Investment in a Foreign Company by Indian Individual

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Investment in a Foreign Company by Indian Individual

Investing in a foreign company by an Indian is governed by the Foreign Exchange and Management Act, 1999, as well as the various laws and regulations issued there. Because of the complex and regulatory environment, it has become important for investors to take the right direction related to their investment issues. Investing in a foreign company with an Indian person it helps the country in promoting economic cooperation with the ruling elites, transferring technology and skills, branding it as an investor, and sharing the results of R&D. This article discusses who can invest in companies outside India.

Table of Contents

Key Abstract

Making an investment in a Foreign Company by an Indian person helps the country promote economic cooperation with host countries, technology and talent transfer, branding of a country as an investor, and sharing of R&D achievements. It also aids in the creation of jobs or the exploitation of raw materials accessible in India in relation to the host nation.

Overseas Direct Investment, in its most basic form, refers to investments made by an Indian outside of India. It can be accomplished by acquiring existing shares of a foreign entity by market acquisition, private placement, or stock exchange, or by subscribing to a foreign entity’s Memorandum, indicating a long-term interest in the foreign entity (JV or WOS).

The Foreign Exchange and Management Act, 1999, as well as the many rules and regulations made under it, govern Indian individuals’ investment in foreign companies. Because of the complicated and regulatory framework, it has become critical for investors to seek adequate assistance on investing concerns. This blog discusses a few practical aspects from the standpoint of an investor.

Who is a Resident Individual in a Foreign Company through an Indian Person?

An Indian person must first enter the definition of an Individual Resident under FEMA to invest in a foreign company. The RBI or the Reserve Bank of India has allowed Resident Individuals to invest in CCPS for companies or their shares listed outside India. In the case of stipulated conditions, a citizen may invest in direct overseas investment.

Section 2 (v) of FEMA, 1999, defines an Individual Resident. ‘Person Resident in India’ means:

  • The person lives in India for more than 182 days in the last financial year but does not include:
    • A person who lives outside India or who has left India for seeking employment, business, or vocation outside of India, or for any other purpose where his or her intention to stay or time is uncertain.
  • Any person who has come to India or resided in India, for a different reason
    • For employment purposes.
    • For business or vocation made in India.
    • As for any other circumstances that indicate his intention to stay in India for an indefinite period.
      • Company or individual registered or registered in India.
      • Any branch, office, or agency outside of India is owned or controlled by an Indian citizen.
      • Any branch, office, or agency outside of India owned or controlled by a person outside India.

In simple terms, ‘Person Resident in India’ includes Indians other than those living abroad for work, business, or any other purpose and foreigners who come to live in India for employment, doing business, or for any other purpose.

Eligibility for an Investment in a Foreign Company by an Indian Person

Investments in foreign companies by the resident or individual Indians can be made by investing in overseas portfolios without any restrictions on listed companies overseas with a minimum share of 10% in an Indian Company. The company should be listed on the known stock exchange in India from January 1 of the investment year.

Indians who cannot invest in a foreign company are as follows:

  • Resident Corporate Companies.
  • Cooperative firms are registered in terms of the Indian Cooperation Act, 1932.

Qualified people can invest overseas in Joint Ventures/Subsidiary owned companies.

Guidelines for Indian Individuals Who Want to Invest in Foreign Companies

The instructions were given in the Reserve Bank of India’s Notification FEMA No. 10 dated 3rd MAY, 2000. It has been updated from time to time, and it is also available on the Reserve Bank’s website, fema.rbi.org.in.
Any clarification about individual circumstances can be received from the Reserve Bank’s Central Office at the following address:

Division of Overseas Investment,

Department of Exchange Control,

The central office,

The Reserve Bank of India (RBI),

Mumbai, India 400001

Or

Contact us at oid@rbi.org.in.

Overseas Direct Investment Types

The requirements for establishing an investment in a foreign company by an Indian individual are outlined in the FEMA, 1999. Typically, an Indian individual’s investment in a foreign firm is called as Overseas Investment, and it is classified as follows:

  • Direct Investment: Direct investment indicates a long-term involvement in overseas trade. It can take the shape of a capital contribution or subscription to the Memorandum of an overseas business, or it can take the form of purchasing shares of a foreign entity via market buy, private placement, or stock exchange. This is done in order to exert influence over the management of the investee firm. Except for the following, an Indian party may make abroad direct investment in any legal activity:
    Real Estate Business– This includes real estate purchases and sales, as well as transactions involving Transferrable Development Rights (TDRs). It does not involve the growth of townships, the construction of residential or commercial properties, or the construction of roads and bridges.
  • Portfolio Investment: Individuals in India invest in foreign companies for a variety of reasons, including financial gain and speculation. There is no goal of establishing long-term investment or influence over a foreign company’s management. This investment is quite volatile in practice. Portfolio investments, unlike direct investments, can be withdrawn quickly.

Routes for making Investment in a Foreign Company

There are two paths that an Indian individual might use to invest in a foreign company:

Automatic Route
Under this route, no prior approval from the Reserve Bank of India is required. One needs to speak to AD Category-Bank on the ODI Form (online) and all the required documents. Guidelines for investing in a foreign company by an Indian company are set out below:

    • By an Indian party other than the Resident: The Indian Party here includes the Registered Partnership Firm, the companies (partner is also eligible to hold shares on behalf of the JV/WOS firm)
      • There is no investment limit. Investments are made with EEFC A / C funds or with money collected through ADRs or GDRs.
      • In most other cases, the financial commitment to the JV or WOS should reach USD 1 billion and 4000% of the total value of the Indian group.
      • Also, the net-worth value determined by the host country will be used.
    • By Resident Individual
      • A person living in India can make Direct Investment in foreign securities without prior RBI authorization in the form of a Liberalized Remittance Program up to USD 125,000.
      • In addition to the above, they are also granted special permission to purchase or acquire equity or CCPS of a Foreign Company, if available.
      • According to ADR/GDR, the affiliate stock options system available to an Indian employee or company director is also within the limits (USD 50,000 in 5 years block).
      • Purchase of up to 5% of JV / WOS overseas payments by employees or directors of an Indian Company operating software (up to USD 10,000 over 5 years).
      • To become a director to buy small shares of up to 1% of JV/WOS paid overseas.
      • An Indian person should not be on the defaulter list under the RBI investigation, Credit Information Bureau of India Ltd. (CIBIL), or any other bank or investigative agency.
    • Authorized Dealer
      • The Indian party must submit all investment-related activities to JB/WOS in the form of a single branch of the authorized dealer to be nominated by the Indian party.
      • Even if there are any investors/investment promoters in the JV/WOS, they will be considered as a single group of Indians. It must therefore transfer all its functions through only one branch of the AD Category-I bank.
      • If a group of Indians want to change the AD, they must find the NOC in the existing AD and apply the same.
      • For a separate JV/WOS for a single Indian Party, there may be designated ADs.Pricing Guidelines
      • Where the investment made is more than USD 5 million, the value of the company’s shares is more than USD 5 million, the share price of the company should be made Category Merchant Banker registered with SEBI or Investment Banker/Merchant Banker abroad registered with the appropriate regulatory authority in the host country.
      • In all other cases, the calculation must be made by the CA or CPA.
  • Exception: Investments made in Pakistan are subject to the approval process.
  • After Reporting Form ODI: A Unique Identity number (UIN) is generated automatically and instantly in a particular JV / WOS. This can only be done after the UIN allocation. Also, it must be reported on Form ODI within 30 days of the transaction.
  • Approval Route: Investment proposals that are not subject to the applicable Automatic Route and that are not permitted under the Approval Route require prior RBI approval. The ODI form must be duly completed with all required documentation and price guidelines in the manner specified above. All trusts and registered communities operating in a particular sector are allowed to invest overseas in the same sector with permission from the RBI.

Post obligations after making Investment in Foreign Company by Individual

After making an investment in a foreign company, an Indian party must fulfill the following obligations:

  • Share certificates must be obtained and filed to the AD within six months of an Indian individual’s involvement in a foreign company.
  • All dues received from a foreign company, such as dividends, royalties, and so on, must be returned to India.
  • The RBI must receive an Annual Performance Report in Part III of Form ODI.
  • Where the aforementioned report is based on the company’s unaudited financial statements because that country’s legislation does not require auditing, the Statutory Auditor of the Indian party shall indicate that it delivers an accurate and fair value and the same is approved.
  • Critical decisions made by such Foreign JV/WOS must be reported to the RBI within 30 days of the decision’s approval. The details must be included in the Annual Performance Report.
  • For decision restructuring, a listed Indian company following the Automatic route and an unlisted Indian company following the Approval method can write off up to 25% of the equity investment in WOS/ JV having at least a 51 percent interest. It should also be submitted together with a verified copy of the balance sheet and a five-year profit prediction.
  • In the event of disinvestment, the sale profits must be remitted to India within 90 days of receipt.

Indian Subsidiary Registration for foreigners

Final words

ODI rules fail to define portfolio investment. Generally, portfolio investment is widely understood as a financial instrument; also, is not included in the administrative or management rights. At the bottom of this, it can be argued that an Indian party can invest abroad without being subject to applicable ODI terms. It is not yet clear whether the RBI will voluntarily accept this exposition.

If you are looking for someone who can assist you in investing in Foreign Companies, then Connect to our Experts at Legal Window.

CS Urvashi Jain is an associate member of the Institute of Company Secretaries of India. Her expertise, inter-alia, is in regulatory approvals, licenses, registrations for any organization set up in India. She posse’s good exposure to compliance management system, legal due diligence, drafting and vetting of various legal agreements. She has good command in drafting manuals, blogs, guides, interpretations and providing opinions on the different core areas of companies act, intellectual properties and taxation.

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