Master Circular on Direct Investment by Residents in Joint Venture (JV)/ Wholly Owned Subsidiary (WOS) abroad

In terms of Regulation 6 of the Notification, an Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), as under: -not exceeding 300 per cent of the net worth of the Indian party (corporates) as on the date of the last audited balance sheet. -not exceeding 200 per cent of the net worth of the Indian party (registered partnership firms) as on the date of the last audited balance sheet. This ceiling will not be applicable where the investment is made out of balances held in Exchange Earners' Foreign Currency account of the Indian party or out of funds raised through ADRs/GDRs. The Indian party should approach an Authorised Dealer Category - I bank with an application in Form ODI and prescribed enclosures / documents for effecting remittances towards such investments. The above ceiling will include contribution to the capital of the overseas JV / WOS, loan granted to the JV / WOS, and 100 per cent of guarantees issued to or on behalf of the JV/WOS. Such investments are subject to the following conditions: a) The Indian entity may extend loan / guarantee to an overseas concern only in which it has equity participation. Indian entities may offer any form of guarantee - corporate or personal / primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India; provided that i) All financial commitments including all forms of guarantees are within the overall ceiling prescribed for overseas investment by the Indian party i.e. currently within 300/200 per cent of the net worth of the Indian party, as the case may be. ii) No guarantee is 'open ended' i.e. the amount of the guarantee should be specified upfront, and iii) As in the case of corporate guarantees, all guarantees are required to be reported to Reserve Bank, in Form ODI Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside India, would be outside this ceiling and would be subject to prudential norms issued by Reserve Bank from time to time . The Indian party should not be on the Reserve Bank’s Exporters caution list / list of defaulters to the banking system circulated by the Reserve Bank / The Credit Information Bureau (India) Ltd (CIBIL) or under investigation by any investigation / enforcement agency or regulatory body. All transactions relating to a JV / WOS should be routed through one branch of an authorised dealer bank to be designated by the Indian party. In case of partial / full acquisition of an existing foreign company, where the investment is more than USD 5.00 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and, in all other cases by a Chartered Accountant or a Certified Public Accountant. However, in cases of investment by way of swap of shares, in all cases irrespective of the amount, valuation of the shares will have to be by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of the Foreign Investment Promotion Board (FIPB) will also be a precondition. In case of investment in overseas JV / WOS abroad by a registered Partnership firm, where entire funding for such investment is done by the firm, it will be in order for individual partners to hold shares for and on behalf of the firm in the overseas JV / WOS if the host country regulations or operational requirements warrant such holdings. An Indian party is also permitted to acquire shares of a foreign company engaged in a bonafide business activity, in exchange of ADRs/GDRs issued to the latter 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 there under from time to time by the Central Government, provided: ADRs/GDRs are listed on any stock exchange outside India; The ADR and/or GDR issue for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian party; The total holding in the Indian entity by persons resident outside India in the expanded capital base, after the new ADR and/or GDR issue, does not exceed the sectoral cap prescribed under the relevant regulations for such investment under FDI; Valuation of the shares of the foreign company shall be (i) as per the recommendations of the Investment Banker if the shares are not listed on any recognized stock exchange; or (ii) based on the current market capitalisation of the foreign company arrived at on the basis of monthly average price on any stock exchange abroad for the three months preceding the month in which the acquisition is committed and over and above, the premium, if any, as recommended by the Investment Banker in its due diligence report in other cases. The Indian Party is required to report such acquisition in form ODI to the AD Bank for report to the Reserve Bank within a period of 30 days from the date of the transaction. Note: Investments in Nepal are permitted only in Indian rupees. Investments in Bhutan are permitted in Indian Rupees as well as in freely convertible currencies. All dues receivable on investments made in freely convertible currencies, as well as their sale / winding up proceeds are required to be repatriated to India in freely convertible currencies only. The automatic route facility is not available for investment in Pakistan.

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2007-08/17 · issued 02 Jul 2007. The plain-English explanation above is BankPulse’s own independent summary.