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Outward Foreign Direct Investment Policy (ODI) Basics of FEMAAugust 16, 2011

Vijay GuptaAICWA, FCS, FCA

VKGN & AssociatesChartered AccountantsMobile: 9810083373E-mail: vijay.gupta@vkgnassociates.com

IndexFEMA RegulationsEligible OptionsEligible Indian PartyProhibited ActivitiesAutomatic Route LimitsFinancial Commitment Valuation norms/ChargeFinancial services sectorSources for FundingSPVObligationsDisinvestment Resident individualIndian Mutual FundsInvestment in agricultureLiberalised Remittance Scheme

FEMA RegulationsRegulation 2(e) of FEMA 120/2004-RB dated July 7, 2004 defines Direct Investment outside India asInvestment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity, Orby way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange.ODI does not include portfolio investmentMASTER CIRCULAR entitled Direct Investment by Residents in JV/WOS Abroad dated July 1, 2010 Master Circular for opening Branch, Representative Office, JV, Subsidiary, Investment abroad by NBFC dated July 1, 2010 LIBERALISED REMITTANCE SCHEME FOR Resident Individuals

Office outside IndiaBy registered Firm, Company or Body Corporate Trading or non-trading office,

branch and representative office

For conducting normal business activities

Remittance can be made to meet initial and recurring expenses.

Withdrawal from EEFC not subject to ceiling.JVs / WoS under ODIAUTOMATIC ROUTEAPPROVAL ROUTE - ENGAGED IN ANY BONA FIDE BUSINESS ACTIVITY- For undertaking activities in financial services sector, certain additional conditions required.

PORTFOLIO INVESTMENTBY LISTED INDIAN COMPANIES - UP TO 50 % OF THEIR NET WORTH IN OVERSEAS COMPANIES, LISTED ON A RECOGNIZED STOCK EXCHANGE, OR BY WAY OF RATED DEBT SECURITIES

Eligible Indian PartyCompany, body corporate, registered partnership firm

Investment in Pakistan is not allowed under Automatic route.

Investments in Nepal can be only in Indian Rupees. Investments in Bhutan are allowed in Indian Rupees and in freely convertible currencies.

Not on RBIs exporters' caution list / list of defaulters

PROHIBITED ACTIVITIESReal estate business: 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

Banking business: Indian banks can after obtaining clearance DBOD, RBI

Automatic Route LimitsApproach Authorized Dealer with Form ODI

Financial services sector, prior approval is required from the regulatory authority concerned both in India and abroad

UP TO 400 % OF NET WORTH as per the last audited Balance Sheet.

Ceiling not applicable for EEFC account or out of funds raised through ADRs/GDRs.

Net worth clubbed for its Indian subsidiary/holding company holding at least 51% stake, and letter of disclaimer.Financial CommitmentEquity, loans and 100% of the amount of guarantee and 50% of Performance Guarantees.

Can extend loan or guarantee to only if equity participation

Amount and period of guarantee specified upfront. Guarantee for first level step down operating JV/WoS set up by operating company or a SPV. Second generation and subsequent step down subsidiaries where holding at least 51% under Approval route.

Bank BranchRoutes all transactions through only one branch of Bank.

More than one Group company, same branch.

Different branched for different JVs/WoS.

Bank to file Part I (Sections A to D), II and III of form ODI on-line in with RBI for allotment of UIN, reporting of subsequent remittances, filing of APRs, etc.

Valuation norms/ChargePartial / full acquisition: More than USD five million - SEBI Category I Merchant Banker or Investment Banker/Merchant Banker outside India; and in all other cases by CA/CPA

Swap Of Shares, irrespective of amount, by SEBI Category I Merchant Banker or Investment Banker/Merchant Banker outside India (Not CA).

Create a charge on immovable property or pledge shares of Indian party: Prior permission of the Reserve BankGENERAL PERMISSION: RESIDENTs IN INDIA For Purchase / Acquisition of Securities:

Out of funds held in the RFC account;As bonus sharesWhen not permanently resident in India (duration in India does not exceed 3 years), from the foreign currency resources outside India

To sell the shares so purchased or acquired.Approval route Prior approval of RBI through AD Bank

In energy and natural resources sector exceeding 400% of the net worth

Overseas Unincorporated entities in oil sector by resident corporate exceeding 400% of net worth

Navaratna Public Sector Undertakings, ONGC Videsh Ltd and Oil India Ltd are allowed to invest in overseas unincorporated entities in oil sector (i.e. for exploration and drilling for oil and natural gas, etc.), which are duly approved by the Government of India, without any limits, under automatic routeContd.By proprietorship concerns and unregistered partnership firms satisfying certain eligibility criteria

Investments by Registered Trusts / Societies (satisfying certain eligibility criteria) engaged in the manufacturing / educational / hospital sector in the same sector in a JV / WOS outside IndiaParametersPrima facie viability of the JV / WOS outside India

Likely contribution to external trade and other benefits that may accrue to India and business track record of the Indian party

Foreign entity, experience and expertise of the Indian party in the same or related line of activity of the JV / WOS outside IndiaFinancial services sectorOnly Indian company engaged in financial services sector activities

Earned net profit in preceding three financial years from financial services activities

Registered as NBFCComply with Master Circular Guidelines for opening Branch, Representative Office, JV, Subsidiary, Investment abroadContd.Obtained approval both in India and abroad before venturing into such financial activity

Fulfilled the prudential norms relating to capital adequacy

Trading in Overseas Commodities Exchanges: Reckoned is financial services activity, and clearance from Forward Markets Commission

Sources for FundingDrawal of foreign exchange from Bank in India.

Swap of shares (prior approval of FIPB for the inward leg of the investment)

Capitalization of exports, fees, royalties or any other dues from the foreign entity for supply of technical know-how, consultancy, managerial and other services.

Through the proceeds of External Commercial Borrowings / Foreign Currency Convertible Bonds

In exchange of ADRs / GDRs

Exchange Earners Foreign Currency account (not counted for ceiling)

Proceeds raised through ADR / GDR issues (not counted for ceiling)

Indian software exporters: Permitted to receive 25 % of the value of their exports in form of shares, with the prior approval of the Reserve Bank.

SPVNo restrictions for setting up of a second generation company

SPV for sole purpose of investment in JV/WOS overseas and not in India

All funding to operating subsidiary routed through SPV only

Shares of a JV/WOS abroad pledged: For availing fund based or non-fund based facility for itself or for JV/WOS, from an authorised dealer/ public financial institution in India or from an overseas lenderPledge of Shares of JV/WOS

Pledge of shares of overseas company permitted to:

Indian Bank / public financial institution for loan for Indian party itself or for the JV/ WOS abroad.

Overseas Lender subject to:The lender being regulated and supervised as a banktotal financial commitments of the Indian party remaining within the limit stipulated by RBI for overseas investments

Guarantees

Indian entities (promoter, group or associate company) permitted to offer guarantee (corporate / personal / primary / collateral etc.) provided:Indian entity has equity participation in Foreign CompanyPercentage computed towards 400% ceiling:50 % of the amount of the performance guarantee 100% of the amount for all other guaranteesNo guarantee is 'open ended' Time specified for completion of contract is the validity period of performance guaranteeCorporate Guarantee on behalf of First level down subsidiary is under Automatic Route (operating Company or SPV)Corporate Guarantee to Second level or subsequent level subsidiary under Approval level subject to the Indian party holding at least 51% or more directly or indirectly

Report in Form ODI-Part II to be submitted to RBI

RBI approval required for creating charge on immovable property / pledge of shares in favour of non-resident entity

Prior approval of RBI required before remitting funds in case on invocation of the performance guarantee results in breach of the 400% limit.

ObligationsReceive share certificates or any other documentary evidence

Repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc.

Submit Annual Performance Report within 3 months of closing. Penalty for non submision

Report the details regarding diversification of its activities /setting up of step down subsidiaries/alteration in its share holding pattern within 30 days

DisinvestmentConditions for automatic route for disinvestment:No write off of investmentNo outstanding dues such as dividend , royalty, technical know- how from JV / WOSSale after > 1 full year of operations and APR for said year has been submittedIndian party is not under investigation in IndiaShares sold on a Stock Exchange or if unlisted, share price not less than value certified by CA/CPA based on latest audited balance sheetSale proceeds repatriated to India not later than 90 days

Restructuring - Writing off Capital and other receivables

Indian Promoters of a WOS or having a minimum 51% stake in foreign JV may write off capital or other receivables such as loans, royalty, technical knowhow fees and management fees even while the JV/WOS continues to operate as below Listed Indian companies can write off 25% -Automatic RouteUnlisted Indian Companies can write off 25% - Approval route

In both cases they need to submit:A certified copy of the balance sheet showing the loss in the overseas WOS/JV; and Projections for the next five years indicating benefit accruing by such write off / restructuring.

Restructuring to be reported to RBI within 30 daysExit from JV/WOS Involving write off of capitalAutomatic route for disinvestment if any of the following are satisfied:JV / WOS is listed overseas; orIndian party is listed and has a net worth > Rs. 100 crore; orListed Indian party with net worth < Rs. 100 crore and Investment in JV/WOS is < US$ 10Milion; orUnlisted Indian party and investment in JV / WOS < US$ 10 million.

Resident individual Without prior approval of RBI: Receive as a gift from a person outside IndiaBy way of ESOPs issued by a company incorporated outside India under Cashless Employees Stock Option Scheme which does not involve any remittance from IndiaBy way of ESOPs issued to an employee or a director of Indian office or branch of a foreign company or of a subsidiary in India of a foreign company or of an Indian company in which foreign equity holding is not less than 51 per centAs inheritance from a person whether resident in or outside India By purchase of foreign securities out of funds held in the Resident Foreign Currency Account By way of bonus/rights sharesContd.Qualification Shares as Director: Up to 1% of the paid-up capital of the overseas company and amount does not exceed USD 20,000 in a calendar year Individual employees/directors engaged in the field of software. Consideration for purchase does not exceed USD 10,000 or its equivalent per employee in a block of five calendar yearsShares acquired by all the employees/directors do not exceed 5% of the paid-up capital of the Joint Venture or Wholly Owned Subsidiary outside IndiaResident employees of Indian companies in the knowledge based sectors including working directors may purchase foreign securities under the ADR/GDR linked stock option scheme provided the consideration for purchase does not exceed USD 50,000 or its equivalent in a block of five calendar years.

Indian Mutual Funds Overallcap of USD 7 billion ADRs / GDRs of the Indian and foreign companiesEquity of overseas companies listed on recognized overseas stock exchangesForeign debt securities- short term as well as long term with rating not below investment grade - in the countries with fully convertible currenciesMoney market investments not below investment grade; repos where the counter party is not below investment gradeGovernment securities

Contd.Derivatives traded on recognized stock exchangesShort term deposits with banks overseas where the issuer is rated not below investment gradeUnits / securities issued by overseas Mutual Funds or Unit TrustsDomestic Venture Capital Funds: Overall limit of USD 500 million in equity and equity linked instruments of off-shore VCFs

Investment in agricultureResident corporate and partnership firms may undertake agricultural operations including purchase of land incidental to such activity either directly or through their overseas offices,

Valuation of land is certified by a certified valuer registered with the appropriate valuation authority in the host country.LIBERALISED REMITTANCE SCHEMEResident individuals including minors Remittances can be consolidated in respect of family membersUp to US$ 200,000 per financial year (April March) for any permitted capital and current account transactions or a combination of bothGross basisPAN mandatoryNo restriction on the frequencyIllustrative listImmovable propertyOutward remittance can also be in the form of a DD in the residents own name or the name of the beneficiaryShares or debt instruments - No ratings or guidelinesPurchase of objects of artFor acquisition of ESOPsRepayment of loanUnits of Mutual Funds, Venture Funds, unrated debt securities, promissory notes - No ratings or guidelinesOther assets outside IndiaOpen, maintain and hold foreign currency accounts with banks outside India

Prohibited items:Lottery tickets/sweep stakes - Call back services

Banned magazines

Margins or margin calls to overseas exchanges / overseas counterparty

FCCBs issued by Indian companies in the overseas secondary marketTrading in foreign exchange abroad

For setting up a company abroad

No credit facilities in Indian Rupees or foreign currency

Remittances directly or indirectly to Bhutan, Nepal, Mauritius and Pakistan

Banned countries, Individuals and entities

Facility in addition to:Private travel (US$ 10,000) for one or more visits

Business travel (US$ 25,000)

Studies Abroad (US$ 100,000)

Medical treatment (as estimated by Doctor)

Acquisition of qualification sharesContd.Remittances for gift and donation part of Scheme:Can remit towards gifts (exceeding US$ 10,000) and donations (exceeding US$ 10,000)under Scheme

Accrued interest/dividend on deposits/investments abroad:Can be retained and re-invested

All transactions should be routed through same Authorised Dealer

Thank You