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Foreign Direct Investment Overview and recent developments

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Title: Foreign Direct Investment Overview and recent developments


1
Foreign Direct InvestmentOverview and recent
developments
Nabin Ballodia Sujay Paul 24 April 2010
2
Agenda
Overview
Recent Developments
Procedural Aspects
Sector Specific Guidelines
Questions
3
Overview
4
India Transformed !!
Yesterday
  • Slow rate of growth
  • Bureaucratic
  • Protected and slow
  • Small consumer markets
  • Weak infrastructure

Today
  • Strong macro economic fundamentals
  • Encouraging foreign investment
  • Outsourcing destination
  • Growing consumerism
  • Impetus on infrastructure development

India -- the largest Democracy - one of the
fastest growing economies in the World!
5
India is Relatively Stable and Growing !
"If there is one place on the face of this Earth
where all the dreams of living men have found a
home when man began the dream of existence, it is
India". Romain Rolland, French philosopher
6
Forms of business presence in India
Forms of Business presence in India
Foreign investor
Government approval required. Typically, not
forthcoming
Generally requires approval (except for Project
Office)
Generally permitted except for certain sectors
where government approval is required
Unincorporated entities
Incorporated entities
Partnerships
Liaison office
Joint venture
Unlimited partnership
Project office
Wholly owned subsidiary
LLP
Branch office
A preferred form of business presence may be
chosen based on operating flexibility, tax
efficiencies, regulatory compliances and
efficiency in capital raising
7
Foreign Direct Investment Policy
  • Foreign Direct Investment (FDI) cross border
    investment with an objective to establish
    lasting interest
  • Objective - to encourage FDI to promote
    industrial socio-economic development
    supplement domestic capital/ technology
  • Foreign investment in India is regulated by
    Government of Indias FDI policy. The FDI
    guidelines administered by the Ministry of
    Commerce and Industry.
  • Department of Industrial Policy Promotion
    (DIPP), Foreign Investment Promotion Board
    (FIPB) and Secretariat of Industrial Assistance
    (SIA) regulate the FDI Policy
  • Administrative and compliance aspects of FDI
    monitored by RBI
  • Since 1991, policy has been liberalized
    substantially to facilitate foreign investment

8
Foreign Direct Investment Snapshot
56
Figures in Million US
184
April 2009 January 2010
  • Mauritius, Singapore and Cyprus are the favorite
    jurisdictions for investment into India
  • Foreign investment (FI) from Mauritius
    constituting 43 of Indias total FI

as per information in the Press
9
The Roadmap so far
Sectoral caps raised Conditions relaxed
Up to 100 under Automatic Route in all
sectors except a small negative list
Up to 74/51/50 in 111 Sectors under Automatic
Route 100 in some sectors
Up to 51 under Automatic Route for 35
Priority Sectors
Allowed selectively up to 40
Pre 1991
1991
1997
2000
Post 2000
10
Foreign Direct Investment Policy
FDI Guidelines for Investing in Indian Wholly
Owned Subsidiary / Joint Venture
Government Route
Automatic Route
Foreign Investment Promotion Board (FIPB)


No Prior Regulatory Approval but only Post Facto
Filings to RBI, through AD
  • Only for cases other than Automatic Route and
    those mentioned in sectoral policy
  • Applies to cases with existing venture/ tie up in
    same filed
  • Applies to investment over 24 in SSI reserved
    items
  • Allowed for Most sectors
  • Limits Sectoral caps/ stipulated sector
    specific guidelines
  • Inward remittances through proper banking
    channels
  • Pricing valuations prescribed
  • Post facto filing with 30 days of fund receipt
  • Filings within 30 days of share allotment
  • Includes Technical Collaboration/ Brand Name/
    Royalty

?
?
11
Foreign Direct Investment Policy
FDI limits Illustrative list
Negative List (Illustrative)
Prior Approval (Illustrative)
Automatic Route (Illustrative)
  • Existing Airports 100
  • Asset Reconstruction Companies 49
  • Titanium Minerals 100
  • Broadcasting (a)
  • Cigars Cigarettes 100
  • Courier 100
  • Print Media (a) 26
  • Single brand retailing 51
  • Agriculture (b)
  • Atomic energy
  • Retail trading (except single brand up to 51)
  • Lottery, betting and gambling
  • Chit fund, Nidhi company
  • Trading in Transferable Development Rights
  • NBFC (minimum capitalization norms)
  • IT / ITes
  • Financial services(a)
  • Telecom Sector (74 cap)(a)
  • Insurance (26 cap)(a)
  • Real Estate(a)
  • Special Economic Zones
  • Infrastructure
  • Shipping
  • Manufacturing sector
  • Hotels and tourism

?
?
?
Note (a) Sector specific guidelines
(b) Subject to certain exceptions
12
Recent Developments
13
Setting the context
  • Contribution of FDI in Indias economic
    development is an acknowledged fact
  • From inception policy subject to extensive
    amendments from time to time through Press Notes,
    circulars and clarifications
  • Press Note 2,3 and 4 of 2009 issued to provide
    clarity on indirect FDI and downstream investment
  • FM stressed the need for a consolidated FDI
    policy in Budget 2010-11
  • Draft consolidated policy issued in late 2009 for
    public comments
  • Consolidated FDI policy issued effective from 1
    April, 2010

14
Consolidated FDI Policy salient features
  • Consolidated document of all foreign investment
    policies /regulations under FEMA, Press Notes,
    Press Releases and Clarifications issued by DIPP
  • Underlying rationale to promote FDI through a
    policy framework that is transparent,
    predictable, simple and clear and which reduces
    regulatory burden
  • As an investor friendly measure, a new Circular
    is proposed to be issued every six months
  • Press Notes/Press Releases/Clarifications on FDI
    in force as of 31 March 2010 will stand
    rescinded. Savings for actions taken under
    earlier press notes
  • Use of chapters, headings and definitions
  • Two kinds of foreign investment (i) FDI and
    (ii) Foreign Portfolio Investment (FPI)
  • FDI strategic long term relationship and
    establish a lasting interest
  • FPI no intention to influence the management of
    the investee entity

15
FDI Policy Principles
  • Capital defined as Equity, Compulsorily Fully
    Convertible Preference Shares and Compulsorily
    Fully Convertible Debentures
  • Warrants, partly paid up shares other hybrid
    instruments not permitted for FDI
  • Investment in other instruments such as
  • Non Convertible Preference Shares/ Debenture
    (NCP)
  • Optionally Convertible Preference Shares/
    Debentures (OCP)
  • Partially Convertible Preference Shares/
    Debentures (PCP)
  • treated as External Commercial Borrowings
    (ECB) - subject to ECB guidelines
  • Existing NCP/ OCP/ PCP on cut off date outside
    sectoral cap till current maturity

16
FDI Policy Principles contd.
  • FDI permitted in
  • Indian companies including micro small
    enterprise
  • Partnership firm/ proprietorship concern only
    by NRI/PIOs
  • Trust only in the form of VCFs
  • Not permitted in LLPs or any other entities
    under consideration
  • Investment by FIIs permitted upto 10 for
    individual FII and 24 in aggregate
  • Pricing of capital instruments (including
    conversion price for convertible instruments) is
    now required to be decided upfront at the time of
    issue of instruments
  • Investment by FVCI in DVCF set up as trust would
    now require specific Government approval FVCI
    can directly invest subject to FDI policy

17
Existing Venture/ Tie-up cases
  • In case intending foreign investor had existing
    venture/ collaboration as on January 12, 2005 in
    same field FIPB approval subject to NoC
  • Same field as per 4 digit National Industrial
    Classification (NIC) 1987 code
  • Restriction not applicable under following
    circumstances
  • Investment by VC Fund registered with SEBI
  • existing joint venture has less than 3
    investment by either party
  • existing joint venture is defunct/sick
  • existing venture in specified sectors including
    mining, IT enabled services

18
Royalty/ Foreign Technology Agreement
Earlier
Brand name/ trade mark royalty
Foreign Technology Agreements
  • Payment of royalty upto 1 of domestic sales and
    2 of exports permitted (without technology
    transfer)
  • Where royalty for brand name/ trademark and
    technology, then overall limits of 5 of domestic
    sales and 8 of exports
  • Lumpsum payments not to exceed USD 2 mn (per
    technology)
  • Royalty upto 5 of domestic sales and 8 of
    exports

Now
  • The Government has liberalized the aforesaid
    limits by permitting, under the automatic route,
  • and without any restrictions
  • All payments for royalty
  • Lump sum fee for transfer of technology
  • Payments for use of trademark/ brand name

19
Calculation of Indirect FDI
Direct Foreign Investment
Indirect Foreign Investment
Foreign Co.
Foreign Co.
Overseas
Overseas
Direct FI
India
India
I Co1
I Co1
Indirect FI
I Co2
20
Calculation of Indirect FDI
Earlier
  • Different methods of computing Indirect FI
    prescribed for
  • different sectors. E.g.
  • Telecom/ Broadcasting Proportionate method
  • Investing companies in Infrastructure/ Services
    sector Management Ownership Test

Telecom sector
Infrastructure sector
Foreign Co.
Foreign Co.
Overseas
Overseas
90
49
India
India
I Co1
I Co1
60
100
Management of I Co1 with Indians
I Co2
I Co2
FI in I Co2 is 54 (9060)
FI in I Co2 is NIL
21
Calculation of Indirect FDI
  • RIC means
  • Resident Indian Citizen as interpreted / in
    line with the definition of person resident in
    India as per FEMA 1999, read in conjunction with
    the Indian Citizenship Act and/or
  • Indian Companies (Companies registered /
    incorporated in India) which are ultimately owned
    and controlled by Resident Indian Citizens
  • Non Resident Entity (NRE) means
  • A person resident outside India as defined
    under FEMA 1999
  • Owned by RIC means
  • If more than 50 of equity interest in Indian
    Company is beneficially owned by RIC
  • Controlled by RIC means
  • If RIC has power to appoint majority of directors
    in the Indian Company
  • Owned by NRE means
  • If more than 50 of equity interest in Indian
    Company is beneficially owned by non-residents
  • Controlled by NRE means
  • If non-residents have power to appoint majority
    of directors in the Indian Company

22
Calculation of Indirect FDI
Now
  • Total FI is sum of Direct FI and Indirect FI
  • FI to include all types of foreign investments
  • For RIC own and control are cumulative
    conditions for NRE these are non-cumulative
  • The methodology to apply to every stage of
    investment at Indian company

Non Resident Entity (NRE)
NRE
Overseas
Overseas
51
40
India
India
I Co1 (Owned or Controlled by NRE)
I Co1 (Owned and Controlled by RIC)
39
51
10
49
I Co2 (Owned and Controlled by RIC)
I Co2 (Owned and Controlled by NRE)
Direct FI in I Co2 39 Indirect FI in I Co2
Nil Total FI in I Co2 39
Direct FI in I Co2 51 Indirect FI in I Co2
49 Total FI in I Co2 100
23
Calculation of Indirect FDI
Non Resident Entity (NRE)
Non Resident Entity (NRE)
Overseas
Overseas
75
26
India
India
I Co1 (Investing/ operating cum investing company)
I Co1 (Investing/ operating cum investing company)
25
74
RIC
100
100
I Co2
I Co2
Indirect FI in I Co2 75
Indirect FI in I Co2 NIL or 26?
What is indirect FDI in near 100 say 99 held
companies?
24
Downstream Investment
Foreign Co.
  • ICo1 could be
  • An investing company or
  • An investing-cum-operating company
  • ICo2 is an operating company

Overseas
India
I Co1
Downstream Investment
I Co2
25
Downstream investment
  • Guiding principle downstream investment by
    Indian companies owned or controlled by NRE
    subject to same guidelines as direct investment
  • For operating companies Foreign investment
    subject to sectoral FDI policy conditions
  • For operating-cum-investing companies - Foreign
    investment subject to sectoral FDI policy
    conditions
  • For investing companies Foreign investment in
    investing companies under approval route
    downstream investment subject to sectoral FDI
    policy
  • Reporting requirements within 30 days of
    investment with DIPP/ FIPB introduced
  • Investing and Investing-cum-operating companies
    not permitted to leverage funds from domestic
    market for downstream investment

26
Transfer of securities basic rules
27
Procedural Aspects
28
FDI Policy Procedural Aspects
  • Intimation of receipt of share application money
    within 30 days
  • Purpose of inward remittance clearly stated on
    FIRC
  • Allotment of shares within 180 days of receipt of
    funds
  • Funds against which shares not allotted to be
    refunded
  • Reporting in Form FC GPR within 30 days of
    allotment
  • In case of Approval route, application to FIPB
    along with supporting documents
  • All applications to be placed before FIPB within
    15 days
  • FIPB empowered to prioritise applications based
    on sector, export potential etc.
  • Violations of regulations attract penal
    provisions under FEMA

29
Sector Specific Guidelines
30
Sector Specific Guidelines Prohibited sectors
  • FDI not allowed in the following
  • Retail trading (except single brand)
  • Atomic Energy
  • Lottery business
  • Gambling Betting
  • Chit fund and Nidhi company
  • Trading in Transferable Development Rights
  • Real Estate business or construction of Farm
    Houses
  • Sectors not opened for private sector investments
  • Prohibition extended to foreign technology
    collaboration including licensing for franchisee,
    trademark, brand name or management contract for
    lottery, betting and gambling business

31
Sector Specific Guidelines Telecommunication
  • FDI allowed in the following (illustrative)
  • Basic and cellular
  • Unified Access Services
  • National/ International Long Distance
  • Global Mobile Personal Communications Services
    (GMPCS)
  • Other value added telecom services
  • FDI in ISPs without gateways now capped at 74 in
    line with DoT guidelines of 2007
  • Subject to guidelines issued DOT
  • FDI Limits

32
Sector Specific Guidelines Trading
  • No change in existing sectoral caps
  • Cash Carry wholesale trading/ Wholesale trading
    (WT) specifically defined to mean sale to
    Retailers, Industrial, Commercial, Institutional
    or other professional business users and other
    wholesalers and related subordinated service
    providers
  • Some of the other key attributes of WT
  • Implies sales for trade, business and profession
    as opposed to sales for personal consumption
  • Benchmark is the type of customers and not size
    and volume of sales
  • WT include Resale, Sale after processing, Bulk
    imports with export and B2B e-Commerce
  • WT permitted among group companies subject to max
    25 of total turnover of the wholesale venture
    and only for internal use
  • Can be as per normal business practice including
    on credit
  • WT trader cannot open retail shops to sell to
    consumer directly

33
Sector Specific Guidelines Trading
  • Purchasing entity to fulfill one of the
    following
  • Entity should hold sales tax/ VAT /service tax /
    excise duty registration or
  • Entity should hold trade licenses reflecting that
    the entity is itself engaged in business
    involving commercial activity or
  • Entity should hold permits/license etc. for
    undertaking retail trade from Government /Local
    Self Government Bodies or
  • Entity should be an Institution having
    certificate of incorporation or registration as a
    society or registration as public trust for their
    self consumption
  • Obligation on Indian company to maintain
    day-to-day records with respect to satisfaction
    of above conditions.
  • FDI in e-commerce permitted only in B2B trade and
    not in retail trade

34
Sector Specific Guidelines Private sector banks/
Civil Aviation
Banks
  • No change in existing conditions
  • FDI permitted under automatic route upto 49 and
    thereafter upto 74 under Approval Route

Civil Aviation
  • No change in existing conditions
  • FDI in Non-scheduled air transport services/
    non-schedule airlines, Chartered and Cargo
    airlines permitted under automatic route upto 49
    and thereafter upto 74 under Approval Route

35
Sector Specific Guidelines Broadcasting
  • In the Broadcasting sector, all FDI are under the
    Approval route
  • For reckoning the FDI limits, FII investment also
    to be considered
  • Subject to guidelines issued by IB ministry
  • FDI permitted in broadcasting sector

FDI component not to exceed 20 May be
raised to 49 as per recent press reports
36
Sector Specific Guidelines Print Media
  • FDI is permitted under Approval route based on
    nature of publication
  • Investment subject to sectoral policy issued by
    Ministry of Information and Broadcasting
  • FDI limits on publications

May be raised to 49 as per recent press reports
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