Overseas Investment and the Externalization

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  • Last Updated on 15 January, 2022

Overseas Investment and the Externalization; FEMA

[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.

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