inbound outbound investments for nri's
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INBOUND & OUTBOUND INVESTMENTS
BC SHETTY & CO. Chartered Accountants
INBOUND AND OUTBOUND INVESTMENTS
FEMA, 1999 was enacted with the objective of facilitating external trade and payments
and for promoting the ‘orderly development’ and ‘maintenance of foreign exchange
markets in India’. This interaction between countries lead to Foreign Investments.
The key regulators are the central government and RBI who control the Department of
Industrial Policy & Promotion (DIPP), Foreign Investment Promotion Board (FIPB) and the
foreign exchange department
Kinds of Investment
• Automatic Route – no prior approval from the RBI/ Government (100% FDI permitted,
Agriculture & animal husbandry, Almost all forms of manufacturing and service
industries, Mining, Coal & lignite.
• Electricity generation, transmission, distribution & trading Industries.
• Approval Route- prior approval of the FIPB required (no separate RBI approval
Mode of Investment
• Greenfield : Setting up a new JV/ WOS (fresh issue of shares/ ADR/ GDR)
• Brownfield: Relating to existing investments/ business activities
Foreign Investment into an Indian company
• Ease of access to debt and equity capital
• Tax Haven/ Black listed Countries
• Treaty network
• Cost of setting up and administration
• Other non-tax considerations like political stability, banking facility etc.
• Corporate tax rate in SPV jurisdiction
• Taxation of dividend/ interest Withholding tax on dividend/ interest Capital gain tax on
transfer of
• investments/ shareholding
• Thin Cap rules
• Limitation on Benefit clauses
SPV CONSIDERATIONS
• Equity Shares
• Compulsorily Convertible Preference Shares
• Compulsorily Convertible Debentures
• External Commercial Borrowings
• Optionally Convertible Preference Shares
• Optionally Convertible Debentures
FUNDING OPTIONS
• Equity Shares
• Simplest mode for funding
• • No end use restrictions
• Compulsorily Convertible Preference Shares
• Preference Shares have to be compulsorily redeemed/ converted within 20 years
• Only fully and mandatorily Convertible Preference Shares are construed as part of equity
and considered as FDI
Compulsorily Convertible Debentures
• Only Fully and Mandatorily Convertible Debentures are construed as part of equity
• and considered as FDI
• All other forms of debentures construed on par with ECB
• No time limit for conversion prescribed
FUNDING OPTIONS
External Commercial Borrowings
• ECB means overseas foreign currency borrowings by Indian companies
• Automatic route/ approval route
•
FUNDING OPTIONS- CLASSIFICATION
FUNDING OPTIONS
FUNDING INSTRUMENTS EXCHANGE CONTROL
INCOME TAX
Equity Shares EQUITY EQUITY
CCPS EQUITY EQUITY
CCD EQUITY DEBT
RPS/ OCPS DEBT EQUITY
ECB/ Loans/ Debt/ OCD/ PCD DEBT DEBT
Instrument Mode Jurisdiction Effective Tax Cost
Decision Making
Equity(Revenue)
Dividend Any 40%
Equity(Capital) Capital Gains Cyprus/Singapore/ Mauritius/
0%
Debt(Revenue) Interest Cyprus/Singapore/ Mauritius/
5%
Debt(Capital) Repayment Any 0%
Technical Services/ Royalty
Technology fees to JV Partner
Any Treaty Rate/ 25%
REPATRIATION OF FUNDS- ANALYSIS
• Buy-back of shares by domestic unlisted companies taxable at 20%
• Tax will be levied on the company buy-back shares on ‘Net Consideration’
• Net Consideration = Buy-back consideration Less Consideration received on allotment of
shares
Buy-Back Of Shares after June 1, 2013
PARTICULARS INR in CRORES
Share Capital 100
Free Reserves 400
Shareholders Funds 500
• Calculation of total foreign investment in a company : direct + indirect
• In case the investing Indian company is owned or controlled by ‘non resident entities’,
the entire
• investment by such company into the target would be considered as indirect foreign
investment
• Downstream investments by such companies are to be notified to SIA/ FIPB
DOWNSTREAM INVESTMENTS
FDI Policy – Trading Sector
FIPB approval
Applicable for FDI > 51%
Subject to Conditions
Retailing is allowed, Retail Trading is regulated
B2C e-commerce prohibited for FDI
Wholesale/ Cash &Carry Trading
• 100% FDI permitted under Automatic Route
• Restriction on Sales to group companies, in
excess of 25%
Multi Brand Retail
• 51% FDI permitted with
FIPB approval
• Local Sourcing NormsApplicable
Single Brand Retail
• 100% FDI permitted with
• Local Sourcing Norms
Wholesale Trading
Eligible Customers•
•
•
•
Sales tax/ VAT registration/ service tax/ excise duty registration holders
Trade license holders
Permits/ license, etc. from Government Authorities
Certificate of incorporation or society registration or trust registrationSales to Group
Companies• Wholesale trading to group companies not to exceed 25% of the total
turnover of thewholesale venture
Meaning of ‘group company’ not specified
•
Single Brand Retail Trading
Key Aspects • Up to 100% FDI with Government Approval –
Increased from 51% earlier
• Single Brand products only
• Sold internationally under same brand
• Products to be branded during manufacturing
• The investor should be the brand owner
Local Sourcing • 30% mandatory sourcing of the value of goods purchased
from India, preferably from MSME (does not apply in case
the FDI is capped to 51%)ChangesNotified
• Sourcing
− From anywhere in India (preferably small industries*)
− Base of purchase cost (not turnover)
• Exclusive License/ Franchisee can also be Investor
Multi Brand Retail Trading
• 51% FDI Cap with Government approval
Back-end Infrastructure
• US$ 100 mn minimum capitalization
• Processing, manufacturing,
distribution• 50% investment in back-end
infrastructure within 3 years
• Design improvement, quality
control, packaging• Stores only in select States and Cities • Logistics, storage, ware-
house,
agriculture marketing infrastructure …..
• 30% procurement from small enterprises• Compliance – averaged in first 5 years, then
annual • Land cost and rentals – Excluded
Swap of Shares – Some Issues
Pure Swap
Resultant Structure
Original structure and transaction steps
ICo
ICo
Equity
Issue of shares Equit
yIndia
Outside India
Issue of shares
Foreign HoldCo
Foreign HoldCo
F Sub Co
F Sub Co
I Co acquires the shares of F Sub Co and issue
of its own shares to Foreign Hold Co
Swap of Shares – Some Issues
Reverse Pure Swap
Resultant Structure
Original structure and transaction steps
Hold Co
Sub Co
Hold Co
Sub Co
Issue of shares
EquityIndia
Outside India Issue
of shares
Equity
F Co
F Co
Hold Co acquires the shares of F Co in exchange of
issue of shares of Sub Co to F Co
PORTFOLIO OF INVESTMENTS
• Listed Indians Companies are permitted to make portfolio investments
outside India
• Such investments cannot be more than 50% of its net-worth as on the
date of the last audited balance sheet
• Such investments could be in shares and bonds/ fixed income
securities, rated not below investment grade by accredited/
registered credit rating agencies, issued by overseas listed
companies
• Hence, investments in offshore mutual funds, private equity funds,
hedge funds is not permissible
India Tax Implications
Broad Framework for Investing
Equity + Debt
Equity Debt
Equity/ Debt ?Equit
y
Equity/ Debt ?Deb
t
Equity/ Debt ?Equity + Debt
I Co
F Co
I Co
F Co
I Co
F Co
Underlying Tax Credit
• An indirect credit granted for the tax levied on the profits ofthe company out of which the dividends have been paid
Meaning
• Avoidance of economic double taxation of profitdistributions
Purpose
• Where dividends pass through a chain of companies, the creditmay also be given for the tax levied on the profits of each company in the chain (e.g. Mauritius)
In some cases this is limited to a number of levels,
or “tiers”. Such relief may be given either under a
tax treaty or inaccordance with unilateral provisions
GeneralApproac
h •
•
Options for Investing
Option 1
Option 2
Option 3
India Co
AHC
SPV
Operating Cos
India Co
SPV
Operating Cos
India Co
Operating Cos
CONTACT US
• Mr. Sathya Hegde - BBM, FCA, CPA- Partner BC SHETTY & CO._______________________________________________________Ph.:- +919945179868
Email:- sathyahegde@bcshettyco.com
Address:- # 137, B/w 4th and 5th Main,
• MES College Road,15th cross, Malleshwaram,
• Bangalore – 560003
THANK YOU.
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