Foreign direct investment, Foreign direct investmentForeign direct investmentForeign direct investment

foreign direct investment

1. Samisti Legal

2. 2
Agenda
Entry Route
Sectoral Caps
Downstream Investment
Swap of shares
Shares for non-cash consideration
Overview

3. 3
Overview

4. 4
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

5. 5
Entry Routes

6. 6
Entry Routes
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
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.
Government Route
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
Automatic Route
FDI Guidelines for Investing in India
Foreign Investment Promotion Board (FIPB)

No Prior Regulatory Approval but only
Post Facto Filings to RBI, through AD



7. 7
Entry Routes
Existing Airports 100%
Asset Reconstruction Companies 49%
Titanium Minerals 100%
Broadcasting
(a)

Courier 100%
Print Media
(a)
26%
Single brand retailing 100%
Agriculture
(b)
Atomic energy
Retail trading (except single
brand up to 100%)
Lottery, betting and gambling
Chit fund, Nidhi company
Trading in Transferable
Development Rights
Cigars & Cigarettes
Negative List
(Illustrative)
Government Route
(Illustrative)
NBFC (minimum capitalization
norms)
IT
Financial services
(a)
Telecom Sector (74% cap)
(a)
Insurance (26 % cap)
(a)
Real Estate
(a)
Special Economic Zones
Infrastructure
Shipping
Manufacturing sector
Hotels and tourism
Automatic Route
(Illustrative)
Note: (a) Sector specific guidelines
(b) Subject to certain exceptions
 
FDI limits – Illustrative list

8. 8
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

9. 9
Sector Specific Caps

10. 10
Snapshot of Certain Specific Sectors
Sector / Activity % of FDI Cap / Equity Route
Real estate i.e. (Development of
Townships, Housing, Built-up
infrastructure and Construction-
development projects)
100% Automatic
Trading
(i)Cash & Carry Wholesale
Trading / Wholesale Trading
(ii)Single Brand Product Trading
100%
100%
Automatic
Government
NBFC 100% Automatic
Defence 26% Government

11. 11
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

12. 12
Real Estate
•Real Estate Investment subject to the following conditions:
Parameter Condition
1.Area For development of serviced
housing plots
Minimum 10 Hectare
Construction development projectsMinimum 50,000sq.mtrs
2. Capitalization 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

13. 13
Trading- Cash & Carry Wholesale trading
/ Wholesale trading (WT)
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 ex-port/ex-
bonded warehouse business sales,
or
•B2B e-Commerce
Type of customers to whom the sale is
made
Cash & Carry Wholesale trading/
Wholesale trading
Sale to qualify for WT, it should
primarily be for the purpose of trade,
business or profession and not
personal consumption
Yardstick for Determination
whether sale is WT


Size and volume of sales

14. 14
•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.
Trading- Cash & Carry Wholesale trading
/ Wholesale trading (WT)

15. 15
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

16. 16
NBFC
•FDI in NBFC is allowed under the automatic route in only the following activities:
x.Factoring
xi.Credit Rating Agencies
xii.Leasing & Finance
xiii.Housing Finance
xiv.Forex Broking
xv.Credit Card Business*
xvi.Money Changing Business
xvii.Micro Credit
xviii.Rural Credit
i.Merchant Banking
ii.Under Writing
iii.Portfolio Management Services
iv.Investment Advisory Services
v.Financial Consultancy
vi.Stock Broking
vii.Asset Management
viii.Venture Capital
ix.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.

17. 17
NBFC
•Investment would be subject to the following minimum capitalisation norms:
•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
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.

18. 18
NBFC – Non- Fund based activities
•Investment in Non-Fund based activities would be subject to the following -
•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
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
FDI in NBFC is subject to compliance with guidelines by RBI and other relevant
regulators

19. 19
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

20. Consolidated FDI Policy – salient features
20
•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)

21. FDI Policy – Principles
21
•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

22. Transfer of securities – basic rules
22
Type of transfer Window Key conditions
NR to NR or
NRI to NRI
AutomaticSubject to prior venture/ tie up condition
R to NR Automatic
- Min. valuation and compliances
- Activities not under approval route
NR to R AutomaticMax. valuation and compliances
R to NR in financial
services
RBI
approval
--
Control or ownership
from R to NR pursuant to
M&A
Govt.
approval
Only for sectors with sectoral caps
Gift by R to NR
RBI
approval
-Gift not to exceed 5% of paid-up capital
-Subject to sectoral caps
- Cap of USD 25,000 per calendar year

23. 23
Indirect & Downstream Investment

24. 24
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.

25. 25
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

26. 26
Calculation of Indirect FDI
F Co.
I Co
1

Overseas
India
I Co
1

Overseas
India
I Co
2
F Co.
Direct FI
Direct Foreign Investment Indirect Foreign Investment
Indirect FI
Total FI is sum of Direct FI and Indirect FI

27. 27
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

28. 28
Calculation of Indirect FDI
I Co
1

Overseas
India
I Co
2
NRE
If ICO
2
& ICO
1
owned and controlled by RIC,
investment by ICO
1
in ICO
2
is not indirect FDI
1
If ICO
1
is owned or controlled by NRE, investment by
ICO
1
in ICO
2
is considered indirect FDI
2
•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
If ICO
1 holds 100% in ICO
2, NRE investment in ICO
1 is
considered indirect FDI in ICO
2
3

29. 29
Calculation of Indirect FDI
Direct FI in I Co
2
= 39%
Indirect FI in I Co
2
= Nil
Total FI in I Co
2
= 39%
Non Resident Entity
(‘NRE’)
I Co
1
(Owned and
Controlled by RIC)
I Co
2
(Owned and
Controlled by RIC)
Overseas
India40%
10%
39%
Rule 1
Direct FI in I Co
2
= 39%
Indirect FI in I Co
2
= 10%
Total FI in I Co
2
= 49%
NRE
I Co
1 (Owned or
Controlled by NRE)
I Co
2
(Owned and
Controlled by RIC)
51%
10%
39%
Rule 2

30. 30
Calculation of Indirect FDI
Indirect FI in I Co
2
= 75%
Non Resident Entity
(‘NRE’)
I Co
1
(Investing/
operating cum
investing company)
I Co
2
Overseas
India75%
100% RIC
25%
Indirect FI in I Co
2
= NIL or 26%?
Non Resident Entity
(‘NRE’)
I Co
1
(Investing/
operating cum
investing company)
I Co
2
Overseas
India26%
100%
74%
What is indirect FDI in near 100% say 99%
held companies?
Rule 3

31. 31
Investment by way of Swap of Shares

32. 32
Swap of Shares
F Co 1
I Co
F Co 2
India
Issue of
shares
Transfer of
sharesOutside India
Existing Structure
F Co 1
I Co
F Co 2
Equity
Resulting Structure
Equity
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

33. 33
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

34. 34
Issue of shares for Non-cash consideration

35. 35
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

36. 36
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

37. 37
Shares for Non-cash consideration
Pre-
incorporation
Incorporated but
not
operational(Pre-
operational)
Set-up or
Commencemen
t of business
Indian Company not in existence– Payment
cannot be made to the Indian Company
Payments to be directly made to Indian
Company’s bank account and FIRCs to
explicit mention that funds remitted to
meet “pre-operative” expenses
Shares cannot be issued in lieu of
payment made by Foreign Investor
towards “Pre-incorporation”
expenses
Shares can be issued in lieu of
foreign direct inward remittances
made by Foreign Investor towards
“Pre-operative” expenses
Issue
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
Bank Account opened
subsequent to issue
of PAN

38. Thank You