FOREIGN DIRECT INVESTMENT - Institute of Company Secretaries of India Tudekar Updates on FDI... · India and owned & controlled by Non-Resident Indians (including PIO/ OCI) can invest

FOREIGN DIRECT INVESTMENT

By

Devesh Tudekar

Basic Concepts – An Overview

CAPITAL ACCOUNT TRANSACTION

“Capital Account Transaction" means a transaction which alters the assets or liabilities,

including contingent liabilities, outside India of persons resident in India or assets or liabilities in

India of persons resident outside India, and includes transactions referred to in sub-section(3) of

section 6.

Definition:


CURRENT ACCOUNT TRANSACTION

“Current Account Transaction" means a transaction other than a capital account transaction

and without prejudice to the generality of the foregoing such transaction includes,—;

i. payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,

ii. payments due as interest on loans and as net income from investments,iii. remittances for living expenses of parents, spouse and children residing abroad, andiv. expenses in connection with foreign travel, education and medical care of parents, spouse and

children;

Definition:


All Capital Account Transactions are prohibited

subject to specified exceptions.

All Current Account Transactions are now permitted

subject to certain restrictions.


PERSON RESIDENT IN INDIA

“Person Resident in India" means—

(i) a person residing in India for more than one hundred and eighty-two days during the course of

the preceding financial year but does not include—

(A) a person who has gone out of India or who stays outside India, in either case—

(a) for or on taking up employment outside India, or

(b) for carrying on outside India a business or vocation outside India, or

(c) for any other purpose, in such circumstances as would indicate his intention to

stay outside India for an uncertain period;

Definition:

Basic Concepts – An Overview(B) a person who has come to or stays in India, in either case, otherwise than—

(a) for or on taking up employment in India, or

(b) for carrying on in India a business or vocation in India, or

(c) for any other purpose, in such circumstances as would indicate his

intention to stay in India for an uncertain period;

(ii) any person or body corporate registered or incorporated in India,

(iii) an office, branch or agency in India owned or controlled by a person resident outside

India,

(iv) an office, branch or agency outside India owned or controlled by a person resident in

India;

CATEGORIES OF PERSON RESIDENT IN INDIA


Category 1 - An individual person.

Category 2 - Person [six kinds: section 2(u)] or body

corporate registered/ incorporated in India.

Category 3 - Office/branch/agency in India owned/controlled

by a non-resident.

Category 4 - Office/branch/agency outside India owned

/controlled by a resident.

Brief for Category 1 : An Individual Person


Basic Criteria: residing in India for more than 182 days during the preceding financial year.

Two Exclusions:

1. Person going/staying abroad for three purposes:

• Employment outside India

• Business or vocation outside India

• Any other purpose signifying his intention to stay abroad for an uncertain period

2. Person coming/staying in India for any purpose other than following three purposes:

• Employment in India

• Business or vocation in India

• Any other purpose signifying his intention to stay in India for an uncertain period

IllustrationsIllustration 1 Facts -

For entire financial year 1.4.2009 – 31.3.2010, Mr. A was in India.

Mr. A left India on 15 June, 2010 (financial year: 1.4.10 – 31.3.11) for sightseeing trip to

USA where his brothers permanently reside. Mr. A returned to India on 10 April, 2011

(financial year: 1.4.11 – 31.3.12).

After returning to India on 10th April, 2011, Mr. A has decided not to leave India at least

for one year.

Question -

What is the residential status of Mr. A for financial year: 1.4.2010 – 31.3.2011 and for

financial year: 1.4.2011 – 31.3.2012?

IllustrationsAnswer -

Financial Year: 1.4.2010 – 31.3.2011

During the preceding financial year (1.4.2009 – 31.3.2010) , he was in India for 365 days.

Therefore, in terms of the definition of “person resident in India” in section 2(v),

Mr. A would be considered resident for financial year 1.4.2010 – 31.3.2011 even though during

that year, he was out of India for 289 days.

Financial Year 1.4.11 – 31.3.12

During the preceding financial year (1.4.2010 – 31.3.2011), Mr. A was residing in India for less

than 182 days. Therefore, in terms of the definition of “person resident in India” in section 2(v),

Mr. A would be considered non-resident for financial year 1.4.2011 – 31.3.2012.

IllustrationsIllustration 2

Facts -

Mr. B left India on 19 September, 2010 for taking up employment in U.K.

This was Mr. B’s first departure abroad.

Question -

What is Mr. B ’s residential status for financial year 1.4.2010 – 31.3.2011?


Reference to section 2(v)(i)(A) shows that since Mr. B was in India during the preceding

financial year (1.4.09-31.3.10) for more than 182 days, he would have been considered

resident for the financial year 1.4.2010 – 31.3.2011.

On 19 September, 2010 when Mr. B left India for taking employment in UK, he became non -

resident in terms of the exception specified in sub-clause (A) (a) of Clause (i) of section 2 (v)

Hence, Mr. B will be considered non-resident from 19.9.2010.


Facts -

Mr. C arrives in India on 1 September, 2010 for Carrying on business.

This is his first visit to India.

Question -

What is the residential status of Mr. C for financial year 1.4.2010 – 31.3.2011?


Mr. C was not in India during the entire preceding financial year (1.4.09 – 31.3.2010). Hence, for

financial year 1.4.2010 – 31.3.11, Mr. C was non-resident.

The question of attracting the exception in sub-clause (A) or (B) of clause (i) of section 2(v)

does not arise as these sub-clauses can apply only to the person who is considered resident.

Accordingly, for financial year 1.4.2010 – 31.3.2011, Mr. C will continue to be non-resident.


Facts -

Mr. D, a science student went to USA in November, 2009 for advanced studies in

computer software. He completed his studies in November 2010.

Thereafter, during his campus interview, he was selected for employment by a French

company. His employment in France commenced on 1 December, 2010.

Question -

What is the residential status of Mr. D for financial year 2010-11?


As Mr. D was in India during the preceding financial year (1.4.09– 31.3.10) for more than 182 days,

normally he would have been considered resident for financial year 1.4.2010 – 31.3.2011.

However, upon his taking up employment abroad in December 2010, his case falls under

sub-clause (a) of clause (A) of section 2(v)(i).

Accordingly, from the date of commencement of his employment in France on 1 December 2010, Mr.

D became a non-resident.


Facts -

X Inc – a USA company engaged in manufacture of cell phones has branches and

office in several countries.

The main office of X Inc is in Hyderabad.

For strategic reasons, X Inc. has permanently stationed its senior executives in

Hyderabad to oversee its branches in, Singapore, Japan and Hon Kong.

Question -

What is the residential status of Hyderabad office of X Inc.?

Illustrations

Answer -

This Case falls within the parameters of Clause (iii) of section 2(v).

As the Hyderabad office of X Inc. is “owned and controlled” by Novice Inc., a person resident

outside India, it will be considered ‘person resident in India’ in terms of the said clause (iii).

SIGNIFICANT UPDATES IN FDI POLICY

FDI

Governed by Foreign Direct Investment Policyannounced by the Government of India – (Secretariatof Industrial Assistance) -- and

The provisions of Foreign Exchange Management Act,1999 – Foreign Exchange Management (Transfer orIssue of Security by a person resident Outside India)Regulations, 2000

FDI

FDI policy is reviewed on half yearly basis andchanges in sectoral policy/sectoral equity cap arenotified through Press Notes by the Secretariat forIndustrial Assistance (SIA), Department of IndustrialPolicy & Promotion (DIPP).

All Press Notes are available at DIPP website(www.dipp.gov.in). FDI Policy is also notified byReserve Bank of India (RBI) under Foreign ExchangeManagement Act (FEMA) 1999 (www.rbi.org.in)

Review of Press Notes 2015

Press Note No. 1 of 2015 dated 5th January 2015

Mapping of activities with NIC 2008

Activities provided under Schedule I – mapped with NIC 2008

Review of Press Notes 2015

Press Note No. 2 of 2015 dated 6th January 2015

Review of Policy on Pharmaceutical Sector – Carve out for medical devices

Pharmaceutical :-

Green 100% Automatic

Brown 100% Government – Amended vide Press Note 5 of 2016

Manufacturing Medical Devices – 100% Automatic Route for Green as well as brown

Press Note 6 of 2015 dated 3rd June 2015

Review of Investment limit for cases requiring priorapproval of FIPB/Cabinet Committee on EconomicAffair

Authority ExistingRevised by this Press

Note

Further Revised inNov. 2015

FIPB 2000 Cr 3000 Cr 5000 Cr

CCEA Above 2000 Above 3000 Above 5000

CCEA Matters referred by FIPB / MOF

Press Note 7 of 2015 dated 3rd June 2015

Definition of NRI include PIO and OCI

Investment under Schedule 4 of FEM Not. No. 20 byNRIs will be deemed to be Domestic Investment atpar with the investments made by the Residents.

Press Note 8 of 2015 dated 30th July 2015

Composite Foreign Investment for calculating direct and indirect Non-resident holding

Schedule 1 – FDI

Schedule 2 – FII

Schedule 2A – FPI

Schedule 3 – NRI (PIS)

Schedule 6 – FVCI

Schedule 8 – QFIS

Schedule 9 - LLPs

Schedule 10 - Depository Receipts

Press note 9 of 2015 dated 15th September, 2015

Allow Partly paid equity shares and warrants aseligible capital instruments, subject to the terms andconditions as stipulated by RBI

PARTLY PAID SHARES

Partly paid equity shares and warrants allowed on Repatriation onfollowing terms :- (earlier prior permission of FIPB was required)

The pricing to be determined upfront

25% of the total consideration amount ( including share premium, ifany), shall also be received upfront;

The balance consideration towards fully paid equity shares shall bereceived within a period of 12 months and for warrants within 18months

Partly Paid Shares and Warrants are allowed to be subscribed onNon-Repatriation Basis by complying Cos Act..

Press Note 12 of 2015 dated 24th November 2015

Cos., Trusts and Partnership Firms incorporated outsideIndia and owned & controlled by Non-Resident Indians(including PIO/ OCI) can invest in India with a specialdispensation as available to NRIs.

Such investment will be deemed domestic investment atpar with the investment made by Residents.

An NRI may contribute, on non-repatriation basis, to thecapital of a partnership firm, a proprietary firm or aLimited Liability Partnership without any limit.

Prohibited sectors

Nidhi company

agricultural/plantation activities

real estate business

construction of farm houses

dealing in Transfer of Development Rights.

Definition of “Manufacture”

Provided in Press note no. 12 of 2015 dt. 24th Nov., 2015

“Manufacture” with its grammatical variations, means a change in a non-living physical object or article or thing –

(a) resulting in transformation of the object or article ofthing into a new and distinct object or article or thinghaving a different name, character and use; or

(b) bringing into existence of a new and distinct object orarticle or thing with a different chemical composition orintegral structure.

Definition of “Manufacture”

A manufacturer is permitted to sell its productsmanufactured in India through

wholesale

retail

e-commerce without Government Approval.

Foreign Direct Investment – Trading Company100% FDI Permitted in Wholesale, Wholesale Cash & Carry Trading

Importer/

trader

Distributor

Retailer

End

Customer

Foreign Direct Investment – Trading Company

Importer/

Trader

• Retailers,

• Industrial,

• Commercial,

• Institutional or

• other professional

business users

• wholesalers or

• other related

service providersB2B E-Commerce

Foreign Direct Investment – Trading Company

Single brand Retail – up to 49% automatic – beyond49% Government – e-commerce retail allowed subjectto conditions.

Multi-brand retail – up to 51% - Government – e-commnot allowed

Duty Free Shops – 100% Automatic (new addition videPress Note 12 of 2015)

Foreign Direct Investment – E-commerce

Press Note 3 of 2016 dated 29th March 2016

B2B e-commerce was permitted

FDI in B2C e-commerce is permitted subject tofollowing:-

A manufacturer is permitted to sell his productsmanufactured in India through e-commerce

Single Brand retail operating through brick andmortar is permitted


Inventory Based E-Commerce :- (FDI not permitted)Where inventory of goods and services is owned by e-commerce entity and is sold to its customers directly.

Market based model :- 100% FDI PermittedProviding of an information technology platform by ane-commerce entity on a digital or an electronic networkto act as a facilitator between buyer and Seller


E-Commerce Entity means Company incorporated under the Companies Act Foreign Company covered under Section 2 (42) of the

Companies Act, 2013 An office, branch or agency in India of a Foreign Co.

Owned or controlled by person resident outside Indiaand conducting the e-commerce business.

Press Note 12 of 2015 –

Definition of “Real Estate Business” Changed :-

means dealing in land and immovable property with aview to earn profit therefrom and does not includedevelopment of township, construction ofresidential/commercial premises, roads or bridges,educational institutions, recreational facilities, city andregional level infrastructure, township.

Further earning of rent/income on lease of the property,not amounting to transfer, will not amount to real estatebusiness.


Definition of “Real Estate Business” Changed :-


Foreign Investor is eligible to exit beforecompletion of project, provided that a lock inperiod of 3 years, calculated with reference toeach tranche of foreign investment iscompleted.

Transfer of shares from One Non-Resident toAnother Non-Resident without repatriation offunds will be neither subject to any lock in norany government approval.


Condition of lock in period will not apply toHotels & Tourists Resorts, Hospitals, SEZs,Educational Institutions, Old Age Homes andNRIs.

100% FDI is permitted in completed projectsfor operation and management of townships,malls/ shopping complexes, and businesscentres.


Consequent to foreign investment, transfer ofownership and/or control of the ownership ofthe Company from R to NR is also permitted,subject to lock in period of three years from thecalculated with reference to each tranche ofFDI.

During this period transfer of immovableproperty or part thereof is not permitted.

ISSUE PRICE

A. for listed Companies the price worked out inaccordance with the SEBI Guidelines,

B. In all other cases fair valuation done by a CA or SEBIRegistered Merchant Banker as per any internationallyaccepted pricing methodology on arm’s length basis

C. Subscribers to Memorandum – Face Value

ISSUE PRICE – RIGHT ISSUE OF SHARES

Listed Co. – the price determined by the Co. as per SEBIGuidelines

Unlisted Cos. – at a price which is not less than the price atwhich the offer on right basis is made to the resident shareholder

Additional Allocation of rights shares by residents to Existing NRs– the investee company can allot the additional rights shares outof the unsubscribed portion (within the sectoral cap).

Whether Resident Can renounce shares offered to him to NR

Foreign Direct Investment – Mode of Payment

By inward remittance through normal banking channel

By debit to NRE/FCNRAccount of the person concerned

Conversion for royalty/lump sum fee due for payment or conversionof ECB

Any other funds payable by the investee company, remittance ofwhich does not require prior permission of the Government ofIndia or Reserve Bank of India

(import dues deemed as ECB, or trade credits or payable againstimport of second hand machinery not permitted).

Issue of equity shares shall be subject to tax laws as applicable.

Foreign Direct Investment – Mode of Payment

Against import of capital goods/ machinery/equipment (excluding

second hand machinery) – under the Government Route

Application to be made within 180 days from the date of shipment

Import as per Foreign Trade Policy

Payables on Second had machinery not allowed to be converted in

to shares.

Mode of Payment – issue of shares against pre-incorporation expenses – GOVT. ROUTE

With the following conditions:

Submission of FIRC for remittance of funds by the overseas promotersfor the expenditure incurred.

Verification and certification of the pre-incorporation / pre-operativeexpenses by the statutory auditor.

Payments being made by the foreign investor to the company directly orthrough the bank account opened by the foreign investor, as providedunder FEMA regulations. (as amended vide AP DIR Circular No. 104dated May 17, 2013) .

The applications, complete in all respects, for capitalisation being madewithin the period of 180 days from the date of incorporation of thecompany.

Mode of Payment – issue of shares against LEGITIMATE DUES –

in terms of paragraph 3 of Schedule 1 of FEMA 20(MSE – Items reserved for SSI) or

import dues deemed as ECB or trade credit or payable against import of second hand machinery

shall continue to be dealt in accordance with extantguidelines;

Downstream Investment

The foreign investment through the investingIndian company would not be considered forcalculation of the indirect foreign investment incase of Indian companies which are ‘owned andcontrolled’ by resident Indian citizens and/or IndianCompanies which are owned and controlled byresident Indian citizens

Downstream Investment – Owned and Controlled by Resident Indians

45% 55%

50%

FDI – NIL%

F C

Indian Co. 1R I

Indian Co. 2

Downstream Investment - Owned or Controlled by Non-Resident Entities

76% 24%

55%

FDI – 55%

F C

Indian Co. 1R I

Indian Co. 2

Downstream Investment - Owned or Controlled by Non-Resident Entities

76% 24%

100%

FDI – 76%

F C

Indian Co. 1R I

Indian Co. 2

Downstream Investment – Press Note no. 4

‘Operating Company’ is an Indian companywhich is undertaking operations in variouseconomic activities and sectors.

Foreign investment in such companies wouldhave to comply with the relevant sectoralconditions on entry route, conditionalities andcaps with regard to the sectors in which suchcompanies are operating.

Downstream Investment by operating Companies

Software

Development

Co. (100% FDI)

Auto Parts

Manufacturi

ng Company

Conditions for automatic

route

1. Activity

2. Sectoral Cap

3. Fair Value

4. Funds cannot be leveraged

from domestic market

5. Funds to be brought in

from abroad or from

internal accruals

6. ECB not allowed

Downstream Investment by Investing Companies

Investing Co.

(100% FDI – under

Approval Route)

Auto Parts

Manufacturing

Company

Government route

1. Activity

2. Sectoral Cap

3. Fair Value

4. Funds cannot be

leveraged from

domestic market

5. Funds to be brought in

from abroad or from

internal accruals

6. ECB not allowed


For companies which do not have anyoperations and also do not have anydownstream investments, for infusion offoreign investment into such companies,

Government/FIPB approval dispensed with forinfusion of funds provided the activity falls underthe Automatic Route.


Reporting Compliance:-

(a) Such company is to notify SIA, DIPP and FIPB of itsdownstream investment within 30 days of such investmenteven if equity shares/CCPS/CCD have not been allotted alongwith the modality of investment in new/existing ventures(with/without expansion program);

(b) downstream investment by way of induction of foreignequity in an existing Indian Company to be duly supported bya resolution of the Board of Directors supporting the saidinduction as also a shareholders Agreement if any;

FDI in LLP

Following persons are not eligible to invest in LLP

a citizen/entity of Pakistan and Bangladesh or

a SEBI registered Foreign Institutional Investor (FII)

a SEBI registered Foreign Venture Capital Investor (FVCI)

a SEBI registered Qualified Foreign Investor (QFI)

a Foreign Portfolio Investor registered in accordance withSecurities and Exchange Board of India(Foreign PortfolioInvestors) Regulations, 2014 (RFPI).

FDI in LLP Is permitted subject to

(a) FDI is permitted under the automatic route in LLPs operating insectors where 100% FDI is allowed, through the automatic route andthere are no FDI linked performance conditions

(for example minimum capitalisation norms applicable to 'Non-Banking Finance Companies' or 'Development of Townships, Housing,Built-up infrastructure and Construction-development projects', etc.)

Downstream Investment by Co./ LLPs in another LLP

FDI –

Operating Co.FDI –

Operating LLP

Operating

LLP

50% investment50% investment

REPORTING COMPLIANCES BY LLPs

REPORTING REQUIREMENTS

Filing of Form Foreign Direct Investment – LLP (I) – not later than 30 days from receipt of the amount.

Filing of Form Foreign Direct Investment – LLP (II) - Declarationregarding transfer of capital contribution/profit shares of an LimitedLiability Partnership from resident to non- resident / non-resident toresident – within 60 days of receipt of funds.

Annual Compliances

Indian companies are now required to submit anAnnual return for Foreign Assets and Liabilities,

The return should be submitted by July 15 of everyyear to the Director, External Liabilities and AssetsStatistics Division, Department of Statistics andInformation Management (DSIM), Reserve Bank ofIndia, C-8, Bandra Kurla Complex, Bandra (E),Mumbai - 400 051

Annual Reporting compliance by Companies having downstream investment in

subsidiaries

Investing Co. obtain a certificate to this effect from its statutory

auditor on an annual basis as regards status of compliance with the

instructions on downstream investment and compliance with FEMA

provisions.

Should report in Board of Directors Report

Qualified report should be brought to the notice of RBI (Regional

Office) and obtain acknowledgement

RO shall file the action taken report to the Principal Chief General

Manager, Foreign Exchange Department, Reserve Bank of India, Central

Office, Central Office Building, Shahid Bhagat Singh Road,

Practical problems

FIRC is not obtained from the Authorized Dealer

The particulars of remitter does not match with the name of allottee

Bank Charges deducted from the share application money.

The purpose of remittance is not mentioned or not correctly mentioned.

When the money is remitted on behalf of nominee

Practical problems

While reporting to RBI in form FC-GPR for thesubsequent issue of shares – proof of all previoussubmissions and acknowledgements be given,especially when the shares have been transferredunder FC-TRS Route.

Ensure to get letter from RBI acknowledging thatthe investment has been taken on record.

Practical issues

In case of delay in getting KYC Report and FIRC from Bank, written reminders be given to the Bank.

The Investor be made aware of the KYC Report compliance- this will ensure prompt receipt of KYC details from the Investor’s Bank abroad.

Before issuing shares under automatic route – apply all the criteria for automatic route and ensure that the FDI does not violate any provision under FEMA.

E-filing of Forms under FEMA -Ebiz

Advance Reporting Form- ARF

Reporting of Issue of Shares/CCPS/CCDs

Reporting of Transfer of Shares / CCPS / CCDs

Background

With a view to promoting the ease of reporting oftransactions under foreign direct investment, theReserve Bank of India, under the aegis of the e-Bizproject of the Government of India vide A.P. (DIRSeries) Circular No. 40 dated February 01, 2016has made filing of Form ARF, FCGPR and FCTRSthrough Ebiz Portal w.e.f. February 8, 2016 –www.ebiz.gov.in

http://www.ebiz.gov.in/

What is Ebiz?

Ebiz is the web-portal ofthe Government of Indiamaintained under theguidance and aegis ofDepartment of IndustrialPolicy and Promotion(DIPP), Ministry ofCommerce & Industry,Government of India.

What is Ebiz?

The focus of eBiz is to improvethe business environment in thecountry by enabling fast andefficient access to Government-to-Business (G2B) servicesthrough an online portal

Process of Filing

Creation of User Log in

Registering the Business

Filing the Form

Creation of Log In

An individual Log in has to be created by fillingbasic information such as name, address, mobilenumber, etc.

Use your log in credentials and select generatecodes and OTP will be generated on yourregistered email ID and Mobile Number and bothhave to be entered to authenticate the log in.

Registering the Business

Once logged in select“Business Registration”on the dash board andenter basic details of theCompany whose formsare required to be filed.

Foreign Investment Promotion Board (FIBP)

Offers a single window clearance for applications on FDI that are under approval route

Chairman – Secretary of Department of Economic affairs

Members – Secretaries of DIPP, Department of Commerce, Economic Relations, External affairs & Overseas Indian affairs


Application is to be made electronically

After the E-filing of application is complete, printed Copy along with relevant documents needs to couriered

For submitting the application one has to register with details such as – Name, E-mail, Telephone, etc.

OTP will be generated for verification against the Specific Request Number, and the login details are generated


User can submit & track only one application through one Login ID

User needs to register for filing a query and for registering Downstream Investment as well.

User can track status of the application through Login ID


Some of the Documents to be uploaded at the time of submission of application:

a) Summary of proposal

b) COI

c) MOA & AOA

d) Audited Financial Statement for Last FY

e) FIRC

f) Copy of agreement

g) Any other relevant Document

Questions?