SBEC – SETTING UP OF BUSINESS OUTSIDE INDIA

The Globalization of Business has become a very essential feature for any economy in the past decades. India opened its doors for globalization and liberalization in 1991. The Industrial Policy was the turning point to the Indian Economy aiming at goal of making the economy more market- and service-oriented and expanding the role of private and foreign investment. Though there were foreign transactions before this, it was merely to conserve our foreign exchange reserve.Until 1991, India’s economic integration with the rest of the world was very limited. Exports were only the predominant way of expanding business abroad. However the export promotion strategies had restrictions on cash outflows. Post the industrial revolution policy in 1991, it substantially changed the foreign investmentpolicies of the country which led foreign investments to enter Indian territory. More importantly it also made Indians eligible to set up business abroad or make an investment abroad as the case may be. 

BACKGROUND

Subsequent to the liberalization policies, business houses across industries realized the necessity to increase their share in the world market not only by exporting their products but also by acquiring overseas assets and establishing their presence abroad (i.e. an overseas establishment). This meant that business had to be set up outside India in order to ensure their presence in the concerned markets. This requirement, paved the way to formulate regulations to make investments abroad.

Accordingly, the policy for outward capital flows has evolved.The policy on Indian investments overseas was first liberalized in 1992 to meet the need to provide Indian industry access to new markets and technologies with a view to increase their competitiveness globally and help the country’s export efforts.. Under this policy, an Automatic Route for overseas investments was introduced and cash remittances were allowed for the first time with restrictions on the total value. Later, the introduction of FEMA (Foreign Exchange Management Act) in the year 2000 changed the entire perspective on foreign exchange particularly those relating to investment abroad.

OVERSEAS DIRECT INVESTMENT (ODI)

According to the Reserve Bank of India, Overseas Direct Investment means investments, either under the Automatic Route or the Approval Route-

• by way of contribution to the capital or subscription to the Memorandum 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, signifying a long-term interest in the foreign entity (JV or WOS). This is different from portfolio investment

Some of the major overseas investments by Indian companies that would help understand the ODI are:

• Indian conglomerate, Reliance Industries Ltd (RIL), is going to invest US$ 25 million in Israel-based Jerusalem Innovation Incubator (JII), which will focus on start-ups working in the field of big data, analytics, Internet of Things and other similar areas.
• Adani Enterprises Ltd has announced the final approval of the company’s board to proceed with the US$ 16.5 billion worth Carmichael mine and rail projects in Central Queensland, Australia, which would be one of the largest single infrastructure and job creating developments in Australia’s recent history.
• Sun Pharmaceutical Industries Ltd, India’s largest drug maker, has entered into an agreement with Switzerland-based Novartis AG, to acquire the latter’s branded cancer drug Odomzo for around US$ 175 million.
• WNS Global Services, the Mumbai-based business process management company, has announced its plans of acquiring Denali Sourcing Services, a US-based business process outsourcing company, for US$ 40 million.
• AurobindoPharma has bought Portugal based Generis Farmaceutica SA, a generic drug company, for EUR 135 million (US$ 146.67 million).

REGULATORY PROVISIONS

Section 6 of the Foreign Exchange Management Act, 1999 provides powers to the Reserve Bank of India in consultation with the Government of India to specify, the classes of permissible capital account transactions and limits up to which foreign exchange is admissible.

Section 6(3) of the aforesaid Act provides powers to the Reserve Bank to prohibit, restrict or regulate various transactions referred to in the sub-clauses of that sub-section, by making Regulations.

In exercise of the above powers conferred under the Act, the Reserve Bank seeks to regulate acquisition and transfer of a foreign security by a person resident in India i.e.

• investment (or financial commitment) by Indian entities in overseas joint ventures and wholly owned subsidiaries as also investment by a person resident in India in shares and securities issued outside India.
• Overseas Investment (or financial commitment) can be made under two routes viz.
• Automatic Route and
• Approval Route or Government Route

 ELIGIBILITY

Legal Entities permitted to make investments:

• company incorporated in India or a body created under an Act of Parliament
• Limited Liability Partnership (LLP), registered under the Limited Liability Partnership Act, 2008
• partnership firm registered under the Indian Partnership Act, 1932,
• any other entity in India as may be notified by the Reserve Bank

These entities are collectively referred to as Indian Party/s henceforth in this Article

PROHIBITIONS

With respect to ODI investment, there are few investment which is prohibited. They are-

1. Indian Parties are prohibited from making investment (or financial commitment) in a foreign entity engaged in real estate (meaning 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) or banking business, without the prior approval of the Reserve Bank.

2. An overseas entity, having direct or indirect equity participation by an Indian Party, shall not offer financial products linked to Indian Rupee (e.g. non-deliverable trades involving foreign currency, rupee exchange rates, stock indices linked to Indian market, etc.) without the specific approval of the Reserve Bank. Any incidence of such product facilitation would be treated as a contravention of the extant FEMA regulations and would consequently attract action under the relevant provisions of FEMA, 1999.

AUTOMATIC ROUTE

With respect to the Automatic Route, the following regulations shall constitute the procedure for Overseas Direct Investment-

• In terms of Regulation 6 of the Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time, an Indian Party has been permitted to make investment / undertake financial commitment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), as per the ceiling prescribed by the Reserve Bank from time to time. However,
• With effect from July 03, 2014, any financial commitment (FC) upto USD 1 (one) billion shall only come under the automatic approval. The eligible limit of investment under the automatic route is 400% of the net worth of the Indian Party as per the last audited balance sheet.
• any financial commitment (FC) exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank even when the total FC of the Indian Party is within the eligible limit under the automatic route (i.e., within 400% of the net worth as per the last audited balance sheet).
• For the purpose of making investment / undertaking financial commitment in overseas Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS), the Indian Party should approach an Authorised Dealer Category – I bank with an application in Form ODI (Master Document on Reporting) and prescribed enclosures / documents for effecting such remittances.
• The investments/financial commitments are subject to the following conditions:
• The Indian Party/entity may extend loan/guarantee only to an overseas JV/WOS in which it has equity participation.

For any 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.

• The Indian Party should not be on the Reserve Bank’s Exporters’ caution list / list of defaulters to the banking system circulated by the Reserve Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information company as approved by the Reserve Bank or under investigation by any investigation / enforcement agency or regulatory body.
• All transactions relating to a JV / WOS should be routed through one branch of an Authorised Dealer bank to be designated by the Indian Party.
• In case of partial / full acquisition of an existing foreign company, where the investment is more than USD 5 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and, in all other cases by a Chartered Accountant or a Certified Public Accountant.
• In cases of investment by way of swap of shares, irrespective of the amount, valuation of the shares will have to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.
• In case of investment in overseas JV / WOS abroad by a registered Partnership firm, where the entire funding for such investment is done by the firm, it will be in order for individual partners to hold shares for and on behalf of the firm in the overseas JV / WOS if the host country regulations or operational requirements warrant such holdings.
• An Indian Party may acquire shares of a foreign company engaged in a bonafide business activity, in exchange of ADRs/GDRs issued to the latter in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued there under from time to time by the Government of India.

APPROVAL OR GOVERNMENT ROUTE

• Unlike Automatic Route, the Reserve Bank has prescribed Investment which cannot be made under Automatic Route and specifically required approval of the Reserve Bank of India. The prescribed regulation are-
• Prior approval of the Reserve Bank would be required in all other cases of direct investment (or financial commitment) abroad. For this purpose, application together with necessary documents should be submitted in Form ODI through their Authorised Dealer Category – I banks with their specific recommendation.
• 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 (Unique Identification Number) is allotted.
• Some other proposals which require prior approval of Reserve Bank of India are:
• Overseas Investments in the energy and natural resources sector exceeding the prescribed limit of the net worth of the Indian companies as on the date of the last audited balance sheet.
• Investments in Overseas Unincorporated entities in the oil sector by resident corporates exceeding the prescribed limit of their net worth as on the date of the last audited balance sheet, provided the proposal has been approved by the competent authority and is duly supported by a certified copy of the Board Resolution approving such investment.