Question 1.
What is direct investment outside India?
Answer:
Direct investment outside India means investments by way of contribution to the capital or subscription to the MOA 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 the stock exchange, signifying a long-term interest in the foreign entity (JV or WOS).
Direct investment outside India may be through automatic route or approval route
Some of the Major Overseas Investment is:
(a) Indian conglomerate, Reliance Industries Ltd. (RIL), is going to invest US$ 25 million in Israel-based Jerusalem Innovation Incubator (JII)
(b) Adani Enterprises Ltd. has announced the final approval of the com¬pany’s board to proceed with the US$ 16.5 billion worth of Carmichael mine and rail projects in Central Queensland, Australia, which would be one of the largest single infrastructure and job-creating develop¬ments in Australia’s recent history.
(c) Intas Pharma has announced the purchase of two companies in the UK and Ireland, Actavis UK Ltd. and Actavis Ireland Ltd., from Israeli pharma major Teva Pharmaceutical Industries Ltd., for an enterprise value of GBP 600 million (US$ 754.14 million).
(d) India-focused private equity firm Everstone Group, through its Sin¬gapore arm Everise Services, has agreed to buy C3, a US-based global CRM solutions provider, for an estimated deal value of US$ 150 million.
(e) India’s third-largest software services firm Wipro will be spending US$ 500 million to acquire US-based cloud services firm Appirio.
Question 2.
What do you understand by the ‘Approval Route’ for making investment outside India? What is the procedure for obtaining such approval? What factors are considered by the RBI before granting such approval?
Answer:
In case of investment outside India, following two types of the proposal comes under the approval route:
- Proposals that are not covered under the automatic route.
- Proposals covered under automatic route but not fulfilling the eligibility criteria.
Application: For taking approval of the RBI, the application together with necessary documents should be submitted in Form ODI through their Authorized Dealer Category -1 banks with their specific recommendation.
Designated AD: The designated AD before forwarding the proposal should submit the Form ODI in the online ODI application under the approval route and the transaction number generated by the application should be mentioned in the letter.
Unique Identification Number: In case the proposal is approved, the AD J bank should effect the remittance under advice to RBI so that the UIN (Unique Identification Number) is allotted.
Factors to be taken into consideration by the RBI: RBI may take into account the following factors while granting the approval of any proposal under the Approval Route:
- Prima facie viability of the JV/WOS outside India.
- Contribution to external trade and other benefits which will accrue to India.
- Financial position and business track record of the Indian Party and the foreign entity.
- Expertise and experience of the Indian Party in the same or related line of activity of the JV/WOS outside India.
Question 3.
ABC Ltd., a company listed on the National Stock Exchange, is interested in investing in a company in the USA. [June 2009 (3 Marks)]
Answer:
As per Regulation 6 of the FEM (Transfer or Issue of Foreign Securities) Regulations, 2004, an Indian party may make direct investment in a Joint Venture or Wholly Owned Subsidiary outside India. If an Indian Party does not satisfy the eligibility norms it may apply to the RBI for approval.
Question 4.
An Indian company engaged in the financial sector is interested in making investments in the banking business abroad. Advice with reference to FEMA. [June 2010 (1 Mark)]
Answer:
As per Regulation 5 of the FEM (Transfer or Issue of Foreign Securities) Regulations, 2004, without prior approval of RBI, no Indian party shall make any direct investment in a foreign entity engaged in real estate business or banking business.
Thus, an Indian company can make an investment in the banking business abroad after obtaining prior approval from RBI.
Question 5.
Aadarsh Education Society, engaged in the education sector, intends to make an investment in the education sector in a joint venture in the USA. Comment. [June 2012 (1 Mark)]
Answer:
As per Regulation 9A of the FEM (Transfer or Issue of Foreign Secu¬rities) Regulations, 2004, Registered Trusts and Societies engaged in the manufacturing/educational sector satisfying the criteria as per Schedule III may invest in the same sector in JV/WOS outside India with the prior approval of the RBI.
Thus, the Aadarsh Education Society, engaged in the education sector can make an investment in the education sector in a joint venture in the USA by taking prior approval of RBI.
Question 6.
An Indian company intends to make direct investment in a joint venture outside India. Advice with reference to FEMA. [Dec. 2012 (1 Mark)]
Answer:
As per Regulation 6(1) of the FEM (Transfer or Issue of Foreign Securities) Regulations, 2004, an Indian Party may make an investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to conditions specified in Regulation 6(2).
Thus, an Indian company can make direct investment in a joint venture outside India subject to compliance with the above-stated provisions.
Question 7.
Rajiv, a person resident in India, wishes to acquire foreign securities as qualification shares issued by a company incorporated outside India for holding the position of a director in the company. Advice with reference to FEMA. [Dec. 2011 (1 Mark)], [Dec. 2012 (1 Mark)]
Answer:
A person resident in India being an individual may acquire foreign security as qualification shares issued by an entity incorporated outside India for holding the post of a director in the entity.
Conditions:
- Qualification Shares: The extent of acquiring the qualification shares is as per the law of the host country where the entity is located.
- Within Overall Ceiling: The limit of remittance for acquiring such qualification shares shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme in force at the time of acquisition.
Thus, Rajiv can acquire foreign securities as qualification shares issued by a company incorporated outside India for holding the position of a director I subject to compliance with the above-stated provisions.
Question 8.
Discuss the method of funding foreign direct investment under the Foreign Exchange Management Act, 1999. [Dec. 2014 (5 Marks)]
Answer:
Investment or financial commitment in an overseas JV/WOS may be funded out of one or more of the following sources:
- Drawal of foreign exchange from an AD bank in India.
- Capitalization of export proceeds and other dues.
- Swap of shares.
- Proceeds of ECBs/FCCBs
- In exchange for ADRs/GDRs issued in accordance with the Scheme/ Guidelines/Rules & Regulations.
- Balances held in the EEFC account of the Indian party.
- Proceeds of foreign currency funds raised through ADR/GDR issues.
- ADR/GDR stock swap subject to valuation norms and sectoral caps.
Question 9.
Divesh Digital Network LLP wants to expand its business through investment in an overseas Joint Venture (JV) or/and Wholly Owned 1 Subsidiary (WOS). The partners of the firm seek your advice about the various sources/modes of funding through which overseas investment can be made. Advise them in the light of the provisions of the Foreign Exchange Management Act, 1999. [June 2019 (4 Marks)]
Answer:
Investment or financial commitment in an overseas JV/WOS may be funded out of one or more of the following sources:
- Drawal of foreign exchange from an AD bank in India.
- Capitalization of exports proceeds and other dues.
- Swap of shares.
- Proceeds of ECBs/FCCBs.
- In exchange for ADRs/GDRs issued in accordance with the Scheme/ Guidelines/Rules & Regulations.
- Balances held in the EEFC account of the Indian party.
- Proceeds of foreign currency funds raised through ADR/GDR issues; and
- ADR/GDR stock swap subject to valuation norms and sectoral caps.
An Indian Party may make a direct investment without any limit in any foreign security out of the proceeds of its international offering of shares through the mechanism of ADR/GDR subject to the following conditions:
(a) The ADR/GDR issue has been made in accordance with relevant the Scheme/Guidelines/Rules & Regulations.
(b) The Indian Party files with the designated authorized dealer in Form ODA full details of the investment proposed.
Question 10.
Choice of business locations outside India involves consideration of many factors. Comment. [June 2019 (4 Marks)]
Answer:
While setting up any business outside India many issues are required to be taken into consideration. Such issues/aspects are discussed below:
Geographical Location of the business:
- Infrastructure (ports, airports, storage, specific storage types – such as cold storage, secure storage).
- Access (transportation of goods, materials, and personnel).
- Relevance to supply-chain: raw material sourcing, processing, dispatch of the finished product).
- Availability of talent pool for productions (labor), services, and management.
Economic Aspects:
- Ease of doing business: entering, establishing, restructuring, and closing the business, visa availability.
- Cost of doing business.
- Return on investment computations.
- Laws relating to labor.
- Laws relating to taxation: Investment allowances, subsidies, distribution of profits, repatriation of profits, withholding taxes, the existence of double-taxation avoidance agreements, information sharing.
Political Aspects:
- Friendly relations of the countries.
- Long-standing and established legislative precedents with companies going through regulatory recourse.
- Relations of the country with its neighboring countries.
Social Aspects:
- Trade bodies, the interaction between commercial entities of both nations.
- Expatriate-friendliness of the nation for relocating key employee personnel.
Technological Aspects:
- Intellectual property protection.
- Power, communication, telecom – availability, quality, and cost Issues like infrastructure, geography, time zone, political considerations/ conditions, the safety of investments, economic policy and stability of the country, culture, and language have a critical bearing on the strategy for globalization.
- Value systems and institutions are also becoming increasingly important from a long-term perspective, in order to have the support of stakeholders.
Ultimately, any chosen business strategy has to be executed within the parameters of legal and regulatory compliances.
Question 11.
Your Company proposes to enter into a Joint Venture outside India and the Management of the Company wants to know from you various methods/modes available for funding the joint venture. [Dec. 2019 (4 Marks)]
Answer:
Investment or financial commitment in an overseas JV/WOS may be funded out of one or more of the following sources:
- Drawal of foreign exchange from an AD bank in India.
- Capitalization of export proceeds and other dues.
- Swap of shares.
- Proceeds of ECBs/FCCBs
- In exchange for ADRs/GDRs issued in accordance with the Scheme/ Guidelines/Rules & Regulations.
- Balances held in the EEFC account of the Indian party.
- Proceeds of foreign currency funds raised through ADR/GDR issues.
- ADR/GDR stock swap subject to valuation norms and sectoral caps