Legal Know-hows For Indian Startups Setting Up Business Overseas

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Legal experts from NovoJuris show you the way

If you as a business setting up business outside of India, then not only do the legal requirements of that country becomes applicable, but quite a few of the Indian legislation and statutory requirements have to be kept in mind as well. In this post, we are focusing on the Overseas Direct Investment (ODI) governed by the Foreign Exchange Management Act, 1999 and the regulations there under.

A quick thumb rule to understand if you are reading foreign exchange related matters like this one (at a very very high level) is, if the foreign exchange is getting into India there are quite a few relaxations including valuation terms. Obviously, the country needs foreign exchange. However, when there is foreign exchange outflow from India, there are quite a few restrictions.

The Master Circular on Overseas Direct Investment issued on 1 July 2011 covers many of these aspects that we have captured below. You’ll find the is under the Notifications tab on RBI’s website. We would have loved to give a link to the right circular, but RBI website’s Terms of Service requires their prior permission .

Under the ODI Indian Entities can directly invest outside India by way of contribution to the capital or through subscription to the Memorandum of Association of the foreign entity, as this signifies long term interest in the overseas entity. In other words there are limited options available are through a Joint Venture (JV) or a wholly owned subsidiary (WOS).

A JV means a foreign concern formed, registered or incorporated in a foreign country in accordance with the laws and regulations of that country and in which investment has been made by an Indian entity. In a WOS scenario, the entire capital is owned by an Indian entity.

Legal Entities permitted to make investments:

  • Company incorporated in India
  • Body created under an Act of Parliament ( NTPC, Airport Authority of India)
  • Partnership registered under the Partnership Act, 1932
  • (and no, LLP or an individual is not permitted. See below for exceptions)

Legal entities permitted to open overseas branches

  • A firm
  • A company
  • Body corporate registered and incorporated in India
  • Proprietary concern
Category of InvestmentCriteria for InvestmentMode of InvestmentHow to Apply
Investment in a JV or a WOSDirect investment can be made in a foreign entity engaged in the same core activity carried on by the Indian party.The Indian Party should have earned net profit during the preceding three accounting years. Investment 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
  • Swap of shares
  • Proceeds of External Commercial Borrowings (ECBs)/ Foreign Currency Convertible Bonds (FCCBs)
  • In exchange of ADRs/GDRs issued in accordance with the Scheme for issuing of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from time to time by the Government of India.
  • Balance held in EEFC account of the Indian party
  • Proceeds of foreign currency funds raised through ADR/GDR issues.
 It should be noted that the ceiling of 400% of the net worth will apply to the last two points 
 To submit Form ODI, duly completed, to the designated branch of an Authorised Dealer (AD) Category- I (Bank) for onward transmission to Reserve Bank.
Investment out of ADR/GRD(American Depository Receipt/ Global Depository Reciept)The ADR/GDR that is issued has to be in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme 1993 and the guidelines issued thereunder.The Indian Party is required to report such acquisition in Form ODA to the AD Bank for submission to the Reserve Bank within a period of 30 days from the date of the transaction.
Investment in equity of companies registered overseasShould be a  Listed Indian company but investment should not exceed more than 50% of the net worth as on the date of the last audited balance sheetListed Indian companies can invest in shares, bonds / fixed income securities, rated not below investment grade by accredited / registered credit rating agencies, issued by listed overseas companiesThe Indian Party is required to route such transaction through the designated branch of an authorized dealer in India
Investment by capitalizationIndian party should have supplied technical know-how, consultancy, managerial and other services within the ceilings applicable.Direct investment is permitted by way of capitalization in full or part.Capitalization of export proceeds remaining unrealised beyond a period of six months of realization will require prior approval of the Reserve Bank.Indian software exporters are permitted to receive 25 % of the value of their exports to an overseas software start-up company in the form of shares without entering into Joint Venture Agreements, with prior approval of the Reserve Bank.
Investment by individualsResident of IndiaShares can be acquired in a foreign entity as consideration for professional services rendered to the foreign entity.   RBI will permit after giving due consideration to the following:i. credentials and net worth of the individual and the nature of his profession;ii. the extent of his forex earnings/balances in his EEFC and/or RFC account;iii. financial and business track record of the foreign entity;iv. potential for forex inflow to the country;v. other likely benefits to the country. 
Other Investments in Foreign SecuritiesResident of IndiaForeign Securities can be acquired:
  • ● as a gift from any person resident outside India;
-  under cashless Employees Stock Option Programme (ESOP) issued by a company outside India, provided it does not involve any remittance from India-inheritance from a person whether resident in or outside India-  to purchase equity shares offered by a foreign company under its ESOP Schemes, if he is an employee, or, a director of an Indian office or branch of a foreign company, or, of a subsidiary in India of a foreign company, or, an Indian company in which foreign equity holding, either direct or through a holding company/Special Purpose Vehicle (SPV), is not less than 51 per cent.
AD Category – I banks are permitted to allow remittances for purchase of ESOP shares by eligible persons irrespective of the method of operationalisation of the scheme i.e where the shares under the scheme are offered directly by the issuing company or indirectly through a trust / a Special Purpose Vehicle (SPV) / step down subsidiary, provided (i) the company issuing the shares effectively, directly or indirectly, holds in the Indian company, whose employees / directors are being offered shares, not less than 51% of its equity, (ii) the shares under the ESOP Scheme are offered by the issuing company globally on a uniform basis, and (iii) an Annual Return (Annex B) is submitted by the Indian company to the Reserve Bank through the AD Category – I bank giving details of remittances / beneficiaries, etc. 
General permission to individualsResident of India-qualification shares for becoming a director of a company outside India provided it does not exceed 1 % of the paid up capital of the overseas company and the consideration for the acquisition does not exceed USD 20,000 in a calendar year- rights shares provided that the rights shares are being issued by virtue of holding shares in accordance with the provisions of law for the time being in force- purchase of shares of a JV / WOS abroad of the Indian promoter company by the employees/directors of Indian promoter company which is engaged in the field of software where the consideration for purchase does not exceed  USD 10,000 or its equivalent per employee in a block of five calendar years;- purchase of foreign securities under ADR / GDR linked stock option schemes by resident employees of Indian companies in the knowledge based sectors, including working directors provided purchase consideration does not exceed  USD 50,000 or its equivalent in a block of five calendar years. To submit Form ODI, duly completed, to the designated branch of an Authorised Dealer (AD) Category- I (Bank) for onward transmission to Reserve Bank.

Obligations of Indian Entity:

The Indian party which has made direct investment abroad is under obligation to:

  1. Receive share certificate or any other document as evidence of investment.
  2. Repatriate to India the dues receivable from foreign entity.
  3. Submit the documents/ Annual Performance Report to the Reserve Bank through the AD Category- I Bank.

The nuances of reporting, compliances, application process is still arduous, but then if your startups market or business is outside of India, the logistics of getting out on foreign shores should not hold you back!

 

Disclaimer: This post is meant for information purposes only and is not a legal opinion.

 

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