Outward Foreign Direct Investment Policy (‘ODI’) – Basics of FEMA August 16, 2011 Vijay Gupta AICWA, FCS, FCA VKGN & Associates Chartered Accountants Mobile:

Index FEMA Regulations Eligible Options Eligible Indian Party Prohibited Activities Automatic Route Limits Financial Commitment Valuation norms/Charge Financial services sector Sources for Funding SPV Obligations Disinvestment Resident individual Indian Mutual Funds Investment in agriculture Liberalised Remittance Scheme

FEMA Regulations Regulation 2(e) of FEMA 120/ 2004-RB dated July 7, 2004 defines Direct Investment outside India as Investment by way of contribution to the capital or subscription to the Memorandum of Association 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. ODI does not include portfolio investment MASTER CIRCULAR entitled Direct Investment by Residents in JV/WOS Abroad dated July 1, 2010 Master Circular for opening Branch, Representative Office, JV, Subsidiary, Investment abroad by NBFC dated July 1, 2010 LIBERALISED REMITTANCE SCHEME FOR Resident Individuals

Office outside India By registered Firm, Company or Body Corporate Trading or non-trading office, branch and representative office For conducting normal business activities Remittance can be made to meet initial and recurring expenses. Withdrawal from EEFC not subject to ceiling.

JVs / WoS under ODI AUTOMATIC ROUTE APPROVAL ROUTE - ENGAGED IN ANY BONA FIDE BUSINESS ACTIVITY - For undertaking activities in financial services sector, certain additional conditions required.

PORTFOLIO INVESTMENT BY LISTED INDIAN COMPANIES - UP TO 50 % OF THEIR NET WORTH IN OVERSEAS COMPANIES, LISTED ON A RECOGNIZED STOCK EXCHANGE, OR BY WAY OF RATED DEBT SECURITIES

Eligible Indian Party Company, body corporate, registered partnership firm Investment in Pakistan is not allowed under Automatic route. Investments in Nepal can be only in Indian Rupees. Investments in Bhutan are allowed in Indian Rupees and in freely convertible currencies. Not on RBI’s exporters' caution list / list of defaulters

PROHIBITED ACTIVITIES Real estate business: buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges Banking business: Indian banks can after obtaining clearance DBOD, RBI

Automatic Route Limits Approach Authorized Dealer with Form ODI Financial services sector, prior approval is required from the regulatory authority concerned both in India and abroad UP TO 400 % OF NET WORTH as per the last audited Balance Sheet. Ceiling not applicable for EEFC account or out of funds raised through ADRs/GDRs. Net worth clubbed for its Indian subsidiary/holding company holding at least 51% stake, and letter of disclaimer.

Financial Commitment Equity, loans and 100% of the amount of guarantee and 50% of Performance Guarantees. Can e xtend loan or guarantee to only if equity participation Amount and period of guarantee specified upfront. Guarantee for first level step down operating JV/WoS set up by operating company or a SPV. Second generation and subsequent step down subsidiaries where holding at least 51% under Approval route.

Bank Branch Routes all transactions through only one branch of Bank. More than one Group company, same branch. Different branched for different JVs/WoS. Bank to file Part I (Sections A to D), II and III of form ODI on-line in with RBI for allotment of UIN, reporting of subsequent remittances, filing of APRs, etc.

Valuation norms/Charge Partial / full acquisition: More than USD five million - SEBI Category I Merchant Banker or Investment Banker/Merchant Banker outside India; and in all other cases by CA/CPA Swap Of Shares, irrespective of amount, by SEBI Category I Merchant Banker or Investment Banker/Merchant Banker outside India (Not CA). Create a charge on immovable property or pledge shares of Indian party: Prior permission of the Reserve Bank

GENERAL PERMISSION: RESIDENTs IN INDIA For Purchase / Acquisition of Securities: a. Out of funds held in the RFC account; b. As bonus shares c. When not permanently resident in India (duration in India does not exceed 3 years), from the foreign currency resources outside India To sell the shares so purchased or acquired.

Approval route Prior approval of RBI through AD Bank In energy and natural resources sector exceeding 400% of the net worth Overseas Unincorporated entities in oil sector by resident corporate exceeding 400% of net worth Navaratna Public Sector Undertakings, ONGC Videsh Ltd and Oil India Ltd are allowed to invest in overseas unincorporated entities in oil sector (i.e. for exploration and drilling for oil and natural gas, etc.), which are duly approved by the Government of India, without any limits, under automatic route

Contd…. 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

Parameters Prima facie viability of the JV / WOS outside India Likely contribution to external trade and other benefits that may accrue to India and business track record of the Indian party Foreign entity, experience and expertise of the Indian party in the same or related line of activity of the JV / WOS outside India

Financial services sector Only Indian company engaged in financial services sector activities Earned net profit in preceding three financial years from financial services activities Registered as NBFC Comply with Master Circular Guidelines for opening Branch, Representative Office, JV, Subsidiary, Investment abroad

Contd…. Obtained approval both in India and abroad before venturing into such financial activity Fulfilled the prudential norms relating to capital adequacy Trading in Overseas Commodities Exchanges: Reckoned is financial services activity, and clearance from Forward Markets Commission

Sources for Funding Drawal of foreign exchange from Bank in India. Swap of shares ( prior approval of FIPB for the inward leg of the investment) Capitalization of exports, fees, royalties or any other dues from the foreign entity for supply of technical know-how, consultancy, managerial and other services. Through the proceeds of External Commercial Borrowings / Foreign Currency Convertible Bonds In exchange of ADRs / GDRs Exchange Earners Foreign Currency account (not counted for ceiling) Proceeds raised through ADR / GDR issues (not counted for ceiling) Indian software exporters: Permitted to receive 25 % of the value of their exports in form of shares, with the prior approval of the Reserve Bank.

SPV No restrictions for setting up of a second generation company SPV for sole purpose of investment in JV/WOS overseas and not in India All funding to operating subsidiary routed through SPV only Shares of a JV/WOS abroad pledged : For availing fund based or non-fund based facility for itself or for JV/WOS, from an authorised dealer/ public financial institution in India or from an overseas lender

Pledge of Shares of JV/WOS Pledge of shares of overseas company permitted to: Indian Bank / public financial institution for loan for Indian party itself or for the JV/ WOS abroad. Overseas Lender subject to: The lender being regulated and supervised as a bank total financial commitments of the Indian party remaining within the limit stipulated by RBI for overseas investments

Guarantees Indian entities (promoter, group or associate company) permitted to offer guarantee ( corporate / personal / primary / collateral etc.) provided: Indian entity has equity participation in Foreign Company Percentage computed towards 400% ceiling: 50 % of the amount of the performance guarantee 100% of the amount for all other guarantees No guarantee is 'open ended ' Time specified for completion of contract is the validity period of performance guarantee Corporate Guarantee on behalf of First level down subsidiary is under Automatic Route ( operating Company or SPV ) Corporate Guarantee to Second level or subsequent level subsidiary under Approval level subject to the Indian party holding at least 51% or more directly or indirectly Report in Form ODI-Part II to be submitted to RBI RBI approval required for creating charge on immovable property / pledge of shares in favour of non-resident entity Prior approval of RBI required before remitting funds in case on invocation of the performance guarantee results in breach of the 400% limit.

Obligations Receive share certificates or any other documentary evidence Repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc. Submit Annual Performance Report within 3 months of closing. Penalty for non submision Report the details regarding diversification of its activities / setting up of step down subsidiaries/alteration in its share holding pattern within 30 days

Disinvestment Conditions for automatic route for disinvestment: No write off of investment No outstanding dues such as dividend, royalty, technical know- how from JV / WOS Sale after > 1 full year of operations and APR for said year has been submitted Indian party is not under investigation in India Shares sold on a Stock Exchange or if unlisted, share price not less than value certified by CA/CPA based on latest audited balance sheet Sale proceeds repatriated to India not later than 90 days

Restructuring - Writing off Capital and other receivables Indian Promoters of a WOS or having a minimum 51% stake in foreign JV may write off capital or other receivables such as loans, royalty, technical knowhow fees and management fees even while the JV/WOS continues to operate as below Listed Indian companies can write off 25% - Automatic Route Unlisted Indian Companies can write off 25% - Approval route In both cases they need to submit: A certified copy of the balance sheet showing the loss in the overseas WOS/JV; and Projections for the next five years indicating benefit accruing by such write off / restructuring. Restructuring to be reported to RBI within 30 days

Exit from JV/WOS Involving write off of capital Automatic route for disinvestment if any of the following are satisfied: JV / WOS is listed overseas ; or Indian party is listed and has a net worth > Rs. 100 crore ; or Listed Indian party with net worth < Rs. 100 crore and Investment in JV/WOS is < US$ 10Milion ; or Unlisted Indian party and investment in JV / WOS < US$ 10 million.

Resident individual Without prior approval of RBI: Receive as a gift from a person outside India By way of ESOPs issued by a company incorporated outside India under Cashless Employees Stock Option Scheme which does not involve any remittance from India By way of ESOPs issued to an employee or a director of Indian office or branch of a foreign company or of a subsidiary in India of a foreign company or of an Indian company in which foreign equity holding is not less than 51 per cent As inheritance from a person whether resident in or outside India By purchase of foreign securities out of funds held in the Resident Foreign Currency Account By way of bonus/rights shares

Contd…. Qualification Shares as Director: Up to 1% of the paid- up capital of the overseas company and amount does not exceed USD 20,000 in a calendar year Individual employees/directors engaged in the field of software. Consideration for purchase does not exceed USD 10,000 or its equivalent per employee in a block of five calendar years Shares acquired by all the employees/directors do not exceed 5% of the paid-up capital of the Joint Venture or Wholly Owned Subsidiary outside India Resident employees of Indian companies in the knowledge based sectors including working directors may purchase foreign securities under the ADR/GDR linked stock option scheme provided the consideration for purchase does not exceed USD 50,000 or its equivalent in a block of five calendar years.

Indian Mutual Funds Overall cap of USD 7 billion ADRs / GDRs of the Indian and foreign companies Equity of overseas companies listed on recognized overseas stock exchanges Foreign debt securities- short term as well as long term with rating not below investment grade - in the countries with fully convertible currencies Money market investments not below investment grade; repos where the counter party is not below investment grade Government securities

Contd…. Derivatives traded on recognized stock exchanges Short term deposits with banks overseas where the issuer is rated not below investment grade Units / securities issued by overseas Mutual Funds or Unit Trusts Domestic Venture Capital Funds: Overall limit of USD 500 million in equity and equity linked instruments of off-shore VCFs

Investment in agriculture Resident corporate and partnership firms may undertake agricultural operations including purchase of land incidental to such activity either directly or through their overseas offices, Valuation of land is certified by a certified valuer registered with the appropriate valuation authority in the host country.

LIBERALISED REMITTANCE SCHEME Resident individuals including minors Remittances can be consolidated in respect of family members Up to US$ 200,000 per financial year (April – March) for any permitted capital and current account transactions or a combination of both – Gross basis – PAN mandatory – No restriction on the frequency

Illustrative list Immovable property Outward remittance can also be in the form of a DD in the residents own name or the name of the beneficiary Shares or debt instruments - No ratings or guidelines Purchase of objects of art For acquisition of ESOPs Repayment of loan Units of Mutual Funds, Venture Funds, unrated debt securities, promissory notes - No ratings or guidelines Other assets outside India Open, maintain and hold foreign currency accounts with banks outside India

Prohibited items: Lottery tickets/sweep stakes - Call back services Banned magazines Margins or margin calls to overseas exchanges / overseas counterparty FCCBs issued by Indian companies in the overseas secondary market Trading in foreign exchange abroad For setting up a company abroad No credit facilities in Indian Rupees or foreign currency Remittances directly or indirectly to Bhutan, Nepal, Mauritius and Pakistan Banned countries, Individuals and entities

Facility in addition to: Private travel (US$ 10,000) for one or more visits Business travel (US$ 25,000) Studies Abroad (US$ 100,000) Medical treatment (as estimated by Doctor) Acquisition of qualification shares

Contd…. Remittances for gift and donation part of Scheme: – Can remit towards gifts (exceeding US$ 10,000) and donations (exceeding US$ 10,000)under Scheme Accrued interest/dividend on deposits/investments abroad: – Can be retained and re-invested All transactions should be routed through same Authorised Dealer