Key Compliances In Investing Abroad

1
Key Compliances In Investing Abroad

• Presented by Vinita Bahri-Mehra, Esq.

2
Introduction Key Compliances Under

• Laws of India
• Laws of United States

3
Laws Of India Outbound Investments

• Key Legislations
• Companies Act
• Income Tax Act
• Stamp Duty Legislations
• SEBI Guidelines
• Takeover Code
• Exchange Control Regulations
• (under FEMA RBI rules)

4
Exchange Control Regulations

• Direct Investment in an Overseas JV/WOS
• An Indian party (i.e. corporation) is permitted
  to invest in a JV/WOS not exceeding 400 of its
  net worth (as of the date of the last audited
  balance sheet), either directly or through a
  Special Purpose Vehicle (SPV).
• For a registered partnership, investment not
  exceeding 200 of its net worth.

5

• The ceiling includes (i) contribution to the
  capital of the overseas JV/WOS (ii) loan granted
  to the JV/WOS and (iii) 100 of guarantees
  issued to, or on behalf of JV/WOS.
• There are certain conditions imposed by the RBI
  regulations for issuance of guarantees.
• Such as, (i) Indian entity may extend
  loan/guarantee to an overseas concern only in
  which it has equity participation (ii) no
  open-ended guarantees (i.e. the amount of the
  guarantee should be specified up front) and
  (iii) corporate guarantees are required to be
  reported to the RBI.

6

• The ceiling will not be applicable where, (i)
  investment is made out of EEFC A/C or (ii)
  investment out of proceeds of ADR/GDR.
• Mandatory requirement of effecting remittances
  towards investment in an overseas JV/WOS through
  one branch of an Authorized Dealer Bank.

7
Investment By Cash Or Equivalent

• Partial/Full acquisition of an existing foreign
  company, where the investment is more than USD
  5,000,000 (Five Million Dollars), a valuation of
  the shares of the company is required to be
  undertaken by an investment banker/merchant
  banker registered with SEBI or an investment
  banker/merchant banker outside India, registered
  with the appropriate regulatory authority in a
  target companys country.

8
Investment By Cash Or Equivalent, cont.

• If the investment is less than USD 5,000,000
  (Five Million Dollars), valuation by a chartered
  accountant or a certified public accountant shall
  suffice.

9
Investment By Equity Swap

• Acquisition by way of swap of equity shares of
  overseas company in consideration for the shares
  of an Indian company would require RBI FIPB
  approval
• Such share swap requires valuation of the shares
  to be undertaken by a merchant banker registered
  with SEBI or investment banker/merchant banker
  outside India registered with the appropriate
  authority (irrespective of the amount).

10
Investment - Partnership

• For a registered partnership firm, where funding
  for such overseas investment is done by a firm,
  the individual partners are required to hold
  shares for, and on behalf of, the firm in
  overseas JV/WOS and not in individual capacity.

11
Method Of Funding

• Investment in an overseas JV/WOS may be funded
  out of one or more of the following sources
• Withdrawal of foreign exchange from an authorized
  dealer in India
• Through a loan or guarantee to, or on behalf of,
  the JV
• Utilization of proceeds of External Commercial
  Borrowings and/or Foreign Currency Convertible
  Bonds.

12
Method Of Funding, cont.

• Permitted to acquire shares of an overseas
  company by capitalizing amounts receivable from
  the overseas company against export of goods and
  services, royalties, commissions, or any other
  entitlements due from foreign entity for
  supplying technical know-how, consultancy,
  managerial, and other services (within the
  applicable ceiling).
• Export proceeds remaining unrealized beyond a
  period of 6 months from date of export will
  require the prior approval of RBI before
  capitalization.

13
Separate Regulations For

• Investment in overseas entity engaged in
  financial services sector.
• Be registered with the appropriate regulatory
  authority in India for conducting financial
  sector services.
• Mandatory net profit earnings.
• Approval for investment.
• Fulfilled norms relating to capital adequacy as
  prescribed.

14

• Investments in equity of overseas companies
  listed on stock exchange rated debt
  instruments.
• For listed Indian corporations, the investment
  cannot exceed 35 of its net worth.
• For individuals, per limits conditions
  specified in the Liberalized Remittance Scheme.

15

• For mutual funds registered with SEBI, aggregate
  ceiling of USD 4,000,000,000 (Four Billion
  Dollars).
• For domestic venture capital funds, registered
  with SEBI, may invest in equity and equity linked
  instruments of off-shore Venture Capital
  undertakings subject to an overall limit of USD
  5,000,000 (Five Million Dollars).
• Mutual Funds Venture Capital Funds desirous of
  availing this facility need to approach SEBI for
  necessary permission.

16
Approval Of RBI

• Prior approval of the RBI would be required in
  cases that do not fall under Automatic Route for
  direct investment abroad.
• CONSIDERATIONS FOR APPROVAL RBI shall take into
  account the following factors (i) Prima facie
  viability of the JV/WOS outside India (ii)
  contribution to external trade and other benefits
  which will accrue to India through such
  investment (iii) Financial position and business
  track record of the Indian party and the foreign
  entity and (iv) expertise and experience of the
  Indian party in the same or related line of
  activity of the JV/WOS outside India.

17
Post Investment Changes/Additional Investment In
Existing JV/WOS

• A JV/WOS set up by an Indian party as per the
  regulation may undertake the following on
  reporting to RBI
• Diversify activities
• Set up step down subsidiary
• Alter the shareholding pattern
• Disinvest, where the Indian party is an unlisted
  company and the investment in overseas venture
  does not exceed USD 10,000,000 (Ten Million
  Dollars)

18

• Pledge shares of the JV/WOS to a domestic or
  foreign lender to avail any credit facility for
  itself or for the JV/WOS (within financial
  limit/ceiling stipulated by RBI for overseas
  investment, from time to time)
• Hedging of overseas direct investments (in equity
  and loan) by entering into forward/option
  contracts with Authorized Dealers Bank in India,
  subject to verification of such exposure by
  Authorized Dealers Bank through onward reporting
  to RBI.

19
Other Investments In Foreign Securities

• General permission has been granted by RBI to a
  person residing in India who is an individual
• To acquire foreign securities as a gift from any
  person
• To acquire shares under a Cashless Employees
  Stock Option Scheme issued by a company outside
  India, provided it does not involve any
  remittance from India
• To acquire shares by way of inheritance

20

• To purchase equity shares offered by a foreign
  company under its ESOP scheme, if he is an
  employee or a director of an Indian office or
  branch of a foreign company, or, of a subsidiary
  in which foreign equity holding, either directly
  or through a holding company/SPV, is, (i) not
  less than 51 (ii) shares under the ESOP scheme
  are offered by foreign company on uniform basis
  and (iii) a report is submitted by Indian company
  to RB I giving details of remittances/beneficiarie
  s, etc.

21
Export Of Goods Services

• General guidelines for exports under RBI rules.
• Manner of receipt and payment
• The amount representing full export value of the
  goods exported is required to be received through
  an Authorized Dealer Bank in the following
  manner
• Bank draft, wire transfer, bankers or personal
  checks
• Payment out of funds held in an FCNR/NRE account
  maintained by buyer
• International credit cards of the buyer.

22

• Exchange Earner Foreign Currency Account (EEFC).
• An Indian party (i.e. corporation or individuals)
  may open an EEFC account in a form of
  non-interest bearing current account to keep
  foreign exchange earned in the currency received.
• No credit facilities, either fund based or
  non-fund based shall be permitted to obtain
  against security of balances held in EEFC.
• Foreign exchange earners are allowed to credit up
  to 100 of their foreign exchange earning to
  their EEFC account.

23

• Advance payment against exports.
• An exporter receiving advance payment from a
  buyer outside India is under the obligation to
  ensure that goods or services are exported within
  one year from date of receipt of advance payment.
• If exporter is unable to fulfill its export
  obligation within one year, then no remittance
  toward refund of unutilized portion of advance
  payment shall be made, without prior approval of
  RBI.

24

• Operating/Hiring of warehouses abroad.
• Authorized Dealers Bank through RBI could
  consider applications and grant permission for
  opening/hiring warehouses abroad, subject to (i)
  exporters outstanding does not exceed 5 of
  exports made in previous financial year (ii)
  exporter has a minimum export turnover of USD
  100,000 (One hundred thousand dollars) during
  the previous financial year and (iii) all
  transactions are routed through the designated
  branch of the Authorized Dealer Bank.
• Permission granted generally for a period of one
  year and renewal may be considered by RBI.

25
Setting Up Branches/Representative Offices Abroad
And Acquisitions Of Immovable Property For
Overseas Offices

• For setting up branch/representative overseas
  offices, remittances towards initial expenses up
  to 15 of the average annual sales/income during
  the last two financial years or up to 25 of the
  net worth, whichever is higher is allowed.
• For recurring expenses, remittances up to 10 of
  the annual sales/income during the previous two
  financial years is allowed for normal business
  operations of the office/branch or representative
  office outside.

26

• Conditions - the overseas branch/representative
  office should not create any financial
  liabilities, contingent or otherwise, for the
  head office in India and also not invest surplus
  funds without prior approval of RBI. Any funds
  rendered surplus should be repatriated to India.
• Details of bank account opened in the overseas
  country should be promptly reported to Authorized
  Dealer Bank.

27
External Commercial Borrowings (ECB)policy

• New restrictions are imposed by RBI on raising
  funds through the External Commercial Borrowings
  (ECB) route. It appears that RBIs clampdown on
  ECB is to prevent Rupee appreciation and
  therefore the restrictions could be in force for
  a short term.
• General ECB Regulations.These guidelines apply
  to all eligible borrowers and are subject to the
  following modifications

28

• Per RBIs regulations, ECB refers to commercial
  loans (in form of bank loans, buyers credit,
  suppliers credit, securitized instruments)
  availed from non-resident lenders with minimum
  averages maturity of three years. The salient
  features of the regulations are as follows
• Eligible Borrowers Corporations registered
  under the Indian Companies Act, 1958 are eligible
  to raise ECB.

29

• Recognized Lenders Borrowers can raise ECB from
  internationally recognized sources such as (a)
  international banks (b) international capital
  markets (c) multilateral financial institutions
  (d) export credit agencies (e) suppliers of
  equipment (f) foreign collaborates and (g)
  foreign equity holders.

30

• A foreign equity holder to be eligible as a
  recognized lender under the ECB route would
  require minimum holding of equity in the borrower
  company as follows (a) for ECB up to US 5
  million-minimum equity of 25 held directly by
  the lender and (b) for ECB more than US
  million-minimum equity of 25 held directly by
  the lender and debt-equity ratio not exceeding
  41 (i.e. the proposed ECB not exceeding four
  times of the direct foreign equity holding).

31

• Amount Maturity Terms The maximum amount of
  ECB, which a corporate can raise, is capped at
  US 500 million per financial year. ECB up to
  US 20 million in a financial year must have a
  minimum average maturity of three years. ECB
  above US 20 million and up to US 500 million
  per year must have a minimum average maturity of
  five years.

32

• All-in-Cost Ceilings The All-in-Cost ceilings
  are reviewed from time to time by RBI.
  Presently, the following All-in-Cost ceilings are
  applicable for (a) average maturity period of 3
  to 5 years 150 basis points, over 6 month
  LIBOR and (b) average maturity period of more
  than 5 years 250 basis points, over 6 month
  LIBOR.

33

• End-uses Utilization of ECB is not permitted
  for all uses. ECB can be raised only for certain
  permissible end uses, such as for investments
  (such as import of capital goods, new projects,
  modernization/expansion of existing production
  units) in real-industrial sectors, including
  small and medium enterprises (SME) and
  infrastructure sector in India. End uses of ECB
  for on lending or investment in capital market,
  working capital, general corporate purposes and
  repayment of existing rupee loans are not
  permitted.

34

• Guarantees Issuance of guarantee, standby
  letter of credit, and letter of undertaking and
  so on by Banks relating to ECB is not permitted.

35

• Approvals ECB can be accessed under two routes,
  viz., (a) Automatic Route (i.e. does not require
  any prior RBI approval) and (b) Approval Route
  (i.e. prior RBI approval required).
• ECB for investment in real sector-industrial
  sector and in accordance with the parameters
  outlined above fall under the Automatic Route.
  Any ECB beyond the parameters laid down above
  would fall under the Approval Route.

36

• Keeping in mind the current macroeconomic
  situation in India, RBI has modified the ECB
  regulations as follows
• ECB more than US 20 million per borrower Company
  per financial year is permitted only for foreign
  currency expenditure for permissible end uses of
  ECB. Accordingly, borrowers raising ECB more
  than US 20 million shall keep the ECB proceeds
  overseas for use as foreign currency and shall
  not remit the funds to India.

37

• ECB up to US 20 million per borrower Company per
  financial year is permitted only for foreign
  currency expenditures for permissible end uses
  and these funds shall be kept overseas and not be
  remitted to India.
• Borrowers proposing to avail ECB for Rupee
  expenditure for permissible end uses would
  require prior approval of the RBI under the
  approval route and will be allowed to raise ECB
  only up to US 20 Million. However, such funds
  shall continue to be kept overseas until actual
  requirement and expenditure in India.

38
Miscellaneous Remittances From India

• Authorized dealers are allowed to release foreign
  exchange to person residents in India for various
  current capital account transactions (non-trade
  trade related).
• Certain limits are imposed for release of foreign
  exchange transactions related to non-trade
  current account transaction. For example,
  foreign exchange for undertaking business travel
  or attending a conference or for specialized
  training is limited to 25,000 per person, under
  automatic approval.

39
Miscellaneous Remittances From India

• Liberalized Remittance Scheme of US 200,000.
• For any current capital account transaction
  (trade related), Authorized Dealers shall allow
  residents to remit up to US 200,000 under the
  scheme.

40

• Advance Remittance Import of Services
• Authorized Dealers Bank may allow residents to
  give advance remittance for import of services.
• Where the amount exceeds US 100,000 (One Hundred
  Thousand Dollars) or its equivalent, a guarantee
  from a bank of international repute situated
  outside India or a guarantee from an authorized
  dealer bank in India, if such a guarantee is
  issued against the counter-guarantee of a bank of
  international repute should be obtained from the
  overseas beneficiary.

41

• Issuance of Guarantee Import of Services
• Authorized Dealer Bank is allowed to issue
  guarantee on behalf of customers (i.e. residents
  of India), importing services, provided
• The guarantee amount does not exceed US 100,000
• Is satisfied about the bonafides of the
  transaction and
• The guarantee is to secure a direct contractual
  liability arising out of a contract between a
  resident and a non-resident.

42
Company Law Considerations

• An Indian Public Limited Company that acquires a
  foreign company by issuing its shares as
  consideration, it requires
• Special Resolution by the shareholders of the
  Indian company to permit such issue.
• If investment by an Indian company in the foreign
  company exceeds 60 of the paid up share capital
  and free reserves, or 10 of free reserve, it
  requires
• Special Resolution to be passed under Section
  372A of the Indian Companies Act, 1956.

43

• Merger of an Indian Company into a foreign
  company not envisage by Indian Company Act, 1956.
• Corporate Law provisions, such as
  rules/provisions regarding buyback, board meeting
  for approval adoption, dividends payment
  mechanism, etc. also need to be taken into
  consideration.

44
Securities Law Consideration

• SEBI (Disclosure and Investor Protection)
  Guidelines 2000.
• If the Indian company is listed on any stock
  exchange in India and is issuing its shares to
  the shareholders of the foreign company as
  consideration for acquiring shares of the foreign
  company, then it will need to comply with the
  guidelines for preferential allotment under SEBI
  (Disclosure Investor Protection) guidelines.

45

• Pricing for Preferential Allotment not less
  than average of the weekly high and low of the
  closing prices of the shares quoted on stock
  exchange during the 26 weeks.
• Lock in 1 year from date of allotment

46
Securities Law Consideration

• SEBI (Substantial Acquisition of Shares and
  Takeovers) Regulations 1997.
• Regulate takeovers of listed companies in India.
• Implications regulations require a foreign
  acquirer of a foreign target company, whether
  acting alone or in conjunction with others, to
  make an open offer in India, if as a result of
  the overseas acquisition of the foreign target
  company, there is a change in control of an
  Indian company listed on an Indian stock
  exchange.

47
Outbound Investment- Key Structuring Issues

• Entity structuring
• Choice of Entity for foreign operations
• Structuring of international acquisition
• Asset purchase vs. share purchase (in terms of
  benefits under applicable treaty and host
  countrys tax law)
• Acquisition financing

48

• International holding structures.
• Direct holding vs. intermediate holding (i.e. use
  of SPV).
• Choice of jurisdiction for holding company
  (tax-haven jurisdiction) e.g. Maruitus,
  Singapore, Cyprus, Netherlands, Poland, Hungary,
  Barbados (all have absence of taxing LOB clause
  in tax treaties with US and NIL withholding tax
  incidence under India and US treaty).

49

• Post acquisition structuring and objectives.
• Legal and business model integration with large
  group.
• Objectives for profit generation and future
  investments.

50
Laws of USA Inbound Investments

• Key reporting requirements and legislation.
• Hart-Scott-Rodino Antitrust Improvement Act
• International Investment to Trade Services Survey
  Act
• Agriculture Foreign Investment Disclosure Act
• National Security Review (Exxon-Florio) Act
• Foreign Assets Control Regulation (pursuant to
  Trading With the Enemy Act)
• Buy American Act
• USA Patriot Act

51
General Restrictions Ownership Limits In
Sensitive Highly Regulated Sector

• US Federal Laws restrict the percentage of
  foreign ownership in certain sectors considered
  particularly sensitive and highly regulated.
• Some restrictions may be avoided by incorporating
  a US subsidiary. Usually the laws will look to
  the nationality of the owners or the nationality
  of management, or both, in order to determine
  whether even a U.S. subsidiary may be utilized
  for the investment.

52

• Some of the sensitive and highly regulated
  sectors are
• Aviation
• Aircraft may be registered by US citizens or
  permanent residents, partnership in which all
  partners are US citizens or companies in which
  75 of stock is controlled by US citizens.
• Foreign corporations organized and doing business
  under laws of the US may be able to register the
  aircraft if it is based or primarily used in the
  US.

53

• Banking
• Require US Federal Reserve Board approval.
• All directors of a national bank must ordinarily
  be US citizens.
• If operating (subject to license approval) as a
  branch or agency of a foreign affiliated bank,
  then subject to extensive regulation and
  supervision.

54

• Insurance
• Some states have US citizenship and residency
  requirements for directors of insurance
  companies.
• Approval from State Insurance Commission.
• Power Generation Utility Service
• Atomic Energy Act prohibits foreign ownership or
  control of nuclear power facilities.

55

• Communications Broadcasting
• Review process under Telecommunication Act of
  1996, foreign corporations or partnerships may
  not be denied license under An equity and public
  interest standard.
• Real Estate

56
Key Legislations Reporting Requirements

• Hart-Scott-Rodino Antitrust Improvement Act, 1976
  (Act)
• Under the Act, foreign individuals or entities
  seeking to acquire a US entity through merger or
  purchase, must report the acquisition to the
  Federal Trade Commission where the transaction
  will substantially affect commerce.

57

• Transactions meeting this standard are
  interpreted to include (among other definitions),
  to include any transaction in which amount of
  acquired assets exceeds US 15,000,000 (Fifteen
  Million Dollars) or where transaction results in
  foreign ownership of 15 or more of the voting
  securities of a US entity with annual net sales
  or total assets in excess of US 10,000,000 ( Ten
  Million Dollars).
• Extensive and stringent reporting requirements.

58

• International Investment Trade in Services
  Survey Act, 1976 (Act)
• Establishment of a new US business enterprise or
  foreign acquisition of 10 or more of the voting
  securities of any US entity, either directly or
  through a US affiliate, are required to be
  reported to the Bureau of Economic Analysis (BEA)
  of the US Department of Commerce within 45 days
  after the direct investment occurs.

59

• US affiliate is defined as a business
  enterprise located in the US, that is directly or
  indirectly controlled by a foreign person or
  entity with an ownership interest of 10 or more.
• An exemption from reporting could be claimed if
  the new US affiliate has no more than US
  3,000,000 (Three Million Dollars) in total assets
  and owns less than 200 acres of land immediately
  after being established or acquired.

60

• Other exemption from reporting exists for certain
  types of investment. For example, real estate
  held exclusively for personal use and not as a
  business for profit.

61

• Agricultural Foreign Investment Disclosure Act,
  1976 (Act)
• Act requires foreign person acquiring or
  transferring an interest in US agricultural land
  to file a report with the Agriculture
  Stabilization Conservation Service within 90
  (Ninety) days of such acquisition or transfer.

62

• National Security Review (Exon-Florio) Act, 1950
  (Act)
• Act authorizes the President, following a review
  by committee on foreign investment in the US
  (CIFUS), to block an acquisition of a US
  business by a foreign person or entity if the
  acquisition threatens to impair the national
  security of the US.
• Exon-Florio law does not define national
  security, but lists factors that could be
  considered by CIFUS.

63

• In most instances, the ruling under Exon-Florio
  is technically voluntary. Any transactions not
  reasonably related to US national security is
  exempted filing.

64

• USA Patriot Act, 2001
• The act expands the power of certain law
  enforcement officials to counter terrorism both
  in the US and abroad.
• As a result, when seeking to engage in various
  financial transactions in the US, foreign
  investors, including their families and
  associates must now expect to be more forthcoming
  with information regarding such matters as
  ownership statistics and non-affiliation with
  certain individuals and organizations deemed to
  be adverse to national security.

65

• Buy America Act
• Under this Act, subject to exception, only
  articles, materials and supplies produced in the
  US may be acquired by the federal government for
  public use.
• In construction contracts with the federal
  government, contractors of supplies may only use
  US-produced goods
• Exceptions (i) desired items are not
  manufactured or produced in sufficient and
  reasonably quantity and quality (ii) domestic
  prices are unreasonably high and (iii) materials
  used by federal government outside US.

66

• Foreign Assets Control Regulation Act
• Certain US investments and other transactions
  with persons of listed countries require licenses
  from US Treasury Department.
• Countries presently on the list include Cuba,
  Iran, Iraq, Libya, North Korea Sudan.
• So be aware of not investing in the US through
  companies or partnerships formed in the listed
  countries.

67

• Disclosure of Ownership in Tax Reports
• Federal and state taxation authorities require
  information about foreign ownership or control as
  part of the tax return process.

68

• Any US corporation that is owned directly or
  indirectly at least 25 in voting power or value
  by a foreign person or any foreign corporation
  engaged in a US trade or business (through, for
  example, an unincorporated branch/representative
  office) must file a report /form annually with
  the Internal Revenue Service (IRS), if they
  have any sales or purchase of property, rents, or
  royalties, commissions, interest or insurance
  premiums paid or received, or loans or
  borrowings.

69
Penalties Fines

• Failure to adhere to reporting requirements
  proposed in the above-mentioned Acts or failure
  to comply with provisions of the Acts noted
  results in hefty PENALTIES and may include
  imprisonment and fines for willful failure by
  individuals or corporate officers.

70
Conclusion

• US traditionally welcomes foreign investment.
• This attitude is reflected in the relative
  absence of restrictions compared to those imposed
  by other countries.
• A non US person can usually establish a US
  subsidiary or branch without substantial control
  or review by any federal, state or local
  governmental authority in the US. Very few
  sector exceptions, as discussed above, where
  limits are imposed.

71

• Foreign owned US enterprises may freely remit US
  profits abroad and its owners may freely
  repatriate their equity and debt capital
  investment, subject to payments of withholding
  tax.
• Foreign exchange controls are generally absent.

72

• BOTTOM LINE Although there are various
  compliances and reporting requirements (on a
  case-to-case basis) under the key acts mentioned,
  these should be viewed as exception to general
  overriding rule that foreign investment has
  traditionally been welcome in the US.

73
Thank You!

• Vinita Bahri-Mehra, Esq.
• International Law and Business
• Kegler, Brown, Hill Ritter Co., L.P.A.
• Suite 1800, 65 East State Street
• Columbus, Ohio 43215
• Direct Dial [phone]
• Fax [phone]
• Email vmehra_at_keglerbrown.com
• www.keglerbrown.com