SETTING UP A BUSINESS OUTSIDE INDIA

INTRODUCTION:

With the advent of globalization, an increasing number of Indian enterprises are interested in doing business outside of their home country. They need to open a branch office or a subsidiary in another country. There are numerous advantages to doing so, including cost savings due to duty savings, ease of doing business, and the development of a global brand, among others.

Indian entrepreneurs have recognized overseas investment in Wholly-Owned Subsidiaries(hereinafter WOS) or joint ventures as a significant option for expanding their worldwide business. In general, there are two ways to find a WOS abroad: the automatic path and the permission method. The automated method eliminates the need for prior clearance from the administrative unit before implementing a WOS abroad.

Other proposals/activities not covered by the conditions under the automatic route would require the banking company’s prior permission. Overseas investments in joint ventures and totally owned subsidiaries are acknowledged by Indian businesses as a significant outlet for growing global companies.

There are several substantial advantages to such international investments, including technology and skill transfer, access to a larger global market, brand name promotion, job creation, and so on. These investments are critical drivers of international trade. It refers to investments made via the automatic or approval method in a remote entity’s capital or memorandum, or through the acquisition of existing shares in an overseas entity, demonstrating an extended-term interest within the foreign entity, such as Joint Ventures or Wholly Owned Subsidiaries. Other proposals/activities not covered by the automated route would require Reserve Bank clearance prior to implementation.

  • WHOLLY OWNED SUBSIDIARY:

A totally owned subsidiary is a far-flung entity founded, registered, or incorporated in accordance with the host country’s rules and regulations and whose entire capital is held by the Indian party. It’s a separate legal entity in which the holding or parent business owns and controls the common shares. The parent firm has complete authority over the entity, and it operates in accordance with the parent company’s instructions. It should be mentioned that the parent firm makes the decisions for wholly-owned subsidiaries (WOS); yet, it has its own senior management that oversees business operations.

There are no individual shareholders because the common stocks are not publicly traded for a WOS. The Board of Directors is appointed by the parent business, but it is nonetheless considered an independent legal entity. It means that the provisions that apply to the WOS are not always relevant to the parent firm.

  • AVAILABLE RESOURCES FOR DIRECT INVESTMENT IN OVERSEAS:
  • OVERSEAS INVESTMENT VIA THE AUTOMATIC ROUTE:


Under the Automatic Route, an Indian Party does not need prior Reserve Bank approval to make overseas direct investments in a Wholly Owned Subsidiary (WOS) abroad. The Indian Party should approach an Authorized Dealer Category – I bank for remittances to such investments.

Any or all of the following constitutes an “Indian Party“:

• A partnership firm registered under the Indian Partnership Act, 1932

•A company formed in India

• A body created by an Act of Parliament

• A limited liability partnership formed under the Limited Liability Partnership Act of 2008, as well as any other Indian company that the Reserve Bank may notify.

It should be emphasized that the Automatic Route does not allow individuals to invest.

  • Permitted activities for Overseas Investment:

An Indian company can invest in any activity in which it has experience and competence (excluding those that are expressly barred). When engaging in financial sector operations, certain additional conditions established in Regulation may be observed.

Foreign investment is prohibited in the real estate and banking industries. However, provided they obtain authorization under the Banking Regulation Act 1949, Indian banks operating in India can form joint ventures or wholly-owned subsidiaries (JV/WOS) in other countries.

Only an Indian financial services business that meets the following standards is allowed to invest in the financial services sector:

  1. has made a profit from financial services activities in the previous three financial years;
  2. is registered with the appropriate regulatory authority in India for conducting financial services activities;
  3. has obtained approval from the regulatory authorities concerned both in India and abroad for venturing into such financial sector activity;
  4. has met the prudential capital adequacy norms as prescribed by the concerned regulatory authority.

Under the Automatic Route, the following criteria for overseas direct investment/financial commitment apply:

  1. The Indian Party is not on the Reserve Bank’s exporters’ caution list/list of defaulters to the banking system published/ circulated by the Credit Information Bureau of India Ltd. (CIBIL) / RBI or any other credit bureau;
  2. The Indian Party routes all transactions related to a WOS investment through a single branch of an approved dealer (AD bank) that the Indian Party designates.

“Financial commitment” refers to an Indian Party’s direct investments outside of India, which include:

  1. contributions to equity shares of its WOS abroad;
  2. loans to its WOS abroad;
  3. 100% of the amount of corporate guarantee issued on behalf of its overseas WOS;
  4. 100% of the amount of bank guarantees; and
  5. 50% of the amount of performance guarantee issued on behalf of its overseas WOS.

Procedure to be followed under the Automatic Route:

The Indian Party wishing to make an overseas direct investment through the automatic route must first complete form ODI online through AD bank, which must be accompanied by the documents listed therein, such as a certified copy of the Board Resolution, a Statutory Auditors certificate, and a valuation report (in the case of an existing company) that meets the valuation norms, before approaching an Authorized Dealer (designated Authorized Dealer) for the investment/remittance.

  1. OVERSEAS INVESTMENT UNDER RBI APPROVAL ROUTE:

Proposals not covered by the automatic route’s limitations require Reserve Bank approval, which is obtained by submitting a specific application in Form ODI together with the necessary evidence to Authorized Dealer Category – I banks.

When examining such applications, the Reserve Bank will examine the following factors:

a) The WOS’s external viability;

b) The contribution to external trade and other benefits that will accrue to India as a result of such investment;

c) The Indian Party’s financial position and business track record; and

d) The Indian Party’s expertise and experience in the same or related line of activity as the WOS outside India.

To allow recognized star exporters with a proven track record and consistently high export performance to benefit from globalization and liberalization, proprietorship concerns and unregistered partnership firms are allowed to set up WOS outside India with the Reserve Bank’s prior approval, provided they meet certain eligibility criteria. Through their bank, they can apply to the Reserve Bank of India, Foreign Exchange Department, Overseas Investment Division, Central Office, Amar Building, 5th Floor, Fort, Mumbai 400 001. Registered Trusts and Societies in the manufacturing, educational, and healthcare sectors are permitted to invest in the same sector(s) in a WOS outside India with the Reserve Bank’s prior approval.

  • Compliances by Indian Party:
  • Financial Commitment/Investment: Submitting Form ODI with the following attachments:
  • Certified copy of Board Resolution for Investment
  • Statutory Auditor’s Certificate
  • Share Valuation ReportObtain a Unique Identification Number (UIN) from AD Bank – this is necessary for all investments. After you’ve made your investment, make sure you get your share certificates or any other proof you need and present it to the AD bank within six months. Report the details of the decisions taken by a WOS regarding diversification of its activities/setting up stepdown subsidiaries/altering its shareholding pattern within 30 days of the approval of those decisions by the competent authority concerned of such WOS in terms of the local laws of the host

country.

  • PURPOSE for ESTABLISHING WHOLLY-OWNED SUBSIDIARY:

The major reason for forming a Wholly Owned Subsidiary is to diversify a corporation’s commercial activities and provide a unique channel for running it. It also allows the parent company to exert influence over overseas enterprises and markets.

  • ADVANTAGES of WHOLLY-OWNED SUBSIDIARY:

The following are the benefits of a wholly-owned subsidiary:

1. One of the first benefits of WOS is that the parent firm has complete control over its operations in a foreign location.

2. Because the parent business has all of the necessary permits, the corporate will face less administrative challenges and will be able to simply obtain the WOS.

3. The parent business sorts every aspect of the WOS, so it doesn’t have to divulge its technology or competitive advantages to outsiders.

  • ELIGIBILITY TO OWN A WHOLLY-OWNED SUBSIDIARY:

a) A foreign bank’s establishment of a WOS in India must be approved by the regulator/supervisor in its home country.

b) A foreign bank applying to open a WOS in India must demonstrate to RBI that it is subject to proper prudential supervision, including consolidated supervision, in its home country, in accordance with internationally recognized standards.

c) The following elements would be considered when examining applications for the establishment of WOS in India:

(i) Economic and political relations with the parent bank’s country of incorporation,

(ii) Reciprocity with the parent bank’s home country,

iii) financial soundness,

iv) Ownership pattern,

v) International and home country ranking of the parent bank by a reputable agency,

vi) Home country/parent bank rating by an international reputed rating agency such as Moody Investors Service, Standard & Poor’s, and Fitch Ratings,

vii) International presence

The requirements stated above are the minimum that an applicant must achieve in order to apply to RBI for a license under Section 22 of the Banking Regulation Act, 1949 (to create a bank as a WOS of the parent bank), and they are not exhaustive. The final decision on whether or not to grant a license will be made by the RBI.

  • CONDITIONS REQUIRING PRESENCE AS WOS ONLY:
  • Foreign banks that started doing business in India after August 2010 or foreign banks that are not currently doing business in India but want to do so in the future must do so through a totally owned subsidiary if any of the following circumstances apply:

i) Banks incorporated in a jurisdiction with legislation providing a preferential claim to home country deposits in the event of bankruptcy;

ii) Banks that do not have adequate disclosure requirements in their home jurisdiction;

iii) Banks with complex structures;

iv) Banks that are not widely held;

v)The Reserve Bank of India is dissatisfied with the adequacy of supervisory mechanisms (including disclosure arrangements) and market discipline in the country where they were established; and

vi) For any other reason deemed required by the Reserve Bank of India for the bank’s subsidiary form of presence; or

  • If the RBI considers a foreign bank that established a branch presence in India after August 2010 to be systemically important due to the size of its business.
  • MINIMUM CAPITAL REQUIREMENT:
    • A WOS’ initial paid-up voting equity capital must be at least $5 billion.
    • The foreign bank’s newly established WOS would be required to bring in the entire amount of initial capital upfront, which would be supported by free foreign exchange remittance from its parent.

c) If an existing foreign bank with a branch presence in India wishes or is forced to shift into a WOS, it must convert its branch capital into WOS capital. According to the Master Circular on Basel III Capital Regulations, the regulatory capital instruments for the WOS would have the same components, parts, and eligibility criteria as the other domestic banks. The deficit must be brought in as inward remittance from its parent if the net worth following conversion is less than the minimum capital required under these requirements.

d) The WOS must continue to meet Basel III criteria from the moment of admission/conversion. WOS must, however, maintain a minimum capital adequacy ratio of 10% on a continuous basis for the first three years after it begins operations, which is 1% more than the requirement under Basel III’s phased implementation. WOS is also required by the existing capital adequacy framework to maintain a capital conservation buffer and other buffers.

  • STATUTORY, REGULATORY, PRUDENTIAL, AND OTHER REQUIREMENTS:

a) The WOS will be governed by the Companies Act of 1956, the Banking Regulation Act of 1949, the Reserve Bank of India Act of 1934, the Foreign Exchange Management Act of 1999, the Payment and Settlement Systems Act of 2007, and other relevant statutes, directives, prudential regulations, and other guidelines/instructions issued by the RBI and other regulators from time to time.

b) The regulatory framework for consolidated prudential reporting and supervision, currently applicable to foreign bank branches as laid out in circular DBOD No.FSD.BC. 46/24.01.028/2006-07 dated December 12, 2006, will also apply to WOS in all cases where the parent/group of the WOS in India has NBFCs.

c) If any jurisdiction/bank is found to have deficiencies in the areas of Know Your Customer (KYC), Anti Money Laundering (AML), or Combating the Financing of Terrorism (CFT), banks from that jurisdiction will face significant prudential requirements.

  1. INDIA’S NON-EQUITY CAPITAL RAISING:

WOS of a Foreign Bank can raise rupee resources by issuing non-equity capital instruments, just like domestic banks can.

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