RBI regulates cross border transactions through Master Circulars and various rules along with FEMA Act. Hence, to understand the nature and provisions related to such transactions we need to go through such Master Circulars and various Rules. We have covered a Guide to Investment in entities situated outside India after considering requirements of various Master Circulars
Prohibition on Investments:
Indian Parties are prohibited from investing in a foreign entity engaged in real estate activities (buying and selling real estate or instruments related thereto) but construction activities or development of township is not prohibited.
Investment in Foreign Banks can be done only after obtaining prior approval of RBI.
In addition to above, those activities which are illegal in host country are prohibited. Very surprisingly, the Indian law does not mention about prohibition of invesing in an activity that is illegal in India but legal in that particular host country.
| Invetsment under Automatic Route persons resident of India does not need Approval of RBI and FIPB in any of the following cases |
| Under Librelized Remittance Scheme by Individuals upto USD 2,50,000 per annum:
Authorised Dealers, freely allow remittances by resident individuals up to USD 250,000 per financial year for any permitted current or capital account transactions or a combination of both. Resident Individuals are also permitted to acquire and hold immovable property, shares, JV/WOS, debt instruments using this scheme without prior approval of RBI.
WEF February 2015, the limit includes all foreign exchange used by an individual in a financial year. (i.e. travel or treatment abroad, education)
Individuals can also open, maintain and hold foreign currency accounts with a bank outside India for making remittances under the Scheme without prior approval of the RBI.
For Transaction one need to submit a small two-page application-cum-Declaration Form. PAN is mandatory requirement.
Under General Permission Route for funds held in foreign currency accounts:
In case someone has earned any money when he was not in India, he can invest such money outside India even after becoming Indian Resident.
General permission has been granted to individual resident in India for purchase / acquisition of securities as under:
- Out of funds held in the RFC account;
- As bonus shares on existing holding of foreign currency shares;
- When not permanently resident in India, from the foreign currency resources outside India.
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| Under Automatic Approval Route – not exceeding 400 percent of net worth:
An Indian Party does not require any prior approval for making overseas direct investments JV / WOS. The Indian Party should approach an Authorized Dealer Category–I bank for effecting the remittances towards such investments.
For the purpose of this scheme, Indian Party can be any of the following:
Individuals are not allowed to invest under the Automatic Route.
Criteria as under:
Indian Party can invest up to 400% of its net worth (as per the last audited Balance Sheet) ceiling of 400% is not applicable where the investment is made out of balances held in the EEFC (Exchange Earner’s Foreign Currency) account of the Indian party.
If financial commitment in any financial year is above USD 1 billion, prior approval of Reserve Bank will be required;
Indian Party shall not in Bad eye with on the Reserve Bank’s exporters’ caution list or any investigative agency or regulatory authority; and
All the transactions relating to the investment be routed through only one branch of an authorized dealer.
Financial commitment means the amount of direct investments outside India by an Indian Party by way of : –
- contribution towards equity shares
- By way of Loan to JV/ WOS
- 100% of amount of corporate guarantee issued on behalf of its overseas subsidiary
- 50% of amount of performance guarantee
- Creation of charge on the assets of Indian party for benefit of Overseas entity.
The Indian party may give loan/ guarantee only to an overseas entity in which it has equity participation. Proposals from the Indian party for undertaking financial commitment without equity contribution in such overseas entity may be considered by the Reserve Bank under the approval route. |
Prior approval of the RBI is required in all other cases of direct investment abroad. For this purpose, application together with necessary documents has to be submitted through a bank dealing in foreign exchange.
RBI take into account the following factors for considering the applications:
- Prima facie viability of the JV / WOS;
- Contribution to external trade and other benefits which will accrue to India through such investment
- Financial position and business track record of the Indian party and the foreign entity; and
- Expertise and experience of the Indian party in the same or related line of activity
Obligations of Indian Party
- Receive share certificate or any other document as an evidence of Investment and submit the documents to designated bank, which will monitor the documents.
- Repatriate to India the funds receivable from foreign entity.
- Submit the documents/ annual performance reports to RBI on timely basis.
- Where the host country does not require books of accounts to be audited, the Indian party may submit the annual report provided the auditor of Indian party certify that un-audited books of such overseas entity reflect true and fair view and board of Indian Party has adopted such accounts.
