Developing countries like India need Foreign Direct Investments for the growth of their emerging markets and overall growth and development of the nation. This makes Cross-Border Investment a key player in this regard. But what is a Cross-Border Investment?

Cross-border investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.

In other words,

Investing in a company incorporated under the laws of another country either in the individual capacity by buying shares and/or debentures or in the capacity of a company by way of mergers and acquisitions and/or forming a new company or taking over an existing company etc.

The Foreign capital is seen as a way of filling in the gap between domestic savings and investment. One of the key factors for attracting foreign capital is the tax and regulatory environment, which has a direct bearing on the investment climate in the country.

Type of Cross-Border Investments

There are two type of Cross-Border Investments

  • Inward Investment
  • Outward Investment

An Inward Investment means an external or foreign entity either investing in or purchasing the ownership of an indigenous company. To elaborate the same “Inward Investment commonly known as Foreign Direct Investment occurs when instead of forming a new business, a foreign company acquires and/or merges with an existing company giving it a platform to grow and open border for international integration”.

On the other hand, an Outward Investment means “when a domestic firm expands its operations to a foreign country either via a Greenfield investment, merger/acquisition and/or expansion of an existing foreign facility.” To elaborate,” an Outward Investment commonly known as Outward Direct Investment occurs when a company has bloomed enough in the domestic market that now it is ready to open a new venture in foreign country and set up a base in the Foreign market”.

Who are eligible to make Cross-Border Investments?

Anybody from the following can do an Outward Investment in India

  • An Individual or a group of related Individuals
  • A Public Company
  • A Private Company
  • A Government Body
  • A Trust or Social Institutions.

In the case of Inward investment, the following can invest in India.

  • An NRI or an OCI
  • A non-resident, other than a citizen of Bangladesh or Pakistan or an entity incorporated in Bangladesh or Pakistan can invest in India, subject to the FDI policy except in those sectors/activities which are prohibited.
  • A company, trust and partnership firm incorporated outside India and owned and controlled by NRIs can invest in India with the special dispensation as available to NRIs under the FDI Policy

How to make an Investment?

The biggest question after understanding the basic idea of investing in a Foreign Country is how to make such an Investment. The different ways of investing in other countries are through,

  • Incorporating a subsidiary or a company which is owned by the original company
  • Acquiring shares in an associated enterprise
  • Through Mergers and Acquisitions with a local Company
  • Participating with an Equity Joint Venture with another investor and/or enterprise

Methods of Cross border investment

Investment (or financial commitment) in an overseas JV / WOS may be funded out of one or more of the following sources

  • Drawal of foreign exchange from an AD bank in India.
  • Capitalization of exports.
  • Swap of shares.
  • Proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs).
  • In exchange of ADRs/GDRs issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from time to time by the Government of India.
  • Balances held in EEFC account of the Indian Party.
  • Proceeds of foreign currency funds raised through ADR / GDR issues.

Factors to be kept in mind while doing cross border investment

Economic Conditions

As a Company when you chose to enter a foreign market, you need to study the economic condition of the market and be sure whether that you are going flourish by investing in that market or your investment is a total lost call i.e. if the market is ready to accept and invest into something new or it is too reluctant to accept the change and want to stick with the existing goods in the market.

Political and Legal Factors

Another very important factor is the attitude of nationals of a country towards foreign companies, foreign products and foreign citizens. Nationals of countries who have been dominated by foreign powers in the past are wary of anything foreign and may not be too open to accept the foreign investment in the country and may instead want to uplift the domestic products. Moreover, the Legal factor may vary country to country i.e. if one country does not levy too many legal formalities when it comes to foreign investment it may not be necessary, and other countries would do the same too.

Social and Cultural Factors

Every Country is different, and thus the people will react differently to different things i.e. a new product appreciated and welcomed by the people of one country may not be welcomed the same way by another. When it comes to investing understand the social and cultural factor of a market is very important because understanding the culture followed by people gives you an idea if the investment is going to be fruitful or no.

Market Attractiveness

The attractiveness of a market can be assessed by evaluating the market potential in terms of revenues that can be generated, access to the market in terms of the host country being warm to investments by multinational companies, and potential competition and dynamics of the industry in the prospective market. A big market with a rapid rate of growth can be very attractive, and a big upfront investment can be justified in such a market. Lack of entrenched competitors and stability in the type and number of competitors add to the attractiveness of the market.

Capability of the Company

The last and the most important factor is the capability of the company to invest in such a market. Before a company decides to go global, it should conduct an audit of its resources and capabilities. The Company should have clear competitive advantages in terms of market knowledge, technology, the portfolio of products, reliable partners and other relevant parameters, failing which the Company can face a big loss in a foreign market or may end up bearing such losses that the standing of a company in the domestic market may also suffer.

Ranjith

Dilzer Consultants Pvt Ltd

Reference: –

https://economictimes.indiatimes.com/small-biz/resources/startup-handbook/foreign-investment-compliance-under-rbi/fema/articleshow/59488429.cms?from=mdr

https://economictimes.indiatimes.com/news/economy/policy/legal-shield-in-the-works-for-foreign-investments/articleshow/64214579.cms?from=mdr

https://taxguru.in/income-tax/cross-border-transactions-investments.html

https://resource.cdn.icai.org/55675citax45044.pdf