Finance Business Foreign Portfolio Investment

Basics of Overseas Direct Investment: Investment by Indians Abroad

Overseas Direct Investment has allowed Indians to show their capabilities on the global platform by allowing diversification of businesses abroad and enabling businesses to grab the wide number of opportunities that come from overseas.

Overseas Direct Investment from India is the opposite of Foreign Direct Investment. It not only helps the Indian party to earn profit but also helps in building good relations with other countries by offering a chance to become their business partners and share the knowledge, resources, technology offered by developed nations.

Channels of Overseas Direct Investment

Overseas Direct Investment outside India can be made by acquiring a significant interest in the foreign entity either as a Joint Venture or wholly-owned subsidiary, by way of making Investment through:

1. Contribution to its capital,
2. Subscription to the memorandum,
3. Purchase of existing shares of foreign entity either by Market Purchase/Private Placement/Stock Exchange.

Overseas Direct Investment can be made either through automatic route or government approval route.

Difference between Portfolio Investment and Overseas Direct Investment (ODI)

1. The listed entity can only make portfolio Investment up to 50% of its net worth based on the last audited balance sheet of the company. Investments made in overseas companies can either be in its equity or debt securities issued by such companies.
2. Portfolio investment can be much more volatile, whereas direct Investment implies controlling stake in a business.

General Permission to Individual (Resident) For Purchase and Sale of Foreign Securities

An Individual resident is allowed to make Overseas Direct Investment through:

1. RFC account;
2. As bonus shares of foreign currency shares;
3. From the foreign Currency.

Remittance of the amount made shall be up to the limit prescribed under the Liberalized Remittance Scheme for permitted capital and cash transaction.

Indian Party Making Investment in Joint Venture and Wholly Owned Subsidiary (WOS)

An Indian Party can make Overseas Direct Investment from India in the joint venture and WOS as per the ceiling prescribed by Reserve Bank of India.

If the financial commitment is exceeding USD 1 (one), billion or its equivalent in a fiscal year would require prior approval of RBI though even the financial commitment is under the automatic route.

The term ‘Indian Party’ can be defined as:

• A company incorporated in India,
• An LLP registered under the LLP Act, 2008,
• A body which has been established under Act of Parliament,
• A partnership firm that has been formed under the Partnership Act, 1932.

Read, Also: FDI Norms in Loan Company and Compliance under FEMA.

Conditions for Overseas Direct Investment (ODI) by the Indian Party

• Approval of Reserve Bank is required for giving Loan/ Guarantee to Overseas JV/WOS where there is no equity participation.
• AD Bank shall forward such proposal to Bank after ensuring that the law of the host country permits loan/ guarantee without equity participation.
• Indian Parties should not be on the Reserve Bank’s Exporters’ Caution list/ list of defaulters in the banking system / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information company as approved by the Reserve Bank or under investigation by any investigation/enforcement agency or regulatory body.
• All transactions related to JV/WOS should be routed through one branch of an Authorised dealer as designated by the Indian Party.
• In case an investment amount is more than USD 5 million, valuation of shares needs to be done by the Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country;
• However, in all other cases by a Chartered Accountant or a Certified Public Accountant.
• In case of swap of shares, Approval from FIPB will be required along with the valuation of shares by Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; irrespective of its holding.
• In exchange of ADR/ GDR issued as per the Scheme for the 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 provided.
• Overseas Direct Investment/ Financial commitment by Indians in Nepal shall be in the Indian Currency and Bhutan it is allowed in rupees and freely convertible currencies.
• Investment in Pakistan is under the approval route.

Conditions to Acquire Shares in Exchange of ADR/GDR

An Indian Party can acquire the shares of a foreign company in exchange of ADRs/GDRs issued under the Scheme for the issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued there under from time to time by the Government of India provided:

1. ADRs/GDRs which are listed on any stock exchange outside India;
2. ADR, GDR either or both issued for the purpose of acquisition of shares shall be backed by new equity shares issued by the Indian entity;
3. The total holding of the person resident outside India in the Indian body in the expanded capital base, after the exchange, shall not exceed the sectoral cap as prescribed under the regulation.
4. Valuation of shares shall be made:
   1. By an Investment Banker if the shares not listed on any recognised stock exchange; or
   2. Based on the current market capitalisation of the foreign company arrived based on the monthly average price on any stock exchange abroad for three months preceding the month in which the acquisition has committed over and above, the premium, if any, as recommended by Investment Banker in its due diligence report in other cases.

Methods of Funding

Overseas Direct Investments by Indian individuals of companies in an overseas JV / WOS shall be out of any of the following modes:

1. Drawl of foreign exchange from an Authorised Dealer bank in India;
2. Capitalisation of exports;
3. Swap of shares(based on the valuation report);
4. Proceeds from External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs);
5. In exchange of ADRs/GDRs issued under the Scheme for the issue of Foreign Currency Convertible Bonds and Ordinary Shares through Depository Receipt Mechanism Scheme, 1993, and the guidelines issued there under from time to time by the GOI;
6. Balances which is held in EEFC account of the Indian Party, and
7. Proceeds of foreign currency funds raised through ADR / GDR issues.

Financial commitments made shall be in the following ways:

1. Amount of equity shares
2. Compulsorily Convertible Preference Shares (CCPS);
3. Amount of other preference shares;
4. Amount of loan;
5. Amount of guarantee (other than performance guarantee) issued by the Indian Party;
6. An amount of bank guarantee backed by a counter-guarantee / collateral issued by a resident bank on behalf of JV or WOS of the Indian Entity.
7. Half of the amount of performance guarantee issued by Indian Party on the condition that if the outflow on account of invocation of performance guarantee results in the breach of the limit of the financial commitment in force, then prior approval of the Reserve Bank of India need to be obtained before executing the remittance beyond the limit prescribed for the financial obligation.

Prohibited Sectors for Overseas Direct Investment from India

• Buying and selling of real estate (does not include the development of townships, construction of residential/commercial premises, roads or bridges) or trading in Transferable Development Right (TDR).
• Banking Business except Indian Bank operating in India can open its JV and WOS after taking the approval from Department of Banking Regulation (DBR), CO, and RBI.
• An Overseas JV/WOS shall not offer financial products linked to Indian Rupee without the approval of Reserve Bank of India.

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