12 March 2009

Foreign Investment Policy in India: Recent Guidelines

2

Glossary

1) Foreign Investment: ‘FI’

2) Foreign Company- ‘F Co’

3) Indian Company: ‘I Co’

4) Non resident Entity: ‘NRE’

5) Resident Indian Citizen(s): ‘RIC’

6) Investing Company- ‘Invest Co’

7) Operating Company- ‘Op Co’

3

Setting the context: Manner of Investing in an Indian Company (1/2)

Foreign Company

(‘F Co’)

Indian Company

(‘I Co’)

100%

Overseas

India

Foreign Investment in an Indian Company - Direct

Foreign Company is a shareholder in the Indian Company

4

Setting the context: Manner of Investing in an Indian Company (2/2)

F Co

I Co1

Overseas

India

I Co2

Indian Company (I Co1) is the shareholder in I Co2 . In other words, F Co owns shares in I Co2 through I Co1

100%

100%

FI in an Indian Company - Indirect

TOTAL FI= Direct FI + Indirect FI

5

Setting the context: Manner of computing Indirect FI in I Co2 (1/2)

Currently, different methods of computing Indirect FI have been prescribed for different sectors (in which I Co2

operates)

- Telecom/ Broadcasting: Proportionate method

- Investing companies in Infrastructure/ Services sector: Management + Ownership Test

- Insurance: Governed by regulations issued by Insurance Regulatory Authority of India (‘IRDA’)

For other sectors, no method has been prescribed. Accordingly, Indirect FI in those cases was not considered for computing Total FI

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Setting the context: Manner of computing Indirect FI in I Co2 (2/2)

F Co

I Co1

Overseas

India

I Co2 in Telecom sector

I Co2

100%

60%

F Co

I Co1*

Overseas

India

I Co2 in Infrastructure sector

I Co2

49%

100%

*Management of I Co1 is with Indians

FI in I Co2 is 60% FI in I Co2 is NIL

7

Press Note 2 (2009 Series)

8

Overview

•Objective: To bring in clarity, uniformity, consistency and homogeneity in computation of FI in I Co

•Defines the framework for computing Indirect FI in I Co

•Shift from ‘economic ownership’ to ‘beneficial ownership and control’

Meaning: Amount or % of Investment in an Indian company is no longer the only the criterion for determining Indirect FI

9

Some Key aspects (1/4)

Ownership: Majority Equity Interest (>50%)

Control: Power to appoint majority of directors

Resident Indian Citizen (‘RIC’): Person resident in India*

Non-resident Entity (‘NRE’): Person resident outside India*

* As per Foreign Exchange Management Act, 1999 read with Indian Citizenship Act, as applicable

NRE

I Co 1

X%

Overseas

India

Foreign (Direct) Investment in I Co1 = X%

Direct Investment

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Some Key aspects (2/4)

Direct FI in I Co2 = 39%Indirect FI in I Co2 = NilTotal FI in I Co2 = 39%

NRE

I Co1 (Owned and Controlled

by RIC

I Co2 (Owned and Controlled

by RIC)

40%

39%

10%

Overseas

India

Direct FI in I Co2= 51%Indirect FI in I Co2 = 49%Total FI in I Co2 = 100%

NRE

49%

40%

I Co1 (Owned and Controlled

by RIC)

Overseas

India

I Co2 (Owned or Controlled by

NRE)

51%

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Some Key aspects (3/4)

Direct FI in I Co2= 40%Indirect FI in I Co2 = 9%Total FI in I Co2 = 40%

NRE

9%

60%

I Co1 (Owned or Controlled by

NRE)

Overseas

India

I Co2 (Owned and Controlled

by RIC)

40%

Direct FI in I Co2= 51%Indirect FI in I Co2 = 20%

Total FI in I Co2 = 71%

NRE

20%

60%

I Co1 (Owned or Controlled by

NRE)

Overseas

India

I Co2 (Owned or Controlled by

NRE)

51%

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Some Key aspects (4/4)

Indirect FI in I Co2 is Mirror holding in I Co1 , i.e. 75%

NRE

100%

75%

I Co2

I Co1 (Owned or Controlled by

NRE)

Overseas

India

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Issue 1: Equal Ownership & Control between RIC and NRE

50%

NRE

I Co1

Overseas

India

RIC

I Co2

50%

X%

IssueDetermination of Ownership/ Control in I Co1 (between NRE & RIC)

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Issue 2: ‘Mirror shareholding’ in case of Wholly Owned Subsidiaries

IssueIndirect FI in I Co2 - NIL?

NRE

100%

75%

25% RIC

I Co1 (Owned and Controlled

by RIC)

I Co2

Overseas

India

100%

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Issue 3: Near 100% subsidiaries

Indirect FI in I Co2 : 75%

NRE

100%

75%

I Co2

I Co1

(Owned or Controlled

by NRE)

Overseas

India

Indirect FI in I Co2 : 99%

NRE

99%

75%

I Co2

I Co1

(Owned or Controlled

by NRE)

Overseas

India

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Issue 4: Downstream investment in Prohibited sectors

51%

49%

IssueTotal FI in I Co2:a) Direct: Nilb) Indirect : Nil

Q. Whether Investment in I Co2 (Prohibited sector) possible?

NRE

I Co1 (Owned and controlled

by RIC)

I Co2 (Owned and controlled by RIC- prohibited sector)

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Issue 5: Economic ownership > Sectoral cap

Applicable Sectoral Cap= 74%IssueTotal FI in I Co2:a) Direct: 30%b) Indirect : 70%c) Total FI: 100%<Economic ownership= 30% + 70*60% = 72%>

Q. Whether breach of sectoral limits permissible?

NRE

70%

60%

I Co1 (Owned or Controlled by

NRE)

Overseas

India

I Co2 (Owned or Controlled by

NRE)

30%

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Issue 6: Retrospective Vs Prospective

IssueConformity of past FI to the new guidelines

Compliant earlier; not compliant now

Not compliant earlier; compliant now

All other cases

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Press Note 3 (2009 Series)

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Overview

•Presently, transfer of shares from RIC to NRE permitted under automatic route, subject to relevant sectoral guidelines.

•PN 3 lays down the Guidelines for transfer of ownership or control of I Co in sectors with caps from RIC to NRE

Guidelines not applicable where 100 % FI is permitted under automatic route

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Overview

Mandatory to seek Government approval in specified situations:-

- I Co, owned or controlled by NRE, being established with FI or;

-Transfer of Ownership/ control in an I Co, from RIC to NRE under a scheme of amalgamation/ merger/ acquisition etc.

Food for thoughtNeed for approval in Sectors where Foreign Investments within caps has been allowed without any approval up till now?

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Issue

I Co2

I Co1 NRE

Ownership and/or control transferred

Amalgamation, Merger, Acquisition

Government approval required

Issue: Whether transfer possible without amalgamation/ merger/acquisition etc and need for

approval in such cases?

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Press Note 4 (2009 Series)

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Overview

- Further to PN 2 of 2009, Government of India has issued clarificatory guidelines on downstream investments made by Indian companies owned or controlled by NRE.

- Downstream investments by I Cos ‘owned’ or ‘controlled’ by NRE would need to adhere to the same norms as Direct FI. Guidelines specified for the following companies:

- Operating;

- Operating and investing;

- Investing;

- Neither operating nor investing.

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Some Key aspects (1/3)

F Co

Op Co

Overseas

India

Only Operating companies

Investment in Op Co would require compliance with the sectoral conditions and caps

1% to 100%

(I)

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F Co

Op Co

Overseas India

FIPB* approval required

F Co

Op Co

Co with No operations

(NRE owned or controlled)

Overseas India

FIPB approval required

-Compliance with sectoral conditions and caps required-Co with no operations - Compliance required when business commences/ downstream investment is made-Other applicable conditions for downstream Investment, e.g. Board resolution, notifying FIPB/ DIPP/ SIA

Only Investing Companies Companies having no operations

Invest Co (NRE owned or

controlled)

Some Key aspects (2/3)

1% to 100%1% to 100%

*FIPB- Foreign Investment Promotion Board

(II) (III)

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Some Key aspects (3/3)

F Co

Op Co

Op + Invest Co (NRE owned

or controlled)

Overseas India

Operating-cum-Investing companies

Other compliance conditions apply

1% to 100%

>51%

Variants to the above situation have been illustrated in subsequent slides

(IV)

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I Co 1 - Operating cum Investing Co. – Situation I

F Co

I Co1

(Automatic route)

I Co2

(Automatic route)

No Approval required (as long as sectoral caps are

met)

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I Co 1 - Operating cum Investing Co– Situation II

F Co

I Co1

(Approval route)

I Co2

(Automatic route)

Foreign Investment received in I Co1 from F Co

(1) For Own use Approval required

(2) Partly for own, partly for Downstream Investment

Approval required

(3) Entirely for Downstream Investment

?

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I Co 1- Operating cum Investing Co– Situation III

F Co

I Co1

(Automatic route)

I Co2

(Approval route)

- No Approval required for Investing in I Co1

- Approval required for downstream investment in I Co2

IssueNeed for approval if internal accruals of I Co1 are used to make investment in I Co2?

IssueWhere I Co1 & I Co 2 both are under approval route, whether accruals from I Co1 can be used for investment in I Co 2 without approval?

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Other Issues (1/2)

Whether approval is required when the operations would commence in due course?

I Co incorporated with foreign investors as subscribers to Memorandum (Para 5)

Can redeemable instruments be issued to the investing company?

Para no. 6 (a) only refers that Equity, CCPS, CCD could be issued by downstream company

Whether RBI valuation guidelines for Direct FI by NRE apply to downstream investment (as both companies are Indian)?

SEBI / RBI guidelinesto apply in case of Issue/ transfer/ pricing/ valuation of shares (Para 6 (c))

32

Other Issues (2/2)

PN 4 not applicable to an Indian company holding investments for trading

purposes

How to determine whether Investments are for trading purposes?

Investments held for Trading purposes

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Thank You!