The Department of Industrial Policy and Promotion (DIPP) in the Ministry of Commerce & Industry, Government of India has vide Circular no. 1 of 2011 dated 31 March 2011 issued a consolidated Foreign Direct Investment (‘FDI’) Policy. This policy becomes effective from 1 April 2011 and shall subsume all the press notes, press releases, circulars and clarifications issued by the DIPP which were in force till 31 March 2011.
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 Reserve Bank of India (‘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.
This article covers certain significant highlights contained in the consolidated FDI policy. The said circular shall take effect from 1 April 2011 and the next FDI policy revision is expected on 30 September 2011.
CERTAIN SIGNIFICANT HIGHLIGHTS OF THE CONSOLIDATED FDI POLICY
1. Issue of Convertible Instruments – Option of Prescribing a Price / Conversion Formula Upfront
Under the erstwhile FDI policy, Indian companies are allowed to 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 Foreign Exchange Management (‘FEMA’) Regulations.
Further, under the erstwhile policy, the pricing of the capital instruments including convertible instruments are required to be determined upfront at the time of issue of the instruments based on the FEMA guidelines in case of unlisted companies and SEBI Regulations in case of listed companies.
The new consolidated FDI Policy has relaxed the requirement of upfront determination of price in case of issue of convertible capital instruments.
− Accordingly, the company may provide, upfront, for a conversion formula for such instruments at the time of their issue.
− However, 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 applicable regulations.
2. Permissibility for Issue of Equity Shares Against Import of Capital Goods / Pre-Operative & Pre-Incorporation Expenses
General permission is available to Indian companies for conversion of External Commercial Borrowings (‘ECB’), Lumpsum Fee & Royalty into Equity Shares, subject to certain conditions.
The new consolidated FDI policy has further allowed issue of equity shares under the Government route against import of capital goods and pre-operative / pre-incorporation expenses subject to certain conditions. The brief regulations are as tabulated hereunder.
|Conditions specified in the FDI Policy
Import of capital goods / machinery / equipment (including second-hand machinery)
|Pre-operative/pre- incorporation expenses (including payments of rent etc.)
3. Removal of the Condition of Prior Government Approval in Case of Existing Joint Venture! Technical Collaborations in the ‘Same Field’
Under the erstwhile FDI policy, where a non-resident investor has an existing joint venture/ technology transfer/ trademark agreement as on 12 January 2005, new proposals in the same field for investment / technology transfer/ technology collaboration / trademark agreement required Government approval through FIPB/ Project Approval Board. This was essentially to protect the interest of the joint venture partner where the agreement was entered on / prior to 12 January 2005.
In order to attract fresh investment and technology inflows into the country, as also to reduce the levels of State intervention in the commercial sphere the Government has decided to abolish this condition. It is expected that this measure will promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI and technology inflows into the country.
4. Guidelines Relating To Downstream Investments Simplified & Rationalized
The erstwhile FDI policy had laid down guidelines on downstream investment for operating companies, operating-cum¬investing companies and investing companies. These terms are now done away with.
The new FDI policy has streamlined the guidelines of downstream investment into 2 categories vis-à-vis ‘companies owned or controlled by foreign investors’ and ‘companies owned and controlled by Indian residents’. Though there are no major changes in the existing guidelines, they have been simplified as under
− Foreign investment into an Indian company engaged only in the activity of investing in the capital of other Indian company / (ies) (regardless of its ownership or control);
− Downstream investment by an Indian company which is owned and/or controlled by non resident entity (ies.) The new FDI policy clarifies that the Foreign investment into Non-Banking Finance Companies (NBFCs) carrying on the activities approved for FDI will be subjected to the FDI regulations. Further, Core Investment Companies (CICs) to additionally comply with the RBI’s regulatory framework for CICs.
5. FDI in Agriculture – Removal of the ‘Under Controlled Conditions’ in Case of Development of Seeds
The erstwhile FDI policy allowed 100% FDI in development of seeds subject to them being carried out “under controlled conditions”.
However, the new consolidated FDI policy now permits the development and production of seeds and planting material, without the stipulation of having to do so “under controlled conditions”.
6. Other Aspects
Form FCGPR – Part B has been replaced by Annual Return on Foreign Liabilities and Assets based on the circular issued by RBI.
The Government of India had issued the following discussion papers for public comments during recent times
− FDI in Limited Liability Partnerships.
− FDI in Multi-brand Retail Trading
− FDI in Defence Sector
− Removal of the condition of prior approval in case of existing joint ventures/ technical collaborations in the ‘same field.’
− Issue of shares against non-cash considerations.
Note: Out of the above aspects , removal of the condition of prior approval in case of existing joint ventures/ technical collaborations in the ‘same field’ and issue of shares against non-cash consideration have been dealt with in the consolidated FDI Policy, while the other 3 discussion papers are still under the review of Government.