FEMA Act 1999: Overseas Investment and its Routes

Table of Contents

1. Foreign Exchange Management Act, 1999: Overseas Investment
2. Foreign Exchange Management Act, 1999 -Automatic and Approval Route & Foreign Direct Investment Policy
3. Reporting requirement under Master Direction : Reporting under Foreign Exchange Management Act, 1999

1. Foreign Exchange Management Act, 1999: Overseas Investment

1.1 Overseas Investment

1.2 Legal Entities permitted to make Overseas Investments

• • Company incorporated in India or a body created under an Act of Parliament,
  • Limited Liability Partnership (LLP) registered under the Limited Liability Partnership Act, 2008,
  • Partnership Firm registered under the Indian Partnership Act, 1932.
  • Any other entity in India as may be notified by the Reserve Bank.

1.3 Prohibitions for Overseas Investment

• • Indian Parties are prohibited from making investment (or financial commitment)
  • In a foreign entity engaged in real estate meaning buying and selling of real estate or trading in Transferable Development Rights (TDRs)
  • but does not include development of townships, construction of residential/commercial premises, roads or bridges or banking business, without the prior approval of the Reserve Bank.
  • An overseas entity having direct/indirect equity participation by an Indian Party shall not offer financial products linked to Indian Rupee without the specific approval of the Reserve Bank of India.
  • Any incidence of such product facilitation would be treated as a contravention of the extant FEMA regulations and would consequently attract act-ion under the relevant provisions of  FEMA, 1999.

1.4 Method of Funding

Investment (or financial commitment) in an overseas JV/WOS may be funded out of one or more of the following sources:

• • drawal of foreign exchange from an AD bank in India; capitalisation of exports;
  • capitalisation of exports and other dues and entitlements;
  • swap of shares;
  • proceeds of External Commercial Borrowings (ECBs)/Foreign Currency Convertible Bonds (FCCBs);
  • in exchange of ADRs/GDRs issued 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 Government of India;
  • balances held in EEFC (Exchange Earners Foreign Currency) account of the Indian Party maintained with an Authorised Dealer; and
  • proceeds of foreign currency funds raised through ADR / GDR issues.

General permission has been granted to persons resident in India for purchase/ acquisition out of funds held in RFC account; bonus shares on existing holding of foreign currency shares and out of their foreign currency resources outside India when not permanently resident in India.

2. Foreign Exchange Management Act, 1999 -Automatic and Approval Route & Foreign Direct Investment Policy

2.1 Investments under Automatic Route

An Indian Party has been permitted to make investment/undertake financial commitment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS) as per the ceiling prescribed by the Reserve Bank from time to time. Any financial commitment (FC)

• • upto USD 1 (one) billion shall only come under the automatic approval.
  • eligible limit of investment under the automatic route is 400% of the net worth of the Indian Party  as per the last audited balance sheet.

For investment/undertaking financial commit-ment in overseas Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS), the Indian Party.

• • should approach an Authorised Dealer Category – I bank with an application in Form ODI (Master Document on Reporting) and
  • prescribed enclosures / documents for affecting such remittances.

2.2 Investment under Approval Route

• • Prior approval of the Reserve Bank would be required in all other cases of direct investment (or financial commitment) abroad.
  • For the above purpose, application together with necessary documents should be submitted in Form ODI through their AD Category – I banks with their specific recommendation.
  • The designated AD before forwarding the proposal should submit Form ODI in the on-line OID application under approval route and the transaction number generated by the application should be mentioned in the letter.
  • In case the proposal is approved, AD bank should affect the remittance under advice to Reserve Bank so that Unique Identification Number is allotted.

Factors by RBI for considering applications under Approval Route

• • 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.
  • Expertise and experience of the Indian Party in the same or related line of activity as of the JV / WOS outside India.
  • Prima facie viability of the JV / WOS outside India.

2.3 Proposals that require prior approval of Reserve Bank of India

• • Overseas Investments in the energy and natural resources sector exceeding the prescribed limit of the net worth of the Indian companies as on the date of the last audited balance sheet.
  • Overseas Investments by proprietorship concerns and unregistered partnership firms satisfying certain eligibility criteria.
  • Investments by Registered Trusts/Societies (satisfying certain eligibility criteria) engaged in the manufacturing / educational / hospital sector in the same sector in a JV / WOS outside India.
  • Corporate guarantee by the Indian Party to second and subsequent level of Step Down Subsidiary (SDS). All other forms of guarantee which is offered by the Indian Party to its first and subsequent level of SDS.
  • Restructuring of the balance sheet of JV/WOS involving write-off of capital and receivables in the books of listed/unlisted Indian Company satisfying certain eligibility criteria.

2.4 Foreign Direct Investment Policy

Department for Promotion of Industry and Internal Trade (DPIIT) is the nodal Department for formulation of the policy of the Govt. on Foreign Direct Investment (FDI) and responsible for maintenance and management of data on inward FDI into India based upon the remittances reported by the RBI.DPIIT plays an active role in the liberalization and rationalization of the FDI policy and has been constructively engaged in extensive stakeholder consultations on various aspects of the FDI Policy. FDI policy is reviewed on an ongoing basis with a view to making it more investor-friendly. With a view to attracting higher levels of FDI, Govt. has put in place a liberal policy on FDI under which upto 100% is permitted under the automatic route in most sectors.

3. Reporting requirement under Master Direction: Reporting under Foreign Exchange Management Act, 1999

3.1 Form ODI (Annex I)

An Indian Party and a Resident Individual making an overseas investment is required to submit form ODI.

Structure of the Form ODI comprise the following parts:

1. Part I – Application for allotment of Unique Identification Number (UIN) and reporting of Remittances / Transactions:

Section A – Details of the IP/RI.
Section B – Capital Structure and other details of JV/ WOS/ SDS.
Section C – Details of Transaction/ Remittance/ Financial Commitment of IP/ RI.
Section D – Declaration by the IP/ RI.
Section E – Certificate by the statutory auditors of the IP/ self-certification by RI.

2. Part II – Annual Performance Report (APR).

3. Part III – Report on Disinvestment by way of:

• • Closure / Voluntary Liquidation/Winding up/ Merger/ Amalgamation of overseas JV/WOS.
  • Sale/ Transfer of the shares of the overseas JV/ WOS to another eligible resident or non-resident.
  • Closure / Voluntary Liquidation/Winding up/ Merger/ Amalgamation of IP.
  • Buy-back of shares by the overseas JV/ WOS of the IP / RI.

An annual return on Foreign Liabilities and Assets (FLA) is required to be submitted directly by all the Indian companies duly filled-in, validated and sent by e-mail by July 15 every year.

New reporting format has also been introduced for Venture Capital Fund (VCF)/ Alternate Investment Fund (AIF), Portfolio Investment and overseas investment by Mutual Funds as per the format in Annex II and Annex III of the Master Direction.

In case of reporting purchase and repurchase of ESOPs, the AD banks may continue to report the same in the existing format (Annex IV):

Annual Statement shares allotted to Indian employees/ Directors under ESOP Schemes is required to be submitted to the Central Office of RBI by Indian Company through its AD bank.

Annual Statement of shares repurchased by the issuing foreign company from Indian employees/ Directors under ESOP Schemes is required to be submitted to the Central Office of the Reserve Bank of India by the Indian Company through its AD bank.

Any post investment changes subsequent to the allotment of the UIN are required to be reported as indicated in the operational instructions on submission of Form ODI Part I (Annex I).

In case of RI undertaking ODI certification of Form ODI Part I by statutory auditor or chartered accountant need not be insisted upon. Self-certification by the Resident Individual concerned may be accepted.