Guidelines
for Indian Direct Investment in Joint Ventures and Wholly Owned Subsidiaries
Abroad
1.1 Guidelines
for Indian Direct Investment in Joint Ventures and Wholly Owned Subsidiaries
Abroad reflect a need for transparency, recognition of global development,
capturing of Indian realities and learning of lessons from the past experience.
1.1-1 Firstly,
there is a need for a transparent policy framework to enable Indian businessmen
to plan their business and to be able to react to potential collaborators
outside the country. Such transparency is also required to enable the financial
institutions and banks to assess their support through professional judgment in
the context of financial sector reforms. Further, the Non-Resident Indian
community which is expecting to play a strong role in globalising the Indian
economy, is seeking a transparent policy.
1.1-2 Secondly,
there is a need for a formal recognition of the changing global reality. These
include : close relationship between flow of investment and trade;
increasing role of medium sized units; success in the domestic economy as a
precursor to success in the international arena; the importance of continuously
updating the technology through cross investments; more dynamic relation
between market seeking and resource seeking investments and tendency for skill
and service intensity rather than material intensity in the international
flows; the importance of going behind the tariff walls erected by the emerging
regional blocks; the trend towards multi-country ownership of enterprises; and
finally the emerging significance of ethnic links in international investment
and trade. It is also necessary to recognize that there can be a massive
outflow of foreign investment by companies if not monitored carefully.
1.1-3 Thirdly,
the Indian realities relate to the new economic policies. These include :
strengthening globalization of Indian economy by allowing the Indian
entrepreneurship to go global; being a capital importing country, the need to
avoid large capital outflow; visualising the global economic relationship well
beyond physical exports; ensuring that Indian industry and business attain
strategic positions in certain areas or regional blocks; increasing attention
to Joint Ventures Abroad in third countries while finalizing bilateral trade
and economic relationships and the need for a more dynamic approach towards
access to world technology through all means including overseas investment.
1.1-4 Fourthly,
the lessons of experience have to be captured and a clear signal given about
the new policy framework. The lessons of past experience include the low return
on investment; large incidence of morality after approval; low return on
investment in the form of dividends; limited coverage and capital intensity of
overseas investment, perhaps because they were linked with physical exports;
inadequate coverage of trading and service sector till recently; difficulties
for cash borrowing and guarantees by the parent company in India resulting in
cash crunch experience by the overseas venture; inadequate interaction between
Embassies and investors; lack of self regulatory mechanism; a regulatory
approach instead of facilitator or strategic approach to overseas investment;
procedural bottlenecks with clearance being required from multiple agencies and
finally the impression that approval of the Government includes clearance from
the commercial viability angle also and consequently implying directed lending
by banking institutions resulting in defaults to Indian banks.
1.1-5 Liberalized
outward investment procedures of 1992 have had a positive impact and approvals
have increased in number, range and innovativeness.
1.2 The
basic objectives of a transparent policy towards overseas investment from India
through these guidelines are :
(a) recognising
the link between trade and investment flows, to provide a framework for Indian
Industry and Business to access global networks;
(b) to
ensure that such flows, through determined by commercial interest, are
consistent with the macro-economic and balance of payment compulsions of the
country, particularly in terms of the magnitude of the capital flows;
(c) to
provide a transparent mechanism of knowing the priorities of the Government in
regard to the overseas investment, so as to influence the stake holders
including financial institutions/banking sector and Embassies so that there is
an understanding and alignment between macro-economic objectives and the
individual business decisions;
(d) to give
liberal access to Indian business for technology-sourcing or resource-seeking
or market-seeking as strategic responses to the emerging global opportunities
for trade in goods or services;
(e) to give
a signal that there is a qualitative change in the approach of the Government,
from one of regulator or controller to one of facilitator; and
(f) to
encourage the Indian industry to adopt a spirit of self-regulation and
collective effort for improving the image of Indian industry abroad.
1.3 In
the light of the above, the following guidelines are issued to elaborate the
policy framework in the EXIM-policy. The Reserve Bank of India (RBI) will
accord all necessary approvals, and monitor the progress by prescribing the
reporting obligations.
These
guidelines shall apply to Direct Investment by Indian parties in Joint Ventures
(JVs) and Wholly Owned Subsidiaries (WOSs) Abroad (hereinafter referred to as
‘Foreign concerns’). They apply to direct investment by Indian parties in newly
promoted foreign concerns, to make initial or additional direct investment by
Indian parties in existing foreign concerns and to investments for acquisitions
of overseas business.
2.2 The
foreign concern in which the direct investment is proposed to be made may be
engaged in industrial, commercial, trading or service activity including hotel
or tourism industry. This includes financial services such as insurance, mutual
funds etc.
2.3 These guidelines
do not apply to—
(i) portfolio
investment by Indian parties in foreign concerns;
(ii) direct investment in foreign concerns
engaged in the banking sector.
Cases
under Sl. Nos. (i) to (ii) above shall be considered in terms of separate
procedures as prescribed by the Reserve Bank of India/Department of Economic
Affairs (Ministry of Finance).
For purposes of these guidelines :
(a) ‘Direct
Investment’ shall mean investment by an Indian party in the equity share
capital of the foreign concern with a view to acquiring a long-term interest in
that concern. Besides the equity stake, such long-term interest may be
reflected through representation on the Board of Directors of the foreign
concern and in the supply of technical know-how, capital goods, components, raw
materials, etc. and managerial personnel to the foreign concern.
(b) ‘Host Country’
shall mean the country in which the foreign concern receiving the direct
investment is formed, registered or incorporated.
(c) ‘Indian
Party’ shall mean a private or public limited company incorporated in
accordance with the laws of India. When more than one Indian body corporate
make a direct investment in a foreign concern, all the bodies corporate shall
together constitute the ‘Indian Party’.
(d) ‘Joint
Venture’ shall mean a foreign concern formed, registered or incorporated in
accordance with the laws and regulations of the host country in which the
Indian party makes a direct investment, whether such investment amounts to a
majority or minority shareholding.
(e) ‘Wholly
Owned Subsidiary’ shall mean a foreign concern formed, registered or incorporated
in accordance with the laws and regulations of the host country whose entire
equity share capital is owned by the Indian party.
4. Categories of applications processed by
RBI
There
shall be two categories of applications for setting up overseas JVs and WOSs
viz. Category “A” Automatic Route and Category “B” Normal Route. All
applications are to be made to and processed by RBI.
5.1 Category
“A” Automatic Route
1 A
private/public limited company will be eligible for direct investment in a
joint venture/wholly owned subsidiary abroad on an automatic basis, without
prior reference to RBI up to a total value of investment not exceeding US $ 50
(fifty) million (not applicable to Indian investments in neighbouring
countries, namely, Bangladesh, Maldives, Myanmar, Sri Lanka, Pakistan, Nepal
and Bhutan), in respect of Indian investment in neighbouring countries, namely,
Bangladesh, Maldives, Myanmar and Sri Lanka total value of investment not
exceeding US $ 75 (seventy-five) million and in respect of rupee investment in
Nepal and Bhutan, the total value of investment not exceeding Rs. 350 (three
hundred and fifty) crores provided:]
(i) Investment
is projected by investing Indian company in its core activity area. Core
activity shall be determined on the basis of 50% of total turnover of the
investing company.
(ii) The
investing Indian company should have earned profits during the preceding three
years.
(iii) Investment
is not predominantly real estate - oriented.
The funding of such investments shall be by one or a
combination of the following sources :—
(i) Balances in EEFC accounts of investing
companies.
(ii) Other
domestic resources including loans, equity and other contingent liabilities
like guarantees which should not exceed 25% of net worth of investing company
as on the date of last audited balance sheet of the investing company.
(iii) Upto
50% of the proceeds of ADR/GDR issues by investing company.
5.2 Investment
upto any amount can be made under the automatic route provided the investments
are funded out of 50% of the proceeds of ADR/GDR issued by investing companies.
The eligibility conditions stipulated under paragraph 5.1 excepting sub-para
5.1(iii) above shall not be applicable in such cases.
5.3 Investments
upto a maximum of US $ 50 million shall be permitted out of EEFC accounts by
the Authorised Dealers without reference to the guidelines on Indian direct
investment abroad and also without reference to the RBI. Such cases shall be
considered in terms of separate procedures as prescribed by the Reserve Bank of
India.
5.4 The
investment may, besides cash remittance at the discretion of the Indian party,
be contributed by the capitalisation in full or in part of :
(a) Indian
made plant, machinery, equipment and components supplied to the foreign
concern;
(b) the
proceeds of goods exported by the Indian party to the foreign concern;
(c) fees,
royalties, commissions or other entitlements from the foreign concern for the
supply of technical know-how, consultancy, managerial or other services.
5.5 In
cases where the applicant company is a new company and does not meet the
requisite net worth criteria, credit may be given to the parent company’s net
worth, provided the applicant company is either a wholly owned subsidiary
company of the said parent company, or the latter owns at least 51% shares in
the former.
5.6 Apart
from the above requirements, the following shall apply to applications for
overseas direct investment in the financial sector :
(a) Financial
services companies proposing to set up JV/WOS overseas, should either be
registered with SEBI as Category 1 Merchant Banker or as an NBFC under the
Non-Banking Finance Companies (Reserve Bank) Directions, 1977 issued by RBI
from time to time.
(b) The
company should have a minimum net worth (paid-up capital + fee reserves) of Rs.
15 crores.
(c) Finance
companies seeking to make overseas investments should have fulfilled the
prudential norms relating to capital adequacy ratio of 8%.
(d) Subsidiaries
of Indian financial institutions which are conforming to the above said norms
will also be permitted to make overseas direct investment in the financial
services sector.
5.7 Within the
overall limit of US $ 50 (fifty) million investing companies may opt
for :—
(i) cash
remittances;
(ii) capitalisation of export proceeds
towards equity; or
(iii) giving
loans or corporate guarantees to/on behalf of Indian JVs/WOSs. Guarantees shall
be taken at 50% of the face value for determining the overall limit of
investment.
5.8 For
loans/guarantees from banks/financial institutions from India to/on behalf of
Indian JVs/WOSs abroad, requisite clearance from commercial banking angle for
loans and guarantees as required would need to be taken as normally prescribed.
1[5.9 This
facility of automatic route will be available to the Indian party only once in
a block of three calendar years including the calendar year in which the
investment is made. However, within the overall limit of US $ 50 (fifty)
million and its entitlement of 25% of the net worth, US $ 75 (seventy five)
million in case of investment in neighbouring countries, namely, Bangladesh,
Maldives, Myanmar and Sri Lanka, Rs. 350 (three hundred and fifty) crores in
case of investment in Nepal and Bhutan, the Indian party may be permitted to
invest in equity/provide guarantee etc. on the automatic route on more than one
occasion and in more than one JV/WOS abroad.]
5.10 Companies
should comply with all provisions of the Companies Act including Board
Resolution specifying clearly that the norms indicated above have been complied
with. A certificate from their Statutory Auditor certifying that the above
conditions have been complied with should also be obtained. A copy of the Board
Resolution along with the Statutory Auditor’s certificate as above is to be
furnished to be RBI while reporting the investments.
All
applications not qualifying for “Automatic Route” clearance on the basis of the
applicable criteria outlined in paragraph 5.1 above, and the cases in excess of
US $ 50 million will be processed in the RBI, without reference to Ministry of
Finance, through the existing Special Committee appointed by RBI in
consultation with the Government keeping in view of the criteria laid down in
para 7.1 of these guidelines. The Committee shall be chaired by the Deputy
Governor, RBI with representatives of the Ministry of Finance, Ministry of
Commerce, Ministry of External Affairs and the RBI as members. The Committee
will be empowered Committee to consider and clear all proposals without reference
to Ministry of Finance. The Committee shall co-opt as members other
Secretaries/Institutions dealing with the sector to which the case before the
Committee relates.
A
recommendation will be made within 60 days of receipt of the complete
application and RBI will grant or refuse permission on the basis of the
recommendations. Such proposal should be accompanied by a Project
Report/Feasibility Report submitted by the applicant and by a statement from a
Chartered Accountant verifying the ratios, projections made etc. If the Special
Committee is not satisfied with the Project Report submitted by the applicant,
it may require the applicant to submit the project to an appraisal by IDBI,
ICICI, Exim Bank, SBI cap or any other similar agency.
6.2 The
Special Committee will inter alia, review the criteria for and progress of all
overseas investments under the guidelines and evolve its own procedure for
consultations and approvals.
6.3 The
overseas investments under various routes involving outflow of foreign exchange
should not exceed the annual limit fixed by the Ministry of Finance for the
purpose. The annual limit shall be reckoned with reference to cash remittance
only and shall not include ADR/GDR realisation/Stock Swap/Guarantees.
6.4 The
nodal responsibility relating to assistance in establishing various industries
in foreign countries stands transferred from Department of Commerce to Ministry
of Finance. Consequently guidelines for Indian direct investments in JV/WOS
abroad shall be administered by the Ministry of Finance (Deptt. of Economic
Affairs).
7. The
existing proposals for overseas investments which are pending with RBI on the
date of issue of this Notification may also be considered in terms of the
amended Guidelines.
In
considering an application under category “B” the Committee shall, inter alia
have due regard to the following :
(a) the
financial position, standing and business track record of the Indian and
foreign parties;
(b) experience
and track record of the Indian party in exports and its external orientation;
(c) quantum
of the proposed investment and the size of the overseas venture in the context
of the resources, net worth and scale of operations of the Indian party
including the EEFC/GDR funds proposed as a component of the overseas direct
investment;
(d) benefits
to the country in terms of foreign exchange earnings, two way trade generation,
technology transfer, access to raw materials, intermediates or final products
not available in India;
(e) prima
facie viability of the proposed investment provided that the proposals for
overseas direct investment in the financial sector under Category “B” shall
also conform to the requirements laid down for this sector at para 5.6 above.
7.2 Indian
financial and banking institutions considering to support the venture will
examine independently the commercial viability of the proposal.
In
the case of a joint venture in which the Indian party has a minority equity
shareholding, the Indian party shall report to the Ministry of Commerce and the
Reserve Bank of India the details of following decisions taken by the joint
venture within 30 days of the approval of those decisions by the
shareholders/promoters/Directors of the joint venture in terms of the local laws
of the host country;
(i) undertake
any activity different from the activity originally approved by the
RBI/Government of India for the direct investment;
(ii) participate
in the equity capital of another concern;
(iii) promote
a subsidiary or a wholly owned subsidiary as a second generation foreign
concern;
(iv) alter
its share capital structure, authorised or issued, or its shareholding pattern.
8.2 In
case of a joint venture in which the Indian party has a majority equity
shareholding or in the case of a wholly owned subsidiary, the Indian party may,
without prior reference to the RBI, consent to the following decisions being
taken by the foreign concern, subject to the foreign concern having been in
operation for not less than two years:
(i) undertake
any activity different from the activity originally approved for the direct
investment;
(ii) participation
in the equity capital of another concern;
(iii) promote
a subsidiary or a wholly owned subsidiary as a second generation foreign
concern;
(iv) alter
its share capital structure, authorised or issued, or its shareholding pattern:
Provided, the following conditions are
fulfilled:
(a) the
Indian party has repatriated all entitlements due to it from the foreign
concern, including dividends, fees and royalties and this is duly certified by
a Chartered Accountant;
(b) the
Indian party has no overdues older than 180 days from the foreign concern in
respect of its exports to the latter;
(c) the
Indian party does not seek any fresh cash remittance from India; and
(d) the
percentage of equity shareholding of the Indian party in the first generation
joint venture of wholly owned subsidiary is not reduced unless it is pursuant
to the laws of the host country.
The
Indian party shall report to the Ministry of Finance and the Reserve Bank of
India the details to the decision taken by the joint venture or wholly owned
subsidiary within 30 days to the approval of those decisions by the
shareholders/promoters/Directors in terms of the local laws of the host country,
together with a statement on the fulfilment of the conditions mentioned above.
8.3 In
the case of subscription by an Indian party to its entitlement of equity shares
issued by a joint venture on Rights basis, or in the case of subscription by an
Indian party to the issue of additional share capital by a joint venture or a
wholly owned subsidiary, prior approval of the RBI shall be taken for such
subscription. Approval for such subscription may be given in accordance with
paragraph 5 or 6 above, as the case may be.
The
foreign exchange needed for overseas investment may be drawn after the approval
is granted, either from an authorised dealers or by utilizing the balance
available in the EEFC account of the Indian party or by any other means
specified in the letter of approval.
The
Indian party shall furnish an annual performance report in respect of the
foreign concern, together with a certified copy of its Annual Report and
Audited Annual Accounts and a note on the basic features of the progress and
achievements on the basis of original projections, within 30 days of the expiry
of the statutory period for finalisation of audited annual accounts applicable
in the host country to the RBI. The statutory period should be certified by an
independent Chartered/Public Accountant of the host country. In case there is
no such statutory period the report shall be submitted within six months of the
close of the relevant accounting period. Together with the annual performance
report, the Indian party shall also furnish a detailed statement of all the
entitlements due to it from the foreign concern and their remittance to India.
10.2 The
Indian party shall remit to India in free foreign exchange (in Indian Rupees
for Indian Rupee investment in Nepal) all entitlements due to it from a foreign
concern by way of royalty, technical fees, management fees or any other type of
payments within a period of 60 days from the date they become due. The Indian
party shall remit to India in free foreign exchange dividends/profit after tax
due to it from a foreign concern within a period of 60 days from the date they
are declared/approved by the Directors/shareholders of the foreign concern. The
remittances mentioned above shall be subject to the time taken for clearance of
the remittance by the Central Bank of the host country. In case the remittance
of any entitlement mentioned in this paragraph has not been completed even
within the following financial year of the foreign concern, the Indian party
shall furnish a special report to the Reserve Bank of India explaining the
reasons for non-remittance of the entitlements due to it from the foreign
concern.
Proposals
for disinvestment from a JV/winding up of WOS will be processed by RBI. The application
shall be accompanied by share valuation and justification for sale price as
certified by a Chartered Accountant.
12. Export
of indigenous machinery towards equity
Both
under Category “A” and Category “B” above, second hand or reconditioned indigenous
machinery may be supplied by the Indian party towards its contribution to the
direct investment in the foreign concern.
No
Agency commission shall be payable to a joint venture/wholly owned subsidiary
against the exports made by the Indian party towards its equity investment.
Similarly, no agency commission shall be payable to a trading joint
venture/wholly owned subsidiary if the Indian party makes an outright sale to
it.
14. Clearances
under other laws
Where
the Indian party requires approval under the Companies Act or any other law for
the time being in force for the proposed direct investment, it would be the
responsibility of the Indian party etc. to obtain such approvals from the
appropriate authorities.
15. The
direct investment shall conform to the laws and regulations of the host
country. It is desirable to associate, to the extent possible, local parties,
local development banks, and local financial institutions in a joint venture.
Unless there are strong reasons to the contrary, the association of individuals
as foreign promoters or partners is not encouraged.
16. In
principle approvals for acquisitions
Indian
parties seeking to acquire overseas ventures through time bound bidding/tender
procedures are some times required to obtain “in principle” approvals on an
urgent basis. In such special circumstances RBI may grant such “in principle”
approval. RBI would formulate separate guidelines/conditions of application and
approvals for such cases.
All
direct investment in joint ventures and wholly owned subsidiaries abroad
whether approved under paragraph 5 or 6 of these guidelines, is subject to the
provisions contained in these guidelines. If an Indian party violates any
provision of these guidelines or fails to fulfil any of the conditions
contained in the letter of approval, or if the RBI is satisfied that it is in
the public interest to do so, the RBI may, without prejudice to any action
under any other law applicable to the case, direct the Indian party to disinvest
its shareholding and remit all proceeds and other entitlements to India within
a stipulated period.
18. The
prescribed forms and other details may be obtained from all notified offices of
Reserve Bank of India and filed in offices so notified.
Please
refer to our circulars DBOD.IBS.BC. 104/23.37.001/98-99 dated November 12, 1998
and DBOD.IBS. 1707/23.37.001/98-99 dated January 21,1999 in terms of which
banks were permitted to extend credit/non-credit facilities to Indian Joint Ventures/Wholly
Owned Subsidiaries abroad up to the extent of 5% of their unimpaired Tier - I
capital, subject to certain terms and conditions. The above facility was
permitted to banks to provide additional avenues for deployment of funds held
in FCNR(B), EEFC, RFC etc. accounts.
2. As per the
existing Exchange Control Regulations, vide paragraph 2 of the A.P.(DIR Series)
Circular No. 63 dated December 21, 2002, Authorised Dealers are now free to
undertake investments in overseas markets subject to limits approved by their
respective Boards.
3. In view
of the above, it has now been decided to revise the ceiling from 5% of the
unimpaired Tier - I capital to 10% of banks’ unimpaired capital funds (Tier I
and Tier II capital) for banks to offer credit/non-credit facilities to Indian
Joint Ventures/Wholly Owned Subsidiaries abroad. The following conditions
stipulated in our circular referred to above for such facilities will, however,
remain unchanged:
(i) Loan
will be granted only to those joint ventures where the holding by the Indian
company is more than 51%.
(ii) Proper
systems for management of credit and interest rate risks arising out of such
cross border lending are in place.
(iii) Section
25 of the Banking Regulation Act, 1949 is complied with.
(iv) The resource
base for such lending should be funds held in foreign currency accounts such as
FCNR(B), EEFC, RFC etc. in respect of which banks have to manage exchange risk.
(v) Maturity
mismatches arising out of such transactions are within the overall gap limits
approved by RBI.
(vi) All
existing safeguards/prudential guidelines relating to capital adequacy,
exposure norms etc. applicable to domestic credit/non-credit exposures are
adhered to.
The above facility is subject to review, after one
year.
4. Further, as
already stipulated in our above circular, the loan policy for such
credit/non-credit facility should be, inter alia, keeping with the following :
(a) Grant
of such loans is based on proper appraisal and commercial viability of the
projects and not merely on the reputation of the promoters backing the project.
Non-fund based facilities should be subjected to the same rigorous scrutiny as
fund based limits.
(b) The
countries where the joint ventures/wholly owned subsidiaries are located should
have no restrictions applicable to these companies in regard to obtaining
foreign currency loans or for repatriation etc. and should permit non-resident
banks to have legal charge on securities/assets abroad and the right of
disposal in case of need.
Source : DBOD.IBS.BC. 94/23.37.001/2002-03, dated 8-4-2003,
issued by Department of Banking Operations and Development, RBI.