Overseas Direct Investment

• Overseas investments (or financial commitments) in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) have been identified by Indian entrepreneurs as important avenues for promoting global business.
• Joint Ventures are viewed as a vehicle for economic and commercial cooperation between India and other countries. Other significant benefits of such overseas investments include the transfer of technology and skill, the sharing of R&D results, access to a larger global market.
• Guidelines for overseas investment have been notified by RBI under FEMA.

Prohibited Investments

• Resident Individual cannot make any direct investment in an overseas entity engaged in real estate business or banking business or in the business of financial services activity. (Real Estate mean buying and selling of real estate or trading in Transferable Development Rights but does not include development of townships, construction of residential/commercial premises, roads or bridges.)

General permission

• Persons residing in India have been granted general permission to purchase or acquire securities in the following ways:

1. out of the funds held in RFC account
2. as bonus shares on existing holding of foreign currency shares; and
3. when not permanently resident in India, out of their foreign currency resources outside India.

• General permission is also available to sell the shares so purchased or acquired.

Ceiling on Investments

• The total remittances for permissible capital and current account transactions should be within the overall ceiling prescribed for resident individuals under LRS from time to time. Presently, the ceiling prescribed is USD 2,50,000 per financial year (April to March). The investment made out of the balances held in EEFC / RFC account shall also be restricted to the limit under LRS.
• Hence, the investment amount in an overseas entity should be within USD 2,50,000 per financial year.

POINTS FOR CONSIDERATION

• The overseas Joint venture/Wholly Owned Subsidiary should be engaged in a bonafide business activity.
• The resident individual should not be on the RBI’s exporter caution list or list of defaulters to banking system or under investigation.
• The resident individual should route all the transactions relating to the overseas Joint Venture/Wholly Owned Subsidiary through only one branch of an Authorized Dealer Bank. No foreign account should be used for payments to the overseas entity directly.
• The overseas Joint venture/Wholly Owned Subsidiary shall not be located in countries identified by the Financial Action Task Force as “non-co-operative countries and territories”.
• The overseas Joint venture/Wholly Owned Subsidiary, to be acquired / set up by a resident individual shall be an operating entity only and no step-down subsidiary is allowed to be acquired or set up by the overseas Joint venture/Wholly Owned Subsidiary.
• Financial commitment by resident individual other than by equity and compulsorily convertible preference shares is prohibited. The resident individual cannot provide loan or guarantee.
• For the purpose of making further investment, the valuation of shares of the overseas Joint venture/Wholly Owned Subsidiary shall be made by a Chartered Accountant or a Certified Public Accountant. However, if the investment is more than USD 5 million, the valuation of the shares 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.

REPORTING COMPLIANCES AND OBLIGATIONS ON RESIDENT INDIVIDUAL

One time

• Part I of Form ODI has to be submitted to the AD Bank within 30 days of remittance duly supported by the documents listed as follows:
• Incorporation Certificate of the overseas entity
• Memorandum of Association
• Form A2 and Declaration
• Valuation Report, if applicable
• Any other requirements of the AD bank
• Resident individual has to receive share certificates or any other documentary evidence of investment in the foreign entity as evidence of investment and submit the same to the designated AD within 6 months from the remittance date.

Recurring

• Submit Annual Performance Report of overseas entity to the RBI through AD Bank by 31st December
• If the individual has made an investment in the overseas JV /WOS along with an Indian Party, then Annual Return on Foreign Liabilities and Assets should be filed by 15th July. An overseas JV/WOS solely formed by individuals need not file the same.
• Any alteration in shareholding pattern of the overseas JV /WOS may be reported to the designated AD within 30 days of such alteration.

REPATRIATION OF DUES FROM INVESTEE COMPANY

• Resident individual shall repatriate to India all dues viz. dividends, royalty, technical fees, etc. within 60 days of falling due.

DISINVESTMENT BY RESIDENT INDIVIDUAL

• Disinvestment by a resident individual shall be allowed after one year from the date of making first remittance for setting up or acquiring the overseas JV /WOS.
• The disinvestment proceeds shall be repatriated to India immediately and in any case not later than 60 days from the date of disinvestment.
• The disinvestment by the resident individual may be reported by the designated AD to the RBI in Form ODI Part IV within 30 days of receipt of disinvestment proceeds.
• No write off shall be allowed in case of disinvestment by the resident individual.

CERTAIN IMPORTANT PROVISIONS OF INDIAN TAX LAW

• Disclosure in Indian Income tax return

The Resident Individual should disclose its investment in the overseas entity in the “Foreign Assets Schedule” in the Income Tax Return.

• Transfer Pricing

Transfer pricing regulations of India will be applicable if the Resident Individual has control and participation in the overseas JV/WOS. Therefore, any transactions between the Resident Individual and overseas JV /WOS will be subject to transfer pricing regulations of India and adherence to the arm’s length principle and reporting obligations will be required.

Can resident individual promoters issue personal guarantee on behalf of the overseas JV/ WOS?

• The indirect resident individual promoters of the Indian party may issue personal guarantee on behalf of the overseas JV / WOS of the Indian party provided the provisions under Regulation 6 of FEMA Regulations are fulfilled by the Indian party and further provided that:

1. total ‘financial commitment’ including all forms of guarantees remains within the overall ceiling stipulated for overseas investment by an Indian Party and
2. no guarantee is ‘open ended

Can resident individuals, in any manner, invest in foreign entities?

• Individuals resident in India may invest by way of purchasing/acquiring shares of a foreign entity as a part/full consideration for rendering professional services or in lieu of director’s remuneration.
• However, the aforesaid manner of acquiring such shares in terms of value shall be within the overall ceiling limit as prescribed for the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition.

In case the value of shares exceeds the limit mentioned under the Liberalized Remittance Scheme, such shares are to be acquired after the co