Background and Objective
Recently, the Government of India released the consolidated policy framework for Foreign Direct Investment (‘FDI’) in India. This policy framework contained in Circular No. 1 of 2010 is effective from 1 April 2010. The underlying rationale of the Circular is to promote FDI through a policy framework that is transparent, predictable, simple and clear and which reduces regulatory burden.
The Circular is a consolidated document of all the foreign investment policies /regulations contained in the Foreign Exchange Management Act, 1999 (‘FEMA’) issued by the Reserve Bank of India (‘RBI’), Press Notes, Press Releases and Clarifications issued by the Department of Industrial Policy and Promotion (‘DIPP’).
The Government also proposes that, as an investor friendly measure, a new Circular will be issued every six months to update the Consolidated FDI Policy Framework.
It has also been provided that all Press Notes/Press Releases/Clarifications on FDI issued by the DIPP which are in force as of 31 March 31 2010 will stand rescinded as on 31 March 2010. Nonetheless, it has been specifically clarified that actions taken under the rescinded Press Notes/ Press Releases / Clarifications prior to 31 March 2010 shall be valid and effective.
Further, pursuant to the release of the said Circular, the Hon’ble Minister for Commerce and Industry discussed the same with the captains of Indian Industry at a meeting organized by the Confederation of Indian Industry (CII). In this meeting, apart from discussing the salient features of the Circular, the Honorable Minister indicated that the allowability of FDI in Limited Liability Partnerships (LLPs) is presently under consideration by the Government. Further, the Minister also spoke about of proposed introduction of a Manufacturing Policy which, inter-alia, may provide for creation of Manufacturing Zones to attract foreign technology in India. It was further indicated that the Government may also come out with Discussion Papers on FDI policy for each Industry / Sector and adopt a consultative approach by taking inputs from all stakeholders on various aspects going forward.
The key features of the Consolidated FDI Policy Framework released today, are given below:
Eligibility and Conditions for Foreign Investments
FVCI investment in DVCF
Foreign investment by Foreign Venture Capital Investors (FVCI) in Domestic Venture Capital Fund (DVCF), set up as a trust, would now require specific Government approval. Such investments were earlier allowed under the Automatic Route.
FII limits for investments under FDI route
The limits for investment by Foreign Institutional Investors (FIIs) under the FDI Scheme / Policy now stand at 10% for an individual FII, and 24% in aggregate. Accordingly, an individual FII’s investment in an Indian company appears to be restricted at 10%.
FVCI Investment under the FDI route
It is now clarified that FVCI can make investments under the FDI route subject to compliance with the FDI Policy
Conversion price for specified convertible instruments
The pricing of the capital instruments (including conversion price for convertible instruments) issued by Indian Company is now required to be decided upfront at the time of issue of the instruments.
ECB Guidelines to apply to non-convertible/optionally convertible / partially convertible instruments
Non-convertible, optionally convertible or partially convertible preference shares / debentures to be treated as debt and any issue thereof will need to comply with the External Commercial Borrowings (‘ECB’) guidelines.
Calculation, Caps and Entry conditions for foreign investments
Ownership tests
Earlier, the ownership test for foreign investments referred to beneficial ownership of more than 50% of the equity interest of the Indian company. However, under the Circular, reference to ‘equity’ has been replaced with ‘capital’, where ‘capital’ has been defined to include:
- Equity shares;
- Fully, compulsorily & mandatorily convertible preference shares; and
- Fully, compulsorily & mandatorily convertible debentures.
Warrants / partly paid shares
It is now provided that foreign investment instruments such as warrants, partly-paid shares will not be permitted.
Downstream investments
The indirect foreign investment in a wholly owned subsidiary of an operating-cum-investing / investing company is taken as the percentage of the foreign investment in the operating-cuminvesting/ investing company. Based on this Circular, it appears that this provision would not apply in case of near 100% subsidiaries (say in case of 99% holding). In such cases, the entire downstream investment would be treated as the indirect foreign investment.
The restriction on investing companies to leverage funds from the domestic market for the purpose of downstream investment now also made applicable to operating-cum-investing companies as well.
Government/ FIPB approval
In case where sectoral caps are specified in certain industries / sectors, the transfer of ownership / control in the Indian company to the non-resident entity through amalgamation, merger or acquisition warrants Government / FIPB approval. These provisions would now apply to restructuring through ‘demerger’ as well.
Guidelines for consideration of proposals by FIPB
All applications to the FIPB would now be placed before the Secretariat within 15 days. The FIPB will endeavor to communicate their decision within 30 days. The FIPB has also been empowered to prioritize the applications based on the sector, the export or employment potential, etc.
It has been expressly clarified that once the letter of approval is issued no individual changes therein would be permitted.
Sectoral policies and conditions
Prohibition on Investment in India
Foreign technology collaboration in any form (including licensing for franchise, trademark, brand name and management contract) is now expressly prohibited for Lottery Business and Gambling and Betting activities.
Private Sector Banks
FDI in Private Sector Banks is now allowed under the Automatic Route upto 49% and under the Approval Route beyond 49% upto 74%.Earlier, one could take recourse to the Automatic Route for investments upto 74%.
Civil Aviation Industry
FDI in Non-scheduled Air Transport Service / Non-scheduled airlines, Chartered Airlines and Cargo airlines is now allowed under the Automatic Route upto 49% and under the Approval Route beyond 49% upto 74%.Earlier, one could take recourse to the Automatic Route for investments upto 74%.
Cash and Carry Wholesale Trading / Wholesale Trading
- The phrase “Cash and Cary Wholesale trading / wholesale Trading” is now specifically defined to mean sale of goods to Retailers, Industrial, Commercial, Institutional or other professional business users and other wholesalers and related subordinated service providers.
- The Circular also specifically provides that:
– Wholesale trading implies sales for trade, business and profession as opposed to sales for personal consumption.
– The yardstick to determine whether sale is wholesale or not is the type of customers and not the size and volume of sales
– Wholesale trading would include Resale, Sale after processing, Bulk imports with export and B2B e-Commerce
- Wholesale trading of goods is permitted among group companies subject to a ceiling of 25% of the total turnover of the wholesale venture. The wholesale trade made to the group companies should be for their internal use only.
- Wholesale trading can be undertaken as per normal business practice, including on credit, subject to applicable regulations.
- A Wholesale / Cash & carry trader cannot open retail shops to sell to the consumer directly.
- To constitute wholesale trade, the entity to whom the sale is made should fulfill any one of the following four conditions:
– The entity should hold sales tax/ VAT registration /service tax / excise duty registration; or
– The entity should hold trade licenses i.e. a license / registration certificate / membership certificate / registration under Shops and Establishment Act, issued by a Government Authority/ Government Body / Local Self-Government Authority, reflecting that the entity / person holding the license / registration certificate / membership certificate, as the case may be, is itself / himself / herself engaged in a business involving commercial activity; or
– The entity should hold permits/license etc. for undertaking retail trade (like tehbazari and similar license for hawkers) from Government Authorities/Local Self Government Bodies; or
– The entity should be an Institution having certificate of incorporation or registration as a society or registration as public trust for their self consumption.
- The Indian company obliged to maintained day-to-day records with respect to satisfaction of above conditions.
E-Commerce
Entities engaged in E-commerce having FDI would now be allowed to engage only in B2B trade in line with the above wholesale trading policy. These entities would not be allowed to engage in retail trading.
Development of Township, Housing, Built-up Infrastructure and Construction-development projects:
Both the Investor and the Investee Company are now responsible for obtaining all necessary project approvals with respect building / layout plans, infrastructure, etc. As per the earlier guidelines under Press Note 2 of 2005, this responsibility was solely of the Investor company.
Securities Agencies in Private Sector:
The Foreign Investment in an Indian Company engaged in operating private security agency has been restricted to 49% under the Government / Approval Route in line the provisions of the Private Security Agencies (Regulation) Act 2005.
Telecom Industry
FDI in ISPs without gateways is now capped under the new Circular at 74% (Automatic route continued to be allowed upto 49% and beyond that under approval route) in line with DOT guidelines issued in 2007.
Source: www.dipp.nic.in
