from Cat 1 Merchant Banker ( gt
  US 5 Mn), or CA/CPA (lt US 5 Mn)

10
Direct Investment o/s India Automatic Route -
Reg 6 Contd.

• Investment by swap of shares
• Valuation only by Cat 1 Merchant Banker/approved
  investment banker from host country
• FIPB approval MUST
• Investment by a firm shares in JV/WOS may be
  held by individual partners if warranted by host
  country regulations

11
Direct Investment o/s India Automatic Route -
Reg 6 Contd.

• Funding
• Drawal of FX from AD
• Capitalisation of export proceeds
• Swap of shares
• Proceeds of ECB/ FCCB
• Balance in EEFC a/c
• Proceeds of ADR/ GDR issue
• Limit of 200 NA, except for investment in
  financial sector

12
Direct Investment o/s India Automatic Route -
Reg 6 Contd.

• Capitalisation of export proceeds
• Dues from foreign entity towards exports, fees,
  royalties or other entitlements dues gt 6 months
  need prior RBI approval for capitalisation
• Software exporters can get 25 of value of
  exports to overseas software co in form of shares
  without entering into JV agreements with RBI
  approval.

13
Share Swap Reg 8

• Indian parties which have already made ADR/GDR
  may acquire shares of FC in same core activity
  under Scheme / guidelines
• Conditions
• ADR /GDR listed on any stock exchange o/s India
• Max higher of (a) US 100 Mn (b) 10 times
  export earnings in preceding financial year
  (including automatic investments in same
  financial year)

14
Share Swap Reg 8

• ADR/GDR issue for purpose of acquisition is
  backed by fresh equity shares of Indian party.
• Holding in Indian entity does not exceed sectoral
  caps for FDI
• Valuation as per recommendation of investment
  banker (for unlisted shares) or current market
  cap based of last three months average price on
  stock exchange
• File ODG within 30 days

15
Guarantees

• Till 27/3/06 Only corporate promoters could
  offer guarantees for JV/WOS
• Now all Indian entities may offer any form of
  guarantee corporate/ personal /primary /
  collateral by promoter / group company / sister
  concern / associate companies

16
Guarantees - Contd.

• Conditions
• All financial commitments within prescribed
  ceiling (currently 200 of net worth of Indian
  party)
• No guarantee should be open ended i.e. max
  amount to be specified upfront
• To be reported to RBI in Form ODR
• Guarantees by Indian banks in favour of the JV/
  WOS outside these limits, and subject to usual
  prudential norms of RBI.

17
Portfolio Investments

• Corporates-
• Listed Indian cos can invest in shares of
  companies listed on recognised stock exchange and
  which has at least 10 holding in an Indian
  listed company
• Also permitted to invest in bonds / fixed income
  securities of such companies
• Max 25 of Indian cos net worth
• Individuals-
• Same as corporates except no monetary limit

18
Portfolio Investments

• Mutual Funds-
• Can invest in ADR /GDR of Indian cos rated debt
  instruments and also in equity of overseas
  companies as specified for corporates
• Overall cap of US 1 billion
• SEBI approval required
• General permission in each of the above cases for
  sale of securities so acquired

19
Financial Services Sectors- Additional
Conditions for Indian party

• Shd be regd with appropriate regulatory authority
• Shd have earned net profit during preceding 3
  financial years
• Approval obtained from regulatory authorities in
  India and abroad
• Fulfilled prudential norms relating to capital
  adequacy norms as prescribed by regulatory
  authority

20
Approval Route

• Cases not covered above
• Apply in Form ODB to RBI for same core activity
  in exchange of ADR/GDR gt 100 Mn / 10 times
  export earnings / for acquisition of shares a co
  o/s India
• Apply in ODI in other cases.
• RBI will examine prmia facie viability of JV/WOS,
  and similar other points etc

21
Post investment changes

• JV/WOS may diversify its activities / set up step
  down subsidiaries / alter shareholding pattern
• To be reported by JV/WOS to RBI within 30 days
  from approval of those decisions by the relevant
  competent authority
• To be mentioned in APR

22
Tender / bidding acquisition

• Reg 14
• Remittance of EMD / bid bond guarantee permitted
• Subsequent remittance also permitted

23
Obligations/Rights of Investor

• To receive share certificates / other evidence of
  investment
• Repatriate all dues receivable from foreign
  entity
• Submit APR
• As per Reg 15
• May pledge shares to JV/WOS to an AD in India for
  credit for Indian party / JV/WOS Reg 18
• Hedging of exchange risks of investment

24
Disivestment from JV/WOS

• May transfer to another Indian party which
  complies with conditions of Reg 6 or to a non
  resident
• Subject to conditions / requirements listed
• Indian listed companies may disinvest resulting
  in write off of capital invested, subject to 10
  of previous years export realisation
• To apply to RBI in other cases
• Effective 2732006, write off permitted in
  folowin cases
• JV/ WOS listed in overseas stock exchange
• Indian promoter listed and having net worth gt Rs
  100 crs.
• Indian promoter unlisted and investment lt US 10
  Mn.

25
Other investments

• Acquire foreign securities as a gift from PROI
• Acquire shares under cashless ESOS
• By inheritance from PRII / PROI
• Acquire shares under ESOPs
• Qualification shares 1 of paid up capital
  (upto US 20,000)
• Rights shares provided original holding as per
  prevailing law

26
Overseas Branches

• Remittance upto 10 / 5 of average annual sales
  / income / turnover during last two accounting
  years for initial and recurring expenses of
  foreign branches.
• Before 21st April, 2006 limit was 2 1
  respectively.
• Other conditions as per circular 54 dated 29th
  June, 2002.

27
US 25,000 Scheme

• An individual resident in India is permitted to
  remit up to US 25,000 per calendar year for any
  legal and lawful purpose without obtaining prior
  permission of RBI. The individual can use said
  facility for any current or capital account
  transaction, acquisition of any movable and/or
  immovable property or opening of a bank account
  outside India.
• However, remittances cannot be made to Bhutan,
  Nepal, Mauritius or Pakistan or countries
  identified as "non co-operative countries and
  territories" by the Financial Action Task Force.
  Currently, the countries where investment cannot
  be made are Myanmar, Nauru, Nigeria. The updated
  list can be seen at the website of FATF -
  http//www.fatf-gaf

28
Overseas Agricultural Operations

• Indian company or a partnership firm registered
  under the Indian Partnership Act, 1932 are
  permitted to undertake agricultural operations
  including purchase of land incidental to such
  activity. Inv28estment can be made either
  directly (through a branch) or through an
  overseas subsidiary/joint venture.

29
CS ASHISH PANDAY

• Ashish is an Investment Advisor, Member of
  the Institute of Company Secretaries of India
  Graduate In Economics. He is in capital markets
  Investment management practice and specializes
  in international equity and debt securities
  offerings including IPOs, securities programmers,
  corporate bonds (both high-yield and investment
  grade) and asset-backed debt.
• As well as acting for issuers, originators
  and underwriters on securities offerings, he also
  has experience Corporate Governance Compliance
  Management with a wide experience of Investor
  Grievance
• Ashish Works includes advising
• On a Right Issue with international offering of
  an Indian telecommunications infrastructure
  company to be listed on the National Stock
  Exchange Bombay Stock Exchange, (deal aborted)?
• On an Private placement of Equity to foreign
  venture capital funds of an Drug manufacturer Co
  listed on the Bombay Stock Exchange National
  Stock Exchange.
• Tripartite Foreign Joint Venture Incorporation
  Framing Capital Structure in Manufacturing
  sector Company in Indian Subcontinent.
• Mondon Technologies on its proposed convertible
  Preference share Convertible Bond issue

30
Thanks