Legal Aspects of FDI & Joint Ventures

1. Legal Aspects of FDI &Joint Ventures Presented by: Mohit Saraf, Partner Luthra & Luthra Law Offices L&L/MDI/FDI-JV

2. Agenda • Modes of FDI • Manner of Direct Investment • Automatic Route • Existing Companies • Investment by NRI/ OCB • FIPB Clearance • Foreign Investment in Small Scale Sector • Repatriation L&L/MDI/FDI-JV

3. Agenda (Cont’d.) • ADR/ GDR/ FCCB • Entry Strategy • Wholly Owned Subsidiaries • Joint Venture • Joint Venture - Procedure • Issues • Lender Concerns L&L/MDI/FDI-JV

4. Modes of FDI • Direct Investments in Indian Companies by Foreign Companies/ Non-resident • Global Depository Receipt (GDR)/ American Deposit Receipts (ADR)/ Foreign Currency Convertible Bonds (FCCB) L&L/MDI/FDI-JV

5. Manner of Direct Investment • FDI is freely allowed in all sectors including the services sector, except where the existing and notified sectoral policy does not permit FDI beyond the ceiling. • Routes • by RBI (Automatic) • FIPB clearance L&L/MDI/FDI-JV

6. Automatic Route • All items /activities except the following fall under automatic route. • Proposals that require an Industrial Licence, which includes: - • the item requiring an Industrial Licence under the Industries (Development and Regulation) Act 1951; • foreign investment being more than 24 percent in the equity capital of units manufacturing items reserved for small-scale industries; and • all items which requires an industrial licence in terms of locational policy notified by the government under the new industrial policy of 1991 L&L/MDI/FDI-JV

7. Automatic Route (Cont’d.) • Proposals in which the foreign collaborator has previous joint venture or technology transfer/ trademark agreement in the same or allied field in India. • Proposals falling outside sectoral policy /caps or under sectors in which FDI is not permitted. Some of the activities or items (13 in total) for which automatic route of RBI is not available - banking, civil aviation, atomic energy, defence and strategic industries, print media, broadcasting, postal, housing and real estate development sector for investment from persons other than NRI/OCB. • Proposals relating to acquisition of shares in an existing Indian company in favour of a foreign/ NRI/OCB investors. L&L/MDI/FDI-JV

8. Existing Companies • For existing companies with an expansion programme the additional requirements for automatic approval are: • the increasing equity level must result of the expansion of the equity base of the existing company • the money to be remitted should be foreign currency and • the proposed expansion programme should be predominantly in the sector. • Otherwise, the proposal would need Government approval through the FIPB. L&L/MDI/FDI-JV

9. Existing Companies (Cont’d.) • For existing companies without any expansion programme the additional requirements for eligibility for automatic approval are: • that they are predominantly engaged in the industries under automatic routes. • the increasing equity level must be from expansion of the equity base; and • the foreign equity must be in foreign currency. • Otherwise, the proposal would need Government approval through the FIPB. L&L/MDI/FDI-JV

10. Automatic Route • Prior Approval of RBI not necessary. • Notification to RBI within 30 days of inward remittances. • Filing within 30 days of issuance of shares. L&L/MDI/FDI-JV

11. FIPB Clearance • Proposals that do not quality for automatic approval. • Guidelines issued for consideration of proposal by FIPB. • No further clearance from RBI necessary - only notification of receipt of inward remittance and filing of prescribed documentation upon issuance of shares. L&L/MDI/FDI-JV

12. Investment by NRI/ OCB • Investment by NRI/OCB is treated as FDI. In some sectors like real housing and estate development, FDI is not permitted, however, NRI/OCB are allowed to invest. In aviation sector this category is permitted to invest up to 100% in which otherwise foreign equity of only 40% is allowed. • Investment made by the NRI/OCB is fully repatriable except in the case of real estate, which has a 3-year lock-in period on original investment and 16% cap on dividend repatriation. L&L/MDI/FDI-JV

13. Foreign Investment in Small Scale Sector • The equity holding by other units including foreign equity in a small-scale undertaking is permitted up to 24%. However, there is no bar on higher equity holding for foreign investment if the unit is willing to give up its small-scale status. In case of foreign investment beyond 24% in a small-scale unit, which manufactures small scale, reserved item(s), an industrial licence carrying a mandatory export obligation of 50% would need to be obtained. L&L/MDI/FDI-JV

14. Repatriation • Investment and return are freely repatriable, except where the approval is subject to specific conditions such as lock in period on original investment, dividend cap, foreign exchange neutrality etc as per the notified sectoral policy. L&L/MDI/FDI-JV

15. ADR/ GDR/ FCCB • No ceiling on investment. • Consistent track record for good performance for three years – relaxable for infrastructure projects. • No restriction on number to be floated in a financial year. • No end use restriction except for ban on investment in real-estate & stock market. L&L/MDI/FDI-JV

16. Entry Strategy • Wholly Owned Subsidiaries • Joint Ventures L&L/MDI/FDI-JV

17. Wholly Owned Subsidiaries • Approval from FIPB • Criteria • where only “holding” operation is involved and all subsequent/ downstream investments to be carried out with prior approval of the Government; • where proprietary technology is sought to be protected or sophisticated technology is proposed to be brought in; • where at least 50% of production is to be exported; • proposals for consultancy; and • proposals for power, roads, ports and industrial model towns/ industrial parks or estates. L&L/MDI/FDI-JV

18. Joint Venture • “Any arrangement whereby two or more parties co-operate in order to run a business or to achieve a commercial objective”. • Nature of joint venture will depend on its own facts and on the resources and wishes of parties. • New business • Existing business • Company law, partnership law and/or contract law - taxation, intellectual property, etc. L&L/MDI/FDI-JV

19. Joint Venture (Cont’d.) • Rationale: • to limit capital investment required and exposure to risks. • to reduce manufacturing costs & other overheads by achieving economics of scale. • parties may have complementary skills or resources. • established distribution/ marketing set up of the Indian partners. • established contacts of the Indian partner which help smoothen the process of setting up of operations. L&L/MDI/FDI-JV

20. Joint Venture - Procedure • Identification of partner • Negotiation • Due diligence • Regulatory approval • Incorporation of Company • Issue of shares, registration with Govt. approval. • Documentation L&L/MDI/FDI-JV

21. Issues • Ownership interest Vs. Control • Management of business • No. of directors • Warranties, due diligence & price adjustment • Non-compete • Tax L&L/MDI/FDI-JV

22. Issues (Cont’d.) • Minority protection issues • Mode • exercise of statutory rights - limited scope, effective only in clear cases of oppression • purely contractual provisions • Affirmative Vote • Transferability • Right of first refusal • Valuation • Restrictive legend L&L/MDI/FDI-JV

23. Issues (Cont’d.) • Deadlock & dispute resolution • Committees/ CEO’s • “Tag Along Rights”/ “Put Options” • Termination • breach of terms • insolvency • change of control • reduction in ownership interest L&L/MDI/FDI-JV

24. Issues (Cont’d.) • Conflict between Articles and JVA • Voting Agreement Vs. Fiduciary Responsibility of the Board • Minority Protection Rights • Should company be a party • “Except otherwise provided in the articles” - Severability L&L/MDI/FDI-JV

25. Lender Concerns • JV company • Promoters ‘Lock in’ Period • Board representation • Dividend distribution • Affirmative vote • Deadlock L&L/MDI/FDI-JV