FDI- Recent Changes and Compliance

WHAT IS FOREIGN DIRECT INVESTMENT?

Foreign direct investment (FDI) is an investment made by a company or entity based in one country, into a company or entity based in another country.

It is basically an investment in a business by an investor from another country for which the foreign investor has control over the company purchased. The Organization of Economic Cooperation and Development (OECD) define control as owning 10% or more of the business. Businesses that make foreign direct investments are often called multinational corporations (MNCs) or multinational enterprises (MNEs). A MNE may make a direct investment by creating a new foreign enterprise, which is called a Greenfield investment, or by the acquisition of a foreign firm, either called an acquisition or Brownfield investment.

TYPE OF INVESTORS

INDIVIDUAL:

• Foreign Venture Capital Investor (FVCI)
• Pension/Provident Fund
• Financial Institutions.

COMPANY:

• Foreign Trust
• Sovereign Wealth Funds
• NRIs / PIOs.

FOREIGN INSTITUTIONAL INVESTORS:

• Private Equity Funds
• Partnership / Proprietorship Firm
• Others.

Note:  Citizen or entity from Bangladesh & Pakistan can invest only under Government route. However Pakistan investor cannot invest in defence, space, atomic energy and sectors prohibited for foreign investment.

RECENT CHANGES IN FDI POLICY

The Union Government has radically liberalized the FDI regime vide Press release dated 20^th June 2016, with the objective of providing major impetus to employment and job creation in India. The decision was taken at a high-level meeting chaired by our Hon’able Prime Minister Shri. Narendra Modi.  Now most of the sectors would be under automatic approval route, except a small negative list. With these changes, India is now the most open economy in the world for FDI.

In last two years, Government has brought major FDI policy reforms in a number of sectors viz. Defence, Construction Development, Insurance, Pension Sector, Broadcasting Sector, Tea, Coffee, Rubber, Cardamom, Palm Oil Tree and Olive Oil Tree Plantations, Single Brand Retail Trading, Manufacturing Sector, Limited Liability Partnerships, Civil Aviation, Credit Information Companies, Satellites- establishment/operation and Asset Reconstruction Companies. Measures undertaken by the Government have resulted in increased FDI inflows at US$ 55.46 billion in financial year 2015-16, as against US$ 36.04 billion during the financial year 2013-14. This is the highest ever FDI inflow for a particular financial year. However, it is felt that the country has potential to attract far more foreign investment which can be achieved by further liberalizing and simplifying the FDI regime.  India today has been rated as Number 1 FDI Investment Destination by several International Agencies.

BREVITY OF CHANGES MADE IN FDI POLICY:

• Government eases FDI norms in 15 major sectors.
• Townships, shopping complexes & business centres – all allow up to 100% FDI under the auto route. Conditions on minimum capitalisation & floor area restrictions have now been removed for the construction development sector.
• India’s defence sector now allows consolidated FDI up to 49% under the automatic route. FDI beyond 49% will now be considered by the Foreign Investment Promotion Board. Government approval route will be required only when FDI results in a change of ownership pattern.
• Private sector banks now allow consolidated FDI up to 74%.
• Up to 100% FDI is now allowed in coffee/rubber/cardamom/palm oil & olive oil plantations via the automatic route.
• 100% FDI is now allowed via the auto route in duty free shops located and operated in the customs bonded areas.
• Manufacturers can now sell their products through wholesale and/or retail, including through e-commerce without Government Approval.
• Foreign Equity caps have now been increased for establishment & operation of satellites, credit information companies, non-scheduled air transport & ground handling services from 74% to 100%.
• 100% FDI allowed in medical devices
• FDI cap increased in insurance & sub-activities from 26% to 49%
• FDI up to 49% has been permitted in the Pension Sector.
• Construction, operation and maintenance of specified activities of Railway sector opened to 100% foreign direct investment under automatic route.
• FDI policy on Construction Development sector has been liberalised by relaxing the norms pertaining to minimum area, minimum capitalisation and repatriation of funds or exit from the project. To encourage investment in affordable housing, projects committing 30 percent of the total project cost for low cost affordable housing have been exempted from minimum area and capitalisation norms.
• Investment by NRIs under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations will be deemed to be domestic investment at par with the investment made by residents.
• Composite caps on foreign investments introduced to bring uniformity and simplicity is brought across the sectors in FDI policy.
• 100% FDI allowed in White Label ATM Operations.
  

RESTRICTIONS:

SECTORS WHERE FOREIGN DIRECT INVESTMENT IS PROHIBITED:

• Lottery Business including Government /private lottery, online lotteries, etc.
• Gambling and Betting including casinos etc.
• Chit funds
• Nidhi company-(borrowing from members and lending to members only).
• Trading in Transferable Development Rights (TDRs)
• Real Estate Business (other than construction development) or Construction of Farm Houses
• Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
• Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than construction, operation and maintenance of

(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.)

• Services like legal, book keeping, accounting & auditing
  

SECTORAL CAPS IN DIFFERENT SECTORS

• Petroleum Refining by PSU (49%).
• Teleports (setting up of up-linking HUBs/Teleports), Direct to Home (DTH), Cable Networks (Multi-system operators (MSOs) operating at national, state or district level and undertaking upgradation of networks towards digitalisation and addressability), Mobile TV and Headend-in-the-Sky Broadcasting Service (HITS) – (74%).
• Cable Networks (49%).
• Broadcasting content services- FM Radio (26%), uplinking of news and current affairs TV channels (26%).
• Print Media dealing with news and current affairs (26%).
• Air transport services- scheduled air transport (49%), non-scheduled air transport (74%).
• Ground handling services – Civil Aviation (74%).
• Satellites- establishment and operation (74%).
• Private security agencies (49%).
• Private Sector Banking- Except branches or wholly owned subsidiaries (74%).
• Public Sector Banking (20%).
• Commodity exchanges (49%).
• Credit information companies (74%).
• Infrastructure companies in securities market (49%).
• Insurance and sub-activities (49%).
• Power exchanges (49%).
• Defence (49% above 49% to CCS).
• Pension Sector (49%)
  

ROUTES THROUGH WHICH FDI IS PERMITTED

AUTOMATIC ROUTE:

• Under this route no Central Government permission is required.

GOVERNMENT ROUTE:

• Under this route, applications are considered by the Foreign Investment Promotion Board (FIPB). Approval from Cabinet Committee on Security is required for more than 49% FDI in defence. The proposals involving investments of more than INR 30 billion are considered by Cabinet committee on economic affairs.
• The Indian company receiving FDI either under the automatic route or the government route is required to comply with provisions of the FDI policy including reporting the FDI and issue of shares to the Reserve Bank of India.
  

SECTORS REQUIRING CENTRAL GOVERNMENT APPROVAL:

• Tea sector, including plantations – 100%.
• Mining and mineral separation of titanium-bearing minerals and ores, its value addition and integrated activities -100%.
• FDI in enterprise manufacturing items reserved for small scale sector – 100%.
• Defence – up to 49% under FIPB/CCEA approval, beyond – 49% under CCS approval (on a case-to-case basis, wherever it is likely to result in access to modern and state-of-the-art technology in the country).
• Teleports (setting up of up-linking HUBs/Teleports), Direct to Home (DTH), Cable Networks (Multi-system operators operating at National or State or District level and undertaking upgradation of networks towards digitalisation and addressability), Mobile TV and Headend-in-the Sky Broadcasting Service(HITS) – beyond 49% and up to 74%.
• Broadcasting Content Services: uplinking of news and current affairs channels – 26%, uplinking of non-news and current affairs TV channels – 100%.
• Publishing/printing of scientific and technical magazines/specialty journals/periodicals – 100%.
• Print media: publishing of newspaper and periodicals dealing with news and current affairs- 26%, Publication of Indian editions of foreign magazines dealing with news and current affairs- 26%.
• Terrestrial Broadcasting FM (FM Radio) – 26%.
• Publication of facsimile edition of foreign newspaper – 100%.
• Airports – brownfield – beyond 74%.
• Non-scheduled air transport service – beyond 49% and up to 74%.
• Ground-handling services – beyond 49% and up to 74%.
• Satellites – establishment and operation – 74%.
• Private securities agencies – 49%.
• Telecom-beyond 49%.
• Single brand retail – beyond 49%.
• Asset reconstruction company – beyond 49% and up to 100%.
• Banking private sector (other than WOS/Branches) – beyond 49% and up to 74%, public sector – 20%.
• Insurance – beyond 26% and up to 49%.
• Pension Sector – beyond 26% and up to 49%.
• Pharmaceuticals – brownfield – 100%.
  

SECTORS UNDER AUTOMATIC ROUTE:

• All the items other than above falls under the automatic route.
  

major ENTRY STRUCTURES for making investment in india:

INCORPORATING A COMPANY IN INDIA:

• It can be a private or public limited company. Both wholly owned & joint ventures are allowed. Private limited company requires minimum of 2 shareholders.

LIMITED LIABILITY PARTNERSHIPS:

• FDI in LLPs are allowed, through the Government approval route, only for LLPs  operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions (such as ‘Non Banking Finance Companies’ or ‘Development of Townships, Housing, Built-up infrastructure and Construction-development projects’ etc.).

  SOLE PROPRIETORSHIP/PARTNERSHIP FIRM:

• RBI decides the application in consultation with Government of India.

EXTENSION OF FOREIGN ENTITY:

• Liaison office, Branch office (BO) or Project Office (PO). These offices can undertake only the activities specified by the RBI. Approvals are granted under the Government and RBI route. Automatic route is available to BO/PO meeting certain conditions.
  

OTHER STRUCTURES:

• Foreign investment or contributions in other structures like not for profit companies etc. are also subject to provisions of Foreign Contribution Regulation Act (FCRA).

MAJOR STEPS INVOLVED IN MAKING INVESTMENT:

• Identification of structure
• Central Government approval if required
• Setting up or incorporating the structure
• Inflow of funds via eligible instruments and following pricing guidelines
• Meeting reporting requirements of RBI and respective Act
• Registrations/obtaining key documents like PAN etc.
• Project approval at state level
• Finding ideal space for business activity based on various parameters like incentives, cost, availability of man power etc.
• Manufacturing projects are required to file Industrial Entrepreneur’s Memorandum (IEM), some of the industries may also require industrial license.
• Construction/renovation of unit.
• Hiring of manpower.
• Obtaining licenses if any.
• Other state & central level registrations.
• Meeting annual requirements of a structure, paying taxes etc.

REPATRIATION OF INCOME GENERATED:

REPATRIATION OF DIVIDEND:

• Dividends are freely repatriable without any restrictions (net after tax deduction at source or Dividend Distribution Tax.

REPATRIATION OF CAPITAL:

• AD Category-I bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate from the Income Tax Department has been produced.
• Investments are subject to lock-in period of 3 years in case of construction development sector.

REPATRIATION OF INTEREST:

• Interest on fully, mandatorily & compulsorily convertible debentures is also freely repatriable without any restrictions (net of applicable taxes).
  

ASPECTS OF TAXATION:

DIRECT TAXES:

• The investor is required to pay tax on net income earned in India. The rates of taxes differ among structures.

COMPANY:

• The company incorporated in India is required to pay 30% tax+surcharge+education cess on net income earned. It is also required to deduct tax on profits distributed @15.5%+surcharge+education cess.
  

BRANCH OFFICE / PROJECT OFFICE / LIAISON OFFICE OR PERMANENT ESTABLISHMENT:

• The fixed place of business in India is treated as a permanent establishment and is required to pay tax @40%+surcharge+education cess. There is no tax on profits distributed.

Limited liability parnerships (LLPs) :

• LLPs are required to pay tax @30%+surcharge+education cess. There is no tax on profits distributed.
  

MINIMUM ALTERNATE TAX:

• 5%+SC+EC- Indian tax law requires MAT to be paid by corporations in cases where the tax payable according to the regular tax provisions is less than 18.5% of their book profits. However MAT credit (MAT-actual tax) can be carried forward in next 10 years for set-off against regular tax payable during the subsequent years subject to certain conditions.

NOTE: Transactions between associated enterprises needs to follow transfer pricing regulations.