The foreign investment policies of the country implemented in the year 1991 opened gates for foreign investments to enter Indian territory.Hence,the year 1991 turned out to be the golden year for the Indian economy.This also made Indian companies eligible to set up business abroad or making an investment abroad as the case may be. Prior to 1991, exports were the predominant way of expanding business abroad and hence the emphasis was on export promotion strategies with restrictions on cash outflows so as to conserve our foriegn exchange reserves.Till then, India’s economic integration with the rest of the world was limited and expansion and growth of business houses was felt necessary to increase their share in the world market not only by exporting their products by also by acquiring overseas assets and establishing their presence abroad. This requirement paved the way to formulate regulations to make investments abroad. Accordingly, the policy for outward capital flows has evolved.
In the year 1999, the introduction of FEMA (Foreign Exchange Management Act) changed the entire perspective on foreign exchange, particularly those relating to investments abroad.According to the Reserve Bank of India, Overseas Direct Investment means investments, either under the Automatic Route or Approval Route, by the way of contribution to the capital or subscription to the memorandum of a foreign entity or by the way of purchase of existing shares of foreign entity either by market purchase or private placement or through stock exchange.
FOREIGN EXCHANGE MANAGEMENT ACT,1999
- Section 6 of the Foreign Exchange Management Act,1999 provides powers to the Reserve Bank to specify, in consultation with the Government of India, the classes of permissible capital account transactions and limits up to which foreign exchange is admissible for such transactions. Section 6(3) of the aforesaid Act provides powers to the Reserve Bank to prohibit, restrict or regulate various transactions referred to in the sub-clauses of that sub-section, by making regulations.
- In exercise of the above powers conferred under the Act, the Reserve Bank seeks to regulate acquisition and transfer of a foreign security by a person resident in India i.e Investment by Indian entities in overseas joint ventures and wholly owned subsidiaries and also investment by a person resident in India in shares and securities issued outside India.
- Overseas Investment can be made under two routes- (i) Automatic Route (ii) Approval Route
- Entities permitted to make investments:
- Company incorporated in India or a body created under the act of parliament
- Limited Liability Partnership(LLP), registered under the Limited Liability Partnership Act,2008
- Partnership firm registered under the Indian Partnership Act,1932
- Any other entity in India as may be notified by the Reserve Bank.
PROHIBITION ON INVESTMENT OUTSIDE INDIA
- Indian Parties are prohibited from making investment in a foreign entity engaged in real estate or banking business, without the prior approval of the Reserve Bank.
- An overseas entity,having direct or indirect equity participation by an Indian party, shall not offer financial products linked to Indian Rupee without the specific approval of the Reserve Bank.
An Indian Party has been permitted to make investment/undertake financial commitment in overseas Joint Ventures(JV)/ Wholly Owned subsidiaries (WOS), as per the ceiling prescribed by the Reserve Bank of India from time to time.
- With effect from July 03,2014. Any financial commitment(FC) upto USD 1 billion shall only come under the automatic route.The eligible limit of investment under the automatic route is 400% of the net worth of the Indian Party as per the last audited balance sheet.
- It has been decided that any financial; commitment(FC) exceeding USD 1 billion(or equivalent) in a financial year would require prior approval of the Reserve Bank even when the total FC of the Indian Party is within the eligible limit under the automatic route (i.e, within 400% of the net worth as per the last audited balance sheet).
- For the purpose of making investment / undertaking financial commitment in overseas Joint ventures? Wholly Owned Subsidiaries , the Indian Party should approach an authorized dealer category.
The investments/financial commitments are further subjected to certain conditions as prescribed by the Reserve Bank of India.
INVESTMENT NOT UNDER AUTOMATIC ROUTE AND THAT REQUIRE APPROVAL OF THE RESERVE BANK
- Prior approval of the Reserve Bank would be required in all other cases of direct investment abroad except those mentioned under automatic route. For this purpose, application together with necessary documents should be submitted in Form ODI through their authorized dealer category.
- The designated authorized dealer before forwarding the proposal should submit the Form ODI in the online OID application under the approval route and the transaction number generated should be mentioned in the letter.
- In case the proposal is approved, the AD bank should affect the remittance under advice to the Reserve Bank so that the UIN( Unique Identification Number) is allotted.
Some proposals which require prior approval of Reserve Bank of India are :
- Overseas Investments in the energy and natural resources sector exceeding the prescribed limit of the net worth of the Indian Companies as on the date of the last audited balance sheet.
- Investments in Overseas Unincorporated entities in the oil sector by resident corporations exceeding prescribed limits and subject to further approval of certain other authorities.
- Overseas Investments by proprietorship concerns and unregistered partnership firms satisfying certain eligibility criteria.
- Investments by Registered Trusts/Societies engaged in the manufacturing/ educational / hospital sector is the same sector in a JV/ WOS outside India.
- Corporate guarantee by the Indian Party to second and subsequent level of Step Down Subsidiary(SDS)
- All other forms of guarantee which are offered by the Indian party to its first and subsequent level of SDS.
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