Foreign Direct Investment in India(Full File)

8/13/2019 Foreign Direct Investment in India(Full File)

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FOREIGN DIRECT INVESTMENT IN INDIAINTRODUCTIONThe historical background of FDI in India can be traced back with the establishment of East IndiaCompany of Britain. British capital came to India during the colonial era of Britain in India. After

Second World War, Japanese companies entered Indian market and enhanced their trade with India,yet U.K. remained the most dominant investor in India. After Independence issues relating to foreigncapital, operations of MNCs, gained attention of the policy makers. Keeping in mind the nationalinterests the policy makers designed the FDI policy which aims FDI as a medium for acquiringadvanced technology and to mobilize foreign exchange resource.The Ernst & Young's 2012 India Attractiveness Survey says investors view India as an attractiveinvestment destination. In the survey's global ranking, India is the fourth destination for foreign directinvestment (FDI) just below the United States, China and Britain. China is the largest competitor ofIndia in terms of attractiveness, according to the survey.With an eight-fold increase, India attracted foreign direct investment (FDI) of $8.1 billion in March,the highest ever monthly inflows, despite a brouhaha over Rs 11,000 crore Vodafone tax dispute.MEANING

Foreign direct investment (FDI) is direct investment by a company in production located in anothercountry either by buying a company in the country or by expanding operations of an existing businessin the country. Foreign direct investment is done for many reasons including to take advantage ofcheaper wages in the country, special investment privileges such as tax exemptions offered by thecountry as an incentive to gain tariff-free access to the markets of the country or the region.FDI INDIAForeign Direct Investment (FDI) in India is undertaken in accordance with the FDI policy formulatedand announced by the Government of India and is governed by the provisions of Foreign ExchangeManagement Act, 1999.ENTRY ROUTES FOR INVESTMENT IN INDIAUnder the Foreign Direct Investments (FDI) Scheme, investments can be made in shares, mandatorilyfully convertible debentures and mandatorily fully convertible preference shares of an Indian

company by non-residents through two routes:


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Government Route

FDI in activities not

covered under the

automatic routerequires prior

approval of the

Government which

is considered by the

FIPB, Department of

Economic Affairs,

Ministry of Finance.

Indian companies

having foreigninvestment approval

through FIPB route

do not require any

further clearance

from the RBI for

receiving inward

remittance and for

the issue of shares

to the non-resident

investors.

Automatic Route

FDI up to 100 per

cent is allowed

under the automatic

route in all

activities/sectors

except where the

provisions of the

consolidated FDIPolicy on 'Entry

Routes for

Investment' are

attracted.

FDI in sectors

/activities to the

extent permitted

under the

automatic route

does not require

any priorapproval either of

the Government

or the Reserve

Bank of India.ELIGIBILITY FOR

INVESTMENT IN

INDIA


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PROHIBITION ON

FDI IN INDIA

Foreign investment inany form is prohibited in

a company or apartnership firm or aproprietary concern orany entity, whetherincorporated or not(such as, Trusts) whichis engaged or proposesto engage in thefollowing activities:(a) Business of chitfund, or

(b) Nidhi company, or(c) Agricultural orplantation activities, or(d) Real estatebusiness, orconstruction of farmhouses, or(e) Trading inTransferableDevelopment Rights(TDRs).SECTOR SPECIFIC

CONDITIONSI. Prohibited sectors*Conditions Apply


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I. Permitted sectorsIn the followingsectors/activities, FDIup to the limit indicated

against eachsector/activity isallowed, subject toapplicable laws/regulations; securityand otherconditionalities. Insectors/activities notlisted below, FDI ispermitted upto 100% onthe automatic route,

subject to applicablelaws/ regulations;security and otherconditionalities.Sectors/Activitiesfalling underGovernment Routewith percentage of FDIpermitted


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Sectors/Activitiesfalling underAutomatic Routewhere FDI is not

permitted up to 100%MODES OF

INVESTMENT

UNDER FDI

Foreign DirectInvestment in India canbe done throughfollowing modes:


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RESTRICTIONS ONTRANSFERS Prior permission of RBIis required in following

cases:

Indian companyengaged in financialservices sector,Insurance,Infrastructurecompanies in thesecurities market. Transactions whichattract the provisions of

SEBI (SubstantialAcquisition of Sharesand Takeovers)Regulations, 1997 Activity of IndianCompany falls outsideautomatic route andFIPB approval isobtained for transfer.

Payment ofconsideration by non-resident is proposed tobe deferred. Transfer by way ofgift from resident tonon-resident. Transfer of sharesfrom NRI to NR.

Approval ofGovernment followed bypermission from RBI isrequired in followingcases:

PRICINGGUIDELINES ONTRANSFERS In Case OfTransfer Of SharesFrom Resident ToNon-Resident

a) In case of listedshares, at a pricewhich is not less thanthe price at which apreferential allotmentof shares would bemade under SEBIguidelines.b) In case of unlistedshares at a pricewhich is not less thanthe fair value as perthe Discount FreeCash Flow (DCF)Method to be

determined by aSEBI registeredCategory-I- MerchantBanker/Chartered

Accountant. In Case Of

Transfer Of SharesFrom Non-ResidentTo Resident

The price should notbe more than theminimum price atwhich the transfer ofshares would havebeen made from aresident to a non-resident.


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REPORTING

REQUIREMENTS

I. ON FRESH ISSUE

Details about form

FCGPR As mentioned above,Form FC-GPR needs tobe filed within 30 daysof making the allotmentto non-residents. Itneeds to be filed withthe authorized dealerthrough whom fundshave been received,supported by


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- Copy of FIRC,

- Valuation Report issued by a Chartered Accountant, and

- Certificate from a Practicing Company SecretaryPricing guidelines

Price of shares issued to persons resident outside India under the FDI Policy, shall not

be less than


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a. the price worked out in accordance with the SEBI guidelines, as applicable, where theshares of the company is listed on any recognised stock exchange in India;b. the fair valuation of shares done by a SEBI registered Category - I Merchant Bankeror a Chartered Accountant as per the discounted free cash flow method, where theshares of the company is not listed on any recognised stock exchange in India ; and

c. the price as applicable to transfer of shares from resident to non-resident as per thepricing guidelines laid down by the Reserve Bank from time to time, where the issue ofshares is on preferential allotment.I. ON TRANSFER

Form FC-TRS to be filed, supported by the following documents:For sale of shares / comp ulsor i ly and mandator i ly con vert ib le preference shares /

debentures b y a person resident in India

i. Consent Letter duly signed by the seller and buyer or their duly appointed agent and inthe latter case the Power of Attorney Document.ii. The shareholding pattern of the investee company after the acquisition of shares by aperson resident outside India.iii. Certificate indicating fair value of shares from a Chartered Accountant.iv. Copy of Broker's note if sale is made on Stock Exchange.v. Declaration from the buyer to the effect that he is eligible to acquire shares /compulsorily and mandatorily convertible preference shares / debentures under FDIpolicy and the existing sectoral limits and Pricing Guidelines have been complied with.vi. Declaration from the FII/sub account to the effect that the individual FII / Sub accountceiling as prescribed has not been breached.Addit ional documents in respect of sale of shares / comp ulsor i ly and m andator i ly

con vert ible preferenc e shares / debentures by a perso n resident ou tside India

vii. If the sellers are NRIs/OCBs, the copies of RBI approvals, if applicable, evidencingthe shares held by them on repatriation/non-repatriation basis.


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viii. No Objection/Tax Clearance Certificate from Income Tax Authority/ CharteredAccount.DOWNSTREAM INVESTMENT

Downstream Investment is an indirect mechanism of FDI, whereby a Indian companyhaving FDI (Investing Company), which is owned or controlled byforeign

persons/entities, invests in shares of another Indian Company (Subject Company).CONDITIONS FOR DOWNSTREAM INVESTMENTS


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CALCULATION OF TOTAL FOREIGN INVESTMENT(i) Direct Foreign Investment:All investment directly by a non-resident entity into theIndian company would be counted towards foreign investment.(ii) Indirect Foreign Investment:(a) The foreign investment through the investing Indian company would not be

considered for calculation of the indirect foreign investment in case of Indian companieswhich are owned and controlled by resident Indian citizens and/or Indian Companieswhich are owned and controlled by resident Indian citizens.(b) For cases where condition (a) above is not satisfied or if the investing company isowned or controlled by non- resident entities, the entire investment by the investingcompany into the subject Indian Company would be considered as indirect foreigninvestment, provided that, as an exception, the indirect foreign investment in only the100% owned subsidiaries of operating-cum-investing/investing companies, will be limitedto the foreign investment in the operating-cum-investing/ investing company.IllustrationIf the indirect foreign investment is being calculated for Company A which hasinvestment through an investing Company B having foreign investment, the followingwould be the method of calculation:


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FDI IN PARTNERSHIP FIRM/PROPRIETARY CONCERN

ON NON-REPATRIATION BASIS

Amount is invested by inward remittance or out of NRE / FCNR(B) / NRO account

The firm or proprietary concern is not engaged in any agricultural / plantation or realestate business or print media sector.

NRIs / PIO may seek prior permission of Reserve Bank for investment in soleproprietorship concerns / partnership firms with repatriation benefits.

An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged inany agricultural/plantation activity or real estate business or engaged in Print Media.

FDI IN MICRO AND SMALL ENTERPRISES (MSEs)

MANUFACTURE OF ITEMS RESERVED FOR PRODUCTION IN MICRO AND SMALLENTERPRISES (MSES)


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FDI in MSEs will be subject to the sectoral caps, entry routes and other relevantsectoral regulations.

Any industrial undertaking which is not a MSE, but manufactures items reserved for the

MSE sector would require Government approval where foreign investment is more than24% in the capital.

Such an undertaking would also require an Industrial License under the IDRA.

The issue of Industrial License is subject to a few general conditions and the specificcondition that the Industrial Undertaking shall undertake to export a minimum of 50% ofthe new or additional annual production of the MSE reserved items to be achieved withina maximum period of 3 years.

The export obligation would be applicable from the date of commencement ofcommercial production and in accordance with the provisions of section 11 of the IDRA.

FDI IN LIMITED LIABILITY PARTNERSHIPS (LLPs)

LLPs with FDI will be allowed, through the Government approval route, in thosesectors/activities where 100% FDI is allowed, through the automatic route and there areno FDI-linked performance related conditions.

By FDI-linked performance related conditions, it is meant that in sectors, whereconditions like minimum capitalization etc are prescribed like development of Townships,NBFC, even though 100% FDI is allowed under automatic route, LLPs will not beallowed to bring FDI with the approval of Government of India.

LLPs with FDI will not be allowed to operate in agricultural/plantation activity, printmedia or real estate business.

LLPs with FDI will not be eligible to make any downstream investments, which meanLLP having FDI, cannot make further investment in LLP or companies engaged in anybusiness, even though 100% FDI is allowed under those sectors.

An Indian Company, having FDI, will be permitted to make downstream investment inLLPs only if both the company, as well as the LLP is operating in sectors where 100%FDI is allowed, through the automatic route and there are no FDI-linked performancerelated conditions.

Foreign Capital participation in the capital structure of the LLPs will be allowed only byway of cash considerations, received by inward remittance, through normal bankingchannels, or by debit to NRE/FCNR account of the person concerned, maintained withan authorized dealer/authorized bank. For making


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non cash/intangible contribution towards the capital of the LLP, permission ofGovernment of India will be required.

Foreign Institutional Investors (Flls) and Foreign Venture Capital Investors (FVCIs) will

not be permitted to invest in LLPs.

LLPs will also not be permitted to avail External Commercial Borrowings (ECBs)

The designated partners will be responsible for compliance with the above conditionsand liable for all penalties imposed on the LLP for their contravention.

In case of LLP having FDI and a body corporate is a designated partner, than the bodycorporate should only be a company registered under the Companies Act and not anyother body, such as an LLP or a trust.

Any conversion of a company with FDI into an LLP will be allowed only if the companyis engaged in sectors/activities where 100% FDI is allowed, through the automatic routeand there are no FDI-linked performance related conditions and prior approval ofFIPB/Government is obtained.

CONVERSION OF ECB INTO EQUITY Conversion of ECB into equity ispermitted subject to the following conditions:Conversion of ECB may be reported to the Reserve Bank as follows:


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COMPOUNDING UNDER FEMA

Contravention is a breach of the provisions of the Foreign Exchange Management Act(FEMA), 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issuedthere under. The Reserve Bank is empowered to compound any contraventions asdefined under section 13 of FEMA, 1999 except the contravention under section 3(a), for

a specified sum after offering an opportunity of personal hearing to the contravener. It isa voluntary process in which an Indian citizen or a corporate seeks compounding of anadmitted contravention. It provides comfort to any person who contravenes provisions ofFEMA, 1999.


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Whether contravention under the FEMA is to be treated as technical and/ or minor orserious would be decided by the Reserve Bank on the merits of the case. Persons whohave contravened the provisions of FEMA should not take upon themselves suo moto,or on the basis of external advice to decide whether a particular contravention is of atechnical or minor in nature and, hence, no compounding application need be submitted

to the Reserve Bank. If such applications for compounding are not made, the personconcerned shall expose himself/herself to such action under the provisions of FEMA asthe authorities may deem appropriate. The persons concerned should, therefore, in theirown interest submit their applications for compounding of contravention under FEMA tothe Reserve Bank at the earliest opportunity.REPATRIATION OF INVESTMENT AND PROFITS

All foreign investments are freely repatriable (net of applicable taxes) except in caseswhere:i) the foreign investment is in a sector like Construction and Development Projects andDefence wherein the foreign investment is subject to a lock-in-period; andii) NRIs choose to invest specifically under non-repatriable schemes.


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Further, dividends (net of applicable taxes) declared on foreign investments can beremitted freely through an Authorised Dealer bank.LAST WORD

Foreign direct investment (FDI) in India spiked 34 per cent to a record $46.8 billion in

2011-12, latest RBI data show. A spate of big-ticket deals resulted in the surge. As stock

valuations dipped, overseas investors were eager to pick up stakes in Indian companieslast fiscal. In terms of sectors, services attracted the maximum investment this fiscal as

per Department of Industrial Policy and Promotion (DIPP) data (April-February).

However, in terms of growth, it was drugs and pharmaceuticals that saw the maximum

jump, with an over 15-fold increase. In contrast, the automobile and housing and real

estate sectors saw FDI decline. Investment in the petroleum sector jumped significantly

too.

Foreign Direct Investment in India(Full File)

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