Merchant Banking

It has been the policy of the Indian Government not only to encourage FDI and FII inflows into our country, but also to provide avenues for Indian entrepreneurs to invest abroad liberally in joint ventures and wholly owned subsidiaries for increasing their competitiveness and for effective global integration of our economy. These overseas investments promote foreign exchange earnings like dividend, royalty, and technical know -how fee and are also a major source of increasing exports of plant and machinery and goods from India. The process of overseas investment has been liberalized considerably over the last four years and various simplification measures have been introduced. The extant regulations of Reserve Bank of India governing Indian overseas investments have been summarized in this article for the benefit of readers.

Indian party has earned a net profit during the preceding 3 financial years from the financial service activities. Indian party is registered with regulatory authority in India for conducting financial services activities. Indian party has obtained approval from concerned regulatory authorities both in India and abroad for venturing into such financial sector activity. Indian party has fulfilled capital adequacy norms prescribed in India.

A company incorporated in India or a partnership registered in India may undertake agricultural operations overseas including the purchase of land. A resident individual or a listed Indian company or a registered mutual fund in India can invest in shares of an overseas company listed on a recognized stock exchange, which holds in its name shares of not less than 10% in any listed company in India. The Indian party should not be on the RBI’s exporters caution list / list of defaulters to the banking system. The Indian party should have submitted up to date returns in form APR in respect of all its overseas investments.

The Indian party should route all transactions relating to the investment in JV/WOS through only one branch of an authorized dealer to be designated by it. (for different JV s /WOS different branches of may be designated). The Indian party should submit form ODA duly completed along with Form A-2 to the designated branch of the AD. AD immediately after affecting the remittance is required to submit the report of remittance in form ODR to RBI.

Overseas direct investments may be made from EEFC accounts / or through drawl of foreign exchange from AD. Indian party having made an equity contribution to the JV, can extend a loan or issue a guarantee to or on behalf of the JV/WOS within the permissible financial commitment. Indian party can make direct investment without any limit in foreign security out of proceeds of ADR /GDR issued by it. Indian party is exporting goods / software / plant and machinery from India can capitalize the export proceeds towards equity contribution in the JV/WOS.

Where investment in existing company outside India is more than USD 5 bn, value of shares will be done by the merchant banker registered with SEBI or investment banker registered with appropriate authority in the host country. In cases of investments up to USD 5 bn, value of shares may be done by a chartered accountant or a certified public accountant. Indian party which does not satisfy the above eligibility norms may apply to RBI for approval. In such cases applications for direct investment in JV/WOS or by way of exchange of shares of a foreign company shall be made in form ODI or ODB as applicable.

With increasing competition and technological advancements in the market, going has become tough for individual businesses and firms, forcing them to join hands with other parties. In such a scenario, cross border alliances are emerging with their own sets of problems and solutions, and if implemented for the right purpose and with due level of flexibility, they may serve as better solutions to both parties seeking complementary strengths and cooperation.

It is important that partners have complementary skills and capabilities and also should maintain a balance of strengths. The chances of an efficient ally increase when each partner brings both products and an established market presence in different geographic markets. Flexibility is an important ingredient in a successful alliance; creating a broad board, strong president, and a sense of identity, decision-making system, and it makes the life of an alliance longer and healthy.

Cross border alliances are inevitable collaborations, when provided with due flexibility and allied for complementary strengths and resources, they provide new meaning to competition and co-optation. An Indian party having invested overseas should receive share certificates or any other document within six months from the date of remittance.

All dues receivable from the foreign entity such as dividend, royalty, and technical know-how fee etc. should be received within 60 days from the due date. An Indian Party may transfer his shares in JV/WOS abroad by sale to another resident who complies with eligibility norms or a person resident outside India. An Indian Party may pledge shares in overseas JV/WOS as a security for availing fund based or non fund based facilities for itself or for JV/WOS from an AD /FI in India.

Indian parties can make direct investments in overseas joint ventures (JV) or wholly owned subsidiaries (WOS) engaged in a bonafide business activity. No investments are permitted in the real estate business or banking business abroad. An Indian party can make an investment in a foreign entity engaged in financial services provided that the Indian party has earned a net profit during the preceding 3 financial years from the financial service activities.

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