-Anup
P. Shah
21st February 2015
Gujarat Chamber of Commerce & Industry
40
$232 Bn from 2000-2014
35.12
35
31.39
US$ Billions
30
25
25.83
24.57
22.42
21.38
24.29
20
15
10
5
0
2007-08
2008-09
2009-10
2010-11
2011-12
© PRAVIN P. SHAH & CO.
2012-13
2013-14
2
© PRAVIN P. SHAH & CO.
3
Entry into
India for
business
LO / Branch /
Other Place
Investment in
Firm or
Proprietary
Concern
FDI
Company –
Repatriable /
NonRepatriable
© PRAVIN P. SHAH & CO.
LLP
5
FDI
OffMarket
RFPI
Foreign
Invst.
FVCI
NRI PIS
NonRepat.
© PRAVIN P. SHAH & CO.
6
Foreign Investment
Primary
Repatriable
Direct
Secondary
NonRepatriable
RFPI - PIS
NRI PIS
Downstream
© PRAVIN P. SHAH & CO.
7
FEMA
Income Tax
LLP
Co. Law
Partnership
© PRAVIN P. SHAH & CO.
8
Consolidated FDI
Policy, DIPP,
Commerce
Ministry
AP Dir
Circulars –
RBI’s Changes
FEMA
Regulations –
Mode of
Investment
© PRAVIN P. SHAH & CO.
9
◦ Which Prevails?
 FEMA Regulations or FDI Policy
 What if FEMA Regulations are not in sync with FDI
Policy?
 Does Govt. need to bring FEMA Regulations up to page
with CFDIP?
 Manohar Lal Sharma v UOI– Writ Petition SC
© PRAVIN P. SHAH & CO.
10
◦ AP Dir Circulars
 Operational Instructions by RBI to Authorised Persons
& Banks
 U/ss. 10(4) & 11(1) of FEMA, 1999
 Are they Legally Valid?
 Prof Krishnaraj Goswami v RBI (Bom)
 RBI has power & jurisdiction to issue such Circulars
 AP bound by these Directions
© PRAVIN P. SHAH & CO.
11
RBI
Nodal Regulatory
Authority
DIPP, MoC
Formulates
FDI Policy
FIPB, MoF
Cases requiring
Govt. Approval
© PRAVIN P. SHAH & CO.
12

Foreign Direct Investment
◦ Invst. by NR in Capital of an Indian Company under
Sch. 1 of FEMA Regulations
 Fresh Issue / Private Placement / Rights Issue to NR
 Money comes directly into Indian Co.
 However, now FDI via Stock Market also permissible
 Only for Foreign Promoters of Listed Cos.
 Co. can issue shs in lieu of dividend payable to Promoter
© PRAVIN P. SHAH & CO.
14
Top FDI Destinations
Switzerland
1%
France
2%
Germany
3%
Cyprus
3%
51% of all FDI is
from Tax Havens
USA
6%
Netherlands
6%
Japan
7%
UK
9%
Singapore
12%
Mauritius
36%
0%
5%
10%
15%
20%
25%
© PRAVIN P. SHAH & CO.
30%
35%
40%
15
◦ Treaty Shopping is Valid
◦ To claim DTAA benefits
 PO Box Office & Professional Directors with TRC?
 Substantial Presence?
 Singapore Substantial presence tests?

 Mauritian FSC’s recent proposals
16
© PRAVIN P. SHAH & CO.

For Sale by Mauritius Co.
◦ Can Treaty benefits be denied if only TRC
◦ Can Dept. apply LoB in absence of provision in DTAA?
 Does Vodafone Amdt. nullify Treaty Benefits?
  Capital Gains not taxable by virtue of Indo-Mauritius Treaty?
 Revisit the situation once GAAR comes into force
© PRAVIN P. SHAH & CO.
17
Factor
Mauritius
Cyprus
Singapore
Net Rate on Interest Higher of
Act, DTAA or Domestic Tax Rate
40%
10%
17%
Capital Gains Tax
NIL
NIL
NIL
LoB in DTAA
No
No
Yes
36%
3%
12%
Perception
FDI Share over 14 Years
18
© PRAVIN P. SHAH & CO.
Non-resident
Entity
Bhutan /
Nepal
Erstwhile
OCBs
FVCIs
• Bangaldeshi / Pakistani citizens only by FIPB
route
• NRIs allowed on Repatriation basis
• FDI by Inward remittance in Forex
• Provided not on RBI’s Watch List
• Can invest under FDI with RBI / FIPB approval
• Can invest under FVCI Route in a VCF or under
FDI route in a Company.
© PRAVIN P. SHAH & CO.
19
Co.
VCF
Trusts
Firm
LLPs
© PRAVIN P. SHAH & CO.
20
FDI
Automatic –
Only Filings
Approval
FIPB –MoF <
Rs. 1200 cr.
CCEA – PM >
Rs. 1200 cr.
© PRAVIN P. SHAH & CO.
21
© PRAVIN P. SHAH & CO.
22

Consideration must be for Cash
◦ All other cases – FIPB approval

Issue Price of FDI Shares
◦ Listed Cos.
◦ Unlisted Cos.

Must be issued within 180 days of funds
◦ Companies Act 2013: 2 months
© PRAVIN P. SHAH & CO.
23
◦ Valuation
 Any Internationally accepted Pricing Method
 No Assured Returns
 ALP Basis
 No Method Specified
 DCF / ECM / NAV / Price * Book Value / SOTP / PE /
Comparable Cases / Liquidation
24
© PRAVIN P. SHAH & CO.
◦ S.56(2)(vii)/(viia): IOS ~ Deemed Income
 Applies to Issue of shares by Unlisted Companies
 Sudhir Menon HUF (Mum ITAT)
 Discount to FMV (Book Value) = Income of recipient
 Applies if Recipient is an Unlisted Co. / Ind.

© PRAVIN P. SHAH & CO.
25
 Part of Sectoral Caps Only if CCPS
 If RPS / OCPS – treated as ECBs
 Must be converted within a reasonable timeframe
 Plain redemption / buyback possible?

 Max. Dividend Rate
 DDT Payable
© PRAVIN P. SHAH & CO.
26
◦ Quasi-equity Instruments
◦ Subject to ECB restrictions?
◦ Cap on Rate of Interest?
 All-in-cost ceilings like ECBs?
 Cap like CCPS?
◦ Tax Deduction benefits to Investee Co.
◦ Can be redeemed / bought back by Co.?
© PRAVIN P. SHAH & CO.
27

FEMA
 Issue Price or Conversion Formula to be specified upfront at
time of issue
 Price @ Conversion Date > FMV @ Issue Date
 FMV = Any Internationally Accepted Method

Companies Act
◦ Issue Price of Pref. Issue of CCPS / CCD for Unlisted Cos.
 Takes away flexibility for earn-out formula given by FEMA
© PRAVIN P. SHAH & CO.
28

Issue of NVR Shares possible?
◦ When Useful?

◦ Companies Act 2013 Rules
 Even for Private Companies?
◦ Examples
© PRAVIN P. SHAH & CO.
29
◦ Partly Paid-up Shares?
 Auto Route
 25% Upfront & Balance within 12 mts (NA if Issue > 500 cr)
◦ Warrants?
 Auto Route
 25% Upfront & Balance within 18 mts (NA if Issue > 500 cr)
 Conversion Price not lower than FMV on date of Issue
 FMV = Internationally Accepted Pricing Methodology
© PRAVIN P. SHAH & CO.
30
1
• Chit Fund / Nidhi
2
• Agricultural / Plantations (Exceptions)
3
• Real Estate Business / TDR Trading
4
• Gambling / Lottery / Casinos
5
• Atomic Energy
6
• Tobacco / Related Products
7
• Sectors not open to Private Sectors
© PRAVIN P. SHAH & CO.
31
Controversial
Conditional
Agricultural – Emaar MGF
Telecom – Bharti-Qatar Foundation
Defence – Mahindra / L&T
Broadcasting / Media / FM– Jagran
Real Estate – Vatika / DLF Assets
Petroleum & Gas – RIL-BP
Financial Services – Warburg-Future Private Security – GS Security
Multi-Brand Retail Trading – Walmart Power Exchanges – Indian Exchange
Single-Brand Retail – M &S
Mining – Vedanta / Posco
Courier – Blue Dart
Aviation – Etihad-Jet
Industrial Parks / SEZ- Blackstone
Pharmaceuticals – Mylan / Fresenius Wholesale Trading - Metro
© PRAVIN P. SHAH & CO.
32
Direct FDI
Indirect FDI
© PRAVIN P. SHAH & CO.
33
◦ FDI via Indian Cos
 Owned & Controlled by Resident Indians Citizens = Domestic
Investment not counted as FDI
 Owned OR Controlled by NRs = Downstream treated as
Indirect FDI
 Ownership
 More than 50% of Capital (Eq /CCD/CCPS)
 Control
 Right to appoint a majority of Directors or to control
management or policy decisions including by virtue of their
Shareholding or Management Rights or SHA or Voting
Agreements
© PRAVIN P. SHAH & CO.
34
FDI% in
Indco
controlled by
Residents
Indco’s
Investment in
SPV
Indirect FDI in SPV
40%
51%
Nil – Indco is O&C by Indians
75%
26%
26% - Indco is O or C by NRs so entire
Downstream is Indirect FDI
60%
100%
60% - Downstream in SPV is a mirror image of
Indco
© PRAVIN P. SHAH & CO.
35
Seller
Buyer
RBI
FIPB
Conditions
Resident
Any NR


Invst. breaching the Caps
Sectors needing FIPB nod
Resident
Any NR


Following Sectors:
• Defence
• Air Transport
• ARC
• Bank
• Broadcasting
• Commodity Exchanges
• Credit Info. Cos.
• Insurance
• Print Media
• Telecom
© PRAVIN P. SHAH & CO.
36
Seller
Buyer
RBI
FIPB
Conditions
Resident
Any NR


Not lower than SEBI Regs /
Fair Valuation Any method
Resident
NR under Open 
Offer

Takeover Code complied +
CA’s Certificate
Resident
NR under SEBI 
Regs.

SEBI G/L complied + CA’s
Certificate
Resident
NR for Fin.

Services Sector

NOC from FSS Regulator
Not required
© PRAVIN P. SHAH & CO.
37
Seller
Buyer
RBI
FIPB
Conditions
NR (not
NRI)
Any NR / NRI


Sale or Gift – No conditions
NRI
NRI


Sale or Gift – No conditions
NRI
NR (Not NRI)

--
Not Specified
© PRAVIN P. SHAH & CO.
38
◦ Meaning:
 Only Dividend / Interest can be sent back abroad
 Principal + Gains cannot be repatriated
 Must be credited to NRO A/c.
◦ NRI/PIO can buy shares on NR Basis:
 Without any limit
 Not Nidhi / Chit Fund / Plantations/ Farm Houses /
Dealing in TDRs
39
© PRAVIN P. SHAH & CO.
18 Activities under 100% Automatic Route
• Merchant Banking
• Underwriting
• Portfolio Management
Services
• Investment Advisory Services
• Financial Consultancy
• Stock Broking
• Asset Management
• Money Changing Business
•
•
•
•
•
Venture Capital
Custodian Services
Factoring
Credit Rating Agencies
Leasing and Finance
• Operating Leasing?
•
•
•
•
•
Housing Finance
Forex broking
Credit Card Business
Micro Credit
Rural Credit
© PRAVIN P. SHAH & CO.
41
◦ FDI in Commodity Broking
 Permissible?
 Is it an NBFC activity?

 FDI by Banks in Com. Broking?

◦ FDI in Wealth Management Services?
42
© PRAVIN P. SHAH & CO.
◦ FDI in Investing Co. – Co. engaged in investing in
Capital of Other Companies
 Prior FIPB Approval
 If it is a CIC then also comply with RBI Directions on CIC
 Investing Co. does not include Company buying shares
for Trading / Portfolio Investment
 FDI in Co. without operations and which does not have
any operations – FIPB approval
 When it makes downstream investment – comply with
sectoral caps
© PRAVIN P. SHAH & CO.
43
◦ FDI for Portfolio Investment?
 Prohibited?
 Tata Invst., Future Capital, Goldman
◦ RBI Act – NBFC definition
◦ FIPB’s stance?
 FEMA Regulations – 18 Activities
◦ Dual Interpretation?
◦
44
© PRAVIN P. SHAH & CO.

3 Tiers for Fund based Activities
 Up to 51% of Capital: US $0.5 M upfront
 More than 51% - 75% of Capital: US$5M upfront
 75%+ of Capital: US $50M out of which US $7.5M. upfront
immediately and balance US$42.5 M within 24 months
 Capitalisation refers to Foreign Investment or Total
Investment?
© PRAVIN P. SHAH & CO.
45

Activities classified as Non- fund based are
1.
Investment Advisory Service
2.
Financial Consultancy
3.
Forex Broking
4.
Money changing business
5.
Credit rating agencies

US $ 0.5 M upfront for any amount of investment

Q. What about Stock Broking Activities?
© PRAVIN P. SHAH & CO.
46

General Prohibitions
 Real Estate Business / Trading in TDRs
 Construction of Farm House

‘Real Estate Business’: Meaning?
◦ Assignment of Development Agreements?
◦ Leasing
 Buying & Leasing?
 Constructing & Leasing?

100% Auto FDI in Construction & Development Projects
◦ Subject to conditions
© PRAVIN P. SHAH & CO.
47
© PRAVIN P. SHAH & CO.
47

Minimum Area
Serviced Housing Plots – No minimum area
Built-up area: Floor area of 20,000 sq. mtrs. or 2,15,280 s.ft.
Combination Project – Any one of above 2 conditions
◦ NA if ≥30% of Total Project Cost for Low Cost Affordable Hsg
◦ What is Floor Area?
 As per local laws
 Certificate from Local Architect about Minimum Floor Area usage
◦
48
© PRAVIN P. SHAH & CO.
48

Investment – Minimum Capitalisation
Whether WOS or JV– US $5M
 NA if ≥30% of Total project cost for Low Cost Affordable Hsg
◦ To be brought within 6 mts of commencement of Project
 Date of Approval of building plan / layout by Authority (BMC)
 Subsequent tranches ~ Later of:
 Till 10 years from commencement; or
 Before completion
49
© PRAVIN P. SHAH & CO.
49
◦ Exit from Project:
 After 3 years from date of Final Invst (must develop
trunk infrastructure); OR Completion of Project
◦ FDI Conditions Not Applicable to:
 Investment by NRIs
 SEZs / IT Parks
 Educational Institutions
 Old Age Homes
 Hotels, Tourist resorts, Hospitals
 Completed projects for O & M of Malls, Business Centres
© PRAVIN P. SHAH & CO.
50
© PRAVIN P. SHAH & CO.
50
Sector
FDI Conditions
Agriculture
100% Auto Route only in:
• Floriculture / Horticulture / Vegetables cultivation
•Devlp. of Seeds
• Animal Husbandary, Pisciculture
• Services related to Agro & Allied Activities
100% with FIPB in Tea Plantations
Pharma
• 100% permissible
•FIPB Approval for Greenfield
• Auto Route for Brownfield & All FDI in Medical Devices
© PRAVIN P. SHAH & CO.
51 51
Buyback of Shares
Reduction of Capital
Buyout by Promoter
PRAVIN P. SHAH & CO., CAs
53
◦ Limits under Cos. Act
 25% of Eq. + Free Reserves
 25% of Eq. Capital per FY
 Can use Free Reserves, Sh. Premium
◦ Auto. Route of RBI:
 Pricing G/L
 Max. Price – Valn Int’l accepted Pricing method
 CA’s Certificate on TDS / ITO’s NOC
◦ Buyback Tax payable by Unlisted Company
 Tax @ 20% + SC + Cess
 No Tax / No Credit in hands of Investor
 Negates benefit of DTAA – No benefit of coming through DTAA
© PRAVIN P. SHAH & CO.
54

Reduction of shares held by FDI alone
◦ Shares cancelled and consideration paid
◦ Court process u/s. 100 of Companies Act
◦ Selective Reduction possible
◦ Auto Route of RBI subject to Pricing Guidelines
 Reduction @ Price not higher than DCF Valuation
 Tax consequences
 Co. liable to pay DDT up to Accumulated Profits
 Excess of consideration over Cost & Dividend = LTCG
 No tax on Cap Gains if Treaty benefits available to Investor
© PRAVIN P. SHAH & CO.
55

Automatic Route of RBI

Pricing Guidelines:
◦ Valuation: Int’l Accepted pricing method

Tax on Sale of shares by Fco
◦ On-market: Nil for LTCG and 15% for STCG
◦ Off-market: 10% without indexation for LTCG?
◦ Unlisted: 10% for LTCG
◦ MAT Payable?
◦ Tax Benefit if through Tax Havens
◦ CA’s Certificate on TDS / ITO’s NOC
© PRAVIN P. SHAH & CO.
56
◦ Reporting of FDI Inflows within 30 days to Regional
Office, RBI
◦ Advance Reporting Form + FIRCs + KYC
 RBI allots an UIN
 KYC on Foreign Investor
 Passport / Social Security No. of Individual Investor
 Bank Name & Bank A/c
 Period of Banking relationship
© PRAVIN P. SHAH & CO.
58
◦ Reporting of Issuance of Shares within 30 days to Regional
Office of RBI – Form FC-GPR
 Even if FVCI / FII invests under FDI Scheme
 Signed by MD / Dir / CS
 Valuation Certificate from CA / Auditor
 Certificate from CS of Co.
◦ Online Filing on eBiz Portal wef 19th Feb www.ebiz.gov.in
 Online Verification by AD and onward transmission to RBI’s RO
 If OK – RBI allots UIN
◦ Annual Return of Foreign A &L by 15th July
© PRAVIN P. SHAH & CO.
59
anup@ppsco.in
www.ppsco.in