The Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India, has released its Circular 1 of 2011 dated 31 March 2011 being the third edition of the Consolidated Foreign Direct Investment (FDI) policy effective from 1 April 2011. The key changes / liberalizations introduced by the revised FDI policy are summarized below:-
Pricing of Convertible instruments
The earlier FDI policy required the conversion price of equity convertible instruments (debentures and preference shares) to be determined upfront at the time of issue of such convertible instruments. With an intention to provide better valuation based on performance, the revised FDI Policy permits the option of using a conversion formula for such convertible instruments subject to FEMA/SEBI guidelines on pricing.
Issue of Shares permitted against specified non-cash considerations under Approval Route
Apart from conversion of ECB/lump-sum fee/Royalty into equity under the Approval Route, the revised FDI policy now permits issue of equity / equity convertible instruments under the Government / Approval route in the following cases:
• Import of capital goods/ machinery/ equipment (including second-hand machinery)
• Pre-opera tive/ Pre-incorporation expenses (including payments of rent etc.).
The above is subject to compliance with specified conditions including special resolution of the company and pricing guidelines. The above changes are a sequel to the draft discussion paper on the subject released earlier in September 2010.
Approval / conditionalities surrounding previous joint venture/collaborations done away with
The revised FDI policy has done away with the prior approval requirement for new ventures / collaboration by Non-residents who had existing joint ventures / technical collaboration in the same field as on 12 January 2005. Further, for ventures/ technical collaboration post 12 January 2005, the requirement for incorporating a ‘conflict of interest’ clause in the Joint Venture Agreement has been done away with. These changes are a sequel to the draft discussion paper on the subject released earlier in September 2010.
Guidelines relating to Down-Stream investments
The revised FDI policy now incorporates only two categories of Companies – ‘companies owned or controlled by foreign investors’ and ‘companies owned and controlled by Indian residents’. The earlier categorisation of companies as ‘investing companies’, ‘operating companies’ and ‘investing-cum-operating companies’ has been done away with.
Sector Specific policy for FDI- Agriculture
In the Agriculture Sector, the revised FDI policy now permits Development and production of Seeds and planting material without the stipulation of having to do so under controlled conditions.
Our Comments: – The revised FDI policy does carry the process of liberalization further and would assist in augmenting FDI into the Country. However, the revised FDI policy has kept at bay significantly expected changes such as permitting FDI in Limited Liability Partnership, Multi-Brand Retail Trading and several other subjects on which draft discussion papers were released earlier for public comments. It is important that these areas are also taken up the Government for liberalisation towards making India one of the most favourable FDI destinations in the world.
