pri Summary of Consolidated Foreign Direct Investment (FDI) Policy – Circular No. 2 of 2010 Summary of Consolidated Foreign Direct Investment (FDI) Policy – Circular No. 2 of 2010

To have a transparent, simple and clear Foreign Direct Investment (“FDI”) policy framework, the Department of Industrial Policy and Promotion (“DIPP”) had issued Circular No. 1 on 31 March, 2010, consolidating all prior policies/regulations, including the extant Reserve Bank of India (“RBI”) Master Circular on FDI.

With an objective to issue an updated FDI policy every 6 months, bringing into one document all changes brought in vide various Press Notes, Press Releases, Clarifications, the DIPP has issued Consolidated Circular No. 2 (“Circular”) on 29 September, 2010. This Circular will be effective from 1 October, 2010.

The Circular includes all Press Notes, Press Releases, Clarifications issued by the DIPP in force as on 30 September, 2010.Some of the amendments / clarifications introduced in this Circular are set out below.

General amendments / clarifications

Partly Paid shares and Warrants – It is clarified that issue of partly paid shares and warrants to persons resident outside India would be permitted after prior approval from the Government. However, these instruments would not be considered as part of ‘capital’ of the company.

Share Swaps – The DIPP has introduced a specific clause mentioning allowability of share swap transactions with prior Foreign Investment Promotion Board (“FIPB”) approval. Valuation of the shares will need to be undertaken by Category 1 merchant banker registered with Securities Exchange Board of India (“SEBI”) or a registered investment banker in the host country.

Valuation Norms – For issue / transfer of shares, the valuation norms have been updated to reflect valuation based on discounted cash flow methodology

Internal Accruals – Downstream investments are now permissible through use of internal accruals, subject to such investments complying with sectoral caps / policy

Existing venture/Tie-up – It is clarified that approval requirements will apply to all “new proposals” in the same field and not only to “new joint ventures”

Share Premium – For sectors having minimum capitalisation norms [such as Non Banking Finance Companies (“NBFC”) and construction development projects], it has been clarified that share premium received along with face value of the shares upon issue of the shares to non-resident investors would be counted as part of minimum capitalisation requirement.

Sectoral Amendments / Clarifications

Agriculture – 100% FDI under automatic route is allowed for undertaking certain agriculture activities and animal husbandry, subject to undertaking the same under ‘controlled conditions’. The term ‘controlled conditions’ has now been defined in respect of ‘floriculture/horticulture/cultivation of vegetables and mushrooms’; ‘development of seeds’; ‘animal husbandry’; and ‘pisciculture & aquaculture’

Construction Development Projects – “Original investment” has been clarified to mean the entire amount brought in as FDI. Further, the lock-in period of three years will be applied from the date of receipt of each installment / tranche of FDI or from the date of completion of minimum capitalisation, whichever is later

NBFC – It is clarified that 100% foreign owned NBFCs, with minimum capitalisation of $50 million, can set up subsidiaries for specific NBFC activities, without having to meet minimum capitalisation norms for such downstream subsidiaries

Wholesale Trading – The operational guidelines have been amended to remove the condition of “sales to group companies should only be for their internal use”. However, the condition of sales between group companies being limited to maximum 25% of the turnover of the wholesale company still continues

Manufacturing of Tobacco products – Based on policy issued earlier this year, manufacture of Cigars, Cheroots, Cigarillos and Cigarettes, of Tobacco or of Tobacco substitutes has been included in the list of sectors/activities in which FDI is prohibited

Mining – FDI for separation of Titanium bearing minerals and ores was allowed subject to value addition facilities being set up within India along with transfer of technology. The concept of what will constitute value addition has been expressly stated

Telecom – General conditions, such as manner of computing FDI, adherence to License agreement, source of FDI etc, have also now been made applicable to companies operating telecom services with the FDI cap of 49%. This is in addition to the security conditions which are already applicable to companies operating telecom services with the FDI cap of 49%.

Residuary Sectors – For sectors not mentioned under sector specific policy for FDI (Chapter 5 of the Circular), it has been stated that 100% FDI under automatic route will be allowed, subject to applicable laws / sectoral rules / regulations. Vide this change, sectors such as “Business Services, Advertising and Films, Alcohol distillation & brewing, coffee & rubber processing and warehousing, drugs & pharmaceuticals, hotels & tourism, etc” have been removed from Chapter 5.

Conclusion

The Circular, while clarifying several aspects on which earlier there was ambiguity, also recognises the introduction of various Discussion Papers issued by DIPP (Defence, multi brand retail, existing venture/tie-ups, issue of shares for consideration other than cash and FDI in Limited Liability partnership (“LLP”)). It is expected that appropriate amendments to the FDI policy would be made as and when the policy framework in respect of these matters is finalised.

The Circular is clearly a step forward in increasing the transparency in the FDI policy framework. The Government’s initiative of using a consultative process with various stakeholders will help in further addressing other ambiguities and in evolving the policy.

More Under Fema / RBI

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

July 2021
M T W T F S S
 1234
567891011
12131415161718
19202122232425
262728293031