1. Outbound Investments February 21, 2015 12.15 p.m. to 1.30 p.m.by
Cyril Shroff
Managing Partner
Amarchand & Mangaldas & Suresh A. Shroff & Co.
Peninsula Chambers, Peninsula Corporate Park,
Ganpatrao Kadam Marg, Lower Parel, Mumbai
Tel: (91-22) Fax:(91-22)
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2. About Amarchand Mangaldas
India’s Leading and Largest Law Firm
Over 650 lawyers including 82 partners
Presence in 8 major cities in India - new office in Gurgaon
Over 95 years of experience
Full service offering
Consistently Voted as One of the Top Law Firms in Asia Pacific
IFLR Asia Awards - National Law Firm of the Year (India) for 2014, & 2012
ALB SE Asia Law Awards - India Deal Firm of the Year for 2014, 2013, 2012 & 2011
Acritas’ Elite Law Firm Brand Index – 4th in Asia Pacific & 20th Globally for 2014
Asian Legal Business – 10th Largest Firm in Asia 2014
The Lawyer Asia Pacific - Ranked 13th in Asia Pacific Top 100 Independent Law Firms for 2014
Asian Legal Business Employer of Choice for 2014 & 2013
IBLJ Indian Law Firm Awards – Law Firm of the Year & Best Overall Law Firm for 2013, 2012 & 2011
RSG India - Ranked 1 amongst India’s Top 40 Law Firms for 2013, & 2011
Leading clients include domestic and foreign commercial enterprises, financial institutions, leading private equity funds and venture capital funds as well as state and regulatory bodies
New Delhi A
Gurgaon
Kolkata A
Ahmedabad A A
Mumbai A
Hyderabad
Bangalore A A
Chennai
Consistently been rated as top ranked law firm in India by various professional organizations
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3. Mr. Cyril Shroff Cyril Shroff Managing Partner
Cyril is a leading practitioner in the field of corporate and securities law and has been associated with a significant number of high-profile and complex mergers and acquisitions and securities market transactions by Indian issuers
Cyril has over 30 years of experience in a wide range of areas including corporate, mergers & acquisitions, capital markets, infrastructure and others
Cyril has been consistently rated as India’s leading lawyer in most practice areas by several international surveys including those conducted by International Financial Law Review (IFLR), Euromoney, Chambers Global, Asia Legal 500, Asia Law and others
Cyril has authored several publications on legal topics and has written many articles. He is a member of the Centre for Study of the Legal Profession established by the Harvard Law School (HLS)
Cyril is a full member of the Society of Trust Estate Practitioners. He is also the only member from India in the International Academy of Estate and Trust Law.
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4. Overview Introduction
Investing in Companies Overseas – What are the laws?
Establishing Overseas Branch Office
Liberalized Remittance Scheme (LRS)
Recent Developments and Issues
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5. Introduction
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6. Introduction Liberalization Phase I – 1992 to 1995
‘Automatic route’ for overseas investments introduced
Cash remittances permitted for the first time
Value restricted to US$ 2 million, with cash component not exceeding US$ 0.5 million, in a block of 3 years
Phase II – 1995 to 2000
Policy framework laid down – Creation of Fast Track Route
Limits raised to US$ 4 million and linked to average export earnings of the preceding 3 years
Cash remittances continued to be restricted to US$ 0.5 million
Beyond US$ 4 million – Approval of committee consisting of members from RBI, MoF, MoEA and MoC
Beyond US$ 15 million – Considered by MoF + Special Committee
Indian promoters allowed to set up 2nd and subsequent generation companies, provided first generation company set up under Fast Track Route
Neutrality condition done away with in 1999
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7. Introduction Trend Analysis – 2000 till date
Phase III – 2000 till date
Scope of outward investments increased considerably pursuant to FEMA
In 2002, per annum upper limit for automatic approval raised to US$100 million
In 2003, investment limit was 100% of net worth , and gradually increased to 400% of net worth
ECB policy modified and funding of JV/ WOS abroad included as permissible end-use
Capital control measures introduced in 2013, but reversed in 2014
Trend Analysis – 2000 till date
Level of ODI has increased manifold since 1999 – 2000
Sharp uptrend at US$ 74.3 billion recorded during 2nd half of 2000s, compared to US$ 8.2 billion in the 1st half of 2000s
Trend moderately affected during 2009 – 2010 crises; however, rebound seen in 2010 – 2011; may have been affected again in 2013 – 2014
January, 2015 – US$ 2.05 billion; down from US$ 7.3 billion invested in January, 2014
June to December, 2014 – US$ 11.8 billion
India’s share in total developing economy ODI increasing continuously since 2005
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8. Introduction India Inc looking abroad
Overseas assets – source of raw materials, research and technology (primarily IP), base for untapped developing markets and diversification of revenue streams
Acquisition not restricted to developing markets – includes developed markets as well
Desire to compete globally
Increased foreign currency revenues
Easy accessibility to finance and low cost of debt capital – global economic downturn / increased appetite of Western countries for M&A
Mid level firms also seeking to acquire assets abroad
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9. Investing in Companies Overseas
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10. Investing in Companies Overseas – What are the Laws?
Foreign Exchange Management Act, 1999
Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (FEMA 120)
Master Circular on Direct Investments by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) abroad, dated July 1, 2014
RBI Master Circular on Guarantees and Co-Acceptances, dated July 1, 2014
NBFC (Opening of Branch, Subsidiary, JV, Representative Office or Undertaking Investments Abroad by NBFCs) Directions, 2011
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11. Investing in Companies Overseas
Automatic route v. Approval route
Who can invest?
Until recently only companies and registered partnerships could invest
LLPs now included in ‘Indian Party’ definition
Resident individuals permitted to invest in JV/ WOS overseas – interplay with LRS
Unregistered partnerships and proprietorships permitted under Approval Route
Registered societies and trusts engaged in manufacturing/ educational/ hospital sector may invest in same sector, under Approval Route
Conditions for equity investment
Total financial commitment of Indian company – limit reinstated to 400% from 100% in July, 2014
Financial commitment not to exceed US$ 1 billion under automatic route
JV/WOS to be engaged in bona fide business activity
Indian party not to be on RBI’s exporters caution list or defaulters list or under investigation by any investigation/ enforcement agency or regulator
Annual performance report filed
Transactions relating to the investment to be done through one branch of an AD
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12. Investing in Companies Overseas
Overall Acquisition Ceiling = 4 X Net Worth – total financial commitment already incurred, subject to cap of US$ 1 billion
Calculating total financial commitment
400% of the amount of equity shares; preference shares; loans; guarantees (including 3rd party bank guarantees, but excluding performance guarantees (50% ))
Investments through SPVs – Permitted (Impact of S. 186 of the Companies Act, 2013)
Post investment
JV/ WOS permitted to diversify its activities/ set up step down subsidiaries/ alter its shareholding pattern
Further acquisitions by JV/ WOS can be funded from accruals offshore
Portfolio investments by listed Indian companies
Listed Indian companies permitted to invest up to 50% of net worth in shares and bonds / fixed income securities, issued by listed overseas companies
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13. Investing in Companies Overseas
Valuation
Category I Merchant Banker registered with SEBI or an Investment Banker/ Merchant Banker registered with appropriate regulatory authority in the host country for investment, when:
Higher than US$ 5 million
By swap of shares (with prior FIPB approval)
In all other cases, valuation to be done by Chartered Accountant or Certified Public Accountant
ODI by NBFCs
RBI approval required for overseas JV/ WOS/ representative office/ other investments
Additional conditions
Multi layered, cross jurisdictional structures – specifically prohibited
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14. Investing in Companies Overseas
Sensitive Sectors
ODI in real estate business (buying and selling of real estate or trading in TDRs) and banking business prohibited
Additional compliances – investment in financial services sector
Conditions
Register with the regulatory authority in India for financial sector activities
Earned profit in preceding 3 financial years from financial services activities
Obtained approval from relevant Indian and overseas regulator
Capital adequacy requirement complied with
Conditions to be complied with for each step-down subsidiary
Conditions also applicable to regulated entities in financial services sector in India investing in any sector overseas
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15. Guarantees and Access to Debt Capital Overseas
Guarantees by Indian parties (subject to net worth limit)
JV/ WOS – guarantees permitted
First level operating step down – irrespective of whether direct JV/ WOS is established as SPV or operating company, guarantee permitted
Second level/ subsequent level step down operating subsidiaries – guarantee permitted if:
prior approval of RBI procured
Indian party holds at least 51% in the subsidiary indirectly
Financing investments – 3rd party credit enhancement
Guarantees/ LOC/ SBLC issued by Indian banks for overseas investments
LOC/ SBLC issued by AD on behalf of the Indian borrower with respect to its JV/ WOS/ first level step down permitted (subject to net worth limit)
Faster and cheaper access to finance – leveraging Indian balance sheets for financing abroad
Credit enhanced – offshore financing transactions now becoming a reality
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16. Guarantees and Access to Debt Capital Overseas
Pledge of shares
Indian party can pledge shares of JV/ WOS/ step-down subsidiary overseas to domestic or overseas lender for availing credit facility (funded and non-funded) for itself or group companies or for JV/ WOS/ step-down subsidiary overseas
Liberalized in December, 2014 – includes pledge of shares of step-down subsidiaries
Value of facility included in financial commitment of Indian party
Creation of charge on assets
Approval route until December, 2014
Indian party can now create a charge under automatic route on its assets in favour of an overseas lender for availing credit facility (funded and non-funded) for its JV/ WOS/ step-down subsidiary overseas
Indian party can now create a charge under automatic route on the assets of its overseas JV/ WOS/ step-down subsidiary in favour of an AD bank in India as security for availing of facilities for itself or its JV/ WOS/ step-down outside India
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17. Structuring Options: Investor Profile
Case Study Profile
The Patels are an Indian family – comprising of Father, Mother and 2 sons – Son 1 and Son 2. Patels are promoters of a conglomerate that is primary based in India, with interests in the manufacturing, steel, energy sectors
Son 1 is engaged in the business. Son 2 is currently a UK resident
The flagship company of the Patel Group is contemplating acquisition of a mid-sized steel processing business in the UK
The family members are contemplating acquisition of a BPO company in the UK, as an investment by the family
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18. Structuring Options: Acquisition of Steel Co
Acquisition of shares of offshore target company to be in accordance with FEMA 120
Investment can be up to 400% of the ‘net worth’ of the Indian entity – subject to cap of US$ 1 billion
Valuation Report – Chartered Accountant or Category I Merchant Banker (depending on value)
Remittance through an Authorized Dealer
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19. Structuring Options: Acquisition of Steel Co
Direct investment unfavourable
May be routed through an overseas SPV
Tax Benefits (accumulation overseas)
Leveraging on group strength to raise finance
Borrowing of funds at the SPV level
Foreign exchange fluctuation risk mitigated
However, CFC implications under proposed Direct Taxes Code will require consideration
Indian Party
Equity and Preference
UK Target Company
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20. Structuring Options: Acquisition of Steel Co
Factors to consider when choosing location for SPV
Low/ nil withholding tax on dividend and interest
Low/ nil income tax and capital gains tax on exit
Favourable tax treaty with Target and Indian Party
Capitalization norms
Favorable Jurisdictions – Singapore, Mauritius, the Netherlands, etc
Use of SPVs for investment in the UK
Indian Tax Laws
Dividend received from Singapore SPV taxable in 15%
Redemption of preference shares at par not subject to tax in India
Indian Party
Counter Guarantee by Indian Parent
Equity and
Preference
(Operating / SPV)
Singapore SPV
Borrowings
(Operating / can not be holding company)
Equity
UK Target Company
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21. Structuring Options: Acquisition of BPO Co
Possible to now acquire 100% of shares of the BPO company under LRS
Father, Mother and Son 1 can combine remittances under LRS
Total remittance – US$ 375,000
Son 2 cannot remit under LRS, as non-resident
Mandatory to invest directly into the BPO Co – no SPVs permitted
No step-down subsidiaries allowed under LRS
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22. Key Tax Considerations
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23. Key Tax Considerations
Profit repatriation#
Reduced rate of for dividends from overseas subsidiary (shareholding of 26% or more)
Transfer pricing issues
Indian holding companies required to charge guarantee fees at arms length (Indian corporate tax rate – 30%)
The remittance to overseas subsidiary is loan, not equity – thus, interest earnings on deemed loans to be taxed in India
Benefits / advantages for overseas hold co/ regional hold co
Income from target company – taxed in India only when remitted to India – income accumulation in overseas hold co pre-Indian tax permitted
Minimum tax leakage – consider tax benefits for dividend, interest and capital gain between hold co jurisdiction and target company jurisdiction, including the beneficial provisions contained in the relevant tax treaties
# Surcharge and education cess additional
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24. Key Tax Considerations
Going Forward
Controlled Foreign Company Rules under the proposed Direct Tax Code
Passive income earned by an overseas subsidiary, controlled directly or indirectly, by Indian resident shall be charged to tax, even if such income is not distributed to shareholders in India
Place of Effective Management under the proposed Direct Tax Code
Foreign company regarded as resident in India if at anytime in the year its POEM is in India (based on where BoD/ executive directors make commercial and strategic decisions)
General Anti-Avoidance Rules – Expected to be postponed
No clarity on the fate of DTC
Can mitigate risk through appropriate structuring, strong commercial rationales and substance
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25. Establishing Overseas Branch Offices
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26. Establishing Overseas Branch Offices
Under FERA: Regulated by Chapter 9 of Exchange Control Manual issued by RBI
No specific regulations or guidelines under FEMA Regime
Section 1(3) of FEMA – Provisions apply to all branches, offices and agencies outside India owned or controlled by a person resident in India
Section 2(iv) of FEMA - a ‘Person Resident in India’ includes “any office, branch or agency outside India owned or controlled by a person resident in India”
For setting up and operations of overseas branch offices, companies need to open bank account in such jurisdiction
Regulation 7(4A) of FEM (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000 read with Master Circular on Export of Goods and Services, July 1, 2014 – Permits opening of a foreign currency account with a bank outside India by an Indian entity, its overseas branch or representative posted outside India
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27. Establishing Overseas Branch Offices
Conditions include:
Branch is set up for normal business operations
Remittances (for initial expenses and recurring expenses) made to all such accounts in an accounting year to be within specified ceilings, unless remittance out of EEFC Account or if overseas branch is set up by 100% EOU, or a unit in export processing zone, hardware/ software technology park (within 2 years of establishment)
Such branch should not enter into contract or agreement in contravention of FEMA
Branch should not create any financial liabilities, contingent or otherwise, for the head office in India
Branch should not invest surplus funds abroad without prior approval of RBI
Details of bank accounts opened overseas to be promptly reported to the AD Bank
Some AD Banks continue to require submission of Form OBR (issued under the erstwhile FERA regime) at the time of remittance for opening an overseas branch
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28. Liberalized Remittance Scheme
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29. Liberalized Remittance Scheme
Introduced in 2004
Available only to resident individuals
Limit reduced from US$ 200,000 to US$ 75,000 in 2013 – Increased to US$ 125,000 per financial year in 2014
RBI Sixth Bi-Monthly Monetary Policy (released in February, 2015) – proposed increase of limit to US$ 250,000
Scheme available for minors
Consolidation of LRS remittances of family members permitted
Residents can open, maintain and hold foreign currency accounts with a bank outside India
Permitted to retain, reinvest the income earned on the investments overseas
Jurisdictional restrictions – Facility not available for direct or indirect remittances to:
Bhutan, Nepal, Mauritius and Pakistan
Countries identified by Financial Action Task Force as non-co-operative countries and territories
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30. Liberalized Remittance Scheme
End-use
Permitted current and/ or capital account transactions
Acquisition of shares, debt instruments, units of mutual funds, venture capital funds, unrated debt securities, promissory notes, acquisition of ESOPs
Rupee gift/ loan to a NRI /PIO, who is a close relative
Acquisition of immovable property
Prohibited in 2013 – Permitted again in 2014
Acquisition of JV/WOS overseas
Lack of clarity until August, 2013
Permission available under LRS, but not under FEMA 120
Numerous instances of compounding
W.e.f. August 1, 2013 individuals permitted to set up JV/WOS abroad
Linked to FEMA 120
Permission only to set up operating companies
No step-down subsidiaries permitted
Sectoral restrictions same as that on Indian companies, and includes financial services
Welcome move, but pragmatic?
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31. Recent Developments and Issues
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32. Recent Developments and Issues
RBI’s capital control measures – 2013
INR v. USD – Rupee’s free fall
August, 2013
Total financial commitment of Indian party for JV/ WOS reduced from 400% to 100% of total net worth
Exceptions - Financial commitments made on or before August 14, 2013
LRS limits reduced to US$ 75,000 per financial year
Reversal of capital control measures – 2014
ODI – 400% limit reinstated, albeit with condition
LRS limit – Increased to US$ 125,000
Recent proposal for increase to US$ 250,000 per financial year
Individuals permitted to set up JV/ WOS overseas
Creation of charges on shares of JV/ WOS/ Step down subsidiaries, domestic assets in favour of overseas lenders, overseas assets in favour of domestic lenders – liberalized in 2014
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33. Recent Developments and Issues
Emerging issues in ODI
Use/ abuse of multilayered structures
Two levels SPVs or structures involving Hold Co-Op Co-Hold Co structure permitted?
“Matter under consideration” per RBI circular of December 29, 2014
NBFC exception – specific prohibition on multi-layered structures (June, 2011)
Section 186(1) of Companies Act, 2013
RBI’s round tripping concerns
Investments in financial services
Requirement to procure approval of overseas regulator for each investment
Stock swap deals not easy – FIPB approval mandatory
Impact on timelines
Increased disclosure requirements under Clause 36 of Listing Agreement – applicable only to listed companies
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34. Recent Developments and Issues
Cross border mergers – Companies Act, 2013
Indian companies now permitted to merge into foreign companies, with resulting company being a foreign company
Prior RBI approval required
Concept of notified territories made applicable to inbound and outbound mergers
Provision not yet notified by MCA –1956 Act stands as of today
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35. Questions?
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36. © Amarchand & Mangaldas & Suresh A. Shroff & Co.
Thank You
© Amarchand & Mangaldas & Suresh A. Shroff & Co.
Mumbai, February 2015
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