Overseas Direct Investment July 9, 2011

Agenda

 Routes of Investment  Automatic route  Approval Route  Funding Mechanism  Pledge of Shares of JV/WOS  Compliances and Valuation  Restructuring of Investments  Exit  Liberalised Remittance Scheme for Resident Individuals Agenda D ESAI & D IWANJI

What is ODI?

Regulation 2(e) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004, defines Direct Investment outside India as Investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity, Or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange. ODI does not include portfolio investment What is ODI? D ESAI & D IWANJI

Routes

Automatic Route No prior approval of RBI Applicable to overseas investment by: Company a body created under an Act of Parliament Registered partnership firm making investment in JV / WOS abroad Subject to conditions Prior approval of RBI Investment by all other entities inter-alia: proprietorship unregistered partnership firm trust; Society Investment in Real estate buisness Banking business Overseas Investment Route – Indian Entity Structure Approval Route D ESAI & D IWANJI

Automatic Route

Automatic Route for ODI - Conditions Automatic approval for “Financial Commitment” upto 400% of Net Worth as of the last audited Balance Sheet Net Worth = Paid up capital + free reserves D ESAI & D IWANJI Permitted subject to investment in the Company Computation of 400% to include: Contribution to capital Loans Guarantee issued to or on behalf of Fco

Investment to be in bona fide business activity Investee company not on RBI’s Exporters’ caution list on list of defaulters to the banking system issued by RBI / CBIL / any other CIC under investigation by any investigation/enforcement agency/ regulatory body Investment routed through one branch of an AD bank category-I Investor company has submitted up to date returns (APR) for all its existing ODIs Investment through SPV also permitted Automatic Route for ODI - Conditions D ESAI & D IWANJI

Approval Route

Has to be a DGFT recognized Star Export House. KYC (Know Your Customer) compliant and engaged in the proposed business Proven track record i.e. overdue exports < 10 % of the average export realization of preceding 3 financial years. Firm not on RBI’s caution list/list of defaulters to the banking system or has come under adverse notice of ED or CBI Investment outside India <10 % of the average of 3 financial years export realization or 200 % of the net owned funds of the firm, whichever is lower Application in Form ODI Proprietorships / Unregistered Partnerships D ESAI & D IWANJI

Sectors – Manufacturing Education Hospital Investment in the same sector Conditions: Registered under the Indian Trust Act, 1882 Trust deed permits the proposed investment overseas Proposed investment should be approved by the trustee/s AD Bank satisfied that trust is KYC compliant and engaged in a bonafide activity In existence at least for a period of 3 years No adverse notice from any regulatory / enforcement agency like CBI, Directorate of Enforcement Permissions/licensees for concerned activity obtained from relevant authority(s) Registered Trust D ESAI & D IWANJI

Sectors – Manufacturing Education Hospital Investment in the same sector Conditions Registered under the Societies Registration Act, 1860 MoA and rules and regulations allows proposed investment Approved by the governing body / council or a managing committee AD Bank satisfied that trust is KYC compliant and engaged in a bonafide activity In existence at least for a period of 3 years No adverse notice from any regulatory / enforcement agency like CBI, Directorate of Enforcement Permissions/licensees for concerned activity obtained from relevant authority(s) Registered Society D ESAI & D IWANJI

Viability of the Overseas company Contribution to external trade and benefits to India Financial position and buisness track record of Indian party and foreign entity Experience of Indian party in same or related line RBI Considerations for Approval D ESAI & D IWANJI

Pakistan Automatic Route Not Available Nepal Investment only in Indian rupees Bhutan Investment in INR or freely convertible currencies Country Specific Conditions D ESAI & D IWANJI

Investments in Financial sector entity permitted under automatic route subject to : Approval from concerned regulatory authority in India and abroad Registered with appropriate regulatory authority in India Earned net profit during last three years from Financial services sector Fulfilled the prescribed prudential norms relating to capital adequacy Is automatic route really automatic ? Automatic Route for ODI (Financial Services) - Conditions D ESAI & D IWANJI

Downstream investment by JV also subject to these conditions Unregulated Indian financial sector entities – comply only if investing in financial sector activities overseas Regulated Indian financial sector entities – have to comply with above regulations for all investments NBFC’s making investment overseas need NOC from RBI Automatic Route for ODI (Financial Services) - Conditions D ESAI & D IWANJI

Funding Mechanisms

Share swap ECB proceeds EEFC A/c balance Capitalisation of export receivables Rupee resources Proceeds of ADR / GDR issue Exchange of ADR/GDR FCCB proceeds 400% ceiling doesn’t apply Funding Mechanism D ESAI & D IWANJI

Pledge of shares of overseas company permitted to: Indian Bank / public financial institution for loan for Indian party itself or for the JV/ WOS abroad. Overseas Lender subject to: The lender being regulated and supervised as a bank total financial commitments of the Indian party remaining within the limit stipulated by RBI for overseas investments Pledge of Shares of JV/WOS D ESAI & D IWANJI

Valuation and Compliances

Investment > USD 5 mn : Category I Merchant Banker / registered investment banker from foreign country All other cases - Any CA / CPA In case of share swap : Category I Merchant Banker / investment banker from foreign country. Valuation Norms D ESAI & D IWANJI

Receive share certificate / other documentary evidence within 6 months Repatriate to India all dues receivable from foreign entity within 60 days Submit APR to RBI in Form ODI Part III within 60 days from date of expiry of the statutory period for finalisation of accounts in the host country Intimate investment in a step down subsidiary / changes in the shareholding pattern / diversification of business within 30 days of approval of this decision by the competent authority of the JV / WOS Submit details of disinvestment to the AD within 30 days Post Investment Compliance Obligations D ESAI & D IWANJI

Restructuring of Investment

Indian Promoters of a WOS or having a minimum 51% stake in foreign JV may write off capital or other receivables such as loans, royalty, technical knowhow fees and management fees even while the JV/WOS continues to operate as below Listed Indian companies can write off 25% -Automatic Route Unlisted Indian Companies can write off 25% - Approval route In both cases they need to submit: A certified copy of the balance sheet showing the loss in the overseas WOS/JV; and Projections for the next five years indicating benefit accruing by such write off / restructuring. Restructuring to be reported to RBI within 30 days Restructuring - Writing off Capital and other receivables D ESAI & D IWANJI

Exit

Conditions for automatic route for disinvestment : No write off of investment No outstanding dues such as dividend, royalty, technical know- how from JV / WOS Sale after > 1 full year of operations and APR for said year has been submitted Indian party is not under investigation in India Shares sold on a Stock Exchange or if unlisted, share price not less than value certified by CA/CPA based on latest audited balance sheet Exit from JV / WOS D ESAI & D IWANJI Party to report divestment through AD within 30 days

Automatic route for disinvestment if any of the following are satisfied: JV / WOS is listed overseas; or Indian party is listed and has a net worth > Rs. 100 crore; or Listed Indian party with net worth < Rs. 100 crore and Investment in JV/WOS is < USD 10Milion; or Unlisted Indian party and investment in JV / WOS <USD 10 million. Exit from JV/WOS Involving write off of capital D ESAI & D IWANJI All other conditions of exit have to be met

Liberalised Scheme of Remittance for Resident Individuals

D ESAI & D IWANJI Resident Individuals may remit upto USD 200,000 in any Financial year (April – March) for: Permissible current and / or capital account transactions or combinations thereof Immovable property Shares Debt Instruments Any other asset outside India Gift / donation Objects of art ESOP’s Mutual funds Venture Capital Funds Unrated debt securities Promissory Notes etc Repayment of loan taken as a non-resident Liberalised Remittance Scheme

D ESAI & D IWANJI Funds cannot be untilised for: transactions not permitted under FEMA and this Scheme remittances specifically prohibited under Schedule I or restricted under Schedule II of Current account transaction rules Countries to which remittance is restricted: Bhutan Nepal Mauritius Pakistan Other territories as notified by RBI and FATF No credit facilities to be given by Banks to undertake such remittances Liberalised Remittance Scheme

D ESAI & D IWANJI Resident Individuals includes minors Remittances can be consolidated in respect of family members Pan number necessary for remittance under the scheme Individuals can open and maintain a foreign currency account with a bank outside India without prior approval of RBI for making remittances under this scheme. Outward remittance can also be in the form of a DD in the residents own name or the name of the beneficiary Liberalised Remittance Scheme

D ESAI & D IWANJI Joebin DevassyAssociate Partner, Desai & Diwanji (+91) Mobile: (+91) Reasonable care has been taken to ensure that the information contained herein is accurate in all respects. However, this is not intended and should not be considered to be legal advice. No person should act on the basis of any information contained in this presentation without considering and seeking professional assistance based on the facts and circumstances of their case.

Regulations for Non Banking Financing Companies

D ESAI & D IWANJI Investment in non-financial sector not permitted Investment in activities prohibited under FEMA or in sectoral funds not permitted Investment permitted only in entities regulated by financial regulator in investment jurisdiction Investment aggregate not exceeding 100% of NoF Investment in single entity inluding subsidiary not to exceed 15% of the NoF Single intermediate holding entity permitted NBFC to maintain level of NoF prescribed by RBI even after overseas investment Net non Performing Assets < 5% of net advances Earning profits for last 3 years, satisfactory performance in general General Conditions for NBFC

D ESAI & D IWANJI CRAR of deposit taking NBFC and NBFC-ND-SI post investment to be not to be less than prescribed RBI CRAR of other NBFC’s post investment to be not less than 10% Compliance with KYC norms Annual certificate from statutory auditors submitted by NBFC with DNBS Quarterly return by NBFC to DNBS and DSIM Parent NBFC to obtain periodical reports/ audit reports about the business undertaken by overseas company and make available to RBI Disclosure in balance sheet of overseas entity that the liability of the parent entity is limited to equity or fund based commitment General Conditions for NBFC Approval can be withdrawn for non-compliance.

D ESAI & D IWANJI Only for market research Liaison work No activity involving outlay of funds No line of credit permitted Representative Offices No new branches permitted Existing branches can continue Branch Parent NBFC not permitted to extend implicit or explicit guarantee No letter of comfort to be issued from any Indian institution Overseas subsidiary not to be a shell company Not to be a vehicle for raising Subsidiaries / JV’s Specific Conditions

Investment upto 50% of Networth as at last audited balance sheet Permitted in: Shares Bonds / fixed income securities ( not below investment grade) Issued by listed companies Portfolio Investment – Listed Indian Companies D ESAI & D IWANJI

Indian entities (promoter, group or associate company) permitted to offer guarantee (corporate / personal / primary / collateral etc.) provided: Indian entity has equity participation in FCo Percentage computed towards 400% ceiling: 50 % of the amount of the performance guarantee 100% of the amount for all other guarantees No guarantee is 'open ended' Time specified for completion of contract is the validity period of performance guarantee Corporate Guarantee on behalf of First level down subsidiary is under Automatic Route (operating Company or SPV) Corporate Guarantee to Second level or subsequent level subsidiary under Approval level subject to the Indian party holding atleast 51% or more directly or indirectly Report in Form ODI-Part II to be submitted to RBI RBI approval required for creating charge on immovable property / pledge of shares in favour of non-resident entity Prior approval of RBI required before remitting funds in case on invocation of the performance guarantee results in breach of the 400% limit. D ESAI & D IWANJI Guarantees

Target ICo Overseas SPV Equity Loan FI/Bank Equity Guarantee ICo can give guarantee only for or on behalf of WoS / JV in which it has equity participation Extending Guarantee D ESAI & D IWANJI

Permitted to capitalise payments due towards: Permitted to capitalise payments due towards: Exports Fee Royalties Any other dues such as technical know-how, consultancy Any other dues such as technical know-how, consultancy RBI approval required for: RBI approval required for: Capitalisation of export proceeds which continue to be unrealized beyond prescribed period(6 months) Capitalisation of export proceeds which continue to be unrealized beyond prescribed period(6 months) Indian software companies to receive upto 25% of export value in form of shares of overseas company without JV agreement Indian software companies to receive upto 25% of export value in form of shares of overseas company without JV agreement Capitalisation of Exports D ESAI & D IWANJI

Transaction requires prior approval of RBI and FIPB OpCo O/s TargetCo O/s Seller ICo sells OpCo shares to the Seller in exchange for TargetCo shares ICo Share Swap D ESAI & D IWANJI