FDI Policy - amendments · Foreign Direct Investment (FDI) inflow has registered a manifold growth 2000 All sectors placed on the Automatic ... SCHEDULE 2 – FII INVESTMENT - PIS

FDI Policy - amendments

May 7, 2011

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Sharath Rao, Gautham LokandeBMR & Associates

ICAI Study Circle meeting

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ICAI Study Circle meeting

Contents

• FEMA Structural framework• FEMA - Structural framework

• FDI Policy Circular and key aspects there underaspects there under

• Key policy changes in the last one yeary

• A close look at the policy in some of the key sectors

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Background

Foreign Exchange Management Act 1999 (“FEMA”) (Manual)

Relevant regulations

Foreign Exchange Management Act, 1999 ( FEMA ) (Manual)

FDI / SIA Manual (Press Notes) – now Consolidated FDI Policy Circulars

Industrial policy

FDI up to 100 percent is allowed under the automatic route in almost all

FDI policy

FDI up to 100 percent is allowed under the automatic route in almost all activities / sectors except the following:

Activities / items that require an Industrial Licence

Prior to April 1 2011 proposals in which the foreign investor has an existing

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Prior to April 1, 2011, proposals in which the foreign investor has an existing financial / technical collaboration in India in the ‘same’ field [Press Note 1(2005)] required approval

Foreign investment in sectors outside notified sectoral policy/caps

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Specified sectors / activities in which FDI is not permitted

FDI

Evolution of FDI policy over the last decade and a half

Progressive Liberalization

Pre- FDI was allowed selectively up to 40%One of the most transparent FDI policy in the world

The policy has been deregulated and lib li d

1991y p

under FERA

1991 35 high priority industry groups wereplaced on the Automatic Route for FDI upto 51%

liberalized

Fuelled by policy changes and simplification of procedures, the F i Di t I t t (FDI)

1997 Automatic Route expanded to 111 highpriority industry groups up to 100%/ 74%/51%/50%

Foreign Direct Investment (FDI) inflow has registered a manifold growth

2000 All sectors placed on the AutomaticRoute for FDI except for a small negativelist

Post Many new sectors opened to FDI; viz.,

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2000y p ; ,

insurance (26%), integrated townships(100%), mass rapid transit systems(100%), defence industry (26%), teaplantations (100%), print media (26%).S t l i th t

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Sectoral caps in many other sectorsrelaxed;

FOREIGN INVESTMENT INTO INDIA – SNAPSHOT

ForeignInvestments

Foreign Foreign Venture Investments onForeign DirectInvestments

Foreign PortfolioInvestments

Foreign VentureCapitalInvestments

Other Investments

Investments onnon-repatriablebasis

AutomaticRoute

GovernmentRoute FIIs NRIs,

PIOs

SEBI registered

FVCIs

G-Sec,NCDs, etc

NRIs,PIOs

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VCFs,IVCUs FIIs NRIs,

PIOs

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Who can invest in India?

Foreign Investmentsinto India

DirectInvestments

PortfolioInvestments

AutomaticRoute

GovernmentRoute FIIs FVCIsNRIs Other Foreign

InvestorsRoute Route Investors

Schedule 1 – FDI schemeSchedule 2

(PIS for FIIs) and

Schedule 5

Schedule 3 (PIS for

NRIs), Sch 4 (NRI

Schedule 6 (Investment

in VCUs)

Budget 2011 announcement

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(Investment by FIIs in

other securities

(investment on a non-

repatriation basis and 5 (Investment

in other

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*Schedules of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000

in other securities)

FOREIGN INVESTMENT INTO INDIA – REGULATIONS

• Foreign investment in Indian shares and other securities is governed by the Foreign Exchange Management (Transfer or Issue of Security by a Person R id t O t id I di ) R l ti 2000 (“TISPRO R l ti ”) f llResident Outside India), Regulations, 2000 (“TISPRO Regulations”) as follows -

Sub-regulation of the TISPRO

Description Schedule reference

Regulations5(1) Investment by foreign individuals (other

than citizens of Bangladesh and Pakistan) and foreign entities under the

Schedule 1

Pakistan) and foreign entities under the Foreign Direct Investment (“FDI”) Scheme

5(2) Investment by registered Foreign Schedule 2

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Institutional Investors (“FIIs”) under the Portfolio Investment Scheme

5(3)(i) Investment by a Non Resident India (“NRIs”) under the Portfolio Investment

Schedule 3

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( NRIs ) under the Portfolio Investment Scheme

FOREIGN INVESTMENT INTO INDIA – REGULATIONSSub-regulation of

the TIS Regulations

Description Schedule reference

5(3)(ii) Investment by NRIs other than the Portfolio Investment Scheme in shares and debentures of an Indian company on a non-repatriation basis

Schedule 4

5(4) Investment by NRIs and registered FIIsin securities, other than shares or convertible debentures

Schedule 5

5(5) I t t b i t d F i V t S h d l 65(5) Investment by registered Foreign Venture Capital Investors (“FVCIs”) in Indian venture capital funds or venture capital undertakings

Schedule 6

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5(6) Investment by registered FIIs in exchange traded derivative contracts

-

5(7) Investment by NRIs in exchange traded derivative contracts on non-repatriation

-

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derivative contracts on non repatriation basis

FOREIGN INVESTMENT INTO INDIA – REGULATIONS

• Schedule 1 of the TISPRO Regulations deals with foreign investment under the FDI Scheme

• The FDI Scheme, amongst other things, refers to two broad routes for investing in India – the Automatic Route and the Approval Route (discussed in the next slide)( )

• The investment under the FDI Scheme will also have to be in accordance with the FDI Policy notified by the Ministry of Commerce and Industry Government of IndiaIndustry, Government of India

• The current FDI Policy of the Government of India is contained in the Consolidated FDI Policy Circular dated April 1, 2011 (The Consolidated FDI P li Ci l i i l Ci l )

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FDI Policy Circular is a semi-annual Circular)

• Schedules 3 – 4 deal with investment by NRIs; Schedules 2, 5 & 6 route for other non-residents has been discussed later on

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SCHEDULE 1 – FDI SCHEME

No approvals required FDI in activities not covered Automatic route Approval route

The Indian company issuing shares and fully convertible instruments is required to

under the automatic routeAll proposals falling outside notified sectoral policy / caps

intimate the Reserve Bank of India (RBI) within 30 days of the receipt of inward

itt d i i d tremittances and is required to file certain documents with the RBI for issue of instruments to foreign investors

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foreign investorsMost sectors qualify under the automatic route (subject to sectoral limits)

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sectoral limits)

SCHEDULE 2 – FII INVESTMENT - PIS

• Schedule 2 of the TISPRO Regulations permits a FII (requires registration with the SEBI) to purchase and sell shares or convertible g ) pdebentures of a listed Indian company [the Portfolio Investment Scheme (“PIS”)]

• The above investment is subject to the limit of 10% holding by each FIIThe above investment is subject to the limit of 10% holding by each FII and overall holding of all FIIs in the concerned company not exceeding 24% (which limit can be increased to the sectoral caps)

FIIs can also invest as portfolio managers for managing the funds of a• FIIs can also invest as portfolio managers for managing the funds of a sub-account and investment can be made on behalf of foreign citizens and other foreign corporate bodies (investments can be made up to 5% of the paid-up equity capital of the investee company under this route)

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of the paid-up equity capital of the investee company under this route)

• The PIS route is a special investment route available to FIIs for investments in listed companies and investments under this route are not

bj t t th diti ib d d th FDI S h

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subject to the conditions prescribed under the FDI Scheme

SCHEDULE 5 – FII INVESTMENT• Schedule 5 of the TISPRO Regulations inter alia permits a SEBI

registered FII to invest (either by subscribing to a direct issue or by purchase from registered brokers) in listed Non-Convertible Debentures p g )(“NCDs”)/bonds issued by an Indian company, on a repatriable basis

• The above investment is subject to the overall limits prescribed by the Reserve Bank of India (“RBI”) and the Securities Exchange Board ofReserve Bank of India ( RBI ) and the Securities Exchange Board of India (“SEBI”) from time to time

• This is a special investment route available to FIIs and this Schedule is t d b th FDI S h f RE i t t ( ib d dnot governed by the FDI Scheme for RE investments (prescribed under

Schedule 1)

• For instance, there is no bar on investment in listed NCDs issued by

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ycompanies engaged in the real estate business and further even an unlisted private company is permitted to issue listed NCDs

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SCHEDULE 6 – FVCI INVESTMENT …• Schedule 6 of the TISPRO Regulations permits a registered Foreign Venture

Capital Investors (“FVCIs”) to apply to the RBI (through the SEBI) to invest in an Indian Venture Capital Undertakings (“VCUs”) or SEBI registered g ( ) gdomestic Venture Capital Funds (“DVCF”)

• The above investment can be made by way of purchase of equity/equity linked instruments/debt/debt instruments or debentures of a VCU or of a DVCF (subject to an FIPB approval) through IPO/private placement or of a scheme floated by a DVCF

• The FVCI can invest as per the RBI approval granted to it and in overallThe FVCI can invest as per the RBI approval granted to it and in overall compliance with the SEBI (FVCI) Regulations, 2000

• VCU is any Indian company (whose shares are not listed) that is not engaged in any sector falling under the negative list specified by SEBI

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engaged in any sector falling under the negative list specified by SEBI

• This is a special investment route available to FVCIs and this Schedule is not governed by the FDI Scheme for investments (prescribed under Schedule 1)

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Schedule 1)

SCHEDULE 6 – FVCI INVESTMENT• Based on the FVCIs approvals issued in the recent past, we

understanding that the approvals granted by RBI to FVCIs to invest in VCUs or DVCFs is subject to the condition (amongst other conditions) j ( g )that the investment is made in one of the nine sectors only as allowed by the RBI (for instance, real estate is not one of these sectors in which investment is permitted by RBI)

• We also understand that the RBI specifically prohibits a FVCI to invest in real estate or in companies engaged in real estate business

FVCI h i t i l t t t d S h d l 1 i• FVCIs however can invest in real estate assets under Schedule 1 in compliant with the FDI Scheme

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EXTERNAL COMMERCIAL BORROWINGS• Foreign debt/loan funding to the Indian companies is governed by the

External Commercial Borrowings (“ECB”) Policy

U d th ECB li f i l ( bj t t th i i• Under the ECB policy, foreign currency loans (subject to the minimum average maturity conditions, end-use conditions, etc prescribed) can be provided to the “real” sector, specified services sectors and specified infrastructure sectorsinfrastructure sectors

• ECBs are not allowed for the real estate sector

• ECBs are however allowed for “Industrial Parks” (under the automaticECBs are however allowed for Industrial Parks (under the automatic route) and to SEZ developers for infrastructure development within the SEZ (under approval from RBI)

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Clearance windows

Alternate clearance windows for FDI

Approval of Foreign No prior approval

Automatic Route Approval Route

Investment Promotion Board (FIPB), Ministry of Finance, Government of India

General permission of the

requirement

Reporting to RBI

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General permission of the RBI in case FIPB approval obtained

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FDI - Key Players

Player Role

Foreign Investment Promotion Board (FIPB) FDI proposals not covered under automatic route approved by the Minister of Finance

Cabinet Committee on Economic Affairs (CCEA)

FDI proposals exceeding Rs 1,200 crores(CCEA)Project Approval Board (PAB) Foreign technology collaboration

Secretariat of Industrial Assistance (SIA) Industrial LicensingDepartment of Industrial Policy & Promotion Policy wingDepartment of Industrial Policy & Promotion (DIPP), Commerce Ministry

Policy wing

Administrative Ministries Comments on sector specific proposals

R B k f I di (RBI) E h t l l ti d

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Reserve Bank of India (RBI) Exchange control regulations and proposals in the financial services sector

SEBI Monitoring FVCI/FII activity among other things

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things

DIPP AND FIPB

Role of DIPPForms part of Ministry of Commerce & I d tIndustry

FDI Policy Circulars

Bulletin Board

For details:

www.dipp.nic.in

Clarifications

SIA Newsletter

Role of FIPBRole of FIPBForms part of Ministry of Finance

Considers applications under approval route For Agenda and list of approved cases:

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Meetings every 2-3 weeks

Handbook of FIPB decisions (FIPB Review 2009 was issued)

approved cases:

http://finmin.nic.in/fipbweb/fipb/webpage.asp

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)

FIPB

Ministry of FinanceAdministrative

Mi i t i

Ministry of Commerce & Industry

Chairman of FIPB & Secretary, Department

f E i Aff i

FIPB Unit

Secretary, Department of

Ministries Secretary, DIPP

of Economic Affairs

Additional Secretary OSD

Department of Commerce

Co-opt

Joint Secretary

y

Secretary, Economic

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Director (FIPB Unit)

Administrative Ministries

Relations, MEA

Secretary, Ministry of Overseas Indian

Affairs

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Ministries

APPROVAL PROCESS

Preparation of applicationPlain paper format

1 FilingE-filing2

Internal referralAdministrative Ministries

3

Plain paper format

Prescribed checklist

New guidelines

Reason for seeking

Ministries

DIPP (if policy issue)

Reason for seeking approval

New versus Amendment case Processing

F ll / ti ith

4ListingAgenda on FIPB website

5

Authorization Follow-up / meetings withFIPB

Administrative Ministries

DIPP (if li i )

Meetings every 2-3 weeks

CommunicationA l

7

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DIPP (if policy issue)

Addressing any queriesMeetingApproval

Deferral

6

“On-file” – no listing in this case

Approval

Rejection

Internal guidelines -notifying applicant of

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Rejection in this casey g ppstatus within 45 / 30 days

Which form of organizations can attract FDI?

Indian companies;

Partnership firms and proprietorship concerns p p p p

NRI / PIO on a non-repatriation basis subject to certain conditions and

exceptions

NRI / PIO on repatriation basis with prior RBI and Government approval

Other non-residents with prior RBI and Government approval

Venture Capital Funds (if company form)Venture Capital Funds (if company form)

Trusts – Not permitted (other than venture capital funds, with

Government approval)

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Government approval)

Other entities – Not permitted

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Where can’t they invest?Retail trading (except single brand product retail – discussion paper on FDI in multi-brand

retail released)

Chit fund / Nidhi companyChit fund / Nidhi company

Lottery business

Gambling and betting including casinos, etc

A i lt ( l di fl i lt h ti lt lti ti f t bl d t ll d

foreign technology collaboration in any form including licensing for franchise, trademark, brand name, etc also prohibited

Agriculture (excluding floriculture, horticulture, cultivation of vegetables under controlled

conditions, development and production of seeds and planting materials, animal

husbandry, pisciculture, aquaculture and services related to agro and allied sectors)

Trading in Transferable Development Rights

Real estate business or construction of farm houses

Manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or tobacco

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substitutes

Activity / sector not open to private sector investment including atomic energy and railway

transport (other than Mass Rapid Transport Systems)

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transport (other than Mass Rapid Transport Systems)

Where can they invest? – Automatic route (Illustrative)

NBFC Activities*

Insurance

100 percent

26 percent

Hotel & Tourism 100 percent

Test marketing 100 percent

49 percentTelecommunications

Housing & Real Estate 100 percent

C l & Li it 100 t

Films 100 percent

Pollution control 100 percent

S i l E i Z 100 tCoal & Lignite

100 percent ….

Wholesale cash and carry trading

100 percent

P 100 t

Special Economic Zones 100 percent

Any other sector….

100 tMi i

100 percent…

Power 100 percent

Drugs & Pharma 100 percent

100 percentMining

Townships/Housing

100 percent

Mass Rapid Transport S

100 percent

E-commerce

100 percent

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…. Systems ..

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Where can they invest? – Approval route

Petroleum sector (by PSUs)Investing companies in Infrastructure and service sectorDefence and strategic industriesAtomic mineralsPrint mediaBroadcasting Postal servicesCourier servicesCourier servicesEstablishment and operation of satelliteTea sector

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Asset reconstruction companyPrivate and Public sector bankingSingle brand retailing

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g gTelecom (beyond 49%)

What instruments can they acquire?

Equity shares – fully paid (automatic) versus partly paid (FUPB approval)

Fully and compulsorily convertible preference sharesy p y p

Fully and compulsorily convertible debentures

Foreign Currency Convertible Bonds (FCCB)

American Depository Receipts / Global Depository Receipts

Warrants (FIPB approval)

Units of a venture capital fund

Other instruments - NO

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FDI POLICY CIRCULAR

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FDI POLICY CIRCULAR - INTENT AND OBJECTIVE

To consolidate all prior policies/regulations on FDI contained in FEMA, RBI Regulations and Press Notes/Press Releases/Clarifications issued by DIPP

All h li i M h 31 2010 t d i d d d b d iAll such policies as on March 31, 2010 stand rescinded and subsumed in the present Circular

To provide a transparent, and simple policy framework to reduces regulatory b rdenburden

Circular only a compilation and comprehensive listing of most matters on FDI and does not intend to make changes

Circular to be updated every six months (next circular to be issued on September 30, 2011)

While Circular consolidates FDI policy, legal edifice is built on notifications

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issued by RBI under FEMA

Circular grandfathers past actions undertaken under the rescinded Press Notes/Press Releases/Clarifications

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DIRECT AND INDIRECT FDI DOWNSTREAMFDI, DOWNSTREAM INVESTMENT AND INVESTMENT IN SECTORS HAVING CAPS

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SALIENT FEATURES

Foreign Direct Investment (FDI) means investment by non-resident entity/person resident outside India in the capital of the Indian company under Schedule 1 of FEM

Definition of FDI (Para 2.1.12)

p p y(Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000

D fi iti f it l (P 2 1 5 )Means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures

Instruments such as warrants and partly paid shares can be issued to a person

Definition of capital (Para 2.1.5 )

Instruments such as warrants and partly paid shares can be issued to a person resident outside India with approval from FIPB (Allowed in the Oct 2010 Policy Circular – before that this was not allowed)

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rvedInward remittances received via Depository Receipts and Foreign Currency

Convertible Bonds would also qualify as FDI

Also included in FDI

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WARRANTS - FIPB CASESSome cases on warrant issuance dealt by FIPB in the interim (between Apr 2010 – Sep 2010)

Case Application Status

GPT Infraprojects Ltd Ex-post-facto approval for warrants already issued. The ApprovedGPT Infraprojects Ltd Ex post facto approval for warrants already issued. The company is engaged in the business of acting as manufacturers, exporters, importers, dealers and agents of concrete and pre-stressed concrete products

Approved

Hindustan Tin Works Ltd Ex-post facto approval for issuance of warrants Approved

M/s Housing Development and Infrastructure Limited, Mumbai

To issue warrants to undertake the business of real estate development

Approved

M/s Flagship Infrastructure Pvt. Ltd., Mumbai

Ex-post-facto approval for warrants Deferred (Additional information sought by Revenue Department)

M/s Advanta India Limited, Hyderabad

To issue and allot Rights Equity Shares, CCPS and Warrants to carry out development of research, development, production, distribution and marketing of hybrid agricultural field crop seeds and plant seed

Rejected

B d l i f i f ti il bl d t d th t FIPB i i f

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Based on analysis of information available, we understand that FIPB is approving cases of conversion of warrants if – convertible within 12 months and 25% of the consideration is brought upfront

For listed companies SEBI ICDR guidelines prescribe 18 months period for conversion it is

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For listed companies, SEBI ICDR guidelines prescribe 18 months period for conversion – it is possible to argue that for listed companies FIPB should permit 18 months

Calculation of direct and indirect foreign investment in Indian companies

Downstream investments by Indian companies

Transfer of ownership or control of Indian companies

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EARLIER POLICYEarlier foreign investment policy (prior to PN 2 2009) specified the manner for calculating indirect foreign holding only for the following sectors:

Telecom / Broadcasting [Press Note 5 (2005 series) / Press Note 3 (2007 Series) d P N 1 (2006 i )] P i h d d f i di f iand Press Note 1 (2006 series)]: Proportionate method used for indirect foreign

investment

Example: If A (foreign company) holds 40% in B (Indian company) and the latter holds 70% in C (operating company in telecom / broadcasting sector), the indirectholds 70% in C (operating company in telecom / broadcasting sector), the indirect foreign investment by A in C would be 40% of 70%, ie 28%

Infrastructure / service [Press Note 7 (2008 series)]: Indirect foreign investment not to be counted, provided the foreign investment in investing company does not

d 49% d th t f th i ti i ith th I diexceed 49% and the management of the investing company is with the Indian owners

Example: In the above example, if C is an operating company in the infrastructure / service sector, the indirect foreign investment by A in C would be Nil

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service sector, the indirect foreign investment by A in C would be Nil

Insurance: Governed by the IRDA regulationsFurther, under the earlier policy, foreign investment ceilings were understood to include only Foreign Direct Investment (FDI) except in some specified sectors (such as telecom, banking etc), where

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composite caps have been prescribed for FDI and FII

Para 4 of the FDI Policy Circular

Lays down uniform principles for calculation of total foreign investment in Indian companies for all sectors, except sectors governed under specific statutes (ie insurance sector)statutes (ie insurance sector)

Total Foreign Investment = Direct Foreign Investment + Indirect Foreign I t tInvestment

For computing indirect foreign investment, “foreign investment” is p g g gdefined to include FDI, investment by FIIs, NRIs, ADRs, GDRs, FCCBs and convertible preference shares (made under schedule 1,2,3,6 of FEMA Regulations)

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preference / CCD investment into another company (now removed in

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the Apr 2011 Circular)

Para 4 of the FDI Policy CircularScenario 1 – Direct foreign investment

F Co

Outside IndiaX%

IndiaCounted as foreign

investment

Op Co

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Para 4 of the FDI Policy CircularScenario 2 – No indirect foreign investment, if Inv Co is owned and controlled by residents

F CoF Co

Outside India<50% and not

controlled by F Co

Inv Co

N t t d

India

Op Co

Not counted as foreign investment

X%

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Scenario 3A – Counted as indirect foreign investment, if Inv Co is owned or controlled by F Co

F CoF Co

Outside India>50% or controlled by

F Co

Inv Co

X% t d

India

O C

X% counted as indirect

foreign investment

X%(<100%)

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Op Co

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Para 4 of the FDI Policy CircularScenario 3B – Exception to Scenario 3A in case Op Co is a wholly owned subsidiary (Para

4.1.3)

F CoF Co

Outside India75%

Inv Co

India

WOS

75% counted as indirect

foreign investment

100%

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WOS

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The prescribed methodology of calculation to apply at every stage of investment in Indian C i d th t h d I di C F ll i i ill t ti

Other key points

Companies and thus to each and every Indian Company. Following is an illustration:

F Co

>50% or controlled by

Inv Co

Outside India

India

>50% or controlled by F Co

Op Co

Inv CoX% counted as indirect foreign

investmentX%

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Op Co

Op Co 1

Y% counted as indirect foreign

investment?

Y%

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Op Co 1 investment?


In sectors having sectoral caps, balance equity beyond the sectoral foreign

Other key points

cap would specifically be beneficially owned by / held with resident Indian citizens and Indian companies, owned and controlled by resident Indian citizens

In the Information & Broadcasting and Defense sectors, where sectoral cap for foreign investment is less than 49 percent, it is provided that

the company would need to be ‘owned and controlled’ by resident I di iti d I di i hi h d d t ll dIndian citizens and Indian companies, which are owned and controlled by resident Indian citizens; and

the equity held by the largest Indian shareholder would have to be at l t 51 t f th t t l it l di th it h ld b P bli

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least 51 percent of the total equity, excluding the equity held by Public Sector Banks and Public Financial Institutions

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For the purpose of seeking approval, full details about the foreign investment like ownership and control information is required to be

Other key points

investment like ownership and control information is required to be furnished to the Government

In case of foreign investment in any sector / activity requiring Government approval any inter se agreements if any between / amongst shareholdersapproval, any inter-se agreements, if any, between / amongst shareholders which have an effect:

on the appointment of the Board of Directors; or

on the exercise of voting rights; or

of creating voting rights disproportionate to shareholding; or

any incidental matter thereof

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any incidental matter thereof

will be required to be furnished to the approving authority

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Example of a situation where the new guideline could have a favourable effect

Broadcasting sector (Cable Network) – 49% cap

F C

Outside India30% 49%

F Co

India

70%Op Co Inv CoHistorical – 64%

[30% + (49% of 70%)]N 30%

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New – 30%

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Example of a situation where the new guideline would have an unfavourable effect

Telecom sector – 74% cap

F C

Outside India30% 60%

F Co

India

70% Historical – 72%[30% + (60% of 70%)]

N 100%Op Co Inv Co

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New – 100%

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Case As per erstwhile PN 2 of 2009:

Foreign Investment in Indian company shall include all types of foreign investments i e FDI; investment by FIIs(holding as on March 31);

F Co

investments i.e. FDI; investment by FIIs(holding as on March 31); NRIs; ADRs; GDRs; Foreign Currency Convertible Bonds (FCCB); fully, compulsorily and mandatorily convertible preference shares and fully, compulsorily and mandatorily convertible Debentures…...

Indian Promoters

Outside IndiaIndia

90,000 CCPS convertible into 5,000

equity share For this purpose, an Indian company may be taken as being:

“owned” by resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, if more than 50% of the equity interest in it is beneficially owned by resident

A Co

Promoters

10,000 equity shares 50% of the equity interest in it is beneficially owned by resident

Indian citizens and Indian companies, which are owned and controlled ultimately by resident Indian citizens;

Consolidated FDI Policy – Circular No 2

Whether A Co is an Indian Owned Co [33% foreign ownership] or a

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A company is considered as 'Owned’ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or Indian companies, which are ultimately owned and controlled by resident Indian citizens

Foreign Owned Co [90% foreign ownership]

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EARLIER POLICY

An Indian company with foreign investment previously required prior approval of FIPB to be categorized as a ‘Holding company’ or ‘Operating-cum-Holding company’

Relevant press notes were Press Note 3 (1997 series) and Press Note 9 (1999Relevant press notes were Press Note 3 (1997 series) and Press Note 9 (1999 series)

Press Note 3 (1997 series) – Relevant extract:

“FIPB may consider and recommend proposals for 100 per cent foreign ownedFIPB may consider and recommend proposals for 100 per cent foreign owned holding/subsidiary companies based on the following criteria:

(a) where only "holding" operation is involved and all subsequent/downstream investments to be carried out would require prior approval of the Government”

Press Note 9 (1999 series)

It permitted foreign owned Indian holding companies to make downstream investment in Annexure III activities, which qualify for Automatic Approval subject to

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specified conditions, including the condition that downstream investments may be made within foreign equity levels permitted for different activities under the automatic route

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Para 4.6 of the FDI Policy Circular‘Guiding principle’ – only as much can be done by way of indirect foreign investment through downstream investment as can be done through direct foreign investment (this guiding principle is missing in the Apr 2011 Circular)

I th d d t i t t b i ‘ d’ ‘ t ll d’ bIn other words downstream investment by companies ‘owned’ or ‘controlled’ by non-resident entities will require to follow the same norms as applicable to direct foreign investment

‘Downstream investment’ means indirect foreign investment by one Indian companyDownstream investment means indirect foreign investment by one Indian company into another Indian company by way of subscription or acquisition in terms of erstwhile Press Note 2 (2009 Series)

‘Investing company’ means an Indian company holding only investments in another I di di tl i di tl th th f t di f h h ldi /Indian company, directly or indirectly, other than for trading of such holdings / securities (concept removed in the Apr 2011 Circular)

‘Operating Company’ is an Indian company which is undertaking operations in various economic activities and sectors (concept removed in the Apr 2011 Circular)

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( p p )

The new guidelines provide the Downstream investment norms for (a) only Operating Companies (b) Operating-cum-investing companies (c) only Investing Companies (d) Companies having no operations and no downstream investments (language

d i th A 2011 Ci l )

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removed in the Apr 2011 Circular)

Para 4.6 of the FDI Policy CircularCase 1 – Company having only operations

F Co

Outside India

India

Investment in Op Co would Op Co

phave to comply with the

relevant sectoral conditions and caps and Press Note 3

(2009)

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Para 4.6 of the FDI Policy Circular

F Co

Case 2 – Company having operations and investing in other companies

F Co

Outside India>50% or controlled

by F Co

Op-Inv Co

IndiaNo approval required for investing in Op-Inv Co,

subject to erstwhile Press Note 3 (2009) and

Ind Co

( )satisfaction of sectoral

conditions / capsInvestment in Op-Inv Co and

Ind Co should comply with the respective sectoral conditions

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respective sectoral conditions and caps

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F Co

Case 3A – Company having only investing activity

F Co


by F Co

Inv Co

India

Government / FIPB approval required

Ind CoInvestment in Ind Co should

comply with the relevant sectoral conditions and

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caps

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F Co

Case 4 – Company having no operations

F Co


by F Co

Non-Op Co

India

Government / FIPB approval required

Ind Co

Non Op CoIf operates or invests, should comply with the

relevant sectoral conditions and caps

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Ind Co

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Para 4.6.4.2 of the FDI Policy Circular

Other Conditions

For Operating-cum-investing companies, Investing Companies and companies having no

Such company is to notify Secretariat for Industrial Assistance (SIA), DIPP and FIPB of its downstream investment within 30 days of such investment even if equity shares /

operations and no downstream investments, Downstream investments can be made subject to the following conditions:

y q yCompulsory Convertible Preference Shares (CCPS) / Compulsory Convertible Debentures (CCD) have not been allotted along with the modality of investment in new / existing ventures (with / without expansion programme)

Downstream investment by way of induction of foreign equity in an existing Indian companyDownstream investment by way of induction of foreign equity in an existing Indian company to be duly supported by a resolution of the Board of Directors supporting the said induction as also a Shareholders’ Agreement, if any

Issue / transfer / pricing / valuation of shares shall be in accordance with applicable SEBI / RBI guidelines

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RBI guidelines

Investing Companies would have to bring in requisite funds from abroad and not leverage funds from domestic market for such investments. This would, however, not preclude downstream operating companies to raise debt in the domestic market. Also, the internal

l b d f th f d t i t t ( t itt d i

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accruals can be used for the purpose of downstream investment (was not permitted in the Apr 2010 Circular)




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Para 4.2.2 of the FDI Policy Circular

In sectors with caps, Government approval / FIPB approval would be required in all cases where:

An Indian company is being established with foreign investment and is owned orAn Indian company is being established with foreign investment and is owned or controlled by a non-resident entity

Ownership or control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or

t ll d b id t I di iti ill b /i b i t f d/ d tcontrolled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares to non-resident entities through amalgamation, merger, acquisition etc

‘Foreign investment’ shall include all types of foreign investments ie FDI, investmentForeign investment shall include all types of foreign investments ie FDI, investment by FIIs, NRIs, ADRs, GDRs, FCCBs and convertible preference shares. The definition of ‘owned’ and ‘controlled’ is consistent with Press Note 2 (2009 series) discussed above

Th id li ld t b li bl h th f i i t t

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These guidelines would not be applicable where there are no foreign investment caps, that is, 100 percent foreign investment is permitted under the automatic route

The above cases have been diagrammatically represented in the subsequent slides

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g y p q


F Co

Situation 1 – New company established with foreign investment

F Co

Outside India

>50% or controlled by F Co

Ind Co

India

Would operate in a sector with

FDI cap

Requires Government / FIPB approval

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Outside IndiaIndia

Situation 2 – Transfer of shares to non-resident in case of an existing company

Share transfer through amalgamation, merger,

acquisition

Requires Government / FIPB approval

F CoInd Co

>50% or controlled by Ind Co

Control or ownership of X Co gets

transferred to F Co

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X Co

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OTHER SALIENT FEATURES

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SALIENT FEATURES

FDI is not permitted in Trusts, except Venture Capital Funds registered with SEBI

Foreign Vent re Capital In estor (FVCI) ma contrib te 100 percent in Indian

Trust / Venture Capital Fund (Para 3.3.3)

Foreign Venture Capital Investor (FVCI) may contribute 100 percent in Indian Venture Capital Undertaking and may also set up a domestic asset management company to manage the funds (automatic route)

SEBI registered FVCI can also invest in Domestic Venture Capital Fund registered g p gwith SEBI, subject to RBI regulations and FDI policy

In case the entity undertaking venture capital fund activity is a trust registered under the Indian Trust Act, 1882, FDI would be permitted under the approval route (specifically clarified in the Apr 2011 Circular)(specifically clarified in the Apr 2011 Circular)

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SALIENT FEATURES

FIIs are permitted to invest in the capital of an Indian company either under the FDI scheme or under the Portfolio Investment Scheme

Foreign Institutional Investors (Para 3.1.4)

scheme or under the Portfolio Investment Scheme

The 10 percent individual limit and 24 percent aggregate limit for FII investment would be applicable for FII investment under PIS (this limit could be increased to the sectoral cap/ceiling after approval from the Board of Directors and Shareholders’

l th h i l l ti ) FDI/PIS l ti i t t t b ithiapproval through a special resolution) – FDI/PIS cumulative investment to be within caps (clarified in the Apr 2011 Circular – as per Sep 2010 Circular, 10%/24% limits applied even if FIIs invested under the FDI Scheme)

Valuation norms (Para 3.2.1)

Under the present FDI policy, Indian companies can issue equity shares / convertible preference shares or debentures to non residents subject to valuation norms prescribed under FEMA

Valuation norms (Para 3.2.1)

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Pricing/formula of the instruments should be decided upfront at the time of issue of these instruments, however that the conversion price should not be lower than the price prevailing at the time of issue of the convertible instruments) (formula based conversion was allowed in the Apr 2011 Circular)

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p )

Convertible instruments – pricing

Scenario I : Indian company does wellPrice as per AmountDCF price at the time of issue of convertible instruments 15

FMV prevailing at the time of conversion (this is the agreed formula) 20

Actual conversion price 20

C li ith i i YES

Scenario II : Indian company does bad

Compliance with pricing YESPromoter protection YES

Price as per AmountDCF price at the time of issue of convertible instruments 15

FMV prevailing at the time of conversion (this is the agreed formula) 12

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Forced conversion price 15

Compliance with pricing YESForeign investor protection NO

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Revised pricing guidelines for transfer of shares 1/5

Transfer by way of sale of shares of an Indian company by a Resident to a Non-resident (R to NR)

Old provisions (pre May 2010) Revised provisionsa)For shares listed on a recognised stock exchange

Price should not be less than the Price shall not be less than the price ruling market price at which a preferential allotment of

shares can be made under the SEBI Guidelines

b) F li t d hb) For unlisted sharesPrice should not be less than fair value of shares arrived at and certified by a Chartered

Price should not be less than the fair value determined and certified by a SEBI registered Category I

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certified by a Chartered Accountant as per guidelines issued by the erstwhile Controller of Capital Issues

a SEBI registered Category – I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method

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Transfer by way of sale of shares of an Indian company by a Non-resident to a Resident (NR to R)

Old i i ( M 2010) R i d i iOld provisions (pre May 2010) Revised provisionsa) For shares listed on a recognised stock exchange

• If effected through a SEBI registered merchant banker or a stock broker registered with the stock

Price shall not be more than the price at which a preferentialbanker or a stock broker registered with the stock

exchange – At the prevailing market price• Otherwise – the price arrived at by taking the

average quotations (average of daily high and low) f k di th d t f li ti ith

price at which a preferential allotment of shares can be made under the SEBI Guidelines

for one week preceding the date of application with 5 per cent variation.

• Where shares are sold by the foreign collaborator / promoter of the Indian company to the existing

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promoters in India with the objective of passing management control in favour of the resident promoters – a price which may be higher by up to a ceiling of 25 % over the price arrived at as

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above.


Transfer by way of sale of shares of an Indian company by a Non-resident to a Resident:

Old provisions (pre May 2010) Revised provisionsb) For thinly traded or unlisted shares

• If the consideration does not Price should not be more than the exceed Rs 20 lakh: (i) at a price mutually agreed to between the seller and the buyer and (ii) on submission of

fair value determined and certified by a SEBI registered Category – I Merchant Banker or a Chartered Accountant as per the discountedbuyer and (ii) on submission of

a certificate from the statutory auditors of the Indian company

Accountant as per the discounted free cash flow method

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Transfer by way of sale of shares of an Indian company by a Non-resident to a Resident:

Old i i ( M 2010) R i d i iOld provisions (pre May 2010) Revised provisionsb) For thinly traded or unlisted shares

• If the consideration exceeds Rs 20 lakh: at a price arrived at in any of

Price should not be more than the fair value determined and certified by a SEBIlakh: at a price arrived at in any of

the following manner:- Higher of price based on EPS linked to the PE multiple; or

value determined and certified by a SEBI registered Category – I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method

- prevailing market price in small lots as laid down by RBI; or - Lower of the independent valuations of the statutory auditor

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of the company or by a SEBI registered Category – I Merchant Banker or a Chartered Accountant

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Issues / comments

Projection of future cash flowsj

Projections in the case of loss making / defunct companies

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Pricing and tax issues 1/1

Scenario I : Transfer by a Non-resident to a ResidentPrice as per AmountDCF [As per FEMA pricing guidelines] 80

Actual transaction price 80

As per FMV rules [Section 56(2)] 85

Scenario II : Transfer by a Resident to a Non-resident

Difference (income for the resident) 5

Price as per AmountDCF [As per FEMA pricing guidelines] 80

A t l t ti i 83

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Actual transaction price 83

As per FMV rules [Section 56(2)] 75

No income to NR

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WHOLESALE CASH AND CARRY

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FDI up to 100 percent is permitted for ‘Cash and Carry Wholesale Trading’

It means “sale of goods and merchandise to retailers industrial commercial

Meaning (Para 5.2.24.1.1)

It means sale of goods and merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. Wholesale trading would, accordingly, be sales for the purpose of trade, business and profession, as opposed to sales for the purpose of internal consumption”of internal consumption

The test would be the type of customers to whom the sale is made and not the size and volume of sales

It includes resale processing and thereafter sale bulk imports with export / exIt includes resale, processing and thereafter sale, bulk imports with export / ex bonded warehouse business sales and B2B e-Commerce

Earlier specific clarification provided

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Sale of goods/merchandise to retailers, industrial, commercial institutions, professional business users, wholesalers and other related subordinate services

Local purchase from contract manufacturer and onward sale of these products to

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wholesalers, distributors, retailers, institutions, corporate houses, etc


Requisite licenses / registration / permits should be obtained

E t i f l t G t l d b h l l ld lif

Guidelines (Para 5.2.24.1.2)

Except in case of sales to Government, sales made by wholesaler would qualify as cash and carry wholesale trading only when sales are made to the following entities:

Entities holding sales tax / VAT / excise / service tax registration

E titi h ldi t d liEntities holding trade license

Entities holding permits / license for undertaking retail trade

In case of self consumption, institutions having certificate of incorporation or i t ti i t bli t tregistration as a society or as public trust

Full records indicating all the details of such sales should be maintained on a day to day basis

Wh l l t di f d ithi th i i itt d id d

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Wholesale trading of goods within the same group companies is permitted providedSuch trade does not exceed 25 percent of the total turnover of the wholesale venture

Internal use condition left out in the Oct 2010 Policy Circular

Wh l l t d t t il h t ll t th di tl

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Wholesale trader cannot open retail shops to sell to the consumer directly

Sector specific omissions

• Warehousing (100% automatic route) (para 5.8 of the Apr 2010 Circular) since left out in the Oct 2010 CircularApr 2010 Circular) since left out in the Oct 2010 Circular

• Trading for Exports (para 5.2.24.2 of the Oct 2010 Circular) under the automatic route since left out in the Apr 2011 Circular

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THEREFORE COVERED UNDER THE AUTOMATIC ROUTE?

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Wholesale trading – some indicators

Group firm tag if affiliate stake above 26 Percent

• No definition of what is “group company” - Government expected to define theNo definition of what is group company Government expected to define the term ‘group company’ clearly to remove the confusion in the foreign investment policy regarding restrictions on sales by wholesale cash and carry companies to related firms (not yet defined in Apr 2011 Circular)

• The new definition could be based on the one given in the foreign trade policy and the Competition Act, which says a company with more than 26% investment by another company will be considered a group company of the latter

• The DIPP (the policy making body on foreign investment) is expected to go with the definition of the group company in the foreign trade policy and the Competition Act, as per press reports

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• The new definition has implications for wholesale cash and carry ventures such as Bharti Wal-Mart, Tata-Tesco and Future group -Carrefour , which may have to rejig their holding structures to be able to conduct business

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their holding structures to be able to conduct business

Wholesale trading – some thoughts• Bharti Retail is a 100% subsidiary of Bharti Enterprises. Bharti Enterprises and

Wal-Mart have a 50:50 wholesale venture, Bharti Wal-Mart. If 26% rules are introduced, Bharti Retail and Bharti Wal-Mart will be considered group

i i iti th t i ti ti d i th FDI licompanies, inviting the restrictions mentioned in the FDI policy

• This means Bharti Wal-Mart cannot have more than 25% of its sales going to Bharti Retail

• The government had, in April 2010, put these restrictions to preclude indirect entry of foreigners in multi-brand retail. The current policy prohibits foreign direct investment in multi brand retail but allows 100% foreign investment indirect investment in multi-brand retail, but allows 100% foreign investment in wholesale trade

• After intense lobbying and several industry representations, the Government

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had recently (Oct 2010) removed the condition that sales to group companies must be for internal use. The 25% clause, however, still remains, making the policy extremely restrictive. These restrictions could, however, become redundant if the government decides to open multi-brand retail to foreign

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redundant if the government decides to open multi brand retail to foreign investment

General clarifications/ amendments

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FCCB’s – Oct 2010 Circular

Inward remittances received via Depository Receipts and FCCBs would alsoInward remittances received via Depository Receipts and FCCBs would also

qualify as FDI [prior to Apr 2010, FCCB’s were considered as equity only

upon conversion] p ]

FCCB’s are upfront subject to end use restrictions as applicable to ECB

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Downstream investments – Oct 2010 Circular

Downstream investments are now permissible through use of internalDownstream investments are now permissible through use of internal

accruals under automatic route

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View adopted by FIPB in case of downstream investments through internal accruals

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General clarifications/ amendmentsTransaction

A Co and B Co are wholly owned subsidiaries of F Co

Whether investment by A Co in B Co through RedeemableF Co Whether investment by A Co in B Co through Redeemable Preference Shares/ Non Convertible Preference Shares would be considered as ‘downstream investments’ and/ or subject to ECB guidelines?

F Co

100%Outside India

India

FIPB clarification obtained

PN 9 of 1999 – Transaction not a ‘downstream investment’ in terms of PN 9 of 1999 and not subject to ECB guidelines

A Co B Co

A Co. invests in B Co. through RPS/ NCPS

PN 2 & 4 of 2009 - Transaction not a ‘downstream investment’ in terms of PN 2 of 2009. However for applicability of ECB guidelines, FIPB advised to refer the matter to MoF (RBI)

X Co Pvt Ltd

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X Co Pvt Ltd

FIPB held that ‘downstream investment’ through internal accruals is not permitted through RPS and the same, if allowed, would be subject to ECB guidelines – hence,

Will a loan from 100% foreign

owned company to an Indian Company

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approved the investment in the form of CCPSqualify as an ‘ECB’

General clarifications/ amendmentsShare swaps - Oct 2010 Circular

Earlier there was no explicit policy – guidance was obtained from FDI Manual which stated:Manual which stated:

Issue of equity to non-residents against other modes of FDI inflows or in kind is not permissible, except issue of equity shares against lump-sum fee and royalty payable for technology collaborations and external commercial borrowings (ECBs) in convertible foreign currency which are permitted under the automatic route subject to meeting all applicable tax liabilities and sector specific guidelines

In Circular No 2 of Oct 2010, DIPP has introduced a specific clause permitting share swap transactions with prior approval of FIPBpermitting share swap transactions with prior approval of FIPB

Valuation of shares [irrespective of the amount] to be undertaken by Category 1 merchant banker registered with SEBI or a registered investment banker in the host country

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banker in the host country

In case of outbound investments of less than USD 5 million, RBI prescribes for CA valuation and above that a Merchant Banker valuation. In case of inbound investment DIPP prescribes for DCF valuation by a CA

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inbound investment, DIPP prescribes for DCF valuation by a CA


Share Premium - Oct 2010 Circular

For sectors with minimum capitalization norms [such as NBFC, real estate],For sectors with minimum capitalization norms [such as NBFC, real estate],

it has been clarified that share premium received would be counted as part

of minimum capitalization requirement [any amount paid in a secondary

transaction will not be considered as a premium for the purpose of minimum

capitalization]

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Sector specific clarifications/ amendments

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Sector specific clarifications/ amendments

Construction – Development activities

100% FDI is allowed under the automatic route in townships, housing, built i f t t d t ti d l t j t bj t t t iup infrastructure and construction development projects subject to certain

guidelines

Present FDI policy vide Press Note 2 (2005 series) envisages obligations on in estor in relation to restriction on sale of nderde eloped plots andinvestor in relation to restriction on sale of underdeveloped plots and obtaining all statutory approvals – Now this obligation would also lie on the investee company in addition to the investor

Earlier policy vide PN 2 of 2005 Original investment cannot be repatriatedEarlier policy vide PN 2 of 2005 - Original investment cannot be repatriated before a period of three years from completion of minimum capitalization

Change introduced vide Circular No 2 (Oct 2010): "Original investment" has been clarified to mean the entire amount brought in as FDI Further the

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has been clarified to mean the entire amount brought in as FDI. Further, the lock-in period of three years will be applied from the date of receipt of each installment / tranche of FDI or from the date of completion of minimum capitalization, whichever is later

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Sector specific clarifications/ amendmentsAs per PN 2 of 2005 - Original investment cannot be repatriated before a period of three years from completion of minimum capitalization

As per consolidated FDI policy (Oct 2010) - Original investment has been clarified to mean the entireAs per consolidated FDI policy (Oct 2010) - Original investment has been clarified to mean the entire amount brought in as FDI. Further, the lock-in period of three years will be applied from the date of receipt of each installment/ tranche of FDI or from the date of completion of minimum capitalization, whichever is later

Year Investments (MUSD) View - 1 View – 2

April 1, 10 4Minimum capitalization A il 1 11 4

Minimum capitalization – MUSD 10 and Total investment – MUSD 20

plocked in till March 31, 15

Total investment is locked in till March 31, 18

April 1, 11 4

April 1, 12 2

April 1, 13 6 Lock in till March 31, 16

April 1 14 2 Lock in till March 31 17

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April 1, 16 -18

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Other changes

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Press Note 1 of 2005 approval not required

• The Government has decided to do away with the prior approval requirement in case of existing joint ventures/collaborations in the same field (as on January 12, 2005)

• As per the Press Release, this is intended to attract more FDI and to d G t i t ti i i l ttreduce Government intervention in commercial matters

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Pledge of Shares

• Under the existing regulations, Ads were allowed to approve pledge of shares owned by an Indian shareholder of an Indian company was allowed only in the case of ECBs

• Any other pledge of shares required RBI approval

• ADs have now been delegated the power to approve pledge of shares held by non-resident shareholders where the pledge is either with an Indian bank or with an overseas bankwith an Indian bank or with an overseas bank

• The conditions are submissions of required certificate by the statutory auditor (in case money is borrowed in India) or by a CA/CPA where

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auditor (in case money is borrowed in India) or by a CA/CPA where the borrowing is outside India, in the case of invocation of pledge, transfer of shares will be as per the policy prevailing at the time pledge is made, overseas borrowing not be brought to India, etc

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p g , g g ,

Pledge of Shares

• This is a welcome move as NRs can now leverage their investments in India

• Due to dispensation of RBI approval, debt processing will be faster

Th l li bilit f FDI li t th ti f i ti f th• The rule on applicability of FDI policy at the time of inception of the pledge (and not at the time of invocation) may not be fair, especially in cases where there is a change in the FDI policy at the time of invocationinvocation

• This is also not consistent with the ECB policy, as per which the policy prevailing at the time of invocation applies

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policy prevailing at the time of invocation applies

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Escrow account

• ADs are currently allowed to open escrow accounts/special accounts on behalf of NR corporates for acquisition /transfer of shares of an Indian company through open offers/delisting/exit offers subject to SEBI compliance

I th i l i f FDI t ti RBI l• In other cases involving escrow for FDI transactions, RBI approval was needed

• With a view to provide greater operational flexibility and to facilitate• With a view to provide greater operational flexibility and to facilitate cross-border transactions, RBI has relaxed norms for escrow accounts, and general permission has been granted to authorized bankers (Category I banks) to open an escrow account to facilitate

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bankers (Category I banks), to open an escrow account to facilitate FDI transactions involving non-residents, subject to specified conditions

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Escrow account• Escrow account in Indian Rupees would be maintained only with

authorized bankers (Category I banks) in India

• The account will be non-interest bearing

• No facilities (fund based or non-fund based) will be permitted against the balance in such escrow accounts

• Permitted credits/ receipts into the escrow account:

i. Receipt of foreign inward remittance as consideration towards issue or transfer of shares through normal banking channels; or

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ii. Receipt of rupee consideration through the normal banking channels from India by the resident acquirer of shares who proposes to acquire them from non-resident investors by way of

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proposes to acquire them from non-resident investors by way of transfer

Escrow account• Permitted debits/ payments from the escrow account:

i. Remittance of consideration for issue of shares or transfer of sharesi. Remittance of consideration for issue of shares or transfer of shares directly into the bank accounts of the beneficiary (issuer in India or transferor of shares in India or abroad); or

ii. Remittance of consideration for refund to the initial remitter of funds in case of failure / non-materialization of the transaction for which an escrow account was opened

• The underlying FDI transaction for which an escrow account is opened should be compliant with prevailing exchange control norms. Further for the purposes of reporting FDI date of transfer of funds

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Further, for the purposes of reporting FDI, date of transfer of funds into the bank account of the issuer or transferor of shares, will be the relevant date of remittance

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Escrow account• Where the transaction is governed by SEBI guidelines/regulations,

operation of an escrow account will also be in accordance with the relevant SEBI regulationsrelevant SEBI regulations

• Balance in an escrow account, if any, may be repatriated at the then prevailing exchange rate (exchange risk would be to the foreign remitter’s account), after all the formalities in respect of the said acquisition are completed. In cases, where proposed acquisition/ transfer does not materialize, the authorized dealer (Category – I bank), may allow repatriation/ refund of the entire amount lying to the credit of an escrow account on being satisfied with the bonafide of such remittances

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Escrow account• The escrow account shall remain operational for a maximum period

of six months only and the account shall be closed immediately after completing the requirements as outlined above or on completion ofcompleting the requirements as outlined above or on completion of six months from the date of opening of such account, whichever is earlier. In case the escrow account is required to be maintained beyond six months, specific approval from RBI will be required

• Requirement of compliance with KYC guidelines issued by the RBI/SEBI shall rest with the authorized dealer (Category – I bank) / SEBI authorised Depository Participants

• Terms of the escrow account should be laid down strictly in the Escrow Agreement Share Purchase Agreement conditions of issue

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Escrow Agreement, Share Purchase Agreement, conditions of issue of shares, etc

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Escrow account• It is keenly awaited if RBI will also liberalise the regime for permitting

indemnity escrow accounts with extended timelines in order to facilitate post closure indemnities/contingenciesfacilitate post closure indemnities/contingencies

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Advance import remittances• Under the existing regulations, advance remittance for import of

goods up to US$ 100,000 requires AD-1 banks to obtain irrevocable LC/BG from banks outside India or a BG from a bank in India if suchLC/BG from banks outside India or a BG from a bank in India if such BG is itself against a counter BG from a bank outside India

• The amount of US$ 100,000 has been now raised to US$ 200,000

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Discussion paper matters issued by DIPP brought into the FDI Policy Circular of Apr 2011brought into the FDI Policy Circular of Apr 2011

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Issue of shares for non cash considerationPresent status – issue of shares for non cash consideration possible against ECB conversion, technical know how fee and royalty

Paper discusses the following transactions, against which shares could be issued (formalised in Apr 2011 Circular under Government Approval route)Circular under Government Approval route)

Case Comments by DIPP Recommendation Import of capital goods (including second hand

hi ) (if i i

• Any import by a resident in India has to be in accordance with the Export/ Import Policy i d b G t f I di

Allotment of shares with prior G tmachinery) (if conversion is

within 180 days of import)issued by Government of India

• Import of such goods is fully documented by the customs authorities, who also make an assessment of the fair-value of such imports

Government approval

Pre operative expenses • Submission of FIRC for remittance of funds Allotment of sharesPre operative expenses • Submission of FIRC for remittance of funds• Verification of pre-incorporation/pre operative

expenses by the statutory auditor• Compliance with accounting and regulatory

norms

Allotment of shares with prior Government approval

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Share swap • Share-swaps could continue under Government route:• ODI Norms • Valuation norms

Allotment of shares with prior Government approval

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Scope limitation

• This presentation is meant for the limited purposes of ICAI Study Circle session and cannot be used for any other purpose

• We have provided our comments on the Indian income tax, policy and regulatory provisions based on our understanding of the tax and regulatory laws as on date

• It is advisable that any person entering into any transaction takes professional advice

• Our comments are based on the current practice and our understanding and interpretation of the specified legislation and they are not binding on any regulators nor is there any assurance that the regulators will not take a position contrary to our comments

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• We have examined only Indian tax and regulatory provisions and have not commented on tax and regulatory provisions in overseas jurisdictions

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TRADING

Retail trading has traditionally been a restricted sector from a foreign investment perspective. We have summarized below, the present FDI regime pertaining to retail trading operations

Multi-brand Retailing Cash & Carry whole sale tradingSingle Brand Retailing (51%)

100% FDI allowed without prior approval of

Government or Reserve Bank of India

(“RBI”) - only intimation to be made to the

Multi brand Retailing

Activities not covered under automatic

route - require prior approval of

Government through Foreign

FDI expressly prohibited

Cash & Carry whole sale tradingSingle Brand Retailing (51%)

RBIInvestment Promotion Board (“FIPB”)

“Retail” trading means direct sales to end-customers

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“Cash and carry wholesale trading” is commonly referred to as Wholesale trading. Under FDI guidelines ‘cash and carry’ covers

all forms of trading other than retail trading including sale to retailers/ industrial/ commercial/ institutional or other professional

business users or to other wholesalers – sale to end customers is not permitted

Multi Brand retaining – It has been defined under FDI guidelines as Retail Trading except ‘Single Brand’ retailing

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inForeign Investment is prohibited in Multi Brand Retail Trading. However, FII investment in multi brand retail trading is permitted,

some of the listed ‘multi brand’ retail trading companies having FII investments are:

Pantaloon Retail (23%) Shopper’s Stop (10%) Vishal Retail (1.64%)

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FDI for manufacturing and retail trading is allowed under the Automatic Route

Documents

FDI Policy - amendments · Foreign Direct Investment (FDI) inflow has registered a manifold growth 2000 All sectors placed on the Automatic ... SCHEDULE 2 – FII INVESTMENT - PIS