Corporate Professionals-Highlights of FDI-10.04.2010

8/8/2019 Corporate Professionals-Highlights of FDI-10.04.2010

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HIGHLIGHTS OF FDI POLICY Page 1

Highlights of FDI Policy

Issued on 01.04.2010

OUR GAMUT OF SERVICES:-Investment Banking; Corporate Restructuring-M & A; FEMA Advisory; Securities Laws Advisory; Corporate Finance &Taxation; India Entry Services; Capital Market & Intermediaries Services; Corporate Compliances & Due Diligence




INTENT BEHIND CONSOLIDATION

Consolidated FDI policy as issued by Department of Industrial Policy

and Promotion, Ministry of Commerce and Industry and

Government of India on 1st April 2010, consolidated all earlier Press

Notes/ Press Release/ Clarifications on FDI issued by DIPP into

Single Circular and submitted into one. Government has clarified

that this consolidation is not intended to make changes in the

extant regulations.

Government has also clarified that the policy pronouncement on

FDI by Press Notes/ Press Releases shall take effect from the date of

press notes/ press releases regardless of the procedural instructions

which shall be issued by the Reserve Bank of India (RBI) vide

relevant A.P. DIR series circular for amending Foreign Exchange

Management (Transfer or Issue of Security by a Person Resident

Outside India) Regulations, 2000.

The Circular has been issued with the sunset clause of six months. A

new Circular consolidating all amendments to the FDI Policy shall be

issued on September 30, 2010 superseding the present Circular.

INSERTION AND ELBORATION OF DEFINITONS

Few definitions have been inserted and few are elaborated further

through the FDI policy:

Definition of Capital is elaborated

From the definition of capital instruments like warrants, partly paid

shares etc are specifically excluded and such instruments cannot be

issued to person resident outside India.

Definition of Investing Company is elaborated

Investing company means Indian company holding only investments

in another Indian company, directly or indirectly, other than for

trading of such holdings/ securities.

Definition of Joint Venture (JV) is newly inserted

JV in India means an Indian entity incorporated in accordance with

the laws and regulations in India in whose capital a foreign entity

makes an investment. Earlier there is no such definition exists.

Definition of Owned by resident Indian citizens is elaborated

A company is considered as ‘owned’ by resident citizens if more

than 50% of the capital in it is beneficially owned by resident Indian

citizens and / or Indian companies, which are ultimately owned and

controlled by resident Indian citizens.




Definition of Transferable Development Rights (TDR) is newly

inserted

TDR means certificates issued in respect of category of land

acquired for public purposes either by the Central or State

Government in consideration of surrender of land by the owner

monetary compensation, which are transferable in part or whole.

Earlier no such definition is given anywhere.

Definition of Lottery Business is elaborated

Now lottery business includes Government/ Private Lottery, Online

Lotteries, etc.

Definition of Gambling and Betting is elaborated

Now Gambling and Betting includes casinos etc.

SALIENT FEATURES OF FOREIGN DIRECT INVESTMENT

Under the new FDI Policy, Indian companies can issue equity shares,

fully, compulsorily and mandatorily convertible debentures (FCD’s)

and compulsorily and mandatorily convertible preference shares

(CCPS) to the non residents subject to pricing guidelines/ valuation

norms as prescribed under FEMA from time to time. Also it has

been further clarified that for FCD’s/ CCPS, pricing of the

instruments would need to be decided/ determined upfront at the

time of issue of these instruments.

Now, warrants and partly paid shares are specifically excluded from

the ambit of capital. Before this amendment RBI suggests to take

post facto approval from FIPB if not earlier taken by the concerned

company. From now onwards, without obtaining prior approval

from foreign investment promotion Board (FIPB) warrants, partly

paid shares cannot be issued to person resident outside India.

FIIs are permitted to invest in the capital of an Indian company

either under the Foreign Direct Investment (FDI) Scheme or under

the Portfolio Investment Scheme (PIS).

Now onwards prior approval of FIPB followed by permission from

RBI would be required for transfer of equity shares/ FCD’s/ CCPS

from residents to non residents by way of sale or otherwise where

Indian company is engaged in any sectors falling under Government

route.

Also a person resident outside India other than

NRIs/ PIO may make an application and seek

prior approval of Reserve Bank for making investment by way of

contribution to the capital of a firm or a proprietorship concern of

any association of persons in India.




It has clearly mentioned that FDI in Trusts other than Venture

capital fund is also not permitted.

A Foreign Venture Capital Investor may contribute upto 100% of the

capital of a Venture Capital Fund / Indian Venture Capital

Undertaking and may also set up a domestic asset management

company to manage the fund under Automatic Route subject to

SEBI & RBI regulations and FDI policy. However, FVCIs are also

allowed to invest as non-resident entities in other companies

subject to FDI Policy. Earlier such investment was regulated under

RBI approval.

Already in existence Non Convertible, Optionally Convertible or

Partially Convertible Preference Shares and Debentures, all such

instruments are to be considered as debt on or after May 01, 2007.

Such instruments would be regulated by applicable External

Commercial Borrowings (ECB) Guidelines.

Any kind of inward remittance received by the Indian company vide

issuance of Deposit Receipts (DRs) and Foreign Currency Convertible

Bonds (FCCBs) are treated as FDI and reckoned towards FDI.

Erstwhile OCBs as derecognized as class of foreign investor w.e.f

September 16, 2003 who are not eligible to invest in India and

entities prohibited from buying, selling or dealing in securities by

SEBI will not be eligible to subscribe to ADRs/ GDRs issued by Indian

companies.

Two way Fungibility Scheme

A registered stock broker in India can now purchase shares of Indian

company from market for conversion into ADRs/ GDRs based on

instructions received from overseas investors. Re issuance of ADRs/

GDRs would be permitted to the extent of ADRs/ GDRs which have

been redeemed into underlying shares and sold in Indian Market.

SECTORAL MODIFICATIONS IN BREIF

Non Banking Financial Services (NBFC)

Classification of Non-Fund Based activities under NBFC head,

(i) Investment Advisory Services

(ii) Financial Consultancy

(iii) Forex Broking

(iv) Money Changing Business

(v) Credit Rating Agencies

Classification of Credit Card Business under NBFC

Likewise 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.

Security Agencies in Private Sector

In accordance with the provisions of Private Security Agencies

(Regulation) Act, 2005 FDI upto 49% is permitted under approval

route, subject to licensing conditions specified therein. Earlier there

were no guidelines regarding foreign investment in security

agencies.

Storage and Warehousing Services is newly inserted

Government has expanded fund limits of participants

Engaged in Storage and Warehouse Services and hence fore allowed

100% FDI under the Automatic Route in this sector which also

includes warehousing of agricultural products with refrigeration

(cold storage). Earlier there were no such provisions exists.

Clarification in regard to Cash and Carry Wholesale Trading

In order to clarify the meaning of cash and carry wholesale trading

Government has defined the term “Cash and Carry Wholesale

Trading’ to mean sale of goods/ merchandise to retailers, industrial,

commercial, institutional or other professional business users or to

other wholesalers and related subordinated service providers.

Wholesale trading would, accordingly, be sales for the purpose of

trade, business and profession, as opposed to sales for the purpose

of personal consumption.

Hence any sale to fulfill personal consumption would not be

considered as ‘Cash and Carry Wholesale Trading’. To determine

whether the sale is wholesale or not, consideration would be given

to the type of customers to whom the sale is made and not the size

and volume of sales.

Wholesale trading would include resale, processing and thereafter

sale, bulk imports with ex-port/ ex-bonded warehouse business

sales and B2B e-commerce.

Guidelines to be followed to undertake Cash & Carry Wholesale

Trading/ Wholesale Trading (WT):-

Requisite Licenses/ Registration/ Permits, as specified under the

relevant Acts/ Regulations/ Rules/ Orders of the State Government/

Government Body/ Government Authority.

Except in sale to Government, sales made by the wholesaler would

be considered as ‘cash & carry wholesale trading/wholesale trading’

with valid business customers, only when wholesale trading are

made to the following entities:

1. Entities holding valid sales tax/VAT registration/service

tax/excise duty registration; or

2. Entities holding trade license or

3. Entities holding permits /license etc or




4. Institutions having certificate of incorporation or registration as

a society or registration as public trust for their self

consumption.

Trading for exports is sub classified as E-commerce activities

Earlier there were no sub classification exists. E- Commerce

activities refer to the activity of buying and selling by a company

through the e-commerce platform. Such companies would engage

only in Business to Business (B2B) e-commerce and not in retail

trading. Hence, FDI existing restriction in domestic trading would be

applicable to e-commerce activities also.

Transport and Transport Support Services is newly inserted

FDI is allowed under 100% Automatic Route for the following

activities:

1. Pipeline transport, Ocean and water transport, inland water

transport

2. Transport Support Services

Research and Development Services is newly inserted

FDI is allowed under 100% Automatic Route excluding

basic Research and setting of R & D/ academic institutions which

would award degrees/ diplomas/ certificates. Earlier there were no

category exists.

New Sector (Advertising and Films) under Services Sector is

introduced

In both the activities 100% FDI under the Automatic Route is

allowed. Here Film Industry includes film financing, production,

distribution, exhibition, and marketing and associated activities

related to film industry.

Headend-In-The-Sky (HITS) is added in the Broadcasting Service

The total direct and indirect foreign investment including portfolio

and foreign direct investment in HITS shall not exceed 74%. FDI upto

49% would be on automatic Route and beyond that under approval

route. HITS Broadcasting Service refers to the multichannel down

linking and distribution of television programme in C-Band or Ku

Band wherein all the pay channels are downlinked at a central

facility (Hub/teleport) and again uplinked to a satellite after

encryption of channel. Foreign Investment would be subject to

guidelines/ conditions as specified by Ministry of Information and

Broadcasting.

Business Services is also newly inserted

FDI is allowed up to 100% under the Automatic Route in data

processing, software development and computer consultancy

services, software supply services, Business and management

consultancy services, market research services, technical testing &

analysis services.

Health and Medical Services is newly inserted

FDI is allowed up to 100% under the automatic route.




Certain conditions are introduced for foreign banks operating in

India

Foreign subsidiary in India shall be subject to following conditions:

1) Foreign banks will be permitted to either have branches or

subsidiaries but not both.

2) Foreign banks regulated by banking supervisory authority in the

home country and meeting Reserve Bank’s licensing criteria will

be allowed to hold 100 % paid up capital to enable them to set

up a wholly owned subsidiary in India.

3) A foreign may operate in India through only one of the three

available channels i.e. (Branches; A wholly owned subsidiary

and a subsidiary with aggregate foreign investment up to a

maximum of 74 % in a private bank.

I. Foreign Banks are allowed to establish a wholly owned

subsidiary either through conversion of existing branches

into subsidiary or through conversion of existing branches

into subsidiary or through fresh banking license.

II. A subsidiary of Foreign Bank shall be subject to the licensing

requirements and conditions broadly consistent with those

for new private sector banks.

III. No person holding shares, in respect of any share held by

him, shall exercise voting rights on poll in excess of ten per

cent of the total voting rights of all the share holders.

Additional conditions are prescribed for companies dealing with

development of Transgenic Seeds/ Vegetables, which are as

follows:

1) Genetically modified seeds or planting material are to be dealt

in compliance with safety requirements prescribed under the

Environment (Protection) Act.

2) Any import of genetically modified shall be subject to the

conditions specified under Foreign Trade (Development and

Regulation) Act, 1992.

3) The company shall also comply with any other Law, Regulation

or Policy governing genetically modified material.

4) Company can undertake the business activities involving the use

of genetically engineered cells and material after obtaining

requisite approvals from Genetic Engineering Approval

Committee (GEAC) and Review Committee on Genetic

manipulation (RCGM).

5) Import of material shall be in accordance with National Seeds

Policy.

Government has allowed 100% FDI for companies dealing in

genetically modified seeds in conformity with various safety

standards and environment protection laws.




GUIDELINES FOR DELIBERATION BY FIPB FOR FDI PROPOSALS

A guideline has been laid down by FIPB to consider the proposals for

FDI and to formulate its recommendations. FDI proposals should be

considered by board keeping in view the time frame of 30 days for

communicating of its decision. While considering proposals, FIPB

may prioritize the following:

(i) Proposals for infrastructure sector,

(ii) Proposals having export potential,

(iii) Proposals with employment prospect especially for rural people,

(iv) Proposals with backward linkage - agro business/ farm sector,

(v) Proposals having greater social relevance,

(vi) Proposals which help in induction of technology/ capital

Following should be specifically considered by Board during the

scrutiny and consideration of proposals:

The extent of foreign equity proposed to be held in the company,

Purpose behind the proposal i.e. whether for fresh induction

offerings/ NRI equity and or enlargement of foreign/ NRI equity.

Proposal is considered with Board Resolution and shareholders

agreement or not.

Issue/ Transfer/ Pricing of shares will be as per SEBI/ RBI

Guidelines.

Is an industrial or a service activity or combination of both?

Items of activity involve any restrictions by way of reservation for

the Micro or Small Enterprises sector.

Whether there is any sectoral restriction on the activity.

Whether proposal involve import of items that are hazardous,

banned or detrimental to environment.

For further information, contact us at

Corporate Professionals India Private Limited

D-28, South Extn., Part I, New Delhi – 110049,

Ph: 011-40622232, Fax: 011-40622201

Email:kavita indiac .com

Corporate Professionals-Highlights of FDI-10.04.2010

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