JOINT
VENTURE AND WHOLLY OWNED SUBSIDIARY IN FOREIGN COUNTRY BY INDIAN
PARTY
The success
of Indian companies in software exports as also in other businesses
have opened up the possibilities of Indian companies entering
into joint venture (J/V) and also open wholly owned subsidiary
(WOS) in foreign countries. For J/V and WOS the Indian companies
have to make investment in foreign currency. As the foreign exchange
goes out of India the Reserve Bank of India comes into picture.
The
provisions related to J/V and WOS are governed by the Foreign
Exchange Management Act (FEMA) and The Foreign Exchange Management
(Transfer or issue of any foreign security) Regulations, 2000.
(Said regulations).
Before
we discuss in detail we see how some of the important terms are
defined.
·
"American
Depository Receipt" (ADR) means a security issued by a bank
or a depository in United States of America (USA) against underlying
rupee shares of a company incorporated in India;
·
`Core
Activity’ means activity carried on by an Indian entity which
constitutes at least 50% of its average turnover in the previous
accounting year;
·
"Global
Depository Receipt"(GDR) means a security issued by a bank
or a depository outside India against underlying rupee shares
of a company incorporated in India;
·
"Direct
investment outside India" means investment by way of contribution
to the capital or subscription to the Memorandum of Association
of a foreign entity, but does not include portfolio investment
or investment through stock exchange or by private placement in
that entity;
·
"Indian
party" means a company incorporated in India or body created
under an Act of Parliament, making investment in a Joint Venture
or Wholly Owned Subsidiary abroad, and includes any other entity
in India as may be notified by Reserve Bank
·
"Joint
Venture (JV)" means a foreign entity formed, registered or
incorporated in accordance with the laws and regulations of the
host country in which the Indian party makes a direct investment;
·
"Wholly
Owned Subsidiary (WOS) " means a foreign entity formed, registered
or incorporated in accordance with the laws and regulations of
the host country, whose entire capital is held by the Indian party;
·
"Real
estate business’ means buying and selling of real estate or trading
in transferable development rights (TDRs) but does not include
development of townships, construction of residential/commercial
premises, roads or bridges;
SOME
IMPORTANT POINTS
·
Only (a) Public Ltd. Company, (b)
Private Limited Company are allowed to invest for J/V and WOS
called Indian party.
·
Individual, partnership firms etc
are not allowed to invest.
·
Investment in banking business and
real estate business are not allowed.
·
Investment can be by way of equity, debentures,
loans, and guarantees.
·
Remittance
can be by way of cash, or export of goods and services.
·
Dividends,
royalties, etc. due to Indian investor should be repatriated to
India .
We
shall now look at the various ways of investments by Indian party
in detail.
|
CATEGORY
OF INVESMENT
|
AMONT
OF INVESTMENT NOT TO EXCEED
|
CRITERIA
FOR PERMISSION
|
MODE
OF INVESTMENT
|
HOW
TOAPPLY
|
|
Investment in J/V or WOS outside India
except Nepal & Bhutan
|
US $ 50 million or its equivalent in a block of three financial years
|
The
direct investment is made in a foreign entity engaged in
the same core activity carried on by the Indian party;
The
Indian Party has earned net profit during the preceding
three accounting years;
.
|
Investment
can be made by way of equity or loan or by way of giving
guarantee.
Investment
can be made out of EEFC account funds or by drawing Foreign
Exchange from the Authorised Dealer.
Investment
by way of capitalisation of exports of goods and services
towards equity contribution and any other dues can be also
be made as prescribed under the regulations.
|
To submit form ODA,
duly completed, to the designated branch of an authorised
dealer (Bank) for onward transmission to Reserve Bank.
|
|
Investment in J/V or WOS in Nepal &
Bhutan
|
Rs. 120 crores in a block of three financial years
|
Same
as above
|
Same
as above
|
Same
as above
|
|
Investment
out of ADR/GDR issues
|
50% of amount raised by ADR
/ GDR issue
|
The
ADR/GDR issue has been made in accordance with the Scheme
for issue of Foreign Currency Convertible Bonds and Ordinary
Shares (through Depository Receipt Mechanism) Scheme 1993
and the guidelines issued thereunder
|
Same
as above
|
To
file with Reserve Bank, in form ODA full details
of the investment made, within 30 days of such investment.
|
|
Investment
in Financial Service Sector
|
US
$ 50 million or its equivalent in a block of three financial
years
|
Only
Indian party engaged in financial service activities can
make investment in entity engaged in financial services
activities – If
Investor
company has earned net profit in 3 preceding financial years
and has minimum net worth of Rs. 15 Cr. as on last audited
Balance Sheet
|
Same
as above
|
To
submit form ODA, duly completed, to the designated
branch of an authorised dealer (Bank) for onward transmission
to Reserve Bank.
|
|
Investment
in foreign security by way of Swap or exchange of shares.
|
US$
100 million or 10 times of export earning of Indian
party in preceding financial year including all investment
in same financial year
|
Only
those Indian party engaged in, Information Technology and
entertainment Software, Pharmaceutical sector, biotech [Specified
activity] may acquire shares of foreign company in exchange
of ADR / GDR
|
ADR
/ GDR issue of Indian party is listed outside India
80%
of average turnover of Indian party in 3 previous financial
year - is from activity included in schedule or Indian party
has annual average export earning of at least Rs. 100 Cr.
in previous 3 financial year from it’s activities.
ADR
/ GDR issue is backed by fresh equity shares by Indian party.
|
To
submit a report in form ODG to the Reserve Bank
|
|
Acquisition
of a foreign Company through bidding or tender
|
Same
as first category
|
Same
as first category
|
Acquisition
of the foreign company
|
To
fill form ODA and ODI as prescribed to Reserve
Bank
|
|
Investment
proposal, not falling under General Permission Category
|
As
per the permission of Reserve Bank
|
·
Prima
facie viability of J/V or WOS
·
Contribution
to external trade by proposed investment
·
Financial
position & business track record of Indian party &
foreign entity.
·
Experience
& expertise of Indian party in related line of activity
|
Direct
investment
|
File
form ODI
|
|
Exchange
of shares
|
File
form ODB
|
Obligations
of the Indian Party
An
Indian Party which has acquired foreign security as above shall
–
(i)
receive share certificates or any other document as an evidence
of investment in the foreign entity to the satisfaction of the
Reserve Bank 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 Reserve Bank may
permit;
(iii)
submit to the Reserve Bank every year an annual performance report
in form APR in respect of J/V or WOS outside India set
up or acquired by the Indian Party and other reports or documents
as may be stipulated by the Reserve Bank.
Transfer
by way of sale of shares of a JV/WOS not allowed without the permission of Reserve Bank or as provided in
the Act or rules or regulations made or directions issued there
under.
Pledge
of Shares of J/V and WOS as a security for
availing of fund based or non-fund based facilities for itself
or for the J/V WOS from an authorised dealer (Bank) or a public
financial institution in India is allowed.
© Zarana Khona
2001 email: zarana@indiaitlaw.com
