The Non-Automatic Route (Normal Route):Investments that do not qualify for the automatic route are subject to the non-automatic (normal route). Under this route, the applications for investing abroad have to be made to RBI. Such applications are approved by the 'special committee' of RBI considering the following parameters: Viability of the venture; contribution to external trade (particularly foreign exchange earnings) & financial position and track record of parties involved.

Some practical aspects to be taken note of:
1) The committee is now headed by the deputy governor and is therefore, a committee driven by RBI.
2) Practical experience has shown that this is likely to facilitate the frequency of meetings as indeed the speed of decision making.
3) Valuation is becoming a key issue and especially considering the significant amount of investments that are being made and are likely to be made in the new and emerging sectors either through share swaps or otherwise, recent practical experience has shown that the clearance of several potential investments gets delayed in the absence of the subjectivity that is necessarily involved in any valuation.
One understands that the RBI is in the process of coming to some kind of a decision on this; clearly it cannot step into the shoes of a businessman or a valuer and perhaps a valuation report from certain recognised bodies (such as accounting firms or investment bankers) as a benchmark for the transaction could form the basis for giving the clearances.

Taxation issues
OECD ReportTax is a significant cost of any transaction. For outbound investments, tax assumes greater significance as two or more taxing jurisdictions could be involved. The taxation aspects, particularly in respect of tax treatment to be accorded to income streams and capital gains, need to be carefully examined, as the investor entity may, through planning avenues, be able to significantly mitigate tax liabilities. From a tax standpoint, one of the key recent developments which is specifically relevant to outbound investments is the issue by OECD of a report on harmful tax competition. In order to eliminate harmful tax practices followed by certain tax jurisdictions (which, for the purposes of encouraging foreign investment, indulge in different sorts of exemptions, rebates, credits, etc), the OECD has issued a report that sets forth guidelines for dealing with harmful preferential regimes.

The OECD report has classified countries into tax havens and preferential tax regimes considered as potentially harmful. The countries identified as tax havens include British Virgin Islands, Netherlands, Antilles and Panama. However, it does not refer to certain countries such as Cyprus, Malta and Mauritius either as Tax Havens or as potentially harmful since their governments have committed themselves to eliminate harmful tax practices.

All such developments have a significant bearing upon structuring outbound investments. This is especially relevant in the context of setting up overseas investments through an apex holding company in a tax efficient jurisdiction.

Obviously, in a large number of cases, the setting up of an apex holding company is not tax driven, but any company investing outside would look at the locating the apex holding company in a tax efficient jurisdiction.

Transfer pricing
Transfer pricing is a key issue in an inbound investment situation. This is especially relevant to the pharmaceutical and information technology segment where transactions between the Indian holding company and the overseas subsidiary are quite common.

The current regulations relevant to transfer pricing in India are Section 92 which in essence, provides for adjustment to the income of a resident in the event of a non arms length relationship with a resident. One realises that from a tax standpoint, an adjustment to the income of a resident may not be relevant if the entire income is exempt for the Indian holding company (as could be the case where the Indian software exports are relevant to a STP).

However, this may not always be so. The above seeks to outline recent regulatory and tax issues impacting outbound investments. While one must appreciate the bold measures and considerable liberalisation manifested in FEMA - the crying need for clearance of an outbound investment proposed within a defined time frame (say 45 days) and the need for a clearly articulated policy to address the valuation issues should be paid attention to. (Concluded)