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Foreign Investments
in India
Primary Market
Secondary Market
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Foreign Investments
Repatriation Basis
Foreign Direct Investments
Automatic Route
PROI
Govt Route
Foreign Portfolio
Investments
FIIs NRI,PIO
,QFIs
Foreign Venture Capital
Investments
SEBI regd. FVCIs
VCF, IVCUs
Other Investments
FIIs NRIs,PIO,QFIs
Non Repatriation Basis
NRIs, PIO
Foreign Investments in India
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What is FDI
FDI Means investment by Non-resident Entity/Person resident outside India in the capital of an Indian Company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000.
Consolidated FDI Policy Issued by Department of Industrial Policy and Promotion(DIPP), Ministry of Commerce and Industry annually along with Press Notes/Press releases, rules and Regulations, A.P. Dir. (series) Circulars determine the modalities of Foreign Direct Investment in India
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Eligibility for FDI in India
A non-resident entity or PROI
NRIs resident in Nepal and Bhutan as well as citizens
of Nepal and Bhutan
Erstwhile Overseas Commercial Bodies
SEBI registered Foreign Institutional Investor
SEBI registered Foreign Venture Capital Investor
Qualified Foreign Investors
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Eligibility for FDI in India
• It covers all persons resident outside India. • Citizen of or an entity incorporated in Bangladesh can invest
only under the Government route. • *A citizen of or an entity incorporated in Pakistan can invest,
only under the Government route, in sectors/activities other than defence, space and atomic energy. *Amended by Press Note No.3 (2012 Series) on August 1, 2012 issued by DIPP
Non Resident Entity
• Invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.
NRIs or Citizens of Nepal and
Bhutan
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Eligibility for FDI in India
• Derecognized as class of investors in India w.e.f. September 16, 2003.
• Can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of GOI, if investment is through Government route; and with prior approval of RBI, if investment is through Automatic route. For those incorporated outside India and are not under the adverse notice of RBI
Erstwhile Overseas
Commercial Bodies
• FII means an entity established or incorporated outside India which proposes to make investment in India and which is registered as a FII in accordance with the SEBI (FII) Regulations 1995)
• SEBI registered FII can invest directly in Indian company under FDI Policy
• Can also invest though a registered broker on recognized Exchange under
Foreign Institutional
Investors(FII)
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Eligibility for FDI in India
• SEBI registered FVCIs are also allowed to invest under the FDI Scheme, as non-resident entities subject to FDI Policy and FEMA regulations in
• SEBI registered IVCU • SEBI registered IVCF • Other companies as per FDI policy
Foreign Venture
Capital Fund
• QFIs can invest through SEBI registered DP(for listed companies), equity shares of other Indian companies which are offered to public in India
• Individual & aggregate investment limit is 5% and 10% respectively of the paid up capital of an Indian company.
Qualified Foreign
Investors
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Entities Into Which FDI Can Be Made
Indian Company
Partnership Firm/
Proprietorship Concern
Venture Capital Funds
Trusts LLPs
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Indian Company
Indian Company
Can issue capital against FDI, i.e. Equity shares, Fully and mandatorily convertible preference shares, Fully and
mandatorily convertible Debentures, ADRs/GDRS
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Partnership Firm/ Proprietary Concern
Non Repatriation
NRI or PIO resident outside India can invest
Investment by Inward remittance or out of
NRE/FCNR/NRO account
Repatriation
NRIs/PIO only with prior approval of RBI
Note: 1) An NRI or PIO is not allowed to invest in a firm or proprietorship concern
engaged in any agricultural/plantation activity or real estate business or print media.
2) Other than NRI/PIO can invest with prior approval of RBI
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Venture Capital Fund
FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs) /Venture Capital Funds (VCFs) /other
companies.
A person resident outside India can invest in Domestic VCF set up as a trust, subject to approval of the FIPB.
A person resident outside India can invest in a domestic VCF is set-up as an incorporated company under the
Companies Act, 1956 under the automatic route.
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Trusts and Limited Liability Partnerships
Trusts
FDI in Trusts other than VCF is not permitted
Limited Liability Partnerships
FDI is permitted, subject to certain conditions
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Entry routes for FDI in India
Foreign investor or the Indian company doesn't require any approval from RBI or GOI
Foreign investor or the Indian company should obtain prior approval of
Foreign Investment Promotion Board (FIPB)
Approval Route Automatic Route
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Types of Instruments
Equity Shares
Fully & Compulsorily convertible preference
Shares
Fully & Compulsorily convertible debentures
ADRs/GDRs/ FCCBs
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Pricing Guidelines
• Listed Companies- SEBI guidelines • Unlisted Companies- Not less than fair value
determined by SEBI registered Merchant Banker or a Chartered Accountant as per DFCF
Fresh Issue of shares
• Issue Price shall not be less that the price as applicable to transfer of shares from resident to non-resident
Preferential Allotment
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Pricing Guidelines
• Company listed on recognised stock exchange - At a price as determined by the company
• For others- At a price which is not less than the price at which the offer on right basis is made to the resident shareholders
Right Shares
• Companies listed on recognized stock exchange- negotiated price for shares, which shall not be less than the price at which the preferential allotment of shares can be made under the SEBI guidelines, as applicable.
• Price per share arrived at certified by a SEBI registered Merchant Banker or a Chartered Accountant.
• Companies not listed on recognized stock exchange- negotiated price for shares, which shall not be less than the fair value to be determined by a SEBI registered Merchant Banker or a Chartered Accountant as per DFCF
Acquisition/ transfer of existing
shares (private arrangement)
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Total Foreign Investment in Indian Company
Direct Foreign Investment by non resident
entity into Indian company
Indirect Foreign Investment by
Resident Indian entity, having
Foreign Investment
Total Foreign Investment in
Indian Company
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Direct Foreign Investment in Indian Company for further Investment
Direct Foreign Investment in Indian Company for further
Investment
Investing Company
Approval of FIPB for formation of investing
company with FDI
Operating cum Investing Company
Sectoral Caps and Pricing Guidelines etc. to be
complied with, as per FDI Policy
Non Operating Company
Approval of FIPB is required
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Calculation of Direct and Indirect Foreign Investment
Direct Foreign Investment
All investment directly by a non-resident entity into the Indian company.
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Calculation of Direct and Indirect Foreign Investment
Indirect foreign Investment
Investment by Indian companies owned and controlled by resident Indian citizens and/or Indian Companies which are owned and controlled by resident Indian citizens- This would not be considered for calculation of the indirect foreign investment.
Cases where condition (a) above is not satisfied or if the Indian investing company is owned or controlled by ‗non resident entities- the entire investment would be considered as indirect foreign investment.
Exception: 100% owned subsidiaries of operating-cum-investing/investing companies, will be limited to the foreign investment in the operating-cum-investing/ investing company
Note: A company is considered as Controlled by resident Indian citizens if the resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors in that company A company is considered as 'Owned‘ by resident Indian 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
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Down Stream Investment
Less than 50% Investment in X Ltd
Invests 49% in Y Ltd
Total Indirect Foreign Investment
is NIL
Foreign Company Y Ltd, Indian Company
X Ltd, Indian Company
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Down Stream Investment
More than 50% Investment in X Ltd
Invests 15% in Y Ltd
Total Indirect Foreign Investment
is 15%
Foreign Company Y Ltd, Indian Company
X Ltd, Indian Company
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Down Stream Investment
More than 50% Investment in X Ltd
Invests 90% in Y Ltd
Total Indirect Foreign Investment
is 90%
Foreign Company Y Ltd, Indian Company
X Ltd, Indian Company
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Down Stream Investment
75% Investment in X Ltd
Invests 100% in Y Ltd
Total Indirect Foreign Investment
is 75%
Foreign Company Y Ltd,
Wholly Owned Subsidiary of X Ltd
X Ltd, Indian Company
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Modes of Investment under FDI
Modes of Investment
Issue of fresh shares
Transfer of existing shares
by Person resident in or outside India
Issue of Rights / Bonus shares
Conversion of ECB /
Lumpsum Fee / Royalty / Import
of capital goods by SEZs
into Equity/ Import
payables / Pre incorporation
expenses
Acquisition of shares under
Scheme of Merger /
Amalgamation
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Issue of Fresh Shares & Swap
• Indian company may issue fresh shares /convertible debentures under FDI Scheme to PROI (who is eligible for investment in India) subject to compliance with FDI policy and FEMA Regulations
Issue of Fresh Shares
• Issue can be done in lieu for the consideration which has to be paid for shares acquired in the overseas company, with prior approval of FIPB and in compliance of pricing guidelines
Issue of shares to a non-resident
against shares swap
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Issue of Rights / Bonus shares
An Indian company may issue Rights / Bonus shares to existing non-resident shareholders, subject to adherence to sectoral cap, reporting requirements, etc.
• Right Shares- Specific prior permission from RBI. • Bonus shares- Without prior approval of RBI. Should not
be in the adverse list of RBI.
Issue of Right /Bonus shares to Erstwhile OCBs
• Investee company can allot the additional rights shares out of unsubscribed portion, subject to the condition that the overall issue of shares to non-residents in the total paid-up capital of the company does not exceed the sectoral cap.
Additional allocation of rights share by residents to non-residents
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Conversion of ECB / Lumpsum Fee / Royalty / Import of capital goods by SEZs into Equity/ Import payables / Pre incorporation expenses
Conversion of ECB into shares /
convertible debentures
General Permission
Lump-sum technical
know-how fee/royalty
General permission
under automatic route or SIA / FIPB route
Import of capital goods
by units in SEZs
Can issue equity shares to non
residents, subject to valuation
Import of capital goods /
machinery / equipment
Allowed under Government
route
Pre-operative / pre –
incorporation expenses
Allowed under Government
route
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Acquisition of shares under Scheme of Merger / Amalgamation
Mergers & Amalgamations of companies in India are usually governed by an order issued by a competent Court. The transferee
company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject
to following conditions
Percentage of shareholding of persons resident outside India in the transferee or
new company does not exceed the sectoral cap, and
Transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy
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Transfer of Shares
Transfers of existing shares by PRI to PROI or vice
versa
By Gift By Sale
Transfer where FIPB Approval
required
Transfers where RBI Approval is
required
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Transfers of existing shares by PRI to PROI or vice versa by way of Gift
By Gift
Non Resident to Non Resident
General Permission
Comply with Sectoral
Caps/Pricing Guidelines/ Reporting formalities
Non Resident to Resident
General Permission is
granted
Resident to Non resident
Approval of RBI with specific conditions
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Transfers of existing shares by way of Sale
Non Resident to Non Resident
General Permission
granted
Non Resident to Resident
General Permission, if sale through recognised Stock Exchange
Where transfer is under SEBI guidelines and pricing guidelines are not met, provided
following conditions are met
Comply with FDI policy and
FEMA regulations
Pricing complies with relevant SEBI
regulations
CA certificate is obtained
Compliance with reporting
and other guidelines
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Transfers of existing shares by way of Sale
Resident to Non Resident
General Permission
granted, if sale through Stock
Exchange
FIPB approval where required
Adhere to SEBI(SAST) Regulations
Certain conditions to be fulfilled if pricing guidelines are
not met
Comply with FDI Policy and
FEMA regulations
Pricing is compliant with
specific regulations
CA Certificate of compliance of
SEBI regulations
NOC from regulators
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Transfer of Shares by Resident to Non Resident requiring FIPB approval
Transfer of shares from residents to non-residents by way of sale or
otherwise
Transfer of shares of companies engaged in sector falling under the
Government Route.
Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral
cap applicable.
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Prior permission of the Reserve Bank in certain cases for acquisition / transfer of security
Deferment of payment of the amount of
consideration
PRI who intends to transfer any security, by way of gift to PROI
Transfer of shares from NRI to NR
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Investments other than FDI
Investments other than FDI
Foreign Portfolio Investments
Foreign Venture Capital
Investments
Other investments (G-Sec, NCDs, etc)
Investments on non-repatriable
basis
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Foreign investments under Portfolio Investment Scheme (PIS)
Entities Investment in listed Indian companies
Transfer of shares
acquired under PIS
under private arrangement
Prior intimation to
Reserve Bank of India
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Entities
• Eligible to purchase shares and convertible debentures issued by Indian companies. FIIs registered with SEBI
• Eligible to purchase shares and convertible debentures , if permitted by designated branch of any AD Category - I bank (which has been authorized by RBI to administer the PIS)
NRIs
• General permission granted SEBI approved sub
accounts of FIIs (sub accounts)
• Not permitted to invest. • OCBs which have already made investments under the PIS
are allowed to continue holding such shares / convertible debentures till such time these are sold on stock exchange
Erstwhile Overseas Commercial Bodies
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Investment in Listed Companies
FIIs
An Individual FII/ SEBI approved sub accounts
Maximum 10% investment of paid-
up capital or paid-up value of each series
of convertible debentures
The limit would include shares held by SEBI registered FII/ sub accounts of FII under PIS as well as shares acquired by SEBI registered
FII
Total holdings of all FIIs / SEBI approved sub accounts
of FIIs
Shall not exceed 24 % of paid-up capital or paid-up value of
each series of convertible debentures.
Limit of 24% can be increased to the
sectoral cap / statutory limit, by passing a Board
resolution followed by a special
resolution and subject to prior
approval from RBI.
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Reporting of FDI By Company
Fresh issue of Shares Transfer of Shares Conversion of Equity into equity
ESOPs for allotment of equity shares ADRs/GDRs
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Fresh Issue of Shares
Reporting of Inflow
• Details of amount of consideration within 30 days from the date of receipt in Advance Reporting Form.
• Equity instruments shall be issued within 180 days, and have to file Form FC-GPR within 30 days from the date of issue
• FC-GPR for Issue of bonus/rights shares or shares on conversion of stock options issued under ESOP to persons resident outside India directly or on amalgamation / merger with an existing Indian company, as well as issue of shares on conversion of ECB / royalty / lumpsum technical know-how fee / import of capital goods by units in SEZs
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Transfer of shares
Reporting of FDI for Transfer of shares route • Reporting of transfer of shares between residents and non-residents and vice- versa is to be made
in Form FC-TRS
• It should be submitted to the AD Category – I bank, within 60 days from the date of receipt of the amount of consideration.
• Onus of submission of the Form FC-TRS within the given timeframe would be on the transferor / transferee, resident in India.
• The sale consideration in respect of equity instruments purchased by a person resident outside India, remitted into India through normal banking channels, shall be subjected to a KYC check by the remittance receiving AD Category – I bank at the time of receipt of funds.
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Conversion of ECB into equity
Reporting of conversion of ECB into equity
• Details of issue of shares against conversion of ECB has to be reported to concerned Regional Office of RBI
• In case of full conversion of ECB into equity, the company shall report the conversion in Form FC-GPR as well as in Form ECB-2.
• In case of partial conversion of ECB, converted portion in Form FC-GPR well as in Form ECB-2 clearly differentiating the converted portion from the non-converted portion.
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ESOPs
Reporting of ESOPs for allotment of equity shares
• The issuing company is required to report the details of issuance of ESOPs to its employees within 30 days from the date of issue of ESOPs.
• At the time of conversion of options into shares in FC-GPR, within 30 days of allotment of such shares.
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ADRs/GDRs
Reporting of ADR/GDR Issues
• Indian company issuing ADRs / GDRs has to furnish full details of such issue in the Form DR, within 30 days from the date of closing of the issue.
• Company should also furnish a quarterly return in the Form-DR Quarterly, within 15 days of the close of the calendar quarter.
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Prohibited Sectors
Lottery Business including Government /private lottery, online lotteries, etc.
Retail Trading (except single brand product retailing)
Real Estate Business or Construction of Farm Houses
Trading in Transferable Development Rights (TDRs)
Nidhi company
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Prohibited Sectors
Chit funds
Gambling and Betting including casinos etc.
Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).
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Foreign Investment Promotion Board
FIPB
Secretaries to Government
Chairperson-Department of
Economic Affairs, Ministry
of Finance
Department of Industrial Policy
& Promotion, Ministry of
Commerce & Industry
Department of Commerce, Ministry of
Commerce & Industry
Economic Relations, Ministry of
External Affairs
Ministry of Overseas Indian
Affairs
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Levels of Approvals for cases under Government Route
Minister of Finance
In-charge of FIPB
Would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs.1200
crore.
Cabinet Committee on Economic Affairs (CCEA)
Would consider recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 1200
crore
It would also consider proposals which may be referred to it by the FIPB/ the
Minister of Finance
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Cases which do not require Fresh Approval (For bringing in additional foreign investment into the same entity)
Required FIPB/CCFI/CCEA approval was obtained at the time of initial foreign investment, and the activity was subsequently came under automatic route
Prior approval of FIPB/CCFI/CCEA was obtained for activities with sectoral caps at the time of initial foreign investment, and the caps were removed/increased and the activities placed under the automatic route. Additional investment alongwith the initial/original investment shall not exceed the sectoral caps
Prior approval of FIPB/CCFI/CCEA had been obtained at the time of original foreign investment due to requirements of Press Note 18/1998 or Press Note 1 of 2005 and prior approval of the Government under the FDI policy is not required for any other reason/purpose
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Compounding of Offences under FEMA
• Under Section 13(1) of the FEMA, 1999, an applicant can seek compounding voluntarily
Compounding under FEMA
• Contravention of any provision of FEMA, 1999,or any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by RBI
What can be compounded
• RBI empowered to compound contraventions of all sections of FEMA, 1999, except Section 3(a) of the Act
• Directorate of Enforcement empowered to compound contraventions under Section 3(a) of FEMA, 1999 (dealing essentially with Hawala transactions).
Powers of Compounding
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Type of Contravention
Technical and/or minor
Needs only an administrative
cautionary advice
Material
Compounding of the contravention
Serious/ Sensitive
Money Laundering, National and Security
concerns involving serious infringement of regulatory framework
Note: Master Circular dated July 2, 2012 issued by RBI reserves the right to classify the contraventions as stated above and neither the contravener nor others have any right to classify any contravention as technical suo- moto.
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Process of Compounding
Application
• To be submitted with Compounding Authority on being advised of a contravention under FEMA, 1999, either through a memorandum or suo moto on being made or on becoming aware of the contravention
Order
• After completion of proceedings, order to be issued by the authority within 180 days from the date of the receipt of application
Additional Information
• Authority may call for any additional information, to be submitted within specified period
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Process of Compounding
Examination & Assessment
• Application will be examined to assess whether the contravention is compoundable and the amount of contravention is quantified.
Penalty
• Penalty up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees Two lakh, where the amount is not quantifiable
• If contravention is a continuing one, further penalty which may extend to Rs. 5000/-for every day after the first day during which the contravention continues.
• FE (Compounding Proceedings) Rules, 2000, prescribes the power to compound the contravention with regard to the sum involved in such contravention.
• No contravention shall be compounded unless the amount involved in the contravention is quantifiable
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Arun Gupta
Corporate Professionals, D-28, South Ex-Part-1, New Delhi - 110 049, India, (B): 09810275571, +91 11 40622214
www.CorporateProfessionals.com
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