Joint Ventures / Wholly Owned Subsidiaries which abroad promote economic co-operation between India and the host countries. This results in various benefits like transfer of technology and skills, access to global market, a building of the brand image, creation of employment opportunities and utilization of raw materials available in India and in the host country, import of goods and services, increased exports of plant and machinery, goods and services, also results in earning of foreign exchange, technical know-how fee, etc. Globalization has resulted in the removal of restrictions in trade, lead to an integration of the Indian economy with the rest of the world.This is achieved through investment in a foreign company or overseas investment. It is the opposite of Foreign Direct Investment (FDI). Broadly there are two schemes under which one can go for overseas investment, namely automatic route, and approval route. Investment by an Indian Company in a Foreign Company
Automatic Route
Here, An Indian company which wishes to invest in a foreign company does not require to take any prior permission from the Reserve Bank of India for making overseas direct investments in a JV/WOS abroad. The Indian Company must approach an Authorized Dealer Category – I bank with an application in Form ODI and the supporting documents for effecting the remittances towards such investments. However, if the foreign investment has to be done in the financial services sector, prior approval is required from the regulatory authority concerned, both in India and abroad.
Approval Route
Proposals not covered by the conditions under the automatic route require permission from the Reserve Bank of India beforehand. An application in Form ODI with the supporting documents is required to be filed with the Authorized Dealer Category-1 bank.
Prerequisites for Foreign Investment
The following points must be kept in mind before investing in the shares of a foreign company.
- The Indian Company is prohibited to make overseas investment in a foreign company engaged in Real Estate Business or banking business. It requires prior permission from RBI.
- The company investing in a foreign company should not be on RBI export caution list or list of defaulters in the banking system.
- Annual Performance Report must be filed up to date for all foreign investment in the format provided.
- The details of transactions of the investment in the foreign company have to be routed only through one authorized dealer.
- The direct investment is made in an overseas JV or WOS (foreign company) engaged in a bonafide business activity.
- The company total financial commitment should be up to a prescribed limit(100%) of the net worth of the company as on the date of the balance sheet last audited
Financial commitment means the amount of direct investments outside India (foreign investment) by an Indian Party
- By way of subscription to equity shares.
- Investing in the JV / WOS preference shares.
- As loans to its WOS / JV abroad
- 100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS and
- 50% of the amount of performance guarantee issued on behalf of its overseas JV/WOS.
- Bank guarantee/standby letter of credit issued by a resident bank on behalf of an overseas JV / WOS.
- Creation of charge.
For the purpose of the limit of 100% of the net worth, the following shall be reckoned, namely
- Cash remittance by market purchase.
- Export proceeds capitalization.
- Fifty percent of the value of guarantees issued by the Indian party to or on behalf of the joint venture company or wholly owned subsidiary.
- Investment in agricultural operations through overseas offices or directly.
- External Commercial Borrowing in accordance with other parameters of the ECB guidelines.
If the company does not satisfy the eligibility norms as mentioned above, then an application must be made to the Chief General Manager, RBI for clarification for specific cases.