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Process for Foreign Investment by Indian Resident: Compliance & Regulatory?

Foreign Investment by Indian Resident means investment by an Indian Resident under any of the route i.e. Automatic Route or Approval Route.

In simple words, it can be explained as it an investment by an Indian Resident by way of contribution to capital or subscription to the memorandum of association Of Foreign Entity but does not include Portfolio Investment.

Who all are eligible to make Overseas Direct Investment:

An Indian Party is eligible to make an overseas direct investment under the Automatic Route, Indian party can be referred to a company incorporated in India either under the Indian Partnership Act 1932, Limited Liability Partnership Act 2008^[1], or under any Act of the Parliament.

Or any other entity notified by the Reserve bank.

That investment can be made in the following ways:

BY AN INDIVIDUAL:

• He may purchase foreign securities out of the fund maintained in Resident Foreign Currency Accounts^[2];
• He may acquire the bonus shares of the securities held in a foreign
• He may invest in foreign equity shares of an overseas company listed on a recognized stock exchange.
• He may invest in Rated Bonds & Fixed Income Securities.
• They can also invest in the ADR/GDR linked Stock Schemes.
  

  Individuals can also acquire equity shares of a foreign entity without seeking prior   approval of RBI in the following cases:

  (i) By way of gift;
  (ii) By acquiring shares of a foreign company under the Cashless Employees Stock Option;
  (iii) By way of inheritance.

BY INCORPORATED ENTITIES:

An Indian Company can make foreign investment in the following manner:

(i) They can make the investment up to 200% of its net worth in an outside India incorporated joint venture or a wholly-owned subsidiary as on the date of last audited balance sheet;

NOTE: This ceiling limit of 200% is not applicable if the company is making an investment out of the funds maintained in the EEFC Account with an authorized dealer in accordance with the FEM (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000.

(ii) Investment in overseas companies can be made without being subject to any monetary limits. But that funds should be raised by the international offering of its securities by way of ADR / GDR mechanism;

(iii) They may acquire equity shares of a foreign company in exchange for ADR / GDR of the Indian party issued to the concerned foreign company.

Prohibited areas for Overseas Investment:

An individual investing outside India cannot invest in the following areas:

• Real Estate Business i.e. buying and selling of real estate.
• Banking Business. However Indian banks operating in India can set up JV/ WOS abroad, but they have to take clearance from Banking Regulation Act, 1949.

What is the Automatic Route & Approval Route?

Automatic Route: Under this route, no approval is required from Reserve Bank of India for making overseas Direct Investment. The party has to take approval of Authorized Dealer Category– I Bank with an application in form ODI.

Approval route: Under this route, prior approval of Reserve Bank is required.

What are the criteria to make an investment in Automatic Route?

The criteria to make an investment under Automatic Route are the following:

• The total financial commitment of the Indian Party in joint ventures/wholly-owned subsidiaries in any country other than Nepal, Bhutan, and Pakistan is up to US$ 100 million or its equivalent in a financial year.

                                                                 OR

100% of its net worth (whichever is lower).

• The Indian Party making the investment is not on the RBI’s Defaulters Caution List or under the investigation by Enforcement Directorate.
• The Indian Party routes all the transaction relating to an investment in a Joint Venture/wholly-owned subsidiary through only one branch of an authorized dealer.
• The investing company should have a proven track record in non-core activities.

The obligation of the Indian Party after making Investment outside India:

The Indian Party has to comply with the following after making the investment outside India:

• Submit the share certificate or any other documentary evidence of investment in foreign JV/WOS as evidence of investment to the designated AD within 6 months of making the investment.
• Repatriate to India, all dues receivable from foreign JV/WOS like dividend, royalty, technical fees, etc.
• Submit to Reserve Bank of India through the Designated Authorized Dealer every year an Annual Performance Report.
• Report the details of the decisions regarding the diversification of the activities, setting up of down subsidiaries, alteration in its shareholding pattern within 30 days of the approval of that decision by the competent authority.
• In case of disinvestment, the sale proceeds of shares/securities shall be repatriated to India immediately after receiving the same and in any case not later than 90 days from the date of sale of those shares.