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Foreign Direct Investment

Foreign Direct Investment. Contents. Eligible investor to India Entities into which FDI can be made Types of Instruments Issue/Transfer of Shares Certain cases for transfer of capital Instruments under prior approval of RBI Specific conditions in certain cases

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Foreign Direct Investment

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  1. Deepender Anil & Associates Foreign Direct Investment

  2. Contents • Eligible investor to India • Entities into which FDI can be made • Types of Instruments • Issue/Transfer of Shares • Certain cases for transfer of capital Instruments under prior approval of RBI • Specific conditions in certain cases • Acquisition of shares under Scheme of Merger/demerger/Amalgamation • Issue of Shares under ESOPs • Entry routes for investments • Downstream investments by an Indian Company • Remittance, Reporting and Violation Deepender Anil & Associates

  3. Eligible Investor to FDI • A Non-Resident Entity • Other than a citizen of Pakistanor an entity incorporated in Pakistan • A citizen of Bangladeshor an entity incorporated in Bangladesh –under Government Route. • NRIs resident in Nepal and Bhutanand Citizen of Nepal and Bhutan- subject to Inwards Remittance in free foreign Exchange • OCBs have been derecognized as a class of investors except Erstwhile OCBs can make fresh investments subject to- • Incorporated outside India • not under the adverse notice of RBI • Government Route- Prior Approval of GOI • Automatic Route- Prior Approval of RBI Deepender Anil & Associates

  4. Eligible Investor to FDI • An FIIunder the Portfolio Investment Scheme subject to the following limits- • Individual holding of an FII - 10% of the capital • Aggregate holding for FII – 24% of the capital • Only SEBI registered FII and NRIs can invest/trade through a registered broker in a capital of Indian Companies on Recognized Indian Stock Exchange. • SEBI registered FVCI may invest- • Up to 100% of the capital of an IVCU and set up domestic AMC to manage funds- under Automatic Route. • in Domestic VCF – subject to FEMA regulations and FDI policy. • under FDI scheme- subject to FDI policy and FEMA regulations. Deepender Anil & Associates

  5. Eligible Investor to FDI • Qualified Foreign Investors (QFIs) investment in equity shares- Permitted to invest • through SEBI registered Depository Participants(DPs) only in Listed Indian companies’ equity shares • through recognized brokers on recognized stock exchanges in India as well as in equity shares of Indian companies which are offered to public in India subject to SEBI guidelines Permitted to acquire • by way of right shares, bonus shares • on account of stock split/ consolidation • on account of amalgamation, demerger Note: QFIs are allowed to sell the equity shares so acquired to the relevant SEBI guidelines. Deepender Anil & Associates

  6. Eligible Investor to FDI • The individual and aggregate investment limits for the QFIs over and above the FII and NRI investment ceiling prescribed under Portfolio Investment Scheme • Individual Limit- 5% of the Paid-up capital of an Indian Company • Aggregate Limit- 10% of the Paid-up capital of an Indian Company Note:- Wherever there are composite sectoral caps under the extant FDI policy, QFI investment shall be within the overall FDI sectoral caps. Dividend payment to QFIs Designated Overseas Bank Account Single Rupee pool Bank Account With in 5 working days Remitted to the Designated Overseas Bank Account Deepender Anil & Associates

  7. Entities into which FDI can be Made • An Indian Company • Partnership Firms/ Proprietary Concern • Venture Capital Fund (VCF) • Trust • Limited Liability Partnerships (LLPs) • Other Entities Deepender Anil & Associates

  8. FDI in Indian Company • Indian Company can issue capital against FDI Deepender Anil & Associates

  9. FDI in Partnership Firm/ Proprietary Concern • Investment by NRI or a Person of Indian origin (PIO) • on Non- repatriation basis subjected to- - Amount invested by Inward remittance or out of NRE/FCNR/NRO account - The Firm or Proprietary concern not engaged in the business of agriculture/plantation/ or real estate or print media sector - Amount invested shall not be eligible for repatriation outside India. • Investment on repatriation basis- -Prior permission of RBI - Application decided in consultation with GOI Deepender Anil & Associates

  10. Investment by Non- Resident other than NRIs/PIO -Prior approval of RBI - Application decided in consultation with GOI • Restrictions: An NRI or PIO is not allowed to invest in a Firm or proprietorship concern engaged in any agricultural/ plantation activity or real estate business or print media. Deepender Anil & Associates

  11. FDI in Venture Capital Fund (VCF) FVCIs are allowed to investin Indian Venture Capital Undertakings (IVCUs)/ Venture Capital Funds (VCFs)/other companies subjected to- • If domestic VCFset-up as a TRUST, with the prior approval of the FIPB • If domestic VCF is set-up as a COMPANY, under the Automatic Routeof FDI scheme, subjected to the pricing guidelines, reporting requirements, mode of payment, minimum capitalization norms etc. Deepender Anil & Associates

  12. FDI in Limited Liability Partnerships (LLPs) FDI in LLPs is permitted, subject tothe following conditions: • Automatic Route- If LLPs operating in sectors/activities where 100% FDI allowed Government Approval Route– Otherwise • LLPswith FDI will notbeallowed to operatein agricultural/plantation activity, print media or real estate business. • AnIndian company, having FDI, will be permittedto make downstreaminvestment in an LLP – If both Company as well as LLP are operating in sectors where 100% FDI is allowed , through the automatic route. • LLPswith FDI will notbeeligibleto make any downstream investments. Deepender Anil & Associates

  13. Modes of Participation/ Investment • by way of cash consideration • received by inward remittance, through normal banking channels • by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank • Following Investors are not permitted to invest in LLPs • Foreign Institutional Investors (FIls) • Foreign Venture Capital Investors (FVCIs) • LLPs will also not be permitted to availExternal Commercial Borrowings (ECBs) Deepender Anil & Associates

  14. FDI in Other Entities • FDI in TRUST- FDI in Trusts other than VCF is not permitted. • FDI in other Entities- FDI in resident entities other than those mentioned above is not permitted. Deepender Anil & Associates

  15. Types of Instruments • Indian Companies can issue • equityshares • fully, compulsorily and mandatorily convertible debentures • fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation normsprescribed under FEMA Regulations. • The pricing of the capital instruments should be decided/determined upfrontat the time of issue of the instruments. • Thepriceat the time of conversion should notin any case be lower than the fair valueworked out in accordance with the extant FEMA regulations [the DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies]. Deepender Anil & Associates

  16. Types of Instruments • Other types of Preference shares/Debentures i.e. non-convertible, optionally convertible or partially convertiblefor issue of which funds have been received on or after May 1, 2007 are considered as debt. • The inward remittance received by the Indian company vide issuance of DRs and FCCBsaretreated as FDI and counted towards FDI. Deepender Anil & Associates

  17. Types of Instruments • Issue of shares by Indian Companies under FCCB/ ADR/GDR Indian companies can raise foreign currency resources abroad through the issue of FCCB/DR (ADRs/GDRs), in accordancewith the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares(Through Depository Receipt Mechanism) Scheme, 1993 And guidelines issued by the GOI there under from time to time. Deepender Anil & Associates

  18. Types of Instruments • An Indian listed company , which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs. • Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market, would require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments. • Unlisted companies, which have already issued ADRs/GDRsin the international market, have to list in the domestic market on making profit Or within three years of such issue of ADRs/GDRs, whichever is earlier. Deepender Anil & Associates

  19. Types of Instruments • There are no end-use restrictions exceptfor a ban on deployment / investment of such funds in real estate or the stock market. There is no monetary limit up to which an Indian company can raise ADRs / GDRs. • Voting rights on shares issued under the Scheme shall be as per the provisions of Companies Act, 1956and in a manner in which restrictions on voting rights imposed on ADR/GDR issues shall be consistent with the Company Law provisions. • Voting rights in the case of banking companieswill continue to be in terms of the provisions of the Banking Regulation Act, 1949 and the instructions issued by the Reserve Bankfrom time to time, as applicable to all shareholders exercising voting rights. Deepender Anil & Associates

  20. Types of Instruments • Erstwhile OCBs who are not eligible to invest in India and entities prohibited from buying, selling or dealing in securities by SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian companies. • The Pricing of ADR / GDR issues should be made at a price determined under • The provisions of the Scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 and • Guidelinesissued by the GOIand • Directionsissued by the RBI, from time to time. Deepender Anil & Associates

  21. Issue/Transfer of Shares • Thecapital instrumentsshould be issued within 180 days from the date of receipt of the inward remittance or by debit to the NRE/FCNR (B) account of the non-resident investor. • In case, not issued within 180 days the amount so received should be refunded immediatelyto the non-resident investor. • Non-compliancewith the above provision would attract penal provisions under FEMA. Deepender Anil & Associates

  22. Issue Price of Shares Price of shares issued to persons resident outside India under the FDI Policy shall not be less than:- • In case of Listed Company- the price worked out in accordancewith the SEBIguidelines, • In case ofUnlisted Company- the fair valuation of shares done by a SEBI registered Category - I Merchant Banker or a Chartered Accountant as per the Discounted free cash flow method, • In case of Preferential Allotment - the price as applicable to transfer of shares from resident to non-resident as perRBI Price Guidelines. Foreign Currency Account- Indian companies which are eligible to issue shares to Non residents under the FDI Policy may be allowed to retain the share subscription amount in a Foreign Currency Account, with the prior approval of RBI. Deepender Anil & Associates

  23. Transfer of Shares and Convertible Debentures • General permission has been granted to non-residents/NRIs for acquisition of shares by way of transfer subject to the following: • A person resident outside India (other than NRI and erstwhile OCB) may transfer by way of sale or gift, the shares or convertible debentures toany person resident outside India (including NRIs). • NRIs may transfer by way of sale or gift the shares or convertible debentures held by them to another NRI. • A person resident outside India can transfer any security to a person resident in India by way of gift. • A person resident outside India can sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a stock broker registered with stock exchange or a merchant banker registered with SEBI. The Form FC-TRS should be submitted to the AD Category-I Bank, within 60 days from the date of receipt of the amount of consideration by transferor/transferee, resident in India. Deepender Anil & Associates

  24. Other Conditions on Transfer of Shares • The sale consideration in respect of equity instruments purchased by a person resident outside India, remittedinto India through normal banking channels, shall be subjected toa Know Your Customer (KYC) checkbythe remittance receiving AD Category-I bank at the time of receipt of funds • Escrow Account-AD Category-I banks have been given general permission to open Escrow account and Special account of non-resident corporate for open offers / exit offers and delisting of shares. These facilities will be applicable for both issue of fresh shares to the non- residents as well as transfer of shares from / to the non- residents Deepender Anil & Associates

  25. Certain cases for Transfer of Capital Instruments under Prior Approval of RBI • FromResident to Non- Residentby way of a SALEwhere: • Transfer is at a price which falls outside the pricing guidelines specified by RBI • Transfer of capital instruments by the non-resident acquirer involving deferment of payment of the amount of consideration. II.FromResident to Non- Residentby way of a GIFTthe following factors are considers by RBI • The proposed transferee (donee) is eligible to hold such capital instruments under FEMA • The gift does not exceed 5 per cent of the paid-up capital of the Indian company/each series of debentures/each mutual fund scheme. • The applicable sectoral cap limit in the Indian company is not breached. Deepender Anil & Associates

  26. The transferor (donor) and the proposed transferee (donee) are close relatives • The value of capital instruments does not exceed the rupee equivalent of USD 50,000 during the financial year. III.Transfer of shares from NRI to non-resident Deepender Anil & Associates

  27. Cases where approval of RBI is not Required • Transfer of shares from a Non Resident to Resident under the FDI scheme Provide:- • The original and resultant investmentarein line with the extant FDI policy and FEMA regulations. • The pricingfor the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines, • Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank. Deepender Anil & Associates

  28. Transfer of shares from Resident to Non Resident: • Where the transfer of shares requires the prior approval of the FIPBprovided that: • the requisite approval of the FIPB has been obtained; • the transfer of share adheres with the pricing guidelines and documentation requirements as specified by RBI ii.where the transfer of shares attract SEBI (SAST) guidelines subject to the adherence with the pricing guidelines and documentation requirements as specified by RBI. Deepender Anil & Associates

  29. where the transfer of shares does not meet the pricing guidelines under the FEMA, 1999 Provided that: • The resultant FDI is in compliance with the extant FDI policy and FEMA regulations ; • Thepricingfor the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines; • Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank • where the investee company is in the financial sector provided that : • NOCsareobtained from the respective financial sector regulators/ regulatorsof the investee company as well as transferor and transferee entities and such NOCs are filed along with the form FC-TRS with the AD bank; and • The FDI policy and FEMA regulations are complied with. Deepender Anil & Associates

  30. Conversion of ECB/Lump sum Fee/Royalty etc. into Equity • Indian companies have been granted general permission for conversion of ECB(excluding those deemed as ECB) in convertible foreign currency intoequity shares OR fully compulsorily and mandatorily convertiblepreference shares, subject to the following conditions and reporting requirements. • Theactivity of the company is covered under the Automatic Routefor FDI or the company has obtained Government approval for foreign equity in the company; • The foreign equity after conversion of ECB into equity is within the sectoral cap, if any; • Pricing of shares is as per the provisions Deepender Anil & Associates

  31. Compliancewith the requirements prescribed under any other statute and regulation in force;and • The conversion facility is available for ECBs availed under the Automatic or Government Route and is applicable to ECBs, due for payment or not, as well as secured/unsecured loans availed from non-resident collaborators. • General permission is also available for issue of shares/preference shares against lump sum technical know-how fee, royalty, under automatic route or SIA/FIPB route, subject to pricing guidelines and compliance with applicable tax laws. Deepender Anil & Associates

  32. Issue of equity shares under the FDI policy is allowed under theGovernment route for the following: • Import of Capital goods/machinery/equipment subject to the following conditions: • Any import of capital goods/machinery etc., has to be in accordance with the Export/ Import Policy issued by GOI • An independent valuation of the capital goods/machinery/equipments • The application clearly indicating the beneficial ownership and identity of the Importer Company as well as overseas entity. • Applications should be made within 180 days from the date of shipment of goods. Deepender Anil & Associates

  33. Pre-operative/ pre-incorporation expenses (including payments of rent etc.), subject to compliance with the following conditions: • Submission of FIRCfor remittance of funds • Verification and Certification of such expenses by Statutory auditor • Payment should be made by the foreign investor to the company directly or NRE account opened under FEMA • The applications should be made within the period of 180 days from the date of incorporation of the company. General Conditions: (i)All requests for conversion should be accompanied by a special resolution of the company. (ii) Government‘s approval would be subject to pricing guidelines of RBI and appropriate tax clearance. Deepender Anil & Associates

  34. SPECIFIC CONDITIONS IN CERTAIN CASES Deepender Anil & Associates

  35. Issue of Rights/Bonus Shares • FEMA provisions allow Indian companies to freely issue Rights/Bonus shares to existing non-resident shareholders, subject to adherence to sectoral cap, if any. • However, such issue of bonus / rights shares has to be in accordance with other laws/statutes like the Companies Act, 1956, SEBI Regulations, 2009 (in case of listed companies), etc. • The offer on right basis to the persons resident outside India shall be: • in the case of shares ofa company listed on a recognized stock exchange in India,at a price as determined by the company; • in the case of shares of a company not listed on a recognized stock exchange in India,at a price which is not less than the price at which the offer on right basis is made to resident shareholders. Deepender Anil & Associates

  36. Prior Permission of RBI for Rights issue to Erstwhile OCBs- • Companies desiring to issue rights share to such erstwhile OCBs will have to takespecific prior permission from RBI. • As such, entitlement of right share is not automatically available to erstwhile OCBs. • Howeverbonus shares can be issued to erstwhile OCBs without the approval of RBI Additional allocation of rights share by residents to non-residents • The investee company can allot the additional rights share out of unsubscribed portion,subject to the condition that the overall issue of shares to non-residents in the total paid-up capital of the company does not exceed the sectoral cap. Deepender Anil & Associates

  37. Acquisition of shares under Scheme of Merger/ Demerger/ Amalgamation • Once the scheme of merger or demerger or amalgamation of two or more Indian companies has been approved by a Court in India, the transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject to the conditions that: (i) The percentage of shareholding of persons resident outside India in the transferee or new companydoes not exceed the sectoral cap, and (ii) Thetransferor company or the transferee or the new company isnot engaged in activities which are prohibited under the FDI policy . Deepender Anil & Associates

  38. Issue of shares under Employees Stock Option Scheme (ESOPs) • Listed Indian companies are allowed to issue shares under the ESOPs, to its employees or employees of its JV or wholly owned subsidiary abroad who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued directly or through a Trust subject to the condition that: • The scheme has been drawn in terms of relevant regulations issued by the SEBI, and • The face value of the shares to be allotted under the scheme to the non-resident employeesdoes not exceed 5 per cent of the paid-up capital of the issuing company. Deepender Anil & Associates

  39. Unlisted companies have to follow the provisions of the Companies Act,. • The issuing company is required to reportthe details of Office concerned of the Reserve Bank, within 30 days from the date of issue of shares. • Share Swap: valuation of the shares will have to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. • Approval of the Foreign Investment Promotion Board (FIPB)will also be aprerequisite for investment by swap of shares. Deepender Anil & Associates

  40. Pledge of Shares • A person being a promoter of a company registered in India (borrowing company),which has raised external commercial borrowings, may pledge the shares of the borrowing company or that of its associate resident companies for the purpose of securing the ECB raised by the borrowing company, provided No objection from an authorized dealer after satisfying the following : • the loan agreement has been signed by both the lender and the borrower, • there exists a security clause in the Loan Agreement requiring the borrower to create charge on financial securities, and • the borrower has obtained Loan Registration Number (LRN) from the Reserve Bank: and the said pledge would be subject to the following conditions : • the period of such pledge shall be co-terminus with the maturity of the underlying ECB; Deepender Anil & Associates

  41. b).In case of invocation of pledge, transfer shall be in accordance with the extant FDI Policy and directions issued by the Reserve Bank; c).The Statutory Auditor has certified that the borrowing company will utilized / has utilized the proceeds of the ECB for the permitted end use/s only. • ByNon-Resident in favor of the AD bank in India to secure the credit facilities, subject to the following conditions: • in case of invocation of pledge, transfer of shares should be in accordance with the FDI policyin vogue at the time of creation of pledge; • submission of a declaration/ annual certificate from the statutory auditor of the investee company that the loan proceeds will be / have been utilizedfor the declared purpose; • theIndian company has to followthe relevant SEBI disclosure norms; and Deepender Anil & Associates

  42. pledge of shares in favour of the lender (bank) would be subject to Section 19 of the Banking Regulation Act, 1949. • ByNon-Resident in favour of the Overseas bank in India to secure the credit facilities, subject to the following conditions: • loan is availed of only from an overseas bank; • utilized for genuine business purposes overseas not in India • overseas investment should not result in any capital inflow into India; • in case of invocation of pledge, transfer should be in accordance with the FDI policy • submission of a declaration/ annual certificate from a Chartered Accountant/ Certified Public Accountant of the non-resident borrower that the loan proceeds will be / have been utilized for the declared purpose. Deepender Anil & Associates

  43. ENTRY ROUTES FOR INVESTMENT GOVERNMENT ROUTE Under the Government Route, prior approval of the Government of India is required. Proposals for foreign investment under Government route, are considered by FIPB. AUTOMATIC ROUTE Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment Deepender Anil & Associates

  44. CAPS on Investments Deepender Anil & Associates Investmentscan be made by non-residents in the capital of a resident entity onlyto the extent of the percentage of the total capital as specified in the FDI policy. Entry Condition on Investment Investmentsby non-residents can be permittedin the capital of a resident entity in certain sectors/activitywith entry conditions. Such conditions may include norms for minimum capitalization, lock-in period, etc.

  45. FOREIGN INVESTMENT INTO/ DOWNSTREAM INVESTMENT BY INDIAN COMPANIES • Foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian company/ies, will require prior Government/FIPB approval, regardless of the amount or extent of foreign investment. • Core Investment Companies (CICs), will have to additionally follow RBI‘s Regulatory Framework for CICs. • For infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments, Government/FIPB approval would be required, regardless of the amount or extent of foreign investment. Deepender Anil & Associates

  46. Downstream investment by an Indian company which is owned/controlled by non resident entity • It would be in accordance/compliance with therelevant sectoral conditions on entry route, conditionalities and caps, with regard to the sectors in which the latter Indian company is operating. • Such a company is to notify SIA, DIPP and FIPB of its downstream investment in the form within 30 days of such investment, • Dulysupported by a resolution of the Board of Directors as also a shareholders Agreement, • Issue/transfer/pricing/valuation of shares shall be in accordance with applicable SEBI/RBI guidelines; • investmentswould have tobring in requisite funds from abroad and not leverage funds from the domestic market. Deepender Anil & Associates

  47. Calculation of Foreign Investment Deepender Anil & Associates

  48. Total Foreign Investment in Indian Companies DIRECT INVESTMENT All investmentdirectly by a non-residententity into the Indian company would be counted towards foreign investment. INDIRECT INVESTMENT • If the investing company isowned or controlled by non resident entities‘, the entire investment by the investing company into the subject Indian Company would be considered as indirect foreign investment • Indirect Investment includes all types of foreign investment 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 Deepender Anil & Associates

  49. SECTOR SPECIFIC CONDITIONS ON FDI Deepender Anil & Associates

  50. PROHIBITED SECTORs • Retail Trading (except single brand product retailing) • Lottery Business including Government /private lottery, online lotteries, etc. • Gambling and Betting including casinos etc. • Chit funds • Nidhi company • Trading in Transferable Development Rights (TDRs) • Real Estate Business or Construction of Farm Houses • Manufacturingof Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes • Activities / sectors not open to private sectorinvestment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems). Deepender Anil & Associates

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