OVERSEAS DIRECT INVESTMENT
The Foreign Exchange Management Act (FEMA) regulates overseas investments by Indian resident individuals.
A resident individual (single or in association with another resident individual or with an ‘Indian Party’) may make Overseas Direct Investment (ODI) in the equity shares and compulsorily convertible preference shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India under the Liberalized Remittance Scheme (LRS). The facility is available to all resident individuals including minors. However, in case of minors, the guardian shall countersign the LRS declaration form.
INTRODUCTION TO LIBERALISED REMITTANCE SCHEME
Under LRS, all resident individuals can freely remit $250,000 overseas every financial year without the prior approval from RBI for permissible set of current or capital account transactions.
If the resident individual wishes to make an investment of more than $250,000 for the financial year, he/she will need a prior approval from the RBI. However, there is an exception to the rule in case of medical treatment, overseas education and emigration, subject to certain documents and compliances.
Resident individuals are permitted to acquire and hold immovable property using this scheme. Also, LRS may be used to purchase shares (of listed companies or otherwise) or debt instruments or any other asset outside India without prior approval of the RBI. However, in case of investment in the financial services sector, prior approval is required from the regulatory authority concerned, both in India and abroad.
Remittances are permitted for overseas education, travel, medical treatment and purchase of shares and property, apart from maintenance of relatives living abroad, gifting and donations.
Resident individuals can also open, maintain and hold foreign currency accounts with overseas banks for carrying out transactions.
The following valuation norms shall be carried out when the resident individual makes remittance overseas in an existing foreign company :
1. where the investment is more than $5 million, by a Category I Merchant Banker Registered with Securities and Exchange Board of India, or an Investment Banker/Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and
2. in all other cases, by a Chartered Accountant or a Certified Public Accountant.
The LRS do not allow remittances for trading on the foreign exchange markets, margin or margin calls to overseas exchanges and counterparties and the purchase of Foreign Currency Convertible Bonds (FCCB) issued by Indian companies abroad.
Also, sending money to certain countries and entities is also barred under this scheme. Resident individual can’t send money to countries identified as ‘non cooperative’ by the Financial Action Task Force (FATF) and remittances are prohibited to entities identified as posing terrorist risks.
Some operational points to be noted for making remittances under LRS are as follows:
1. All remittances under LRS by an individual have to be made through only one designated branch of a bank. Banks are not permitted to offer any kind of credit facilities to facilitate capital account remittances under LRS. For capital account remittances, an individual has to maintain a bank account with the bank for at least one year before making any such remittance. However, there is no such restriction for current account remittances.
2. The resident individual may open, hold and maintain Foreign Currency Account (FCA) overseas for the purpose of ODI subject to certain terms and conditions. FCA so opened shall be closed immediately or within 30 days from the date of disinvestment from JV/WOS or cessation thereof.
3. The designated bank, which receives the request for making remittance under LRS, may ask for such documents, as it deems necessary.
4. The designated bank shall also ensure that TDS requirements under Income Tax Act are duly complied with before making remittance.
5. The designated bank will also ensure that Know Your Consumer (KYC) norms have been duly complied in respect of the individual making the remittance.
6. The designated bank will also ensure that Anti-Money Laundering Rules are duly complied with.
For remittances overseas, an individual resident is required to furnish the following documents:
1. File and signing of Form A2 (Required as per FEMA).
2. Application cum declaration for purchase of foreign exchange under LRS (Required as per FEMA).
3. It is mandatory to have PAN card to make remittances under LRS for capital account transactions. However, for current account transactions, PAN card is not mandatory for remittances less than USD 25,000.
Obligations of Indian resident individual making ODI:
1. The resident individual has to file Form ODI Part I with the AD Bank at the time of remittance to invest in JV or WOS overseas.
2. The resident individual has to obtain UIN for each WOS/JV established abroad and receive share certificate within six (6) months.
3. Any alteration in shareholding pattern of the JV or WOS must be reported to the AD bank within 30 days of such alteration. And also any change in investment pattern is to be reported to RBI within one (1) month from such investment changes.
4. Resident individuals must repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees, disinvestment proceeds, etc. within 60 days of its falling due.
Annual Performance Report:
1. Resident individual which has made ODI has to submit an Annual Performance Report (APR) in Form ODI Part II to the AD bank by 31 December every year in respect of each JV / WOS outside India.
2. Whenever number of resident individuals have invested in the same overseas JV / WOS, the APR shall be submitted by the resident individual having maximum stake in the JV / WOS.