BY- BOMI DARUWALA - ICSI - FDI in India 5 11 2015... · The defendants challenged the invocation of guarantee inter-alia on the grounds that enforcing of guarantee is against public

BY-

BOM I D A R U WA LA

PA RT N E R , VA I S H A S S O C I AT E S , A D V O C AT E S

© 2013 Vaish Associates Advocates. All rights reserved.

Inbound Investment- Developments in policies

Pre-1991 FDI was allowed selectively up to 40% under FERA

1991 35 high priority industry groups were placed on the Automatic Route for FDI

up to 51%

1997 Automatic Route expanded to 111 high priority industry groups up to 100% /

74%/ 51%/ 50%

2000 All sectors placed on the Automatic Route for FDI except for a small

negative list

Post 2000 Many new sectors opened to FDI; viz., insurance (26%), integrated townships

(100%), mass rapid transit systems (100%), defense industry (26%), tea

plantations (100%), print media (26%), multi-brand retail trading (51%-

Approval route). Sectoral caps in many other sectors relaxed

Foreign Investment in India- Applicable Legislations

• The Foreign Exchange Management Act, 1999

(“FEMA”);

• Foreign Exchange Management (Transfer or Issue of

Security by a Person Resident outside India)

Regulations, 2000;

• Master Circular on Foreign Investment in India,

dated July 01, 2015 (“Master Circular”) [issued on

July 1st every year];

• Other circulars / notifications as released by Reserve

Bank of India (“RBI”) from time to time.

• Consolidated FDI Policy dated May 12, 2015

[updated every one year];

• Other press notes / press releases / clarifications

released by Department of Industrial Policy and

Promotion (“DIPP”) from time to time.

RBI

DIPP

Foreign Investment in India– A Brief Overview

FDI

Foreign

Investments

PIS FVCI

Others

(G-Sec,

NCDs,

etc.)

Investments on

non-repatriable

basis

Company LLP

RFPI NRIs, PIO

SEBI regd.

FVCIs

VCF,

IVCUs

RFPI NRIs, PIO NRIs, PIO

Automatic

Route

Govt.

Route

Persons resident

outside India

Foreign Direct Investment- Entry Routes

Entry Routes for FDI

Automatic Route

No prior Government approval required

Only filings have to be made by the

Indian company with RBI within 30

days of receipt of remittance and within

30 days of issuance of shares

Pricing:

Listed – SEBI (ICDR) Regulations

Unlisted – Any internationally accepted

pricing methodology on arm’s length

basis

Government Route

Investment proposals falling outside the

automatic route would require prior

Government approval by:

- FIPB- Proposals below Rs.3000 crore ;

or

- CCEA - Proposals of more than

Rs.3000 crore

Decision of the FIPB/CCEA usually

conveyed in 8-10 weeks. Thereafter,

filings have to be made by the Indian

company with the RBI.

Foreign Direct Investment-Prohibited Sectors

• FDI is prohibited in the following cases:

• Gambling and Betting

• Lottery Business

• Chit funds

• Nidhi company

• Trading in Transferable Development Rights

• Real Estate Business or Construction of Farmhouses

• Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of

tobacco substitutes

Activities/sectors not open to private sector investment e.g. (I) Atomic energy

and (II) Railway operations (other than permitted under FDI Policy)

Foreign technology collaboration in any form including licensing for franchise,

trademark, brand name, management contract is also prohibited for Lottery

Business and Gambling and Betting activities

Sectors where 100% FDI is permitted under Automatic Route subject to certain conditions

Specific activities in Agriculture & Animal Husbandry (Besides these, FDI is not allowed in

any other agricultural sector/activity)

Mining and Exploration of metal and non-metal ores

Coal and Lignite

Petroleum & Natural Gas: Exploration activities

Helicopter services/seaplane services requiring DGCA approval

Pharmaceuticals: Greenfield

Industrial Parks – new and existing

Courier services

Maintenance and Repair organizations; flying training institutes; and technical training

institutions

Foreign investment in NBFC is allowed under the automatic route in specific activities

Construction, operation and maintenance of Railways Infrastructure

E-commerce activities: Only in Business to Business (B2B) e-commerce and not in retail

trading.

Cash & Carry Wholesale Trading/ Wholesale Trading (including sourcing from MSEs)

White Label ATM (WLA)

Sectors where 100% FDI is permitted under Approval Route

Mining and mineral separation of titanium bearing minerals and ores, its value

addition and integrated activities

Up-linking of Non-‘News & Current Affairs’ TV Channels/ Down-linking of TV

Channels

Publication of facsimile edition of foreign newspapers

Publishing/printing of scientific and technical magazines/specialty journals/

periodicals

Pharmaceuticals: Brownfield

Foreign investment in other financial services, other than those indicated in the

FDI Policy, would require prior approval of the Government.

Tea sector including tea plantations (Besides this FDI is not allowed in any other

plantation sector/activity.)

Downstream Investment

• Investment by Foreign ‘Owned’ and/ or

‘Controlled’ Indian company into another Indian

company is regarded as Indirect FDI and requires

compliance with the relevant sectoral conditions

on entry route, conditionalities and caps, with

regard to the sectors in which the Downstream

Indian company is operating.

X

Downstream Indian Company

Foreign Company

Y

Indian Company

Downstream Investment - Concept

• The calculation of “Downstream investment”, is as below:

• Where Y has foreign investment less than 50%, then, X

would not be taken as having any indirect foreign

investment through Company Y;

• Where Y has foreign investment of 50% or above, then, the

entire amount invested by Y in X would be treated as

indirect foreign investment;

• Where X is a wholly owned subsidiary of Y, then , the

indirect foreign investment in X would be equal to the

quantum of foreign investment in Y.

Y

(Indian Company with

foreign investment)

X

(Indian Company)

Downstream investment-compliance

Notification to Secretariat for Industrial Assistance, DIPP and FIPB of

downstream investment

Downstream investment to be duly supported by a resolution of its Board

of Directors as also a Shareholders’ Agreement, if any;

Issue/transfer/pricing/valuation of shares shall continue to be in

accordance with extant SEBI/RBI guidelines;

Requisite funds for downstream investment to be brought from abroad and

not be funds borrowed in the domestic market. Downstream investments

through internal accruals are permissible subject to certain provisions

contained in the FDI Policy

The FDI recipient Indian company at the first level to would obtain a

certificate to this effect from its statutory auditor on an annual basis as

regards status of compliance with the instructions on downstream

investment in subsidiaries and compliance with FEMA provisions.

IDBI Trusteeship Services Ltd. v. Hubtown Ltd.

In November 2009, a Netherlandcorporation NederlandseFinancierings – Maatschappiji Voor

Ontwikkelingslanden N.V. (“FMO”) (foreign investor) subscribed to CCDs issued by

Vinca Developers (Vinca) (Indian company)

Upon conversion of the CCDs, FMO would hold approximately 99% shareholding in Vinca. Until

such conversion, Hubtown and its promoters held 90% of Vinca.

Vinca used proceeds from CCDs to purchase OPCDs issued by Amazia Developers Pvt. Ltd.

(Amazia) and Rubix Trading Pvt. Ltd. (Rubix), two wholly-owned subsidiaries of Vinca.

Hubtown had issued a corporate guarantee to secure the liability arising under the OCDs.

In 2012, the debenture trustee invoked the guarantee for default of OPCDs by Amazia and Rubix.

The defendants challenged the invocation of guarantee inter-alia on the grounds that enforcing of

guarantee is against public policy as the guarantee was for a downstream investment which was

against the laws of India, FDI Policy and FEMA regulations.

The Bombay High Court held that the transaction was a colourable device and part of an illegal

structure that provided an assured return to the foreign investor and violated the FDI regulations in

India. While rendering the judgement, the Court did not accept the argument of the Defendant that

that downstream investment by a “foreign owned or controlled company” is only permitted

through equity or compulsorily convertible instruments and not through non-convertible or

optionally convertible instruments.

Foreign Direct Investment-Recent Developments… (cont.)

Partly Paid Equity Shares And Warrants As Eligible Capital Instruments

Partly paid equity shares and warrants included within the scope of eligible

capital instruments for issuance to foreign investors, subject to the condition

that prior approval of FIPB will be required for the issuance of partly paid

equity shares and warrants to foreign investors by those companies whose

activities fall within the government route under the FDI Policy

Pricing of partly paid equity shares has to be determined upfront and 25% of

the total consideration amount (including share premium, if any), to be

received upfront. The balance consideration towards fully paid equity shares

to be received within a period of 12 months

Pricing of Warrants and price/ conversion formula to be determined upfront

and 25% of the consideration amount to be received upfront. The balance

consideration towards fully paid up equity shares to be received within a

period of 18 months

Foreign Direct Investment-Recent Developments… (cont.)

Composite Cap

Under the FDI Policy, while foreign investment in most sectors is permitted

up to 100% under the automatic route, there are certain sectors in which

there are sectoral caps. Further, in some such sectors, there were separate

caps for FDI and FPI route investments. DIPP has introduced composite

caps for simplification of foreign direct investment policy to attract foreign

investments.

FDI in WLA

Foreign investment up to 100% allowed in White Label ATM (WLA)

Operations, under the automatic route.

Foreign Direct Investment– Instruments

Fully, compulsorily

and mandatorily convertible debentures

Equity Shares

(including partly paid

equity shares)

Fully, compulsorily and

mandatorily convertible

preference shares

Instruments - FDI

Warrants

Foreign Direct Investment– Pricing Guidelines

Pricing Mechanism:

• Companies, if listed on a recognized stock exchange in India

- Issue and transfer of shares shall be as per the SEBI guidelines

• Companies, if not listed on a recognized stock exchange in India

- Not less than fair value of shares determined by a SEBI registered Merchant

Banker or a Chartered Accountant as per any internationally accepted

pricing methodology on arm’s length basis

In case of FDI instruments with optionality clauses, the non-resident investor

shall be eligible to exit at the market price prevailing on the recognised stock

exchanges subject to lock-in period as stipulated, without any assured return

Foreign Direct Investment Route– Key Issues

• Sector specific conditions:

- E-commerce activities

• 100% permitted under automatic route under B2B format for wholesale trading;

• Not allowed for retail trading.

• Questionable Structure – Flipkart Issue

equity investments

100%

Supply of goods license “Flipkart”

Foreign Investors

Flipkart Online

Services

(WC & C Co.)

WS Retail Services

(Licensed brand

“Flipkart”

(E-commerce Retail Co.)

Flipkart India Pvt.

Ltd.

(Owner of brand

“Flipkart”)

Indian Partners

Foreign Direct Investment Route–Key Issues

Facility sharing agreements between group companies through leasing/sub-

leasing arrangements for the larger interest of business will not be treated as

'real estate business' within the provisions of the Consolidated FDI Policy

Circular of 2015, provided such arrangements are at arm's length price in

accordance with relevant provisions of Income Tax Act 1961, and annual lease

rent earned by the lessor company does not exceed 5% of its total revenue.

In sectors/activities with caps, Government approval/FIPB approval would be

required in all cases where:

(i) An Indian company is being established with foreign investment and is not

owned by a resident entity or

(ii) An Indian company is being established with foreign investment and is not

controlled by a resident entity or


(iii) The control of an existing Indian company, currently owned or controlled by

resident Indian citizens and Indian companies, which are owned or controlled by

resident Indian citizens, will be/is being transferred/passed on to a non-resident

entity as a consequence of transfer of shares and/or fresh issue of shares to non-

resident entities through amalgamation, merger/demerger, acquisition, etc. or

(iv) The ownership of an existing Indian company, currently owned or controlled

by resident Indian citizens and Indian companies, which are owned or controlled

by resident Indian citizens, will be/is being transferred/passed on to a non-

resident entity as a consequence of transfer of shares and/or fresh issue of shares

to non-resident entities through amalgamation, merger/demerger, acquisition, etc.

or


Foreign investment in sectors under Government approval route resulting in

transfer of ownership and/or control of Indian entities from resident Indian

citizens to non-resident entities will be subject to Government approval.

Foreign investment in sectors under automatic route but with conditionalities,

resulting in transfer of ownership and/or control of Indian entities from

resident Indian citizens to non-resident entities, will be subject to

compliance of such conditionalities

Notwithstanding anything contained in paragraph above, portfolio investment,

upto aggregate foreign investment level of 49% or sectoral/statutory cap,

whichever is lower, will not be subject to either Government approval or

compliance of sectoral conditions, as the case may be, if such investment does

not result in transfer of ownership and/or control of Indian entities from

resident Indian citizens to non-resident entities. Other foreign investments will

be subject to conditions of Government approval and compliance of sectoral

conditions as laid down in the FDI policy

Foreign Direct Investment Route–Key Issues

Under NBFC, Leasing & Finance covers only financial leases and not operating leases, as per the New FDI Policy, 2015. FDI in operating leases is permitted up to 100% on the Automatic Route

WT of goods would be permitted among companies of the same group. However, such WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture

Key Policy Change –Price at the time of issuance of instruments

Consolidated FDI Policy dated

April 17, 2014

Consolidated FDI Policy

May 12, 2015

The Price shall be in accordance to the

extant FEMA Regulations (DCF

method of valuation for unlisted

companies and valuation in terms of

SEBI (ICDR Regulations) for listed

Companies.

The same shall be in accordance to the

extant FEMA Regulations (as per any

internationally accepted pricing

methodology on arm’s length’s basis for

unlisted companies and valuation in terms

of SEBI (ICDR Regulations) for listed

Companies.

Key Policy Change – Cases Which do not Require Fresh Approval


April 17, 2014


May 12, 2015

No Corresponding Provision.. New inserted:-

Additional foreign investment into the

same entity within an approved foreign

equity percentage/or into a wholly owned

subsidiary.

Key Policy Change – Defence Activity/Industry


April 17, 2014


May 12, 2015

Defence Industry subject to Industrial

license under the Industries

(Development & Regulation) Act,

1951

Government route up to 26%.

Above 26% to Cabinet Committee on

Security (CCS) on case to case basis,

Note: (i) Investment by Foreign

Portfolio Investors FPIs/FIIs (through

portfolio investment) is not permitted.

Government route up to 49%.

Above 49% to Cabinet Committee on

Security (CCS) on case to case basis,

(i) FDI limit of 49% is composite and

includes all kinds of foreign investments

i.e. Foreign Direct Investment (FDI),

Foreign Institutional Investors (FIIs),

Foreign Portfolio Investors (FPIs), Non

Resident Indians (NRIs), Foreign Venture

Capital Investors (FVCI) and Qualified

Foreign Investors (QFIs) regardless of

whether the said investments have

Key Policy Change – Defence Activity/Industry


April 17, 2014


May 12, 2015

No fresh FPI/FII (through portfolio

investment) is permitted even if the

level of such investment falls below the

capped level subsequently.

been made under Schedule 1 (FDI), 2 (FII),

2A (FPI), 3 (NRI), 6 (FVCI) and 8 (QFI) of

FEMA (Transfer or Issue of Security by

Persons Resident Outside India)

Regulations.

(ii) Portfolio investment by

FPIs/FIIs/NRIs/QFIs and investments by

FVCIs together will not exceed 24% of the

total equity of the investee/joint venture

company. Portfolio investments will be

under automatic route.

Key Policy Change – Construction Development:-Townships, Housing, Built-up infrastructure


April 17, 2014


May 12, 2015

Investment will be subject to the

following conditions:-

(1) Minimum area to be developed

under each project would be as under:

(i) In case of development of serviced

housing plots, a minimum land area of

10 hectares

(ii) In case of construction-development

projects, a minimum built-up area of

50,000 sq. mts

(iii)In case of a combination project,

any one of the above two conditions

would suffice.

Investment will be subject to the following

conditions:-

(A) Minimum area to be developed under

each project would be as under:-

(i) In case of development of serviced plots,

no minimum land area requirement.

(ii) In case of construction-development

projects, a minimum floor area of 20,000 sq.

meter

Key Policy Change – Construction Development:-Townships, Housing, Built-up infrastructure


April 17, 2014


May 12, 2015

Minimum capitalization of US $10

million for wholly owned subsidiaries

and US $ 5 million for joint ventures

with Indian partners. The funds would

have to be brought in within six months

of commencement of business of the

Company.

Investee company will be required to bring

minimum FDI of US$ 5 million within six

months of commencement of the project.

The commencement of the project will be

the date of approval of the building plan/lay

out plan by the relevant statutory authority.

Subsequent tranches of FDI can be brought

till the period of ten years from the

commencement of the project or before the

completion of project, whichever expires

earlier.

Key Policy Change – Railway Infrastructure


April 17, 2014


May 12, 2015

No Corresponding Provision Allowed under 100% Automatic Route

Construction, operation and maintenance of

the following:-

(i) Suburban corridor projects through

PPP,

(ii) High speed train projects,

(iii) Dedicated freight lines,

(iv) Rolling stock including train sets,

and locomotives/coaches manufacturing and

maintenance facilities,

(v) Railway Electrification,

(vi) Signaling systems,

(vii) Freight terminals,

(viii) Passenger terminals,

Key Policy Change – Railway infrastructure


April 17, 2014


May 12, 2015

Foreign Direct Investment in the

abovementioned activities open to private

sector participation including FDI is subject

to sectoral

(ii)Proposals involving FDI beyond 49% in

sensitive areas from security point of view,

will be brought by the Ministry of Railways

before the Cabinet Committee on Security

(CCS) for consideration on a case to case

basis.

Key Policy Change – Insurance Sector/Activity


April 17, 2014


May 12, 2015

26%- automatic

(FDI+FII/FPI+NRI)

Includes:-

(i) Insurance Company

(ii) Insurance Brokers

(iii) Third Party Administrators

(iv) Surveyors and Loss Assessors

Automatic up to 26%

Government route beyond 26% and up to

49%

Includes:-

(i) Insurance Company

(ii) Insurance Brokers

(iii) Third Party Administrators

(iv) Surveyors and Loss Assessors

(v)Other Insurance Intermediaries appointed

under the provisions of Insurance

Regulatory and Development Authority Act,

1999 (41 of 1999)

Key Policy Change – PHARMACEUTICALS


April 17, 2014


May 12, 2015

No corresponding Provisions….. FDI up to 100%, under the automatic route

is permitted for manufacturing of medical

devices.

Medical device means-

a. any instrument, apparatus, appliance,

implant, material or other article, whether

used alone or in combination, including the

software, intended by its manufacturer to be

used specially for human beings or animals

for one or more of the specific purposes of-

(aa) diagnosis, prevention, monitoring,

treatment or alleviation of any disease or

disorder;



April 17, 2014


May 12, 2015

(ab) diagnosis, monitoring, treatment,

alleviation of, or assistance for, any injury or

handicap;

(ac) investigation, replacement or

modification or support of the anatomy or of

a physiological process;

(ad) supporting or sustaining life;

(ae) disinfection of medical devices;

(af) control of conception, and which does

not achieve its primary intended action in or

on the human body or animals by any

pharmacological or immunological or

metabolic means, but which may be assisted

in its intended function by such means;



April 17, 2014


May 12, 2015

c. a device which is reagent, reagent

product, calibrator, control material, kit,

instrument, apparatus, equipment or system

whether used alone or in combination

thereof intended to be used for examination

and providing information for medical or

diagnostic purposes by means of in vitro

examination of specimens derived from the

human body or animals.

iii. The definition of medical device at Note

(ii) above would be subject to the

amendment in Drugs and Cosmetics Act.

Additional Important Pointers to be kept in mind:-

- An Indian company issuing partly paid equity shares shall file a report inForm FC-GPR to the extent they become paid up

- However, in cases where the NR investor, including an NRI, acquires shares on thestock exchanges under the FDI scheme, the investee company would have to fileform FC-TRS with the AD Category-I Bank

- Reporting of FCCB/ADR/GDRDR Issues:- The domestic custodian shallreport the issue/transfer of sponsored/unsponsored depository receipts as perDR Scheme 2014 in 'Form-DRR' within 30 days of close of the issue

THANK YOU

BY- BOMI DARUWALA - ICSI - FDI in India 5 11 2015... · The defendants challenged the invocation of guarantee inter-alia on the grounds that enforcing of guarantee is against public

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