Overseas investments in joint ventures (JV) and wholly owned subsidiaries (WOS) have been recognised as important avenues for promoting global business by Indian entrepreneurs. JVs are perceived as a medium of economic and business co-operation between India and other countries.
Transfer of technology and skill, sharing of results of R&D, access to wider global market, promotion of brand image, generation of employment and utilisation of raw materials available in India and in the host country are other significant benefits arising out of such overseas investments. They are also important drivers of foreign trade through increased exports of plant and machinery and goods and services from India and also a source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments.
Governing Regulation
The transaction of investment by an Indian party outside India is a capital account transaction in terms of s 6 of the Foreign Exchange Management Act, 1999.
It is regulated and governed by the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 vide Notification No. FEMA.120/RB-2004 dated 7 July 2004 (herein after referred as ‘ODI Regulations’).
The ODI Regulations seeks to regulate acquisition and transfer of a foreign security by a person resident in India, ie, investment by Indian entities in overseas JVs and WOSs as also investment by a person resident in India in shares and securities issued outside India.
Wherein JV and WOS means :
- “Joint Venture (JV)”/ “Wholly Owned Subsidiary (WOS)” means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party/Resident Indian makes a direct investment;
- A foreign entity is termed as JV of the Indian Party/Resident Indian when there are other foreign promoters holding the stake along with the Indian Party. In case of WOS entire capital is held by the one or more Indian Party/Resident Indian.
Mode of Investment
As per Regulation 2(e) of the ODI Regulations, ‘Direct investment outside India’ means:
“investment by way of contribution to the capital or subscription to the Memorandum of Association 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, but does not include portfolio investment”
The term Direct Investment outside India is defined to mean the following:
- Investment by way of the contribution to capital; and also
- Includes the subscription to Memorandum of Association of a foreign entity;
- The acquisition of shares can be:
- by any way of purchase of shares;
- by way of market purchase; or
- private placement of through stock exchange; and
But does not include portfolio investment.
It has been discussed in detail below:
Investment by way of contribution to capital: The investment can be made by way of contribution to the capital of the company in the country in which the foreign entity receiving the direct investment from an Indian party is registered or incorporated; where the Indian party is partnership firm, it will be in order for individual partners to hold shares for and on behalf of the firm in an overseas JV/WOS in the individual name as well if the host country regulations or operational requirements warrant such holdings, subject to the condition that the entire funding for such investment is done by the firm.
Investment by way of Subscription to Memorandum and Articles of association: Subscription to Memorandum and Articles of Association has been specified as a way of direct investment; even in few cases, it does not amount to outflow of funds at the initial stage. It is relevant to note here that the investment shall be considered to be direct investment, even though there is no cash outflow from India in case the company has subscribed to the incorporation document of the foreign entity as the laws of certain countries do not have the requirement of a minimum paid-up capital and a company can be opened without capital contribution.
For example, where in a transaction a Director of an Indian company went on a visit to Singapore and opened a company through a Singapore local consultant. The Singapore local consultant opened a company with the initial capital being charged to the Indian Company in the professional fees bill. The Indian company subscribed to the Memorandum of Association of the company in Singapore. Although on the face of it, there is no outflow from India in the transaction, however, since the company subscribed to the Memorandum of Association, the company shall be considered as direct 
investment by the Indian company and the regulations relating to same are required to be followed including reporting to RBI and pricing.
- Purchase of shares by Indian party: The share of the foreign entity can be purchased by the Indian party by way of purchase of existing shares of the Indian company by way of:
■ Market purchase
■ Private placement
■ Through stock exchange
Portfolio investment not included in direct investment: Direct investment does not include the portfolio investment (only listed Indian companies are permitted to invest up to 50% of their net worth as on the date of the last audited balance sheet in (i) shares and (ii) bonds/fixed income securities, rated not below investment grade by accredited/registered credit rating agencies, issued by listed overseas companies). The Term portfolio investment is not defined in the regulation.
Our services
- Assistance in making investments outside India involving management of funding, compliance and reporting. Providing of loan, Guarantee, conversion of debt into equity
- Establishing the entry strategy in other jurisdiction
- Drafting of agreements and other documents
- Filing of Annual form
- Valuation
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