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Foreign Direct Investment in India

Foreign Direct Investment in India . Nabin Ballodia July 9, 2011. Agenda. Overview. Entry Route. Sectoral Caps. Downstream Investment. Swap of shares. Shares for non-cash consideration. Overview. FDI Policy.

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Foreign Direct Investment in India

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  1. Foreign Direct Investment in India Nabin Ballodia July 9, 2011

  2. Agenda Overview Entry Route Sectoral Caps Downstream Investment Swap of shares Shares for non-cash consideration

  3. Overview

  4. FDI Policy • Objective of India’s FDI Policy to invite and encourage foreign investment in India • Since 1991, the policy has been liberalized substantially to facilitate foreign investment • The Department of Industrial Policy & Promotion (DIPP), the Foreign Investment Promotion Board (FIPB) and Secretariat of Industrial Assistance (SIA) regulate the FDI Policy • The administrative and compliance aspects of FDI are monitored by the RBI • Consolidated half yearly policy document - subsumes all Press notes etc

  5. Entry Routes

  6. Entry Routes FDI Guidelines for Investing in India Automatic Route Government Route No Prior Regulatory Approval but only Post Facto Filings to RBI, through AD Foreign Investment Promotion Board (FIPB) • Allowed for Most sectors • Limits : Sectoral caps/ stipulated sector specific guidelines • Inward remittances through proper banking channels • Pricing valuationsprescribed • Post facto filing with 30 days of fund receipt • Filings within 30 days of share allotment • Includes Technical Collaboration/ Brand Name/ Royalty • Only for cases other than Automatic Route and those mentioned in sectoral policy • Applies to investment over 24% in SSI reserved items • Investments by citizens / entity incorporated in Bangladesh  

  7. Entry Routes FDI limits – Illustrative list Automatic Route (Illustrative) Government Route (Illustrative) Negative List (Illustrative) • NBFC (minimum capitalization norms) • IT / ITes • Financial services(a) • Telecom Sector (74% cap)(a) • Insurance (26 % cap)(a) • Real Estate(a) • Special Economic Zones • Infrastructure • Shipping • Manufacturing sector • Hotels and tourism • Existing Airports 100% • Asset Reconstruction Companies 49% • Titanium Minerals 100% • Broadcasting (a) • Courier 100% • Print Media(a) 26% • Single brand retailing 51% • Agriculture (b) • Atomic energy • Retail trading (except single brand up to 51%) • Lottery, betting and gambling • Chit fund, Nidhi company • Trading in Transferable Development Rights • Cigars & Cigarettes    Note: (a) Sector specific guidelines (b) Subject to certain exceptions

  8. FDI Policy – Procedural Aspects • Applications can be filed online/physically – mandatory preliminary application • Intimation of receipt of share application money – within 30 days • Allotment of shares within 180 days of receipt of funds • Funds against which shares not allotted to be refunded • For transfer of shares file Form FC-TRS within 60 days of receipt of consideration • Downstream investment by Indian companies to be notified to SIA, DIPP and FIPB within 30 days of investment • Onus on transferor/ transferee, resident in India

  9. Sector Specific Caps

  10. Snapshot of Certain Specific Sectors

  11. Real Estate • For business of development of townships, housing, built-up infrastructure and construction-development projects • Illustrative list • Commercial premises, • Hotels & resorts • Hospitals, • Educational institutions, • Recreational facilities, • City and regional level infrastructure • FDI is not allowed in Real Estate business, construction of farm houses

  12. Real Estate • Real Estate Investment subject to the following conditions: Conditions (1) to (4) would not apply to Hotel & Tourism, Hospitals and SEZs as well as investment by NRIs

  13. Trading- Cash & Carry Wholesale trading/ Wholesale trading (WT) Cash & Carry Wholesale trading/ Wholesale trading Yardstick for Determination whether sale is WT  Type of customers to whom the sale is made Sale of goods/merchandise to • Retailers, • Industrial users, • Commercial users, • Institutional users, • Other professional business users, • Other wholesalers and related subordinated service providers, • Resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales, or • B2B e-Commerce  Size and volume of sales Sale to qualify for WT, it should primarily be for the purpose of trade, business or profession and not personal consumption

  14. Trading- Cash & Carry Wholesale trading/ Wholesale trading (WT) • Requisite licenses/registration under the relevant State / Central legislations • Sales by the wholesaler (except to Government) to qualify as above if made to entities : • Holding sales tax/ VAT /service tax/excise registrations; or • Holding trade licenses under Shops and Establishment Act; or • Holding license for undertaking retail trade (like tehbazari and similar license for hawkers); or • Registered as a society or public trust for their self consumption • Maintenance of full records indicating all the details of such sales on a day to day basis • WT to group companies - limited to 25% of the total turnover of the wholesale venture • WT as per normal business practice - including extending credit facilities • Restriction on opening retail shops to sell to the consumer directly.

  15. Trading- Single Brand product trading • Conditions to be satisfied • Products to be sold should be of a ‘Single Brand’ only • Products should be sold under the same brand internationally • Covers only products which are branded during manufacturing • Application to indicate product/ product categories - any additions require a fresh approval

  16. NBFC • FDI in NBFC is allowed under the automatic route in only the following activities: • Merchant Banking • Under Writing • Portfolio Management Services • Investment Advisory Services • Financial Consultancy • Stock Broking • Asset Management • Venture Capital • Custodian Services • Factoring • Credit Rating Agencies • Leasing & Finance • Housing Finance • Forex Broking • Credit Card Business* • Money Changing Business • Micro Credit • Rural Credit * Credit Card business includes issuance, sales, marketing & design of various payment products such as credit cards, charge cards, debit cards, stored value cards, smart card, value added cards etc.

  17. NBFC • Investment would be subject to the following minimum capitalisation norms: • 100% foreign NBFCs with minimum USD 50 million can set up step down subsidiaries for specific NBFC activities, • No restriction on the number of operating subsidiaries/minimum capital. • NBFCs with 75% or less FDI can also set up subsidiaries for undertaking other NBFC activities • Subsidiaries should also comply with the min cap norms stated above

  18. NBFC – Non- Fund based activities • Investment in Non-Fund based activities would be subject to the following - • Such NBFC is not permitted • to set up any subsidiary for any other activity, nor • to participate in any equity of an NBFC holding/operating company • Following activities classified as Non-Fund based activities: • Investment Advisory Services • Financial Consultancy • Forex Broking • Money Changing Business • Credit Rating Agencies FDI in NBFC is subject to compliance with guidelines by RBI and other relevant regulators

  19. Defence • Applications to be considered by the DIPP, MoCI and MoD • Applicant should be an Indian company/firm. • Management of applicant in Indian hands [Board / Chief Executives Indian resident) • Full particulars of the Directors / Chief Executives to be furnished along with the applications. • Government to verify the background of foreign collaborators / domestic promoters including • No minimum capitalization, however adequate Net Worth of foreign investor important • Three-year lock-in period for transfer of equity from one NR to another • Such transfer would be subject to prior approval of the FIPB

  20. Indirect & Downstream Investment

  21. Downstream Investment • FDI in a company can be in two forms • Direct : A non-resident investing directly in an Indian company, or • Indirect : Investment by one Indian company into another, wherein the former has foreign investment in it. • Indirect can also be a cascading investment i.e. through multi-layered structure • For the purpose of FDI, Foreign Investment shall include all types of foreign investments i.e. • FDI • Investment by FIIs; NRIs; ADRs; GDRs; FCCB; • Fully, compulsorily and mandatorily convertible preference shares and • Fully, compulsorily and mandatorily convertible Debentures.

  22. Downstream Investment • FI in pure investing company – Approval route • For other companies – Foreign investment subject to sectoral FDI policy conditions • Reporting requirements within 30 days of investment with DIPP/ FIPB introduced • Issue / transfer / pricing / valuation as per SEBI / RBI guidelines • Indian company making downstream investment not permitted to leverage funds from domestic market

  23. Calculation of Indirect FDI Total FI is sum of Direct FI and Indirect FI Direct Foreign Investment Indirect Foreign Investment F Co. F Co. Direct FI Overseas Overseas India India I Co1 I Co1 Indirect FI I Co2

  24. Calculation of Indirect FDI RIC means: • ‘Resident Indian Citizen’ as interpreted / in line with the definition of ‘person resident in India’ as per FEMA 1999, read in conjunction with the Indian Citizenship Act; and/or • Indian Companies (Companies registered / incorporated in India) which are ultimately owned and controlled by ‘Resident Indian Citizens’ Non Resident Entity (NRE) means: • A ‘person resident outside India’ as defined under FEMA 1999 ‘Owned’ by RIC means: • If more than 50% of capital in Indian Company is beneficially owned by RIC/ICO owned and controlled by RIC Owned by NRE means: • If more than 50% of capital in Indian Company is beneficially owned by non-residents ‘Controlled by’ means: • Power to appoint majority of directors in the Indian Company

  25. Calculation of Indirect FDI • FI to include all types of foreign investments • For RIC own and control are cumulative conditions; for NRE these are non-cumulative • The methodology to apply to every stage of investment at Indian company NRE Overseas India If ICO2 & ICO1 owned and controlled by RIC, investment by ICO1 in ICO2is not indirect FDI 1 I Co1 If ICO1 is owned or controlled by NRE, investment by ICO1 in ICO2is considered indirect FDI 2 I Co2 If ICO1 holds 100% in ICO2, NRE investment in ICO1is considered indirect FDI in ICO2 3

  26. Calculation of Indirect FDI Rule 1 Rule 2 Non Resident Entity (‘NRE’) NRE Overseas 51% 40% India I Co1 (Owned and Controlled by RIC) I Co1 (Owned or Controlled by NRE) 39% 39% 10% 10% I Co2 (Owned and Controlled by RIC) I Co2 (Owned and Controlled by RIC) Direct FI in I Co2 = 39% Indirect FI in I Co2 = Nil Total FI in I Co2 = 39% Direct FI in I Co2 = 39% Indirect FI in I Co2 = 10% Total FI in I Co2 = 49%

  27. Calculation of Indirect FDI Rule 3 Non Resident Entity (‘NRE’) Non Resident Entity (‘NRE’) Overseas Overseas 75% 26% India India I Co1 (Investing/ operating cum investing company) I Co1 (Investing/ operating cum investing company) 25% 74% RIC 100% 100% I Co2 I Co2 Indirect FI in I Co2 = 75% Indirect FI in I Co2 = NIL or 26%? What is indirect FDI in near 100% say 99% held companies?

  28. Investment by way of Swap of Shares

  29. Swap of Shares Existing Structure Resulting Structure F Co 1 F Co 2 F Co 1 F Co 2 Transfer of shares Issue of shares Equity Equity Outside India India I Co I Co Mechanics • To start with - F Co 1 holds shares in F Co 2, I Co not in structure • I Co acquires the shares of F Co 2 from F Co 1 • As a consideration, I Co issues its own shares to F Co 1

  30. Swap of Shares • Approval required from the FIPB for such transaction • Irrespective of the amount, valuation of shares to done either by • by a Category I Merchant Banker registered with SEBI, or • An Investment Banker outside India registered with the appropriate authority of the host country • Share valuation norms to be complied under both the legs: ODI and the FDI • Overseas investment to comply with ODI guidelines and inward issue of shares to FDI policy

  31. Issue of shares for Non-cash consideration

  32. Shares for Non-cash consideration • Shares to be issued to a non-resident against receipt of funds through normal banking channels • If the funds not received through normal banking channels, prior approval of the Government required • Exception to the above condition • Shares are to be issued against ECB and/or • Shares are to be issued against royalty payments (including lump-sum technical know-how fees) • Issue of shares for non-cash consideration also extended under the approval route for following - • Import of capital goods/ machinery/ equipment (including second-hand machinery), subject to conditions • Pre-operative/ Pre-incorporation expenses (including payments of rent etc.), subject to conditions

  33. Shares for Non-cash consideration • For import of capital goods/ machinery/ equipment - • Import as per the Export / Import Policy as notified by the DGFT and RBI • Independent valuation by a third party entity from importing country with documents • Application to indicate beneficial ownership and identity of importer / exporter • All such conversions should be completed within 180 days from the date of shipment of goods. • For pre-operative/ pre-incorporation expenses - • Submission of FIRC for remittance of funds • Verification / certification of the pre-incorporation/ pre-operative expenses by statutory auditor; • Payments to be made directly by the foreign investor to the company.; and • Capitalization be completed within the stipulated period of 180 days Special Resolution to be passed by the company for conversion Government approval subject to pricing guidelines of RBI and appropriate tax clearance

  34. Shares for Non-cash consideration Issue Payments to be directly made to Indian Company’s bank account and FIRCs to explicit mention that funds remitted to meet “pre-operative” expenses Indian Company not in existence– Payment cannot be made to the Indian Company Set-up or Commencement of business Incorporated but not operational(Pre-operational) Pre-incorporation Shares can be issued in lieu of foreign direct inward remittances made by Foreign Investor towards “Pre-operative” expenses Shares cannot be issued in lieu of payment made by Foreign Investor towards “Pre-incorporation” expenses Bank Account opened subsequent to issue of PAN • Definition / meaning of pre-operative / pre-incorporation expenses not provided • Trigger point for time period of 180 days for issue of shares not clear • Past transactions may not get covered

  35. Thank You Nabin Ballodia July 9, 2011

  36. Calculation of Indirect FDI Erstwhile Regulations Different methods of computing Indirect FI prescribed for different sectors. E.g. • Telecom : Proportionate method • Investing companies in Infrastructure sector : Management + Ownership Test Telecom sector Infrastructure sector F Co. F Co. Overseas Overseas 90% 49% India India I Co1 I Co1* 60% 100% *Management of I Co1 with Indians I Co2 I Co2 FI in I Co2 is 54% (90*60%) FI in I Co2 is NIL

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