Foreign Investment in India - 91st SMTP

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Foreign Investment in India91st SMTP

10th

August, 2009Institute of Company Secretaries of

India


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Regulatory Framework


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Regulatory Framework

Foreign Exchange Management Act,1999

Section 6(3)

Notification No. FEMA 20/2000-RB dated May 3,

2000, as amended from time to time Reserve Bank of India

Master Circular. No.1/2009-10 dated July 01, 2009

Department of Industrial policy and Promotion

Press notes


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Definitions


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Definitions

A Person is defined under FEMA as an individual a Hindu Undivided Family

a company a firm an association of persons or body of individuals,

whether incorporated or not

every artificial juridical person, not falling withinany of the preceding sub-clauses and any agency, office or branch owned or

controlled by such person.


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Definitions (contd..)

Person resident in India means(i) a person residing in India for more than one hundred and eighty-two days during the

course of the preceding financial year but does not include

(A) a person who has gone out of India or who stays outside India, in either case(a) for or on taking up employment outside India, or(b) for carrying on outside India a business or vocation outside India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay outsideIndia for anuncertain period;

(B) a person who has come to or stays in India, in either case, otherwise than(a) for or on taking up employment in India, or(b) for carrying on in India a business or vocation in India, or(c) for any other purpose, in such circumstances as would indicate his intention to stay in India

for an uncertain period;

(ii) any person or body corporate registered or incorporated in India,(iii) an office, branch or agency in India owned or controlled by a person resident outside India,(iv) an office, branch or agency outside India owned or controlled by a person resident in India;

person resident outside India means a person who is not resident in India


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Foreign Investment in IndiaRoutes


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Foreign Investment Routes

Foreign Direct Investments

Foreign Portfolio Investments

Foreign Venture Capital Investments Other Investments


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Foreign Direct Investment


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Foreign Direct Investments

Foreign Direct Investments (FDI) a brief

FDI Policy announced by the Government of India.

Provisions of the Foreign Exchange Management Act(FEMA), 1999.

Reserve Bank - Notification No. FEMA 20 /2000-RBdated May 3, 2000.


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Foreign Direct Investments (contd..)

Entry routes for investments in India*:

Automatic Route

No approval require from Government of India or

Reserve Bank of India for the investments.

Government Route

Prior approval of the Government of India, Ministryof Finance, Foreign Investment Promotion Board(FIPB) is required for the investments.

* subject to sector specific investment limits as mentioned in theMaster Circular dated 1stJuly, 2009.


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Prohibition on Investment in India: Foreign Investment in any form is prohibited in the following

activities: Business of chit fund, or Nidhi company, or

Real estate business, or construction of farm houses, or Trading in Transferable Development Rights (TDRs). (a) Retail

Trading (except single brand product retailing)Atomic Energy Lottery Business Gambling and Betting

Activities / sectors not opened to private sector investmentAgriculture (excluding Floriculture, Horticulture, Development of

seeds, Animal Husbandry, Pisciculture and cultivation of vegetables,mushrooms, etc. under controlled conditions and services related toagro and allied sectors) and Plantations (other than TeaPlantations)


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Eligibility for Investment in India:

a person resident outside India (other than a citizen ofPakistan)

entity incorporated outside India (other than an entity

incorporated in Pakistan)

a citizen of Bangladesh or entity incorporated inBangladesh (subject to prior approval of FIPB)

Overseas Corporate Body (OCB)


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Type of Instruments:

Equity Shares

Fully and Compulsory Convertible Debentures

Fully and Compulsory Convertible Preference Shares Issue of other types of preference shares such as

partially or optionally or non convertible, can beissued subject to pricing guidelines applicable for ECB


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Investment in Small Scale

Industrial (SSI) Units


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Investment in SSI Units

Investment is permitted provided it is notengaged in any activity prohibited under FDIpolicy

Limit of 24% of the paid up capital of theIndian Company

Investment of more than 24% subject to certainconditions

Investment of more than 24% in case of SSIunits in the nature of EOU, FTZ, EPZ, STP,EHTP.


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Investment in Asset

Reconstruction Companies(ARCs)


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Investment in ARC

Person resident outside India other thanFII can invest in equity of ARCs registeredwith RBI only under Government Route.

FDI is restricted to 49% of paid up capitalof the ARC.


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Investment in Infrastructure

Companies


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Investment in Infrastructure Companies

Investment is permitted subject to followingconditions:-

Composite ceiling of 49 per cent for Foreign

Investment, with a FDI limit of 26 per centand an FII limit of 23 per cent of the paid upcapital;

FDI will be allowed with specific prior

approval of FIPB; and FII can invest only through purchases in the

secondary market.


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Investment in Credit Information

Companies


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Investment in Credit Information Companies

Investment is permitted subject to following conditions:-

Composite ceiling of 49 per cent for Foreign Investment,with a FDI limit of 25 per cent and an FII limit of 24 percent of the paid up capital;

FDI will be allowed with specific prior approval of FIPB andRBI;

Investment by SEBI Registered FIIs is permitted only

through purchases in the secondary market to an extent of24 per cent.

No FII can individually hold directly or indirectly more than10 per cent of the equity.


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Investment in Commodity

Exchanges


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Investment in Commodity Exchanges

Investment is permitted subject to following conditions:-

Composite ceiling of 49 per cent for Foreign Investment,with a FDI limit of 26 per cent and an FII limit of 23 percent of the paid up capital;

FDI will be allowed with specific prior approval of FIPB ;

The FII purchases in equity of Commodity Exchanges arerestricted to the secondary markets only.

Investment is also subject to compliance with theregulations issued, in this regard, by the Forward MarketCommission.


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Investment in Public Sector Banks


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Investment in Public Sector Banks

FDI and Portfolio Investments innationalized banks are subject to overallstatutory limits of 20%.


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Issue of Right Shares and Bonus

Shares


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Issue of Right and Bonus Shares

Indian Companies are allowed to issue Right shares and Bonusshares to existing non-resident shareholders subject to adherenceof sectoral cap.

Issue to be in accordance other applicable acts.

Price of right shares offered to non-resident shareholders shall notbe lower than price at which shares are offered to residentshareholders.

Existing non-resident shareholders are allowed to apply for issue of

additional shares / convertible debentures / preference shares overand above their rights share entitlements subject to the conditionthat the overall issue of shares to nonresidents in the total paid-upcapital of the company does not exceed the sectoral cap.


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Issue of shares under scheme of

Merger/Amalgamation


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Issue of Shares under scheme of

Merger/Amalgamation

On approval of scheme of merger or amalgamation by HighCourt the transferee company or new company is allowedto issue shares to non - resident shareholders of thetransferor company subject to the following :-

the percentage of shareholding of persons residentoutside India in the transferee or new company doesnot exceed the sectoral cap, and

the transferor company or the transferee or the newcompany is not engaged in activities which areprohibited under the FDI policy


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Issue of shares under Employee

Stock Option Scheme (ESOPs)


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Issue of Shares under ESOPs

Listed Indian Companies are allowed to issued shares under ESOP toits employees or employees of its joint venture or wholly ownedsubsidiary abroad who are resident outside India, other than tothe citizens of Pakistan. Citizens of Bangladesh can invest with the priorapproval of the FIPB. Shares under ESOPs can be issued directly orthrough a Trust subject to the condition that:

The scheme has been drawn in terms of relevant regulationsissued by the SEBI, and

The face value of the shares to be allotted under the scheme to

the nonresident employees does not exceed 5 per cent of thepaid-up capital of the issuing company.

Details of such issues has to be reported to RBI within 30 daysfrom the date of issue of shares.


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Reporting of FDI


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Reporting of FDI

Reporting of Inflow:

An Indian company receiving investment fromoutside India should report the details of

amount received through an Authorised DealerI category bank, not later than 30 days from thedate of receipt.


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Reporting of FDI (contd..)

Time frame within which shares have tobe issued

The shares/debentures have to be issued

within 180 days from the date of receipt ofthe inward remittance.

In case the shares/debentures are not issued

within the stipulated time frame, the entireconsideration received should be refundedimmediately.


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Reporting of FDI (contd..)

Reporting of issue of shares The Indian company has to file Form FCGPR not later

than 30 days from the date of issue of shares.

Part A of the Form has to be signed by ManagingDirector/Director/Secretary of the Company andshould be submitted to authorised dealer alongwithcertificate from Company Secretary and CharteredAccountant.

Part B of the Form should be filed on annual basis bythe Indian company before July 31.


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Transfer of shares and

convertible debentures


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Transfer of Shares and DebenturesForeign Investors can also invest in Indian Companies by purchasing/acquiring existing shares from

Indian shareholders or from other non-resident shareholders. General permission has been granted tonon-residents / NRIs for

acquisition of shares by way of transfer subject to the following:

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

NRIs may transfer by way of sale or gift the shares or convertible debentures held by them

to another NRI. A person resident outside India can transfer any security to a person resident in India by

way of gift.

A person resident outside India can sell the shares and convertible debentures of an Indiancompany on a recognized Stock Exchange in India through a stock broker registered withstock exchange or a merchant banker registered with SEBI.

A person resident in India can transfer by way of sale, shares / convertible debentures

(including transfer of subscriber's shares), of an Indian company in sectors other thanfinancial services sector (i.e. Banks, NBFC, Insurance, ARCs, CICs, and infrastructurecompanies in the securities market viz. Stock Exchanges, Clearing Corporations andDepositories, etc.) under private arrangement to a person resident outside India.

General permission is also available for transfer of shares / convertible debentures, by wayof sale under private arrangement by a person resident outside India to a person resident inIndia


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Prior Permission of RBI in

certain cases of transfer ofsecurity


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Prior Permission of RBIIn the following cases of transfer of shares from residents to non-residents by

way of sale require RBI approval:-

Transfer of shares or convertible debentures of an Indian companyengaged in financial sector (i.e. Banks, NBFCs, Asset ReconstructionCompanies, CICs, Insurance and Infrastructure providers in thesecurities market such as, Stock Exchanges, Clearing Corporations,

etc.). Transactions which attract the provisions of SEBI (Substantial

Acquisition of Shares and Takeovers) Regulations, 1997.

The activity of the Indian company whose securities are beingtransferred falls outside the automatic route and the approval of theFIPB has been obtained for the said transfer.

The transfer is to take place at a price which falls outside the pricingguidelines specified by the Reserve Bank from time to time.

Transfer of equity instruments where the non-resident acquirerproposes deferment of payment of the amount of consideration, priorapproval of the Reserve Bank would be required.


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Prior Permission of Government

in certain cases of transfer ofsecurity


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Prior Permission of Government

In the following cases of transfer of shares from residentsto non-residents by way of sale require Governmentapproval followed by RBI approval:-

Transfer of shares of companies engaged in sectorsfalling under the Government Route.

Transfer of shares resulting in foreign investments inthe Indian company, breaching the sectoral capapplicable.


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Portfolio Investment Scheme


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PORTFOLIO INVESTMENT SCHEME (PIS)

Where NRIs are permitted to acquireshares/debentures of Indian companies orunits of domestic Mutual Funds through thestock exchange (s) in India.


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By Whom?

FIIs(Foreign Institutional Investors)

NRIs(Non Residential Indians)

OCBs(Overseas Corporate Bodies)


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INVESTMENTS BY FIIs


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Shareholding limits

Total shareholding ofeachFII

< 10% of paid-up capital

Aggregate shareholding ofallFIIs


> 24 % of paid-up capital

- by Board Resolution followed by specialresolution

h b


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Prohibition on Investments in equityshares issued by -

Asset Reconstruction Company.

Chit Fund

Nidhi CompanyAgricultural or plantation activities or

Real estate business, or construction of

farm houses Trading in Transferable Development

Rights (TDRs).

Sh lli b FII bj h


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Short selling by FIIs subject to thefollowing conditions

Current FDI Policy

Equity shares of companies which are inthe ban list and / or caution list of RBI

E h T d d D i ti


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Exchange Traded DerivativeContracts

SEBI Registered FIIs are allowed to trade in all exchange tradedderivative contracts approved by RBI/SEBI on recognised stockexchanges

FIIs are allowed to offer foreign sovereign securities with AAA ratingas collateral to the recognised stock exchanges in India for theirtransactions in derivatives segment

SEBI approved clearing corporations of stock exchanges and theirclearing members are allowed to undertake the followingtransactions: to open and maintain demat accounts with foreign depositories

to remit the proceeds arising from corporate action to liquidate such foreign sovereign securities

clearing corporations have to report, on monthly basis, the balancesof foreign sovereign securities to the RBI


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Accounts with AD category- 1 Banks

FIIs can open a foreign currency denominated account and/ or

special Non- Resident Rupee Account for the purpose of investment

They can transfer sums from the foreign currency account to RupeeAccount for making genuine investments in securities at theprevailing market rate

The Special Non- Resident Rupee Account may be credited with theproceeds of the transactions. The banks shall confirm from theinvestee company/FII concerned that the tax at source, wherevernecessary, has been deducted

The Special Non-Resident Rupee Account may be debited for

payment of fees to applicant FIIs


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Private placement with FIIs SEBI registered FIIs are permitted to purchase

shares/convertible debetures of an indian companythrough offer/ private placement, subject to the ceilingsprescribed, i.e.,

Individual FII/sub-account 10 % and All FIIs/sub-accounts put together 24 % of the paid up capital

Provided that :

- In the case of public offer, the price of shares to be issued is not

less than the price at which the shares are issued to theresidents; and

- In the case of private placement, the price is not less than theprice arrived at in terms of SEBI guidelines


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Reporting of FII Investments

The AD category I banks have to ensure thatthe FIIs who are purchasing the share reportthese details separately in the form LEC(FII)

The indian company which has issued shares toFIIs under the FDI scheme should report thesefigures separately under item no. 5 of FC-GPR,so that the details could be suitably reconciledfor statistical/monitoring purposes

A daily statement in respect of all transactionshave to be submitted by the custodian bank inthe prescribed format directly to RBI to monitorthe overall ceiling limits


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INVESTMENTS BY NRIs

ll d h f


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NRIs are allowed to invest in shares oflisted Indian companies in recognised

stock exchanges under the PIS routeLimits -

Total shareholding ofeachNRI

< 5% of paid-up capital Aggregate shareholding ofallNRIs


can be increased to 24 % of paid-up capital- by Board Resolution followed by specialresolution

C td


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Contd

The NRI investor has to take delivery of theshares purchased and give delivery of sharessold. Short selling is not permitted

Payment for purchase of securities on

repatriation basis has to be made by way ofinward remittance of foreign exchange throughnormal banking channels or out of funds held inNRE/ FCNR (B) account maintained in India

If the shares are purchased on non-repatriationbasis, the NRIs can utilise their funds in NROaccount in addition to the above

Contd


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Contd

The bank shall report to RBI on daily basis PIS transactionsundertaken by it

Shares purchased by NRIs on the stock exchange under PIS cannotbe transferred by way of sale under private under arrangement byway of gift

Exceptions :- by NRIs to their relatives as defined in section 6 of CompaniesAct, 1956 or- to a charitable trust duly registered under the laws in India, and- to a person resident in India or outside India with prior approval ofRBI

NRIs are allowed to invest in exchange traded derivative contractsapproved by SEBI from time to time out of Rupee Funds held inIndia on non-repatriation basis


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INVESTMENTS BY OVERSEAS

CORPORATE BODIES (OCBs)


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With effect from November 29, 2001,OCBs are not permitted to invest under

the PIS in India further, the OCBs which have already

made investments under the PIS areallowed to continue holding suchshares/convertible debentures till suchtime these are sold on the stockexchanges

OCBs have been de-recognised as a classof investor in India with effect fromSeptember 16, 2003


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FOREIGN VENTURE CAPITALINVESTMENTS


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A SEBI registered Foreign Venture CapitalInvestor (FVCI) with specific approval from RBIunder FEMA regulations can invest in

- in Indian Venture Capital Undertaking(IVCI)

- in Indian Venture Capital Fund (IVCF)

- in a scheme floated by such IVCFs

subject to the condition that the VCF shouldshould also be registered with SEBI

contd


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contd.. FCVIs can purchase equity/equity linked

instruments/debt/debt instruments, debentures

of an IVCU or a VCF through

- Initial Public Offer or

- Private Placement

The purchase/sale of shares, debentures andunits can be at a price that is mutuallyacceptable to the buyer and seller

Banks can offer forward cover to FVCIs to theextend of total inward remittance.


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OTHER FOREIGN INVESTMENTS


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Other Foreign Investments

By NRIs

Non-repatriation basisRepatriation basis By FIIs


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Purchase of Securities by NRIs

Non Repatriation basis Securities includes shares/convertible

debentures, government dated securities,Treasury bills, units of domestic mutual funds

without any limit

Inward remittance can be through normalbanking channels/funds held in NRE/FCNR/NRO

account

Sale proceeds will not be repatriated abroad


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Repatriation basis

Securities includes shares/convertibledebentures, government dated securities,Treasury bills, units of domestic mutual

funds without any limit

Purchase is in accordance with terms andconditions stipulated in notice inviting bids


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Purchase of Securities by FIIs

FIIs can buy securities on repatriationbasis from issuer companies or throughregistered stock broker on recognised

stock exchange.

Purchases are subject to limits notified by

SEBI and RBI from time to time

Foreign Investment in India - 91st SMTP

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