FDI in General Vadodara Branch of WIRC 8 th June 2019

1. FDI in General Vadodara Branch of WIRC8th June 2019 By: CA Manoj Shah e-mail :manoj@shahmodi.com

2. OECD Benchmark definition of FDI • Direct investment is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy. • It also includes investment in indirectly influenced or controlled enterprise. • Objective of FDI (From Foreword to OECD Benchmark Definition): With the right policy framework, FDI can provide financial stability, promote economic development and enhance the well being of societies.

3. Direct Investment vs.Portfolio Investment Balance of Payment Manual issued by International Monetary Fund: • Dir Inv is related to control or significant influence and tends to be associated with ‘lasting relationship’ • Direct Investor may supply know-how, technology, management & marketing • Enterprises in dir inv relationship are likely to trade and finance with each other

4. Portfolio Investment • PI have lesser role in decision making of the enterprise. • It is associated with financial markets and with their specialized service providers- exchanges, dealers, regulators.

5. Direct Investor • A direct investor is an entity or group of related entities that is able to exercise control or a significant degree of influence over another entity that is resident of a different economy.

6. Criteria to determine ‘Control’ & ‘Influence’- as per Balance of Payment manual • Immediate direct investment relationships arise when a direct investor directly owns equity that entitles it to 10 percent or more of the voting power in the direct investment enterprise. • Control is determined to exist if the direct investor owns more than 50 percent of the voting power in the direct investment enterprise. • A significant degree of influence is determined to exist if the direct investor owns from 10 to 50 percent of the voting power in the direct investment enterprise.

7. FEMA Regulations for FDI • Section 6(3) of FEMA- without prejudice to the generality of the provisions of sub-sec (2), the RB may by regulations, prohibit, restrict or regulate the following- (b)- transfer or issue of any security by a PROI • Notification No. FEMA 20(R)/2017-RB dated 07-11-2017 – Foreign Exchange Management (Transfer or Issue of Security by Person Resident Outside India - TISPRO), Regulations 2017 in terms of Sec 6(3)(b) • This Notification supersedes Notifications 20 & 24 [Foreign Exchange Management (Investment in Firm or Proprietary Concern in India), Regulations 2000] • New RBI Master Directions and FAQs.

8. Snapshot of Notification 20R

9. Snapshot of Notification 20R

10. Snapshot of Notification 20R

11. FEMA 20(R) – Few Definitions

12. FEMA 20(R) - Definitions

13. FEMA 20(R) - Definitions

14. FEMA 20(R) - Definitions

15. FEMA 20(R) - Definitions

16. FAQs on FDI Definitions • FAQ No. 8 on FDI - Whether the foreign investment will be classified as FDI or FPI based on the schedule under which the investment is being made. Answer: No, FDI and FPI are agnostic from the point of view of the schedule under which investment has been made. It is the percentage which defines whether it is direct or portfolio investment. • Q.9: For an FPI investment, once the investment is classified as FDI (basis total holding), if the FDI holding comes back to <10%, will the holdings be classified as FPI again? Answer: Once an FDI always an FDI.

17. Restrictions on Investment by PROI (Reg 3) vs. Restriction on receiving Investment (Reg 4)

18. Permissions for investment to PROI– Regulation 5

19. Permissions for investment to PROI– Regulation 5

20. Rights Issue or Bonus Issue – Regulation 6 • PROI having Investment in Indian company may make investment in capital instruments issued by such company as rights or bonus issue subject to following: • Offer is in compliance of Companies Act 2013 • There is no breach of sectoral cap • In case of a listed Indian company, the rights issue to persons resident outside India shall be at a price determined by the company; • In case of an unlisted Indian company, the rights issue to persons resident outside India shall not be at a price less than the price offered to persons resident in India. • From 12/11/2002, the Indian company could, on an application made to it, allot to existing shareholders who are PROIs additional capital instruments (other than share warrants) as a rights issue over and above their rights entitlement subject to individual or sectoral caps, as the case may be. (Para 6.11.3 of Master Direction)

21. Renunciation of Right Shares Para 6.11.4 of Master Direction: • PRI and PROI may subscribe for additional shares over and above the shares offered on rights basis by the company and also renounce the shares offered either in full or part thereof in favour of a person named by them. • The facility at para 6.11.3 (additional shares acquired as rights) and para 6.11.4(1) (acquired on renunciation) of Master Direction would not be available to investors who have been allotted such shares as Overseas Corporate Bodies (OCBs). • The capital instruments to be acquired on renunciation of rights shall be subject to the same conditions including restrictions in regard to repatriability as applicable to the original holding against which rights issue has been made.

22. ESOPs and Sweat Equity Shares– Regulation 7 • Permissible to Indian Company to issue ESOP/Sweat equity shares to its employees/directors or employees/directors of its holding company or joint venture or wholly owned overseas subsidiary/subsidiaries who are PROI. • Scheme is either as per SEBI Regulations or Companies Act 2013. • ESOP/Sweat Equity Shares shall be in compliance with sectoral caps

23. Merger or Demerger or Amalgamation of Indian Companies – Regulation 9 Merger/Demerger/Amalgamation: • Issue of Shares to PROI under scheme of merger/demerger/amalgamation subject to approval by NCLT. • Entry routes, sectoral caps and attendant conditionalities to be complied with. Issue of Bonus NCDs: • Indian Company may issue bonus NCDs or NCPs out of its general reserves subject to approval of scheme of arrangement by NCLT. • Original investment must be in compliance with these regulations. • Issue to be in accordance with Companies Act 2013

24. Transfer of Shares • Regulation 10 of FEMA 20R * Prior Government approval will be required for any transfer in case the company is engaged in sector which requires government approval. # NRI holding on non repatriation basis or under 6(5) and transferring to R is under automatic route and does not require any compliance.

25. Transfer of Shares • Regulation 10 of FEMA 20R

26. Transfer of Shares • Regulation 10 of FEMA 20R

27. Transfer of Shares • Regulation 10 of FEMA 20R

28. Transfer of Shares • Regulation 10 of FEMA 20R

29. Transfer of Shares • Regulation 10 of FEMA 20R

30. Pricing Guidelines • Regulation 11 of FEMA 20R

31. Pricing Guidelines • Regulation 11 of FEMA 20R

32. Reporting • Regulation 13 of FEMA 20R

33. Reporting • Regulation 13 of FEMA 20R

34. Reporting • Regulation 13 of FEMA 20R

35. Late Submission Fees – Regulation 13.2 • For transactions on or after 7th November 2017, in case of any reporting delays, entity /person responsible shall be liable to payment of Late Submission Fees (LSF). • FAQs on LSF Q.44: What is meant by Late Submission Fee (LSF)? Answer: For the transactions undertaken on or after November 7, 2017, in case of reporting delays, the person/ entity responsible for filing the reports as provided in Part IV of the Master Direction on Reporting shall be liable for payment of Late Submission Fee (LSF). The payment of LSF is an additional option for regularizing reporting delays without undergoing the compounding procedure. Q.45: Whether compounding option is available for reporting delays Answer: The payment of LSF is an additional facility for regularizing reporting delays without undergoing the compounding procedure. However, this does not mean that the applicant cannot apply for compounding. Both options are available to the applicant for the transactions undertaken on or after November 7, 2017.

36. Downstream Investment (DI)– Regulation 14 • Concept of Ownership: • Indian Company – beneficial holding of more than 50% of capital instruments of the company. • LLP – capital contribution of more than 50% and having major profit share. • Company / LLP owned by Resident Indian Citizens – ownership is vested in resident Indian Citizens and / or Indian Companies which are owned and controlled by resident Indian Citizens. • Company / LLP owned by PROI – ownership with PROI.

37. Downstream Investment (DI)– Regulation 14 • Concept of Control: • Indian Company – beneficial holding of more than 50% of capital instruments of the company. • LLP – capital contribution of more than 50% and having major profit share. • Company / LLP owned by Resident Indian Citizens – ownership is vested in resident Indian Citizens and / or Indian Companies which are owned and controlled by resident Indian Citizens. • Company / LLP owned by PROI – ownership with PROI.

38. Downstream Investment (DI)– Regulation 14 • Downstream Investment means investment by an Indian entity or an Investment Vehicle in capital instruments or capital of another Indian entity. • Indirect Foreign Investment means downstream investment received by an Indian entity from: • Another Indian Entity (IE) which has received Foreign Investment (FI) and (i) IE is not owned and controlled by resident Indian citizens or (ii) owned or controlled by PROI. • An investment vehicle whose sponsor or manager or investment manager (i) is not owned or controlled by resident Indian citizens or (ii) owned and controlled by PROI.

39. Downstream Investment (DI)– Regulation 14 • ‘Total Foreign Investment’ means the total of foreign investment and indirect foreign investment and the same will be reckoned on a fully diluted basis; • Indian Entity (Company or LLP) receiving indirect foreign investment shall comply with entry route, sectoral caps, pricing guidelines and other relevant conditions as applicable for foreign investment.

40. Downstream Investment (DI)– Regulation 14 • Calculation Guidelines: • Any equity of PROI from conversion of any debt instruments shall be reckoned for total foreign investment. • Portfolio Investments as on 31st March shall be considered for computing total foreign investment. • Methodology for calculation will apply at each stage of investment in Indian Companies.

41. Downstream Investment (DI)– Regulation 14 • Compliance Conditions: • BOD approval. • DI through funds received from out of India and / or through internal accruals. Internal accruals means profits transferred to reserve account (net of taxes). • Funds borrowed in domestic market cannot be used.

42. Downstream Investment (DI)– Regulation 14 • Auditor’s Certificate: • Indian Company making DI shall be responsible for ensuring compliance of downstream provisions. • Indian Company has to obtain Statutory Auditor’s Certificate mentioning compliance of downstream provisions. • The same is also to be reported in Directors Report. • In case of qualified auditor report, it shall be brought to the notice of Regional Office of RBI.

43. Downstream Investment (DI)– Regulation 14 • Valuation of downstream investments: • Foreign investor making fresh investments in Indian Company for purpose of making Downstream Investment. • For valuation of Indian Company even downstream company’s value also to be considered. • No specific RBI guidelines for carrying out valuation of downstream company. But value of downstream company needs to be considered while valuing shares of Indian Company.

44. Prohibited Activities – Regulation 15 • Lottery Business including government / private lottery, online lotteries • Gambling and Betting including casinos • Chit Funds • Nidhi company • Trading in TDRs • Real Estate Business or Construction of Farm Houses • Manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or of tobacco substitutes • Activities not open to private sector investment e.g. Atomic Energy, Railway operations (other than permitted activities). • Foreign technology collaboration in any form including license for franchise, trademark, brand name, management contract is also prohibited in lottery business and Gambling and Betting activities.

45. Unincorporated JV • Unincorporated Joint Ventures - Co-operation Agreements/Strategic Alliances • It’s a contractual relationship/arrangement like a cooperation agreement or a strategic alliance wherein the parties agree to collaborate as independent contractors rather than shareholders in a company or partners in a legal partnership. • Co-operation agreements / strategic alliances can be employed for the following types of business activities: • Technology transfer agreements • Joint product development • Purchasing agreements • Distribution agreements • Marketing and promotional collaboration • Intellectual advice In such a JV the rights, duties and obligations of the parties as between themselves.

46. Entry Routes and Sectoral Caps – Regulation 16 Entry Routes: • Automatic Route – No prior approval required. • Government Route – Prior approval is required and investment is subject to conditions stipulated therein in the approval. Sectoral compliance: • Sectoral caps are indicated in the Schedule. • Sectors/activities not listed in schedule or not prohibited are 100% under automatic route. • Investing Companies not registered as NBFC or CICs – under Approval route. • Investing companies registered as NBFC – 100% under automatic route. * Sectors/activities not listed in schedule or not prohibited under Reg 15, foreign investment is permitted up to 100% on automatic route.

47. Sectoral Caps (Schedule of Reg 16) Automatic Route with/without conditions:

48. Sectoral Caps (Schedule of Reg 16) Partly Automatic and Partly under Government route with / without conditions:

49. Certain Issues in FDI • Deferment in conversion to equity shares of convertible instruments requires prior RBI approval. • FDI inward remittance cannot be credited to EEFC account. • Investment made with assured return by promoter or investee company is prohibited. • NR to NR transfer of shares of company engaged in sectors/activities under approval route without obtaining prior government approval.

50. Manner of Investments – Issue of shares against pre-incorporation expenses • Para 1(3) of Schedule 1: • Indian WOS may issue capital instruments to its foreign parent against pre-incorporation / pre-operative expenses up to limit of 5% of its authorised capital or USD 5,00,000 whichever is lower, provided Indian WOS is engaged in sector where 100% Foreign investment is allowed under automatic route and there are no FDI Linked performance conditions. • Reporting in FCGPR is to be done within 30 days from date of issue of capital instruments but not later than 1 year from date of incorporation. • Certificate of Statutory Auditor is to be obtained certifying utilisation of funds.