INVESTMENT IN SHARES OUTSIDE INDIA

By | August 15, 2015

INVESTMENT IN SHARES OUTSIDE INDIA

INVESTMENT IN FOREIGN SECURITY

Question : What are the types of Investment in foreign security ?

Transfer or issue of foreign security has three aspects. –

(a) Issue of ADR/GDR/FCCB

(b) Investment in Joint Venture/Wholly Owned Subsidiary abroad (JV/WOS)

(c) Investment by Indian resident or body corporate.

Provisions relating to all the three aspects i.e. transfer or issue of any foreign security by a person resident in India are contained in Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.

Foreign Securities can be acquired and transferred by a resident of India without approval of RBI only as per following provisions of RBI regulations. In other cases, permission of RBI is required.

Question: Is there any  customs duty if share certificates are brought from abroad for dematerialisation or sale in India ?

It has been clarified that no import duty is leviable if share certificates are brought from abroad for dematerialisation or sale. – MF(DR) circular No. 60/2000-Cus dated 12-7-2000.

Question:  Whether proprietary concern in India can accept shares of a company outside India in lieu of fees due to it for professional services ?

A proprietary concern in India can accept shares of a company outside India in lieu of fees due to it for professional services rendered to that company, with permission of RBI.

Application should be made to RBI in part I of form ODI through authorised dealer.

Value of such shares shall not exceed 50% of fees receivable (i.e., at least 50% fees must be receivable in cash).

Holding of Indian concern shall not be more than 10% of paid-up capital of company outside India, whose shares are accepted in lieu of fees [Regulation 19 of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

Question : Whether the a resident individual can acquire shares in a foreign entity offered as consideration for professional services rendered to foreign entity ?

A resident individual can apply to RBI for permission to acquire shares in a foreign entity offered as consideration for professional services rendered to foreign entity. RBI will grant permission after considering various aspects as specified [Regulation 20 of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

Question : Whether person can acquire shares towards professional services  in lieu of director’s remuneration ?

 General permission has been granted to acquire shares of a foreign entity in part/full consideration of professional services rendered to foreign company or in lieu of Director’s remuneration within limit prescribed under LRS – RBI circular No. 97 dated 28-3-2012 – – Regulation 22(2) of FEM (Transfer or Issue of any Foreign Security) Regulations inserted on 8-5-2013 with retrospective effect.

Question: what are the permissions required in case of Investments in foreign securities other than by direct investment ?

The provisions are given in Part III of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.

Instructions are summarised in section C of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

General permission for purchase of foreign securitiesA person resident in India can purchase/sale foreign security as follows: [regulation 20 of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004] [para A.4 of Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

(a) Purchase of foreign security out of funds held in RFC (Resident Foreign Currency) Account in accordance with provisions in Foreign Exchange Management (Foreign Currency Accounts) Regulations, 2000

(b) Acquire bonus shares on the foreign securities held in accordance with provisions of FEMA Act

(c) When not permanently resident in India, may purchase a foreign security from out of his foreign currency resources outside India.

General permission is available to sell the shares so purchased or acquired

Questions: What are the cases in which general permission is available  for acquisition of foreign securities ?

In following cases, general permission has been given for acquisition of foreign securities (In other cases, approval of RBI is required] – para C.1 of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

Acquisition by individuals

A person resident of India being an individual may acquire foreign securities as follows [regulation 22 of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004] –

(i) by way of gift from a person resident outside India; or

(ii) issued by a company incorporated outside India under Cashless Employees Stock Option Scheme, if it does not involve any remittance from India, or

(iii) by way of inheritance from a person whether resident in or outside India.

(iv) Purchasing equity shares of foreign company under its ESOP schemes if the person is employee or director

(v) Foreign companies can repurchase shares issued to residents in India under ESOP scheme, if such repurchase is in terms of initial offer document and Annual return is submitted through authorised dealer bank – RBI circular No. 30 dated 5-4-2006.

Further, a resident individual (single or in association with another resident individual or with an Indian party can make overseas direct investment in JV/WOS as per prescribed conditions – Schedule V of FEM (Transfer or Issue of any Foreign Security) Regulations inserted on 5-3-2013.

Question : Whether the person resident in India  and Employee of branch of foreign company may purchase the equity shares offered by the said foreign company? What are  Provisions in case shares are acquired under ESOP (Employee Stock Option) ?

A person resident in India, being an individual, who is an employee or a director of Indian office or branch of a foreign company or of a subsidiary in India of a foreign company or of an Indian company in which there is foreign equity holding Irrespective of percentage of such holding (earlier the holding was required to be not less than 51 per cent), may purchase the equity shares offered by the said foreign company. There is no monetary limit. The shares can be freely sold but proceeds should be repatriated to India – para C.1 of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

Shares under ESOP should be offered on uniform basis. Annual return should be submitted to RBI. The foreign company may hold shares directly or indirectly through step down subsidiary company/Special Purpose Vehicle (SPV) or trust [RBI AP (DIR) Circular No. 32 dated 9-2-2005] [regulation 22(2) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

There is no monetary limit on amount that can be remitted. Shares need not be offered at concessional rate. The securities can be sold but amount should be repatriated to India within 90 days from date of sale – para C1 of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

The foreign company which had issued the shares under ESOP can repurchase the same if the repurchase was in terms of initial offer document [regulation 22(5) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

The shares under ESOP can be offered by issuing company directly or indirectly through a trust/SPV/step down subsidiary. Shares should be offered by issuing company globally on a uniform basis.

Question: Whether these shares acquired by person resident in India can be pledged ?

Shares acquired by person resident in India in accordance with provisions of FEMA, can be pledged for obtaining credit facilities in India from AD/PFI – para C.2 of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

Question: Whether a person resident of Indi can acquire foreign securities as qualification shares issued by company incorporated outside India for holding post of director in that company ?

The provisions as contained in para C.3(a) of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013], as follows—

A person resident of India being an individual can acquire foreign securities as qualification shares issued by company incorporated outside India for holding post of director in that company, without approval of RBI. The number of shares should be minimum required for holding of director as per law of the host country. The overall limit will be within overall ceiling prescribed for resident individuals under LRS. If qualification shares are beyond these limits, permission of RBI will be required [regulation 24(1)(a) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004] – as amended by RBI circular No. 97 dated 28-3-2012.

The shares so acquired can be sold without permission of RBI, if proceeds are repatriated India through banking channels [regulation 24(2) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

Question: A person had acquired the foreign securities can he acquire rights shares issued by virtue of holding such shares? Is there any permission required from RBI ?

The provisions are as follows: [para C.3(c) of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in Joint Venture/Wholly Owned Subsidiary abroad (JV/WOS) abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

A person who had acquired any foreign securities in accordance with law can acquire rights shares issued by virtue of holding such shares, without permission of RBI. Investment above that can be made with permission of RBI [Regulation 24(1)(b) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

The shares so acquired can be sold without permission of RBI, if proceeds are repatriated India through banking channels [regulation 24(2) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

Question: Can the  employee/directors of an Indian promoter company  (in the field of software ) purchase  shares of a  Joint Venture/Wholly Owned Subsidiary abroad (JV/WOS)  ?

An employee/directors of an Indian promoter company can purchase shares of a Joint venture or wholly owned subsidiary abroad, of the Indian promoter company in the field of software. The shares so acquired should not exceed 5% of paid-up capital of the Joint Venture/Wholly Owned Subsidiary abroad (JV/WOS). However, after allotment, percentage of shares of Indian promoter together with shares allotted to its employees is not less than percentage prior to allotment. The ceiling on investment will be as prescribed by RBI from time to time. [regulation 24(1)(c) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

Present ceiling is US $ 10,000 or its equivalent per employee in a block of five years – para C.3 of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

Question: What is the limit for  resident employees of Indian companies  in knowledge based sector for Purchase of foreign securities under ADR/GDR linked stock option scheme ?

Purchase of foreign securities under ADR/GDR linked stock option scheme by resident employees of Indian companies in knowledge based sectors, including working directors is permitted upto US $ 50,000 or its equivalent in a block of five financial years [regulation 24(3) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

Question:  Whether the approval of RBI is required in case of  Capital account transactions by resident individual, under Liberalised Remittance Scheme ?

An individual Indian resident (even a minor) can remit an amounts under Liberalised Remittance Scheme (LRS). No approval of RBI will be required. For details, see another chapter.

Question: Whether an Indian party was allowed acquire shares of a foreign company engaged in bona fide business activity, in exchange of ADR/GDR issued to the foreign company ?

An Indian party was allowed acquire shares of a foreign company engaged in bona fide business activity, in exchange of ADR/GDR issued to the foreign company, in accordance with scheme of issue of FCCB. The ADR/GDR should be already listed. Valuation should be done. The investment should not exceed 10 times the export earnings of the Indian party during preceding financial year. Sectoral cap should not be exceeded. Report should be submitted to RBI within 30 days in form ODG [Regulation 8 of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

The regulation 8 has been omitted w.e.f. 20-4-2007.

However, such swap is permitted as per para B.1(g) of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

Question: Whether the bank in can acquire share  of SWIFT ?

Banks in India can acquire shares of SWIFT (Society for Worldwide Interbank Financial Telecommunication), Belgium as per by-laws of SWIFT if RBI has allowed the Bank to become member of SWIFT Unser’s Group in India – RBI circular No. 8 dated 11-7-2013 – Part I para 6D of FEM (Transfer or Issue of any Foreign Security) Regulations.

Question : whether Listed Indian companies can invest in equity shares, rated bonds/fixed income securities of companies listed in foreign stock exchange ? is there any limit ?

Listed Indian companies can invest in equity shares, rated bonds/fixed income securities of companies listed in foreign stock exchange. [regulation 6B of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

Investment of Indian listed company shall not exceed 50% of Indian company’s net worth of last audited balance sheet – RBI AP (DIR) Circular No. 11 dated 26-9-2007 – para B.6(1)(i) of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

Question :can an Indian party engaged in financial services activities in India may make investment in an entity outside India ?

An Indian party engaged in financial services activities in India may make investment in an entity outside India, subject to regulations as contained in part I of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.

The Indian entity should be registered with regulatory authority in India and should obtained approval from regulatory authority in India and abroad [regulation 7(1) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 as amended w.e.f. 6-9-2006].

Step down subsidiary of Joint Venture/Wholly Owned Subsidiary abroad investing in financial services will also comply with these conditions [para B.5(2) of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in Joint Venture/Wholly Owned Subsidiary abroad abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013] and regulation 7(2) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004].

The regulated entities in financial sector in India investing overseas in any activity will have to comply with above provisions. Trading in Overseas Commodities Exchange will be treated as financial services and will require clearance from Forward Markets Commission (FMC) – RBI AP (DIR) Circular No. 6 dated 6-9-2006 – para B.5(3) of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

Question : What are the regulations in case of Investment by mutual funds and Venture Capital Funds ?

In case of mutual funds and Venture Capital Funds, the ceiling will be as prescribed by SEBI from time to time. They have to register with SEBI. They can invest within limits in rated bonds, fixed income securities or Exchange Traded Funds or other securities as may be stipulated by RBI [Regulation 6C and 26 of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004] – para B.6(1)(ii) of RBI Master Circular No. 11/2014-15 dated 1-7-2014 on ‘Investment by Residents in JV/WOS abroad’ [earlier Master Circular No. 11/2013-14 dated 1-7-2013].

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