Liberalised Remittance Scheme Vs. Overseas Direct Investment

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Ever since the liberalisation of the Indian economy in the 1990’s; India and Indians have progressed economically and now have many more options in terms of saving and investing their money including investing in all the major economies of the world. The Reserve Bank Of India (R.B.I) has a scheme known as the Liberalised Remittance Scheme (LRS) wherein an Indian resident can transfer money abroad for the purpose of investing and also for funding other expenses such as children’s education, tourism costs, and for hospital expenses etc. There is also another way for Indian companies or conglomerates to transact with foreign entities and this is via Overseas Direct Investment (ODI).

Liberalised Remittance Scheme:

Some of the salient features of the Liberalised Remittance Scheme (LRS) are as follows:

  1. The current R.B.I guidelines state that any Indian resident (including minors with the permission of their guardians) who holds a Permanent Account Number (PAN Card) can transfer upto 250,000 USD overseas per financial year (April 1st to March 31st). The frequency of transactions is not a matter of concern as long as the amount remitted outside the country is less than 250,000 USD cumulatively for the financial year. 
  2. The first step is to convert your Indian Rupees to US Dollars or any other freely convertible currency such as the Euro, British Pound, Swiss Franc or Japanese Yen etc. 
  3. The money converted must be used for the purposes permitted by the Central Government. There are certain prohibited activities such as using the money for purchasing lottery tickets, sweepstakes, horse race betting, gambling, etc.
  4. If an invested amount is repatriated back to India within the same financial year, it can not be remitted overseas again if the person has already reached the maximum permissible limit for the financial year. 
  5. The R.B.I guidelines state that foreign exchange transactions are permitted only for current account transactions or capital account transactions or both. 
  6. The guidelines for current account transactions for Indian residents apart from remittance is the availability of forex transactions for certain privileges such as — business travel, for meeting the expenses of medical treatment, cost of higher studies, to make donations, to send money as a gift to someone, for employment, for migration purposes. In the case of a private visit such as a vacation to an exotic foreign destination (except Nepal and Bhutan) with family members, one can use their credit card for purchases as well as for the withdrawal of cash as long as the card is set up for these types of international transactions. The person remitting the funds must be aware of FEMA(Foreign Exchange Management Act) rules and regulations. They have to comply with anti money laundering and KYC – Know Your Customer Guidelines.
  7. The guidelines for capital account transactions are altogether different. Under the capital account transactions, one can open a foreign bank account also known as a foreign currency account. They can invest in equity markets, purchase bonds, E.T.F’s, and mutual funds. They can also invest in real estate in the country of their choice. They can invest in businesses via Joint Venture or Wholly Owned Subsidiaries. One of the biggest advantages of indulging in the above mentioned investments is that the LRS guidelines allow the investor to retain and reinvest the income plus the profits in that country where they have invested in. The earned interests, dividends, etc are not required to be repatriated to India. 
  8. Certain restrictions apply such as a bank being unable to open foreign currency accounts in India for Indian residents under LRS. An Offshore banking unit in India cannot be treated the same as a branch of a bank outside India for the purpose of opening a foreign currency accounts in India under LRS.

There are numerous ways to spend rupees converted to other currencies either through current account or via capital account transactions but it is always important to follow the R.B.I guidelines and if required take the help of an authorized dealer or bank. 

Overseas Direct Investment (ODI):

Overseas Direct Investment refers to investments made by resident Indians as well as business conglomerates(Indian Party) made via Joint Ventures and/or Wholly Owned Subsidiaries through a subscription to a foreign entities memorandum. It can also be via share purchases that are existing in the foreign entity via the stock exchange, market purchase, or private placement.  Investments abroad either via Wholly Owned Subsidiaries and/or Joint Ventures  are really helpful for Indian investors. Overseas investments made by Indian parties are usually made via one of two routes:

1.)Automatic Route

2.)Approval Route

An Indian party can be defined as follows:

  1. a company incorporated in India
  2. a body created under an Act of Parliament
  3. a partnership firm registered under the Indian Partnership Act 1932
  4. A Limited Liability Partnership (LLP) registered under the Limited Liability Partnership Act, 2008
  5. Any other entity in India as per the notification of the Reserve Bank of India.

Provisions for an Indian Party:

An Indian party may indulge in an Overseas Direct Investment is almost any bonafide activity except for the prohibited sectors such as the banking and real estate businesses. 

Modes of Investment:

As mentioned earlier, there are two modes of investment – Automatic route and the Approval route.

Automatic Route:

In the automatic route, an Indian party does not require the prior approval of the RBI for making any overseas direct investments in a JV or WOS which are located abroad. The Indian party should however approach an Authorized dealer (AD Bank) who will further guide the Indian party regarding future steps.

Under the Automatic Route, an Indian party can indulge in overseas direct investment in equity shares and compulsory convertible preference shares of a Wholly Owned Subsidiary outside of India. In fact, this can be done without the prior approval of the RBI. It is subject to certain terms and conditions which are listed below:

  1. The WOS in the foreign nation should be engaged and operating in a bonafide business activity.
  2. The cumulative total financial commitment made by an Indian Party in a WOS outside India should not exceed 400% of the net worth of the Indian party as on the date of last audited balance sheet. All those financial commitments exceeding USD 1 billion in a financial year will require prior approval of the RBI.
  3. The above mentioned limits are not applicable to direct investments in any foreign security out of the proceeds of its international offering of shares through ADR’s.
  4. The Indian party should not be on the RBI exporters caution list, or under investigation by a regulatory body, etc.
  5. The Indian party is permitted to loan or stand as a guarantee to or on behalf of the JV/WOS outside India. This can be done provided the Indian party has made an investment via a contribution to the equity capital of the JV/WOS.

Approval Route:

In the case of the Approval Route, the Indian party will need to seek the prior approval of the RBI before investing. The applicant will first need to seek the guidance of the designated Authorized dealer bank who will then submit to the RBI after performing their due diligence. The RBI will take into the following factors before approving:

  1. Prima facie viability of the JV/WOS outside India.
  2. Benefits which will accrue to India via such investments
  3. Business track record and financial standing of the Indian party as well the foreign entity
  4. Experience and expertise of the Indian party in the line of activity of the JV or WOS outside India.

Ways or manner of funding:

The following sources listed below can be used as an investment route to fund a JV or WOS.

  1. Foreign exchange withdrawal via an AD bank in India
  2. Capitalisation of exports
  3. Swap of shares (subject to prior approval)
  4. Proceeds of ECBs – External Commercial Borrowings or FCCBs – Foreign Currency Convertible Bonds
  5. In exchange of ADRs/GDRs
  6. Through balances held in EEFC account of the Indian party
  7. Proceeds of foreign currency funds raised via ADR/GDR issues.

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