Inbound Investment FDI Investments
CTC s Intensive Study Course
CTC’s
on FEMA
25 April 2014, Mumbai
CA. Shabbir Motorwala
Agenda

Overview of Inbound Investments / FEMA 20

A t
Automatic
ti R
Route
t

Approval Route

Issues / Transfer of Shares – Value and Reporting
p
g Compliances
p

Indirect FDI

FDI in LLP

Key recent developments / issues

Selected direct tax issues
1
An Overview – Inbound Investments
 Foreign Direct Investment (FDI) Policy
 FDI policy formulated by the Department of Industrial Policy and Promotion (‘DIPP’), Ministry of Commerce &
Industryy
 The DIPP regulates FDI through Press Notes (PNs) and Consolidated FDI policy
 The Consolidated FDI policy issued by the DIPP - earlier six months, now annually in April
 Consolidation of all press notes/press releases/clarifications and includes various definitions as well
 First Consolidated FDI Policy was effective 1 April 2010 vide Circular 1 of 2010
 Current Consolidated FDI policy is effective 17 April 2014 vide Circular 1 of 2014
 Other DIPP Sources - DIPP Chat, Bulletin Board, Review Books, etc
 FEMA Notification and RBI Circulars
 The FEMA 1999 and FEMA Notification No. 20 is statutory framework / legal edifice which enacts PNs
 RBI’s Master Circular (issued 1 July and now updated from time to time), FAQs and Regular Circulars
 Impact of other laws e.g. Insurance, PSRA, etc
 Portfolio Investment Schemes under FEMA ((Notification No. 20))
 Portfolio Scheme is for NRIs, FIIs, QFIs, FVCI is distinct though they can also invest under FDI Scheme
2
An Overview of FEMA 20 – Schedules (2/2)

Schedule 1

 FDI Scheme for Foreign Investors including NRIs and
incorporates FDI in LLP as well
 Automatic Route or Approval Route i.e. prior approval
from the Foreign Investment Promotion Board

Schedule 2





NRIs Investment on Indian Stock Exchange
g on
repatriation / non-repatriation basis under PIS
Schedule 7


IDR by eligible foreign companies in India
Schedule 8


Foreign Venture Capital Investors Investment
Scheme (SEBI registered)
Investment by QFI in shares
Schedule 9

FDI in LLPs
Schedule 4



FII Investments under PIS
Schedule 3
Schedule 6
NRI Investment on non-repatriation basis
Schedule 5

Purchase and sale of securities other than shares or
convertible debentures by Non-Resident (FIIs, QFI
and NRIs)
3
FDI Policy - Automatic Route
 Sector specific policy - most sectors / activities fall under the Automatic Route of the FDI Policy
− Consistent relaxation of Policy over last two decades and applies even to sectors / activities earlier under
Approval Route but now under Automatic Route
− In certain sectors, sectoral caps include FDI+ FIIs + other forms of foreign investments
− Performance and capital related conditions in many sectors (e.g. Development / Construction, NBFC, etc)
− Cases
C
covered
d
• Issues of shares against inward remittance through banking channel into Indian Company,
• NRE/ FCNR account for NRIs
• Conversion of External Commercial Borrowings
• Issue of shares against payables towards lump-sum know-how / technical Royalties
• Issues of shares on merger / amalgamation / demerger of Indian companies
• Issue of bonus / rights
− FDI scope widened to cover issue / transfer of ‘participating interest/right’ in oil fields to a non resident
− Obligation in line with issue / transfer of shares from NR to R
4
FDI Policy - Automatic Route
 Automatic Route not available to:
− Un-incorporated Non-Resident Entities
− Citizens / Entities incorporated in Pakistan and Bangladesh
− FDI from Pakistan allowed under Approval Route subject to certain sector restrictions)
− Other
Oth cases
− Transfer of shares to Non-Residents in regulated sectors / in certain cases and situations
p
requirement
q
and also relevant for FDI
 Industrial License condition is an independent
 Special cases of erstwhile Overseas Corporate Body – prior RBI approval required in most cases
 Includes issue of shares under FCCB / ADR / GDR –
 As per stipulated schemes / post MoF approval
5
FDI Policy – Approval Route
Approval Route
 Relates to investment in sectors that require prior Government approval – notably therefore fall outside the
Automatic Route and also do not relate to prohibited sectors
General cases of Approval Routes
 Sectors in which FDI can be undertaken only with prior Government approval (e.g. Defense, etc)
 Cases of investment by specified individuals / entities (Bangladesh / Pakistan, etc)
 Swap of shares i.e. Inbound + Outbound leg
 Issue of warrants / Partly Paid up Shares
 Issue of equity / convertible instruments against Import of NEW capital goods / machinery / equipments subject to
conditions: - FIPB application within 180 days from shipment of goods
 Issue of equity / convertible instruments against Pre-operative and pre-incorporation expenses subject to conditions
– payment by foreign investor to company directly or though FEMA compliant bank account of the foreign investor
 FDI in Domestic VCF in the nature of Trust
 FDI in an Indian Company which has no operations or downstream investments
 FDI in an Indian Company which just has or proposes Downstream Investments (Holding Company)
 FDI beyond
b
d 24% iin an IIndian
di C
Company with
ith an IIndustrial
d ti lU
Undertaking
d t ki engaged
d iin manufacturing
f t i off it
items reserved
d
for MSME Sector
6
FDI Policy – Approval Route
Constitution of the FIPB, Department of Economic Affairs, Ministry of Finance
i.
Secretary to Government, Department of Economic Affairs, Ministry of Finance – Chairperson
ii.
Secretary to Government, Department of Industrial Policy & Promotion, Ministry of Commerce & Industry
iii.
Secretary to Government, Department of Commerce, Ministry of Commerce & Industry
i
iv.
S
Secretary
t
to
t Government,
G
t Economic
E
i Relations,
R l ti
Ministry
Mi i t off External
E t
l Affairs
Aff i
v.
Secretary to Government, Ministry of Overseas Indian Affairs.
vi.
p other Secretaries to the Central Government and top
p officials of financial institutions,,
The Board can co-opt
banks and professional experts of Industry and Commerce per requirements
Levels of Approvals for Cases under the FIPB / Government Route
i.
Minister of Finance (as in-charge of FIPB) considers the recommendations of FIPB on FDI proposals below Rs.
1200 Cr and cases exceeding the said ceilings placed for consideration of Cabinet Committee on Economic
Affairs (CCEA).
ii.
The CCEA also considers the proposals which may be referred to it by the FIPB/the Minister of Finance
7
Sectoral policy of FDI
Automatic Route
(Illustrative)
Prior Approval
(Illustrative)
• Manufacturing sector
• Tea plantations
• Floriculture, etc & Animal Husbandry
• Defense 26% / Higher (a)
• Mining
• Existing Airports beyond 74
percent
• Petroleum & Natural Gas
• Courier Services
• Air Transport Services (a)
• Cash & carry / Wholesale Trading / B2B
Ecommerce
• IT / ITES / SEZs
• Insurance (26 percent cap)
• Development of housing, etc.
• Single Brand Retail Trading (up to 49%)
• Infrastructure / Shipping
• Hotels and Tourism
• Pharmaceuticals – Greenfield
Negative List
(Illustrative)
• Agriculture – other Floriculture,
etc which is permitted
• Lottery
• Broadcasting (a)
• Betting and gambling including
Casinos
• Print
P i t Media
M di (26%)
• Chit funds
• Single Brand Retail Trading
(beyond 49% upto 100%)
• Nidhi company
• Multi Brand Retail Trading (51%)
• Telecommunication
T l
i ti
(beyond
(b
d 49%)
• Pharmaceuticals Brownfield
• Private Security Agencies 49%
• Trading in transferable
development rights
• Real Estate business or
construction of farm houses
• Manufacturing of Cigars &
cigarettes
• Activities not open
p to private
p
sector e.g. Atomic energy, Rail
transport, etc.
• NBFC (minimum capitalization norms)
• Telecommunications (up to 49%)
Note: (a) Sector specific, capitalization and other applicable guidelines
8
FDI Instruments
 Nature of instruments
–
Equity Shares /Compulsory Convertible Preference Shares (CCPS) / Compulsory Convertible Debentures
(CCDs) treated on par with Equity – Issue as well as Transfer covered
–
Dividend on CCPS cannot exceed 300 basis points over PLR of SBI . No interest ceiling for CCDs.
–
Optionally and / or Non-convertible Preference Shares treated as External Commercial Borrowings (ECB)
–
N C
Non-Convertible
tibl D
Debentures
b t
nott a ffully
ll recognized
i d FDI iinstruments
t
t
 Recent introduction - Optionality clauses for Equity, CCPS and CCDs
–
Minimum lock-in period of one year or that prescribed under FDI policy whichever is higher
–
Lock-in period to start from the date of allotment of the instruments or as prescribed in the FDI Policy
–
Option / right to exit to be without any assured return
–
Exit for Shares / CCDs of Listed Company - Ruling market price / stock exchange for listed company;
–
Exit for equity shares of unlisted company based on Return on Equity Method (PAT/Net-worth) and for CCPS
and CCDS as per any internationally accepted pricing methodology
–
RBI MC (updated of Feb 14) says provisions apply henceforth on / from 30 December 2013 whereas RBI
Circular No. 86 dated 9 January 2014 says all existing contracts to comply with said condition?
9
FDI – Fair Value
Issue of shares / convertible instruments to be at fair value
 On the date of issue, as per DCF method for unlisted company & SEBI Guidelines (ICDR) for listed company
 Pricing relevant even for convertible Instruments
− Conversion price to be fixed upfront – fixed or formula based but cannot be lower than fair value as per
prescribed method on date of issue of shares / instruments – Key issue: more than one formula?
− Key issues - Whether period of conversion can be extended for CCPS / CCDs? Whether CCDs can be
converted
co
e ted to CC
CCPS
S or
o vice-versa?
ce e sa
 Even transfer of shares between Residents and Non-Residents to comply with fair value thresholds
− Sale by Non-Resident: Maximum payment by Resident is fair value
− Sale by Residents: Minimum receipt to be at fair value
 Pricing not relevant
− FDI by way of subscription Memorandum of Association - Face Value
− For transfers between two Non-Residents
Non Residents for both legs under FDI scheme
 Fair value applicable also to issue of shares / instruments against ECB / Royalty / Imports / other items
− Exchange rate in such cases prevalent on the date of agreement or lower as per mutual agreement
− Fair Valuation date = date of conversion
− Special rules for valuation of imports of capital goods by SEZ, other units, etc
10
FDI – Rights and Bonus issues
 Rights issues
− For listed company – issue price at the price determined by the Company
− For Unlisted Company - at the same price at which shares are issued to Resident shareholders and NonResident can also subscribe to unsubscribed portion from the overall issue
− To issue right shares to OCBs, prior approval of RBI is required.
− Key issue – whether Rights possible in the case of WOS issuing shares to Single Parent / Nominee?

Bonus Shares
–
Bonus issues are under general permission subject to compliance with Sectoral Cap under FDI policy
–
Compliance of other applicable statutes / company law provisions
–
Bonus shares can also be issued to erstwhile OCBs without any RBI approval
approval.
–
RBI Circular No. 84 dated 6 Jan 2014 permits Indian Companies to issue non-convertible / redeemable
preference shares / debentures to non-resident by way of bonus from its general reserve under a Scheme of
Arrangement approved by a Court in India subject to no objection from the Income Tax Authorities.
11
FDI ad FEMA 20 – Key reporting / compliance requirements
 Issue of Shares - Intimation to Reserve Bank of India through Banker / Authorised Dealer
– Receipt of FDI / share application money – within 30 days from receipt
 KYC of overseas investor in prescribed format required from remitting overseas bank
– Issue of shares / convertible instruments - Report to RBI in Form FC-GPR within 30 days from issue of
shares / CCDs along with prescribed documents (CA /Merchant Banker - fair valuation report)
 Shares / convertible instruments to be issued within 180 days from the date of receipt of funds
– RBI allots UIN No. for initial intimation and Registration No. for allotment / issues
– Reporting obligation also for issue Rights and Bonus Shares
 Transfer of shares between Residents and Non-Residents
– Form FC-TRS formalities through AD / Banker within 60 days from receipt of consideration
 Reporting for downstream investments to Government / DIPP
– Within 30 days from downstream investments in stipulated format / per conditionalities specified
 Filing of Annual Return on Foreign Liabilities / Assets with RBI by 15 July every year
12
FDI ad FEMA 20 – Key issues in reporting / compliance requirements
 Key issues
– KYC and documentation if funds received from entity than foreign investors
– KYC in case of nominees if funds received / not received from nominees
– Obtaining FIRC from AD banks and description therein
– Time taken by AD-Bank to peruse the documents
– Date of fair valuation certificate (sometime on format, contents, etc)
– Reconciling of past issue / transfer of shares
– Appropriateness of object clause and other clauses in the Memorandum of Association
– Determining
g correct NIC Codes
– Changes in AD Bank post receipt of funds but before issue of shares
– Interpretation Sectoral aspects with AD-Banks
– Conversion of ECB – whether interest due covered?
13
FDI - General permissions


Issue & acquisition of shares after merger / amalgamation / de-merger of Indian Companies
–
General permission for issue of shares under merger / amalgamation / de-merger of Indian Companies
–
Issue of shares subject to compliance with Sectoral Cap under FDI policy
–
FC-GPR Reporting obligation prescribed within 30 days of issue
–
Shares widely elaborated to mean CCDs / CCPs in RBI MC
Pledge of Shares
–
Residents Promoters of Indian company can pledge shares to non-residents in the course of raising ECB
–
Non-Residents can pledge shares of an Indian Company in favor of AD-Bank to secure credit facilities for the
resident Indian Investee Company for its business purposes
–
N R id t can pledge
Non-Residents
l d shares
h
off an IIndian
di C
Company iin ffavor off an O
Overseas B
Bank
k tto secure credit
dit ffacilities
iliti
for the non-resident investor / overseas group company subject to conditions
© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
14
FDI - Transfer of Shares
 General Permission for transfer of shares and CCDs
– Person Resident Outside India [PROI] (other than NRI / OCB) to any PROI (including NRI) by way of sale / gift
– NRIs to NRIs by way of sale / gift
– PROI to PRI by way of gift
– PROI to PRI by way of sale - subject to sectoral policy, valuation and filings (FC-TRS)
– PRI tto PROI b
by way off sale
l - subject
bj t tto sectoral
t l policy,
li valuation
l ti and
d fili
filings (FC
(FC-TRS)
TRS)
– Sale by PROI on the Recognized Stock Exchange at prevailing price
– Transfer of shares includes buy-back / reduction of capital (PROI to PRI)
 Other points
– General permission for transfer available even if Indian company’s activities earlier fell under approval route but
now are under automatic route
– Form FC-TRS to be submitted to AD-Bank within 60 days from receipts of funds and onus is on transferee /
transferor PRI though FC-TRS to be signed by PROI (buyer / seller)
– Indian company can record transfer only post approval of Form-FC TRS by AD-Bank
– Inward remittances subject to KYC checks
15
FDI – Acquisition on Stock Exchange and Escrow
 FDI / acquisition on Stock Exchange through a registered broker
– Eligible PROI = who has acquired and holds control in accordance with SEBI SAST Regulations
– Sectoral policy,
policy entry route conditions
conditions, etc to be complied with
– Escrow arrangement includes acquisition through dividends entitlements from the Indian Company
– This seems to suggests other FDI / acquisition of shares on stock exchange requires prior RBI approval?
– One of the requirements under RBI guidelines for transfer of share from R to NR is copy of brokers note if the
acquisition is on stock exchange?
 Escrow Arrangements
– AD Bank given permission to allow Escrow Account and Special Account for open offers, exit offers and
delisting of shares as per SEBI Guidelines
– AD Bank given permission to allow non-interest bearing Escrow in India in INR on behalf of NR / R towards
paymentt off issue
i
off share
h
/ CDDS or consideration
id ti relating
l ti tto ttransfer
f off shares
h
/ CCD
CCDs
•
Fresh issue as well as transfer of shares cases eligible
•
Refund / unwinding of escrow also permissible
•
Escrow period is six months and various other conditions stipulated
16
FDI – Transfer of shares / CCDs from NR to R
• Non-resident to Resident where pricing guidelines under FEMA are not met:
− Original and resultant investments are in line with FDI policy ,within the sectoral caps, conditionalities and
reporting requirements are complied with
− Pricing for the transaction is compliant with SEBI guidelines such as IPO, Book Building, Block Deals, Delisting,
Exit, Open Offer/ SAST and Buy-Back Guidelines
− CA certificate to the effect that the pricing norms have been complied with has been attached with Form FC-TRS
− Transfer under any other regulations then SEBI where FEMA pricing guidelines not met requires prior RBI
approval
− AD Banks can also give guarantee on behalf of non-residents for acquiring shares / CCDs as per open offer/
delisting / exit offers as per SEBI regulations subject to a counter guarantee of a bank of international repute
17
FDI – Transfer of shares / CCDs from R to NR
• General permission for transfer of shares / CCDs from R to NR
•
Transfer of shares requires prior FIPB approval which has been obtained and pricing as well as documentation
guidelines are complied
g
p
with
•
Transfer as per SEBI (SAST) guidelines subject to adherence with pricing guidelines and documentation
requirements
•
Transfer where FEMA pricing guidelines not met but:
− Original and resultant investments are in line with FDI policy ,within the sectoral caps, conditionalities and
reporting requirements are complied with
− Pricing for the transaction is compliant with SEBI guidelines [such as IPO, book building, block deals, delisting,
open / exit offer, substantial acquisition / SEBI(SAST)]
− CA certificate that the pricing norms have been complied with has been attached with Form FC-TRS
•
Transfer where the investee Indian company is in the financial service sector provided that:
– From 11 October 2013, ‘fit and proper due diligence’ requirements as regards non-resident investor as
stipulated by financial sector regulator have been complied with [Earlier NOCs were prescribed from
Regulators of all three constituents]
– The FDI policy and FEMA regulations in terms of sectoral caps,
caps conditionalities,
conditionalities reporting requirements
requirements,
documentation etc., are complied with.
18
FDI – Transfer of shares / CCDs between R to NR
• Transfers requiring prior approval of the RBI
•
Transfer of Shares / CCDs between R to NR for deferred payment of amount of consideration
•
Gift of securities from PRI to PROI
−
Transferor (Donor) and Transferee (Donee) are close relatives – Companies Act
−
Gift of shares is within 5% paid-up capital of the Indian Company or each series of Debentures / Mutual
Fund
•
−
Eligibility in accordance with Schedule I, 4 and 5 of FEMA
−
There is no breach of sectoral conditions
−
Value of security does not exceed USD 50,000 per financial year or its equivalent
Transfer of shares from NRI to NR
•
Key issue – significance of fair valuation where shares are held on Non-Repatriation basis?
19
FEMA 20 – General permission

ESOP Shares to Non-residents Individuals
–
Listed Indian Companies can issue ESOP to its employees or employees of its JV / WOS abroad who are PROI
other than Citizens of Pakistan and for issue of ESOP to Citizen of Bangladesh requires prior FIPB approval
–
Shares can be issued directly or through a trust
–
For listed companies, Scheme to be drawn up as per relevant SEBI guidelines
–
Face value of shares allotted should not exceed 5% of the paid up capital of the issuing companies
–
Unlisted companies have to follow the provisions of the Companies Act
–
Issue of ESOP requires reporting to RBI Regional Office within 30 days
–
Subsequent issue of shares under ESOP requires filing of Form FC-GPR within 30 days
–
Mi
Mismatch
t h between
b t
provisions
i i
in
i the
th Consolidated
C
lid t d FDI P
Policy
li and
d RBI MC?
20
FEMA 20 – General permission
 Remittance on winding up /liquidation of companies
–
General permission to AD Bank
–
NOC or ITCC from
f
Income
I
Tax
T Authorities
A th iti
–
Auditor’s certificate for all liabilities fully provided / paid and winding up being in accordance with company law.
–
In case of winding up otherwise than by court, auditor’s certificate that no legal proceeding are pending in any
court and there is no legal impediment in permitting the remittance.
 Recent RBI Circular No. 69 dated 8 Nov 2013
−
Unlisted companies allowed to raise capital abroad without prior / subsequent listing in India for an initial period of
two years
− Listing only in IOSCO / FATF compliant jurisdictions or those with which SEBI has signed bilateral agreements
− Raising
R i i ffunds
d tto b
be iin compliant
li t off FDI policy
li
− Rigorous filings with SEBI
− ADR / GDR terms and conditionality to be complied with
− Capital raised can be used abroad or repatriated to India within 15 days
© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
21
FDI Policy – Control & Ownership
 Concept of ‘owned’ and / or ‘control’ of an Indian Company by Resident(s) or Non-Resident(s)
 Control: Control shall include the right to appoint a majority of the directors or to control the management or
policy decisions including by virtue of their shareholding or management rights or shareholders agreement or
voting agreements.
 Indian Company Owned by Residents: More than 50% of capital is beneficially owned by RICs (Resident Indian
Citizens+ Companies owned and controlled by them) + additional sectorwise conditions (e.g. Defense, etc)
Citizens
 Indian Company Owned by Non-Residents: More than 50% of capital is beneficially owned by Non-Residents
 In sectors / activities with caps, Government / FIPB approval required in the following cases
– Indian Company established with foreign investment is not owned or controlled by a resident entity
– Control or ownership of existing Indian Company owned and controlled by RICs is being transferred to NR
g
, merger
g / demerger,
g , acquisition,
q
, etc.
under transfer of shares,, fresh issue,, amalgamation,
– Foreign Investment
 All types FDI, FII, FPIs, QFIs, NRIs, ADR, GDRs, FCCB, CCPS, CCDS under all schedules of FEMA
20 ((exceptt S
Schedule
h d l 4 ii.e. NRI iinvestment
t
t on non-repatriation
t i ti b
basis)
i )
22
FDI Policy – Downstream Investments

An Indian Company to have indirect foreign investment if the investing Indian company has foreign investment in it

Downstream investments guidelines / parameters:
–
Apply only to Indian Investor company with which is owned and controlled by NR entity
–
Investment subject to entry route conditions as direct FDI and Company’s Board approval
–
The computation of Indirect FDI as per mechanism prescribed and applies at each level in multi – tier structure
–
Indian Investor Company to notify SIA/ DIPP/ FIPB within 30 days even if instruments have not been issued
–
Issue / transfer / pricing / valuation to be in accordance with SEBI / RBI guidelines
–
For downstream investments requisite funds to be brought from abroad and no leveraging of funds from
domestic market permitted
–
Downstream investments permissible from internal accruals

Downstream Investments by Banking Company – guidelines apply only to strategic investments in JVs/ WOSs

Responsibility of compliances of all downstream investments vests with the First Level Indian Company
−
Statutory Auditor’s Certificate to be obtained for compliance plus mention in the Director’s report
−
Qualified Statutory Auditor’s report to be forwarded to relevant Regional Office of RBI
23
Downstream Investment Calculation (1/3)
F Co
F Co
49%
49%
Indian
investing
Co.
51%
RICs
75%
Operating Co.
49% Direct FDI in Operating Co
Operating Co.
25%
Case 1 - No Indirect FDI in Operating Co
24
Downstream Investment Calculation (2/3)
F Co
51%
Indian
investing
Co.
49%
RICs
75%
Operating Co.
25%
Case 2 : 75% Indirect FDI
25
Downstream Investment Calculation (3/3)
F Co
51%
Indian
investing
Co.
49%
RICs
100%
Operating Co.
Case 3 : 51% Indirect FDI
26
FDI in LLP…PN 1 of 2011 dated 20 May 2011 and now enacted by RBI Notification No.
298 in FEMA 20 as Schedule 9 (RBI Circular No. 123 dated 16 April 2014)
FDI permitted in LLP with prior FIPB approval
What is permitted
Important points
 Allowed only in sectors where 100% FDI is permitted under

activity, Print Media and Real Estate business
Automatic Route and there are no FDI-linked performance
related conditions – Thus, not allowed where FDI is under
Approval Route or Sector policy is applicable.
 Examples of sectors with FDI-linked performance related

Investments in LLP by FII / FVCI not permitted

Designated Partner to be Indian company or person
resident in India
conditions are NBFC, Development of Townships, Housing,
Built up infrastructure and Construction-development

projects, etc.
 Downstream investment byy an Indian Companyy with FDI,
into a LLP permitted, if Indian company and LLP both
operate as above i.e. Automatic Route with no FDI-Linked
Capital contribution only in cash by way of inward
remittances / through NRE / FCNR accounts

No downstream investment by
y LLP with FDI p
permitted

LLP not permitted to avail External Commercial
Borrowings (ECB)
performance related conditions – per RBI guidelines onus
i on LLP for
is
f compliance
li
off this
thi condition
diti
FDI in LLP not permitted in Agricultural / Plantation

Conversion of Company with FDI into LLP permitted
27
LLP – FEMA / RBI Guidelines
 Eligible Investors

– A person resident outside India or an entity
– Report of receipt of capital contribution and profits
p
outside India except
p a citizen / entity
y of
incorporate
Pakistan and Bangladesh and SEBI registered
FIIs, FVCI, QFIs, FPIs.

shares in the Form FOREIGN DIRECT
INVESTMENT – LLP(I) within 30 days
– FIRC + KYC + Valuation certificate
Eligible Investments
– Disinvestment / transfer of capital contribution in
Form FOREIGN DIRECT INVESTMENT – LLP(II)
within 60 days
– Contribution to the Capital is an eligible investment
– Inward remittance or NRE / FCNR for NRIs
– RBI to allot UIN Number
– Investment by way of ‘profit
profit share
share’ will be
reinvestment of earnings.

Pricing for investment / acquisition / transfer
– Any
A valuation
l ti norms as per iinternationally
t
ti
ll
accepted / adopted as per Market practice
– Certificate by CA or Cost Accountant or by an
approved valuer from Central Government Panel
Reporting to RBI Regional Office through AD Bank

Other Conditions
− Designated partner – corporate or individual needs
to be resident under FEMA
− Designated partner is liable for penalty for LLP’s
contraventions
− Conversion of Company with FDI, into LLP, will be
allowed
28
FDI – Some key sectoral issues
Wholesale Trading
• WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture
• Group Company – two or more enterprises which, directly or indirectly, are in position to :
(i) exercise 26% or more voting rights in other enterprise; or
((ii)) appoint
pp
more than 50%,, of members of Board of Directors in other enterprise.
p
• Key issues – whether sister concerns covered?
Single Brand Retail Trading
• For FDI beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be preferably
done from Indian small industries/ village and cottage industries, artisans and craftsmen, MSME, etc.
• Interpretation of the term “Preferable sourcing”
• What if conditions not met in five stipulated period?
• Confusion of whether wholesale Trading and SBRT can be permitted in the same Indian Investee Company?
• Retail trade through e-commerce not permitted
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FDI – Some key sectoral issues
Multi-Brand Retail Trading – the wait continues!
• FDI at 51% under Approval Route - several conditions : minimum FDI of USD 100 mn
• 30% local sourcing from small industries, 50 % of the foreign investment to be invested in back-end infrastructure, etc
• Few states retail FDI policy reversal – Law Ministry approached
• Retail trade through
g e-commerce not p
permitted
Pharmaceutical Sector
• No clear / specific guidance on what is Brownfield and approval parameters
• PN 1 dated 8 January 2014 stipulates that non-compete clause will be allowed only in special circumstances
• Aforesaid PN moots that Government can incorporate conditions in Brownfield cases a the time of granting approval
Real Estate
• Exits for various abandoned projects in recent scenario?
NBFC Minimum Capitalization norms
• Relaxation in recent recession / economic scenario?
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FDI Policy – recent discussion paper of E-commerce (Jan 14)
 B2C e-commerce exceeds and expected to exceed several times B2B e-commerce
 Two Models
 Market place model which works like exchange between buyers and sellers
 Inventory based model – ownership of inventory and supplies to customers therefrom
 Relies on A.T. Kearney's 2012 E-Commerce Index
 FDI in B2C - India Scenario
 Recommended by National body of internet / mobile companies and software / IT companies
 Strong opposition by National body of traders
 Discussion paper lays down perceived pros and cons of permitting FDI in B2C e-commerce
 Sought feedback from all stakeholders
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Things to watch out for
 RBI to remove / liberalize valuation norms
 RBI Monetary Policy document suggested that transactions to be based on acceptable market practices
 Step towards capital convertibility?
 Reliance on transfer pricing for related party deals?
 What is acceptable
p
market p
practice?
 Possible doing away of FDI and Portfolio Investment Categories and percentages
 More than 10% to be FDI and below that portfolio
 Practice followed in number of developed and developing countries
 Grandfathering for old investments?
 FDI in B2C E-commerce
E commerce possibly in a staggered manner
 FDI in new sectors – Railways
 Increase in Sectoral limits – Insurance
 LLP –aspects of conversion of company into LLP? Repatriation of past profits / reserves?
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Recent key Direct Tax developments
• Alleged taxation of the Indian Investee Company
– Fair value reworked and where issue price is lower then reworked fair value, then notional interest imputed
on deemed loan basis
– Where shares have been issued above the fair value then additions made on the allegation that share
premium is effectively ‘other income’
– Section 68 of the Income-tax Act also 1961 imputed in few cases.
• Other points
– Conversion of CCPS into Equity is not tax exempt under Section 47
– Whether corresponding relief available to foreign investors on sale of such shares?
– Rate of interest on CCDS – benchmarking India v. overseas rates?
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Answers
Questions
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accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or
pp p
that it will continue to be accurate in the future. No one should act on such / this information without appropriate
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