1. OUTBOUND
INVESTMENTS –
UNDER FEMA REGULATIONS
-CS ASHISH PANDAY
csashishpanday@gmail.com

2. Agenda
• Provisions of FEMA,
1999 and Applicable
Regulations
• Types of Investments –
Prohibited / Regulated
/Permitted
• US$ 25,000 Scheme
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– JV/ WOS
– Investments by
Employees
– Portfolio Investments
– Agricultural operations
overseas
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3. FEMA provisions
• Overseas Investments is a Capital account transaction
• Hence prohibited unless permitted – generally or
specifically - Section 6
• RBI empowered by Section 6(2) to specify permissible
capital account transactions.
• FEM (Permissible Capital account transactions)
Regulations issued in 2000. – Schedule I lists 11 capital
account transactions, of which ODI is # 1
• Notif # 19 issued in 2000, replaced by Notif # 120
dated July 7, 2004, as amended.
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4. Important Definitions
•
•
•
•
•
•
•
•
Foreign Security – Section 2(o)
Direct Investment outside India – Reg 2(e)
Financial Commitment – Reg 2f)
Indian Party - Reg 2(k)
Net worth - Reg 2(o)
Real Estate Business - Reg 2(p)
JV / WOS - Reg 2(m)/ 2(q)
Host Country - Reg 2(j)
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5. Prohibited Investments
• Reg 5 (2)
– All “Indian Parties” prohibited from
investment in a foreign entity engaged in –
• Real estate Business
• Banking Business
• Reg 5(1)
– All residents not to make direct investment
o/s India – except with general / specific
approval
• Reg. 3 of Notif 120
– All persons resident in India prohibited from
issuing foreign security – except with RBI
approval
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6. General Permission
• Reg 4 / Para A 4
• General permission granted to
residents for
– Purchase / acquisition of
foreign securities and sale
thereof
• Out of funds held in RFC account
• As bonus shares on securities
already held
• Out of their Foreign Currency
Resources outside India
(when not permanently resident in
India)
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7. Direct Investment o/s India –
Automatic Route - Reg 6
• Who can invest?
–
–
–
–
Company incorporated in India
Body created under Act of Parliament
Partnership firm regd under Indian Partnership Act
Other entity as notified by RBI
• Effective 27/3/2006, proprietary / unregistered
partnership firms which are star export houses are also
permitted – subject to RBI approval – Form ODI –
Conditions as per Annex to circular dt 27/3/2006
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8. Direct Investment o/s India –
•
•
•
•
•
•
Automatic Route - Reg 6
Indian party permitted to make investment in
overseas JV/WOS
To submit Form ODA to designated branch of
AD
Limit: 200% of Net Worth as on date of last B/s
Ceiling NA for investments out of EEFC a/c or
funds raised thru ADRs/GDRs.
Investment in Nepal/ Bhutan only in INR
Investment in Pakistan not permitted under
automatic route
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9. Direct Investment o/s India –
Automatic Route - Reg 6 – Contd.
• Limit will include capital contribution in / loans granted
to JV/ WOS, and 50% of guarantees issued to / on
behalf of JV/WOS.
• Conditions:
– Loan / Guarantee may be given only to an overseas concern in
which it has equity participation.
– Investor should not be on RBI’s caution list / list of defaulters
to banking system or under investigation
– All transactions to be routed thru one branch of AD.
– For acquisition of existing foreign co. – share valuation
required from Cat 1 Merchant Banker ( > US$ 5 Mn), or
CA/CPA (< US$ 5 Mn)
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10. Direct Investment o/s India –
Automatic Route - Reg 6 – Contd.
• Investment by swap of shares –
– Valuation only by Cat 1 Merchant Banker/approved
investment banker from host country
– FIPB approval MUST
• Investment by a firm – shares in JV/WOS may
be held by individual partners if warranted by
host country regulations
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11. Direct Investment o/s India –
Automatic Route - Reg 6 – Contd.
• Funding:
– Drawal of FX from AD
– Capitalisation of export
proceeds
– Swap of shares
– Proceeds of ECB/ FCCB
– Balance in EEFC a/c*
– Proceeds of ADR/ GDR
issue*
* Limit of 200% NA, except for
investment in financial sector
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12. Direct Investment o/s India –
Automatic Route - Reg 6 – Contd.
• Capitalisation of export
proceeds
– Dues from foreign entity
towards exports, fees, royalties
or other entitlements – dues >
6 months need prior RBI
approval for capitalisation
– Software exporters can get
25% of value of exports to
overseas software co in form
of shares without entering into
JV agreements – with RBI
approval.
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13. Share Swap – Reg 8
• Indian parties which have already made
ADR/GDR may acquire shares of FC in same
core activity under Scheme / guidelines
• Conditions –
– ADR /GDR listed on any stock exchange o/s India
– Max – higher of (a) US$ 100 Mn; (b) 10 times export
earnings in preceding financial year (including
automatic investments in same financial year)
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14. Share Swap – Reg 8
– ADR/GDR issue for purpose of acquisition is
backed by fresh equity shares of Indian party.
– Holding in Indian entity does not exceed sectoral
caps for FDI
– Valuation as per recommendation of investment
banker (for unlisted shares) or current market cap
based of last three months average price on stock
exchange
– File ODG within 30 days
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15. Guarantees
• Till 27/3/06 – Only corporate promoters
could offer guarantees for JV/WOS
• Now – all Indian entities may offer any form
of guarantee – corporate/ personal /primary /
collateral – by promoter / group company /
sister concern / associate companies
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16. Guarantees- Contd.
• Conditions:
– All financial commitments within prescribed ceiling
(currently 200% of net worth of Indian party)
– No guarantee should be open ended – i.e. max
amount to be specified upfront
– To be reported to RBI in Form ODR
• Guarantees by Indian banks in favour of the JV/
WOS outside these limits, and subject to usual
prudential norms of RBI.
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17. Portfolio Investments
• Corporates– Listed Indian co’s can invest in shares of companies
listed on recognised stock exchange and which has at
least 10% holding in an Indian listed company
– Also permitted to invest in bonds / fixed income
securities of such companies
– Max – 25% of Indian co’s net worth
• Individuals– Same as corporates – except no monetary limit
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18. Portfolio Investments
• Mutual Funds– Can invest in ADR /GDR of Indian co’s rated debt
instruments and also in equity of overseas
companies as specified for corporates
– Overall cap of US$ 1 billion
– SEBI approval required
• General permission in each of the above cases for sale of
securities so acquired
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19. Financial Services SectorsAdditional Conditions for Indian party
•
•
•
•
Shd be regd with appropriate regulatory authority
Shd have earned net profit during preceding 3 financial years
Approval obtained from regulatory authorities in India and abroad
Fulfilled prudential norms relating to capital adequacy norms as
prescribed by regulatory authority
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20. Approval Route
• Cases not covered above
• Apply in Form ODB to RBI – for same core
activity in exchange of ADR/GDR > $ 100 Mn
/ 10 times export earnings / for acquisition of
shares a co o/s India
• Apply in ODI in other cases.
• RBI will examine prmia facie viability of
JV/WOS, and similar other points etc
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21. Post investment changes
• JV/WOS may diversify its activities / set up step
down subsidiaries / alter shareholding pattern
• To be reported by JV/WOS to RBI within 30
days from approval of those decisions by the
relevant competent authority
• To be mentioned in APR
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22. Tender / bidding acquisition
• Reg 14
• Remittance of EMD / bid bond guarantee
permitted
• Subsequent remittance also permitted
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23. Obligations/Rights of Investor
• To receive share certificates / other evidence of
investment
• Repatriate all dues receivable from foreign entity
• Submit APR –
As per Reg 15
• May pledge shares to JV/WOS to an AD in
India for credit for Indian party / JV/WOS –
Reg 18
• Hedging of exchange risks of investment
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24. Disivestment from JV/WOS
• May transfer to another Indian party which complies
with conditions of Reg 6 or to a non resident
• Subject to conditions / requirements listed
• Indian listed companies may disinvest resulting in write
off of capital invested, subject to 10% of previous
year’s export realisation*
• To apply to RBI in other cases
• * Effective 2732006, “write off” permitted in folowin
cases:
– JV/ WOS listed in overseas stock exchange
– Indian promoter listed and having net worth > Rs 100 crs.
–
12/3/2013 Indian promoter unlisted and investment < US$ 10 Mn.
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25. Other investments
•
•
•
•
•
Acquire foreign securities as a gift from PROI
Acquire shares under cashless ESOS
By inheritance from PRII / PROI
Acquire shares under ESOPs
Qualification shares – 1% of paid up capital
(upto US$ 20,000)
• Rights shares – provided original holding as per
prevailing law
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26. Overseas Branches
• Remittance upto 10% / 5% of average annual
sales / income / turnover during last two
accounting years for initial and recurring
expenses of foreign branches.
• Before 21st April, 2006 limit was 2% & 1%
respectively.
• Other conditions as per circular 54 dated 29th
June, 2002.
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27. US $ 25,000 Scheme
• An individual resident in India is permitted to remit up to US $
25,000 per calendar year for any legal and lawful purpose
without obtaining prior permission of RBI. The individual can
use said facility for any current or capital account transaction,
acquisition of any movable and/or immovable property or
opening of a bank account outside India.
• However, remittances cannot be made to Bhutan, Nepal,
Mauritius or Pakistan or countries identified as "non cooperative countries and territories" by the Financial Action Task
Force. Currently, the countries where investment cannot be
made are Myanmar, Nauru, Nigeria. The updated list can be seen
at the website of FATF - http://www.fatf-gaf
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28. Overseas Agricultural Operations
• Indian company or a partnership firm registered
under the Indian Partnership Act, 1932 are
permitted to undertake agricultural operations
including purchase of land incidental to such
activity. Inv28estment can be made either
directly (through a branch) or through an
overseas subsidiary/joint venture.
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29. Member of the ICSI, Chartered Institute for Securities & Investment (CISI), London,
and Economics Graduate. In my Career span have worked with Corporate, Merchant
Bankers, Subsy of Stock Exchanges, NBFCs, Stock Brokers. My area of operations
covers Heading of Compliance Division of Listed Companies, Project Financing,
Private Placements of Securities, Banking, Managing IPOs, Right Issues, Bonus Issue,
Listing of Bonds, Merger and Cross Border Takeovers.
I also have associated with prominent intuitions for research and developments. Have
worked with MCA on Companies Bill and with MCX-SX ( India’s leading Currency
Exchange) for Risk Management & Compliance Framework.
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30. Thanks
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