It is the equity investment made by an Indian company outside India.
A lot depends upon the local regulation which changes from country to country. However, following are the general routes.
Liaison Offices or representative office
It undertakes liaison activities. It acts as a channel of communication between Indian Head Office abroad and local parties. It is not allowed to undertake any business activity. It promotes the products of the parent company in India in the foreign market. It can also look for exporters to India to procure goods for its foreign parent. It can enter into memorandum of understanding with the local companies with futuristic intentions.
Indian companies can carry out a larger set of activities without incorporation of a company in the destination country establishing a branch office to manage manufacturing or import export.
Project officers are established to complete the contract (doing project work in that country) awarded by foreign companies or governments.
ODI would involve equity investment, in a 100% subsidiary or a partial stake. Following concerns need to studies carefully before making ODI.
Untimely exit of intended partner:
The joint ventures are intended to be with specific partners and the rights of share transfers should be restricted in order to prevent a major shareholder from leaving immediately. Lock in period also can be introduced.
Diversion of business by the partner:
Joint venture partners are in the same or similar businesses, there might be a sense of competition. The joint venture contract must mention how the conflict of interest is avoided.
Difficulties in employee transfer:
Transfer of existing employees to the joint venture company resignation and rehire or transfer or deputation and this could be a sensitive issue.
Sudden appreciation of rupee:
From the perspective of the Indian company, to the extent it is required for remittances, the trend in exchange rate can destroy excellent performance achieved in the local market.
Applicability of the related party transaction rules:
Transfer-pricing regulations, the local joint venture and the Indian shareholders would be considered “associated enterprises” and any transactions between them would be required to be conducted on an arm’s length basis.
Disagreement on the management structure:
The parties should agree on a mutually acceptable management structure.
Incorporation documents at variance with JV contract:
For the equity joint ventures, all the issues agreed between the parties should be reflected in the incorporation documents.
There may be regulatory upper limits for remittances (both lump sum fees and periodic royalties) in case of technology transfers and license or use of trademark or brand name.
Complexity of tax laws:
The incremental proceeds of sale of shares are taxed as capital gains for foreign investor.
The double tax avoidance agreements (DTAAs) may be applicable or not.
Biased method of share valuation:
While purchasing the shares of local companies, price paid should be more than DCF valuation prepared by a certified valuer. While selling the shares of local company, the price should be equal to or less than DCF value computed by a certified valuer. This kind of bias may exist in select countries.
Misuse of intellectual property:
The intellectual property should be registered in India as well as locally for enforcement of protection. The licensing agreement, know-how agreement, technical services agreement, royalty payment, franchise agreement should be made part of the main agreement.
Limited financial capacity of partner:
The financial capacity of the local partner should be checked.
Place of effective management:
It is important from the perspective of being able to make for the downstream investment into two other local companies without requiring approvals under FDI or making investment, without requiring central bank compliances for running the company.
Understanding client objectives
Preparation of client profile
Secondary market research of the sector and industry
SWOT analysis of possible investment
Appointment of a market search agency
Appointment of a market survey agency
Review of market study report
Study of applicable local legal and regulatory framework
Inception report for entry structure
Analysis of broad entry options (presents in the form of a foreign company, wholly owned subsidiary, equity joint venture, contractual joint venture)
Analysis of mode of subscription to equity
Analysis of form of equity
Orientation of client management for the joint venture process
Preparation of the desired target profile of the foreign company
Anonymous advertising in print media, online media, social media
Circulation of opportunity among investor forums, business forums, online deal platforms
Identification of the a list target foreign companies
Groundbreaking discussions with target companies
Selection of the target company
Non disclosure agreement between principals
Structuring of the joint venture
Negotiation for sharing of control and scope of work
Formulation of a strategy for a new project (size, location, capacity, etc)
Preparation of project information memorandum
Preparation of project profile
Preparation of a Business plan
Preparation of time Schedule of investment requirement
Negotiation on mode of issue of equity
Determination of type of equity
Preparation of nature of amendments in MOA & AOA
Preparation of of drafts of board resolutions for internal approvals
Preparation of mutual NDA between principles
Preparation of the financial model
Preparation of valuation for various levels of Equity stakes in the company
Preparation of key strategic terms of joint venture agreement
Selection of accounting, taxation and secretarial experts
Valuation for the purpose of taxation through certified valuers
Identification of due diligence agency
Due diligence (corporate, financial, key contracts, marketing, procurement, key assets, real estate, manufacturing facility, permits & certifications, technology, operations, brand, intellectual property, compliance, associate companies, forensic, human resources, information technology, administration)
Preparation of due diligence report
Preparation of risk profile of the joint venture or WOS project
Compilation of data for specific query
Preparation of term sheet
Preparation of draft business transfer agreement
Assistance in board meeting and General Meeting as special expert invitee
Analysis of disclosure schedule
Assistance in negotiation of business transfer agreement
Assistance in execution of the investment document
Assistance in understanding the investment payment process
Resolution of deadlocks
Key inputs on integration process
Hand holding support for management of joint venture after the deal