Manoj C. Shah, manoj@shahmodi.com Shah & Modi Chartered Accountants

Visakhapatnam Branch of SIRC 23rd October 2008 Presentation on Outbound Investment- FEMA Provisions Manoj C. Shah, manoj@shahmodi.com Shah & Modi Chartered Accountants

Introduction • Key driving factors • Overseas expansion • Overseas listing • Spreading of Risk • Ensuring supply chain • Access to wider global markets

Introduction • Powers to RBI conferred by Section 6(3)(a) and Section 47 of the FEM Act 1999. • Governing Notification No. 120 - titled as “Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004.” • Issued in place of Notification No. 19 dated 3rd May, 2000. • Modified again from time to time by issue of further Notifications & AP (Dir. Series) Circulars.

Definition of Overseas Direct Investment • Contribution to the Capital or subscription to the Memorandum of Association of a foreign entity or • Purchase of existing shares of foreign entity either by market purchase or private placement but doesn’t include Portfolio Investment.

Different Modes of Investment • Direct Investment Outside India • By Corporates/Body Corporate/Partnerships- Part-I • By Individuals/Trusts – Part-II • Portfolio Investments- Part-III • Branch Outside India. • Regulation No 7(4A) of Notification No. 10 • To pursue the objects of the HO. • Initial expenses - 15% of average annual Sales/TO/Income for last two years OR 25% of Net worth whichever is higher. • Recurring Expenses - 10% of average Sales/TO/Income for last two years. • Acquisition of immovable property permitted within these limits • Activities not to contravene provisions of the Act, Rules or Regulations. • Investment under US$ 200,000 Scheme

General Permission to Acquire or Transfer Foreign Security • Purchase out of funds held in RFC account. • Bonus shares on the foreign securities held in accordance with FEMA • Out of foreign currency resources held outside India- applicable only to persons not permanently resident in India. (Res in India for employment of a specified duration or for specific job, duration of which doesn’t exceed three years) • Sell the foreign security purchased or acquired under clauses (a), (b) or (c).

Direct Investment Outside India - Part I Direct Investment by Indian Party

Indian Party • A company incorporated in India or • Body Corporate created under an Act of Parliament or • Registered Partnership • Any other entity in India notified by RBI. • RBI under approval route has notified Unregistered Partnerships and Proprietorship firms - subject to fulfillment of prescribed conditions (AP Dir Circular No. 29 dated 29.03.2006) • If more than one such entities make direct investment in the foreign entity, all such entities together shall constitute the “Indian party”

Automatic Route • Direct investment in a JV or WOS overseas except engaged in real estate or banking business. • Investment in Nepal is permitted only in Indian rupees. Optional for Bhutan. • Investment in Pakistan is not permitted under the automatic route. • ‘Financial Commitment’ not to exceed 400% of the ‘Net Worth’ of the ‘Indian Party’ as on the date of last audited balance sheet • Exception: For EEFC account holders and investment out of proceeds of ADR / GDR issue • Net Worth of holding / Subsidiary may be clubbed subject to fulfillment of certain conditions.

Automatic Route • “Financial Commitment Outside India” means- • The Amount of Direct Investment by way of contribution to Equity and Loan and • 100% of the amount of guarantees issued to or on behalf of its JV/WOS. (Amt to be specified upfront) • IP can provide Loan/guarantee on behalf of JV/WOS provided there is equity participation • No minimum percentage of equity investment prescribed; however, recommended that equity should not be nominal • Investment in preference shares possible. But not preference shares only, if debt involved

Automatic Route • IP is not on the Reserve Bank’s Exporters caution list /list of defaulters to the banking system circulated by the Reserve Bank or under investigation by any investigation /enforcement agency or regulatory body • IP routes all Transactions through only one Branch of an AD. • IP Submits Form ODI to the designated AD. • IP has submitted up to date returns in Form APR

Automatic Route Funding: Drawal of Foreign Exchange upto 400% of Net Worth of the Indian Party. Capitalisation of Exports (unrealized exports beyond prescribed period requires prior approval of Reserve Bank) Guarantees (100% of the value to be considered) (guarantee not to be open ended) Share Swaps Would require FIPB approval for Inbound leg of the Investment & Valuation by Merchant Banker Proceeds of ADRs/ GDRs ADR/GDR stock swap subject to the valuation norms and sectoral cap Resources raised through ECB in conformity with parameters of the guidelines. Utilization of FCCB peoceeds Note: Limit of 400% net worth will not apply to utilization balances held in EEFC a/c & funds raised through ADR/GDR issue

Procedures for Investment • File form ODI with the AD • Board Resolution authorizing such an investment • Last three years’ financial statements along with Net worth certificate in the prescribed format • Unique Identification Number • Issued by RBI to each JV/WOS • To be quoted in all communications and reports • Second and further remittances only after allotment of UIN • (Note: Don’t use basic travel quota for investment in shares of J/V or WOS)

Valuations • In cases where Investment is more thanUS $ 5 (five) Million in an existing company or is by way of Share swap : • The valuation has to be done by Category I Merchant Banker registered with SEBI or Investment Banker/ Merchant Banker outside India registered with the appropriate regulatory authority in the host country. • In all other cases: • a Chartered Accountant or a Certified Public Accountant.

Overseas Investment in Agricultural Operations • Indian Company or Regd. Partnership firm is eligible to carry on agricultural operations and purchase land incidental to such operations either directly or through their overseas offices • Conditions- • Indian party is otherwise eligible to make investment & • Valuation of the land is by Certified Valuer

Direct Investment in Equities of Companies abroad • Other strategic Investments • Other than JV/WOS route • In equity or rated debt instruments • Conditions:- • Overseas Company should be listed on a recognised Stock Exchange. • Persons eligible- • Listed Indian Companies • Upto 50% of their Networth as on last date of the audited balance sheet • Mutual Funds registered in India.

Investment in Financial Services Sector • Both Investor/Investee should be engaged in Financial Services Activities. • IP has earned Net profit during the preceding three financial years from the financial activities. • IP is registered with appropriate regulatory authority in India. • Has obtained prior approvals from the concerned regulatory authorities - both in India & abroad for the venture. Note: Financial services not defined. One can look at services in inbound notification Schedule I

Investment in Financial Services Sector • Investment limits & Conditions will be as per Part-I. • Has fulfilled prudential norms relating to capital adequacy. • AP Dir. Circular No. 6 dated 6.09.2006 • Trading/JVS in Commodities Exchanges Overseas are to be treated as investment in Financial Services Activities. • Companies engaged in Financial Service Activities in India and making Investment in Non-financial activities abroad will have to comply with the conditions of this regulation.

Investment By Capitalisation of Dues, Export of Goods, Bidding or Tender Procedure • Investment by way of Capitalisation of Dues • Outstanding dues on accounts of Export of goods, plant & machinery, royalty, services, etc. • Software exporters may receive 25% of export value by way of shares of an overseas startup company without entering in to JV subject to prior RBI approval. • Export of goods towards equity • GR / SOFTEX / SDF shall be superscribed as “Export against equity participation in JV / WOS abroad” • Customs certified copy of the invoice to be submitted to AD • Acquisition through bidding or tender procedure • Remittance of EMD/subsequent payment- If eligible under automatic route

Transfer by way of sale • Automatic Route if:- • Transferred to another Indian Party who is eligible to invest • JV/WOS is listed on the overseas exchange • Indian Promoter is listed and has a net worth of not < 100 Crore • Indian promoter is unlisted company and the investment is not more than USD 10 Million

Transfer by way of sale • The above disinvestment is subject to following conditions: • The disinvestment doesn’t result in write off of the investment • The sale is effected through a stock exchange where the shares are listed. • If not listed, the price is not less than the value certified by a CA or CPA as fair value based on the latest audited financial statements. • No outstanding dues from JV/WOS • IP is not under Investigation by CBI/ED/SEBI/IRDA etc. • Overseas entity is in operation at least for one full year and the APR is submitted to the RBI. • Sale proceeds are repatriated immediately and in any case not later than 90 days from date of sale • The Indian party submits details of the disinvestment through the designated AD within 30 days of the disinvestment. • All other cases prior approval from the RBI is required.

Transfer by way of sale • Report to RBI should indicate- • Identification No. • Name of the Indian company. • Name of the country and amount of investment approved. • Amount of disinvestment. • Date of repatriation of the disinvestment proceeds. • Certificate that all documents as above have been obtained.

Pledge of Shares of JV/WOS • Indian Party can Pledge shares of JV/WOS for Availing Credit Facilities for itself or for JV/WOS only from Authorised Dealers or Public Financial Institution in India. • Or to an overseas lender bank and total financial commitment of the Indian party remains within the limit for overseas investment

Hedging of overseas investment • Resident entities permitted to hedge exchange risk arising out of such inv. • AD may enter into forward/option contract (in Equity/Loan) • Cancellation and rebooking also permissible subject to certain conditions

RBI Approval Route • If the conditions under Automatic Route not satisfied • Application to be made in prescribed Forms- ODI • Valuation, if required, in the prescribed manner. • RBI will take into consideration following factors: • Prima Facie viability of the JV / WOS. • Contribution to External trade & other benefits to India. • Financial Position and business track record • both Indian Party & Foreign entity. • Expertise & Experience of the Indian Party in the same or related line of activity.

Obligation of The Indian Party • Receive & Submit to the AD evidence of investment within 6 months from the date of remittance/ capitalisation. • Repatriate all dues (Dividend, Royalty, Technical Fees etc) within 60 days of its falling due. • Submit Form APR to RBI every year within 60 days from the Statutory Time Limit of Finalisation of Audits as per the local laws of the host country.

Post Investment Changes • Diversification of activities or setting up of step down subsidiaries or altering the shareholding pattern of overseas JV/WOS • Needs to be reported to RBI within 30 days of the approval in terms of local laws of the host country and include the same in APR to be filed with AD

Direct Investment Outside India - Part II Investment abroad by Individuals

Investments by Proprietary Concerns/ Individuals • Proprietary Concern • Prior permission- apply in Form ODI • Purpose -acceptance of shares of a company outside India in lieu of professional services. • Value of shares accepted from each company not to exceed 50% of the fees receivable from that Company. • Indian shareholding in a company outside India by virtue of shares so accepted shall not exceed 10 %. • For Individuals • Prior permission. • Purpose- consideration for professional services. • RBI to consider:- • Credentials/networth/nature of profession • Forex earnings/Balances in EEFC/RFC Accounts • Financial & Business Track Record • Potentials for forex inflow • Other benefits

Investment by proprietorship & Un- registered partnership concerns • Conditions: • It’s a recognized star export house with a consistent high export performance. • AD is satisfied that exporter is KYC compliant. • Proven track record & export outstanding doesn’t exceed 10% of average. realization of the preceding three years. • Exporter is not under adverse notice of any Governmental agencies. • Amount of investment doesn’t exceed 10% of the average of three years realization or 200% of net owned funds whichever is lower. Note: Individual partner can hold shares in their name if laws of foreign country do not permit firm to hold shares

Investment by Regd. Trusts/Society • Engaged in manufacturing/educational/hospital may invest with prior RBI approval • Conditions • Must be in existence for at least three years • KYC compliant • Not under adverse notice of Governmental regulatory authority • In case any approval from Home Ministry or such other agency is needed, must be obtained.

Part III Investment in Foreign Securities other than Direct Investment

Investment in Foreign Securities other than Direct Investment • Indian Company or Body Corporates • Issue of FCCBs. • Actually Inbound investment but because it involves issue of foreign security is under this Notification. • Individuals • To acquire securities under limited circumstances only. • Portfolio Investment by • listed Indian Companies up to 50% of their net worth • Mutual Fund up to an overall limit of USD 7 billion • Limited number of MF also permitted to invest up to USD 1 billion in overseas exchange traded funds as permitted by SEBI • Domestic VC funds up to USD 500 million subject to SEBI permission

Foreign Currency Convertible Bonds (FCCB) • Schedule-I - Automatic Route: • [Regulation 21(2)(i)]: • FCCB should conform to the Sectoral cap under FDI policy. • For Maximum of US $ 500 Million in any one Financial year. • Public Issue of FCCB should be through reputed Lead Managers in the International Capital Market.

Foreign Currency Convertible Bonds (FCCB) • Private Placement of FCCB shall be with • Banks, Multilateral and Bilateral Financial Institutions, or • Foreign collaborators / Equity holders with a minimum paid up holding of 5% of the issuing company. • Private Placement with unrecognised sources is prohibited. • Maturity of FCCB shall be 5 years and above. • Call & Put option can be exercised only after 5 years.

Foreign Currency Convertible Bonds (FCCB) • Issue of FCCB with attached warrants is not permitted. • Banks, DFI, NBFC not allowed to issue unless participated in textile/steel sector restructuring • No letter of guarantee/ comfort to be issued by Banks, DFI, NBFC • Use of proceeds for industrial, especially infrastructure sector • FCCB proceeds are not to be used for investment in stock Market. • FCCB for meeting rupee expenditure to be hedged unless there is natural hedge

Foreign Currency Convertible Bonds (FCCB) • “All in Cost” will be at par with the limits prescribed for ECB. • “All in Cost” shall include: • Coupon Rate. • Redemption Premium. • Default Payment. • Commitment Fees. • Fronting Fees. • “All in cost” shall not include issue related Expenses Like. • Legal Fees. • Lead Manager’s Fees. • Out of Pocket Expenses.

Foreign Currency Convertible Bonds (FCCB) • Issue related Expenses not to exceed • 4% of issue size or • 2% of issue size in case of private placement. • Report to RBI within 30 days of the issue containing:- • Total amount of FCCB issued. • Names of the investors resident outside India. • Number of FCCB issued to each of them. • Bank certificates for amount repatriated to India.

Purchase/acquisition of Foreign Securities By Individuals • By way of Gift From a Person Resident Outside India (PROI) • Under Cashless ESOP • Issued by a FC under ESOP Scheme subject to certain conditions. • Remittance irrespective of method of operationalisation (i.e. directly by the Company or through Trust/SPV/step down subsidiary etc) of the scheme. • By way of Inheritance From PRII or PROI • By an employee or a director of an Indian office or branch or 51 per cent subsidiary can purchase the equity shares offered by the said foreign company.

Purchase/acquisition of Foreign Securities By Individuals • Minimum qualification and subsequent right shares not to exceed 1% & consideration doesn’t exceed USD 20,000 in a calendar year. • Acquisition by employee/director of Indian Promoter Company not exceeding 5% & consideration not to exceed USD 10,000 per employee in a block of 5 calendar years. After such allotment stake of Indian promoter not to fall below original holding. • Entity in knowledge based industry- ESOPs by way of ADRs/GDRs • Sale/Transfer by way of Pledge • Sale - Remittance within 90 days. • Pledge with AD in India or • With overseas lender provided the lender is bank and total financial commitment remains within limit of 400%.

Purchase/acquisition of Foreign Securities By Individuals • US$ 200,000 scheme. • Notified vide Notification No. 110 Dated 5th February, 2004 • Facility is available only to the resident Individuals. • Facility allows to freely acquire/ hold immovable properties, shares and other assets without RBI approval. • Allows to open, maintain and operate Foreign Currency accounts outside India • Facility is in addition to other facility like foreign travel, gift, donations, etc. • Facility is not available for Current Account - Schedule-I transactions, Nepal, Butan, Pakisatn or Mauritius or countries identified by FATF as "non co-operative countries and territories"

Need for an Overseas Structuring through Holding Company • Taxation of foreign dividends in India • Retention of profits in offshore jurisdiction • Deferment of tax • Greater flexibility for inter-company transfer of funds and for setting up operations in other overseas jurisdictions • Future restructuring easy

Ideal Holding Company Jurisdiction?? • Has a wide Tax Treaty network, thereby minimising withholding taxes on dividend income. • Has tax relief on foreign dividend income. • Does not charge capital gains tax on the disposal of subsidiaries. • Does not impose withholding taxes on distributions from the holding company to its parent or shareholders. • Does not impose capital gains tax on profits arising from the sale of shares in the holding company by non-resident shareholders. • Does not impose capital duties on share capital. • Does not have a minimum paid up share capital requirement.

Forms WEF 1/6/2007 there is only one Form which is ODI Part I –for Automatic as well as Approval route Part II - is for reporting of remittances by A.D. Part III-Annual Performance Report (APR) To be filed with RBI within two months from the prescribed date which is Part III of form ODI. Part IV- Report on closure/Disinvestment

Thank You

Manoj C. Shah, manoj@shahmodi.com Shah & Modi Chartered Accountants