Samisti Legal

Agenda

Overview

Entry Route

Sectoral Caps

Downstream Investment

Swap of shares

Shares for non-cash consideration

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Overview

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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

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Entry Routes

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Entry Routes

FDI Guidelines for Investing in India

Automatic Route Government Route

No Prior Regulatory Approval but only Foreign Investment Promotion Board (FIPB)
Post Facto Filings to RBI, through AD

 Allowed for Most sectors  Only for cases other than Automatic Route
and those mentioned in sectoral policy
 Limits : Sectoral caps/ stipulated sector
specific guidelines
 Applies to investment over 24% in SSI
 Inward remittances through proper banking reserved items
channels
 Pricing valuations prescribed  Investments by citizens / entity incorporated
 Post facto filing with 30 days of fund receipt in Bangladesh

 Filings within 30 days of share allotment

 an entity of a country, sharing land border
with India or where the beneficial owner of
an investment into India is situated in or is a


citizen of any such country.

 6
Entry Routes

FDI limits – Illustrative list

Automatic Route Government Route Negative List
(Illustrative) (Illustrative) (Illustrative)

 NBFC (minimum capitalization  Existing Airports 100%  Agriculture (b)

norms)  Asset Reconstruction Companies
 Atomic energy
49%
 IT  Retail trading (except single
 Titanium Minerals 100%
 Financial services (a)
 Broadcasting (a)
brand up to 100%)
 Telecom Sector (74% cap)(a)  Courier 100%  Lottery, betting and gambling
 Insurance (26 % cap)(a)  Print Media (a) 26%  Chit fund, Nidhi company
 Real Estate(a)  Single brand retailing 100%  Trading in Transferable
 Special Economic Zones Development Rights

 Infrastructure  Cigars & Cigarettes

 Shipping



 
Manufacturing sector
 Hotels and tourism

Note: (a) Sector specific guidelines

(b) Subject to certain exceptions
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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

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Sector Specific Caps

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Snapshot of Certain Specific Sectors

Sector / Activity % of FDI Cap / Equity Route

Real estate i.e. (Development of 100% Automatic
Townships, Housing, Built-up
infrastructure and Construction-
development projects)

Trading
(i)Cash & Carry Wholesale 100% Automatic
Trading / Wholesale Trading

(ii)Single Brand Product Trading 100% Government

NBFC 100% Automatic

Defence 26% Government

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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

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Real Estate

• Real Estate Investment subject to the following conditions:

Parameter Condition
1. Area For development of serviced Minimum 10 Hectare
housing plots
Construction development projects Minimum 50,000sq.mtrs

2. Capitalization WOS Minimum USD 10 Million

JV with Indian partner Minimum USD 5 Million

3. Repatriation of Original Lock in of 3 years

Investment
4. Timeline for development 50% of project, within 5 years of statutory clearances – restriction
on undeveloped projects
5. Norms and standard To conform as laid by respective local/state authorities

6. Responsibility for seeking On the investor / investee company

approval

Conditions (1) to (4) would not apply to Hotel & Tourism, Hospitals and SEZs as well as investment by NRIs

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Trading- Cash & Carry Wholesale trading
/ Wholesale trading (WT)

Cash & Carry Wholesale trading/ Yardstick for Determination whether

Wholesale trading sale is WT

Sale of goods/merchandise to
• Retailers,
 Type of customers to whom the sale is made

•
•
Industrial users,
Commercial users,
 Size and volume of sales

• Institutional users,
• Other professional business users,
Sale to qualify for WT, it should primarily be
• Other wholesalers and related subordinated for the purpose of trade, business or
service providers, profession and not personal consumption
• Resale, processing and thereafter sale, bulk
imports with ex-port/ex-bonded warehouse
business sales, or
• B2B e-Commerce

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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 applicable tax 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.

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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

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NBFC

• FDI in NBFC is allowed under the automatic route in only the following activities:

i. Merchant Banking x. Factoring

ii. Under Writing xi. Credit Rating Agencies
iii. Portfolio Management Services xii. Leasing & Finance
iv. Investment Advisory Services xiii. Housing Finance

v. Financial Consultancy xiv. Forex Broking

vi. Stock Broking xv. Credit Card Business*

vii. Asset Management xvi. Money Changing Business

viii. Venture Capital xvii. Micro Credit

ix. Custodian Services xviii. 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.

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NBFC

• Investment would be subject to the following minimum capitalisation norms:

Foreign Capital Share Minimum Amount of Funds

i. Upto 51% USD 0.5 Million, to be brought upfront

ii. More than 51% but up to 75% USD 5 Million, to be brought upfront

iii. More than 75% USD 50 Million, out of which USD 7.5 million to be brought upfront ;
balance in 24 months.

• 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

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NBFC – Non- Fund based activities

• Investment in Non-Fund based activities would be subject to the following -

Foreign Capital Share Minimum Amount of Funds

Irrespective of share USD 0.5 Million to be brought upfront for all permitted non-fund
based NBFCs irrespective of the level of foreign investment

• 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
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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

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Consolidated FDI Policy – salient features

• Consolidated document of all foreign investment policies /regulations under FEMA, Press Notes, Press
Releases and Clarifications issued by DIPP
• Underlying rationale to promote FDI through a policy framework that is transparent, predictable, simple
and clear and which reduces regulatory burden
• As an investor friendly measure, a new Circular is proposed to be issued every six months
• Use of chapters, headings and definitions
• Two kinds of foreign investment – (i) FDI and (ii) Foreign Portfolio Investment (FPI)

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FDI Policy – Principles

• Capital defined as Equity, Compulsorily Fully Convertible Preference Shares and Compulsorily Fully
Convertible Debentures

• Warrants, partly paid up shares other hybrid instruments not permitted for FDI under automatic route.
• Investment in other instruments such as:
− Non Convertible Preference Shares/ Debenture (‘NCP’)
− Optionally Convertible Preference Shares/ Debentures (‘OCP’)
− Partially Convertible Preference Shares/ Debentures (‘PCP’)
treated as External Commercial Borrowings (‘ECB’) - subject to ECB guidelines

• Existing NCP/ OCP/ PCP on cut off date outside sectoral cap till current maturity

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Transfer of securities – basic rules

Type of transfer Window Key conditions

NR to NR or
Automatic Subject to prior venture/ tie up condition
NRI to NRI
- Min. valuation and compliances
R to NR Automatic
- Activities not under approval route

NR to R Automatic Max. valuation and compliances

R to NR in financial RBI
--
services approval
Control or ownership
Govt.
from R to NR pursuant to Only for sectors with sectoral caps
approval
M&A
-Gift not to exceed 5% of paid-up capital
RBI
Gift by R to NR -Subject to sectoral caps
approval
- Cap of USD 25,000 per calendar year

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Indirect & Downstream Investment

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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.

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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

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Calculation of Indirect FDI

Total FI is sum of Direct FI and Indirect FI

Direct Foreign Investment Indirect Foreign Investment

F Co. F Co.

Overseas Overseas

India
Direct FI India

I Co1 I Co1

Indirect FI

I Co2

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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

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Calculation of Indirect FDI

• FI to include all types of foreign investments

NRE
• For RIC own and control are cumulative conditions; for NRE these
are non-cumulative
Overseas • The methodology to apply to every stage of investment at Indian
India company

I Co1 If ICO2 & ICO1 owned and controlled by RIC, investment by

1
ICO1 in ICO2 is not indirect FDI

If ICO1 is owned or controlled by NRE, investment by ICO 1 in

2
ICO2 is considered indirect FDI
I Co2
If ICO1 holds 100% in ICO2, NRE investment in ICO1 is
3
considered indirect FDI in ICO2

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Calculation of Indirect FDI

Rule 1 Rule 2

Non Resident Entity NRE

(‘NRE’)
Overseas
40% India 51%
I Co1 (Owned and I Co1 (Owned or
39% 39%
Controlled by RIC) Controlled by NRE)

10% 10%
I Co2 (Owned and I Co2 (Owned and
Controlled by RIC) Controlled by RIC)

Direct FI in I Co2 = 39% Direct FI in I Co2 = 39%

Indirect FI in I Co2 = Nil Indirect FI in I Co2 = 10%
Total FI in I Co2 = 39% Total FI in I Co2 = 49%

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Calculation of Indirect FDI

Rule 3

Non Resident Entity Non Resident Entity

(‘NRE’) Overseas (‘NRE’)
Overseas
75% India 26% India
I Co1 (Investing/ I Co1 (Investing/
25% 74%
operating cum operating cum
investing company) investing company)

100% RIC 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?

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Investment by way of Swap of Shares

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 Swap of Shares

Existing Structure Resulting Structure

F Co 1 F Co 2 F Co 1 F Co 2
Issue of Transfer of
Outside India Equity Equity
shares shares

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

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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

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Issue of shares for Non-cash consideration

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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

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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
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Shares for Non-cash consideration

Issue
Payments to be directly made to Indian
Company’s bank account and FIRCs to explicit
Indian Company not in existence– Payment mention that funds remitted to meet “pre-
cannot be made to the Indian Company operative” expenses

Incorporated but not Set-up or

Pre-incorporation
operational(Pre- Commencement
operational) of business
Shares can be issued in lieu of foreign
Shares cannot be issued in lieu of
payment made by Foreign Investor direct inward remittances made by
towards “Pre-incorporation” expenses Foreign Investor towards “Pre-operative”
Bank Account opened expenses
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

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Thank You