FEMA Regulations for Incorporation of WOS/JV/ Step-down Subsidiary outside India

Key Takeaways:

Acquisition of JV/WOS by Indian parties
Approvals required for investment in JV/WOS by Indian parties
Understanding step-down subsidiary
Setting up step-down subsidiary outside India and reporting procedures involved

1. Joint Venture, Wholly Owned Subsidiary and Step Down Subsidiary CA T.K. Sundara Rajan

2. Credits & Acknowledgements R Subash R D Bharathi Priya

3. Legends Used in the Presentation APR Annual Performance Report AS Accounting Standards CCPS Compulsorily Convertible Preference Shares FATF Financial Action Task Force FDI Foreign Direct Investment JV Joint Venture RBI Reserve Bank of India SDS Step Down Subsidiary WOS Wholly Owned Subsidiary

4. Presentation Schema

5. Introduction

6. Relevant Definitions

7. Caveats The term ‘CAPITAL’ has not been defined in the regulation but in Clause B.12 ‘Restructuring of the balance sheet of the overseas entity involving write off of capital and Receivables’, the term Capital (Equity / Preference Shares) has been used. Therefore, it can inferred as capital includes both Equity and Preference share capital. Difference between JV and WOS A foreign entity is termed as JV of the Indian Party/Resident Indian when there are other foreign promoters holding the stake along with the Indian Party In case of WOS, entire capital is held by the one or more Indian Party/Resident Indian Difference between definition of JV as per FEMA and definition of JV as per Accounting Standard 27 “Financial Reporting of Interests in Joint Venture” As per the definition JV in FEMA, there is no need for control of the JV by the Indian Party, Direct investment in JV is sufficient for the entity to become JV. Whereas, as per AS 27, a JV is a contractual agreement between two or more parties and such contractual agreement establishes Joint Control. Therefore, in JV as per FEMA control is not mandatory but JV as per AS 27 control is mandatory

8. Meaning of Indian Party [ reg 2(k)]

9. Setting up JV or WOS abroad

10. Setting up JV/WOS

11. Automatic Route and Approval Route

12. Acquisition or Setting up JV/WOS by Indian Parties through Automatic Route- Regulation 6

13. Contd …

14. Acquisition or Setting up of JV/WOS by Indian Parties through Approval Route Prior Approval from RBI has to be acquired for the following transactions undertaken by Indian Party: 

15. Acquisition or Setting up JV/WOS by Resident Individuals through Automatic Route Any investment in JV or WOS by resident individuals which is not satisfying the conditions prescribed above, shall require prior approval from RBI.

16. Factors for Approval of ODI by RBI

17. Setting up Step Down Subsidiary Abroad

18. Step Down Subsidiary- Meaning A Ltd B Ltd C Ltd Subsidiary of B Ltd Subsidiary of A Ltd Step Down Subsidiary of A Ltd “Subsidiary Company" or “Subsidiary” – Sec 2(87) of The Companies Act, 201 Subsidiary Company means a company in which the holding company (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies

19. Judicial Precedents

20. Calculating the Level of SDS In the above case, C Ltd will be the first level step down subsidiary.

21. Limit for SDS

22. Setting up SDS

23. Setting up SDS Abroad by JV/WOS of Indian Party Automatic Route Approval Route

24. Step Down Subsidiary for Individuals A Ltd B Ltd Subsidiary of A Ltd Mr. X (Resident Indian) WOS Step Down Subsidiary of Mr. X

25. Setting up SDS Abroad by JV/ WOS of Resident Individuals Approval Route

26. Automatic Route - Illustration A Ltd Indian Party B Ltd Indian Party D Ltd (WOS) C Ltd Indian Party E Ltd Subsidiary 51% in Equity / Control

27. Approval Route – Illustration 1 E Ltd (JV) F Ltd Subsidiary

28. Illustration 2 Mr. X Indian Resident A Ltd (WOS) B Ltd (Subsidiary) Illustration 3 A Ltd Indian Party B Ltd Indian Party C Ltd (WOS) Special Purpose Vehicle

29. Reporting Procedures for setting up a Step Down Subsidiary

30. Thank You! Scan the QR Code to Join our Research Group on WhatsApp Scan the QR Code to explore more Research from our Website DVS Advisors LLP India-Singapore-London-Dubai-Malaysia-Africa www.dvsca.com Copyrights © 2020 DVS Advisors LLP