CS Rupali Kulshrestha

Introduction

Like every year, the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry had released the Consolidated Foreign Direct Investment Policy Circular, 2016[1] (FDI Policy 2016) which took effect from June 7, 2016. Several amendments were made in various sectors vide Press Note No. 12 dated November 24, 2015[2]. FDI Policy 2016 consolidates the amendments made vide press notes issued during the year as well as introduces few additional amendments. A comparative analysis of FDI Policy 2016 vis-a-vis in the FDI Policy 2015[3] is given below:

Particulars
FDI Policy 2015
FDI Policy 2016
Remarks
Definition of Capital
2.1.5 ‘Capital’ means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures.
Note: Warrants and partly paid shares can be issued to person/(s) resident outside India only after approval through the Government route.
2.1.5 ‘Capital’ means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures and warrants.
Note: The equity shares issued in accordance with the provisions of the Companies Act, as applicable, shall include equity shares that have been partly paid. Preference shares and convertible debentures shall be required to be fully paid, and should be mandatorily and fully convertible. Further, ‘warrant’ includes Share Warrant issued by an Indian Company in accordance to provisions of the Companies Act, as applicable.
FDI Policy 2016 permits companies to issue warrants without any approval. This was amended vide Press Note No. 9 of 2015 dated September 15, 2016.
Definition of Control
2.1.7 ‘Control’ shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.
2.1.7 ‘Control’ shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. For the purposes of Limited Liability Partnership, ‘control’ will mean right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of the LLP.
Definition of Control now includes control for the purpose of LLP. These changes were originally brought out through Press Note No. 12 dated November 24, 2015.
Consequentially, RBI amended the definition of control in FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 vide Notification No. FEMA.362/2016-RB dated February 15, 2016[4].
Definition of Employees Stock Option
New insertion
2.1.9 ‘Employees Stock Option’ means the option given to the directors, officers or employees of a company or of its holding company or joint venture or wholly owned overseas subsidiary/subsidiaries, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.
The same was added vide Notification No. FEMA 344/2015 RB dated 11th June, 2015[5] as Regulation 2 (iif) of FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000
Accordingly, FDI Policy 2016 has been aligned with FEMA Regulations.
Definition of ‘Investment Vehicle’
New insertion
2.1.23 ‘Investment Vehicle’ shall mean an entity registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose and shall include Real Estate Investment Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014 and Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012.
The same was added vide Notification No. FEMA. 355/2015-RB dated November 16, 2015[6] as Regulation 2(iig) of the FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000.
Accordingly, FDI Policy 2016 has been aligned with FEMA Regulations.
Definition of ‘Manufacture’
New insertion
2.1.28 ‘Manufacture’ with its grammatical variations, means a change in a non-living physical object or article or thing- (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure
This was amended vide Press Note No. 12 making amendment in FDI Policy 2015.
The same was added vide Notification No.FEMA.362/2016-RB dated February 15, 2016[7] as Regulation 2(vii AA) of the FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000
Definition of Non- Resident Indian
2.1.27 ‘Non- Resident Indian’ (NRI) means an individual resident outside India who is a citizen of India or is a person of Indian origin
2.1.30 ‘Non- Resident Indian’ (NRI) means an individual resident outside India who is a citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955. ‘Persons of Indian Origin’ cardholders registered as such under Notification No. 26011/4/98 F.I. dated 19.8.2002 issued by the Central Government are deemed to be ‘Overseas Citizen of India’ cardholders’
The definition of NRI was amended vide Press Note No. 7 dated June 3, 2015.
The same was added vide Notification No.FEMA.361/2016-RB dated February 15, 2016[8] as Regulation 2(viia) of the FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000
Definition of Owned
2.1.28 A company is considered as ‘Owned’ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or Indian companies, which are ultimately owned and controlled by resident Indian citizens;
2.1.31. A company is considered as ‘Owned’ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or Indian companies, which are ultimately owned and controlled by resident Indian citizens. A Limited Liability Partnership will be considered as owned by resident Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and/or entities which are ultimately ‘owned and controlled by resident Indian citizens’ and such resident Indian citizens and entities have majority of the profit share.
This was amended vide Press Note dated November 24, 2015
The same was amended vide Notification No.FEMA.362/2016-RB dated February 15, 2016[9] as Regulation 14(1)(i)(a) of the FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000
Definition of Qualified Foreign Investor
2.1.34 ‘Qualified Foreign Investor’ means a non-resident investor (other than SEBI registered FII and SEBI registered FVCI) who meets the KYC requirements of SEBI for the purpose of making investments in accordance with the regulations/orders/circulars of RBI/SEBI.
Deleted
Definition of ‘Sweat Equity Shares’
New insertion
2.1.43 ‘Sweat Equity Shares’ means such equity shares as issued by a company to its directors or employees at a discount or for consideration other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called
The same was added vide Notification No. FEMA. 344/2015 RB dated 11th June, 2015[10] as Regulation 2(xa) of the FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000
Accordingly, FDI Policy 2016 has been aligned with FEMA Regulations.
Definition of Unit
New insertion
2.1.45 ‘Unit’ shall mean beneficial interest of an investor in the Investment Vehicle and shall include shares or partnership interests.
The same was added vide Notification No. FEMA. 355/2015-RB dated November 16, 2015[11] as Regulation 2(xa) of the FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000.
Accordingly, FDI Policy 2016 has been aligned with FEMA Regulations.
Definition of ‘Venture Capital Fund’
2.1.42 ‘Venture capital Fund’ (VCF) means a Fund established in the form of a trust, a company including a body corporate and registered under Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996, which
(i) has a dedicated pool of capital;
(ii) raised in the manner specified under the Regulations;
(iii) invests in accordance with the Regulations
2.1.46 ‘Venture Capital Fund’ (VCF) means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and shall include an angel fund as defined under Chapter III-A of SEBI (AIF) Regulations, 2012.
Reference to SEBI (VCF) Regulations has been changed to AIF Regulations.
Eligible Investors
Company, trust and partnership firm incorporated outside India
New insertion
3.1.4. A company, trust and partnership firm incorporated outside India and owned and controlled by NRIs can invest in India with the special dispensation as available to NRIs under the FDI Policy.
A new category of investors has been introduced vide FDI Policy 2016 who can invest in India with special dispensation as are available to NRIs.
The amendment was made vide Press Note No. 12 dated November 24, 2015
The same was added vide Notification No. FEMA. 355/2015-RB dated November 16, 2015[12] in the FEM (Transfer or issue of security by a person resident outside India) Regulations, 2000.
Subscription to National pension System
New insertion
3.1.8 A Non- Resident Indian may subscribe to National Pension System governed and administered by Pension Fund Regulatory and Development Authority (PFRDA), provided such subscriptions are made through normal banking channels and the person is eligible to invest as per the provisions of the PFRDA Act. The annuity/ accumulated saving will be repatriable.
This was inserted vide Notification No. FEMA. 353 /2015-RB dated 6th October, 2015 in Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000.
Accordingly, FDI Policy 2016 has been aligned with FEMA Regulations.
QFIs investment in equity shares
3.1.7.1 QFls are permitted to invest through SEBI registered Depository Participants (DPs) only in equity shares of listed Indian companies through recognized brokers on recognized stock exchanges in India as well as in equity shares of Indian companies which are offered to public in India in terms of the relevant and applicable SEBI guidelines/regulations. QFls are also permitted to acquire equity shares by way of right shares, bonus shares or equity shares on account of stock split/consolidation or equity shares on account of amalgamation, demerger or such corporate actions subject to the prescribed investment limits. QFIs are allowed to sell the equity shares so acquired subject to the relevant SEBI guidelines.
3.1.7.2 The individual and aggregate investment limits for the QFls shall be 5% and 10% respectively of the paid up capital of an Indian company. These limits shall be within FPI aggregate limits. Further, wherever there are composite sectoral caps under the extant FDI policy, these limits for QFI investment in equity shares shall also be within such overall FDI sectoral caps.
3.1.7.3 Dividend payments on equity shares held by QFls can either be directly remitted to the designated overseas bank accounts of the QFIs or credited to the single non-interest bearing Rupee account.
Deleted
FIs and QFIs have been merged into FPIs. Therefore, reference to QFIs as an investor class has been removed.
Eligible investee entities
FDI in Venture Capital Fund
3.2.3. FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs)/Venture Capital Funds (VCFs)/other companies, as stated in paragraph 3.1.6 of this Circular. If a domestic VCF is set up as a trust, a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF subject to approval of the FIPB. However, if a domestic VCF is set-up as an incorporated company under the Companies Act, as applicable, then a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF under the automatic route of FDI Scheme, subject to the pricing guidelines, reporting requirements, mode of payment, minimum capitalization norms, etc
Deleted
FDI in Limited Liability Partnerships (LLPs)
3.2.5 FDI in LLPs is permitted subject to the following conditions:
(a) FDI will be allowed, through the Government approval route, only in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions (such as ‘Non Banking Finance Companies’ or ‘Development of Townships, Housing, Built-up infrastructure and Construction-development projects’ etc.).
(b) LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business.
(c) An Indian company, having FDI, will be permitted to make downstream investment in an LLP only if both-the company, as well as the LLP- are operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.
(d) LLPs with FDI will not be eligible to make any downstream investments.
(e) Foreign Capital participation in LLPs will be allowed only by way of cash consideration, received by inward remittance, through normal banking channels or by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank
(f) Investment in LLPs by Foreign Portfolio Investors (FPIs) and Foreign Venture Capital Investors (FVCIs) will not be permitted. LLPs will also not be permitted to avail External Commercial Borrowings (ECBs).
(g) In case the LLP with FDI has a body corporate that is a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of Section 7 of the LLP Act, 2008, such a body corporate should only be a company registered in India under the Companies Act, as applicable and not any other body, such as an LLP or a trust.
(h) For such LLPs, the designated partner “resident in India”, as defined under the ‘Explanation’ to Section 7(1) of the LLP Act, 2008, would also have to satisfy the definition of “person resident in India”, as prescribed under Section 2(v)(i) of the Foreign Exchange Management Act, 1999.
(i) The designated partners will be responsible for compliance with all the above conditions and also liable for all penalties imposed on the LLP for their contravention, if any.
(j) Conversion of a company with FDI, into an LLP, will be allowed only if the above stipulations (except clause 3.2.5(e) which would be optional in case of a company) are met and with the prior approval of FIPB/Government.
3.2.4 FDI in LLPs is permitted subject to the following conditions:
(i) FDI is permitted under the automatic route in Limited Liability Partnership (LLPs) operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions
(ii) )An Indian company or an LLP, having foreign investment, is also permitted to make downstream investment in another company or LLP in sectors in which 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions.
(iii) FDI in LLP is subject to the compliance of the conditions of LLP Act, 2008.
These amendments were made vide Press Note No. 12 dated November 24, 2015. The amendments have liberalized FDI in LLP, thereby promoting incorporation of LLP.
The same was amended vide Notification No.FEMA.362/2016-RB dated February 15, 2016[13] in Schedule 9 of the FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000
Investment Vehicle
New insertion
An entity being ‘investment vehicle’ registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose including Real Estate Investment Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014, Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012 and notified under Schedule 11 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 is permitted to receive foreign investment from a person resident outside India (other than an individual who is citizen of or any other entity which is registered / incorporated in Pakistan or Bangladesh), including an Registered Foreign Portfolio Investor (RFPI) or a non-resident Indian (NRI).
Investment vehicle has been introduced as new eligible investee entities in which investment can be made by a person resident outside India (other than an individual who is citizen of or any other entity which is registered / incorporated in Pakistan or Bangladesh), including a Registered Foreign Portfolio Investor (RFPI) or a non-resident Indian (NRI)
Acquisition of Warrants and Partly Paid Shares
New insertion
Point 4 of Annexure 2
An Indian company may issue warrants and partly paid shares to a person resident outside India subject to terms and conditions as stipulated by the Reserve Bank of India in this behalf, from time to time.
This was amended vide DIPP Press Note No. 9 of 2015 dated September 15, 2015
Issue of Employees Stock Option Scheme (ESOPs)/ Sweat Equity
3.5.5 Issue of shares under Employees Stock Option Scheme (ESOPs)
(i) Listed Indian companies are allowed to issue shares under the Employees Stock Option Scheme (ESOPs), to its employees or employees of its joint venture or wholly owned subsidiary abroad, who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued to citizens of Bangladesh with the prior approval of FIPB. Subject to this, Government approval is not required for issue of ESOPs in sectors under automatic route. Shares under ESOPs can be issued directly or through a Trust subject to the condition that:
(a) The scheme has been drawn in terms of relevant regulations issued by the SEBI, and
(b) The face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5 per cent of the paid-up capital of the issuing company.
(ii) Unlisted companies have to follow the provisions of the Companies Act, as applicable. The Indian company can issue ESOPs to employees who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued to the citizens of Bangladesh with the prior approval of the FIPB. Subject to this, Government approval is not required for issue of ESOPs in sectors under automatic route.
(iii) The issuing company is required to report (plain paper reporting) the details of granting of stock options under the scheme to non-resident employees to the Regional Office concerned of the Reserve Bank and thereafter the details of issue of shares subsequent to the exercise of such stock options within 30 days from the date of issue of shares in Form FCGPR.
Point 5 of Annexure 4
An Indian company may issue “employees’ stock option” and/or “sweat equity shares” to its employees/directors or employees/directors of its holding company or joint venture or wholly owned overseas subsidiary/subsidiaries who are resident outside India, provided that :
a. The scheme has been drawn either in terms of regulations issued under the Securities Exchange Board of India Act, 1992 or the Companies (Share Capital and Debentures) Rules, 2014 notified by the Central Government under the Companies Act 2013, as the case may be.
b. The “employee’s stock option”/ “sweat equity shares” issued to non-resident employees/directors under the applicable rules/regulations are in compliance with the sectoral cap applicable to the said company.
c. Issue of “employee’s stock option”/ “sweat equity shares” by a company where foreign investment is under the approval route shall require prior approval of the Foreign Investment Promotion Board (FIPB) of Government of India
d. Issue of “employee’s stock option”/ “sweat equity shares” under the applicable rules/regulations to an employee/director who is a citizen of Bangladesh/Pakistan shall require prior approval of the Foreign Investment Promotion Board (FIPB) of Government of India.
e. The issuing company shall furnish to the Regional Office concerned of the Reserve Bank of India under whose jurisdiction the registered office of the company operates, within 30 days from the date of issue of employees’ stock option or sweat equity shares, a return as per the Form-ESOP.
Provision related to issue of ESOPs as given under FDI Policy 2015 has also been extended to Sweat Equity Shares vide FDI Policy 2016.
In terms of FDI Policy 2015, only listed Indian companies were permitted to Issue ESOPs. Now the provision has been extended to any Indian company.
Indian companies are now permitted to issue ESOPs and/or sweat equity shares to the employees/directors of holding company.
This apart, company may, now, issue ESOPs and/or sweat equity shares to its employees/directors resident in Pakistan subject to prior approval of FIPB.
Further, a new form Form-ESOP has been introduced for reporting the details of issue of shares under ESOP and/or Sweat Equity within 30 days from the date of issue. Earlier the same used to be reported in Form FC-GPR.
The same was substituted vide Notification No. FEMA. 344/2015 RB dated 11th June, 2015[14] as Regulation 8(1) of the FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000
Accordingly, FDI Policy 2016 has been aligned with FEMA Regulations.
Share Swap
In cases of investment by way of swap of shares, irrespective of the amount, valuation of the shares will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of the Government conveyed through Foreign Investment Promotion Board (FIPB) will also be a prerequisite for investment by swap of shares.
In cases of investment by way of swap of shares, irrespective of the amount, valuation of the shares will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of the Government will also be a prerequisite for investment by swap of shares for sector under Government approval route. No approval of the Government is required for investment in automatic route sectors by way of swap of shares.
FDI Policy 2016 just provides a clarification that approval is not required for investment in automatic route sectors by way of swap of shares. This was amended vide Press Note No. 12 dated November 24, 2015
Foreign investment in sectors/activities under government approval route
3.6.2 In sectors/activities with caps, including inter-alia defence production, air transport services, ground handling services, asset reconstruction companies, private sector banking, broadcasting, commodity exchanges, credit information companies, insurance, print media, telecommunications and satellites, Government approval/FIPB approval would be required in all cases where:
(i) An Indian company is being established with foreign investment and is not owned by a resident entity or
(ii) An Indian company is being established with foreign investment and is not controlled by a resident entity or
(iii) The control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc. or
(iv) The ownership of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc
(v) It is clarified that these guidelines will not apply to sectors/activities where there are no foreign investment caps, that is, 100% foreign investment is permitted under the automatic route.
(vi) It is also clarified that Foreign investment shall include all types of foreign investments i.e. FDI, investment by FIIs, FPIs, QFIs, NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds (FCCB) and fully, mandatorily & compulsorily convertible preference shares/debentures, regardless of whether the said investments have been made under 30 Schedule 1, 2, 2A, 3, 6 and 8 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations.
3.4.2 Foreign investment in sectors/activities under government approval route will be subject to government approval where:
(i) An Indian company is being established with foreign investment and is not owned by a resident entity or
(ii) An Indian company is being established with foreign investment and is not controlled by a resident entity or
(iii) The control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to nonresident entities through amalgamation, merger/demerger, acquisition etc. or
(iv) The ownership of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to nonresident entities through amalgamation, merger/demerger, acquisition etc
(v) It is clarified that Foreign investment shall include all types of foreign investments, direct and indirect, regardless of whether the said investments have been made under Schedule 1 (FDI), 2 (FII), 2A (FPI), 3 (NRI), 6 (FVCI), 9 (LLPs), 10 (DRs) and 11(Investment Vehicles) of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations. FCCBs and DRs having underlying of instruments which can be issued under Schedule 5, being in the nature of debt, shall not be treated as foreign investment. However, any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned as foreign investment.
(vi) Investment by NRIs under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations will be deemed to be domestic investment at par with the investment made by residents.
(vii) A company, trust and partnership firm incorporated outside India and owned and controlled by non-resident Indians will be eligible for investments under Schedule 4 of FEMA (Transfer or issue of Security by Persons Resident Outside India) Regulations and such investment will also be deemed domestic investment at par with the investment made by residents.
Type of foreign investment has been extended to include LLPs, DRs and Investment Vehicles.
Further, it has been clarified that the investment by NRI on non-repatriation basis as per schedule 4 of FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations will be deemed to be domestic investment.
This apart, permission has been granted to a company, trust or partnership firm incorporated outside India and owned and controlled by non-resident Indians to make investments on non-repatriation basis as per schedule 4 of FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations and such investment shall be deemed to be domestic investment. These changes were originally brought out through Press Note dated November 24, 2015 in the FDI Policy 2015.
The same was amended vide Notification No.FEMA.362/2016-RB dated February 15, 2016[15]
as Regulation 14(5) of the FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000
Accordingly, FDI Policy 2016 has been aligned with FEMA Regulations.
Foreign investment in Indian Company which does not have any operations
3.10.3.3 For infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments, Government/FIPB approval would be required, regardless of the amount or extent of foreign investment. Further, as and when such a company commences business(s) or makes downstream investment, it will have to comply with the relevant sectoral conditions on entry route, conditionalities and caps.
3.8.3.3 For undertaking activities which are under automatic route and without foreign investment linked performance conditions, Indian company which does not have any operations and also does not have any downstream investments, will be permitted to have infusion of foreign investment under automatic route. However approval of the Government will be required for such companies for infusion of foreign investment for undertaking activities which are under Government route, regardless of the amount or extent of foreign investment. Further, as and when such a company commences business(s) or makes downstream investment, it will have to comply with the relevant sectoral conditions on entry route, conditionalities and caps.
These changes were originally brought out through Press Note No. 12 dated November 24, 2015
Accordingly, RBI amended Regulation 14(6)(ii)(d)(C) of the FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000
vide Notification No.FEMA.362/2016-RB dated February 15, 2016[16]
Total Foreign Investment
4.1.2 For the purpose of computation of indirect foreign investment, foreign investment in an Indian company shall include all types of foreign investments i.e. FDI; investment by FIIs (holding as on March 31); FPIs (holding as on March 31); QFIs (holding as on March 31); NRIs; ADRs; GDRs; Foreign Currency Convertible Bonds (FCCB); fully, compulsorily and mandatorily convertible preference shares and fully, compulsorily and mandatorily convertible Debentures regardless of whether the said investments have been made under Schedule 1, 2, 2A, 3, 6 and 8 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000.
1.1. For the purpose of computation of indirect foreign investment in an Indian company, foreign investment in an Indian company shall include all types of foreign investments i.e. FDI; investment by FIIs (holding as on March 31), FPIs (holding as on March 31); NRIs; ADRs; GDRs; Foreign Currency Convertible Debentures (FCCBs); Investment Vehicles, fully, compulsorily and mandatorily convertible preference shares and fully, compulsorily and mandatorily convertible Debentures or units of an Investment Vehicle, regardless of whether the said investments have been made under Schedule 1, 2, 2A, 3, 6, 9, 10 and 11 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000.
Type of foreign investment now includes FPIs, investment vehicle and units of investment vehicle. Investment by QFIs have been removed, due to deletion of this class as eligible investors.
The same was amended vide Notification No. FEMA.354/2015-RB dated 30th October, 2015[17] as Regulation 14(3)(ii) of the FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000
Accordingly, FDI Policy 2016 has been aligned with FEMA Regulations.
Guidelines for calculation of foreign investment
4.1.3 Foreign investment will include investment made by the non- resident entity into the Indian Company
Annexure 5
1.2 Foreign investment will include investment made by the non- resident entity into the Indian Company/ LLP
Foreign investment can now be made into LLPs
Counting of indirect foreign investment
New insertion
1.2 (ii)(aa)
Downstream investment by an Investment Vehicle shall be regarded as foreign investment if either the Sponsor or the Manager or the Investment Manager is not Indian ‘owned and controlled’ as defined in Regulation 14 of the principal Regulations as defined in RBI Notification No.362/2015-RB dated February 15, 2016. Provided that for sponsors or managers or investment managers organized in a form other than companies or LLPs, SEBI shall determine whether the sponsor or manager or investment manager is foreign owned and controlled.
Provisions related to downstream investment as defined in Regulation 14 of FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulation, 2000 vide Notification No.362/2015-RB dated February 15, 2016 by an investment vehicle has been included in the FDI Policy 2016.
Conditions of downstream investment by investment vehicles
New insertion
Annexure 5 1.3
(i) Downstream investment by an Investment Vehicle shall be regarded as foreign investment if either the Sponsor or the Manager or the Investment Manager is not Indian ‘owned and controlled’ as defined in Regulation 14 of the principal Regulations as defined in RBI Notification No. 362/2015-RB dated February 15, 2016.
(ii) Provided that for sponsors or managers or investment managers organized in a form other than companies or LLPs, SEBI shall determine whether the sponsor or manager or investment manager is foreign owned and controlled.
Explanation 1: Ownership and control is clearly determined as per the extant FDI policy. AIF is a pooled investment vehicle. ‘Control’ of the AIF should be in the hands of ‘sponsors’ and ‘mangers/investment managers’, with the general exclusion of others. In case the ‘sponsors’ and ‘managers/investment managers’ of the AIF are individuals, for the treatment of downstream investment by such AIF as domestic, ‘sponsors’ and ‘managers/investment managers’ should be resident Indian citizens.
Explanation 2: The extent of foreign investment in the corpus of the Investment Vehicle will not be a factor to determine as to whether downstream investment of the Investment Vehicle concerned is foreign investment or not.
(ii) Downstream investment by an Investment Vehicle that is reckoned as foreign investment shall have to conform to the sectoral caps and conditions / restrictions, if any, as applicable to the company in which the downstream investment is made as per the FDI Policy.
(iii) Downstream investment in an LLP by an Investment Vehicle that is reckoned as foreign investment has to conform to the provisions of Schedule 9 of the principal FEMA Regulations as well as the extant FDI policy for foreign investment in LLPs.
(iv) An Alternative Investment Fund Category III with foreign investment shall make portfolio investment in only those securities or instruments in which a Registered Foreign Portfolio Investor is allowed to invest under the principal Regulations.
(v) The Investment Vehicle receiving foreign investment shall be required to make such report and in such format to Reserve Bank of India or to SEBI as may be prescribed by them from time to time.
Provisions related to downstream investment as defined in Regulation 14 of FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulation, 2000 vide Notification No.362/2015-RB dated February 15, 2016 by an investment vehicle has been included in the FDI Policy 2016.

Changes brought in the Construction Sector through FDI Policy 2016 are given in the below table:

Particulars
FDI Policy 2015
FDI Policy 2016
Remarks
Construction Development: Townships, Housing, Built- up Infrastructure
Investment conditions
(A) Minimum area to be developed under each project would be as under:
(i) In case of development of serviced plots, no minimum land area requirement.
(ii) In case of construction-development projects, a minimum floor area of 20,000 sq. meter.
(B) Investee company will be required to bring minimum FDI of US$ 5 million within six months of commencement of the project. The commencement of the project will be the date of approval of the building plan/lay out plan by the relevant statutory authority. Subsequent tranches of FDI can be brought till the period of ten years from the commencement of the project or before the completion of project, whichever expires earlier.
Deleted
(C) (i) The investor will be permitted to exit on completion of the project or after development of trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage.
(ii) The Government may, in view of facts and circumstances of a case, permit repatriation of FDI or transfer of stake by one non-resident investor to another non-resident investor, before the completion of project. These proposals will be considered by FIPB on case to case basis inter-alia with specific reference to Note (i).
(A) (i) The investor will be permitted to exit on completion of the project or after development of trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage.
(ii) Notwithstanding anything contained at (A) (i) above, a foreign investor will be permitted to exit and repatriate foreign investment before the completion of project under automatic route, provided that a lock-in-period of three years, calculated with reference to each tranche of foreign investment has been completed. Further, transfer of stake from one non-resident to another non-resident, without repatriation of investment will neither be subject to any lock-in period nor to any government approval.
FDI Policy 2016 permits a foreign investor to exit and repatriate the foreign investment before the completion of the project under automatic route after the completion of lock-in period of three years. Also, transfer of stake from one non-resident to another non-resident without repatriation will not be subject to any lock in period or government approval.
This amendment was made vide Press Note No. 12 dated November 24, 2015.
As per the FDI Policy 2015, proposal for repatriation of foreign investment or transfer of stake from one non-resident to another non-resident investor used to be considered by FIPB on case to case basis.
Definition of Real estate business
“Real estate business” will have the same meaning as provided in FEMA Notification No. 1/2000-RB dated May 03, 2000 read with RBI Master Circular i.e. dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.
“Real estate business” means dealing in land and immovable property with a view to earning profit there from and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning of rent/ income on lease of the property, not amounting to transfer, will not amount to real estate business.
The definition of “Real estate business” was amended through Press Note No. 12 dated November 24, 2015.
Other points
Note:
(iii) The conditions at (A) and (B) above, will also not apply to investee/joint venture companies which commit at least 30 percent of the total project cost for low cost affordable housing.
(iv) An Indian company, which is the recipient of FDI, shall procure a certificate from an architect empanelled by any Authority, authorized to sanction building plan to the effect that the minimum floor area requirement has been fulfilled.
(v) ‘Floor area’ will be defined as per the local laws/regulations of the respective State governments/Union territories.
(vi) Completion of the project will be determined as per the local bye-laws/rules and other regulations of State Governments.
(vii) Project using at least 40% of the FAR/FSI for dwelling unit of floor area of not more than 140 square meter will be considered as Affordable Housing Project for the purpose of FDI policy in Construction Development Sector. Out of the total FAR/FSI reserved for Affordable Housing, at least one-fourth should be for houses of floor area of not more than 60 square meter.
(viii) It is clarified that 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres.
Note:
(iii) Completion of the project will be determined as per the local bye-laws/rules and other regulations of State Governments.
(iv) It is clarified that 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres. Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted. However, there would be a lock-in-period of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period.
(v) “Transfer”, in relation to FDI policy on the sector, includes,—
(a) the sale, exchange or relinquishment of the asset ; or
(b) the extinguishment of any rights therein; or
(c) the compulsory acquisition thereof under any law ; or
(d) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or
(e) any transaction, by acquiring shares in a company or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of, any immovable property.
This was amended through Press Note No. 12 dated November 24, 2015.

[1] http://taxguru.in/corporate-law/consolidated-fdi-policy-circular-2016-wef-june-07-2016.html

[2] http://taxguru.in/corporate-law/review-foreign-direct-investment-fdi-policy-sectors.html

[3] http://taxguru.in/rbi/consolidated-fdi-policy-effective-12-2015.html

[4] http://taxguru.in/rbi/foreign-exchange-management-transfer-or-issue-of-security-by-a-person-resident-outside-india-second-amendment-regulations-2016.html

[5] http://taxguru.in/rbi/foreign-exchange-management-transfer-issue-security-person-resident-india-fourth-amendment-regulations-2015.html

[6] http://taxguru.in/rbi/foreign-exchange-management-transfer-or-issue-of-security-by-a-person-resident-outside-india-eleventh-amendment-regulations-2015.html

[7] http://taxguru.in/rbi/foreign-exchange-management-transfer-or-issue-of-security-by-a-person-resident-outside-india-second-amendment-regulations-2016.html

[8] http://taxguru.in/rbi/foreign-exchange-management-transfer-issue-security-person-resident-india-amendment-regulations-2016.html

[9] http://taxguru.in/rbi/foreign-exchange-management-transfer-or-issue-of-security-by-a-person-resident-outside-india-second-amendment-regulations-2016.html

[10] http://taxguru.in/rbi/foreign-exchange-management-transfer-issue-security-person-resident-india-fourth-amendment-regulations-2015.html

[11] http://taxguru.in/rbi/foreign-exchange-management-transfer-or-issue-of-security-by-a-person-resident-outside-india-eleventh-amendment-regulations-2015.html

[12] http://taxguru.in/rbi/foreign-exchange-management-transfer-or-issue-of-security-by-a-person-resident-outside-india-eleventh-amendment-regulations-2015.html

[13] http://taxguru.in/rbi/foreign-exchange-management-transfer-or-issue-of-security-by-a-person-resident-outside-india-second-amendment-regulations-2016.html

[14] http://taxguru.in/rbi/foreign-exchange-management-transfer-issue-security-person-resident-india-fourth-amendment-regulations-2015.html

[15] http://taxguru.in/rbi/foreign-exchange-management-transfer-or-issue-of-security-by-a-person-resident-outside-india-second-amendment-regulations-2016.html

[16] http://taxguru.in/rbi/foreign-exchange-management-transfer-or-issue-of-security-by-a-person-resident-outside-india-second-amendment-regulations-2016.html

[17] http://taxguru.in/rbi/foreign-exchange-management-transfer-issue-security-person-resident-india-tenth-amendment-regulations-2015.html

(Author is associated with Vinod Kothari & Company and can be reached at rupali@vinodkothari.com)

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