Doing Business Abroad

Today business organizations not only focus on domestic market but try to widen their roots in the world market. To achieve the objective of growth and expansion it is imperative for the business man to see the entire world as a single market.

Indian companies can straightaway invest abroad by contributing to the capital or subscription to the Memorandum of Association (MoA) of a foreign organization, indicating a long term interest in the overseas entity. It involves establishing a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS) abroad. RBI is the statutory body that regulates and processes all the applications for approval for setting up a JV/WOS abroad.

A JV means a foreign entity formed and registered overseas in conformity with the laws and standards of that country and in which investment has been made by an Indian party. And a WOS means a foreign entity formed and registered abroad as per the laws and standards of that country and whose entire capital is owned by an Indian entity.

There are two routes through which the Indian Companies can invest abroad:-

1. Fast Track or Automatic Route
2. Normal Route

Under Automatic Route the Indian companies (except those investing in the financial sector) can set up JV/WOS abroad without any prior approval from RBI. The conditions for the same are:-

• The overall 'financial commitment' of the Indian Party in Jvs/WOSs should be 100 percent in any outside nation other than Nepal, Bhutan and Pakistan and the investment should be in a lawful decree as allowed by the host country.
  
  
• The Indian company should not be listed on the Reserve Bank's exporters caution list / list of defaulters to the banking system published or under the probe of the Enforcement Directorate or any other regulatory agency.
  
  
• The Indian Party should designate only one authorized dealers branch to administer all the transactions relating to the investments in a JV/WOS abroad.
  
  
• In case of partial or full acquisition of an existing foreign company, where the investment is more than USD 5.00 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an investment Banker or Merchant Banker outside India registered with the appropriate regulatory authority in the host country. While in all other cases, by a Chartered Accountant or Certified Public Accountant.
  
  

The Indian Party trying to make a direct investment under the automatic route is required to file form ODA along with certified copy of the Board Resolution, Statutory Auditors certificate, Valuation report (in case of acquisition of an existing company) as per the valuation norms and approach an Authorized Dealer for making the investment/remittance.

Normal Route

The tenders not covered under the Automatic Route require a prior clearance of the RBI for which a particular application along with the documents prescribed therein has to be filed to the Overseas Investment Division in the Foreign Exchange Department of the RBI. The application shall be made in:-

Form ODB - If the investment is for buying shares of foreign company involved in the same core activity in exchange of ADRs/ GDRs issued to the latter or for buying shares of a company abroad, in lieu of fees due to it for the professional services delivered to the foreign company.

Form ODI - For all other cases.

Now, the proprietary businesses in India are allowed to invest abroad with prior approval of the RBI but only by way of buying of shares of a foreign company in lieu of the fees for the specialist services rendered to the foreign entity. It is subjected to the following conditions:-

• The total value of shares accepted from each company abroad shall not surpass 50% of the fees receivable by the Indian party from that company, and,
• The Indian party's shareholding in any one company abroad shall not transcend 10% of the paid up capital of the company outside India. They can take general permission for 1 year from RBI to make such kind investments by filing form ODB.

A Resident individual can also request for approval from RBI to purchase shares of foreign entity proposed in consideration for professional services delivered to the foreign entity. The Reserve Bank may grant permission on evaluating the certificates and net worth of the individual and the nature of his/ her profession, financial and business track record of the foreign entity, scope for foreign exchange inflows to the country etc.

Overseas Investment Insurance

The Indian companies doing business abroad face a lot of risks which can be commercial, political or of any other type. In order to protect the Indian entrepreneurs investing abroad the Government of India has set up Export Credit Guarantee Corporation of India Limited (ECGC) under the control of Ministry of Commerce & Industry. It offers a variety of credit risk insurance covers to exporters protecting them against losses which they encounter in the process of exporting of goods.

Legal Framework

Foreign Exchange Management Act (FEMA), 1999
FEMA is the most important law concerning regulation of all foreign exchange transactions including investments abroad. It is an investor friendly charter which aims at promoting external trade and payments as well as furthers the growth and maintenance of foreign exchange market. Under the Act, RBI has been authorized to structure various rules, guidelines and standards relating to overseas investments in consultation with the Central Government.

Bilateral Investment Promotion and Protection Agreement

Bilateral Investment Promotion and Protection Agreement (BIPA) is defined as an agreement that promotes and protects on reciprocal grounds, investment made by the investors. The motive behind this treaty is to encourage greater investments by one country in another country. Such agreements are advantageous for both the countries because they exhilarate their business initiatives and thus intensify their prosperity. With the adoption of liberal foreign investment policy the Government of India has negotiated with several countries to bring into action these BIPAs. India has so far signed such agreements with 60 countries out of which 53 have been enforced and are active.

Sources for financing overseas investments

For doing business abroad the entrepreneur requires huge funds. Funds are not only required to initiate business but also to develop, expand and diversify it.

The FEMA and various notices issued by RBI specify the following sources of funds to finance foreign investments:-

• Withdrawal of foreign exchange from an authorized dealer in India.
• Capitalization of exports and other dues.
• Share swapping, which means buying of the shares of an overseas entity in exchange of the shares of the Indian entity. Under this, Indian companies can automatically swap their fresh issue of American Depository Receipts (ADRs)/Global Depository Receipts (GDRs) for overseas acquisitions in the same core activity.
• External commercial Borrowings (ECB)/Foreign Currency Convertible Bonds (FCCBs) raised abroad. ECBs raised overseas means borrowings in foreign exchange by a resident Indian, a firm, a bank or a company incorporated under the Indian Companies Act 1956.

The banks in India offering ECBs are:-

• Bank of Baroda
• State Bank of India
• Indian Overseas Bank
• Canara Bank

Export and Import Bank of India (EXIM) established as a wholly-owned financial institution by the Government of India plays an indispensable role in reinforcing Indian direct investment overseas. It is a major agency for funding the investments made by Indian parties abroad. It has been expediting Indian corporates access to new markets and technologies. It offers financial support to Indian companies thus enabling them to establish, develop and grow their businesses in overseas markets. The bank has established an 'Overseas Investment Finance ' programme which renders financial aid to cover the complete cycle of Indian investment abroad including financing of Indian JV and WOS.

Modes of entry into foreign market
There are various strategies which an Indian entrepreneur can undertake for invading into a foreign market:

• Exporting
• Licensing and franchising
• Management Contracting
• Mergers and Acquisitions
• Strategic Alliances
• Countertrade

Double Taxation Relief
Double taxation refers to a situation under which a party becomes liable to pay tax on the same income in more than one country. Such a situation originates because of different taxation rules in different countries. The two main principles of income tax which can result in double taxation are:-

1. Source of income rule, under this a person becomes liable to pay tax on his income to the country where the business is established or where the assets and property is located.
2. Residential status rule, under which the income of a person is taxed on the grounds of his/her residential status in that country. Hence, if a person is resident of a country, he/she may have to pay tax on any income earned from abroad as well.

In India the obligation to pay income tax under the Income Tax Act arises on the basis of the residential status rule. Hence if a person whose tax liability is being assessed was an Indian resident in the previous year then he/she has to pay tax on the income which has been generated in India plus income which accrues, arises or is received outside India. Thus he/she becomes liable to pay double taxes.

To protect Indian investors against such burdens the government has adopted two ways:-

• Bilateral Relief
• Unilateral Relief

Under section 90 of the Income Tax Act, the Central Government of India has entered into “Double Taxation Avoidance Agreements” (DTAA's) with countries outside India to prevent the investors from facing double taxation burden.