Nowadays many individuals are exploring investments outside India through investing in existing companies’ set-up in developed or emerging countries. A lot of Indian start-ups are setting-up or want to set-up entities in offshore jurisdiction for many advantages like raising funds overseas or attracting global investors and many more. The Founders or Entrepreneurs as well as employee communities are willing to understand whether it is possible to obtain stake / shares of foreign companies while continuing to be residents of India. Employees of MNCs or big corporate houses are also offered to participate in many employee incentive initiatives like ESOPs, stock appreciation rights, etc. make them feel of ownership in the company.
Having said that, an individual should be aware of the relevant rules & regulations for investing outside India i.e. permissible or not permissible, because a violation could have serious concerns on the Individual. Let’s understand some basic nuances of overseas investment by resident individuals in simple terms.
First of all, any foreign investments by an Individual should be subject to exchange control regulations i.e. governed by rules and regulations prescribed by the RBI. An Indian resident is permitted to invest in securities of an offshore company under
- ODI i.e. Overseas Direct Investment route or
- LRS i.e. Liberalised Remittance Scheme
Let’s understand them down one by one –
Overseas Direct Investment (ODI)
ODI means investments by way of
- Contribution to the capital or
- Subscription to the Memorandum of a foreign entity or
- Purchasing of existing shares of a foreign entity either by market purchase or private placement or by stock exchange, signifying a long-term interest in the foreign entity (‘JV’ or ‘WOS’).
ODI can either be under
- the Automatic Route or
- the Approval Route,
Under ODI route, Resident Individuals are allowed to make investment in equity shares & mandatorily convertible preference shares of JV / WOS outside India, subject to overall limit prescribed by RBI under the LRS provisions. Resident individuals can acquire/sell foreign securities under automatic route in these cases: –
- Inheritance or as a gift from a person resident outside India;
- By way of Stock options
- Purchasing of foreign securities out of funds held in the RFC Account; and
- By way of bonus/rights shares on the foreign securities already held by them.
Indian residents can purchase / acquire foreign securities from these:
- funds held in the Resident Foreign Currency (RFC) account; or
- From the foreign currency resources outside India when not permanently resident in India
Further, Resident individuals are allowed under General Permission to get shares of a foreign entity in part or full consideration of
- Professional services propounded to the foreign entity OR
- In lieu of Director’s remuneration.
The limit of obtaining such shares in terms of value will be within the overall ceiling prescribed for the resident individuals under theLiberalised Remittance Scheme in force at the time of acquisition.
Sale / disinvestment of shares through the mode of transfer / sale / liquidation / merger of JV / Wholly Owned Subsidiaries is permitted, subject to conditions inter alia obtaining a valuation report and repatriation of funds within sixty days. No write-off allowed.
Liberalised Remittance Scheme (‘LRS’)
Now it is essential to understand the LRS route and what is the ceiling limit prescribed under LRS which is applicable for Overseas Direct Investmentby Individuals. RBI has prescribed that a resident Indian can remit, up to the $ 250,000 per Financial Year under the LRS, for permitted current and capital account transactions including purchase of securities and also setting up / acquisition of Joint Ventures / Wholly Owned Subsidiaries overseas.
Under LRS inter alia the permissible capital account transactions by an Individual includes –
- making investments in abroad – acquisition & holding shares of both listed & unlisted overseas company;
- acquisition of an overseas company’s qualification shares for holding the post of Director;
- acquisition of foreign company’s shares towards professional services rendered or in lieu of Director’s remuneration;
- Investment in Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes; setting up Wholly Owned Subsidiaries and JV (w.e.f. 05 August,2013) outside India for bonafide business;
- Extending loans including loans in Indian Rupees to NRL (Non-resident Indians) who are relatives as defined in Companies Act, 2013.
The individual need to designate a branch of an Authorised Dealer (‘AD’) through which all the remittances under the LRS will be made. The resident individual looking for to make the remittance should furnish Form A2 for purchase of foreign exchange under Liberalised Remittance Scheme.
Obligation of Resident Individual
An Indian Party will have to consider these: –
- Receive share certificates or any other documentary evidence of investment in the foreign Joint Ventures / Wholly Owned Subsidiaries as evidence of investment and submit the same to the designated AD within six months;
- Repatriate to India, all dues receivable from the foreign Joint Ventures / Wholly Owned Subsidiaries such as royalty, technical fees, dividend etc.;
- 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 Joint Ventures or WOS.
- Report the details of the decisions taken by a Joint Ventures /WOS regarding diversification of its activities /setting up of step-down subsidiaries/alteration in its share holding pattern within 30. These are also to be comprehend in the relevant Annual Performance Report; and
- In case of disinvestment, sale proceeds of shares/securities shall be repatriated to India within 90 days of receipt and documentary evidence to this effect shall be submitted to the Reserve Bank through the designated Authorised Dealer.
Taxation
Advertisement Indian resident individuals are typically subject to tax in India on their global income. Thus, any dividend / interest income received from investment in foreign companies should be subject to tax as Income from other sources in India according to the tax slab rates (highest rate is 30%). Further, capital gains should be subject to tax based on period of holding i.e. long term (>24 months) – 20% & short term (<=24 months), at slab rates. The above are base rates and should be increased by applicable surcharge & cess.
Separately, the Individual is need to disclose the foreign assets in their tax return in the prescribed form.
Key takeaways
Points to keep in mind
- The LRS ceiling limit ($ 250,000) and permissible investments;
- Further, disclosure and reporting requirements both under Income-tax and FEMA laws to be complied with; and
- Income-tax treatment for income arising from the foreign assets.