Overseas Direct Investment Sunil Kumar Director EY

Overseas Direct Investment Sunil Kumar Director EY

Agenda 1 Overview of FEMA 2 Overseas Direct Investments 3 Key updates/ related issues 4 Compounding orders Page 2 Overseas direct investments

Overview of FEMA Page 3 Overseas direct investments

Overview of FEMA- Framework FEMA* (Governed by RBI in consultation with Central Government) Rules (framed by Central Government) Regulations/Notifications# Master circulars*- Compilation (framed by RBI) of procedural directions [known as A. P. (DIR) Circulars] Further amended through RBI also issues notifications issued by RBI, clarification in the form of which amends base FAQs on different subjects regulations which may be referred to for guidance purposes *Now known as Master Direction *FEMA repealed FERA- Emphasis shifted to management rather than control # e. g. , Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 also known as FEMA 120 as these regulations were notified vide notification No. FEMA 120/2004 -RB, GSR 757(E), DATED 7 -7 -2004 Page 4 Overseas direct investments

Determine whether transaction is Capital or a Current Account Transaction? Capital Account - Transactions which are of capital account in nature are generally restricted unless specifically permitted Current Account - Transactions which can be categorized as current account transactions are generally permitted unless restricted Capital Account • Current Account A transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India and includes transactions referred as under: • • A transaction other than a capital account transaction Includes following payments/ remittances – • foreign trade, other current business, services • Transfer/ Issue of foreign security by an Indian resident short-term banking and credit facilities in the ordinary course of business, • interest on loans • Transfer/Issue of security by a non-resident • • Borrowing/ lending in foreign exchange/ INR Due as interest on loans and net income from investments, • Deposits • • Cross border transactions in immovable properties living expenses of parents, spouse and children residing abroad, • Giving guarantees to non-residents/ in connection with cross border liabilities • foreign travel, education and medical care of parents, spouse and children • Page 5 Overseas direct investments

Applying FEMA on transaction ► Current or capital/ residency - proceed accordingly CAPITAL ACCOUNT TRANSACTION FDI -FEMA 20 read with master circular -FDI policy read with press notes Page 6 ODI -FEMA 120 read with master direction & FAQs on ODI issued by RBI CURRENT ACCOUNT ECB -FEMA 3 read with master direction & FAQs issued by RBI Overseas direct investments Export/Import of goods & services - FEM(Current Account Transactions) Rules, 2000 -Master direction on Export and Import

Overseas Direct Investment Page 7 Overseas direct investments

Overseas Direct Investment ► RBI provide framework for investment in foreign entities by residents. Some of the important definitions are provided below: ► "Direct investment outside India" means investment by way of contribution to the capital or subscription to the Mo. A of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment ► "Indian party" 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 or a Limited Liability Partnership (LLP) making investment in a JV or Wo. S abroad, and includes any other entity in India as may be notified by the Reserve Bank : Provided that when more than one such company, body or entity make an investment in the foreign entity, all such companies or bodies or entities shall together constitute the "Indian party" ► "Joint Venture (JV)" 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, registered or incorporated in accordance with the laws and regulations of the host country, whose entire capital is held by the Indian party: includes Venture Capital Fund (VCF), Trust, and Society, Page 8 Overseas direct investments

Overseas Direct Investment Automatic route- Indian Company & Partnership Firm – All sectors (bona-fide activity) except Real Estate and Banking – All countries except Pakistan- Rupee funding for Nepal and Bhutan – Financial commitment up to 400% of Net Worth Permissible sources of funding EEFC A/c ADR/GDR Balance Proceeds Rupee resources Share swap Proprietorship concern, unregistered partnership firm, Trust & Societies can invest with RBI approval. ECB proceeds Capitalization of export receivables/ other dues No limit Financial Commitment – 100 % Equity + 100 % convertible & other preference shares + 100% amount of Loan + 100% of guarantees (50% for performance guarantee) – Investment by resident Individuals under ODI Page 9 Overseas direct investments

Overseas Direct Investment Disinvestment by Indian Party in its overseas JV/WOS- Automatic route a) Transfer by way of sale of shares- Indian party may transfer its shares held in a JV/WOS outside India to another resident or person resident outside India subject to following conditions: i. It does not result in any write off of the investment made ii. sale is not less than fair value iii. Indian party does not have any outstanding dues from the JV/WOS iv. Overseas JV/WOS must be operating entity from atleast 1 year and APR along with audited accounts has been submitted v. The Indian party is not under investigation by any Indian regulatory authority b) Restructuring of the balance sheet of JV/WOS involving write-off of capital and receivables- Indian listed party who has set up or have atleast 51% stake in its JV/WOS abroad may write off capital and other receivables up to 25 per cent of the equity investment in the JV/WOS subject to the submission of following documents along with an application to AD banki. certified copy of the balance sheet showing the loss in the overseas JV/WOS ii. projections for next five years indicating benefit accruing to the Indian party consequent to such write off/restructuring NOTE: An unlisted Indian party who has set up or have atleast 51% stake in its JV/WOS abroad will require prior RBI approval to write off capital and other receivables up to 25 per cent of the equity investment in the JV/WOS Page 10 Overseas direct investments

Overseas Direct Investment Disinvestment by Indian Party in its overseas JV/WOS- Automatic route c) Transfer by way of Sale of Shares involving Write-off- where transfer by an Indian party is for a price less than the amount invested in the share or the security transferred, the Indian party can write off in the following situations: ► ► ► JV/Wo. S is listed Indian party is listed with net worth of over INR 100 cr Investment is less than USD 10 million In all the above mentioned cases, sale proceeds of shares/securities shall be repatriated to India within 90 days from the date of sale of the shares/securities. On disinvestment of JV/WOS abroad, Indian party can receive shares of overseas step-down subsidiary company as sales consideration and Indian party should report the same by filing Form ODI part III (for reporting disinvestment) and Form ODI Part I (for reporting investment) Page 11 Overseas direct investments

Overseas Direct Investment by resident Individuals a. Liberalized Remittance Scheme (LRS) by individuals up to USD 250, 000 per annum where- i. Acquiring shares of an existing foreign company as a passive investor and foreign company is not a WOS ii. Acquiring shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration (governed by Regulation 20 of FEMA 120), iii. Acquiring of qualification/right shares issued by foreign entity for holding the post of director (governed by Regulation 24 of FEMA 120), and b. General permission in case purchase/acquisition is out funds held in resident foreign currency accounts c. acquisition as bonus shares on existing holding of foreign currency shares d. out of their foreign currency resources outside India (when not permanently resident in India) e. Shares acquired when the individual was a non-resident Page 12 Overseas direct investments

Overseas Direct Investments in foreign securities other than by way of direct investment ► No person resident in India shall issue or transfer a foreign security subject to certain exceptions viz: i. by way of gift from a person resident outside India ii. issued by a company incorporated outside India under Cashless Employees Stock Option Scheme (ESOP scheme) i. e. does not involve any remittance from India iii. by way of inheritance from a person whether resident in or outside India iv. by a resident individual, who is an employee or a director of Indian office/BO/subsidiary of foreign company or of an Indian company in which foreign entity has direct or indirect equity holding Page 13 Overseas direct investments

Overseas Direct Investment RBI approval route – All other cases of direct investment (or financial commitment) abroad – Financial commitment exceeding USD 1 billion – Executing of remittance beyond the limit prescribed for the financial commitment – Indian party seeking to make investment in an entity outside India, which is engaged in the financial sector (Regulation 7) – Indian Parties which are under investigations – Capitalisation of export proceeds remaining unrealised beyond the prescribed period of realization – Deferment of investment (purchase consideration) in overseas JV/WOS Page 14 Overseas direct investments

Overseas Direct Investment Compliance checklist- Automatic and RBI route S. No. Prescribed Form Description/Purpose 1. ODI- Part I Section A – Details of the IP / RI Section B – Capital Structure and other details of JV/ WOS/ SDS Section C - Details of Transaction/ Remittance/ Financial Commitment of Indian party/ individual Section D – Declaration by the Indian party/individual 2. ODI- Part II Annual Performance Report (APR) 3. ODI- Part III Report on Disinvestment by way of closure/voluntary liquidation/ winding up/ merger/ amalgamation of overseas JV/WOS or Indian party, sale/transfer of shares, buy back of shares by overseas JV/WOS or Indian party 4. Reporting of overseas investment by VCF/AIF 5. Monthly reporting of Portfolio Investment and Overseas Investment by Mutual Fund 6. ESOP Reporting 7. Request Form for creation of user ID in the Overseas Investment application Page 15 Statement of shares allotted/repurchased to Indian employees/directors under ESOP scheme Overseas direct investments

Obligations of Indian Party File Form ODI with AD Bank at the time of remittance to invest in JV/Wo. S abroad Submit Form APR (Part II) to RBI every year on or before 31 st December each year Repatriate all dues (Dividend, Royalty, Technical Fees etc) within 60 days of its falling due Page 16 Obtain UIN for each subsidiary/JV established abroad and receive share certificate within 6 months Reporting to RBI within 30 days post investment changes Overseas direct investments

Key updates/ related issues Page 17 Overseas direct investments

Key updates- ODI Rationalization of Form ODI ► Earlier details pertinent to remittances and ► Entirely new reporting format in relation to financial commitment of Indian party was reporting of overseas investment by for VCF/ reported in Form ODI Part II, which now has AIF been subsumed within Part I of Form ODI ► AD banks to continue the existing format for Form ODI Part III now includes reporting of reporting the purchase and repurchase of disinvestment by way of buy back of shares by ► Employee Stock Option Purchase (ESOP) the overseas JV/WOS of the Indian party as ► An Indian party who has set up/acquired a one of the modes of disinvestment Self-certification by the Resident Individual Form ODI Part II to the AD bank in relation to concerned sufficient for Form ODI Part I each JV/WOS acquired overseas by 31 eliminating mandatory requirement for ► JV/WOS overseas shall submit APR in revised December every year statutory auditor/CA certification Page 18 Overseas direct investments

General issues ► Permissibility of Two-layer holding companies ► Overseas JV/WOS of Indian company having a Indian subsidiary- Round tripping ► Merger of overseas WOS into Indian Company ► Compliances of ODI guidelines on SDS/ JV ► ODI by residents – Reporting LRS+ODI ► Including Share Premium for calculation of Net Worth of Indian party ► Impairment of assets in case of JV/WOS abroad - Does such write-off require an approval? ► What is the definition of ‘financial sector’ Page 19 Overseas direct investments

Compounding orders- RBI Page 20 Overseas direct investments

Compounding orders- RBI Compounding order- 1 Company name: The Malayala Manorama Company Limited ► In this case, the contraventions sought to be compounded are (i) delay in filing Form ODI (ii) non-reporting of setting up of step-down subsidiary within the stipulated time period (iii) non-receipt of share certificates within the stipulated time period and non-submission of APR within the stipulated time period ► Amount of contravention- INR 18, 05, 76, 705. 8; Penalty levied- INR 13, 681 Compounding order-2 Resident individual: Debayan Banerjee ► Contravention sought by a resident individual who acquired 1760000 shares of a foreign company incorporated in US obtained by way of swapping the 59 shares of a foreign company incorporated in Switzerland without prior approval of RBI ► Amount of contravention- INR 9, 275; Penalty levied- INR 3, 000 Page 21 Overseas direct investments

Compounding orders- RBI Compounding order- 3 Company name: Binani Industries Limited ► In this case, the Company operates as a holding company for subsidiaries engaged in the manufacture of glass fibre products. The Company merged the transactions operations of its Indian subsidiary with its SPV in Luxembourg. Further the Company sold its stakeholding in Indian subsidiary to Luxembourg SPV thereby violating the provisions of Reg. 6(2)(ii) of FEMA 120 and is not bonafide business activity of the overseas SPV ► RBI stated the receipt of FDI under an ODI transaction is not a bonafide business activity permissible under the Automatic Route ► Amount of contravention- INR 155, 92, 33, 934; Penalty levied- INR 1, 01, 85, 000 Page 22 Overseas direct investments

Thank you

FEMA 120 - relevant provisions Annexure Regulation 7 - Investment by Indian Party engaged in Financial Services Sector An Indian Party engaged in financial services sector in India may make investment in an entity outside India subject to fulfilment of following conditions by Indian party: ► Earned net profit during the preceding three financial years from the financial services activities ► Registered with the regulatory authority in India for conducting the financial services activities ► Obtained approval from the concerned regulatory authorities both in India and abroad, for venturing into such financial sector activity ► Fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India NOTE: Any additional investment by an existing JV/WOS or its step down company in the Financial Services Sector shall be made only after complying with the above conditions Page 24 Overseas direct investments

FEMA 120 - relevant provisions Annexure Schedule V- Overseas Direct Investments by Resident Individuals Resident individual can acquire or set up JV/WOS abroad under Regulation 20 A subject to following conditions: ► JV or WOS abroad shall be engaged in bona fide business activity ► Prohibited from making direct investment in the countries identified by Financial Action Task Force (FATF) or in a company engaged in real estate business or banking business or in the business of financial services activity ► JV/WOS acquired shall be an operating entity only and no SDS is allowed to be acquired or set up by the JV/WOS ► Financial commitment by a resident individual to/on behalf of overseas JV/WOS other than the ODI is prohibited ► Resident individual shall not under investigation by any regulatory authority ► permissible ceiling shall be within the overall ceiling prescribed for the resident individual LRS Page 25 Overseas direct investments