The Department of Industrial Policy and Promotion (DIPP) has unveiled a Consolidated FDI Policy on 1 April 2010 which consolidates all the prior policies / regulations on Foreign direct investments (FDI) as per Foreign Exchange Control Regulations and Press Notes /Press Releases / Clarifications issued by DIPP, into a single document and thereby reflects the current ‘policy framework’ on FDI.

With the issue of the consolidated FDI policy Circular, all earlier Press Notes / Press Release / Clarifications on FDI issued by DIPP stand rescinded and subsumed in the present Circular.

It is the intent and objective of the Government to promote foreign direct investment through a policy framework which is transparent, predictable, simple and clear and reduces regulatory burden. The system of periodic consolidation and updation is introduced as an investor friendly measure. While the said Circular consolidates FDI Policy Framework, the legal edifice is built on notifications issued by RBI under FEMA. Therefore, any changes notified by RBI from time to time would have to be complied with and where there is a need / scope of interpretation, the relevant FEMA notification will prevail.

It has been decided that from now onwards a consolidated circular would be issued every 6 months to update the FDI policy. The said consolidated circular will, therefore, be superseded by a new circular to be issued on 30 September 2010.

Cash & Carry Wholesale trading / Wholesale trading under Foreign Direct Investment (FDI) Policy

As per the extant FDI regulations, 100% FDI is permitted under the automatic route for trading companies engaged in the activity of Cash & Carry Wholesale trading / wholesale trading. However, the term Cash & Carry Wholesale trading/Wholesale trading was not specifically defined in the earlier FDI policy.

Vide Circular No. 1 of 2010, the Government has provided an explanation in respect of Cash & Carry Wholesale trading/Wholesale trading activity.

1. Definition of Cash & Carry Wholesale trading/Wholesale trading

>          Cash & Carry Wholesale trading/ Wholesale trading would mean sale of goods / merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. In other words, wholesale trading would be the sales made for the purpose of trade, business and profession. The sales for the purpose of personal consumption would not be treated as Cash & Carry Wholesale trading/Wholesale trading.

>          The yardstick to determine whether the sale is wholesale or not would be the type of customers to whom the sale is made and not the size and volume of sales.

>          Wholesale trading would include resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales and B2B e-Commerce sales.

2. Guidelines for determining Cash & Carry Wholesale TradinglWholesale Trading (WT)

The following guidelines should be followed for determining whether a particular transaction is covered under Cash & Carry Wholesale Trading / Wholesale Trading.

i. Requisite licenses / registrations / permits under various regulations as prescribed by the State Government should be obtained.

ii. Except in case of sales to Government, sales made by the wholesaler would be considered as ‘cash & carry wholesale trading’ only when sales are made to any of the following entities:

>        Entities holding sales tax / VAT registration / service tax / excise duty registration; or

>        Entities holding trade licenses i.e. a license / registration certificate / membership certificate / registration under Shops and Establishment Act, issued by concerned 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

>        Entities holding permits/license etc. for undertaking retail trade from the concerned authority; or

>        Institutions having certificate of incorporation or registration as a society or registration as public trust for their self consumption.

An entity to whom sale is made, may fulfill any one of the aforesaid 4 conditions so as to qualify as wholesale trade.

iii. Full records indicating all the details of such sales like name of entity, kind of entity, registration / license / permit etc. number, amount of sale etc. should be maintained on a day to day basis

iv. Wholesale Trading of goods would be permitted among companies of the same group. However, such Wholesale Trading to group companies taken together should not exceed 25% of the total turnover of the wholesale venture and the wholesale made to the group companies should be for their internal use only.

v. Wholesale Trading can be undertaken as per normal business practice, including extending credit facilities subject to applicable regulations.

vi. A Wholesale/Cash & carry trader cannot open retail shops to sell to the consumer directly.

Investment by Foreign Institutional Investors (Flls) in Indian Company

A Foreign Institutional Investors (Flls) may invest in the capital of an Indian company either under the FDI Scheme / Policy or the Portfolio Investment Scheme.

It is specifically clarified in the Circular that 10% individual limit and 24% aggregate limit for Fll investment would still be applicable even when Flls invest under the FDI scheme/policy.

Pricing of the capital instruments

As per the extant regulations, Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines / valuation norms prescribed under FEMA Regulations.

It is clarified that the pricing of the capital instruments should be decided / determined upfront at the time of issue of the instruments.

Receipt of remittances against issuance of Depositary Receipts and FCCBs treated as FDI:-The inward remittances received by the Indian company vide issuance of Depositary Receipts and FCCBs are treated as FDI and counted towards FDI.

Partly Paid Shares / Warrants:-Any other type of instruments like warrants, partly paid shares etc. are not considered as capital and cannot be issued to person resident outside India.

Non-convertible, optionally convertible or partially convertible Preference shares / Debentures:-Other types of Preference shares/Debentures i.e. non-convertible, optionally convertible or partially convertible for issue of which funds have been received on or after May 1, 2007 are considered as debt. Accordingly all norms applicable for ECBs relating to eligible borrowers, recognized lenders, amount and maturity, end-use stipulations, etc. shall apply. Since these instruments would be denominated in rupees, the rupee interest rate will be based on the swap equivalent of London Interbank Offered Rate (LIBOR) plus the spread as permissible for ECBs of corresponding maturity.

Transfer of Shares under Government Route:-The transfer of capital instruments of companies engaged in sectors falling under the Government Route from residents to non-residents by way of sale or otherwise requires Government approval followed by permission from RBI.

Development of Townships, Housing, Built-up infrastructure and Construction-development projects:-As per the Circular, the FDI guidelines under development of Townships, Housing, Built-up infrastructure and Construction-development projects prescribes restriction on sale of undeveloped plots by the investor / investee company. Further, the investor / investee company shall be responsible for obtaining all necessary approvals as required under the law. Earlier, the Press note 2 (2005 series) prescribe the aforesaid obligations only for the investor and not on the investee company.

Security Agencies in Private sector:-The ‘Private Security Agencies (Regulation) Act, 2005’ regulates the operations of private security agencies. Under Section 6(2) of the above Act, “A company, firm or an association of persons shall not be considered for issue of a licence under this Act, if, it is not reg­istered in India, or is having a proprietor or a majority shareholder, partner or director, who is not a citizen of India”. As such, under the provisions of this Act:

>             A foreign company cannot be considered for a license under the Act

>             Only a firm registered in India can be eligible for a license

>             To be eligible for a license under the Act, a firm cannot have a foreign director/partner

>             Majority shareholder cannot be a foreigner i.e. foreign shareholding would be restricted to a maximum of 49% under the Government route.

Earlier there were no guidelines regarding foreign investment in security agencies.

Penalty on contravention of FDI Regulations:-If a person violates / contravenes any FDI Regulations, by way of breach / non-adherence / non-compliance / contravention of any rule, regulation, notification, press note, press release, circular, direction or order issued in exercise of the powers under FEMA or contravenes any conditions subject to which an authorization is issued by the Government of India / FIPB / RBI, he shall, upon adjudication be liable for a penalty as provided under FEMA which could be thrice the sum involved in such contraventions where such amount is quantifiable, or up to Rs. 200,000 where the amount is not quantifiable, and where such contraventions is a continu­ing one, further penalty which may extend to Rs. 5,000 for every day during which the contraventions continues may be imposed.

Scope and Limitations: This Article is general in nature. In this Article, we have made an attempt to summarize certain clarifications in the Consolidated FDI policy issued by Department of Industrial Policy and Promotion. It may be noted that nothing contained in this Article should be regarded as our opinion and facts of each case will need to be analyzed on case to case basis to ascertain applicability or otherwise of any laws and professional advice should be sought for applicability of legal provisions based on specific facts. We are not responsible for any liability arising from any statements or error contained in this Article.

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