Direct Investment Outside India: 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 foreign entity. Overseas Investments in Joint Venture and Wholly Owned Subsidy have been recognized as important avenues for promoting global business by Indian entrepreneurs. Joint Ventures are perceived as a medium of economic and business cooperation between India and other countries.
General permissions that has been granted to persons resident in India for purchase or acquisition of securities abroad:
1. Out of funds held in the RFC account
2. As bonus shares on existing holding of foreign currency shares
3. When not permanently resident in India, from the foreign currency resources outside India
Prohibited activities for Overseas Direct Investment: An Indian party can make overseas direct investment in any bonafide activity. Real Estates and Banking Business are the prohibited sectors for Overseas Direct Investment. Real Estate Business means buying and selling of real estate or trading in Transferable Development Rights but does not include development of townships, construction of residential or commercial premises, roads or bridges.
Joint Venture and Wholly Owned Subsidy: Joint Venture and Wholly Owned Subsidy means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment. A foreign entity is termed as Joint Venture of the Indian Party when there are other foreign promoters holding the stake along with the Indian Party. In case of Wholly Owned Subsidy the entire capital is held by the one or more Indian Company.
Automatic Route and Approval Route: Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for making Overseas Direct Investment in a Joint Venture or Wholly Owned Subsidy abroad. The Indian Party should approach an Authorized Dealer.
How to forward proposal for making Overseas Direct Investment under approval route?
The applicant should approach their designated Authorized Dealer with the proposal which shall be submitted to the Reserve Bank after due scrutiny and with the specific recommendations of the designated AD Bank along with the supporting documents. The designated AD before forwarding the proposal should submit the form ODI in the on-line ODI application under the approval route and the transaction number generated by the application should be mentioned in the letter. In case the proposal is approved, the AD bank should affect the remittance under advice to Reserve Bank so that the UIN is allotted.
ODI transactions that require RBI approval
1. Overseas Investment
2. Investments in Overseas Unincorporated entities
3. Overseas Investment by proprietorship and unregistered partnership firms
4. Investments by Registered Trusts or Societies engaged in the manufacturing or education or hospital sector in the same sector in a Joint Venture or Wholly Owned Subsidy outside India
5. Corporate guarantee by the Indian Party to second and subsequent level of Step Down Subsidiary
6. All other forms of guarantee which is offered by the Indian Party to its first and subsequent level of Step Down Subsidiary
Who are eligible to make Overseas Direct Investments under the Automatic Route? Who is an Indian Party?
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 incorporated under the LLP Act, 2008 and any other entity in India as may e notified by the Reserve Bank. When more than one such company, body or entity makes investment in the foreign Joint Venture or Wholly Owned Subsidy, such combination will also form an Indian Party.
What is the procedure to be followed by an Indian Party to make Overseas Direct Investment in a Joint Venture or Wholly Owned Subsidy 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; certified copy of the Board Resolution, Statutory Auditors certificate and Valuation report as per the valuation norms.
Permissible sources for funding Overseas Direct Investment
1. Withdrawal of foreign exchange from an AD Bank in India
2. Swap of Shares
3. Capitalization of exports and other dues and entitlements
4. Proceeds of External Commercial Borrowings
5. Proceeds of foreign currency funds raised through ADR issues
Online Reporting of Form ODI
Online ODI application has been revamped to further reduce the traditional paper based filing system, to provide the AD Banks fast and easy accessibility to data for reference purpose, to improve the coverage and ensure proper monitoring of the flows in a dynamic environment.
Top 10 ODI Destination Countries ( April 2013 to January 2017)
3. United States of America
5. British Virgin Islands
6. United Arab Emirates
8. United Kingdom
Foreign Exchange Management Act( FEMA)
The Foreign Exchange Management Act, 1999 is an act of the Parliament of India to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. The Foreign Exchange Management Act (FEMA) was passed in the winter session of Parliament in 1999, replacing the Foreign Exchange Regulation Act (FERA). This act makes offences related to foreign exchange civil offences. The Foreign Exchange Management Act extends to the whole of India. It shall also apply to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention thereunder committed outside India by any person to whom this Act applies. The Foreign Exchange Management Act( FEMA) became an act on the 1st day of June, 2000. A significant change that FEMA brought with it was that it made all offences regarding foreign exchange civil offences as opposed to criminal offences. The FEMA head office also known as Enforcement Directorate is situated in New Delhi and is headed by a Director.
Rules or Regulations under Foreign Exchange Management Act(FEMA)
1. Foreign Exchange Management( Current Account Transactions) Rule, 2000
2. Foreign Exchange Management ( Permissible Capital Account Transactions) Regulations, 2000
3. Foreign Exchange Management ( Transfer or Issue of any Foreign Security) Regulations, 2004
4. Foreign Exchange Management ( Foreign Currency Accounts by a person resident in India) Regulations, 2000
5. Foreign Exchange Management ( Acquisition and Transfer of immovable property in India) Regulations, 2000
6. Foreign Exchange Management ( Establishment in India of branch or office or other place of business) Regulations, 2000
7. Foreign Exchange Management ( Manner of Receipt and Payment) Regulations, 2000
8. Foreign Exchange Management ( Export of Goods and Services) Regulations, 2000
9. Foreign Exchange Management ( Realisation, repatriation and surrender of Foreign Exchange) Regulations, 2000
10. Foreign Exchange Management ( Possession and Retention of Foreign Currency) Regulations, 2000
11. Foreign Exchange ( Adjudication Procedure and Appeals) Rules
Provisions of Foreign Exchange Management Act( FEMA) : FEMA provides:
1. Free transactions on current account subject to reasonable restrictions that may be imposed
2. RBI control over capital account transactions
3. Control over realization of export proceeds
4. Dealing in foreign exchange through Authorized Persons like Authorized Dealer or Money Changer
5. Adjudication of Offences
6. Appeal provisions including Special Director( Appeals) and Appellate Tribunal
7. Directorate of Enforcement
Enforcement of FEMA: Though RBI exercises overall control over Foreign Exchange Transactions, enforcement of FEMA has been entrusted to a separate Directorate of Enforcement formed for this purpose.
Overall Scheme of FEMA
1. FEMA makes provisions in respect of dealings in foreign exchange. Broadly, all current account transactions are free. However, Central Government can impose reasonable instructions by issuing rules. ( Section 3 of FEMA)
2. Capital Account Transactions are permitted to the extent specified by RBI by issuing regulations. ( Section 6 of FEMA)
3. FEMA envisages that RBI will have a controlling role in management of foreign exchange. Since RBI cannot directly handle foreign exchange transactions, it authorizes ‘Authorized Persons’ to deal in foreign exchange as per directions issued by RBI. ( Section 10 of FEMA)
4. RBI is empowered to issue directions to such ‘ Authorized Persons’ under Section 11 of FEMA. These directions are issued through AP circulars.
5. FEMA also makes provisions for enforcement, penalties, adjudication and appeals.
Main Features of Foreign Exchange Management Act ( FEMA)
1. It is consistent with full current account convertibility and contains provisions for progressive liberalization of capital account transactions.
2. It is more transparent in its application as it lays down the areas requiring specific permissions of the Reserve Bank or Government of India on acquisition or holding of foreign exchange.
3. It classified the foreign exchange transactions into two categories i.e., capital account and current account transactions.
4. It provides power to the Reserve Bank for specifying in consultation with the central government, the classes of capital account transactions and limits to which exchange is admissible for such transactions.
5. It gives full freedom to a person resident in India, who was earlier resident outside India, to hold or own or transfer security or immovable property situated outside India and acquired when she or he was a resident.
6. This act is a civil law and the contraventions of the Act provide for arrest only in exceptional cases.
7. FEMA does not apply to Indian citizen’s resident outside India.
Difference between FERA and FEMA
1. FERA is an old enactment. It was passed in 1973. Now this act has been repeated. FEMA is a new enactment. It was passed in the year 1999.
2. FERA is a long enactment with 81 sections. It was very strict in nature. FEMA is a small enactment with 49 sections. It is liberal in nature.
3. FERA approach towards foreign exchange transactions which were conservative and restrictive. FEMA approach towards foreign exchange transactions and is very positive and welcoming.
4. Penalty Provisions in FERA were very hard. In this Act, imprisonment was imparted to the person violating its provisions. FEMA provides only for monetary penalty for violating the provisions. Imprisonment is imparted only on non- payment of monetary penalty.
5. The scope of FERA was very wide. It deal with all transactions related to foreign exchange i.e., anything and everything related to foreign exchange was controlled by FERA. The scope of FEMA is narrow. It deals only with specified transactions related to foreign exchange i.e., it checks and controls only those transactions which are specifically mentioned in the act. It does not deal with the transactions which are not specifically mentioned in its scope.
Written by- Muskan Bharija
Delhi Metropolitan Education, GGSIPU