• How-to

Markets may be crashing faster than an avalanche, but that isn’t stopping enterprising Indians from investing in foreign companies. They are convinced that the profits they stand to gain outweigh the risks. If you would like to invest abroad but aren’t sure of the procedure, here’s what you need to know.

Firstly, who is eligible to make investments abroad? Resident corporate entities and partnership firms registered under the Indian Partnership Act, 1932 (Indian party), can make direct investments abroad in Joint Ventures (JVs) or Wholly Owned Subsidiaries (WOSs).

There are two schemes under which an Indian party can set up a JV/WOS abroad: automatic route and normal route. Under the automatic route, an eligible Indian party does not require any prior approval from the Reserve Bank India (RBI). If you want to make a direct investment under the automatic route, you need to fill in an application, supported by a certified copy of the Board Resolution, statutory auditor’s certificate, valuation report (in case of acquisition of an existing company) as per the valuation norms listed in answer to Q.16. Then, you need to approach the designated authorized dealer to make the remittance.

Remember, RBI will allot an identification number, but this is not an approval for the investment made or to be made in the foreign venture. So who isn’t eligible to invest under the automatic route? That would be companies under investigation by the Enforcement Directorate or other iagencies, or those that are on

the RBI’s exporters caution list, or those included in the list of defaulters to the banking system in India as circulated by RBI. Requests for direct investment in a JV/WOS abroad through a share swap arrangement can be made under the Automatic Route. But the valuation of the shares must be done either by a category I merchant banker who is registered with the Securities and Exchange Board of India (SEBI), or an investment banker/merchant banker outside India who is registered with the appropriate regulatory authority in the host country.

Note that all share swap transactions require prior approval from the Foreign Investment Promotion Board for the inward leg of the investment. Listed Indian companies can invest up to 25 percent of the net worth in overseas companies (listed on a recognized stock exchange) that have at least a 10 percent share in an Indian company (listed on a recognized stock exchange) as on January 1st of the year of investment. Or, they can do so by way of rated debt securities issued by the same companies. This 10 percent holding, however, needs to be a direct holding, not one through a subsi-diary or a Special Purpose Vehicle (SPV).

©Entrepreneur September 2009

Tags:
joint ventures, overseas, RBI, SEBI, wholly owned subsidiaries