Overview: Investment In A Foreign Company
Indian shareholders seeking to increase their businesses, get entry into new markets, acquire intellectual property, and conduct R&D in recent years. Overseas direct investments or Overseas Direct Investments have gained significant traction in this regard. From the investor’s standpoint, navigating the Overseas Direct Investment regulatory framework remains difficult.
Placing an investment in a foreign company by an Indian citizen enables the government to promote economic ties with the receiving country, innovation and skill transfer, rebranding as an entrepreneur, and exchange of R&D achievements. It also aids in the creation of jobs or the use of raw materials accessible in India concerning the new country.
To state it simply, Overseas Direct Investment is nothing but the investments that are done by the citizen of India, outside India. It can either be done by purchasing prevailing shares of a multinational entity on the open market, or on a stock exchange, by private placement or by signing up for an international entity’s Memorandum, showing a long-term interest in that international entity.
The act of Overseas Exchange and Management, 199, and all its regulations lead the investment in international firms by Indian citizens. Because of the complicated regulatory environment, investors must seek adequate advice on problems concerning their investments. From the standpoint of an investor, this blog discusses a few practical aspects.
Eligibility Criteria to make Investment in a Foreign Company
Indian people and residents can engage in registered offshore firms with a minimum 10% stake in an Indian firm without any restrictions. Since about January 1st of the funding year, the business must be registered on a recognized Indian stock exchange.
People from India who are eligible to invest in a multinational corporation include:
- The Business Entities in Residence.
- The Indian Partnership Act of 1932 regulates partnership companies.
Eligible individuals can engage in joint projects or completely owned affiliates in other countries.
Guidelines For making Investment in A Foreign Company
The guidelines for making investments in a foreign company are mentioned in the Notification section, FEMA No. 10, and dates 3rd May 2000 by the Reserve Bank of India. These guidelines go through timely amendments and can be easily accessed at the website of the RBI, fema.rbi.org.in.
Let’s now learn about the guidelines for an Indian party or individual to make an investment in an international firm in detail.
By Resident Individuals:
- Any individual that is a resident of India can file for direct investment in international securities without taking any prior permission from the RBI according to the LRS, Liberalized Remittance Scheme till USD 125,000
- Apart from the above-mentioned factors, they’re also bestowed with special approval to acquire or buy equity or CCPS of an international firm, if acquired.
- As per the GDR/ADR, the present scheme of a stock option is open for workers or the director of an Indian firm but under the prescribed limitation of USD 10,000 in a block of 5 years.
- To attain the position of a director to buy the least qualification shares to 1% of the paid-up capital of WOS/JV overseas.
- The Indian citizen must not be there on the defaulter or the caution list under the RBI investigation, CIBIL (Credit Information Bureau of India Ltd.), or under any other investigation or banking agency.
By Indian Party other than Resident Individuals
- By Indian party, it’s meant here companies, a Registered Partnership Firm, a partner to manage shares for and on behalf of the company of JV/WOS. The investment should be done completely by a company, and the receiving country’s law must approve it too. The Reserve Bank of India should inform a body made under the Parliament Act or any entity.
- There isn’t any limit on the investment. This investment is done from funds in an EEFC account or from funds made via GDRs or ADRs.
- In several other situations, the business commitment is WOS or JV should be up to USD 1 billion and 4000% of the Indian party’s net worth.
The net worth given by the receiving nation must be applied too.
- All operations connected to the engagement in a JB/WOS should be routed through a single department of an authorized dealer identified by the Indian partner.
- Even though there are multiple investors/promoters for a given JV/WOS venture, they will be treated as a single Indian party collectively. As a result, this should channel all of its activities through just one AD Category-I financial institution.
- If the Indian participant wants to replace the AD, it should first get a no-objection certificate from the current AD and then petition for it.
- There could be authorized ADs for separate JV/WOS of a single Indian Party.
If the investment done exceeds the value of USD 5 million, the firm’s share valuation reaches above USD 5 million, then the firm’s share valuation has to be fulfilled by the Merchant Banker belonging to Category I, registered with the SEBI or a Merchant banker / Investment Banker overseas who is authorized with an appropriate regulatory body in the foreign country. In other specified situations, the share valuation of a firm is done either by CPA or CA.
Exception to the Automatic Route
An exceptional example of the automatic route is that all the investment made by an Indian individual in Pakistan has to go through the approval route.
After Reporting Form Overseas Direct Investment
Once the reporting from Overseas Direct Investment is done, a UIN, a unique identification number is developed instantaneously and automatically for a specific JV/WOS. This can only be made once the UIN allotment is done. Another point to note is that it should be mentioned in Form Overseas Direct Investment a month from the date of the transaction.
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Types of Overseas Direct Investment
The FEMA, 1999, sets forth the rules for Indian individuals who want to put money in a multinational corporation. Usually, an Indian person’s involvement in a multinational corporation is referred to as Overseas Investment, and it is categorized as follows:
- Investing directly
Direct investment denotes a long-term commitment to a foreign market. It can take the shape of a capital contribution or registration to the Memorandum of a business overseas, or it can take the shape of a trade acquisition, a private offering, or a stock exchange acquisition of a share in an international company. This is designed in order to exert control over the investee’s business management. An Indian entity can put the money in any lawful enterprise outside of India excluding:
- Real estate company
This includes the purchase and sale of real estate as well as the trade of items related to Transferable Development Rights (TDRs). It excludes township expansion, business, and residential maintenance, and bridge and road construction.
- Investment Portfolio
Indian investors put money in international companies for a variety of reasons, including monetary benefit and curiosity. There is no goal of establishing long-term ownership or influence over a multinational firm’s management. This trade is quite uncertain. Unlike direct investments, portfolio investments can be quickly withdrawn.
Obligations After Making Investment in A Foreign Company
Any Indian individual or party that has invested in a foreign firm should follow the below-mentioned obligations after investing:
- As soon the investment made by Indian citizens in an international firm completes 6 months, share certificates should be acquired and handed over to the AD.
- After investing all dues acquired from the international nation like royalty, dividends, etc should be deported to India.
- A yearly performance report in part 3 of Form Overseas Direct Investment should be handed over to the Reserve Bank of India.
- The aforementioned report is based on the firm’s unaudited accounting records since the constitution of that nation does not mandate auditing, the Statutory Auditor of the Indian party shall declare that it provides a fair and accurate assessment and that it is accepted.
- The Reserve Bank of India must be notified of any significant decisions made by such International JV/WOS within a month of the proposal’s approval. Details of the same must be included in the Yearly Progress Report.
- A registered Indian firm following the Automatic route, and an unregistered Indian firm following the Approval route, can deduct down 25% of its equity interest in WOS/ JV including at least a 51 percent stake in the ultimate reorganization. It must also be presented with a verified document of the financial statements and a projected profit forecast for the following five years.
- The retail revenues should be remitted to India in three months in the event of a lack of investment.
Routes of Making Investment in A Foreign Company
Mainly, there are 2 routes assigned to make investments in an international firm by an Indian party or individual. These routes are:
- Automatic Route
- Approval Route
As per the provisions of the automatic route, one does not require any prior permission from the Reserve Bank of India. Instead, the Indian individual must approach the AD section – I bank in the form Overseas Direct Investment (online) with all the mandatory paperwork.
The investment requests that aren’t fulfilled under the given automatic route and aren’t illegal as per the approval route, need a prior permit from the Reserve Bank of India. The Form Overseas Direct Investment should be diligently filled with all important paperwork and the pricing provisions in the same method as given in the previous section of the article. All the authorized societies and the trusts involved in a particular sector are permitted to put money in foreign entities in the same sector with permission from the Reserve Bank of India
Prohibited Activities For Overseas Direct Investment
One of the main prohibited sectors for international direct investment is the Real Estate (as mentioned in Regulation 2(p) of the Notification) and banking corporations. But Indian financial institutions working in India can make JVs/WOSs overseas only if they get clearance as per the Banking Regulation Act of 1949, from the office of RBI, CO, and DBOD, Department of Banking Operations and Development.
Any international JV/WOS which has an indirect or direct engagement by an Indian partner must not provide financial services linked with Indian Rupee (like non-deliverable operations comprising rupee exchange rates, and stock indices related to the Indian market, or foreign currency) without attaining a particular permit from the RBI. Any case of such service facilitation will be termed as a violation of the present FEMA guidelines and will eventually lead to action under the applicable guidelines of FEMA, 1999.
Source of Funds permissible for making Investment in A foreign Company
Here is the list of fund sources that are approved for investing in a foreign firm:
- Exchange of Shareholdings: If the cost parameters are fulfilled, this is generally accomplished on an automatic basis. The inward leg transfer, though, needs FIPB clearance.
- Withdrawal of international currency by India’s AD Financial institution.
- Foreign Currency Convertible Bonds and External Commercial Borrowings Earnings
- Exports, and other rights and obligations, are capitalized.
- For the trade of ADRs and GDRs created in compliance with the Foreign Currency Convertible Bonds and Ordinary Shares (by Depository System) Scheme of 1993, as well as the Indian Government’s issued instructions on the subject.
- Finances in an Indian participant’s EEFC account kept including an AD.
- International currency earnings from a fund generated via GDR or ADR offerings.
- Loan transformation to equity or CCPS. Underneath the automatic route, this would be permissible.
To engage in a multinational corporation, an Indian citizen must first meet the requirements of a Resident Individual as per FEMA. The RBI or, Reserve Bank of India, has permitted resident individuals to participate in equity shares or CCPS of firms operating outside of India. Residents can engage in ODA under specific conditions.
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With the rise in industrialization, an increasing number of Indians are willing to do business outside of their home country. They wish to open a new branch or a franchise in another country. There are numerous advantages to doing so, including cost savings from reduced import duties, ease of conducting business, and the development of a global brand.
There are 2 main routes through which an Indian party or individual can invest in a foreign firm, the Approval route, and Automatic Route.
Residents are allowed to make unlimited foreign investment portfolios in registered overseas firms that own a minimum of 10% of Indian firms registered on a recognized Indian stock exchange as of the first day of the investment season.
The most common and known exception is that if any Indian individual or party wishes to invest in Pakistan, he or she would have to do it via the Approval route.