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Indian Corporate Venture Abroad – The Regulatory

Graph
Prabir Bandyopadhyay, ACS, Kolkata.

For an Indian corporate venture abroad, the starting point is Section 372A of the
Companies Act, 1956. To the Board of Directors of the Indian investing company,
the Automatic Route at the starting point is ‘narrow’, being up to 60% of the Paid
e-mail : Up Share Capital and Free Reserves of the investing company. It is, however, much
pb@wmg.co.in ‘wide’ under the Foreign Exchange Management Act, 1999. This article traces the
routes available for overseas investments.

Like foreign investments into India, Indian overseas
investments are, needless to say, regulated. An orchestrated
marking of the applicable regulations reveals the graph of the
Overseas Investment Policy of the country. An Indian corporate
planning to participate in a Joint Venture (‘JV’) or create
wholly owned subsidiary (‘WOS’) abroad has to observe the
graph for smooth sailing. It would be interesting to trace the
evolution of public policy in respect of liberalizing outward
investments, within the broader ambit of capital account
management. Indian overseas investment policies have been
progressively liberalized and simplified to meet the changing
needs of a growing economy.
Section 47 of The Foreign Exchange Management Act, 1999
(‘FEMA’) empowers the Reserve Bank to make regulations
for, inter alia, the permissible classes of capital account
transactions, the limits of admissibility of foreign exchange
for such transactions and the prohibition, restriction or
regulation of certain capital account transactions under its
Section 6.
Section 6 of FEMA provides thus :
‘(1) Subject to the provisions of sub-Section (2), any person
may sell or draw foreign exchange to or from an
authorized person for a capital account transaction.
(2) The Reserve Bank may, in consultation with the Central
Government, specify-
(a) any class or classes of capital account transactions
which are permissible;
(b) the limit up to which foreign exchange shall be
admissible for such transactions :
Provided that……..’
‘(3) Without prejudice to the generality of the provisions of
sub-section (2), the Reserve Bank may, by regulations,
prohibit, restrict or regulate the following-
(a) transfer or issue of any foreign security by a person
resident in India;
(b) ……..’
Section 6(2) of FEMA ushered in the Foreign Exchange
Management (Permissible Capital Account Transactions)
Regulations, 2000.
Section 6 (3) (a) of FEMA led to the framing of the Foreign
Exchange Management (Transfer or Issue of any Foreign
Security) Regulations, 2004 which are hereinafter being
referred to as ‘the Regulations’ and other relevant Regulations/
Schemes by their respective names.
AUTOMATIC ROUTE
Only General Permission and not specific permission of the
RBI is required.
1. Meaning of the Direct Investment Outside India
“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

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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 as per
Regulation 2(e) of the Regulations.
2. Allowance of Direct Foreign Investment
According to Regulation 3 of the Foreign Exchange
Management (Permissible Capital Account Transactions)
Regulations, 2000 read with Schedule 1 thereof a person
resident in India may invest in foreign securities provided
that such transaction shall be within the limit specified in
the relevant Regulations, i.e., the Regulations.
3. Foreign Exchange
As per Regulation 4 of the Foreign Exchange Management
(Permissible Capital Account Transactions) Regulations, 2000
save as otherwise provided in FEMA and the Rules and
Regulations made hereunder no person shall undertake or sell
or draw Foreign Exchange to and from an Authorised Person
( i.e., Authorised Dealer, etc. under Section 10 of FEMA) for
any Capital Account Transaction.
4. Permissibility (Automatic Route)
Regulation 6 of the Regulations specifies the basic conditions
of the Foreign Direct Investment policy. Relevant and significant
conditions are briefly described in the ensuing paragraph.
JV or WOS
An Indian party may make direct investment outside India or
overseas direct investment ( hereinafter mentioned as ‘ODI’)
only in a joint venture or wholly owned subsidiary outside
India, which is engaged in a bona fide business activity. As
per the Regulations “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. 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.”
The limit
The ‘total financial commitment’ of the Indian party for this
purpose shall not exceed 400 per cent of its net worth ( i.e. the
aggregate of paid up capital and free reserves as per Regulation
2(o) of the Regulations) as on the date of its last audited balance
sheet.
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Indian Corporate Venture Abroad – The Regulatory Graph
The net worth of the Indian party for the purpose of calculating
the aforementioned limit may be increased by the net worth
of its holding company (which holds at least 51% stake in the
Indian Party) or its subsidiary company (in which the Indian
party holds at least 51% stake) to the extent not availed of by
the holding company or the subsidiary independently. Such
holding company or subsidiary has to furnish a letter of
disclaimer in favour of the Indian Party for the purpose.
Following commitments must be reckoned in the computation
of the ‘total financial commitment’–
(a) Remittance by market purchases, namely in freely
convertible currencies; in case of Bhutan, investment
made in freely convertible currencies or equivalent
Indian Rupees; in case of Nepal investment made only
in Indian Rupees.
(b) Capitalisation of export proceeds and other dues and
entitlements as mentioned in Regulations 11 and 12 of
the Regulations.
(c) 100% of the value of guarantees issued by the Indian
party to or on behalf of the Joint Venture Company or
Wholly Owned Subsidiary.
(d) Investment in agricultural operations through overseas
offices or directly.
(e) External Commercial Borrowing (ECB) in conformity
with other parameters of the ECB guidelines.
As per Section 6 (d) of FEMA read with the Foreign Exchange
Management (Borrowing or Lending in Foreign Exchange)
Regulations, 2000 along with the Schedules thereto (which
deal with the above stated ‘parameters’), one of the purposes
under the Automatic Route (as well as the Approval Route)
for raising ECB is direct investment in Joint Ventures (JV)
and Wholly Owned Subsidiaries (WOS) abroad subject to the
existing guidelines in this respect, i.e. the Regulations.
Funding
From EEFC
The ODI can be funded out of the credit balance of the Indian
party’s EEFC Account (Exchange Earners’ Foreign Currency
Account) maintained with an Authorised Dealer in accordance
with Regulation 4 of the Foreign Exchange Management
(Foreign Currency Accounts by a Person Resident in India)
Regulations, 2000. This being the Indian Party’s foreign
exchange earnings in terms of the said Regulations, the limit
of 400% of the Net Worth of the Indian Party need not be
followed. Hence the entire/part of the foreign exchange
earnings in the Account may be used by the Indian party in
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Indian Corporate Venture Abroad – The Regulatory Graph
making ODI despite the fact that it is crossing the broad
prohibitive limit of ‘400%’ of its Net Worth.
ADR/GDR
Regulation 6(5) of the Regulations provides as under -
An Indian Party may make the ODI without limit out of the
proceeds of its international offering of shares through the
mechanism of ADR and/or GDR provided that -
(a) the ADR/GDR issue has been made in accordance with
the Issue of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt
Mechanism) Scheme 1993 and the guidelines issued
thereunder from time to time by the Central Government;
(b) the Indian Party files with the designated authorised dealer
in Form ODI full details of the investment proposed.
It is apparent that in both the cases of spending [i.e., out of (i)
EEFC Account and (ii) ADR/GDR issue] the Indian Party is
utilising the foreign exchange inflows for foreign investments.
Therefore the usual limit of 400% of the net worth of the
Indian party as aforementioned has not been made applicable.
Here, let us examine in brief the following two questions –
(i) Is there really no limit operational in case of ODI out of
ADR/GDR issue ?
(ii) Is this route really automatic, i.e., no permission is
necessary?
The aforesaid Scheme notified by the Department of Economic
Affairs of the Ministry of Finance placed a limit to the issue
size of the ADR/GDR. According to Paragraph 4, the ordinary
shares and Foreign Currency Convertible Bonds issued against
the Global Depository Receipts shall be treated as direct foreign
investment in the issuing company. The aggregate of the foreign
investment made either directly or indirectly (through Global
Depository Receipts Mechanism) shall not exceed 51% of the
issued and subscribed capital of the issuing company. Provided
that the investments made through Offshore Funds or by
Foreign Institutional Investors will not form part of the limit
laid down in this paragraph.
Hence barring the cases of ADR/GDR issue to Offshore Funds
or Foreign Institutional Investors the aforementioned ‘limit’
of 51% of the issued and subscribed capital of the Indian Party,
in effect, limits the ODI out of ADR/GDR issue proceeds.
Further, in terms of Paragraph 4 read with the FIPB Press
Note 2 dated 13th February, 2009 and Press Note 4 dated 25th
February, 2009 the FDI Sectoral Cap prescribed under
Annexure B of Schedule 1 (‘the Schedule’) to the Foreign
Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2000 is applicable
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in case of issue of ADR/GDR. Therefore, the Sectoral Cap
for FDI as applicable to the Indian Party further limits ODI
out of ADR/GDR issue.
Again, according to Paragraph 3 of this Scheme read with
Paragraph 4 of the Schedule, the company desirous of raising
funds by issuing Foreign Currency Convertible Bonds or
ordinary shares for equity issues through Global Depository
Receipts is required to obtain prior permission of the
Department of Economic Affairs, Ministry of Finance,
Government of India.
Therefore, in the true sense, ODI out of ADR/GDR issue is
neither a ‘limitless’ route nor an ‘automatic’ route.
Capitalisation of Export Proceeds
Under Regulation 11 (read with Regulation 6 of the
Regulations) the Indian party may capitalise, in full or part,
the amount due to it from the foreign entity on account of
export of plant, machinery, equipment, softwares and other
goods, royalties, commissions, etc. for supplying technical
know-how, etc., provided the amount has not remained
unrealised for more than six months.
Swap of Shares/ADRs/GDRs
The Indian party may generate ODI from swap shares i.e.,
issuing its own Shares against the Shares issued by the foreign
investee company. Similarly, ADR/GDR Stock swap is another
available route of funding the foreign investment. In case of
ADR/GDR Swap, the ADR/GDR issue of the Indian Party
must comply with the conditions stated under B above.
There is a point of interest here. Issuing shares by an Indian
company to a foreign entity is dealt with by the Foreign
Exchange Management (Transfer or Issue of Security by a Person
Resident Outside India) Regulations, 2000 as being an FDI into
an Indian company. As Swap shares are not backed by any
inward remittance of foreign exchange, the automatic route of
FDI as per Schedule I to the Regulations, is not available going
by the scheme of these Regulations . So, the RBI approval is
necessary under Regulation 3 of these Regulations. But according
to the RBI all share swap transactions require the prior approval
of the Foreign Investment Promotion Board (FIPB) for the
inward leg of the investment.
Hence, like the case of ODI out of ADR/GDR proceeds, ODI
through the ADR/GDR/Stock Swap route is not exclusively an
Automatic Route as it involves the Governmental permission.
ECB/FCCB/FCEB
Another permitted source of funding is External Commercial
Borrowing (‘ECB’). Here the parameters of ECB Guidelines
have to be observed.
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The Foreign Exchange Management (Borrowing or Lending
in Foreign Exchange) Regulations, 2000 cover ECB. In terms
of these Regulations ECB may be issued either through the
Automatic Route or the Approval Route (approval of the RBI).
Under the Automatic Route borrowing up to US$ 500 Million
is allowed. Under both the routes (‘Both Routes’)the minimum
Maturity Period of the borrowing is 3 Years.
The end-use of the borrowing under both routes under these
Regulations (vide the Schedules thereto) specifically permits
‘direct investment in overseas Joint Venture (JV)/Wholly
Owned Subsidiaries (WOS) subject to the existing guidelines
on Indian Direct Investment in JV/WOS abroad’.
As in the case of ECB, Foreign Currency Convertible Bond
(FCCB) and Foreign Currency Exchangeable Bond (FCEB)
proceeds are also allowed for the purpose (vide Master Circular
of RBI No. 07/2009-10 dated 1st July, 2009 and the Issue of
Foreign Currency Exchangeable Bonds Scheme, 2008).
5. NBFC Investing in Foreign Venture
An Indian NBFC has to meet the following additional
conditions for ODI (apart from above) as per sub-Regulation
(1) of Regulation 7 of the Regulations :
(i) It has earned net profits during the preceding three
financial years from the financial services activities.
(ii) It is registered with the regulatory authority in India for
conducting the financial services activities.
(iii) It has obtained approval from the concerned regulatory
authorities both in India and abroad, for venturing into
such financial sector activity.
(iv) It has fulfilled the prudential norms relating to capital
adequacy as prescribed by the concerned regulatory
authority in India.
Further, as per Regulation 7(2) any additional investment by
an existing JV/WOS or its step down company shall be made
only after complying with the conditions given above.
It may be seen that before the amendment of this Regulation
in July 2009 the above conditions were meant for any Indian
Party which was to make ODI in any foreign entity engaged
in financial services. After the amendment, the conditions
apply to an Indian Party which is engaged in financial services
sector making ODI in any foreign entity.
6. Investment in Overseas Agricultural Activities
In terms of Regulation 6A an Indian Company (besides a
partnership firm registered under the Partnership Act, 1932)
is allowed to invest in overseas agricultural operations including
purchase of foreign land being incidental to such activity
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Indian Corporate Venture Abroad – The Regulatory Graph
(conditions of Regulation 6 including that of the maximum
limit apply).
[The Overseas Investment Policy of the country allows Indian
Direct Investment in agriculture abroad. But the Foreign Direct
Investment Policy of the country does not allow Foreign Direct
Investment in Indian agricultural and plantation sectors ( other
than Floriculture, Horticulture, Development of Seeds, Animal
Husbandry, Pisciculture, Aquaculture and Cultivation of
Vegetables & Mushrooms and Tea Plantation)].
7. Acquisition of a Foreign Company by Bidding/
Tender
Under Regulation 14, an Indian Party which is otherwise
eligible for ODI in terms of Regulation 6, may do so by way
of acquiring any overseas company through the bidding/tender
process according to the formalities given in Regulation 14.
8. Disinvestment
In terms of Regulation 16 the Indian Party which invested in
the Shares in its JV/WOS abroad may transfer its holding to –
(a) another Indian Party which complies with the conditions
in terms of Regulation 6 of the Regulations, or
(b) a resident outside India.
The disinvestment does not require RBI approval in the
following cases -
(i) The investee JV/WOS is listed in the overseas stock
exchange.
(ii) The Indian promoter company is listed on a stock
exchange in India and has a net worth of not less than
Rs.100 crore.
(iii) If the Indian promoter is an unlisted company, the
investment in the overseas venture does not exceed USD
10 million.
Apart from above there are other conditions including
provisions for write off ( Regulation 17).
9. Diversification
Regulation 13 permits the Indian investor to diversify the
activities of its JV/WOS abroad or set up step down subsidiary
abroad or change the shareholding pattern in the JV/WOS.
Needless to say, the Indian investor as well as the JV/WOS
should act within the boundary of the applicable conditions of
the Regulations mentioned above.
10. Pledge of Foreign JV/WOS Shares to avail of
Financial Assistance
Regulation 18 entitles the Indian party to avail of fund based
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or non-fund based facilities for itself or for the foreign JV/
WOS by pledging its holding in the JV/WOS. The pledgee/
lender may be any of the following –
(a) An authorised dealer.
(b) A public financial institution in India.
(c) An overseas lender, provided the lender is regulated and
supervised as a bank and the total financial commitment
of the Indian Party remains within the limit stipulated
by the Reserve Bank for overseas investments in JV/
WOS (i.e. 400% of the Indian Party’s Net Worth).
11. Loan/Guarantee to the Foreign JV/WOS by the
Indian Party
Regulation 6(4) authorises the Indian Party to extend loan or
guarantee to or on behalf of the Joint Venture/Wholly Owned
Subsidiary abroad, within the permissible financial
commitment, ( i.e. 400 % of its Net Worth - vide above )
provided that the Indian Party has made investment by way of
contribution to the equity capital of the Joint Venture.
For extending such loan the Indian Party has to take into
account the Foreign Exchange Management (Borrowing or
Lending in Foreign Exchange) Regulations, 2000 too,
according to Regulation 5 of which an Indian entity may lend
in foreign exchange to its wholly owned subsidiary or joint
venture abroad constituted in accordance with the provisions
of Foreign Exchange Management (Transfer or Issue of
Foreign Security) Regulations, 2000 i.e., the Regulations.
Further, the Foreign Exchange Management (Permissible
Capital Account Transactions) Regulations, 2000, as given in
its Schedule I, permits guarantee by a person resident in India
in favour of a person resident outside India (in terms thereof).
12. Portfolio Investment
Besides allowing the Indian Party to invest directly by
participating in the share capital of its foreign JV/WOS (‘ODI’),
the Regulations allow the Indian Party to make Port Folio
Investments in foreign securities (Regulation 6B) as below:
A person resident in India, being a listed Indian company
may invest in :
(a) the shares of an overseas company which is listed on a
recognised stock exchange (overseas)
(b) the rated bonds/fixed income securities issued by
companies at (a) above:
Provided that:
(i) in the case of investment by a listed Indian company,
the investment shall not exceed 50% of its net worth as
on the date of its last audited balance sheet; (A - 126)
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(ii) every transaction relating to purchase and sale of shares
of the overseas company or bonds/securities shall be
routed through the designated branch of an authorised
dealer in India.
13. Bonus Shares in the foreign JV or WOS
Bonus shares by the Indian Party ( in relation to the foreign
securities held in accordance with the Regulations ) does not
entail any foreign exchange remittance on the part of the Indian
Party and is covered under the Automatic Route [4(b) of the
Regulations].
APPROVAL ROUTE (UNDER SPECIFIC
PERMISSION OF THE RBI)
Under Regulation 5 the basic policy is that save as otherwise
provided in the Act, ( i.e., FEMA) rules or regulations made
or directions issued thereunder, or with prior approval of the
Reserve Bank, no person resident in India shall make any direct
investment outside India.
Regulation 9 clarifies that an Indian Party which does not
satisfy the eligibility norms under Regulations 6 or 7 of the
Regulations may do so with the specific approval of the RBI.
Following specific cases of ODI requires specific approval of
the RBI as per the Regulations:
1. Direct Investment in a foreign entity engaged in Real
Estate Business/Banking Business [Regulation 5 (2)].
2. Investment in Pakistan [Regulation 6(2)(i)].
3. Investment by an Indian Party which is in the RBI
Exporters Caution List [Regulation 6(2)(iii)].
4. Investment by an Indian Party which is in the List of
Defaulters to the Banking System in India as circulated
by the RBI [Regulation 6(2)(iii)].
5. Investment by an Indian Party which is under
investigation by any investigation/enforcement agency
or regulatory body in India [Regulation 6(2)(iii)].
6. An Indian software exporter to receive in the form of
shares up to 25% of the value of exports to an overseas
software start up company without entering into any JV
Agreement [in terms of Regulation 11(2)]. Such party
has to file an application with the RBI through an
Authorised Dealer.
In general, whenever any transaction/action/incident regarding
ODI is not covered under the Automatic Route mentioned
above, specific permission of RBI is necessary.
MARCH 2011
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relevant statutory provisions and the principles enunciated
in earlier decisions of the Supreme Court and curbs the
tendency of the High Court to go overboard in rendering
justice, one only hopes that a time-bound trial would alleviate
the woes and sufferings of the payee/drawee/recipient of
bounced-cheques who, not only fail to get payment in time,
but who has necessarily to go through tedious processes and
lengthy litigation to get justice and ultimately the payment
of the dishonored cheque amount. Piling up of lakhs of
bounced-cheque cases in the trial courts defies the intention
of the Legislature in amending the N.I. Act and incorporating
the provisions of section 143(3) which stipulates that
bounced-cheque trials shall be conducted as expeditiously as
possible and endeavor shall be made to conclude the trial
within six months from the date of filing of the complaint.
Despite such laudable statutory provisions, trial of bounced
cheque cases normally take abnormally long time of 4 to 8
years and the drawee/payee of the bounced cheque continue
to face the consequential harassments and laments the non-
effectiveness of the provisions of sections 138 to 143 of the
N.I. Act. Unless some urgent steps are taken to speed up the
Indian Corporate Venture Abroad – The Regulatory Graph
(Contd. from p. 343)
Multipurpose Form ODI
Presently, the Regulations contain, as annexure thereto, one
multipurpose Form, namely, Form ODI to be submitted by
the Indian Party to the Authorised Dealer. This Form actually
replaced a number of previous Forms by virtue of the
Amendment of the Regulations in 2008 (Notification No.
FEMA.180/RB-2008 dated September 5, 2008 ). Precisely,
following are the uses of filing the Form –
I To invest through the Automatic Route/Approval
Route - Parts I and II of the Form [Regulations 6(2)(vi)
and 9(2)].
II To submit Annual Performance Report in respect of all
its overseas investments – Part III of the Form
[Regulation 6(2)(iv)].
III To invest out of ADR/GDR issue proceeds – Parts I and
II of the Form [Regulation 6(5)(b)].
IV To invest by way of Share swap - Part I of the Form
[Regulation 9(2)]
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trial of such cases, the system of dependency on cheques in
commercial transactions will lose its validity. Just like the
provisions of Order 37 of the Civil Procedure Code where
the defendant has necessarily to seek the leave of the Court
to defend the case and where the Court normally asks the
defendant to deposit in the Court a specified amount of the
claim-amount before allowing the Defendant to defend its
case, it is suggested that the N.I. Act be amended mandating
the Magistrate’s Court/Trial Courts trying bounced-cheque
cases to ask the “accused” to deposit in the court a specified
percentage of the amount of the bounced-cheque and then
face the trial. It is also suggested that within the available
resources of the High Court, it can earmark dedicated courts
to try cases involving dishonored cheques and encourage that
the trials should be completed within the period specified in
section 143(3) of the N.I. Act. Otherwise, the judgments in
bits and pieces on a specific aspect of the law-point on section
138 trials will make it difficult for the complainants to get
speedier justice and the trade and commerce will continue to
suffer. Therefore, concerted pragmatic action by all concerned
is called for urgently. 
V For disinvestment/closure/winding up etc. of the foreign
JV/WOS - Part IV of the Form.
VI To report any change/additional investment/
diversification of the activities foreign JV/WOS - Part
III [Regulation 13].
VII To report acquisition of foreign JV/WOS by
bidding/tender procedure – Parts I and II of the Form
[Regulation 14].
CONCLUDING REMARKS
For the Indian corporate ventures abroad, the starting point is
Section 372A of the Companies Act, 1956. To the Board of
Directors of the Indian investing company, the Automatic
Route at the starting point is ‘narrow’, being up to 60% of the
Paid Up Share Capital and Free Reserves of the investing
company. It is much ‘wide’ under the Foreign Exchange
Management Act, 1999. Crossing the ‘narrow’ boundary is
possible with the consent of the Shareholders of the investing
company (given through Special Resolution) but to break the
wide barriers RBI approval is necessary. 
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