In this blog post, Chandra Bhanu Mitra, a student  pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, provides business structuring advice for an FMCG Company headquartered in Delhi and who wants to open a BPO in the Philippines. 

Introduction

Setting up business abroad and expanding operations internationally opens up new opportunities for a Company which are hitherto unexplored. Apart from gaining access to untapped markets, a Company by commencing a venture in foreign soil is able to enjoy superior exposure leading to greater brand recognition domestically as well as internationally which eventually helps the Company to gain a “global footprint”.  In the present day scenario, countries more specifically in the emerging markets, are vying to attract foreign investments for which they are willing to create and provide a favourable business environment in the form of tax concessions, lenient regulatory requirements, improved infrastructure and like offerings. Companies are able to take benefit of all this by setting up business on foreign soil which may not otherwise be available to them as domestic entities in their own countries.

Over the years the Philippines have become a favoured destination for companies desiring to set up business process outsourcing and related activities. Availability of a captive English speaking population at comparatively low human resource cost coupled with a steadily burgeoning educated class and a favourable business environment, on the whole, makes Philippines an attractive destination for knowledge-based IT enabled businesses.

Recommendation

In this instance, it is an FMCG major (hereinafter referred to as the “Company”) who are desiring to set up a BPO in the Philippines. For an Indian entity who are in the FMCG domain and are having little exposure to IT enabled services like BPO, it is advisable to venture in this direction in a measured manner and commence operations initially with a small footprint. Hence, as a first step it will not be advisable to open a wholly owned subsidiary which though provides the Company with complete control over operations and final product but at the same time demands a higher level of commitment for a longer term. The FMCG Company being new domain wise as well as geographically, it does not make business sense for it to over commit on a long term basis in the initial stages. It is important that the Company makes a fair assessment of the business environment, political stability, culture, local customs & traditions, profitability and its ability to align with the prevailing geopolitical environment before deciding on its commitment levels. Thus the initial foray is best done with limited commitments which allow an opportunity to the Company to gain sufficient perspective and acquire necessary know-how of the local conditions before embarking on a larger scale.

A Joint Venture (JV) with a Concern located in the Philippines who are having an operating BPO as its core business is suggested at this stage. A JV enables a Company to achieve market penetration into new areas over time, enter and develop new product markets, expand into new geographic areas and participate in new technology is driven value activities. A JV also allows the local partner to contribute in the form of specialised knowledge about local conditions, which are essential to the success of the venture. However, the foremost advantage of a JV in this scenario will be the ability of the Company to enjoy substantial control over the operations of the JV with minimal commitment in terms of capital investment and time frame. 

Governing Laws & Bodies

The Foreign Exchange Management Act, 1999 (FEMA) is the governing law which provides the framework for investment by an Indian entity on foreign soil. The Reserve Bank of India (RBI) is the regulatory body which ensures compliance with the provisions of FEMA apart from issuing guidelines & directives from time-to-time.

As per the FEMA and Master Direction – Direct Investment issued by the RBI, an Indian Company whether privately held or publicly can set up a business on foreign soil either by participating in a joint venture (JV) with a similar entity incorporated under the laws of the host country (in this case Philippines) or alternately can own a wholly owned subsidiary (WOS) whose entire capital is owned by the Indian Company. An Indian entity can also acquire an existing foreign company – either partially or wholly – through acquisition by way of contributing to its share capital or alternately by share swapping.

Approval Options

Automatic Route: The Company has the option of availing automatic route (not requiring prior permission of the RBI) if investment corpus is below 400% of net worth of the Company as per the last audited balance sheet. This could be any amount not exceeding USD 1 (one) billion (or its equivalent) in a financial year.  

Approval Route”Prior approval of the Reserve Bank would be required in all other cases of direct investment abroad. For this purpose, application together with necessary documents will have to be submitted by the Company in Form ODI (Overseas Direct Investment) through an Authorised Dealer Category – I bank it has designated for the purpose. RBI will take into account the following factors while considering such application:

• Prima facie viability of the JV in the Philippines;
• Contribution to external trade and other benefits which will accrue to India through such investment;
• Financial position and business track record of the Company and its partner in the Philippines;
• Expertise and experience of the Company in the same or related line of activity as of the proposed JV in the Philippines;

Other Stipulations

• The Company should not be on the Reserve Bank’s Exporters’ caution list / list of defaulters to the banking system circulated by the Reserve Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information Company as approved by the Reserve Bank or under investigation by any investigation / enforcement agency or regulatory body.
• In the event the Company plans for a partial / full acquisition of the existing entity in the Philippines, where the investment is more than USD 5 million, valuation of the shares of the Company will have to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and, in all other cases by a Chartered Accountant or a Certified Public Accountant.
• In cases of investment by way of a swap of shares, irrespective of the amount, valuation of the shares will have to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of the Foreign Investment Promotion Board (FIPB) will also be a prerequisite for investment by the swap of shares.
• The Company will require routeing all its transactions relating to the investment through one branch of an Authorised Dealer Category – I bank designated by it. All communication from the Company to the Reserve Bank, relating to its investment in the Philippines will be routed through the same branch of the AD Category – I bank.

Method of Funding

The Company has the option to avail any of the following Investment routes while participating in the JV:

• a swap of shares;
• capitalisation of exports;
• drawing of foreign exchange from an Authorised Dealer bank in India;
• proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs);
• in exchange of ADRs/GDRs;
• balances held in EEFC account and
• proceeds of foreign currency funds raised through ADR / GDR issues.

Obligations of the Company

The following obligations will have to be adhered to / complied with by the Company:

• receive share certificates or any other document as an evidence of investment in the foreign entity to the satisfaction of the Reserve Bank;
• repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees, etc., within 60 days of its falling due, or such further period as the Reserve Bank may permit;
• submit to the Reserve Bank, through the designated Authorised Dealer, every year on or before June 30, an Annual Performance Report (APR) in Part III of Form ODI in respect of the JV in the Philippines. The APR, so required to be submitted, has to be based on the audited annual accounts of the JV for the preceding year;
• In the event, Philippines law does not mandatorily require auditing of the books of accounts of the JV the Annual Performance Report (APR) will have to be submitted by the Company based on the un-audited annual accounts of the JV provided:

• The Statutory Auditors of the Company certify that ‘the un-audited annual accounts of the JV reflect the true and fair picture of the affairs of the JV and
• That the un-audited annual accounts of the JV have been adopted and ratified by the Board of the Company.

• Annual return on Foreign Liabilities and Assets (FLA) will be required to be submitted directly by the Company to the Reserve Bank of India.

Conclusion

Therefore, it can be surmised from the above that adequate provisions have been made by the government for encouraging and fostering investments abroad by an Indian entity. The Company can go ahead to forge an alliance with its chosen entity in the Philippines and carve out a JV and may look to converting it into a wholly owned subsidiary in the future. The Company also has the option to avail the acquisition route by way of which it can go for partial or full acquisition of an existing entity in the Philippines. The depth of know-how, existing & future potential and long-term business outlook of the Company should govern and guide its decision regarding the manner it would want to set up the BPO venture in the Philippines.

References

1. The Foreign Exchange Management Act, 1999 http://finmin.nic.in/the_ministry/dept_eco_affairs/capital_market_div/FEMA_act_1999.pdf
2. The Reserve Bank of India www.rbi.org.in
3. Business portal of the Govt. of India http://www.archive.india.gov.in/business/
4. Web portal of the Govt. of India https://india.gov.in/