Writeoff,Pledge,Transfer of Investment in Joint Venture/Wholly Owned Subsidiary/Step Down Subsidiary

Write off, Pledge, Transfer of Investment in
Joint Venture/Wholly Owned Subsidiary/Step
Down Subsidiary
CA T.K. Sundara Rajan

Credits & Acknowledgements
Vigneesver P

Legends Used in the Presentation
APR Annual Performance Report
AD Authorised Dealer
JV Joint Venture
RBI Reserve Bank of India
SDS Step Down Subsidiary
WOS Wholly Owned Subsidiary

Presentation Schema
Relevant Definitions
Post Investment
Changes/Additional
Investment
Criteria for Writing
off Capital &
Receivables
Reporting
Requirements
relating to Write-off
Conditions for
transfer by way of
Sale of Shares of
JV/WOS
Transfer by way of
Sale of Shares of
JV/WOS involving
Write-off
General conditions
for creation of
charge
Specific conditions
relating to charge
on assets
Invocation of
charge
Other provisions
relating to charge

Relevant Definitions
Wholly Owned Subsidiary
A foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country,
whose entire CAPITAL is held by the Indian party. [reg 2(q)]
Joint Venture
A foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in
which the Indian party makes a direct investment; [reg 2(m)]
Joint Venture as per Accounting Standard 27 “Financial Reporting of Interests in Joint Ventures”
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is
subject to joint control
Direct Investment
"Direct investment outside India" means investment by way of contribution to the CAPITAL or subscription to the
Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by
market purchase or private placement or through stock exchange, but does not include portfolio investment. [reg 2(e)]

Post Investment Activities in
Existing JV/WOS

Post Investment Changes/Additional Investment
(Regulation 13)
A JV/WOS set up by the Indian Party as per Regulation 6 may
diversify its activities/set up SDS/alter shareholding pattern in
the overseas entity.
Additional compliance under Regulation 7 shall apply in case
of financial services sector companies.
The Indian Party should do the following:
Report the details of such decisions to the RBI through AD
category-I bank
within 30 days of approval of those decisions by the
competent authority of JV/WOS concerned in terms of local
laws of the host country.
Include the same in the APR required to be forwarded to the
AD category-I bank.

Write-off of Capital & Receivables of
the JV/WOS

Criteria for writing off Capital & Receivables
(Regulation 16A)
The Indian promoters (Companies) who have set up WOS or holding at least 51% stake in an
overseas JV, may write-off capital or other receivables upto an amount equivalent as
mentioned in the below criteria.
Capital includes both Equity and Preference share capital. Other receivables include loans,
royalty, technical knowhow fees & management fees in respect of the JV/WOS.
Listed
Indian Co.
Write-off amount
<=25% of Equity
Investment
Unlisted
Co.
Write-off
criteria
Write-off amount
<=25% of Equity
Investment
Automatic
Route
Approval
Route
In the above criteria, the term ‘Equity’ includes Compulsorily Convertible Preference Shares (CCPS).

Illustration
A BHolds
51% stake in
Rs. 120 Crore
Equity & receivable
Investment Amount (Rs. Crore)
Equity Shares 50
Preference Shares (CCPS) 50
Other receivables 20
Total 120
Eligible write-off amount
= 25% of Equity Investment
= 25% of investment in Equity
shares & CCPS
= 25*(50+50)
= Rs. 25 Crore
A can, on satisfying the stipulated conditions, write-off an amount up to Rs. 25 Crore
out of Rs. 120 Crore invested in its JV, B

Reporting Requirements relating to Write-Off
The write-off / restructuring have to be reported to the Reserve Bank through the
designated AD Category-I bank within 30 days of write-off/ restructuring.
The following documents have to be submitted for scrutiny along with the application to
the designated AD category-I bank under Automatic as well as Approval Routes, for
initiating write-off/restructuring.
• A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up
by the Indian Party; and
• Projections for the next five years indicating benefit accruing to the Indian company
consequent to such write off / restructuring.
It is imperative to note that the regulation deals only with Indian Companies & aims to
provide more operational flexibility to the Indian corporates.

Transfer by way of sale of shares of
JV/WOS

Conditions for transfer by way of sale of shares of
JV/WOS [Regulation 16(1)]
The Indian Party is required to submit details of such disinvestment through its designated AD category-I bank within
30 days from the date of disinvestment.
An Indian Party, without prior approval of the RBI, may transfer by way of sale of any share or security held by it in a
JV or WOS outside India to another Indian Party which complies with the provisions of Regulation 6, or to a person
resident outside India, subject to the following conditions:
the sale does not result in any write off of the investment (or financial commitment) made [covered by
Regulation 16 (1A) to be discussed later].
the sale is effected through a stock exchange where the shares of the overseas JV/ WOS are listed;
if the unlisted shares are disinvested by a private arrangement, the share price is not less than the value
certified by a CA/CPA as the fair value of the shares based on the latest audited financial statements of
the JV / WOS;
the Indian Party does not have any outstanding dues by way of dividend, technical know-how fees, royalty,
consultancy, commission or other entitlements and / or export proceeds from the JV or WOS;
the overseas concern has been in operation for at least one full year and the APR together with the audited
accounts for that year has been submitted to the RBI;
the Indian Party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India.

Additional Conditions for Transfer involving Write-Off
[Regulation 16(1A)]
in case where the JV / WOS is listed in the overseas stock exchange;
in cases where the Indian Party is listed on a stock exchange in India and has a net worth
of not less than Rs.100 crore;
where the Indian Party is an unlisted company and the investment (or financial
commitment) in the overseas venture does not exceed USD 10 million, and
where the Indian Party is a listed company with net worth of less than Rs.100 crore but
investment (or financial commitment) in an overseas JV/WOS does not exceed USD 10
million.
The situation of transfer by way of sale of shares involving write-off arises when the amount repatriated
after disinvestment is less than the original amount invested.
The Indian Party may, without prior approval of the RBI, disinvest and write-off in the following cases:
An Indian Party, which does not satisfy the conditions laid down above for undertaking any disinvestment
involving write-off in its JV/WOS abroad, shall have to apply to the RBI for prior permission.

Illustration
A B
WOS
In the above case, though the repatriated proceeds is greater than the carrying amount, the sale can
be done under automatic route only if the conditions specified in regulation 16(1A) are satisfied.
In the above example even if the sale proceeds are greater than Rs.50 Crores but if the amount
repatriated is less than Rs.50 Crores, the disinvestment would be allowed under automatic route only
if the conditions under Regulation 16 (1A) are satisfied.
Particulars Amount (Rs. Crore)
Original investment 50
Carrying value 35
Sale proceeds 40
Gain on sale of investment
= 40-35
= Rs. 5 Crore
Repatriated proceeds < Original investment

Operational Instructions to AD Banks
The Indian Party should report details of disinvestment to the Overseas Investment
Division (OID) of RBI in the online OID application through AD Category – I bank
within 30 days of disinvestment in Part III of the Form ODI.
Sale proceeds of shares / securities shall be repatriated to India immediately on
receipt thereof and in any case not later than 90 days from the date of sale of the
shares / securities.

Pledge of Shares of JV/WOS/SDS

Creation of Charge
The designated AD bank may permit creation of charge on shares or assets under the following
circumstances and subject to certain conditions.
Particulars Shares Domestic Assets Overseas Assets
Lender Domestic/Overseas Overseas Lender Domestic Lender
Facility type Funded or non-funded Funded or non-funded Funded or non-funded
Borrower
Indian Party /its sister concerns
/group concerns /associate concerns
/ JV/WOS/SDS
Sister concerns /group concerns /associate
concerns / JV/WOS/SDS of an Indian Party
Indian Party /its sister concerns
/group concerns /associate
concerns/ JV /WOS /SDS
Security
Shares of JV/ WOS /SDS of Indian
Party
Domestic assets (movable /immovable /financial
/other) of an Indian Party or its group / sister /
associate concern including the individual
promoter / director
Overseas assets (excluding shares)
of Indian party or its JV/WOS/SDS
Charge type Pledge Pledge /Mortgage /Hypothecation or otherwise
Mortgage /Hypothecation or
otherwise
The SDS mentioned above can be any SDS of an Indian Party irrespective of its level.

Associate Company definition
Sec 2(6) of the Companies act, 2013 - "associate company", in relation to another company,
means a company in which that other company has a significant influence, but which is not a
subsidiary company of the company having such influence and includes a joint venture
company.
the expression "significant influence" means control of at least 21% of total voting power, or
control of or participation in business decisions under an agreement;
the expression "joint venture" means a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement;
As per Accounting Standards, An associate is an enterprise in which the investor has
significant influence and which is neither a subsidiary nor a joint venture of the investor.
Significant influence is the power to participate in the financial and/ or operating policy
decisions of the investee but not control over those policies.

General Conditions for creation of Charge under Automatic
Route [A.P. (DIR series) Circular no.54]
The Indian party is complying with the provisions under Regulation 6 (and Regulation 7 for financial
services sector) for undertaking financial commitment;
The value of the fund based or non-fund based facility is reckoned as financial commitment for the
Indian party;
The period of charge, if not specified upfront, may be co-terminus with the period of respective loan or
other facility;
The loan / facility availed by the JV / WOS / SDS from the domestic / overseas lender shall be utilized
only for its core business activities overseas and not for investing back in India in any manner
whatsoever;
A certificate from the Statutory Auditors’ of the Indian party, to the effect that the loan / facility availed
by the JV / WOS / SDS has not been utilized for direct or indirect investments in India, is to be obtained
and kept by the designated AD;
In case of the facility from an overseas lender, it should be regulated and supervised as a bank;
the total financial commitment of the Indian party remains within the limit stipulated by the RBI for
overseas direct investments in the JV/WOS from time to time;

Specific conditions relating to charge on assets
(Regulation 18A)
• The assets, on which charge is being created, are not securitized.
• A 'No Objection' is obtained from the domestic lender in whose favour if charge is already
created on the domestic assets.
• The overseas undertakes that, in the event of enforcement of charge on domestic assets,
the assets shall be transferred by way of sale to a resident only.

Invocation of Charge
• The invocation of charge resulting into the domestic lender acquiring the shares of the
overseas JV / WOS / step down subsidiary shall be governed by the extant FEMA
provisions / regulations issued by the RBI from time to time.
• In case of invocation of charge on domestic assets, the resultant remittance of the
proceeds exceeding the prescribed limit of the financial commitment of the Indian party
(prevailed at the time of creation of charge) shall require prior approval of the RBI
• The invocation of charge resulting into the domestic lender acquiring the overseas assets
shall require prior approval of the RBI.
Wherever creation of charge involves pledge of shares of an Indian company, it shall also
be governed by the extant FEMA provisions / regulations issued by the RBI and the
consolidated FDI policy issued by the Government of India from time to time.

Other provisions relating to charge creation
The matter relating to the setting up / acquiring the multi-layered structure of
overseas entities by the Indian party, wherever applicable, is under the
examination of the Reserve Bank and the decision taken in this regard shall be
conveyed in due course for necessary compliance at AD / Indian party level.
The facilities extended by the domestic lender to the Indian party or to its
group / sister / associate concern or to any of its overseas JV / WOS / SDS shall
also be governed by the prudential norms and other guidelines issued by the
Department of Banking Regulation (DBR, the erstwhile DBOD), RBI from time
to time.

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Writeoff,Pledge,Transfer of Investment in Joint Venture/Wholly Owned Subsidiary/Step Down Subsidiary

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