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
2
Overview
3
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
4
Entry Routes
5
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 valuations prescribed

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

6
Entry Routes
FDI limits – Illustrative list
Automatic Route
(Illustrative)
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Note:
Government Route
(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

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Existing Airports
Asset Reconstruction
Companies
Titanium Minerals
100%
49%

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Agriculture (b)

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Lottery, betting and gambling

Cigars & Cigarettes
100%
Broadcasting (a)
Courier
Negative List
(Illustrative)
100%
Print Media (a)
26%
Single brand retailing
51%
Infrastructure
Atomic energy
Retail trading (except single
brand up to 51%)
Chit fund, Nidhi company
Trading in Transferable
Development Rights
Shipping
Manufacturing sector
Hotels and tourism



(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
9
Snapshot of Certain Specific Sectors
Sector / Activity
% of FDI Cap / Equity
Route
100%
Automatic
Trading
(i) Cash & Carry Wholesale
Trading / Wholesale Trading
100%
Automatic
(ii) Single Brand Product Trading
51%
Government
NBFC
100%
Automatic
Defence
26%
Government
Real estate i.e. ( Development of
Townships, Housing, Built-up
infrastructure and Constructiondevelopment projects)
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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
11
Real Estate
•
Real Estate Investment subject to the following conditions:
Parameter
1. Area
2. Capitalization
Condition
For development of serviced housing
plots
Minimum 10 Hectare
Construction development projects
Minimum 50,000sq.mtrs
WOS
Minimum USD 10 Million
JV with Indian partner
Minimum USD 5 Million
3. Repatriation of Original
Investment
Lock in of 3 years
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
approval
On the investor / investee company
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 sale is WT
Wholesale trading
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 export/ex-bonded warehouse business sales, or
•
B2B e-Commerce


Type of customers to whom the sale is made
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
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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 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.
14
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
15
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.
vii.
Asset Management
xvi. Money Changing Business
Credit Card Business*
viii. Venture Capital
xvii. Micro Credit
ix.
xviii. Rural Credit
Custodian Services
* 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
Irrespective of share
•
Minimum Amount of Funds
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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Indirect & Downstream Investment
20
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.
Overseas
F Co.
Overseas
Direct FI
India
I Co1
India
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
NRE
Overseas
•
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
India
I Co1
1
If ICO2 & ICO1 owned and controlled by RIC, investment by ICO1 in ICO2 is not
indirect FDI
2
If ICO1 is owned or controlled by NRE, investment by ICO1 in ICO2 is considered
indirect FDI
3
If ICO1 holds 100% in ICO2, NRE investment in ICO1 is considered indirect FDI in
ICO2
I Co2
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Calculation of Indirect FDI
Rule 1
Rule 2
NRE
Non Resident Entity (‘NRE’)
40%
39%
I Co1 (Owned and Controlled
by RIC)
10%
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%
Overseas
India
51%
39%
I Co1 (Owned or Controlled by
NRE)
10%
I Co2 (Owned and Controlled by
RIC)
Direct FI in I Co2 = 39%
Indirect FI in I Co2 = 10%
Total FI in I Co2 = 49%
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Calculation of Indirect FDI
Rule 3
Non Resident Entity (‘NRE’)
75%
I Co1 (Investing/ operating
cum investing company)
100%
Non Resident Entity (‘NRE’)
Overseas
India
26%
25%
74%
India
I Co1 (Investing/ operating
cum investing company)
RIC
100%
I Co2
Indirect FI in I Co2 = 75%
Overseas
I Co2
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
F Co 1
Outside India
India
Resulting Structure
F Co 2
F Co 1
Transfer of
shares
Issue of
shares
I Co
F Co 2
Equity
Equity
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
31
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
Indian Company not in existence– Payment cannot be made to the
Indian Company
Pre-incorporation
Payments to be directly made to Indian Company’s bank account and
FIRCs to explicit mention that funds remitted to meet “pre-operative”
expenses
Incorporated but not
operational(Pre-operational)
Shares cannot be issued in lieu of payment made by
Foreign Investor towards “Pre-incorporation” expenses
Bank Account opened subsequent
to issue of PAN
Set-up or
Commencement of
business
Shares can be issued in lieu of foreign direct inward
remittances made by Foreign Investor towards “Preoperative” expenses
 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
Nabin Ballodia
July 9, 2011
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
Telecom sector
F Co.
90%
I Co1
60%
+ Ownership Test
Infrastructure sector
F Co.
Overseas
India
49%
I Co1*
100%
I Co2
I Co2
FI in I Co2 is 54% (90*60%)
FI in I Co2 is NIL
Overseas
India
*Management of
I Co1 with Indians
36