Foreign Direct Investment. Foreign Direct Investment or FDI Is the process whereby residents of one country (the source country) acquire ownership of.

Foreign Direct Investment

Foreign Direct Investment or FDI

Is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution, and other activities of a firm in another country (the host country).

The International Monetary Fund’s balance of payment manual defines FDI as an investment

That is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investors’ purpose being to have an effective voice in the management of the enterprise’.

Foreign Direct Investment or FDI

The United Nations 1999 world investment report defines FDI as

‘an investment involving a long term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate)’.

Foreign direct investment: Indian scenario The FDI relationship consists of a parent enterprise and

a foreign affiliate which together form a Multinational corporation (MNC).

In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate.

The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment.

Regulatory Framework

Foreign Investment and Promotion Board (“FIPB”), which formulates foreign investment policy, and

The Reserve Bank of India (“RBI”), India’s central bank, with the primary responsibility of implementing and enforcing foreign exchange regulations and government policy.

Foreign direct investments in India are approved through two routes: Automatic approval by RBI: The Reserve Bank of India accords automatic approval

within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable.

The lists are comprehensive and cover most industries of interest to foreign companies.

Investments in high priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.

Foreign direct investments in India are approved through two routes: The Automatic Route would not be available to those who have any

previous joint venture in the same or allied field in India.

Investors investing under the Automatic Route do not require any approval from any of the authorities.

FDI in the public sector would also qualify under the Automatic Route.

The investors are only required to notify the relevant Regional Office of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of the issuance of shares to foreign investors.

Foreign direct investments in India are approved through two routes: The FIPB Route – Processing of non-automatic approval cases: FIPB stands for Foreign Investment Promotion Board which

approves all other cases where the parameters of automatic approval are not met.

Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few.

It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company.

The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

Foreign direct investments in India are approved through two routes: Government Approvals are accorded on the recommendation of the

FIPB.

Application for all FDI cases should be submitted to the FIPB Unit, Department of Economic Affairs, Ministry of Finance.

No fee is payable.

The application is generally processed in 4-6 weeks.

There is no requirement of notification to RBI after getting FIPB’s approval.

Foreign direct investment: Indian scenario

FDI is permitted as under the following forms of investments:Through financial collaborations. Through joint ventures and technical

collaborations. Through capital markets via Euro issues. Through private placements or preferential

allotments.

New investment by an existing collaborator in India

A foreign investor with an existing venture or collaboration (technical and financial) with an Indian partner in particular field proposes to invest in another area, such type of additional investment is subject to a prior approval from the FIPB, wherein both the parties are required to participate to demonstrate that the new venture does not prejudice the old one.

Investment by way of Share Acquisition

A foreign investing company is entitled to acquire the shares of an Indian company without obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines.

If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange, it would require the approval of the Security Exchange Board of India.

Participation by International Financial Institutions

Equity participation by international financial institutions such as ADB, IFC, etc., in domestic companies is permitted through automatic route, subject to SEBI/RBI regulations and sector specific cap on FDI.

Opening Subsidiary in India

Private Limited Company Public Limited Company Unlimited Company Sole Proprietorship

Entry Option

Foreign Companies can also set up their operations in India through the business entities:Liaison Office/Representative Office Project Office Branch Office

Entry Options Foreign investors planning to set up business in

India have two options, either to set up a separate corporate entity in India, i.e.

incorporating an Indian company or through an

Incorporation of an Indian company can be possible under the provisions of the Indian Companies Act, 1956.

The foreign investors can invest in such Indian company up to 100% of capital depending upon sectoral guidelines prescribed by the Government of India.

Entry Options

Unincorporated entity, for instance a branch office of the foreign entity.

Under this option, a foreign company are allowed to operate in India, subject to conditions and activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office of Other Place of Business) Regulations, 2000, through setting up either of the following:

liaison office/representative office, project office, or branch office.

Entry Option

Decide structure of India entry: It could be a JV with an Indian partner or a 100% Indian subsidiary.

Except for certain sectors a foreigner can set up a 100% subsidiary in India with full repatriation of capital and dividend facility.

Identify a good strategic partner in India

Foreign Investment through GDRs (Euro Issues): Indian companies are allowed to raise equity capital in the

international market through the issue of Global Depository Receipt (GDRs).

GDR investments are treated as FDI and are designated in dollars and are not subject to any ceilings on investment.

An applicant company seeking Government’s approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years.

This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

Use of GDRs:

The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic

purchase/installation of plant, equipment and building and investment in software

development, prepayment or scheduled repayment of earlier

external borrowings, and equity investment in JV/WOSs in India.

Clearance from FIPB:

There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year.

A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

Points to note

Tax: India has entered into a Double Tax Avoidance Agreement with many countries.

The agreement allocate the taxing jurisdiction between the source country and residence country.

Wherever such jurisdiction is given to both the countries, the agreement prescribes a maximum rate of tax in the source country which is generally lower than the rate of tax under the domestic laws of that country.

The double taxation in such cases is avoided by the residence country agreeing to give credit for tax paid in the source country thereby reducing tax payable in the residence country by the amount of tax paid in the source country.

Tax

Presently, due to various central and state taxes on goods and services, the Indian taxation framework is fragmented.

There is a little cascading of taxes in the present taxation system.

From both the domestic and foreign investment perspective a suitable reform in indirect tax is required to do away with the multiplicity of taxes thereby reducing cumbersome requirements, high cost of transaction and nagging uncertainty in tax liability for a business.

Forbidden Territories:

Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron, manganese, chrome,

gypsum, sulfur, gold, diamonds, copper, zinc.

Dispute Resolution

Indian law recognises the freedom of parties in an international contract to choose both the governing law, the forum (arbitration/courts) and the jurisdiction for settling disputes.

The FIPB often requires as a condition of its approval that agreements involving FDI be governed by Indian law.

Litigation in India is an onerous and time-consuming process. Arbitration is therefore a popular dispute resolution option.

Dispute Resolution

FDI regime in India has been liberalized to a great extent and a very large number of foreign investors has benefited thorough these policies.

Though there are certain important sectors like retail trade and telecommunications in which 100% FDI is not permitted but the steps are being taken by the Indian government to attract investors in these segments also.

Even under the present policies, India is being viewed as an investment heaven, and it is very difficult for wise investors to ignore India.

Foreign Direct Investment (FDI) in India: Sector wise Guide for Foreign

Investors

Hotel & Tourism: FDI in Hotel & Tourism sector in India

100% FDI is permissible in the sector on the automatic route.

The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and

food facilities to tourists.

Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to

tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units for tourists

and Convention/Seminar units and organizations.

Hotel & Tourism: FDI in Hotel & Tourism sector in India

For foreign technology agreements, automatic approval is granted if

Up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects, design, supervision, etc.

Up to 3% of net turnover is payable for franchising and marketing/publicity support fee, and up to 10% of gross operating profit is payable for management fee, including incentive fee.

Private Sector Banking:Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time.

FDI/NRI/OCB investments allowed in the following 19 NBFC activities:

Merchant banking Underwriting Portfolio Management

Services Investment Advisory

Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring

Credit Reference Agencies Credit rating Agencies Leasing & Finance Housing Finance Foreign Exchange Brokering Credit card business Money changing Business Micro Credit Rural Credit

Minimum Capitalization Norms for fund based NBFCs:

i) For FDI up to 51% - US$ 0.5 million to be brought upfront

ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront

iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be brought upfront and the balance in 24 months

Minimum capitalization norms for non-fund based activities:

Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment.


Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital)

Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above.


FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.

Insurance Sector:

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining licence from Insurance Regulatory & Development Authority (IRDA)

Telecommunication

In basic, cellular, value added services and global mobile personal communications by satellite, FDI is limited to 49% subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which investment is being made) to the license conditions for foreign equity cap and lock- in period for transfer and addition of equity and other license provisions.

ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval.

These services would be subject to licensing and security requirements.

No equity cap is applicable to manufacturing activities.

FDI up to 100% is allowed for the following activities in the telecom sector :

ISPs not providing gateways (both for satellite and submarine cables);

Infrastructure Providers providing dark fiber (IP Category 1);

Electronic Mail; and Voice Mail

Telecommunication

The above would be subject to the following conditions:

FDI up to 100% is allowed subject to the condition that such companies would divest 26% of their equity in favor of Indian public in 5 years, if these companies are listed in other parts of the world.

The above services would be subject to licensing and security requirements, wherever required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

FDI in Trading Companies in India

Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house.


Under the FIPB route:- 100% FDI is permitted in case of trading companies

for the following activities: exports; bulk imports with ex-port/ex-bonded warehouse sales; cash and carry wholesale trading; other import of goods or services provided at least 75% is for

procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales.


The following kinds of trading are also permitted, subject to provisions of EXIM Policy:

Companies for providing after sales services (that is not trading per se)

Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India.

Trading of hi-tech items/items requiring specialized after sales service

Trading of items for social sector

Trading of hi-tech, medical and diagnostic items.


Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name.

Domestic sourcing of products for exports.

Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing.


FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world.

Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.

FDI In Power Sector in India

Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants.

There is no limit on the project cost and quantum of foreign direct investment.

Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract

compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted formulations.

Drugs & Pharmaceuticals

FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology, and specific cell / tissue targeted formulations will require prior Government approval.

Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors.

Pollution Control and Management

FDI up to 100% in both manufacture of 1.pollution control equipment and 2.consultancy for integration of pollution control

systems

is permitted on the automatic route.

OTHERS

Call Centers in India / Call Centres in India

FDI up to 100% is allowed subject to certain conditions.

Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain conditions.

Special Facilities and Rules for NRI's and OCB's

Direct investment in industry, trade, infrastructure etc.

Up to 100% equity with full repatriation facility for capital and dividends in the following sectors:


High Priority Industry Groups

Export Trading Companies

Hotels and Tourism-related Projects

Hospitals, Diagnostic Centers

Shipping Deep Sea Fishing Oil Exploration

Power Housing and Real Estate

Development Highways, Bridges and

Ports Sick Industrial Units Industries Requiring

Compulsory Licensing

Industries Reserved for Small Scale Sector


Up to 40% Equity with full repatriation: New Issues of Existing Companies raising Capital through Public Issue up to 40% of the new Capital Issue.

On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged in Industrial, Commercial or Trading Activity.

Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the equity Capital or Convertible Debentures of the Company by each NRI. Investment in Government Securities, Units of UTI, National Plan/Saving Certificates.


On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a General Body Resolution, up to 24% of the Paid Up Value of the Company.

Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares or Debentures of an Indian Company.

Foreign Direct Investment in Small Scale Industries (SSI's) in India

FDI in SSI in India

India has allowed Foreign Direct Investment up to 100% in many manufacturing industries which were designated as Small Scale Industries.

India further ended in February 2008 the monopoly of small-scale units on 79 items, leaving just 35 on the reserved list that once had as many as 873 items.

Reservation means that units producing the reserved items cannot go beyond a stipulated cap on investment in plant and machinery.

FDI in SSI in India

A small-scale unit cannot have more than 24 per cent equity in its paid up capital from any industrial undertaking, either foreign or domestic.

If the equity from another company (including foreign equity) exceeds 24 per cent, even if the investment in plant and machinery in the unit does not exceed Rs 10 million, the unit looses its small-scale status and shall require an industrial license to manufacture items reserved for small-scale sector.

India Further Opens Up Key Sectors for Foreign Investment

Opens Up Key Sectors

The foreign investment limit in Public Sector Units (PSU) refineries has been raised from 26% to 49%. An additional sweetener is that the mandatory disinvestment clause within five years has been done away with.

FDI in Civil aviation up to 74% will now be allowed through the automatic route for non-scheduled and cargo airlines, as also for ground handling activities.

100% FDI in aircraft maintenance and repair operations has also been allowed. But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been given a miss again.

Opens Up Key Sectors

India has decided to allow 26% FDI and 23% FII investments in commodity exchanges, subject to the proviso that no single entity will hold more than 5% of the stake.

Keeping India's civilian nuclear ambitions in mind, India has also allowed 100% FDI in mining of titanium, a mineral which is abundant in India.

Statutory Limits

Foreign direct investment (FDI) up to 49 percent is permitted in Indian private sector banks under “automatic route” which includes Initial Public Issue (IPO), Private Placements, ADR/GDRs; and Acquisition of shares from existing shareholders.

Automatic route is not applicable to transfer of existing shares in a banking company from residents to non-residents. This category of investors require approval of FIPB, followed by “in principle” approval by Exchange Control Department (ECD), Reserve Bank of India (RBI).

The “fair price” for transfer of existing shares is determined by RBI, broadly on the basis of Securities Exchange Board of India (SEBI) guidelines for listed shares and erstwhile CCI guidelines for unlisted shares. After receipt of “in principle” approval, the resident seller can receive funds and apply to ECD, RBI, for obtaining final permission for transfer of shares.

Statutory Limits

Foreign banks having branch-presence in India are eligible for FDI in private sector banks subject to the overall cap of 49% with RBI approval.

Issue of fresh shares under automatic route is not available to those foreign investors who have a financial or technical collaboration in the same or allied field. Those who fall under this category would require Foreign Investment Promotion Board (FIPB) approval for FDI in the Indian banking sector.

Statutory Limits

Under the Insurance Act, the maximum foreign investment in an insurance company has been fixed at 26 percent. Application for foreign investment in banks which have joint venture/subsidiary in insurance sector should be made to RBI. Such applications would be considered by RBI in consultation with Insurance regulatory and Development Authority (IRDA).

FDI and Portfolio Investment in nationalized banks are subject to overall statutory limits of 20 percent.

The 20 percent ceiling would apply in respect of such investments in State Bank of India and its associate banks.

RBI Approval

Transfer of shares of 5 percent and more of the paid-up capital of a private sector bank requires prior acknowledgement of RBI.

For FDI of 5 percent and more of the paid-up capital, the private sector bank has to apply in the prescribed form to RBI.

Under the provision of Foreign Exchange Management Act (FEMA), 1999, any fresh issue of shares of a bank, either through the automatic route or with the specific approval of FIPB, does not require further approval of Exchange Control department (ECD) RBI from the exchange control angle.

RBI Approval

The Indian banking company is only required to undertake two-stage reporting to the ECD of RBI as follows:

(1) the Indian company has to submit a report within 30 days of the date of receipt of amount of consideration indicating the name and address of foreign investors, date of receipt of funds and their rupee equivalent, name of bank through whom funds were received and details of govt. approval, if any.

(2) Indian banking company is required to file within 30 days from the date of issue of shares, a report in form FC-GPR (Annexure II) together with a certificate from the company secretary of the concerned company certifying that various regulations have been complied with.

Divestment by Foreign Investors

Sale of shares by non-residents on a stock exchange and remittance of the proceeds thereof through an authorized dealer does not require RBI approval.

Sale of shares by private arrangement requires RBI’s prior approval.

Regulatory Issues

A foreign bank or its wholly owned subsidiary regulated by a financial sector regulator in the host country can now invest up to 100% in an Indian private sector bank.

This option of 100% FDI will be only available to a regulated wholly owned subsidiary of a foreign bank and not any investment companies.

Other foreign investors can invest up to 74% in an Indian private sector bank, through direct or portfolio investment.

The Government has also permitted foreign banks to set up wholly owned subsidiaries in India. The government, however, has not taken any decision on raising voting rights beyond the present 10% cap to the extent of shareholding..

Regulatory Issues

All entities making FDI in private sector banks will be mandatory required to have credit rating.

The increase in foreign investment limit in the banking sector to 74% includes portfolio investment [i.e., foreign institutional investors (FIIs) and non-resident Indians (NRIs)], IPO’s, private placement, ADRs or GDRs and acquisition of shares from the existing shareholders.

Regulatory Issues

In real terms, the sectoral cap has come down from 98% to 74% as the earlier limit of 49% did not include the 49% stake that FII investors are allowed to hold.

That was allowed through the portfolio route as the sector cap for FII investment in the banking sector was 49%.

Tax

The Government of India is supposed to introduce a new tax policy from April 2010 that will sweep away part of the current VAT system, a variety of state level direct and indirect taxes, excise duties, service tax and luxury tax and replace them with a single Goods and Services Tax (GST).

The GST is expected to be India’s magnet to draw foreign investment. In its final shape, it offers a seamless, transparent tax structure that leaves no room for discretion with the state or central government to change rates.

It is expected that subsuming all indirect taxes and levies under a single tax regime will create a grand common market with little distortions due to local factors.

Foreign Direct Investment. Foreign Direct Investment or FDI Is the process whereby residents of one country (the source country) acquire ownership of.

Documents