Process of Closing an Overseas Subsidiary by Indian Company

The spread of novel coronavirus has spelt disaster for the world which has caught the entire world ill-prepared to deal with such high magnitude pandemic. It has compelled the governments to put lockdown and confined people to their homes. This has not only affected our personal lives but also made huge impact on business operations. Due to lockdown imposed in various parts of the world, the markets have been shut and businesses are halted for a long period. This ongoing crisis has compelled businesses to revise their future strategies and take bold decisions to reduce their expenses.

There are many Indian companies which have subsidiaries across the world or are running independent corporate entities outside the country. Due to COVID-19 pandemic and its adverse impact on global economy, many such Indian companies might not find an ongoing reason to continue their overseas operation especially in countries which have been severely hit by the pandemic.

 There could be various reason for closing a foreign entity, some of them are:

• Lack of revenue and/or high expenses
• Concerns about permanent establishment and taxation or unnecessary burden of other immigration/employment compliances especially for non-productive entities
• Security issues, Changes in markets and customer base
• Economic slowdowns
• Increasing reliance on home country operations
  
  

The process to close an overseas subsidiary will differ depending on the location and the degree of commitment to the country. However, there are some compliances which Indian party needs to fulfill in India as well.

Let us first understand what constitutes an overseas subsidiary and how it is established. We will then discuss the process of closing a foreign entity.

What is Overseas Direct Investment?

Overseas Direct Investments (ODI) means an investment made in overseas JV/WOS by way of capital contribution or by purchasing existing shares either by market or private placement but it does not include portfolio investment.

• A joint venture abroad means a foreign concern formed, registered or incorporated in a foreign country in accordance with the laws and regulations of that country and in which investment has been made by an Indian entity.
• A wholly owned subsidiary abroad means a foreign concern formed, registered or incorporated in a foreign country in accordance with the laws and regulations of that country and whose entire capital is owned by an Indian entity.
  
  

Entry routes for doing business abroad:

A) Automatic Route: Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank of Indian for making overseas direct investments in a JV/WOS abroad. However, in case of investment in the financial services sector, prior approval is required from the regulatory authority concerned, both in India and abroad.

An Indian Party includes:

• Company Incorporated in India
• Registered Partnership Firm
• Limited Liability Partnership (LLP)
• Any Body Corporate set-up under an Act of parliament
  
  

Limits and requirements for Indian Party under the Automatic Route:

1. Can invest up to the prescribed limit of its net worth (Financial Commitment up to 400% of Net worth) in JV/WOS for any bona fide activity permitted as per the law of the host country
2. Not on RBI or CIBIL’s caution list and/or under investigation by any enforcement agency
3. All transactions relating to a JV / WOS are routed through one branch of an AD bank
4. Prohibited from making direct investment in foreign entity engaged in business of Real estate & Banking
   
   

Procedure to make ODI under the Automatic Route:

The Indian Party is required to fill up form ODI duly supported by the documents listed therein, i.e., certified copy of the Board Resolution, Statutory Auditors certificate and Valuation report (in case of acquisition of an existing company) and approach a designated Authorized Dealer for making the investment/remittance.

Form ODI Part I: Application for allotment of Unique Identification Number (“UIN”) and reporting of transaction/remittance to be submitted by the Indian Party.

B) Approval Route:

Proposals not covered by the conditions under the automatic route require prior approval of the Reserve Bank for which a specific application in Form ODI with the documents prescribed therein is required to be made through the Authorized Dealer Category – I banks.

Procedure to make proposal for ODI under approval route:

• The applicant should approach their designated Authorized Dealer (AD) with the proposal which shall be submitted to RBI after due scrutiny and with the specific recommendations of the designated AD bank along with supporting documents to Overseas Investment Division of RBI.
• The designated AD before forwarding the proposal should submit the Form ODI in the on-line OID application under approval route and the transaction number generated by the application should be mentioned in the letter.
• In case the proposal is approved, the AD bank should effect the remittance under advice to Reserve Bank so that the UIN is allotted.
  
  

Obligations of Indian Party after setting up JV/WOS:

1. Receive and submit share certificates or any other documentary evidence of investment in the foreign JV / WOS as an evidence of investment and submit the same to the designated AD within 6 months.
2. Repatriate to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical fees etc. within 60 days of falling due.
3. Form ODI Part II: Annual Performance Report (APR) to be submitted by Statutory Auditor of the Indian Party through its designated Authorised Dealer Category-I bank every year by 31st December as long as the JV/WOS outside India is in existence.
4. Annual return on Foreign Liabilities and Assets (FLA): All the Indian Parties having overseas direct investment must file foreign liabilities and assets return by July 15 every year.
5. Intimation of Post investment Changes: A JV/ WOS set up by an Indian Party may diversify activities/set up step down subsidiary/alter the shareholding pattern. An Indian Party shall report to RBI, the details of such decision taken within 30 days of the approval of those decisions by the competent authority concerned of such JV/ WOS and same shall be reported in APR.
   
   

Is it mandatory to furnish APR & FLA of the overseas JV/WOS based on its audited financial statements?

Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the APR may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS provided:

a) The Statutory Auditors of the Indian party certifies that ‘The un-audited annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS’ and

b) That the un-audited annual accounts of the JV / WOS has been adopted and ratified by the Board of the Indian party.

FLA Return is expected to be filed on the basis of audited financial statements of the Indian entity. However, if the Indian company’s accounts are not audited before 15 July, then the FLA Return should be submitted based on unaudited (provisional) accounts. Subsequently, once the accounts gets audited and if there are revisions from the provisional information submitted by the Indian Company, then the Indian Company is supposed to submit the revised FLA return based on audited accounts by end of September.

Penalties for non-submission of APRs and FLA: Delayed submission/ non-submission of FLA Return and/or APR on or before due date will be treated as a violation of FEMA, 1999 and compounding proceedings may be initiated against the defaulting Indian Party.

DIFFERENT MODES OF DISINVESTMENTS FROM THE JV / WOS ABROAD:

Disinvestment by the Indian party from its JV / WOS abroad may be by way of transfer / sale of equity shares to a non-resident / resident or by way of liquidation / merger / amalgamation of the JV / WOS abroad.

Closure or winding up of overseas WOS/JV:

The Indian Party have to pass the board resolution and file form ODI part III along with the supporting documents related to closure of overseas JV/WOS with the Authorised Dealer. The authorized dealer in turn reports the same in the online OID application through their nodal office.

Disinvestment by way of sale of shares of JV/ WOS outside India without write-off:

An Indian Party may transfer by way of sale to another Indian Party or to a resident outside India, any share or security held by it in a JV/ WOS outside India subject to following conditions:

• In case shares of overseas JV/WOS are listed, sale is to be effected through stock exchanges;
• In case shares of overseas JV/WOS are not listed and shares are disinvested by a private arrangement – share price should not be less than – value certified by CA/ CPA;
• An Indian Party does not have any outstanding dues from the overseas JV/ WOS;
• The overseas JV/WOS has been in operation for atleast one full year and the APR together with audited accounts for that year has been submitted to Reserve Bank;
• An Indian Party is not under any investigation by CBI/ DoE/ SEBI/ IRDA or any other regulatory authority in India.
  
  

Disinvestment by way of sale of shares of JV/ WOS outside India with write-off:

Indian Party may disinvest, without prior approval of the Reserve Bank, in any of the under noted cases where the amount repatriated after disinvestment is less than the original amount invested:

• where the JV / WOS is listed in the overseas stock exchange;
• 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
  
  

Indian Party shall repatriate to India sale proceeds of shares/securities within 90 days from the date of sale of shares/securities and the documentary evidence to this effect shall be submitted to the RBI through the designated AD bank.

Reporting Requirement in case of disinvestment: Form ODI Part III - Report on disinvestment by way of

a)  Closure, voluntary liquidation, winding up, merger or amalgamation of overseas JV/WOS.

b)  Sale or transfer of the shares of the overseas JV/ WOS to another eligible resident or non-resident;

c)  Closure, voluntary liquidation, winding up, merger or amalgamation of Indian Party; and

d)  Buy back of shares by the overseas JV/WOS of the Indian Party or Resident Individual.