Overseas Investment and the Externalization
- Blog|FEMA & Banking|News|
- 389 Views
- 2 Min Read
- By Taxmann
- Last Updated on 15 January, 2022
 134 taxmann.com 125 (Article)
Overseas investments in joint ventures (JV) and wholly owned subsidiaries (WOS) are important avenues for promoting global business by Indian entrepreneurs. As per the data published by Reserve Bank of India the total outflow by Indian Parties by way of overseas Foreign Direct Investment have been 1382.76 million USD for the month of Nov 21 as compared to 1607.22 USD Million in Nov 2020. Out of 1382.76 USD Million the investment in Equity has been 788.55 USD Million, Loan 185 USD million and the Guarantee issued was for 409.06 USD million.
Transfer of technology and skill, sharing of results of R&D, access to wider global market, promotion of brand image, generation of employment and utilisation of raw materials available in India and in the host country are other significant benefits arising out of such overseas investments. They are also important drivers of foreign trade through increased exports of plant and machinery and goods and services from India and also a source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments.
The transaction of investment by an Indian party outside India is a capital account transaction in terms of section 6 of the Foreign Exchange Management Act, 1999 and is regulated and governed by the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 vide Notification No. FEMA.120/RB-2004 dated 7 July 2004 (herein after referred as ‘ODI Regulations’).
Funding is one of the major considerations in any ODI transaction. Broadly, there are limited ways of funding: Owners equity, internal accruals or borrowed funds. The funding of overseas investment should be planned in a manner to reduce the interest cost and tax implications. In small deals, the plain vanilla funding may be sufficient; however, most of the companies opt for more than one way of funding.
As far as policy regarding the funding of overseas investments is concerned, it is allowed in number of ways like Drawal of foreign exchange from an AD bank in India, capitalisation of foreign currency proceeds to be received from the foreign entity on account of exports, fees, royalties or any other dues from the foreign entity for supply of technical know-how, consultancy, managerial and other services, Proceeds of External Commercial Borrowings (ECBs)/Foreign Currency Convertible Bonds (FCCBs); out of balances held in EEFC account of the Indian party; or out of Proceeds of foreign currency funds raised through ADR / GDR issues etc. Banks in India are usually not permitted to fund the equity contribution of the promoters.
Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.
Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.
The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:
- The statutory material is obtained only from the authorized and reliable sources
- All the latest developments in the judicial and legislative fields are covered
- Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
- Every content published by Taxmann is complete, accurate and lucid
- All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
- The golden rules of grammar, style and consistency are thoroughly followed
- Font and size that’s easy to read and remain consistent across all imprint and digital publications are applied