PPT ON FEMA Act Rashmi

OUTBOUND INVESTMENTS – UNDER FEMA REGULATIONS: 

OUTBOUND INVESTMENTS – UNDER FEMA REGULATIONS

Agenda: 

Prof Rashmi Narayanswamy 2 Agenda Provisions of FEMA, 1999 and Applicable Regulations Types of Investments – Prohibited / Regulated /Permitted US$ 25,000 Scheme JV Investments by Employees Portfolio Investments Agricultural operations overseas

FEMA provisions: 

Prof Rashmi Narayanswamy 3 FEMA provisions Overseas Investments is a Capital account transaction Hence prohibited unless permitted – generally or specifically - Section 6 RBI empowered by Section 6(2) to specify permissible capital account transactions. FEM (Permissible Capital account transactions) Regulations issued in 2000. – Schedule I lists 11 capital account transactions, of which ODI is # 1

Prohibited Investments: 

Prof Rashmi Narayanswamy 4 Prohibited Investments Reg 5 (2) All “Indian Parties” prohibited from investment in a foreign entity engaged in – Real estate Business Banking Business Reg 5(1) All residents not to make direct investment o/s India – except with general / specific approval Reg. 3 of Notif 120 All persons resident in India prohibited from issuing foreign security – except with RBI approval

General Permission: 

Prof Rashmi Narayanswamy 5 General Permission Reg 4 / Para A 4 General permission granted to residents for Purchase / acquisition of foreign securities and sale thereof Out of funds held in RFC account As bonus shares on securities already held Out of their Foreign Currency Resources outside India (when not permanently resident in India)

Direct Investment o/s India – Automatic Route - Reg 6: 

Prof Rashmi Narayanswamy 6 Direct Investment o/s India – Automatic Route - Reg 6 Who can invest? Company incorporated in India Body created under Act of Parliament Partnership firm regd under Indian Partnership Act Other entity as notified by RBI Effective 27/3/2006, proprietary / unregistered partnership firms which are star export houses are also permitted – subject to RBI approval – Form ODI – Conditions as per Annex to circular dt 27/3/2006

Direct Investment o/s India – Automatic Route - Reg 6: 

Prof Rashmi Narayanswamy 7 Direct Investment o/s India – Automatic Route - Reg 6 Indian party permitted to make investment in overseas JV/WOS To submit Form ODA to designated branch of AD Limit: 200% of Net Worth as on date of last B/s Ceiling NA for investments out of EEFC a/c or funds raised thru ADRs/GDRs. Investment in Nepal/ Bhutan only in INR Investment in Pakistan not permitted under automatic route

Direct Investment o/s India – Automatic Route - Reg 6 – Contd.: 

Prof Rashmi Narayanswamy 8 Direct Investment o/s India – Automatic Route - Reg 6 – Contd. Limit will include capital contribution in / loans granted to JV, and 50% of guarantees issued to / on behalf of JV. Conditions: Loan / Guarantee may be given only to an overseas concern in which it has equity participation. Investor should not be on RBI’s caution list / list of defaulters to banking system or under investigation All transactions to be routed thru one branch of AD. For acquisition of existing foreign co. – share valuation required from Cat 1 Merchant Banker ( > US$ 5 Mn), or CA/CPA (< US$ 5 Mn)

Direct Investment o/s India – Automatic Route - Reg 6 – Contd.: 

Prof Rashmi Narayanswamy 9 Direct Investment o/s India – Automatic Route - Reg 6 – Contd. Capitalisation of export proceeds Dues from foreign entity towards exports, fees, royalties or other entitlements – dues > 6 months need prior RBI approval for capitalisation Software exporters can get 25% of value of exports to overseas software co in form of shares without entering into JV agreements – with RBI approval.

Share Swap – Reg 8 : 

Prof Rashmi Narayanswamy 10 Share Swap – Reg 8 Indian parties which have already made ADR/GDR may acquire shares of FC in same core activity under Scheme / guidelines Conditions – ADR /GDR listed on any stock exchange o/s India Max – higher of (a) US$ 100 Mn; (b) 10 times export earnings in preceding financial year (including automatic investments in same financial year)

Share Swap – Reg 8 : 

Prof Rashmi Narayanswamy 11 Share Swap – Reg 8 ADR/GDR issue for purpose of acquisition is backed by fresh equity shares of Indian party. Holding in Indian entity does not exceed sectoral caps for FDI Valuation as per recommendation of investment banker (for unlisted shares) or current market cap based of last three months average price on stock exchange

Guarantees : 

Prof Rashmi Narayanswamy 12 Guarantees Till 27/3/06 – Only corporate promoters could offer guarantees for JV/WOS Now – all Indian entities may offer any form of guarantee – corporate/ personal /primary / collateral – by promoter / group company / sister concern / associate companies

Portfolio Investments: 

Prof Rashmi Narayanswamy 13 Portfolio Investments Corporates- Listed Indian co’s can invest in shares of companies listed on recognised stock exchange and which has at least 10% holding in an Indian listed company Also permitted to invest in bonds / fixed income securities of such companies Max – 25% of Indian co’s net worth Individuals- Same as corporates – except no monetary limit

Portfolio Investments: 

Prof Rashmi Narayanswamy 14 Portfolio Investments Mutual Funds- Can invest in ADR /GDR of Indian co’s rated debt instruments and also in equity of overseas companies as specified for corporates Overall cap of US$ 1 billion SEBI approval required General permission in each of the above cases for sale of securities so acquired

Financial Services Sectors- Additional Conditions for Indian party : 

Prof Rashmi Narayanswamy 15 Financial Services Sectors- Additional Conditions for Indian party Should be regd. with appropriate regulatory authority Should have earned net profit during preceding 3 financial years Approval obtained from regulatory authorities in India and abroad Fulfilled prudential norms relating to capital adequacy norms as prescribed by regulatory authority

US $ 25,000 Scheme: 

Prof Rashmi Narayanswamy 16 US $ 25,000 Scheme An individual resident in India is permitted to remit up to US $ 25,000 per calendar year for any legal and lawful purpose without obtaining prior permission of RBI. The individual can use said facility for any current or capital account transaction, acquisition of any movable and/or immovable property or opening of a bank account outside India. However, remittances cannot be made to Bhutan, Nepal, Mauritius or Pakistan or countries identified as "non co-operative countries and territories" by the Financial Action Task Force. Currently, the countries where investment cannot be made are Myanmar, Nauru, Nigeria. The updated list can be seen at the website of FATF - http://www.fatf-gaf