OUTBOUND INVESTMENTS

UNDER FEMA REGULATIONS

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

Prof Rashmi Narayanswamy

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

Prof Rashmi Narayanswamy

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 Prof Rashmi Narayanswamy

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)
Prof Rashmi Narayanswamy 5

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

Prof Rashmi Narayanswamy

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
Prof Rashmi Narayanswamy 7

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 RBIs 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)
Prof Rashmi Narayanswamy 8

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.

Prof Rashmi Narayanswamy

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)

Prof Rashmi Narayanswamy

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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

Prof Rashmi Narayanswamy

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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

Prof Rashmi Narayanswamy

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Portfolio Investments
CorporatesCorporates Listed Indian cos 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 cos net worth

IndividualsIndividuals Same as corporates except no monetary limit

Prof Rashmi Narayanswamy 13

Portfolio Investments
Mutual FundsFunds Can invest in ADR /GDR of Indian cos 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
Prof Rashmi Narayanswamy 14

Financial Services SectorsSectorsAdditional 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
Prof Rashmi Narayanswamy 15

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 cocooperative 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 http://www.fatf-

Prof Rashmi Narayanswamy

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