In the Previous Article, we looked at various definitions related to Overseas Direct Investments done from India and also how it can be done via Direct Route without any approval from government authorities. We are covering the requirements and procedures for approvals required for Overseas Direct Investment.

Q. What is Approval Route?

All activities which are not covered under the automatic route, require prior Government approval.

Q. How to forward the proposal for making Overseas Direct Investment (ODI) under approval route?

The applicant should approach their designated Authorized Dealer (AD) with the proposal which shall be submitted to Reserve Bank after due scrutiny and with the specific recommendations of the designated AD bank along with supporting documents.

The designated AD before forwarding the proposal should submit the Form ODI in the on-line OID application under approval route and the transaction number generated by the application should be mentioned in the letter.

In case the proposal is approved, the AD bank should effect the remittance under advice to Reserve Bank so that the UIN is allotted.

Q. What are the parameters RBI are applied while examining the application?

a) Prima facie viability of the JV / WOS outside India;
b) Contribution to external trade and other benefits which will accrue to India through such investment;
c) Financial position and business track record of the Indian party and the foreign entity; and
d) Expertise and experience of the Indian party in the same or related line of activity as of the JV / WOS outside India.

Q. What are the permissible sources for funding overseas direct investment?

Funding for overseas direct investment can be made by one or more of the following sources:

i. Withdrawal of foreign exchange from an AD bank in India.
ii. A swap of shares (refers to the acquisition of the shares of an overseas JV / WOS by way of exchange of the shares of the Indian party).
iii. Capitalization of exports and other dues and entitlements.
iv. Proceeds of External Commercial Borrowings / Foreign Currency Convertible Bonds.
v. In exchange of ADRs / GDRs issued in accordance with the Scheme for an issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued by Government of India in the matter.
vi. Balances held in Exchange Earners Foreign Currency account of the Indian Party maintained with an Authorized Dealer.
vii. Proceeds of foreign currency funds raised through ADR / GDR issues.

Q. Restructuring of the balance sheet of the overseas entity involving write off of capital and receivables

In order to provide more operational flexibility to the Indian corporates, the Indian promoters who have set up WOS abroad or have at least 51 per cent stake in an overseas JV, may write off capital (equity/preference shares) or other receivables, such as, loans, royalty, technical know-how fees and management fees in respect of the JV /WOS, even while such JV /WOS continues to function as under:

(i) Listed Indian companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV /WOS under the Automatic Route; and
(ii) Unlisted companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV /WOS under the Approval Route.

The write-off / restructuring have to be reported to the Reserve Bank through the designated AD Category-I bank within 30 days of write-off/ restructuring. The write-off / restructuring is subject to the condition that the Indian Party should submit the following documents for scrutiny along with the applications to the designated AD Category –I bank under the Automatic as well as the Approval Routes:

a) A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party; and
b) Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring.

Q. Can an Indian Party extend loan or guarantee to an overseas entity without any equity participation in that entity?

Ans: No.

(i) Loan and guarantee can be extended to an overseas entity only if there is already an existing equity / CCPS participation by way of direct investment.

However, based on the business requirement of the Indian Party and legal requirement of the host country in which JV/WOS is located, proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS may be considered by the Reserve Bank under the approval route.

In case, however, the overseas entity is a first level step down operating subsidiary of the Indian party, the guarantee may be issued by the Indian party on behalf of such step down operating subsidiary provided such guarantee is reckoned for the purpose of computing the total financial commitment of the Indian party.

In case, the overseas entity is a second or subsequent level step down operating subsidiary of the Indian party, guarantee may be issued by the Indian party on behalf of such step down operating subsidiary with prior approval of the Reserve Bank provided such Indian party holds indirect stake of not less 51% in the step down operating subsidiary and guarantee is reckoned for the purpose of computing the financial commitment of the Indian party.

ii) Eligible Indian companies are allowed to participate in a consortium with other international operators to construct and maintain submarine cable systems on the co-ownership basis under the automatic route.

Q. What are the different modes of disinvestments from the JV / WOS abroad?

Disinvestment by the Indian party from its JV / WOS abroad may be by way of transfer/sale of equity shares to a non-resident/resident or by way of liquidation/merger/amalgamation of the JV / WOS abroad.

(a) Can an Indian Party disinvest from JV / WOS not involving write off?

Yes, the Indian Party may disinvest without write off under the automatic route subject to the following:

i. the sale is effected through a stock exchange where the shares of the overseas JV/ WOS are listed;
ii. if the shares are not listed on the stock exchange and the shares are disinvested by a private arrangement, the share price is not less than the value certified by a Chartered Accountant / Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the JV / WOS;
iii. the Indian Party does not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and/or export proceeds from the JV or WOS;
iv. the overseas concern has been in operation for at least one full year and the Annual Performance Report together with the audited accounts for that year has been submitted to the Reserve Bank;
v. Indian party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India;
vi. and other terms and conditions prescribed under Regulation 16 of the Notification ibid.

(b) Can an Indian Party disinvest from JV / WOS involving write off?

Yes, an Indian Party may disinvest, under the automatic route, involving write off in the under noted cases:

a. where the JV / WOS is listed in the overseas stock exchange;
b. where the Indian Party is listed on a stock exchange in India and has a net worth of not less than Rs.100 crore;
c. where the Indian Party is an unlisted company and the investment in the overseas JV / WOS does not exceed USD 10 million; and
d. where the Indian Party is a listed company with net worth of less than Rs.100 crore but investment in an overseas JV/WOS does not exceed USD 10 million.

Indian party needs to not only comply with conditions mentioned above not involving write off but also some additional pre-conditions/compliances subject to which such write off at the time of disinvestment is permitted.

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