FDI POLICY AND ENTRY OPTIONS

INTRODUCTION

• India has one of the most transparent and liberal Foreign Direct Investment (FDI) regimes among emerging and developing economies.

• Differential treatment is limited to a few entry rules, predominantly in some Services sectors, spelling out the proportion of equity that the foreign investor can hold in an India-registered company or more appropriate "sector caps".

• Foreign corporate and individual investment in India, termed collectively as Foreign Direct Investment (FDI) when it relates to control or ownership of a company in India, takes one of two routes

1)Automatic route or Automatic Approval:

This requires no prior approval for FDI. Post-facto filing of data relating to the investment made with the Reserve Bank of India (RBI) are for record and data purposes. This route is available to all sectors or activities that do not have a “sector cap” i.e. where 100% foreign ownership is permitted, or for investments that are within a sector cap (e.g. less than or equal to 26% share of an Insurance company) and where the Automatic route is allowed.

FIPB Approval• FIPB Approval – the Foreign Investment Promotion

Board (FIPB) approves investment proposals:• Where the proposed shareholding is above

prescribed sector capOR

• where the activity belongs to that small list of sectors where FDI is either not allowed

ORwhere it is mandatory that proposals be routed through the FIPB (e.g. sectors that require industrial licensing)

Mechanism of approval by FIPB

• The FIPB ensures a single-window approval for the investment and acts as a screening agency (for sensitive/negative list sectors).

• FIPB approvals (or rejections) are normally received in 30 days.

• Some foreign investors use the FIPB application route where there may be absence of stated policy or lack of policy clarity.

An outline of the broad policies for groups of sectors

RECENT POLICY MEASURES (1)

• 100% FDI allowed in the telecom sector.• 100% FDI in single-brand retail.• FDI in commodity exchanges, stock exchanges &

depositories, power exchanges, petroleum refining by PSUs, courier services under the government route has now been brought under the automatic route.

• Removal of restriction in tea plantation sector.• FDI limit raised to 74% in credit information & 100%

in asset reconstruction companies.

RECENT POLICY MEASURES (2)

• FDI limit of 26% in defence sector raised to 49% under Government approval route.

• Foreign Portfolio Investment up to 24% permitted under automatic route. FDI beyond 49% is also allowed on a case to case basis with the approval of Cabinet Committee on Security.

• Construction, operation and maintenance of specified activities of Railway sector opened to 100% foreign direct investment under automatic route

Different Options for Entry (1)

• INCORPORATING A COMPANY IN INDIA:It can be a private or public limited company. Both wholly owned & joint ventures are allowed. Private limited company requires minimum of 2 shareholders.

• LIMITED LIABILITY PARTNERSHIPS:Allowed under the Government route in sectors which has 100% FDI allowed under the automatic route and without any conditions.

• SOLE PROPRIETORSHIP/PARTNERSHIP FIRM:Under RBI approval. RBI decides the application in consultation with Government of India.

Different Options for Entry (2)

• EXTENSION OF FOREIGN ENTITY:Liaison office, Branch office (BO) or Project Office (PO). These offices can undertake only the activities specified by the RBI. Approvals are granted under the Government and RBI route. Automatic route is available to BO/PO meeting certain conditions.

• OTHER STRUCTURES:Foreign investment or contributions in other structures like not for profit companies etc. are also subject to provisions of Foreign Contribution Regulation Act (FCRA).

STEPS INVOLVED IN INVESTMENT (1)

• Identification of structure• Central Government approval if required• Setting up or incorporating the structure• Inflow of funds via eligible instruments and

following pricing guidelines• Meeting reporting requirements of RBI and

respective Act• Registrations/obtaining key documents like PAN etc.• Project approval at state level

STEPS INVOLVED IN INVESTMENT (2)

• Finding ideal space for business activity based on various parameters like incentives, cost, availability of man power etc.

• Manufacturing projects are required to file Industrial Entrepreneur’s Memorandum (IEM), some of the industries may also require industrial license.

• Construction/renovation of unit• Hiring of manpower• Obtaining licenses if any• Other state & central level registrations• Meeting annual requirements of a structure, paying taxes etc.

CENTRAL GOVERNMENT INCENTIVES

• Investment allowance (additional depreciation) at the rate of 15 percent to manufacturing companies that invest more than INR 1 billion in plant and machinery available till to 31.3.2015.

• Incentives available to unit’s set-up in SEZ & EOUs.• Exports incentives like duty drawback, duty

exemption/remission schemes, focus products & market schemes etc.

• Areas based incentives like unit set-up in north east region, Jammu & Kashmir, Himachal Pradesh, Uttarakhand.

• Sector specific incentives like M-SIPS (Modified Special Incentive Package Scheme) in electronics.

STATE GOVERNMENT INCENTIVES

• Each state government has its own incentive policy, which offers various types of incentives based on the amount of investments, project location, employment generation, etc. The incentives differ from state to state and are generally laid down in each state’s industrial policy.

• The broad categories of state incentives include: stamp duty exemption for land acquisition, refund or exemption of value added tax, exemption from payment of electricity duty etc.

SPECIAL DISPENSATION

• Special dispensations have been envisaged for NRI investments in the following :

• Construction development• Ground Handling & Air transport services• NRI investing on non repatriable basis• FDI from NEPAL & BHUTAN is allowed in Indian

rupees

SECTORS WHERE FOREIGN DIRECT INVESTMENT IS PROHIBITED (1)

• Lottery Business including Government /private lottery, online lotteries, etc.

• Gambling and Betting including casinos etc.• Chit funds• Nidhi company-(borrowing from members and

lending to members only).• Trading in Transferable Development Rights (TDRs)• Real Estate Business (other than construction

development) or Construction of Farm Houses

SECTORS WHERE FOREIGN DIRECT INVESTMENT IS PROHIBITED (2)

• 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 construction, operation and maintenance of (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, (ix) Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and connectivities to main railway line and (x) Mass Rapid Transport Systems.)

• Services like legal, book keeping, accounting & auditing.

FDI POLICY- CONSTRUCTION (1)100% FDI through the automatic route is permitted in townships, housing, built-up infrastructure and construction-development projects (including, but not restricted to housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure). The major conditions under which foreign investment can be made in this sector are:

• 10 hectares is the minimum land area for the development of serviced housing plots. 50,000 sq.mts. is the minimum built-up area for construction-development projects. For combination projects, any one of the prior two conditions would suffice. There are specific exemptions for smart cities, housing projects and old age homes.

• A minimum capitalization of USD 10 Million is envisaged for wholly-owned subsidiaries and USD 5 Million for joint ventures with Indian partners. The funds will have to be brought in within six months of date commencement of business of the company.

FDI POLICY-CONSTRUCTION (2)• The original investment cannot be repatriated before a period of three years

from completion of minimum capitalization. The term ‘original investment’ means the entire amount is brought in as FDI. The lock-in period of three years will be applied from the date of receipt of each installment/tranche of FDI or from the date of completion of minimum capitalization, whichever is later. However, the investor may be permitted to exit earlier, with prior approval of the government through the Foreign Investment Promotion Board (FIPB).

• The conditions of minimum capitalization, minimum area requirement, lock in period and minimum development above do not apply to hotels and tourism sectors, hospitals, Special Economic Zones (SEZs), the education sector, old age homes and investment by NRIs.

• FDI is not allowed in the real estate business or construction of a farmhouse.• 100% FDI is allowed under the automatic route for urban infrastructure areas

like urban transport, water supply, sewerage and sewage treatment subject to relevant rules and regulations.

FDI POLICY-OIL& GAS

• FDI upto 100% is permitted under automatic route in exploration activities of oil and natural gas fields, infrastructure related to the marketing of petroleum products and natural gas, marketing of natural gas and petroleum products, petroleum product pipelines, natural gas/pipelines, LNG re-gasification, market study and formulation and petroleum refining in the private sector.

• FDI in the above activity is subject to the existing policy and regulatory framework in the oil marketing sector and the policy of the government on private participation in exploration of oil and the discovered fields of national oil companies.

• FDI upto 49% is permitted under automatic route in petroleum refining by Public Sector Undertakings (PSUs), without any disinvestment or dilution of domestic equity in the existing PSUs.

FDI POLICY-MINING

• FDI up to 100% is allowed in exploration, mining, minerals processing and metallurgy under the automatic route for all non-fuel and non-atomic minerals including diamonds and precious stones.

• Mining and mineral separation of titanium-bearing minerals and ores, its value addition and integrated activities fall under the government route of foreign direct investment up to 100%.

• FDI in coal mining is allowed for captive consumption only.

FDI POLICY-PORTS

• 100% FDI is allowed under the automatic route for projects related to the construction and maintenance of ports and harbours, subject to applicable regulations and laws.

FDI-RAILWAYS100% FDI under automatic route is permitted for the following:

• Construction, operation and maintenance of sub-urban corridor projects through PPP.

• High speed train projects.• Dedicated freight lines.• Rolling stock including train sets and locomotive/coaches manufacturing and

maintenance facilities.• Railway electrification.• Signaling systems.• Freight terminals.• Passenger terminals.• Infrastructure in industrial parks pertaining to railway line/siding including

electrified railway lines and connectivity to main railway line.• Mass Rapid Transport Systems.

FDI-Renewable Energy

• Foreign Direct Investment (FDI) up to 100% is permitted under the automatic route for renewable energy generation and distribution projects subject to provisions of The Electricity Act, 2003.

FDI POLICY-ROADS & HIGHWAYS

• 100% FDI is allowed under the automatic route in the road and highways sector, subject to applicable laws and regulation.

FDI POLICY-THERMAL POWER

• 100% FDI is allowed under the automatic route in the power sector (except atomic energy), subject to all the applicable regulations and laws.

• FOREIGN DIRECT INVESTMENT IS PERMITTED IN THE FOLLOWING CATEGORIES :• Generation and transmission of electric energy produced in hydro-electric, coal,

lignite, oil and gas-based thermal power plants.• Non-conventional Energy Generation and Distribution.• The distribution of electric energy to households, industrial, commercial and others.• Power Trading.• FDI in power exchanges up to 49% (26% FDI+23% FII/FPI) is under the automatic

route.• FII/FPI purchases shall be restricted to secondary market only. No non-resident

investor/entity, including persons acting in concert, will hold more than 5% of the equity in these companies and the foreign investment would be in compliance with SEBI regulations. Other applicable laws/regulations, security and other conditionalities apply.

FDI POLICY-AVIATION• 100% FDI is permitted for greenfield airport projects under the automatic route.• Up to 74% FDI is permitted for existing airport projects under the automatic route, above

74% and up to 100% permitted under government approval route.• Up to 49% FDI is permitted in domestic scheduled passenger airlines under the automatic

route. 100% permitted for NRIs. Up to 49% FDI under the automatic route is permitted in Non-Scheduled Air Transport Service. FDI above 49% and up to 74% is permitted under Government approval route. 100% FDI permitted for NRIs.

• Up to 100% FDI is permitted in helicopter services and seaplanes under the automatic route.• Up to 49% FDI is permitted in ground handling services under the automatic route. FDI

above 49% and up to 74% is permitted under government approval route. 100% FDI permitted for NRIs.

• Up to 100% FDI is permitted in maintenance and repair organizations; flying training institutes; and techinical training institutes under the automatic route.

• Investments are subject to relevant regulations, approvals from DGCA and security and other conditions. Foreign airlines are also, henceforth, allowed to invest in the capital of Indian companies, operating scheduled and non-scheduled Air Transport Services, up to the limit of 49% of their paid-up capital. Investments will be subject to government route.

TYPES OF INVESTORS

INDIVIDUAL:• FVCI• Pension/Provident Fund• Financial InstitutionsCOMPANY:• Foreign Trust• Sovereign Wealth Funds• NRIs / PIOsFOREIGN INSTITUTIONAL INVESTORS:• Private Equity Funds• Partnership / Proprietorship Firm• Others

Note : Citizen  or  entity  from  Bangladesh  &  Pakistan  can  invest  only  under  the government route also investor from Pakistan cannot invest in defence, space, atomic energy and sectors prohibited for foreign investment.

Entry Options for Foreign Investors

• A foreign company planning to set up business operations in India has the following options:

• Incorporate a company under Companies Act, 1956 through:

JOINT-VENTUREWHOLLY OWNED SUBSIDIARY

• Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the sector/area of activities under the FDI policy.

Enter as a Foreign Company through:• Liaison office/ Representative Office• Project Office• Branch Office

Such offices can undertake activities permitted under the Foreign Exchange Management Regulations, 2000 (Establishment in India of branch or office of other place of business).

INCORPORATION OF A COMPANY

• For registration and incorporation, an application has to be filed with the Registrar of Companies (ROC).

• Once a company has been registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies

LIAISON OFFICE/REPRESENTATIVE OFFICE

• The role of the liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers.

• It can promote export/import from/to India and also facilitate technical/financial collaboration between the parent company and companies in India.

• A liaison office cannot, however, undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India.

• Grant of approval for the establishment of a liaison office in India is by the Reserve Bank of India (RBI).

PROJECT OFFICE

• Foreign companies planning to execute specific projects in India can set up temporary project/site offices in India.

• The RBI has now granted general permission to foreign entities to establish project offices subject to specified conditions.

• Such offices cannot undertake or carry on any activity other than which is related and incidental to the execution of the projects.

• Project offices may remit the surplus of the project on completion outside India, a general permission for which has been granted by the RBI.

BRANCH OFFICE

• Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:

• Export/Import of goods. • Rendering professional or consultancy services. • Carrying out research work, in which the parent company is engaged. • Promoting technical or financial collaboration between Indian companies

and parent or overseas group company. • Representing the parent company in India and acting as buying/selling agent

in India. • Rendering services in Information Technology and development of software

in India. • Rendering technical support to the products supplied by the parent/group

companies. • Foreign airline/shipping company.

• A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer.

• Branch offices established with the approval of the RBI may remit outside India the profit of the branch net of applicable Indian taxes and subject to RBI guidelines.

• Grant of permission for setting up branch offices is by RBI.

BRANCH OFFICE ON 'STAND-ALONE BASIS' IN SEZ

• Such branch offices would be isolated and restricted to the Special Economic Zone (SEZ) and no business activity/transaction will be allowed outside the SEZ in India, which include branches/subsidiaries of their parent office in India.

• No approval shall be necessary from the RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities, subject to specified conditions.

INVESTMENT IN A FIRM OR A PROPRIETARY CONCERN BY NRIs

• A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India may invest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided:

• the amount is invested by inward remittance or out of specified account types (NRE/FCNR/NRO accounts) maintained with an Authorized Dealer (AD).

• the firm or proprietary concern is not engaged in any agricultural/plantation or real estate business i.e. dealing in land and immovable property with a view to earning profit or earning income there-from.

• the amount invested shall not be eligible for repatriation outside India. NRIs/PIOs may invest in sole proprietorship concerns/partnership firms with repatriation benefits with the approval of government/RBI.

IINVESTMENT IN A FIRM OR A PROPRIETARY CONCERN BY OTHER THAN NRIs

• No person residing outside India other than NRI/PIO shall make any investment by way of contribution to the capital of a firm or a proprietorship concern or any association of persons in India.

• The RBI may, on an application made to it, permit a person residing outside India to make such an investment subject to such terms and conditions as may be considered necessary.

Investment Facilitation Agencies

• Foreign Investment Promotion Board (FIPB)The FIPB is a specially empowered board chaired by the Secretary, Ministry of Finance (MoF), set up specifically for expediting the approval process for foreign investment proposals.

• There are no prescribed application forms for applying to FIPB, except in the case of purely technical collaborations.

• Proposals for FDI may be sent to the FIPB unit, Department of Economic Affairs, Ministry of Finance or through any of India’s diplomatic missions abroad.

• The Government has introduced a mailbox facility for accepting FDI proposals through the Internet and providing an acknowledgement number for these, with the condition that a hard copy should be received in original before the proposal is considered by the Government.

Foreign Investment Implementation Authority (FIIA)

• Government of India has set up FIIA in the Ministry of Industry and Commerce to facilitate quick translation of FDI approval and implementation.

• The organization also provides a proactive one-stop after-care service to foreign investors by helping them obtain the necessary approvals, sort out operational problems and meet various government agencies to find solutions to problems and maximize opportunities through the partnership approach.

• FIIA in accordance with its mandate assumes the following role:

• Understands and addresses the concerns of investors

• Understands and addresses the concerns of approving authorities

• Initiates multi-agency consultationRefers matters not resolved at the FIA level to higher levels on a quarterly basis, including cases of project slippage on account of implementation bottlenecks

Investment Commission (IC)

• The three-member Investment Commission, set up in the Ministry of Finance in December 2004 by the Government of India, has Mr. Ratan Tata as Chairman and Mr. Deepak Parekh and Dr. Ashok Ganguly as members.

• The Investment Commission advises the Government of India on changes in policy and procedures that will enhance investment in India, recommends projects and investment proposals that should be fast tracked/mentored and promotes India as an investment destination.

Secretariat for Industrial Assistance (SIA)

• The SIA, functioning with the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, acts as a gateway to industrial investment in India.

• It provides a single-window clearance for entrepreneurial assistance and facilitates the processing of investors’ applications requiring government approval.

India Brand Equity Foundation (IBEF)

• IBEF collects, collates and disseminates comprehensive information on India.

• www.ibef.org has been developed as a single-window resource for in-depth information and insight on India.

• IBEF also produces a wide range of well researched publications focused on India’s economic and business advantages.

THANK YOU!