In this blogpost, Aishwarya Wagle, Student, Government Law College, Mumbai, writes about the benefits of outsourcing and the procedure  to be followed to make an investment in a JV/ WOS abroad.

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Introduction

With the advent of globalization, a rising number of Indian companies are leaning towards outsourcing their work to other countries.  Outsourcing work, as an idea is not a novice, it has been there for a while but has been gaining popularity for various reasons over this last decade. Companies previously outsourced work to cut costs. But today other than cutting costs, it is also about reaping the benefits of strategic outsourcing such as reducing overhead, flexible staffing, increasing efficiency, and accessing skilled expertise.

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Benefits of outsourcing

The one of the biggest benefits of outsourcing is that it will help your company gain a competitive edge in the market. Not only you provide your customer with best of services, but also increases your productivity while managing your in-house resources intelligently.  It also allows you more financial flexibility when there is uncertainty in demand. Offshore outsourcing has the benefit of running your business in a full-fledged manner even during off season and holiday months.

One of the major growth drivers of the Philippine economy today are the call centers which form a major portion of the business process outsourcing (BPO). Multinational corporations and companies run the majority of the call centers in the Philippines. Lately, however, even the local investors have started participating in the outsourcing boom.

To begin with, there are certain regulations prescribed by the Reserve Bank of India which need to be followed.

Indian parties cannot engage in real estate foreign investments, which do not include construction or development activities of towns etc. Since a BPO is not considered an illegal activity in the host country, the Indian company can invest in the outsourcing business. A BPO is not included in the Foreign Exchange Management (Current Account Transactions) Rules, 2000 so there should be no issue on that end either.

Investment by persons in India does not need any approval under the following cases:

  • Liberalized Remittance Scheme (LRS) by individuals up to USD 250,000 per annum
  • General permission for funds held in foreign currency accounts
  • Under Automatic Approval route not exceeding 400% of company’s net worth.

We fall under the third category, where an Indian party does not need prior approval from the Reserve Bank of India for making an overseas direct investment in a wholly-owned subsidiary or a joint venture (WOS/JV) abroad. The Indian Party should approach an Authorized Dealer Category – I Bank for effecting remittances towards such investment.

Under subsection 2(k) of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations, 2004, an Indian Party includes ‘a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932 making investment in a Joint Venture or Wholly Owned Subsidiary abroad, and includes any other entity in India as may be notified by the Reserve Bank: –

Provided that when more than one such company, body or entity make an investment in the foreign entity, all such companies or bodies or entities shall together constitute the ‘Indian party.”

There are certain criteria to be fulfilled to invest directly under the Automatic Route

  • The Indian Company can invest up to its prescribed net worth in a WOS abroad (as per last audited balance sheet) for any bonafide activity as permitted by the law of the host country. As the BPO is becoming a major industry in the Philippines, we will be permitted to invest in a subsidiary/JV in that field. In case, the financial commitment rise above USD 1 billion, prior approval of the RBI will be required.
  • We have to make sure that our FMCG company is not on Reserve Banks caution list or its list of defaulters to the banking system published and circulated by the Credit Information Bureau of India Ltd. (CIBIL)/RBI or any other credit information company which has been approved by the Reserve Bank. Also, we need to make sure that the company is not under investigation by the directorate of enforcement or any investigative agency or regulatory authority.
  • The Company has to route all transactions relating to the investment in the JV/WOS through only one branch of an authorised dealer bank which will be designated by the company itself. All transactions and communications in reference to the investment made will be reported only through this designated branch of an authorised dealer bank. In case, at a later stage, the company wants to change the Authorised Dealer, it will have to be done by means of an application in the form of a letter addressed to the Reserve Bank after obtaining a No Objection Certificate from the existing authorised

Procedure to be followed to make investment in a JV/ WOS abroad

The company has to follow a specific procedure to make an investment in a JV/WOS abroad. The company is required to fill up form ODI with the support of the documents mentioned therein, i.e., a certified copy of the Board Resolution, Statutory Auditors Certificate, and valuation report and approach the Authorised Dealer to make the remittance/investment. Share valuation in case of partial/full acquisition of an existing foreign company where the investment is more than USD five million, has to be done by a Category I Merchant Banker registered with the Securities and Exchange Board of India (SEBI) or an investment or Merchant Banker outside India registered with the regulatory authority of Philippines. In other cases where the investment is less than USD 5 million, the valuation can be done by a Chartered Accountant or a Certified Public Accountant.

The ODI form is available on the RBI website as an annexure to the Master Circular on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad’ dated July 1,2014. Authorized Dealers Category – I banks have to file Part I (Sections A to D), II and III of form ODI on-line in the Overseas Direct Investment Application with the Reserve Bank for allotment of UIN, reporting of subsequent remittances, filing of APRs, etc. AD Category –I banks would continue to receive the ODI forms in physical form from the Indian Company.

Per se there is no need for a prior registration with the RBI to make direct investments under the automatic route. A Unique Identification Number (UIN) is instantaneously generated after the online report of the first remittance in form ODI. The UIN allotment by the RBI does not constitute of an approval stamp given by the RBI for the investment made in the JV/WOS. When the RBI issues a UIN, it only signifies the taking on record of the investment for maintaining the database. The onus of complying with RBI and FEMA regulations rests with the Company.

Conclusion

These are more or less the requirements and criteria to be followed in India with regards to Reserve Bank and FEMA regulations. However, there are various other equally important aspects to be considered while setting up a BPO in the host country. Details like research based on equipment that you need to set up a call centre. From computers to dialing equipment etc. and technical know-how is very important. Even in the Philippines, you need to find the right call centre to depend on. Since they sub-manage your work and are very service oriented, you have to heavily depend on them to get your outsourced work done in a smooth manner. You have to make sure that your work in the host country needs to be well managed and relayed by the agents. For this, you need to express your wants and elaborate the terms of the processing to the people who will be in control in the Philippines.

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