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WOS & Joint Ventures

Joint Ventures / Wholly Owned Subsidiaries abroad promote economic co-operation between India and the host countries. They result in transfer of technology and skills, sharing the results of Research & Development, access to the global market, promotion of the brand image, generation of employment and utilization raw materials available in India and the host country, increased exports of plant and machinery and goods and services from India, foreign exchange earnings through dividend earnings, royalty, technical know-how fee, etc. Since globalization of trade is a two-way process, integration of the Indian economy with the rest of the world with all its attendant benefits is achieved through overseas investment. It is the reverse of Foreign Direct Investment (FDI) i.e. Indian direct investment abroad.

General permission has been granted to persons (individual) resident in India for purchase / acquisition of securities as under:

  1. Out of funds held in the RFC account;
  2. As bonus shares on existing holding of foreign currency shares;
  3. When not permanently resident in India, from the foreign currency resources outside India.

General permission is also available to sell the shares so purchased or acquired. A resident Indian can remit up to USD 200,000/- per financial year under the Liberalised Remittance Scheme (LRS), for permitted current and capital account transactions including purchase of securities.

Direct investment outside India means investments, either under the Automatic Route or the Approval Route, by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity, signifying a long-term interest in the overseas entity (setting up / acquiring a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS). An eligible Indian entity is free to acquire either a partial stake (JV) or the entire stake (WOS) in an already existing entity overseas, provided the valuation is as per the laid down norms. Please also see Q No. 16.

An Indian Party is eligible to make overseas direct investment under the Automatic Route. An Indian Party is a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act 1932 and any other entity in India as may be notified by the Reserve Bank. When more than one such company, body or entity makes investment in the foreign entity, such combination will also form an “Indian Party”.

The Indian Party intending to make a direct investment under the automatic route is required to fill up form ODI duly supported by the documents listed therein, i.e., certified copy of the Board Resolution, Statutory Auditors certificate and Valuation report (in case of acquisition of an existing company) as per the valuation norms listed in answer to Q.16 and approach an Authorized Dealer (designated Authorized Dealer) for making the investment/remittance.

prior registration with the Reserve Bank is necessary for making direct investments under the automatic route. After the report of the first remittance / investment in Form ODI is received by the Reserve Bank, a Unique Identification Number (UIN) for that particular JV/WOS will be issued for the purpose of taking on record the overseas direct investment with the objective of maintaining a database for monitoring the outflows/inflows in respect of the overseas entities. Subsequent investments in the same project can be made only after allotment of the UIN.

Funding for overseas direct investment can be made by one or more of the following sources:

  1. Drawal of foreign exchange from an AD bank in India.
  2. Swap of shares (refers to the acquisition of the shares of an overseas entity by way of exchange of the shares of the Indian entity).
  3. Capitalization of exports and other dues and entitlements.
  4. Proceeds of External Commercial Borrowings / Foreign Currency Convertible Bonds.
  5. In exchange of ADRs / GDRs issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued by Government of India in the matter.
  6. Balances held in Exchange Earners Foreign Currency account of the Indian Party maintained with an Authorized Dealer.
  7. Proceeds of foreign currency funds raised through ADR / GDR issues.

In respect of (6) and (7) above, the ceiling of 400 per cent of the net worth does not apply.

For the purpose of reckoning net worth of an Indian party, the net worth of it’s holding company (which holds at least 51% direct stake in the Indian Party) or its subsidiary company (in which the Indian party holds at least 51% direct stake) may be taken into account to the extent not availed of by the holding company or the subsidiary independently and has furnished a letter of disclaimer in favour of the Indian Party. However, this facility is not available to partnership firms. Also the partnership firm’s net worth cannot be taken into account by an incorporated entity.

A. Direct investment outside India in a JV/WOS by way of share swap arrangement can be made under the automatic route provided the valuation norms prescribed i.e. valuation of the shares is done by a Category I Merchant Banker registered with the SEBI or an Investment Banker outside India registered with the appropriate Regulatory Authority in the host country are satisfied, and the shares are duly issued / transferred in the name of the Indian investing company. Investors may also please note that all share swap transactions require the prior approval of the Foreign Investment Promotion Board (FIPB) for the inward leg of the investment.

An Indian Party will have to comply with the following: –

  1. i. receive share certificates or any other documentary evidence of investment in the foreign entity as an evidence of investment and submit the same to the designated AD within 6 months;
  2. ii. repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc.;
  3. iii. submit to the Reserve Bank through the designated Authorized Dealer, every year, an Annual Performance Report in Part III of Form ODI in respect of each JV or WOS outside India set up or acquired by the Indian party;
  4. iv. report the details of the decisions taken by a JV/WOS regarding diversification of its activities /setting up of step down subsidiaries/alteration in its share holding pattern within 30 days of the approval of those decisions by the competent authority concerned of such JV/WOS in terms of the local laws of the host country. These are also to be included in the relevant Annual Performance Report; and
  5. v. in case of disinvestment, sale proceeds of shares/securities shall be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares /securities and documentary evidence to this effect shall be submitted to the Reserve Bank through the designated Authorised Dealer.

A foreign company can form a WOS in sectors where 100% foreign direct investment is permitted under the FDI policy. A WOS gives the most flexibility and protection to a foreign investor in India. A WOS can be defined as an entity whose entire share capital is held by foreign corporate bodies. A WOS can be formed either as a private or public company, limited by shares or guarantee, or an unlimited liability company. Considering the various exemptions available to a private company limited by shares (a “private company”) under India’s Companies Act, 1956 (the “Act”), it is recommended that a WOS be established as a private company.

Wholly Owned Subsidiaries and Joint Ventures

In India companies are incorporated and regulated under the provisions of the companies Act, 1956 and are subjected to certain procedural formalities under the Act.The personal liability of member is limited to the amount unpaid on their shares.It can undertake all types of business activities as may be permitted by its charter, which may include marketing, manufacturing, providing services, etc.

Whereas in Joint Ventures a foreign & domestic company raise funds and join their hands in particular countries

At the start level ,individual director are required to obtain DIN (Director Unique Identification Number) from the Ministry of Company Affairs.

Funding can be in the form of share capital, loans and business operations.

Legal Consultancy :

  • Formation of WOS in accordance with the requirements of Ministry of Corporate Affairs
  • Assistance in procuring office spaces
  • Obtaining various registrations such as PAN, TAN, ESI / PF, Excise, Service Tax, VAT Registrations, etc.
  • Assistance in managing Bank Accounts
  • Consultancy on utilization of funds
  • Assistance in ECB from overseas bodies and approvals from Indian Authorities
  • Payroll Support
  • Data Entry Support
  • Maintenance of Books of Accounts
  • General Advise on various law matters
  • Ensuring proper compliance with various statutes
  • Preparation and finalization of Balance Sheet and Profit & loss Account
  • Tax Planning and management
  • Filing returns as required by various applicable statutes
  • Representation before Revenue Authority
  • Obtaining advance rulings

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