CS Vinita Nair

Preamble- The Ministry of Commerce & Industry released the consolidated Foreign Direct Investment policy of 2015 (“FDI Policy 2015”) effective from May 12, 2015. We list below the key changes. Further, a detailed comparative of changes incorporated in FDI Policy 2015 juxtaposed with the consolidated FDI policy of 2014 (FDI Policy 2014”) is specified in Annexure A.

♠ Defence

1. FDI under this sector is now liberalized as investment upto 49% is being categorized under automatic route as opposed to 26% under FDI Policy 2014.

2. FPI investment also permitted in the same. Portfolio investment by FPIs/FIIs/NRIs/QFIs and investments by FVCIs together will not exceed 24% of the total equity of the investee/joint venture company.

3. Chief Security Officer (CSO) of the investee/ joint venture company should be resident Indian citizen.

4. Investee/joint venture company should be structured to be self-sufficient in areas of product design and development. The investee/joint venture company along with manufacturing facility, should also have maintenance and life cycle support facility of the product being manufactured in India.

5. Proposals for FDI beyond 49% ( formerly 26%) with proposed inflow in excess of Rs. 2000 crores (formerly 1200 crores), which are to be approved by CCS will not require further approval of the Cabinet Committee on Economic Affairs (CCEA).

6. In case of proposal beyond 49%, following condition will not be applicable:

7. The management of the applicant company should be in Indian hands with majority representation on the Board as well as the Chief Executives of the company/partnership firm being resident Indians.

8. Requirement of three-year lock-in period for transfer of equity from one non-resident investor to another non-resident investor (including NRIs & erstwhile OCBs with 60% or more NRI stake) and that such transfer would be subject to prior approval of the Government , has been done away with.

♠ Railway Infrastructure (other than in those mentioned hereunder FDI is prohibited in Railway operations

1. 100% under Automatic Route – Construction, operation and maintenance of the following: (i) Suburban corridor projects through PPP, (ii) High speed train projects, (iii) Dedicated freight lines, (iv) Rolling stock including train sets, and locomotives/coaches manufacturing and maintenance facilities, (v) Railway Electrification, (vi) Signaling systems, (vii) Freight terminals, (viii) Passenger terminals, (ix) Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and connectivities to main railway line and (x) Mass Rapid Transport Systems.

2. Foreign Direct Investment in the abovementioned activities open to private sector participation including FDI is subject to sectoral guidelines of Ministry of Railways.

3. Proposals involving FDI beyond 49% in sensitive areas from security point of view, will be brought by the Ministry of Railways before the Cabinet Committee on Security (CCS) for consideration on a case to case basis.

♠  Insurance

1. Sectoral cap raised to 49% ( formerly 26%). Upto 26% under Automatic Route, Government Route beyond 26% and upto 49%. No Indian insurance company shall allow the aggregate holdings by way of total foreign investment in its equity shares by foreign investors, including portfolio investors, to exceed forty-nine percent of the paid up equity capital of such Indian insurance company.

2. Other Insurance Intermediaries appointed under the provisions of Insurance Regulatory and Development Authority Act, 1999 (41 of 1999) also permitted to bring FDI. (Formerly FDI was permitted only in (i) Insurance Company; (ii) Insurance Brokers; (iii) Third Party Administrators and (iv) Surveyors and Loss Assessors.

3. An Indian insurance company shall ensure that its ownership and control remains at all times in the hands of resident Indian entities referred to in Notification No. G.S.R 115 (E), dated 19th February, 2015.

4. Where an entity like a bank, whose primary business is outside the insurance area, is allowed by the Insurance Regulatory and Development Authority of India to function as an insurance intermediary, the foreign equity investment caps applicable in that sector shall continue to apply, subject to the condition that the revenues of such entities from their primary (i.e. non-insurance related) business must remain above 50 percent of their total revenues in any financial year

5. Terms ‘Control’, ‘Equity Share Capital’, ‘Foreign Direct Investment’ (FDI), ‘Foreign Investors’, ‘Foreign Portfolio Investment’, ‘Indian Insurance Company’, ‘Indian Company’, ‘Indian Control of an Indian Insurance Company’, ‘Indian Ownership’, ‘Non-resident Entity’, ‘Public Financial Institution’, ‘Resident Indian Citizen’, ‘Total Foreign Investment’ will have the same meaning as provided in Notification No. G.S.R 115 (E), dated 19th February, 2015 – Indian Insurance Companies ( Foreign Investment) Rules, 2015[3]

♠ NBFC

1. Leasing & Finance covers only financial leases and not operating leases. FDI in operating leases is permitted up to 100% on the automatic route.

Pharmaceutical:

1. FDI up to 100%, under the automatic route is permitted for manufacturing of medical devices. The abovementioned conditions will, therefore, not be applicable to greenfield as well as brownfield projects of this industry.

2. Medical device means-

a. any instrument, apparatus, appliance, implant, material or other article, whether used alone or in combination, including the software, intended by its manufacturer to be used specially for human beings or animals for one or more of the specific purposes of-

(aa) diagnosis, prevention, monitoring, treatment or alleviation of any disease or disorder;

(ab) diagnosis, monitoring, treatment, alleviation of, or assistance for, any injury or handicap;

(ac) investigation, replacement or modification or support of the anatomy or of a physiological process;

(ad) supporting or sustaining life;

(ae) disinfection of medical devices;

(af) control of conception,

and which does not achieve its primary intended action in or on the human body or animals by any pharmacological or immunological or metabolic means, but which may be assisted in its intended function by such means;

b. an accessory to such an instrument, apparatus, appliance, material or other article;

c. a device which is reagent, reagent product, calibrator, control material, kit, instrument, apparatus, equipment or system whether used alone or in combination thereof intended to be used for examination and providing information for medical or diagnostic purposes by means of in vitro examination of specimens derived from the human body or animals.

The definition of medical device would be subject to the amendment in Drugs and Cosmetics Act.

♠   Position on Depository Receipt :

Depository Receipt under FDI policy refers to negotiable security issued outside India by a Depository bank, on behalf of Indian Company which represent local Rupee denominated equity shares of the company held as deposit by a custodian bank in India. Depository Receipts under the new FDI Policy would be explicitly governed by FEMA Notification no. FEMA.330/ 2014-RB issued by Reserve Bank of India on 15th December 2014.

♠ Definition of Holding Company and Indian Company :-

Definition of Holding Company and Indian Company would be same as defined under Companies Act, which would be applicable. Thus definition as provided under Companies Act 2013, for the purpose of Holding Company and Indian Company would be applicable for the purpose of FDI Policy 2015 as well.

♠  Eligible Capital Instruments:-

Fully, Compulsorily and Mandatorily Convertible Debentures and Preference Shares are reckoned as eligible capital instruments under FDI Policy 2015 however Fully, Compulsorily and Mandatorily Convertible Debentures and Preference Shares without any option/ right to exit at an assured price were reckoned as eligible capital instruments under FDI Policy 2014.

♠ Lock in period for optionality clauses:-

The new FDI Policy provides for minimum lock in period of one year before which option attached to the relevant capital instrument can be exercised. In the earlier regime optionality clause was locked in for a minimum period of one year subject to such higher lock in period as prescribed for relevant sector under the FDI Regulation.

♠ Transfer of shares and convertible debentures:

Shares and convertible debentures can be transferred from non-resident to non-resident without prior approval of Government in sectors which are under automatic route. In addition, approval of Government will be required for transfer of stake from one non-resident to another non-resident in sectors which are under Government approval route.

♠  Issue of Foreign Currency Convertible Bonds (FCCBs) and Depository Receipts (DRs)

Earlier it was only ADR/GDR but now invest could be made on all types of DRs

DRs are explained as foreign currency denominated instruments issued by a foreign Depository in a permissible jurisdiction against a pool of permissible securities issued or transferred to that foreign depository and deposited with a domestic custodian.

Now the holding by foreign depositories, along with eligible securities already held by persons resident outside India, shall not exceed the limit on foreign holding of such eligible securities under the relevant regulations framed under FEMA, 1999.

The pricing of eligible securities to be issued or transferred to a foreign depository for the purpose of issuing depository receipts should not be at a price less than the price applicable to a corresponding mode of issue or transfer of such securities to domestic investors under the relevant regulations framed under FEMA, 1999

Now there is a reporting requirement for the issue of depository receipts as per DR Scheme 2014 shall be reported to the Reserve Bank by the domestic custodian as per the reporting guidelines for DR Scheme 2014.

♠ For issue of shares

Now for the issue of shares the price of the shares will be determined on the fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on arm’s length basis, where the shares of the company are not listed on any recognised stock exchange in India

♠ Issue of equity shares against any other fund

Issue of equity shares against any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or Reserve Bank of India under FEMA, 1999 or any rules/ regulations framed or directions issued thereunder is permitted

♠ Acquisition of shares under Scheme of Merger/Demerger/Amalgamation

FIPB approval would not be required in case of mergers and acquisitions taking place in sectors under automatic route.

♠  Levels of Approvals for Cases under Government

FIPB would consider the recommendation of FIPB on proposals with foreign equity inflow of and below Rs. 2000 cr which earlier was Rs. 1200 crore.

The recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 2000 crore would be placed for consideration of Cabinet Committee on Economic Affairs (CCEA).

♠  Fresh Approval:

Now no fresh approval will be required   for any additional foreign investment into the same entity within an approved foreign equity percentage/or into a wholly owned subsidiary.

Annexure A

Particulars

FDI Policy 2014 FDI Policy 2015

Definition of

Depository Receipt

2.1.8 : ‘Depository Receipt’ (DR) means a negotiable security issued outside India by a Depository bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian bank in India. DRs are traded on Stock Exchanges in the US, Singapore, Luxembourg, etc. DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded anywhere/elsewhere are known as Global Depository Receipts (GDRs).

2.1.8 : ‘Depository Receipt’ (DR) means a negotiable security issued outside India by a Depository bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian bank in India. DRs are traded on Stock Exchanges in the US, Singapore, Luxembourg, etc. DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded anywhere/elsewhere are known as Global Depository Receipts (GDRs). DRs are governed by Notification No. FEMA 330/ 2014-RB, issued by Reserve bank of India.

 

Definition of Holding Company

2.1.19 : ‘Holding Company’ would have the same meaning as defined in Companies Act, 1956.

 

2.1.19: ‘Holding Company’ would have the same meaning as defined in Companies Act, as applicable.

 

Definition of Indian Company

2.1.20: ‘Indian Companies’ means a company incorporated in India under the Companies Act, 1956.

 

2.1.20: ‘Indian Companies’ means a company incorporated in India under the Companies Act, as applicable.

 

Pricing of Convertible Capital Instrument

3.3.1: The price/conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [the DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies].

 

3.3.1: The price/conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [as per any internationally accepted pricing methodology on arm’s length basis for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies].

Eligible Capital Instruments

3.3.1.1 Equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares without any option/right to exit at an assured price shall be reckoned as eligible capital instruments. 3.1.1Equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares.

Lock in period for optionality clauses

3.3.1.2 (a) -There is a minimum lock-in period of one year or a minimum lock-in period as prescribed under FDI Regulations, whichever is higher (e.g. defence and construction development sector where the lock-in period of three years has been prescribed). The lock-in period shall be effective from the date of allotment of such capital instruments or as prescribed under the FDI Policy, e.g for defence and construction development sectors, etc. 3.3.1.1 (a)-There is a minimum lock-in period of one year which shall be effective from the date of allotment of such capital instruments.

Issue Price of shares

3.4.2- Price of shares issued to persons resident outside India under the FDI Policy, shall not be less than –

a.

b. the fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company are not listed on any recognised stock exchange in India;

 

3.4.2- Price of shares issued to persons resident outside India under the FDI Policy, shall not be less than –

a.

b. the fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on arm’s length basis, where the shares of the company are not listed on any recognised stock exchange in India;

Transferability of shares/ convertible instrument

A person resident outside India (other than NRI and erstwhile OCB) may transfer by way of sale or gift, the shares or convertible debentures to any person resident outside India (including NRIs). A person resident outside India (other than NRI and erstwhile OCB) may transfer by way of sale or gift, the shares or convertible debentures to any person resident outside India (including NRIs).

 

Government approval is not required for transfer of shares in the investee company from one non-resident to another non-resident in sectors which are under automatic route.

 

In addition, approval of Government will be required for transfer of stake from one non-resident to another non-resident in sectors which are under Government approval route.

Types of Instruments

3.3.1.1 Equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares without any option/right to exit at an assured price shall be reckoned as eligible capital instruments

 

3.3.1.2 Optionality clauses are allowed in equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares under FDI scheme, subject to the following conditions:

(a) There is a minimum lock-in period of one year or a minimum lock-in period as prescribed under FDI Regulations, whichever is higher (e.g. defence and construction development sector where the lock-in period of three years has been prescribed). The lock-in period shall be effective from the date of allotment of such capital instruments or as prescribed under the FDI Policy, e.g for defence and construction development sectors, etc.

(b) After the lock-in period, as applicable above, and subject to FDI Policy provisions, if any, in this regard, the non-resident investor exercising option/right shall be eligible to exit without any assured return, as per pricing/valuation guidelines issued by RBI from time to time

3.3.1.1Optionality clauses are allowed in equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares under FDI scheme, subject to the following conditions:

(a) There is a minimum lock-in period of one year which shall be effective from the date of allotment of such capital instruments.

(b) After the lock-in period and subject to FDI Policy provisions, if any, the non-resident investor exercising option/right shall be eligible to exit without any assured return, as per pricing/valuation guidelines issued by RBI from time to time.

 

3.3.2. 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.

Issue of shares by Indian Companies under FCCB/ ADR/GDR

3.3.4 (i) Indian companies can raise foreign currency resources abroad through the issue of FCCB/DR (ADRs/GDRs), in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India there under from time to time.

(ii) A company can issue ADRs/GDRs if it is eligible to issue shares to persons resident outside India under the FDI Policy. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue

(viii) The pricing of ADR/GDR issues should be made at a price determined under the provisions of the Scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India and directions issued by the Reserve Bank, from time to time.

 

 

Issue of Foreign Currency Convertible Bonds (FCCBs) and Depository Receipts(DRs):

(a)FCCBs/DRs may be issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and DR Scheme 2014 respectively, as per the guidelines issued by the Government of India there under from time to time.

(b)DRs are foreign currency denominated instruments issued by a foreign Depository in a permissible jurisdiction against a pool of permissible securities issued or transferred to that foreign depository and deposited with a domestic custodian.

(c) In terms of Notification No. FEMA.20/2000-RB dated May 3, 2000 as amended from time to time, a person will be eligible to issue or transfer eligible securities to a foreign depository, for the purpose of converting the securities so purchased into depository receipts in terms of Depository Receipts Scheme, 2014 and guidelines issued by the Government of India thereunder from time to time.

(e)The aggregate of eligible securities which may be issued or transferred to foreign depositories, along with eligible securities already held by persons resident outside India, shall not exceed the limit on foreign holding of such eligible securities under the relevant regulations framed under FEMA, 1999.

(f)The pricing of eligible securities to be issued or transferred to a foreign depository for the purpose of issuing depository receipts should not be at a price less than the price applicable to a corresponding mode of issue or transfer of such securities to domestic investors under the relevant regulations framed under FEMA, 1999.

(g)The issue of depository receipts as per DR Scheme 2014 shall be reported to the Reserve Bank by the domestic custodian as per the reporting guidelines for DR Scheme 2014.

Issue price of Shares

3.4.2. (b) the fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company are not listed on any recognised stock exchange in India

 

However, where non-residents (including NRIs) are making investments in an Indian company in compliance with the provisions of the Companies Act, 1956, by way of subscription to its Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme.

3.4.2. (b) The fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on arm’s length basis, where the shares of the company are not listed on any recognised stock exchange in India;

 

However, where non-residents (including NRIs) are making investments in an Indian company in compliance with the provisions of the Companies Act, as applicable, by way of subscription to its Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme. However, where non-residents (including NRIs) are making investments in an Indian company in compliance with the provisions of the Companies Act, as applicable, by way of subscription to its Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme.

Transfer of shares and convertible debentures

3.4.4.(a) A person resident outside India (other than NRI and erstwhile OCB) may transfer by way of sale or gift, the shares or convertible debentures to any person resident outside India (including NRIs). (a) A person resident outside India (other than NRI and erstwhile OCB) may transfer by way of sale or gift, the shares or convertible debentures to any person resident outside India (including NRIs). Government approval is not required for transfer of shares in the investee company from one non-resident to another non-resident in sectors which are under automatic route. In addition, approval of Government will be required for transfer of stake from one non-resident to another non-resident in sectors which are under Government approval route.

Issue of Non convertible/redeemable bonus preference shares or debentures

   General permission is also available for issue of shares/preference shares against lump sum technical know-how fee, royalty due for payment, subject to entry route, sectoral cap and pricing guidelines (as per the provision of para 3.4.2 above) and compliance with applicable tax laws. (ii) General permission is also available for issue of shares/preference shares against lump sum technical know-how fee, royalty due for payment, subject to entry route, sectoral cap and pricing guidelines (as per the provision of para 3.4.2 above) and compliance with applicable tax laws.

Further, issue of equity shares against any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or Reserve Bank of India under FEMA, 1999 or any rules/ regulations framed or directions issued thereunder is permitted, provided that:

(I) The equity shares shall be issued in accordance with the extant FDI guidelines on sectoral caps, pricing guidelines etc. as amended by Reserve bank of India, from time to time;

Explanation: Issue of shares/convertible debentures that require Government approval in terms of paragraph 3 of Schedule 1 of FEMA 20 or import dues deemed as ECB or trade credit or payable against import of second hand machinery shall continue to be dealt in accordance with extant guidelines;

(II)The issue of equity shares under this provision shall be subject to tax laws as applicable to the funds payable and the conversion to equity should be net of applicable taxes.

Acquisition of shares under Scheme of Merger/Demerger/Amalgamation

3.5.4.Acquisition of shares under Scheme of Merger/Demerger/Amalgamation Mergers/demergers/ amalgamations of companies in India are usually governed by an order issued by a competent Court on the basis of the Scheme submitted by the companies undergoing merger/demerger/amalgamation. Once the scheme of merger or demerger or amalgamation of two or more Indian companies has been approved by a Court in India, the transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject to the conditions that:

(i) the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap, and

(ii) the transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy..

3.5.4.Mergers/demergers/ amalgamations of companies in India are usually governed by an order issued by a competent Court on the basis of the Scheme submitted by the companies undergoing merger/demerger/amalgamation. Once the scheme of merger or demerger or amalgamation of two or more Indian companies has been approved by a Court in India, the transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject to the conditions that:

(i) the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap, and

(ii) the transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy.

Note: FIPB approval would not be required in case of mergers and acquisitions taking place in sectors under automatic route.

Levels of Approvals for Cases under Government Route

5.2.1 The Minister of Finance who is in-charge of FIPB would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs.1200 crore.

5.2.2 The recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 1200 crore would be placed for consideration of Cabinet Committee on Economic Affairs (CCEA).

5.2.3 The CCEA would also consider the proposals which may be referred to it by the FIPB/the Minister of Finance (in-charge of FIPB).

5.2.1 The Minister of Finance who is in-charge of FIPB would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs. 2000 crore.

5.2.2 The recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 2000 crore would be placed for consideration of Cabinet Committee on Economic Affairs (CCEA).

5.2.3 The CCEA would also consider the proposals which may be referred to it by the FIPB/the Minister of Finance (in-charge of FIPB).

Cases Which do not Require Fresh Approval

Not included 5.4.1. (iv) Additional foreign investment into the same entity within an approved foreign equity percentage/or into a wholly owned subsidiary.

[3]http://www.prsindia.org/uploads/media/Indian%20Insurance%20Company/Indian%20Insurance%20Company%20Rules%202015.pdf

[The above post is contributed by CS Vinita Nair at Vinod Kothari & Co. She can be contacted at vinita@vinodkothari.com]

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