Post on 16-Jan-2016
transcript
Nabin Ballodia
July 9, 2011
Foreign Direct Investment in India
2
Agenda
Entry Route
Sectoral Caps
Downstream Investment
Swap of shares
Shares for non-cash consideration
Overview
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Overview
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FDI Policy
• Objective of India’s FDI Policy to invite and encourage foreign investment in India
• Since 1991, the policy has been liberalized substantially to facilitate foreign investment
• The Department of Industrial Policy & Promotion (DIPP), the Foreign Investment Promotion Board (FIPB) and Secretariat of Industrial Assistance (SIA) regulate the FDI Policy
• The administrative and compliance aspects of FDI are monitored by the RBI
• Consolidated half yearly policy document - subsumes all Press notes etc
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Entry Routes
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Entry Routes
Only for cases other than Automatic Route and those mentioned in sectoral policy
Applies to investment over 24% in SSI reserved items
Investments by citizens / entity incorporated in Bangladesh
Government Route
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
Automatic Route
FDI Guidelines for Investing in India
Foreign Investment Promotion Board (FIPB)
No Prior Regulatory Approval but only Post Facto Filings to RBI, through
AD
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Entry Routes
Existing Airports
100%
Asset Reconstruction Companies
49%
Titanium Minerals
100%
Broadcasting (a)
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
Cigars & Cigarettes
Negative List
(Illustrative)
Government Route
(Illustrative)
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
Automatic Route
(Illustrative)
Note: (a) Sector specific guidelines (b) Subject to certain exceptions
FDI limits – Illustrative list
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FDI Policy – Procedural Aspects
• Applications can be filed online/physically – mandatory preliminary application
• Intimation of receipt of share application money – within 30 days
• Allotment of shares within 180 days of receipt of funds
• Funds against which shares not allotted to be refunded
• For transfer of shares file Form FC-TRS within 60 days of receipt of consideration
• Downstream investment by Indian companies to be notified to SIA, DIPP and FIPB within 30 days of investment
• Onus on transferor/ transferee, resident in India
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Sector Specific Caps
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Snapshot of Certain Specific Sectors
Sector / Activity % of FDI Cap / Equity Route
Real estate i.e. ( Development of Townships, Housing, Built-up infrastructure and Construction-development projects)
100% Automatic
Trading(i)Cash & Carry Wholesale Trading / Wholesale Trading
(ii)Single Brand Product Trading
100%
51%
Automatic
Government
NBFC 100% Automatic
Defence 26% Government
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Real Estate
• For business of development of townships, housing, built-up infrastructure and construction-development projects
• Illustrative list
Commercial premises,
Hotels & resorts
Hospitals,
Educational institutions,
Recreational facilities,
City and regional level infrastructure
• FDI is not allowed in Real Estate business, construction of farm houses
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Real Estate
• Real Estate Investment subject to the following conditions:
Parameter Condition
1. Area For development of serviced housing plots
Minimum 10 Hectare
Construction development projects Minimum 50,000sq.mtrs
2. Capitalization WOS Minimum USD 10 Million
JV with Indian partner Minimum USD 5 Million
3. Repatriation of Original Investment
Lock in of 3 years
4. Timeline for development 50% of project, within 5 years of statutory clearances – restriction on undeveloped projects
5. Norms and standard To conform as laid by respective local/state authorities
6. Responsibility for seeking approval
On the investor / investee company
Conditions (1) to (4) would not apply to Hotel & Tourism, Hospitals and SEZs as well as investment by NRIs
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Trading- Cash & Carry Wholesale trading/ Wholesale trading (WT)
Sale of goods/merchandise to
• Retailers,
• Industrial users,
• Commercial users,
• Institutional users,
• Other professional business users,
• Other wholesalers and related subordinated service providers,
• Resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales, or
• B2B e-Commerce
Type of customers to whom the sale is made
Cash & Carry Wholesale trading/
Wholesale trading
Sale to qualify for WT, it should primarily be for the purpose of
trade, business or profession and not personal consumption
Yardstick for Determination whether sale is WT
Size and volume of sales
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• Requisite licenses/registration under the relevant State / Central legislations
• Sales by the wholesaler (except to Government) to qualify as above if made to entities :
Holding sales tax/ VAT /service tax/excise registrations; or
Holding trade licenses under Shops and Establishment Act; or
Holding license for undertaking retail trade (like tehbazari and similar license for
hawkers); or
Registered as a society or public trust for their self consumption
• Maintenance of full records indicating all the details of such sales on a day to day basis
• WT to group companies - limited to 25% of the total turnover of the wholesale venture
• WT as per normal business practice - including extending credit facilities
• Restriction on opening retail shops to sell to the consumer directly.
Trading- Cash & Carry Wholesale trading/ Wholesale trading (WT)
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Trading- Single Brand product trading
• Conditions to be satisfied
Products to be sold should be of a ‘Single Brand’ only
Products should be sold under the same brand internationally
Covers only products which are branded during manufacturing
• Application to indicate product/ product categories - any additions require a fresh
approval
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NBFC
• FDI in NBFC is allowed under the automatic route in only the following activities:
x. Factoring
xi. Credit Rating Agencies
xii. Leasing & Finance
xiii. Housing Finance
xiv. Forex Broking
xv. Credit Card Business*
xvi. Money Changing Business
xvii.Micro Credit
xviii.Rural Credit
i. Merchant Banking
ii. Under Writing
iii. Portfolio Management Services
iv. Investment Advisory Services
v. Financial Consultancy
vi. Stock Broking
vii. Asset Management
viii. Venture Capital
ix. Custodian Services
* Credit Card business includes issuance, sales, marketing & design of various payment products such as credit cards, charge cards, debit cards, stored value cards, smart card, value added cards etc.
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NBFC
• Investment would be subject to the following minimum capitalisation norms:
• 100% foreign NBFCs with minimum USD 50 million can set up step down subsidiaries for specific NBFC activities,
No restriction on the number of operating subsidiaries/minimum capital.
• NBFCs with 75% or less FDI can also set up subsidiaries for undertaking other NBFC activities
Subsidiaries should also comply with the min cap norms stated above
Foreign Capital Share Minimum Amount of Funds
i. Upto 51% USD 0.5 Million, to be brought upfront
ii. More than 51% but up to 75% USD 5 Million, to be brought upfront
iii. More than 75% USD 50 Million, out of which USD 7.5 million to be brought upfront ; balance in 24 months.
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NBFC – Non- Fund based activities
• Investment in Non-Fund based activities would be subject to the following -
• Such NBFC is not permitted
to set up any subsidiary for any other activity, nor
to participate in any equity of an NBFC holding/operating company
• Following activities classified as Non-Fund based activities:
Investment Advisory Services
Financial Consultancy
Forex Broking
Money Changing Business
Credit Rating Agencies
Foreign Capital Share Minimum Amount of FundsIrrespective of share USD 0.5 Million to be brought upfront for all permitted non-fund
based NBFCs irrespective of the level of foreign investment
FDI in NBFC is subject to compliance with guidelines by RBI and other relevant regulators
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Defence
• Applications to be considered by the DIPP, MoCI and MoD
• Applicant should be an Indian company/firm.
• Management of applicant in Indian hands [Board / Chief Executives Indian resident)
• Full particulars of the Directors / Chief Executives to be furnished along with the
applications.
• Government to verify the background of foreign collaborators / domestic promoters
including
• No minimum capitalization, however adequate Net Worth of foreign investor
important
• Three-year lock-in period for transfer of equity from one NR to another
Such transfer would be subject to prior approval of the FIPB
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Indirect & Downstream Investment
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Downstream Investment
• FDI in a company can be in two forms
Direct : A non-resident investing directly in an Indian company, or
Indirect : Investment by one Indian company into another, wherein the former has
foreign investment in it.
• Indirect can also be a cascading investment i.e. through multi-layered structure
• For the purpose of FDI, Foreign Investment shall include all types of foreign investments
i.e.
• FDI
• Investment by FIIs; NRIs; ADRs; GDRs; FCCB;
• Fully, compulsorily and mandatorily convertible preference shares and
• Fully, compulsorily and mandatorily convertible Debentures.
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Downstream Investment
• FI in pure investing company – Approval route
• For other companies – Foreign investment subject to sectoral FDI policy conditions
• Reporting requirements within 30 days of investment with DIPP/ FIPB introduced
• Issue / transfer / pricing / valuation as per SEBI / RBI guidelines
• Indian company making downstream investment not permitted to leverage funds
from domestic market
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Calculation of Indirect FDI
F Co.
I Co1
Overseas
India
I Co1
Overseas
India
I Co2
F Co.
Direct FI
Direct Foreign Investment
Indirect Foreign Investment
Indirect FI
Total FI is sum of Direct FI and Indirect FI
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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 capital in Indian Company is beneficially owned by RIC/ICO owned and controlled by RIC
Owned by NRE means:
•If more than 50% of capital in Indian Company is beneficially owned by non-residents
‘Controlled by’ means:
•Power to appoint majority of directors in the Indian Company
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Calculation of Indirect FDI
I Co1
Overseas
India
I Co2
NRE
If ICO2 & ICO1 owned and controlled by RIC, investment by ICO1 in ICO2 is not indirect FDI
1
If ICO1 is owned or controlled by NRE, investment by ICO1 in ICO2 is considered indirect FDI
2
• 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
If ICO1 holds 100% in ICO2, NRE investment in ICO1 is considered indirect FDI in ICO2
3
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Calculation of Indirect FDI
Direct FI in I Co2 = 39%Indirect FI in I Co2 = NilTotal FI in I Co2 = 39%
Non Resident Entity (‘NRE’)
I Co1 (Owned and Controlled by RIC)
I Co2 (Owned and Controlled by RIC)
Overseas
India40%
10%
39%
Rule 1
Direct FI in I Co2 = 39%
Indirect FI in I Co2 = 10%
Total FI in I Co2 = 49%
NRE
I Co1 (Owned or Controlled by NRE)
I Co2 (Owned and Controlled by RIC)
51%
10%
39%
Rule 2
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Calculation of Indirect FDI
Indirect FI in I Co2 = 75%
Non Resident Entity (‘NRE’)
I Co1 (Investing/ operating cum
investing company)
I Co2
Overseas
India75%
100% RIC
25%
Indirect FI in I Co2 = NIL or 26%?
Non Resident Entity (‘NRE’)
I Co1 (Investing/ operating cum
investing company)
I Co2
Overseas
India26%
100%
74%
What is indirect FDI in near 100% say 99% held companies?
Rule 3
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Investment by way of Swap of Shares
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Swap of Shares
F Co 1
I Co
F Co 2
India
Issue of shares
Transfer of sharesOutside India
Existing Structure
F Co 1
I Co
F Co 2
Equity
Resulting Structure
Equity
Mechanics
• To start with - F Co 1 holds shares in F Co 2, I Co not in structure
• I Co acquires the shares of F Co 2 from F Co 1
• As a consideration, I Co issues its own shares to F Co 1
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Swap of Shares
• Approval required from the FIPB for such transaction
• Irrespective of the amount, valuation of shares to done either by
by a Category I Merchant Banker registered with SEBI, or
An Investment Banker outside India registered with the appropriate authority
of the host country
• Share valuation norms to be complied under both the legs: ODI and the FDI
• Overseas investment to comply with ODI guidelines and inward issue of shares to FDI
policy
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Issue of shares for Non-cash consideration
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Shares for Non-cash consideration
• Shares to be issued to a non-resident against receipt of funds through normal banking channels
• If the funds not received through normal banking channels, prior approval of the Government required
• Exception to the above condition
Shares are to be issued against ECB and/or
Shares are to be issued against royalty payments (including lump-sum technical know-how fees)
• Issue of shares for non-cash consideration also extended under the approval route for following -
Import of capital goods/ machinery/ equipment (including second-hand machinery), subject to conditions
Pre-operative/ Pre-incorporation expenses (including payments of rent etc.), subject to conditions
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Shares for Non-cash consideration
• For import of capital goods/ machinery/ equipment -
Import as per the Export / Import Policy as notified by the DGFT and RBI
Independent valuation by a third party entity from importing country with documents
Application to indicate beneficial ownership and identity of importer / exporter
All such conversions should be completed within 180 days from the date of shipment of goods.
• For pre-operative/ pre-incorporation expenses -
Submission of FIRC for remittance of funds
Verification / certification of the pre-incorporation/ pre-operative expenses by statutory auditor;
Payments to be made directly by the foreign investor to the company.; and
Capitalization be completed within the stipulated period of 180 days
• Special Resolution to be passed by the company for conversion• Government approval subject to pricing guidelines of RBI and appropriate tax
clearance
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Shares for Non-cash consideration
Pre-incorporation
Incorporated but not operational(Pre-operational)
Set-up or Commencement of business
Indian Company not in existence– Payment cannot be made to the Indian Company
Payments to be directly made to Indian Company’s bank account and FIRCs to explicit mention that funds remitted to meet “pre-operative” expenses
Shares cannot be issued in lieu of payment made by Foreign Investor towards “Pre-incorporation” expenses
Shares can be issued in lieu of foreign direct inward remittances made by Foreign Investor towards “Pre-operative” expenses
Issue
Definition / meaning of pre-operative / pre-incorporation expenses not provided
Trigger point for time period of 180 days for issue of shares not clear
Past transactions may not get covered
Bank Account opened subsequent to issue of PAN
Nabin Ballodia
July 9, 2011
Thank You
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Calculation of Indirect FDI
Different methods of computing Indirect FI prescribed for different sectors. E.g.- Telecom : Proportionate method
- Investing companies in Infrastructure sector : Management + Ownership Test
F Co.
I Co1
Overseas
India
Telecom sector
I Co2
90%
60%
FI in I Co2 is 54% (90*60%)
I Co1*
Overseas
India
Infrastructure sector
I Co2
49%
100%
FI in I Co2 is NIL
F Co.
*Management of I Co1 with Indians
Erstwhile Regulations