1 M. V. Damania & Co Chartered Accountants 1 Foreign Direct Investments Malay Damania M.V. Damania &...

1M. V. Damania & CoChartered Accountants

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Foreign Direct InvestmentsForeign Direct Investments

Malay DamaniaM.V. Damania & Co

Chartered Accountants


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Foreign InvestmentForeign Investment

Investments onA non –

repatriable

Other Investments(G-Sec, NCDs, Etc)

Foreign Direct Investments

Foreign PortfolioInvestments

Foreign VentureCapital Investment

NRIs, PIO FIIs NRIs, PIO SEBI regdFVCIs

FIIs NRIs, PIO Automatic Route

GovernmentRoute

Persons Resident Outside India

VCF, IVCUs

Foreign Investment in India(Schematic Representation)


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FDI inflows in IndiaFDI inflows in India

FDI Inflows in India (INR billions)

171246

707

987

1230 1231

885

FY05 FY06 FY07 FY08 FY09 FY10 FY11

billion

31.5%


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Country-wise FDI Inflows in IndiaCountry-wise FDI Inflows in India

Ranks Country % of total inflows

1 Mauritius 36%

2 Singapore 9%

3 Japan 8%

4 U.S. 6%

5 Netherlands 6%

6 Others 35%

Total FDI Inflows 100%


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Sector-wise FDISector-wise FDI

Ranks Sectors % of total

inflows

1 Services 18%

2 Automobiles 8%

3 Telecommunication 7%

4 Power 6%

5 Housing & Real Estate 6%

6 Others 55%

Total FDI Inflows 100%

Sectorwise FDI Inflow in India

18%

8%

7%6%

6%

55%

ServicesAutomobilesTelecommunicationsPowerHousing & Real EstateOthers


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Definitions of FDIDefinitions of FDI

Some key definitions:

‘Capital’ – equity shares; fully, compulsory & mandatory convertible preference shares & debentures. Instruments like warrants, partly paid shares cannot be issued to person resident outside India.

‘Current Account Transactions’ – Other than Capital Account transactions. Does not mean “Revenue”.

‘Capital Account Transaction’ – alters assets or liabilities, including contingent liabilities. Also refer Sec. 6(3).

- Foreign Trade- Short Term banking facility- Income on Investments


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‘FDI’ – Investment by non-resident entity/person resident outside India in the capital of the Indian Company.

‘NRI’ – Individual resident outside India who is a citizen of India or person of Indian origin.

‘PIO’ – citizen of any country other than Pakistan and Bangladesh, if - he at any time held Indian Passport- He or either of his parents or any of his grand parents was citizen of India or- Is a spouse of Indian citizen or person referred to in above.



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Person Resident in India – • Rules for Person Coming to India:

More than 182 days in India in preceding year?

NRI if purpose is other than Employment, Business,

Vocation or intention to stay for uncertain period.

NRI

No

Yes



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• Rules for person leaving India:

More than 182 days in India in preceding year?

Still NRI, if purpose is Employment, Business, Vocation or intention to stay outside India for uncertain period.

NRI

No

Yes



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Origin of InvestmentOrigin of Investment

A non-resident entity other than citizen of Pakistan or an entity incorporated in Pakistan.

A citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under Government route.

NRIs resident in Nepal/Bhutan can invest on repatriable basis only if the inward remittance is in free foreign exchange.

FII may invest in capital of Indian company. 10% is individual limit and 24% aggregate limit for FII investment.

No person other than registered FII/NRI can invest or trade in Indian Stock Exchange ie. through brokers


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Types of SecuritiesTypes of Securities

Equity shares

Fully, compulsory, mandatory convertible preference shares and debentures.

Other types of preference shares/debentures are considered as debt.

Inward remittance on issue of Depository Receipts (DRs) and Foreign Currency

Convertible Bonds (FCCBs) are treated as FDI.


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Eligibility – Indian CompaniesEligibility – Indian Companies

Indian Companies – Can issue capital against FDI. Partnership Firms/Proprietor –

o NRI or PIONon-repatriable basis if;

a) Amount is invested by inward remittance or out of NRE/FCNR/NRO account.

b) Not engaged in agriculture, plantation, real estate business or print media.

Repatriable basis only with prior permission of RBI.o Other than NRI/PIO only with prior permission of RBI.

Trusts – FDI in Trust other than Venture Capital Funds is not permitted. Any other entity – Not permitted.


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Routes of InvestmentRoutes of Investment

Routes of Investment

Prohibited Approval Auto

RBI FIPB


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Prohibited SectorsProhibited Sectors

• Retail Trading (except single brand product retailing)• Atomic Energy• Lottery• Gambling and Betting• Chit fund• Nidhi Company• Trading in Transferable Development Right (TDR)• Real Estate Business or Construction of Farm House• Activities/Sectors not opened to private sector investment• Agriculture and plantations (excepts selected activities)• Manufacture of Cigars, cheroots, tobacco products etc.

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Sectoral CapSectoral Cap

Manufacturing:• Industrial Undertaking not a micro or small scale enterprise (MSEs)

manufactures items reserved for MSE sector would require Government approval if the foreign Investment is more than 24% in equity capital.

Service Sector:• Advertising – 100% FDI allowed under automatic route.• Films – 100% FDI allowed in Film industry including film financing,

production, distribution, exhibition, marketing and associated activities.• Cable Network: ermitted up to 49% under Government route.

Business Service: • 100% FDI under automatic route for Data processing, software

development, computer consultancy, business management services, Market research, testing and analysis.

M. V. Damania & CoChartered Accountants

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Development of Township:Development of Township:

Minimum Areao Service housing plots –10 hectareso Construction-development projects – built-up area of 50,000 sq. mtrs.

Investments:o For WOS – US$ 10 million.o For JV with Indian Company – US$ 5 million.o Funds have to be brought in within 6 months of commencement of businesso Original investment cannot be repatriated before 3 years from completion of

minimum capitalisation.Above terms do not apply for investment by NRI. They also do not apply for development of SEZ.


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Development of Township:Development of Township:

Other Terms:o At least 50% of the project must be completed within 5 years from obtaining

all statutory compliances.o Company is not permitted to sell undeveloped plots.o Company must obtain all necessary approvals, plans, licenses under

applicable rules/bye-laws/regulations.o FDI is not allowed in Real Estate Business.


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Sectoral CapSectoral Cap

Health and Medical Services – 100% FDI allowed under automatic route.

Hotel and Tourism Industry – 100% FDI allowed under automatic route.• Hotel includes restaurants and beach resorts.• Tourism Industry includes:

o Travel agencies, Tour operators, tourist transporters

Convention/seminar units and organisations.

Investment Advisory services, Financial Consultancy, Credit Rating agencies – 100% FDI allowed under automatic route.


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Cash & Carry Wholesale TradingCash & Carry Wholesale Trading

WT is permitted amongst same group companies. However such trade should not exceed 25% of total turnover. Such purchase by the group companies should be for their internal use only.

WT can be undertaken as per normal business practice, including extending normal credit facilities.

WT cannot open retail shops to sell to consumers directly. Trading for Exports – 100% FDI allowed under automatic route.


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Single Brand Product Retailing Single Brand Product Retailing

FDI up to 51% in retail trade of ‘single brand’ products is allowed subject to:o Product should be of ‘Single Brand’ only.o Product should be sold under the same brand internationally.o Will cover only those products which are branded during manufacturing.



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RBI ApprovalsRBI Approvals

Transactions where RBI prior approval is required.

Indian Company engaged in Financial sector Attracts SEBI takeover code. Activity is outside automatic route Transaction price falls outside the pricing guidelines. When non resident buyer proposes deferment of payment. Companies engaged in sectors falling under Govt. route.


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EntitiesEntities

Entities

L.O B.O. PF/LLPJV/WOS


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Liaison Office (L.O.)Liaison Office (L.O.)

A representative office of the foreign entity. To explore and understand business and investment climate. Communication channel between parent Company and Indian entities. Parent Company with track record of 3 years and Networth of USD 50,000 Permitted activities -

- Represent parent/group Company in India. - Promote export/import - Promote technical/financial collaboration. - Acts a communication channel

Not permitted to carry out any activity which is capable of generating income in India.

Cannot buy immovable property All the expenses to be borne by parent company. A representative based in India. RBI permission is necessary. Annual Accounts to be filed with the Tax Authorities.

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Project Office (P.O.)Project Office (P.O.)

Foreign company has secured a contract from Indian Company to execute project in India

Conditions under automatic route:• Project is funded by inward remittance• Project is funded by bilateral or multilateral International Financing Agency• Project is approved by appropriate authority • Indian entity awarding the contract is granted by public financial

institution or a bank in India.• Corporate Tax at rate applicable to foreign LOS.



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To carry on same or substantially same activity as that of the parent Company.

Parent Company with track record of 5 years and Networth of USD 100,000.

Permitted activities - • Export/Import of goods • Professional/Consultancy services • Research work • Promote technical/financial collaboration • Act as buying/selling agent for parent Company • Services in IT or software development • Render technical support to products supplied by parent Company.

Branch Office (B.O.)Branch Office (B.O.)


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Prohibited activities - • Retail trading • Accepting deposit • Any activity other than expressly approved by RBI.

A representative based in India.

RBI permission is necessary.

Can acquire immovable property if it is necessary to carry out business activity from there.

Profits are fully repatriable, after payment of tax.

Branch Office (B.O.)Branch Office (B.O.)


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Wholly Owned Subsidiary (WOS) Wholly Owned Subsidiary (WOS) or Joint Venture (JV)or Joint Venture (JV)

A foreign Company is permitted to set up a WOS or a JV in India “Automatic Route” or “Approval Route” - Based on some conditions and

criteria. Automatic Route: No permission required from Reserve Bank of India or

Government Authority Approval Route: Specific permission from Reserve Bank of India or Government

Authority. A Company can be formed with The Registrar of Companies (ROC) Minimum of 2 shareholders and 2 directors. Shareholders and directors need not be Indians.


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Wholly Owned Subsidiary (WOS) Wholly Owned Subsidiary (WOS) or Joint Venture (JV)or Joint Venture (JV)

Minimum Paid up share capital - INR 100,000. Valuation of shares under Discounted Free Cash Flow (DCF) method by

Chartered Accountant. Financial Projections and Forecast needs to be shared. Can acquire immovable property if necessary to carry out business from there.


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ECB ECB

Bonus – Rights – ESOPBonus – Rights – ESOP

Indian Companies are granted general permission to convert ECB/Lumpsum fee/Royalty into Equity subject to the regulations on activity of the Company, sectoral cap and pricing guideline.

Indian Companies can also issue bonus/rights shares to existing non-resident share holders subject to adherence of sectoral cap.

The price of the rights shares offered to non-resident shall not be lower than that issued to resident shareholders.

Issue of shares under ESOP: Listed Companies are allowed to issue shares under ESOP to its employees or

employees of its Joint Venture or WOS abroad who are resident outside India. The ESOP scheme should be in accordance with SEBI regulations. The Face value of shares so issued shall not exceed 5% of paid-up capital of the

Company.


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Reporting RequirementReporting Requirement

Reporting of Inflow: Within 30 days of date of receipt in Ann – 5 Foreign Inward Remittance Certificate – FIRC KYC report on overseas investor in Ann – 6

Reporting of issue of Shares: Form FC-GPR within 30 days of allotment of shares Part A of the form be submitted by the Company Management Annual Return to be submitted by 31st July every year. The form includes all foreign investments made into the company. Details of bonus/right shares of stock options to persons resident outside India. Issue of shares on conversion of ECB/Royalty/Lump sum fees etc.


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Reporting RequirementReporting Requirement

Reporting of transfer of shares: Form FC-TRS within 60 days of date of receipt of consideration.

Reporting on non-cash: Full or Partial conversion of ECB into Equity share capital is allowed. Form FC-GPR and Form ECB-2 has to be filed within 7 working days from the

close of the month.


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RepatriationRepatriation

Repatriation of Dividend: Current Account Transaction Freely repatriable Net of Taxes or Dividend Distribution Tax

Repatriation of Interest: Current Account Transaction Freely repatriable Net of Taxes


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ViolationViolation

FDI – a Capital Account Transaction RBI administers FEMA Enforcement Director under Ministry of Finance takes up investigation in case

of contravention. For any violation/contravention of any of the rules, regulations, notification,

press note, press release, circular, direction or order, the person is liable for a penalty up to thrice the amount involved where the amount is quantifiable and Rs. 2 Lakhs where the amount is not quantifiable.

Where the violation is continuing one, further penalty up to Rs. 5,000/- per day In case of Company, every person who is in charge of the Company shall be

deemed to be guilty of contravention. Any adjudicating authority, in addition to penalty, may also confiscate any

currency/security or property in respect of such contravention.


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Compounding ProceedingsCompounding Proceedings

Compounding Officer can either be from RBI or ED. No contravention can be compounded unless the amount involved is

quantifiable. Order shall be passed within 180 days from the date of receipt of application. Speaking order Compounding is generally accepted once in three years

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Question



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For any issue/ clarification, please mail to [email protected]

1 M. V. Damania & Co Chartered Accountants 1 Foreign Direct Investments Malay Damania M.V. Damania &...

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