Investment in Overseas Joint Ventures and Wholly Owned Subsidiary (WOS)

Narendra Kumar

08 Dec, 2020

Overseas investments in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) have been recognized as an important opportunity for promoting global business^[1] by Indian entrepreneurs.

What is overseas Joint Venture (JV) and Wholly Owned Subsidiary?

Overseas Joint Venture means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian Party makes a direct investment.

Wholly Owned Subsidiary (WOS) means a foreign entity formed, incorporated or registered in accordance with the laws and regulations of the host country, whose entire capital is held by the Indian Party.

What is the purpose of investing in JV and WOS?

• They are normally perceived as a medium of economic and business co-operation between India and other countries.
• Transfer of technology and skill, sharing of results of R&D, access to the wider global market, promotion of brand image, generation of employment and utilization of raw materials available in India and in the host country are other significant benefits arising out of such overseas investments.
• They are important drivers of foreign trade through increased exports of plant and machinery and goods and services from India and also a source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments.

What do you mean by Indian Party making Investment?

Indian party with reference to investment means a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932^[2] or a Limited Liability Partnership (LLP) incorporated under the Limited Liability Partnership Act, 2008 making investment in a Joint Venture or Wholly Owned Subsidiary abroad.

What is the General permission given by RBI?

Through RBI notification below are the general permission is granted persons residents in India for purchase/acquisition of securities:

• out of the funds held in RFC account
• as bonus shares on the existing holding of foreign currency shares
• When he is not permanently resident in India, out of their foreign currency resources outside India.
• To sell the shares purchased or acquired

What are the Prohibitions in Foreign Investment?

• Investment in foreign entity engaged in real estate
• Trading in Transferable Development Rights
• To invest in the development of townships, construction of residential/commercial premises, roads or bridges or banking business requires prior RBI approval.

What are the routes of making direct Investment in outside India?

The Indian entity can make the direct foreign investment through two routes that are Automatic Route and Approval Route.

Automatic Route: Investment in the sectors allowed in automatic routes does not require prior approval of RBI. Indian party shall intimate after making the investment.

The Indian Party should approach an Authorized Dealer Category – I bank with an application in Form ODI and the prescribed enclosures/documents for effecting the remittances towards such investments. Nevertheless, in case of investment in the financial services sector, prior approval is required from the regulatory authority concerned, both in India and abroad.

Approval Route: Any activities or sectors fall under approval route requires prior approval of RBI before making the investment.

Investment in overseas Joint Ventures and Wholly Owned Subsidiary (WOS) under approval route:

Transactions require approvals:

• Overseas Investments in the energy and natural resources sector exceeds prescribed limit.
• Investments in Overseas Unincorporated entities in the oil sector.
• 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.
• The Indian Party obtaining corporate guarantee to the second and subsequent level of Step down Subsidiary.
• Guarantee offered by the Indian Party to its first and subsequent level of SDS.
• Rearrangement of the balance sheet of JV/WOS which involves write-off of capital and receivables in the books of listed/ unlisted Indian Company
• Capitalization of export proceeds remaining unrealized beyond the prescribed period.
• Proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS.
• Indian party who creates charge on assets concern or associate company in India, promoter and / or director in favour of an overseas lender as security for availing of the fund based and/or non-fund based facility for its Joint Venture (JV) or Wholly Owned Subsidiary (WOS) or Step Down Subsidiary (SDS) outside India.
• Individual making overseas direct investment in the equity shares and compulsorily convertible preference shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India exceeding the limit.
• Hedging of overseas direct investments by entering into forwarding/option contracts with resident entities.

What is the procedure for approval route?

• The applicant should approach their designated Authorized Dealer (AD) with the proposal the applicant should approach their designated Authorized Dealer (AD) with the proposal.
• The proposal shall be submitted to Reserve Bank after due scrutiny and with the specific recommendations of the designated AD bank along with supporting documents mentioned below:
• A letter from the designated AD containing information:
• Transaction number generated by the OID application.
• Brief details of the Indian entity.
• Brief details of the overseas entity.
• Background of the proposal.
• Brief details of the transaction.
• Reason/s for seeking approval mentioning the extant FEMA provisions.
• Observations of the designated AD bank with respect to the viability of the JV/ WOS outside India.
• A letter from the IP addressed to the designated AD bank.
• Board resolution of the proposed transaction/s.
• Incorporation certificate and the valuation certificate for the overseas entity.
• In case the proposal is approved, the AD bank should affect the remittance under advice to Reserve Bank so that the UIN is allotted.

What are the obligations of the Indian party, which has made direct investment outside India?

An Indian Party will have to comply with the following:

• Receive share certificates or any other documentary evidence of investment in the foreign JV / WOS as an evidence of investment and submit the same to the designated AD within 6 months.
• Expel to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical fees, etc.
• Submit to the Reserve Bank through the designated Authorized Dealer, every year, an Annual Performance Report.
• Report on the details of the decision taken by a JV/WOS on diversification of activities and change in a shareholding pattern within 30 days of the approval.
• In case of disinvestment, sale proceeds of shares/securities shall be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares and documentary confirmation to this effect shall be submitted to the Reserve Bank through the designated Authorised Dealer.