FEMA Foreign Investment

Investment in Foreign Company by Indian Company

Investments made outside India or Outbound investments have undergone a significant change in terms of geographical and sectoral composition.  It has been observed that there has been a shift in the Overseas Investment Destination in the last decade or so. In the first half, overseas investments were directed to countries like UAE, Australia, and Sudan as they were rich in resources. In the second half, the foreign Investment Destination was channeled to countries like Singapore, Netherlands, British Virgin Islands, and Mauritius.

The significant investments made in foreign companies by an Indian Company are made by way of Mergers & Acquisition (M&A) transactions. With the increasing activity of M&A, companies get direct access to a new and extensive market. It helps to provide unique and better technologies, which enables them to increase their customer base and also in achieving a global reach.

Investment in a foreign company by an Indian Company can be made for various reasons such as technical know-how, import and export of goods and services, and also to share the research and development costs. These types of investments in a foreign company by an Indian Company are termed as Joint Ventures (JV).

Procedures for Making Investment in Foreign Company by an Indian Company

There are two modes for investment in foreign company by Indian company:

Automatic Route

If an Indian Company wishes to invest in a foreign company by way of Automatic Route, no prior permission is required from the Reserve Bank of India (RBI) to make overseas direct investments in a JV/WOS abroad. The Indian Company needs to approach an Authorised dealer (AD) Category BANK-I along with an application in Form ODI. The application must be supported with the documents to effect the remittances towards such investments. However, in case the foreign investment is to be done in the financial sector, prior approval is required from the concerned regulatory authority, both in India and abroad.

Approval Route

The proposal excluded from the conditions of the automatic route requires permission from the Reserve Bank of India (RBI) beforehand. In Form ODI, an application must be made, and the required documents must support that. This application needs to be filed with the Authorized Dealer Category -1 Bank.

What are the Prerequisites for Investment in Foreign Company by Indian Company?

The following points must be noted before making any investment in foreign company by Indian Company, especially in shares.

• Any Indian Company is prohibited from making overseas investment in a foreign company that is engaged in Real Estate business or the Banking business. For making an investment in these sectors, the Indian companies require prior approval of the Reserve Bank of India (RBI).
• For the purpose of making an investment in a foreign company, the Indian Company should not be in the list of defaulters in the Banking system or the RBI’s export caution list.
• An Annual Performance Report needs to be filed for the financial year for making an investment in foreign company by Indian Company in the provided format.
• The transaction details of the investment in a foreign company by Indian company must be routed only through one authorized dealer.
• The direct investment must be made in an overseas JV/WOS of a foreign company engaged in bonafide business activity.
• The total financial commitment of the company must be up to 100% of the prescribed limit of the net worth of the company as on the last audited balance sheet.

Financial Commitment in Terms of Investment in Foreign Company by Indian Company

The amount of direct investments outside India by an Indian party or investment in foreign company by Indian Company can be termed as a financial commitment. Financial commitment can be done through the following ways:

1. By taking of subscription to equity shares.
2. By way of loans to its JV or WOS abroad.
3. By investing in the JV or WOS abroad.
4. 100% of the corporate guarantee amount on behalf of the overseas JV or WOS.
5. 50% of the guaranteed performance amount on behalf of the overseas JV or WOS.
6. Bank Guarantee or standby letter of credit on behalf of the overseas JV or WOS issued by a resident bank.
7.  Creation of charge.

Networth for making Investment in Foreign Company by Indian Company

To limit 100 % of the net worth, for the purpose of making an investment in foreign company by Indian Company, the following points must be considered:

1. Cash remittance by way of market purchase.
2. Capitalization in export proceeds.
3. 50% of all the value guarantees that are issued by the Indian party to or on behalf of the JV or WOS.
4. Investment done in agricultural operations either directly or through overseas offices.
5. External Commercial Borrowings with respect to other parameters of the ECB Guidelines.

Note: If in case the company does not fulfill the eligibility norms mentioned above, then it can make an application to the Chief General Manager, RBI, for clarifying particular cases.

Examples of Investment in Foreign Company by Indian Company

Some of the significant examples of investment in foreign company by Indian Company are:

• In February 2020, Bharti Airtel, in its wholly-owned subsidiary in Mauritius, invested US$ 978.92 million.
• In January 2020, the Callies Infrastructure made an investment of  US$ 81.12 million in its wholly-owned subsidiary in the UK.
• In December 2019, Indian Oil Corporation Limited’s refining technology INDMAX was licensed to Naftna Industrija Srbije (NIS) for the purpose of the production of higher-value products.
• In December 2019, National Small Industries Corporation (NSIC) AND Aramco Asia has signed MoU intending to bring development in the MSME Ecosystem in India in the Oil and Gas sector. 
• In December 2019, Panacea Biotec bagged orders, which was worth around Rs. 170 crores (US$ 24.32 million) from the UN agencies, including UNICEF, for the supply of Pentavalent vaccine.
• In December 2019, the supply chain Focussed Fintech Firm, LivFin had raised US$5 million of the equity capital from the German Development finance institution DEG.
• In November 2019, PVR cinemas, a leading multiplex chain in India, made its first international venture by launching its first property in Sri Lanka.
• In September 2019, Petronet, the importer of Liquefied Natural Gas (LNG), agreed with US LNG developer Tellurian Inc. and invested US$2.5 billion.
• In September 2019, Reliance Power announced a JV with the Japanese energy major JERA, for jointly setting a gas –combined cycle power project (phase-I) of 750MW at Meghnaghat in Bangladesh.
• In September 2019, OYO acquired a data science firm Danamica based in Copenhagen.
•  In August 2019, Sun Pharma had entered into a licensing agreement with the China system Medical Holdings(CMS) to commercialize and develop seven generic products in Mainland China.
• In March 2019, Infosys had announced that it would acquire a 75% stake in ABN AMRO’s subsidy.
• In March 2019, Sun Pharmaceuticals had raised its stake in Russia’s PJSC Biosintez to 96.96 percent.

Government initiatives with regard to Investment in Foreign Company by Indian Company

• Public Sector Undertakings under the Government of India have invested more than US$15 billion in Russia’s oil and gas projects. They are also planning to undertake other investments in the field of the country’s oil and gas.
• In order to encourage adequate forex reserves, the RBI has relaxed the domestic companies in investing in foreign companies by doing away with the ceiling for raising funds through pledge of shares, overseas and domestic assets. In addition to the JV and WOS, the Central bank has announced similar concessions for pledging the shares for step down subsidiary.
• The RBI has also rationalized and liberalized the guidelines for making investment in foreign company by Indian Company. It also raised an annual overseas investment ceiling from US$75,000 to US$ 125,000 to establish JV and WOS. 
• The Union Cabinet has also permitted ONGC Videsh to acquire a stake of 11% in the Russian oil company JSC Vankorneft from Rosneft Oil co. for US$930 million.

How Downstream Investment Effects Investment in Foreign Company?

Downstream Investment is a popular method for making an investment in foreign company by Indian Company.

If an Indian entity that is not controlled or owned by a resident entity (having foreign ownership) makes an Investment in an Indian Company with all the necessary compliance like the conditions and caps, relevant sectoral conditions of the investment, this will be termed as a Downstream Investment.

In Downstream investment the eligible Indian entities have to comply with the following conditions:

• The Indian organization must notify the RBI and the Foreign Investment Portal regarding its downstream investment within 30 days of such investment, even if the capital is not allotted along with the modality of investment in the new and existing ventures.
• Downstream investment through induction of foreign investment in an existing Indian Company must be duly supported by a resolution of the Board of Directors and the shareholders agreement.
•  As per the SEBI or RBI guidelines, the issue of transfer pricing and valuation of capital shall be made.
• The eligible Indian entities to make downstream investment must have requisite funds from abroad and not leveraged funds from the domestic market. This policy does not bind the Indian Company from taking leveraged funds from the domestic market.

Additional Conditions For Calculating Total Foreign Investment

The conditions for non-application by Investment Vehicles in downstream are:

1. The Downstream investment made by an investment vehicle will be regarded as foreign investment, if either the manager or the sponsor/Investment manager is not an Indian controlled and owned subsidiary as explained in Regulation 14 of the Principal Regulations defined in RBI Notification Number-363/2015-RB dated 15^th February, 2016.
2. The sponsors/managers/investment managers organize themselves in any form other then LLPs or Companies.It is up to the SEBI to decide whether the investment manager/ sponsor/ managers are owned and controlled by a foreign company.
3. A downstream investment made by an investment vehicle that is recognized as a foreign investment will have to confirm to the sectoral caps and restrictions or conditions, if any, as it applies to the company in which the downstream investment is made according to the FDI policy.
4. Downstream investment made in an LLP by an investment vehicle that is recognized as a foreign investment needs to conform to the provisions of Schedule 9 of the principal FEMA Regulations as well as the FDI policy for foreign investment in the LLPs. 
5. A portfolio investment shall be made as an Alternative Investment Fund Category III only in those securities or instruments under which a Registered Portfolio Investor is permitted to invest under the principal Regulations.
6. In case the investment vehicle receives foreign investment, it must make a report in the prescribed format to the Reserve Bank of India or the SEBI as required from time to time.

Conclusion

The FDI policy has rightly demonstrated the procedure in the flow of funds in the ongoing phase of growth and creation of wealth in the economy. The methodology prescribed by RBI applies to both the new Indian Companies and Enterprises. Our economy will be benefitted if it removes the restrictions in the foreign funds, it will also help boost the capital inflow within the marketplace. By investing in foreign company by Indian company there will be a source of wealth creation with a global exposure of entrepreneurship and professionals in India. With this FDI policy with regard to foreign investment, the Government shall make a better scope of foreign investment and a comprehensive check on the investment routes as well as the growth.