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Direct Investment by Resident in Joint Venture (JV) /Wholly Owned Subsidiaries (WOS) Abroad

June 10, 2010

1. Where are the guidelines pertaining to overseas investment available and from where one can get clarification for the same?

Answer: The guidelines have been notified by Reserve Bank of India vide Notification No. FEMA 120/2004-RB dated July 7, 2004, as amended from time to time, which can be accessed at the Reserve Bank’s website A Master Circular entitled Direct Investment by
Residents in JV/WOS Abroad dated July 1, 2009, which is a compendium of all
notifications/circulars incorporating the developments, till that date, is also available at the website

2. What are the general permissions available to persons resident in India for purchase / acquisition of securities abroad?

Answer: General permission has been granted to persons resident in India for purchase / acquisition of securities as under :a. Out of funds held in the RFC account(Resident Foreign Currency Account);b. As bonus shares on existing holding of foreign currency shares;c. When not permanently resident in India, from the foreign currency resources outside India.
General permission is also available to sell the shares so purchased or acquired. A resident Indian can remit up to USD 2,00,000, per financial year under the Liberalised Remittance Scheme (LRS), for permitted current and capital account transactions including purchase of

3. What is direct investment outside India and does this definition mean that one cannot acquire an existing company either partially or wholly?

Answer: Direct investment outside India means investments, either under the Automatic Route or the Approval Route, by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity, signifying a long-term interest (setting up a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS)) in the overseas entity.No. An eligible entity is free to acquire either a partial stake (JV) or the entire equity (WOS) in an already existing company, provided the valuation is as per the laid down norms.


4. What are the prohibited activities for overseas direct investment and Can overseas direct investment be made in any activity?

Answer: Real estate and Banking are the prohibited sectors for overseas direct investment.However,
Indian banks operating in India can set up JVs/WOSs abroad provided they obtain clearance under the Banking Regulation Act, 1949 from DBOD, RBI, CO.


5. Who is Indian Party? What is the Automatic Route? Who are eligible to make overseas direct investment under the Automatic Route?

Answer: An Indian Party is a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act 1932 and any other entity in India as may be notified by the Reserve Bank. When more than one such company, body or entity makes investment in the foreign entity, such combination will also form an “Indian Party”.Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for setting up a JV/WOS abroad. The Indian Party should approach an Authorized Dealer Category – I bank with an application in Form ODI and the prescribed enclosures / documents for effecting the remittances towards such investments. (However, in case of investment in the financial services sector, prior approval is required from the regulatory authority concerned both in India and abroad). Resident Corporate entities and Partnership firms registered under the Indian Partnership Act,1932(Indian Party) are eligible to make direct investment abroad in Jvs/WOSs.


6. What is the procedure to be followed by an eligible entity to make direct investment in a JV/WOS under the Automatic Route?

Answer: The eligible Indian Party intending to make a direct investment under the automatic route is required to fill up the form ODI duly supported by the documents listed therein, i.e., certified copy of the Board Resolution, Statutory Auditors certificate and Valuation report (in case of acquisition of an existing company) as per the valuation norms and approach an Authorized Dealer (designated Authorized Dealer) for making the investment/remittance.

Form ODI as also other relevant forms pertaining to overseas direct investment are available under Forms at the website


7. What are the Criteria for direct investment to be made under the Automatic Route?

Answer: The criteria for direct investment under the Automatic Route are as under:

i. The total 'financial commitment' of the Indian Party in Jvs/WOSs in any country other than Nepal, Bhutan & Pakistan is upto 400% of its net worth and the investment is in a lawful activity permitted by the host country;

ii. The Indian Party is not on the Reserve Bank’s exporters' caution list / list of defaulters to the banking system published/ circulated by the Credit Information Bureau of India Ltd. (CIBIL)/RBI or under investigation by the Directorate of Enforcement or any investigative agency or regulatory authority; and

iii.The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an authorised dealer to be designated by the Indian Party.


8. What is ‘financial commitment’?

Answer:. Financial commitment means the amount of direct investment outside India by way of contribution to equity and loans and 100% of the amount of guarantee issued by an Indian Party to or on behalf of its overseas JV/WOS. ( the amount and period of the guarantee should be specified upfront).


9. What are the valuation norms ?

Answer: Where the investment is more than USD five million, share valuation of the company has to be done by a Category I Merchant Banker registered with the Securities and Exchange Board of India (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/Certified Public Accountant.

However, in the case of investment by acquisition of shares where the consideration is to be paid fully or partly by issue of the Indian Party’s shares (swap), the valuation will have to be done by a Category I Merchant Banker registered with the Securities and Exchange Board of India (SEBI) or an Investment Banker/Merchant Banker outside India registered with the appropriate regulatory authority in the host country.


10. What is the concept of a ‘designated Authorised Dealer’? Can there be more than one‘designated Authorised Dealer’ for the same JV/WOS in case the JV/WOS has more than one Indian promoter?

Answer:. The Indian party is to route all transactions in respect of a particular overseas JV/WOS only through one branch of an Authorized Dealer. This branch would be the ‘designated Authorised Dealer’ in respect of that JV/WOS and all transactions and communications relating to the investment in that particular JV/WOS are to be reported only through this ‘designated’ branch of an Authorized Dealer. In case the JV/WOS is being set up abroad by two or more Indian promoters, then all Indian promoters collectively called the Indian party would be required to report all transactions in respect of that JV/WOS only through one ‘designated Authorised Dealer’. In case the Indian Party wants to switch over to another AD, an application by way of a letter may be made to the Reserve Bank after obtaining an NOC from the existing Authorized Dealer.

11. Is prior registration with the Reserve Bank necessary for direct investments under the Automatic Route?

Answer: No prior registration with the Reserve Bank is necessary for making direct investments under the automatic route. After the report of the first remittance/investment in form ODi is received by the Reserve Bank, from the designated Authorised Dealer, an Identification Number for that particular JV/WOS will be issued for the purpose of taking on record the overseas direct investment with the objective of maintaining a database for monitoring the outflows/inflows in espect of the overseas entities. Subsequent investments in the same project can be made only after allotment of the Identification Number.

12. What is the Approval route? What is the procedure to be followed for investment
proposed to be made under the Approval Route?What are the parameters for
considering proposals under the approval route?

Answer: Proposals not covered by the conditions under the automatic route require the prior clearance of Reserve Bank for which a specific application in form ODI with the documents prescribed therein. Requests under the approval route are considered by taking into account, inter alia, the prima facie viability of the proposal, business track record of the promoters, experience and expertise of the promoters, benefits to the country,etc.

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

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

  1. the balance held in Exchange Earners Foreign Currency account of the Indian Party maintained with an authorised dealer;
  2. Proceeds of ADR/GDR issues;
  3. market purchases of foreign exchange;
  4. share swap(refers to the acquisition of the shares of an overseas entity by way of exchange of the shares of the Indian entity)
  5. capitalisation of exports, royalities, etc.;
  6. Proceeds of ECBs/FCCBs raised abraod.


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

Answer:. No. Loan and guarantee can be extended to an overseas entity only if there is already existing equity participation.

15. What is the requirement for direct investment in an overseas concern by way of share swap?

Answer: Direct investment outside India in a JV/WOS by way of share swap arrangement can be made under the automatic route provided the valuation norms prescribed i.e. valuation of the shares is done by a category I Merchant Banker registered with the SEBI or an Investment Banker outside India registered with the appropriate Regulatory Authority in the host country are satisfied, and the shares are duly issued / transferred in the name of the Indian investing company. Investors may also please note that all share swap transactions require the prior approval of the Foreign Investment Promotion Board (FIPB) for the inward leg of
the investment.

16. What are the obligations of the Indian party, which has made direct investment outside India? What are the penalties for non-submission of Annual Performance Reports (APRs)?

Answer:. An Indian Party will have to comply with the following:
i. receive share certificates or any other documentary evidence of investment in the foreign entity as an evidence of investment to the RBI within six months.
ii. repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc. Within 60 days of its falling due, or such further period as the RBI may permit;

iii.submit to the Reserve Bank every year within 60 days from the date of expiry of the statutory period as prescribed by the respective laws of the host country for the finalisation of audited accounts of the JV/WOS an Annual Performance Report in form APR in respect of each JV or WOS outside India set up or acquired by the Indian party. This APR should inevitably be accompained by:

(a) copies of FIRCs in support of inward remittances on account of dividend, royalty,etc.

(b) audited financial statements of the overseas venture.

(c) certificate from a chartered accountant in support of realisation of export proceeds.
(d) a note on the working of the JV/WOS during the previous year highlighting the ups
and downs, reasons for non-performance, monetary terms. In case of promoter company it is unable to submit APRs within stipulated time, an applicationon
the due date should be made to the RBI seeking extension,giving reasons for the same.

RBI takes serious view of delayed submission /non-submission of such reports and can take such measures, as prescribed under FEMA 1999, against the delinquent Indian party as it deem fit.

17. Can a India Company invest in the securities of the company which is neither a JV partner nor a wholly owned Subsidiary ?

Answer: Investments overseas by residents is provided under FEMA Notification 120/RB-2004 dated July 7, 2004, (GSR 757 (E) dated November 19, 2004), viz. Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004.

Indian parties are prohibited from making investment in a foreign entity engaged in real estate (as defined in Regulation 2(p)of the Notification) or banking business, without the prior approval of the Reserve Bank. Listed Indian companies are permitted to invest up to 50 per cent of their net worth as on the date of the last audited balance sheet in (i) shares and (ii) bonds / fixed income securities, rated not below investment grade by accredited / registered credit rating agencies, issued by listed overseas companies.

In terms of Regulation 6 of the FEMA 120, an Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not exceeding 400 per cent of the net worth of the Indian party as on the date of the last audited balance sheet.

if an Investment has to be made in the Securities of the Company which is neither a JV partner nor a wholly owned Subsidiary, prior permission of the RBI has to be taken.

18. Can a Indian Company make investment in a foreign subsidiary by way of infusion of loan, the investment will be used by the foreign subsidiary to make further investment in primary and secondary market, whether this permitted ?

Answer: Lending Overseas is provided under FEMA Notification No. FEMA 3 / 2000-RB,viz., Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000.

Under Regulation 5(1), an Indian entity can lend in foreign currency to its overseas Joint Ventures (JV) / Wholly Owned Subsidiaries. Under 5(2), Indian entity can lend upto US$ 1,00,000 for trade purposes only (Please Note not for further investment). Thus even lending as proposed by the queriest is not allowed under the present Regulation. An application to RBI for prior approval for such lending can be made. What would be the fate of such application is difficult to predict in the view of present global economic crisis more so when India needs to preserve its forex reserve and also prevent Indian company from speculating in overseas market.

19. Can a Indian Company make investment in a foreign subsidiary by way of infusion of equity, the investment will be used by the foreign subsidiary to make further investment in primary and secondary market.

Answer: In terms An Indian party (i.e. corporation) is permitted to invest in a JV/WOS not exceeding 400% of its net worth (as of the date of the last audited balance sheet), either directly or through a Special Purpose Vehicle (SPV).

Their is no restriction for the foreign subsidiary to invest in primary and secondary market. This is possible under FEMA.

20. Is prior permission of Reserve Bank required for disinvestment of existing holding in JV/WOS?

Answer: No prior approval of Reserve Bank is required for disinvestment either by way of sale to another Indian Party(which is eligible to make such investments under the Automatic Route) or to a person resident outside India, provided:

(a) the disinvestment does not result in a write off(however, listed Indian Companies have been permitted a write-off of Capital upto 10% of the previous years export realization);

(b) the overseas concern has repatriated all its dues;

(c) the overseas concerns has been in opeartion for at least one year and has submitted upto date APR with prescribed documents;

(d) the Indian party is not under investigation by any investigate/regulatory authority;
(e) the sale is to be effected through a stock exchange where the shares of the overseas JV or WOS are listed;

(f) if the shares are not listed on the stock exchange, and the disinvestment is by private arrangement, the sale price of the share is not less than the value certified by a chartered Accountant /certified Public Accountant/category I Merchant Banker registered with SEBI.

The above conditions are applicable even when an Indian Party wants to windup/close its existing

21. Can a Foreign Subsidiary give loan to its Indian Holding Company?

Answer: The foreign subsidiary company cannot give loan to its Indian holding company. As per FEMA (Borrowing and Lending in Foreign Currency) Regulation, borrowers can raise ECB from internationally recognised sources.

Foreign subsidiary company does not fall in any of the definition of internationally recognised sources. Therefore, it is not possible to take a loan from a foreign subsidiary company as the same may amount to ECB and the extant ECB guidelines does not recognize a foreign subsidiary company as eligible lender for giving loans to its holding company in India.

“An application to RBI has to be made and prior approval shall be taken”


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