Summary of Circular 1 of 2010 for consolidating the Foreign Direct Investment (FDI) Policy Framework
Circular 1 of 2010 (Circular) dated 31.03.2010 – re-released by the, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry (DIPP) Government for consolidating the Foreign Direct Investment (FDI) Policy Framework. FDI by non residents in Indian companies is regulated by the Government of India in accordance with the provisions of Foreign Exchange Management Act, 1999 (FEMA), regulations made there under and the various press notes, press releases, and clarifications etc., issued on the subject over a period of time.
With the objective of consolidating all the prior press notes/ press releases /clarification etc. the Circular has been issued. It reflects the current ‘policy framework’ on FDI prevailing as of March 31, 2010.
The Circular has six chapters dealing with the issues related to (i) intent and objective (ii) definitions (iii) origin, type, eligibility, conditions and issue/transfer of investment (iv) calculation, entry route, caps, entry conditions of investment (v) policy on route and sectoral caps and (vi) remittance, reporting and violations related to FDI.
Salient Features of Circular 1 of 2010
1. Intent and Objective
1.1 With the issue of consolidated FDI policy, all earlier Press Notes / Press Release / Clarifications on FDI issued by DIPP stand rescinded and subsumed in the present Circular.
1.2 Government has clarified that the policy pronouncement on FDI by Press Notes/ Press Releases shall take effect from the date of issue of press notes/ press releases regardless of the procedural instructions which shall be issued by the Reserve Bank of India (RBI) vide relevant A.P. DIR series circulars for amending Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.
1.3 The Circular has been issued with the sunset clause of six months. A new Circular consolidating all amendments to the FDI Policy shall be issued on September 30, 2010 superseding the present Circular.
2. Origin, Type, Eligibility, Conditions and Issue / Transfer of Investments
2.1 Foreign Institutional Investors (Flls) are permitted to invest in the capital of an Indian company either under the FDI Scheme or under the Portfolio Investment Scheme. It has been specifically provided that 10% individual limit and 24% aggregate limit for Fll investment would be applicable even if the Flls investment is made under the FDI scheme.
2.2 Under the extant FDI Policy, Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures (FCD’s) and compulsorily and mandatorily convertible preference shares (CCPS) to the non residents subject to pricing guidelines/valuation norms prescribed under FEMA. It has been specifically clarified that for FCD’s/ CCPS, pricing of the instruments would need to be decided / determined upfront at the time of issue of these instruments.
Also, issue of warrants, partly paid shares etc. are not considered as capital and hence cannot be issued to person resident outside India, without obtaining prior approval of Foreign Investment Promotion Board (FIPB).
2.3 Issue of non-convertible, optionally convertible or partially convertible preference shares / debentures would need to comply the External Commercial Borrowing (ECB) Guidelines. Since these instruments are denominated in Rupees, the rupee interest rate will be based on the swap equivalent of London Interbank offered Rate (LIBOR) plus the spread permissible for ECBs of corresponding maturity.
2.4 It has been clarified that prior approval of FIPB followed by permission from RBI would be required for transfer of equity shares / FCD’s/ CCPS from residents to non residents by way of sale or otherwise if the Indian company is engaged in any sectors falling under the Government route.
2.5 Prior permission from RBI would also be required if the transfer of equity shares / FCD’s/ CCPS from residents to non residents by way of sale is at a price which is not in accordance with the pricing guidelines specified by RBI.
3. Guidelines for consideration of FDI proposals by FIPB
3.1 Government’s decisions on FDI Proposals would be communicated by the FIPB within a time frame of thirty (30) days. While considering proposals, FIPB can prioritize the following:
(i) Proposals for infrastructure sector.
(ii) Proposals having export potential.
(iii) Proposals with large scale employment potential especially for rural areas.
(iv) Proposals that are directly or indirectly related to agro business/farm sector.
(v) Proposals having greater social relevance such as hospitals, human resource development, life saving drugs and equipment.
(vi) Proposals resulting in induction of technology or infusion of capital.
4. Sectoral caps and conditions
4.1 Construction development activities:-The obligations related to restriction on sale of undeveloped projects and obtaining all statutory approval would equally lie on investee company in addition to the investor. Press note 2 (2005 series) prescribe the aforesaid obligations only for the investor.
Construction development projects shall be monitored by the state government / Municipal / local body, which approved the building / development plan
4.2 Security agencies in private sector:- In accordance with the provisions of Private Security Agencies (Regulation) Act, 2005, FDI upto 49% is permitted under approval route, subject to licensing conditions specified therein. Earlier there were no guidelines regarding foreign investment in security agencies.
4.3 Cash and Carry Wholesale Trading:-Government has defined the term ‘Cash and Carry Wholesale Trading’ to mean sale of goods/merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. Wholesale trading would, accordingly, be sales for the purpose of trade, business and profession, as opposed to sales for the purpose of personal consumption. To determine whether the sale is wholesale or not, consideration would be given to 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
The following conditions have been prescribed for undertaking wholesale cash and carry trading activities:
(i) Requisite licenses/registration/ permits, 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 the sale is made to any of the following entities:
(a) Entities holding sales tax/ VAT registration/service tax/excise duty registration; or
(b) Entities holding trade licenses; or
(c) Entities holding permits/license for undertaking retail trade (like tehbazari and similar license for hawkers); or
(d) Institutions having certificate of incorporation or registration as a society or registration as public trust for their self consumption.
5.Penalty
FDI is a capital account transaction and thus any violation of FDI is covered by the penal provisions of the FEMA. Any contravention of FDI Regulations including any press note / press release / guidelines / direction issued by the Government shall 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 Rupees 200,000 where the amount is not quantifiable, and where such contraventions is a continuing one, further penalty which may extend to Rupees 5,000 for every day during which the contraventions continues may be imposed.
6. Before Parting
The Circular is a convenient compendium of the FDI Policy of the Government of India. Some of the salient features highlighted in this alert reflect changes in interpretation of FDI Policy which have now been clarified. Also clearer guidance has been provided with regard to the intent of the FDI policy. It is likely that some of these changes may have an impact on existing foreign investments, which would need to be reviewed on a case specific basis.
