Investment in Foreign Company by Indian individual: An Overall Procedure

In current times, Indian investors are increasingly looking to expand their business, gain access to new markets, procure intellectual property, and undertake research and development. For this purpose, overseas direct investments have gathered considerable momentum. Still, it becomes challenging to navigate the Overseas Direct Investment regulatory regime from the investor’s perspective.

By making an investment in foreign company by Indian individual helps the country in promoting economic-co-operation with the host countries, transfer of technology and skill, branding of a country as an investor and also sharing of results of R&D. It also helps in the generation of employment or utilization of raw material that is available in India with regard to the host country.

In simple terms, Overseas Direct Investment means investments done by an Indian outside of India. It can be made by purchasing existing shares of a foreign entity either by market purchase or private placement or through a stock exchange, or via subscription to the Memorandum of a foreign entity signifying a long-term interest in the foreign entity (JV or WOS).

Investment in foreign company by Indian individual is regulated by the Foreign Exchange and Management Act, 1999, and various rules and regulations issued thereunder. Because of the complex and regulatory regime, it has become essential for investors to take proper guidance related to matters on their investment. This blog covers a few practical considerations that are appropriate from an investor’s perspective.

Who is a Resident Individual for making Investment in Foreign Company by Indian Individual?

An Indian individual must first come under the definitions of Resident Individual under FEMA to make an investment in a foreign company.

The RBI or Reserve Bank of India has allowed the Resident Individual’s to make an investment in CCPS of the companies or its equity shares that is incorporated outside India. With regard to subject to certain stipulated conditions, the Resident individual’s can make an investment in Overseas Direct Investment.

Section 2(v) of FEMA, 1999, defines Resident Individual. ‘Person Resident in India’ means:

1. An individual is residing in India for more than 182 days during the previous financial year. But this definition does not include:
   • A person who stays outside India or has gone out of India for the purpose of seeking employment, business or vocation outside India, or for any purpose where his intention of stay or the time of stay is uncertain.
2. Any individual/person who has come to or stays in India, for a purpose other than
   • For employment purposes.
   • For business or vocation carried in India.
   • With regard to any other circumstances that indicate his intention to stay in India for an uncertain period.
3. A body corporate or person that is registered or incorporated in India.
4. Any branch, office, or agency outside India is owned or controlled by a resident in India.
5. Any branch, office, or agency outside India that is owned or controlled by a person outside India.

In simple terms, a ‘Person Resident in India’ includes persons of India except for those who are staying abroad either for work, business, or any other purpose and also foreign nationals who come and stay in India for employment, carrying out business or any other purpose.

What is the Eligibility Criteria to make Investment in a Foreign Company by Indian Individual?

Investment in foreign company by Indian individuals or resident individuals can be made in overseas portfolio investments without any limit in the listed offshore companies that have at least a 10% share in an Indian Company. The company must be listed in a recognized stock exchange in India as on 1^st January of the investment year.

Indian individuals who can make an investment in a foreign company are as follows:

• The Resident Corporate entities.
• Partnership firms registered as per the Indian Partnership Act, 1932.

The eligible persons can invest abroad in Joint Ventures/ wholly-owned Subsidiaries.

Where are the Guidelines Prescribed for making Investment in Foreign Company by Indian Individual?

The Reserve Bank of India has mentioned the guidelines in its Notification FEMA No. 10 dated 3^rd MAY, 2000. It has been amended from time to time, and also it can be accessed at the Reserve Bank’s website fema.rbi.org.in.

Any clarification with respect to specific cases can be obtained from the Reserve Bank’s Central office in the address mentioned below:

Overseas Investment Division,
Exchange Control Department,
Central office,
Reserve Bank of India,
Mumbai 400001.
or

e-mail: oid@rbi.org.in.

What are the Types of Overseas Direct Investment?

For making an investment in foreign company by Indian individual the regulations are prescribed under FEMA, 1999. Typically investment made in foreign company by Indian individual is also known as Overseas Investment, it is segregated as follows;

Direct Investment

Direct investment signifies a long-term interest in the foreign business. It takes the form of capital contribution or subscription to the Memorandum of an overseas business or through the purchase of shares of a foreign entity either by way of market purchase or by private placement or via stock exchange. This is done with an intention to control the management of the investee company. An Indian party can make overseas Direct Investment in any legal activity except the following:

• Real Estate Business-Which This means buying and selling of real estate or trading in matters that reacted to Transferrable Development Rights (TDRs). It does not include development of townships, construction of residential or commercial premises or roads and bridges.

Portfolio Investment

Investment in foreign company by Indian individuals is sometimes made for financial gain and sometimes for speculation. There is no such intention for building long term investment or control over the management o0f a foreign company. This investment is practically very unpredictable. Unlike the Direct investment, there can be a quick withdrawal of portfolio investment.

What are the Routes of Making Investment in Foreign Company by Indian Individual?

There are two routes prescribed for making investment in  foreign company by Indian individual:

Automatic Route

Under the automatic route, no prior approval of the Reserve Bank of India is required. An individual is required to approach an AD Category –I Bank in Form ODI (online) along with all the required documents. The guideline for making an investment in foreign company by an Indian company is prescribed below:

1. By Indian Party other than Resident Individuals

Indian Party here includes Registered Partnership Firm, companies (a partner is also eligible to hold shares for and on behalf of the firm of JV/WOS. The funding must be entirely made by a Firm, and the law of the host country permits the same. RBI must notify a body created under the Act of Parliament or any entity.

• There is no investment limit. The investment is made out of funds in an EEFC A/C or out of funds that are raised through ADRs or GDRs.
• In many other cases, the financial commitment in JV or WOS must be up to USD 1 billion and 4000% of net worth of the Indian party.
• Also, the networth that is prescribed by the host country shall be applied.

2. By Resident Individuals

• A person resident in India can make Direct Investment in Foreign securities without any prior approval of RBI as per the Liberalized Remittance Scheme up to USD 125,000.
• In addition to the factors mentioned above, they are also given special permission to purchase or acquire equity or CCPS of a Foreign Company, if acquired.
• According to the ADR/GDR, the linked stock option scheme available for employee or director of the Indian company but that too within the prescribed limits (USD 50,000 in block of 5 years).
• To purchase the shares up to 5% of the paid-up capital of JV/WOS overseas by the employees or directors of the Indian Company engaged in software (up to USD 10,000 in a block of 5 years).
• To become a director to purchase the minimum qualification shares up to 1% of the paid-up capital of JV/WOS overseas.
• The Indian individual should not be on the caution list or defaulter list under the investigation of RBI, Credit Information Bureau of India Ltd. (CIBIL), or any other banking or investigation agency.

3. Authorized Dealer

• The Indian party must route all the transactions relating to the investment in a JB/WOS by way of only one branch of an authorized dealer to be designated by the Indian party.
• Even if there are more than one investor/ promoters for a particular investment in JV/WOS, they shall in a collective form be regarded as one Indian party. Hence it must route all its transactions through only one branch of the AD Category-I bank.
• In case if the Indian party wants to change the AD, then it must obtain a NOC from the existing AD and apply for the same.
• For the purpose of different JV/WOS of one Indian Party, there may be designated ADs.

4. Pricing Guidelines

• Where the investment made is more than USD 5 million, the share valuation of the company is above USD 5 million, the share valuation of the company has to be done by a Category I Merchant Banker registered with SEBI or an Investment Banker/ Merchant Banker abroad that is registered with the appropriate regulatory authority in the host country.
• In all the other specified cases, the valuation must be done by CA or CPA.

5. Exception to the Automatic Route

Investment made in Pakistan is under the approval route.

6. After Reporting Form ODI

A unique identification number (UIN) is generated automatically and instantaneously for the particular JV/WOS. This can be made only after the allotment of the UIN. Also, it must be reported in Form ODI within 30 days from the transaction.

 Approval Route

Investment proposals that are not covered under the specified Automatic Route and are not prohibited under the Approval route  require prior approval of the RBI^[1].  The Form ODI must be duly filled in with all the necessary documents as well as the pricing guidelines in the same way as mentioned above. All the trusts and registered societies engaged in a specific sector are allowed to invest overseas in the same sector with approval from RBI.

What are the Obligations After Making Investment in Foreign Company by Individual?

An Indian party must follow the below-listed obligations after making an investment in foreign company by Indian individual:

• Within six months of the investment in foreign company by Indian individuals, share certificates must be received and submitted to the AD.
• All the dues that is received from the foreign company such as dividend, royalty, etc., must be repatriated to India.
• An Annual Performance Report in Part III of Form ODI must be submitted to RBI.
• Wherever the above report is based on the un-audited Financial statements of the company because the law of that country does not require auditing, in that case, the Statutory Auditor of the Indian party should state that it gives an accurate and fair value and the same is adopted.
• The critical decisions that are taken by such Foreign JV/WOS must be informed to the RBI within 30 days from the approval of such a decision. The Annual Performance Report must contain particulars of the same.
• For decision restructuring, a listed Indian company as per the Automatic route as well as the unlisted Indian company according to the Approval route can write off their capital or other receivables up to 25% of the equity investment in WOS/ JV with at least a stake of 51%. It should also be reported along with a certified copy of the balance sheet and projection of estimated profit of the next five years.
• In circumstances where disinvestment occurs, the sale proceeds should be repatriated to India within 90 days of receipt thereof.

What are the Source of Funds permissible for making Investment in foreign Company by Indian individual?

• Drawal of foreign exchange from the AD Bank in India.
• Swap of Shares: This is usually done under the automatic route, if in case the pricing guidelines are met. However, the inward leg transaction requires the approval of FIPB.
• Capitalization of exports as well as other entitlements and dues.
• Proceeds from the Foreign Currency Convertible Bonds and External Commercial Borrowings.
• For exchange of GDRs and ADRs that are issued in accordance with the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Mechanism) Scheme, 1993 and also the issued guidelines by the Government of India in the matter.
• Balances held in the EEFC Account of the Indian individual maintained with an AD.
• Proceeds of the foreign currency a fund that is raised through ADR or GDR issues.
• Conversion of loan to CCPS or equity. This is permitted under the automatic route.

Why Enterslice?

At Enterslice, you will find a group of experts who can guide you through the whole process. Also, we can help you in doing the auditing work and even completion of valuation work as we have duly certified CA to help you through this challenging work.

Conclusion

The ODI Regulations fails to explain the portfolio investment. In general terms, a portfolio investment is widely understood as a financial or treasury instrument; also, it is not included in the management rights. Subject to this, it is also arguable that an Indian party can invest overseas without being subjected to the applicable ODI provisions. It is also unclear whether the RBI will willingly accept this interpretation.