M&A Critique


What is direct investment outside India?

Direct investment outside India means investments, either under the Automatic Route or the Approval Route, by way of

  1. Contribution to the capital or
  2. Subscription to the Memorandum of a foreign entity
  3. Purchase of existing shares of a foreign entity either by market purchase or private placement or through a stock exchange, signifying a long-term interest in the foreign entity (Joint Venture JV or Wholly-Owned Subsidiary WOS).

Who are eligible to make an overseas direct investment under the Automatic Route? Who is an “Indian Party”?

Ans:  An Indian Party is eligible to make an overseas direct investment under the Automatic Route.

An Indian Party is a

  1. Company incorporated in India or a body created under an Act of Parliament
  2. A partnership firm registered under the Indian Partnership Act 1932
  3. A Limited Liability Partnership (LLP) incorporated under the LLP Act, 2008
  4. Any other entity in India as may be notified by the Reserve Bank.
  5. When more than one such company, body or entity makes an investment in the foreign JV / WOS, such combination will also form an “Indian Party”.

What are the sectors in which overseas investment is not permitted?

Real estate sector is the prohibited sector for overseas investment by an Indian party.  In banking and financial services sector, only banks and finance company as the case may be can set up JV/WOS abroad in their respective areas provided they obtain clearance under the Banking Regulation Act 1949/ fulfills RBI norms as the case may be.

What are the routes for making investment outside India?

  1. Automatic Route

  2. Approval Route

What is the procedure to be followed by an Indian party to make an overseas direct investment in a JV/WOS under the Automatic Route?

Ans:  Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments in a JV/WOS abroad.

The Indian Party intending to make overseas direct investment under the automatic route is required to fill up Overseas Direct Investment (ODI)  form  duly supported by the documents listed therein, i.e., certified copy of the Board Resolution, Statutory Auditors certificate and Valuation report (in case of acquisition of an existing company) as per the valuation norms and approach an Authorized Dealer (designated Authorized Dealer) for making the investment/remittance.

Once the report of remittance inform ODR is received by the Reserve Bank through the designated Authorised Dealer, a Unique Identification Number (UIN) for that particular investment is issued for the purpose of future reference. Subsequent investment in the same project will be permitted to be made only after allotment of the identification number.

The only requirement is that regardless of the number of promoters, one JV/WOS will have only one ‘designated Authorised Dealer’ to route all its transactions

What are the limits and requirements for overseas direct investment/ financial commitment to be made under the Automatic Route?

The criteria for overseas direct investment under the Automatic Route is as under:

General requirement

The Indian party is not on the Reserve Bank caution/defaulters list or under investigation by the Enforcement Directorate

Monetary Requirement

The Total financial Commitment of the Indian Party in Joint Ventures/Wholly owned Subsidiaries in any country whichever is lower, and the investment is in a lawful activity permitted by a host country other than Nepal, Bhutan and Pakistan is up to US$ 100 million or its equivalent in any one financial year or 100% of the net worth whichever is lower, and the investment is in a lawful activity permitted by a host country

The prescribed limit vis-a-vis the net worth will not be applicable where the investment is made out of balances held in the Exchange Earners’ Foreign Currency Account (EEFC) account of the Indian party or out of funds raised through American depository receipts(ADRs)/ Global depository receipts (GDRs).

Procedural Requirement

The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an authorized dealer to be designated by the Indian Party.

What is total financial Commitment?

Financial commitment means a number of direct investments outside India by an Indian Party

  1. by way of contribution to equity shares or Compulsory Convertible Preference Shares (CCPS) of the JV / WOS abroad
  2. contribution to the JV / WOS as preference shares (for reporting purpose to be treated as a loan)
  3. as loans to its the JV / WOS abroad
  4. 100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS Subject to equity participation
  5. 50% of the amount of performance guarantee issued on behalf of its overseas JV/WOS, prior RBI approval required in case of invocation.
  6. bank guarantee/standby letter of credit issued by a resident bank on behalf of an overseas JV / WOS of the Indian party, which is backed by a counter guarantee/collateral by the Indian party
  7. Creation of charge (pledge/mortgage/hypothecation) on the movable/immovable property or other financial assets of the Indian party / its group companies

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

Ans An Indian Party will have to comply with the following: –

  1. 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;
  2. Repatriate to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical fees etc.;
  3. Submit to the Reserve Bank through the designated Authorized Dealer, every year, an Annual Performance Report in Part III of Form ODI in respect of each JV or WOS outside India set up or acquired by the Indian party.
  4. Report the details of the decisions taken by a JV/WOS regarding diversification of its activities /setting up of a step down subsidiaries/alteration in its shareholding pattern within 30 days of the approval of those decisions by the competent authority concerned of such JV/WOS in terms of the local laws of the host country. These are also to be included in the relevant Annual Performance Report; and
  5. In a 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 /securities and documentary evidence to this effect shall be submitted to the Reserve Bank through the designated Authorised Dealer.

What is Annual Performance Report?

Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the Annual Performance Report (APR) may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS provided:

  1. The Statutory Auditors of the Indian party certifies that ‘The un-audited annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS’ and
  2. That the un-audited annual accounts of the JV / WOS have been adopted and ratified by the Board of the Indian party.

Delayed submission/ non-submission of APRs entail penal measures, as prescribed under FEMA 1999, against the defaulting Indian Party.

Approval route & other provision related to Overseas Direct Investment will look in the next article.

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Prajakta Deshpande