Setting up a Company abroad by Indian Residents-Regulatory
Requirements
 |
| By CA Pratik Anand, ACA |
With the advent
of Globalization, more and more Indians are interested in doing business
outside India. They want to set-up a branch office or a subsidiary abroad.
There are multiple benefits of doing so such as cost reduction because they
save on import duty, ease of doing business, building an international brand
etc.
We are often
asked this question whether an Indian Residents can set-up a Company abroad?
Let us first
look at the ways in which an Indian Resident can remit the money for investment
outside India.
1)
Liberalised
Remittance scheme (LRS)
As per this Scheme, resident individuals
may remit up to USD 125,000 per financial year for any permitted capital and
current account transactions or a combination of both.
a)
What are
some of the capital account transactions permitted under the scheme?
· Under the Scheme, resident individuals can
acquire and hold shares or debt instruments or any other assets including
property outside India, without prior approval of the Reserve Bank.
Q. Can remittances be made to acquire Joint
Ventures abroad?
Ans. With effect from August 05, 2013, this Scheme,
can be used by Resident individuals to set up Joint Ventures (JV)/ Wholly Owned
Subsidiaries (WOS) outside India for bonafide business activities within the
limit of USD 125,000 subject to the terms & conditions stipulated in FEMA
Notification No.263.
Fema Notification 263:
Acquisition or Setting up of a JV or WOS abroad by
resident individual
A resident individual (single or in association with
another resident individual or with an ‘Indian Party’ as defined in this
Notification) satisfying the criteria as per Schedule V of this Notification,
may make overseas direct investment in the equity shares and compulsorily
convertible preference shares of a Joint Venture (JV) or Wholly Owned
Subsidiary (WOS) outside India.”
Conditions to be followed are:
1. Resident individual is prohibited from making direct
investment in a JV or WOS abroad which is engaged in the real estate business
or banking business or in the business of financial services activity.
2. The JV or WOS abroad shall be engaged in bonafide business
activity.
3. Resident individual is prohibited from making direct
investment in a JV / WOS [set up or acquired abroad individually or in
association with other resident individual and / or with an Indian party]
located in the countries identified by the Financial Action Task Force (FATF)
as "non co-operative countries and territories" as available on FATF
website www.fatf-gafi.org or as notified by the Reserve Bank.
4. The resident individual shall not be on the Reserve
Bank’s Exporters Caution List or List of defaulters to the banking system or
under investigation by any investigation / enforcement agency or regulatory
body.
5. At the time of investments, the permissible ceiling
shall be within the
overall ceiling prescribed for the resident individual
under Liberalised Remittance Scheme as prescribed by the Reserve Bank from time
to time.
[Explanation: The investment made out of the balances held
in EEFC / RFC account shall also be restricted to the limit prescribed under
LRS.]
6. The JV or WOS, to be acquired / set up by a resident
individual under this Schedule, shall be an operating entity only and no step down subsidiary is allowed
to be acquired or set up by the JV or WOS.
7. For the purpose of making investment under this
Schedule, the valuation shall be as per Regulation 6(6)(a) of this
Notification.
8. The financial commitment by a resident individual to /
on behalf of the JV or WOS, other than the overseas direct investments as
defined under Regulation 2(e) read with Regulation 20A of this Notification, is
prohibited.
9. 'Indian
party' means a company incorporated in India or a body created under an Act of
Parliament or a partnership firm registered under the Indian Partnership Act,
1932 making investment in a Joint Venture or Wholly Owned Subsidiary abroad,
and includes any other entity in India as may be notified by the Reserve Bank.
Provided that
when more than one such company, body or entity make an investment in the
foreign entity, all such companies or bodies or entities shall together
constitute the 'Indian party'
Therefore,
It is clear that Resident Individuals can remit money outside India for setting
up either a joint venture or a wholly owned subsidiary abroad under the LRS.
Points to be noted:
Recently, the
RBI has permitted the purchase of immovable property abroad under the LRS.
Therefore, a person can now not only set-up a Company abroad but also purchase
an immovable property abroad for setting up the office of such a business under
the LRS within a total limit of USD 125000 per financial year.
2)
Overseas
Direct Investment
The Second way
by which Residents can set-up business abroad is by way of Overseas Direct
Investment.
·
What is
overseas Direct Investment?
This can be
understood by reading the definition of Overseas Direct Investment on the RBI
Website which is as follows:
Direct investment outside India means
investments, either under the Automatic Route or the Approval Route, by way of
contribution to the capital or subscription to the Memorandum of a foreign
entity or by way of purchase of existing shares of a foreign entity either by
market purchase or private placement or through stock exchange, signifying a
long-term interest in the foreign entity (JV or WOS).
It means that direct
investment outside India is either by way subscribing to the capital of a New
Company set-up outside India or by purchase of shares of an existing Company
outside India.
Here also the
entity to be set-up will be either a Joint venture or a wholly owned
Subsidiary.
Q. Mention the ways in which Overseas Direct Investment
outside India can be made.
·
Direct Investment outside India can be made either by way
of the Automatic Route or the Approval Route
· Automatic Route
·
Under the Automatic Route, an Indian Party
does not require any prior approval from the Reserve Bank for making overseas
direct investments in a JV/WOS abroad.
·
The Indian Party should approach an
Authorized Dealer Category I bank with an application in Form ODI and the
prescribed enclosures/documents for affecting the
remittances towards such investments. However, in case of investment in the
financial services sector, prior approval is required from the regulatory
authority concerned, both in India and abroad.
Q.
Who can make investment under the Automatic route?
·
An ‘Indian Party’ is eligible to
make overseas direct investment under the Automatic Route.
·
An Indian Party is a company incorporated
in India or a body created under an Act of Parliament or a partnership firm
registered under the Indian Partnership Act 1932 or a Limited Liability
Partnership (LLP) incorporated under the LLP Act, 2008 and any other entity in
India as may be notified by the Reserve Bank. When more than one such company,
body or entity makes investment in the foreign JV / WOS, such combination will
also form an “Indian Party”.
·
Therefore, the Investment under the
overseas direct investment automatic route can only be made by an Indian
Company, a registered partnership firm, LLP or a Body Corporate set-up under an
Act of parliament.
Q.
Can
overseas direct investment be made in any activity?
·
An Indian Party can make overseas
direct investment in any bonafide activity (except those that are specifically
prohibited. However, for undertaking activities in the financial services
sector, certain additional conditions as specified in Regulation 7 of the
Notification ibid should be adhered to.
Q. What are the prohibited activities for
overseas direct investment?
·
Real estate as defined in Regulation
2(p) of the Notification and banking business are the prohibited sectors for
overseas direct investment.
·
However, Indian banks operating in
India can set up JVs/WOSs abroad provided they obtain clearance under the
Banking Regulation Act, 1949, from the Department of Banking Operations and
Development (DBOD), CO, RBI.
·
An overseas JV / WOS, having direct or
indirect equity participation by an Indian party, shall not offer financial
products linked to Indian Rupee (e.g. non-deliverable trades involving foreign
currency, rupee exchange rates, stock indices linked to Indian market, etc.)
without the specific approval of the Reserve Bank. Any incidence of such
product facilitation would be treated as a contravention of the extant FEMA regulations
and would consequently attract action under the relevant provisions of FEMA,
1999.
Q. What are the limits and requirements for overseas
direct investment to be made under the Automatic Route?
A. The criteria for overseas direct investment under the Automatic
Route are as under:
- The Indian
Party can invest up to the prescribed limit of its net worth (as per the
last audited Balance Sheet) in JV/WOS for any bonafide activity permitted
as per the law of the host country.
- The Indian
Party is not on the Reserve Bank’s exporters' caution list / list of
defaulters to the banking system published/ circulated by the Credit
Information Bureau of India Ltd. (CIBIL) /RBI or any other credit
information company as approved by the Reserve Bank or under investigation
by the Directorate of Enforcement or any investigative agency or
regulatory authority; and
- The Indian
Party routes all the transactions relating to the investment in a JV/WOS
through only one branch of an authorised dealer to be designated by the
Indian Party.
- The
prescribed limit is 100% of the net-worth of the Indian Party.
What is the procedure to be followed by an Indian party
to make overseas direct investment in a JV/WOS under the Automatic Route?
·
The Indian Party intending to make
overseas direct investment under the automatic route is required to fill up
form ODI duly supported by the documents listed therein, i.e., certified copy
of the Board Resolution, Statutory Auditors certificate and Valuation report
(in case of acquisition of an existing company) and approach an Authorized
Dealer (designated Authorized Dealer) for making the investment/remittance.
Therefore, to summarise the Investment outside India
under the automatic route can be made to set-up a new company abroad (JV or
WOS). This can only be done by an Indian Company set-up under the Companies
Act’1956 or a registered partnership firm or a Body Corporate set-up by an Act
of Parliament.
· Approval Route
· Proposals not covered by the conditions under the automatic
route require prior approval of the Reserve Bank for which a specific
application in Form ODI with the documents prescribed therein is required to be
made through the Authorized Dealer Category – I banks. Some of the proposals
which require prior approval are:
·
i) Overseas Investments in the energy and natural resources
sector exceeding the prescribed limit of the net worth of the Indian companies
as on the date of the last audited balance sheet;
·
ii) Investments in Overseas Unincorporated entities in the
oil sector by resident corporates exceeding the prescribed limit of their net
worth as on the date of the last audited balance sheet, provided the proposal
has been approved by the competent authority and is duly supported by a
certified copy of the Board Resolution approving such investment. However,
Navaratna Public Sector Undertakings, ONGC Videsh Ltd and Oil India Ltd are
allowed to invest in overseas unincorporated / incorporated 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 the
automatic route;
·
iii) Overseas Investments by proprietorship concerns and
unregistered partnership firms satisfying certain eligibility criteria;
·
iv) 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 India;
·
Points To remember:
·
Requests under the approval route are
considered by taking into account, inter alia, the prima facie viability of the
JV / WOS outside India, likely contribution to external trade and other
benefits that may accrue to India through such investment, financial position
and business track record of the Indian party and the foreign JV / WOS,
experience and expertise of the Indian party in the same or related line of
activity of the JV / WOS outside India, etc.
·
Applications in Form ODI- Part I may be forwarded through
the designated Authorized Dealer Category – I bank to:
The Chief General Manager
Reserve Bank of India
Foreign Exchange Department
Overseas Investment Division
Central Office
Amar Building, 5th Floor
Mumbai 400 001
·
After Establishment Obligations
A. An Indian Party will have to comply with the
following: -
i.
receive share certificates or any other documentary
evidence of investment in the foreign JV / WOS as an evidence of investment and
submit the same to the designated AD within 6 months;
ii.
repatriate to India, all dues receivable from the foreign
JV / WOS, like dividend, royalty, technical fees etc.;
iii.
submit to the Reserve Bank through the designated
Authorized Dealer, every year, an Annual Performance Report in Part III of Form
ODI in respect of each JV or WOS outside India set up or acquired by the Indian
party;
iv.
report the details of the decisions taken by a JV/WOS
regarding diversification of its activities /setting up of step down
subsidiaries/alteration in its share holding pattern within 30 days of the
approval of those decisions by the competent authority concerned of such JV/WOS
in terms of the local laws of the host country. These are also to be included
in the relevant Annual Performance Report; and
v.
in case of disinvestment, sale proceeds of
shares/securities shall be repatriated to India immediately on receipt thereof
and in any case not later than 90 days from the date of sale of the shares
/securities and documentary evidence to this effect shall be submitted to the
Reserve Bank through the designated Authorised Dealer.
Is it mandatory to furnish Annual Performance Reports
(APR) of the overseas JV/WOS based on its audited financial statements?
A. Where the law of the host country does not mandatorily
require auditing of the books of accounts of JV / WOS, the Annual Performance
Report (APR) may be submitted by the Indian party based on the un-audited
annual accounts of the JV / WOS provided:
- The
Statutory Auditors of the Indian party certifies that ‘The un-audited
annual accounts of the JV / WOS reflect the true and fair picture of the
affairs of the JV / WOS’ and
- That the
un-audited annual accounts of the JV / WOS has been adopted and ratified
by the Board of the Indian party.
What are the penalties for non-submission of Annual
Performance Reports (APRs)?
Delayed submission/ non-submission of APRs entail penal
measures, as prescribed under FEMA 1999, against the defaulting Indian Party.
Points to remember:
·
An annual return on Foreign Liabilities
and Assets (FLA) is also required to be submitted directly by all the
Indian companies which have received FDI (foreign direct investment) and/or
made FDI abroad (i.e. overseas investment) in the previous year(s) including
the current year i.e. who holds foreign Assets or Liabilities in their Balance
Sheets.
·
FLA return is mandatory under FEMA 1999
and companies are required to submit the same based on audited/ unaudited
account by July
15 every year.
·
If the Partnership firms, Branches or
Trustees have any outward FDI outstanding as on end-March of the reporting
year, then they are required to send a request mail to get a dummy CIN number which will enable them to file the
Excel based FLA Return. If any entity has already got the dummy CIN number from
the previous survey, they should use the same CIN number in the current survey
also. (Therefore Return of Foreign Assets and Liabilities is also mandatory for
Registered Partnership Firms and trustees etc. also).
|
The
author is a CA in practice at Delhi and for any queries and assistances on
the above especially APR and return of Foreign Assets & Liabilities can
be contacted at:
Mobile:
+91-9953199493
|
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