fdi and issues related in

8/6/2019 FDI and Issues Related In

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FDI and Issues Related InBy Prof. Neelam Tandon


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Introduction

Investment is usually understood asfinancial contribution to the equitycapital of an enterprise or purchase of

shares in the enterprise. Foreign investment is investment in

an enterprise by a Non-Residentirrespective of whether this involvesnew equity capital or re-investment of

earnings. Foreign investment is of two kinds

(i) Foreign Direct Investment (FDI)and (ii) Foreign Portfolio Investment.


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International Monetary Fund (IMF)and Organization for EconomicCooperation and

Development(OECD) define FDIsimilarly as a category of crossborder investment made by aresident in one economy (the directinvestor) with the objective ofestablishing a lasting interest in anenterprise (the direct investment

enterprise).


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FDI and its objective

Direct investment allows the directinvestor to gain access to the direct

investment enterprise which itmight otherwise be unable to do.

The objectives of direct investmentare different from those of portfolio

investment whereby investors donot generally expect to influencethe management of the enterprise


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Meaning of FDI

FDI means investment by non-resident entity/person resident

outside India in the capital of theIndian company under Schedule 1of FEM(Transfer or Issue of Securityby a Person Resident Outside India)

Regulations 2000.


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It is the policy of the Government ofIndia to attract and promote

productive FDI from nonresidents inactivities which significantlycontribute to industrialization andsocio-economic development. FDI

supplements the domestic capitaland technology.


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The Legal basis

Foreign Direct Investment by non-residentin resident entities through transfer orissue of security to person resident outside

India is a Capital account transaction Government of India and Reserve Bank of

India regulate FDI under the FEMA, 1999and its various regulations.

Keeping in view the current requirements,the Government from time to time comesup with new regulations andamendments/changes in the existing onesthrough order/allied rules, Press Notes,

etc.


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The Department of Industrial Policyand Promotion (DIPP), Ministry ofCommerce & Industry, Government

of India makes policypronouncements on FDI throughPress Notes/ Press Releases whichare notified by the Reserve Bank ofIndia as amendment to notificationNo.FEMA 20/2000-RB dated May 3,2000.


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It has been decided that from 1st

April 2010 onwards a consolidatedcircular would be issued every sixmonths to update the FDI policy.


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Some Terminologies

Authorized Dealer Category-I Bankmeans a bank ( ScheduledCommercial, State or UrbanCooperative) which are authorizedunder Section 10(1) of FEMA toundertake all current and capital

account transactions according tothe directions issued by the RBIfrom time to time.


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Authorized Bank

Authorized Bank means a bankincluding a co-operative bank (otherthan an authorized dealer)authorized by the Reserve Bank tomaintain an account of a personresident outside India.


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Authorized Dealer

Authorized Dealer means a personauthorized as an authorized dealerunder subsection (1) of section 10 of

FEMA. Authorized Person means an

authorized dealer, money changer,offshore banking unit or any other

person for the time being authorizedunder Sub-section (a) of Section 10 ofFEMA to deal in foreign exchange orforeign securities.


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Capital

Capital means equity shares; fully,compulsorily & mandatorilyconvertible preference shares; fully,compulsorily & mandatorilyconvertible debentures.

Note : Any other type of

instruments like warrants, partlypaid shares etc. are not consideredas capital and cannot be issued to

person resident outside India.


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Capital accounttransaction

Capital account transaction meansa transaction which alters the assetsor liabilities, including contingentliabilities, outside India of personsresident in India or assets orliabilities in India of persons

resident outside India, and includestransactions referred to in sub-section (3) of section 6 of FEMA.


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Controlled Company

A company is considered asControlled by resident Indian citizensif the resident Indian citizens andIndian companies, which are ownedand controlled by resident Indiancitizens, have the power to appoint amajority of its directors in thatcompany .

An entity is considered as Controlledby non resident entities, if non-residents have the power to appoint amajority of its directors


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Depository Receipts

Depository Receipt (DR) means anegotiable security issued outsideIndia by a Depository bank, onbehalf of an Indian company, whichrepresent the local Rupeedenominated equity shares of the

company held as deposit by aCustodian bank in India.


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ADRs and GDRs

DRs are traded on Stock Exchangesin the US, Singapore, Luxembourg,etc.

DRs listed and traded in the USmarkets are known as AmericanDepository Receipts (ADRs) and

those listed and tradedanywhere/elsewhere are known asGlobal Depository Receipts (GDRs).


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FCCB

Foreign Currency ConvertibleBonds(FCCB) means a bond issuedby an Indian company expressed inforeign currency, the principal andinterest of which is payable inforeign currency.


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Foreign CurrencyConvertible Bond

FCCBs are issued in accordancewith the Foreign CurrencyConvertible Bonds and ordinaryshares (through depository receiptmechanism) Scheme 1993 andsubscribed by a non-resident entity

in foreign currency and convertibleinto ordinary shares of the issuingcompany in any manner, either in

whole, or in part.


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FEMA, FIPB and FII

FEMA means the Foreign ExchangeManagement Act 1999 (42 of 1999).

FIPB means the Foreign Investment

Promotion Board constituted by theGovernment of India.Foreign Institutional Investor(FII)

means an entity established orincorporated outside India whichproposes to make investment in Indiaand which is registered as a FII inaccordance with the SEBI (FII)Regulations 1995.


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Foreign Venture CapitalInvestor

Foreign Venture Capital Investor(FVCI) means an investorincorporated and establishedoutside India, which is registeredunder the Securities and ExchangeBoard of India (Foreign Venture

Capital Investor) Regulations, 2000{SEBI(FVCI) Regulations} andproposes to make investment in

accordance with these Regulations


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Government route

Government route means thatinvestment in the capital of residententities by nonresident entities canbe made only with the priorapproval from FIPB, Ministry ofFinance, DIPP as the case may be.


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Indian Venture CapitalUndertaking Indian Company means a company

incorporated in India under the CompaniesAct, 1956.

Indian Venture Capital Undertaking (IVCU)

means an Indian company:(i) whose shares are not listed in a recognized

stock exchange in India;(ii) which is engaged in the business ofproviding services, production or manufacture

of articles or things, but does not include suchactivities or sectors which are specified in thenegative list by the SEBI, with approval ofCentral Government, by notification in theOfficial Gazette in this behalf.


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Investing Company

Investing Company means anIndian Company holding onlyinvestments in another Indiancompany, directly or indirectly,other than for trading of suchholdings/securities.


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Joint Venture

(JV) means an Indian entityincorporated in accordance with thelaws and regulations in India in whosecapital a foreign entity makes aninvestment.

Non resident entity means a personresident outside India as definedunder FEMA

Non Resident Indian (NRI) means anindividual resident outside India whois a citizen of India or is an individualof Indian origin.


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'Owned Company

A company is considered as 'Ownedby resident Indian citizens if morethan 50% of the capital in it isbeneficially owned by residentIndian citizens and / or Indiancompanies, which are ultimately

owned and controlled by residentIndian citizens;


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Non Resident Entities

An entity is considered as Ownedby non resident entities, if morethan 50% of the capital in it isbeneficially owned by non-residents.


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Person of Indian Origin

(PIO) means a citizen of any countryother than Bangladesh or Pakistan, if

(i) he at any time held Indian Passport

(ii) he or either of his parents or anyof his grandparents was a citizen ofIndia by virtue of the Constitution ofIndia or the Citizenship Act, 1955 (57

of 1955); or (iii) the person is a spouse of an

Indian citizen or a person referred toin sub clause (i) or (ii).


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Person resident in India

Is :(i) a person residing in India for morethan one hundred and eighty-two daysduring the course of the precedingfinancial year but does not include

(A) A person who has gone out of India orwho stays outside India, in either case-

(a) for or on taking up employmentoutside India, or

(b) for carrying on outside India a businessor vocation outside India, or (c) for any other purpose, in such

circumstances as would indicate hisintention to stay outside India for an

uncertain period;


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(B) A person who has come to or stays in India, ineither case, otherwise than-

(a) for or on taking up employment (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 anuncertain period;

(ii) any person or body corporate registered orincorporated in India,

(iii) an office, branch or agency in India owned orcontrolled by a person resident outside India, (iv) an office, branch or agency outside India owned

or controlled by a person resident in India.


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TYPES OFINSTRUMENTS Indian companies can issue equity

shares, fully, compulsorily andmandatorily convertible debenturesand fully, compulsorily andmandatorily convertible preferenceshares subject to pricingguidelines/valuation norms prescribedunder FEMA Regulations.

The pricing of the capital instrumentsshould be decided/determined upfrontat the time of issue of theinstruments.


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Other types of Preferenceshares/Debentures i.e. non-convertible, optionally convertible or

partially convertible for issue of whichfunds have been received on or afterMay 1, 2007 are considered as debt.

Accordingly all norms applicable for

ECBs relating to eligible borrowers,recognized lenders, amount andmaturity, end-use stipulations, etc.shall apply.


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Issue of shares by IndianCompanies underFCCB/ADR/GDR

The inward remittance received by the Indiancompany vide issuance of DRs and FCCBs aretreated as FDI and counted towards FDI.

(i) Indian companies can raise foreign currency

resources abroad through the issue ofFCCB/DR(ADRs/GDRs), in accordance with theScheme for issue of Foreign CurrencyConvertible Bonds and Ordinary Shares(Through Depository Receipt Mechanism)Scheme, 1993 and guidelines issued by theGovernment of India there under from time totime.

(ii) A company can issue ADRs / GDRs if it iseligible to issue shares to persons residentoutside India under the FDI Policy.


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However, an Indian listed company, whichis not eligible to raise funds from theIndian Capital Market including a companywhich has been restrained from accessingthe securities market by the Securities andExchange Board of India (SEBI) will notbe eligible to issue ADRs/GDRs.

(iii) Unlisted companies, which have not yet

accessed the ADR/GDR route for raisingcapital in the international market, wouldrequire prior or simultaneous listing in thedomestic market, while seeking to issue

such overseas instruments.


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Unlisted companies, which havealready issued ADRs/GDRs in theinternational market, have to list inthe domestic market on makingprofit or within three years of suchissue of ADRs/GDRs, whichever is

earlier.


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ADRs / GDRs are issued on thebasis of the ratio worked out by theIndian company in consultation withthe Lead Manager to the issue.


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The proceeds so raised have to be kept abroad tillactually required in India. Pending repatriation orutilization of the proceeds, the Indian company can investthe funds in:-

(a) Deposits, Certificate of Deposits or other instrumentsoffered by banks rated by Standard and Poor, Fitch, IBCA,Moody's, etc. with rating not below the rating stipulatedby Reserve Bank from time to time for the purpose;

(b) Deposits with branch/es of Indian Authorized Dealersoutside India; and

(c) Treasury bills and other monetary instruments with amaturity or unexpired maturity of one year or less.

(iv) There are no end-use restrictions except for a ban ondeployment / investment of such funds in real estate orthe stock market. There is no monetary limit up to whichan Indian company can raise ADRs / GDRs.


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(v) The ADR / GDR proceeds can be utilizedfor first stage acquisition of shares in thedisinvestment process of Public SectorUndertakings / Enterprises and also in themandatory second stage offer to the publicin view of their strategic importance.

(vi) Voting rights on shares issued under theScheme shall be as per the provisions of

Companies Act, 1956 and in a manner inwhich restrictions on voting rights imposedon ADR/GDR issues shall be consistentwith the Company Law provisions.


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Voting rights in the case of bankingcompanies will continue to be interms of the provisions of theBanking Regulation Act, 1949 andthe instructions issued by theReserve Bank from time to time, as

applicable to all shareholdersexercising voting rights.


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(vii) Erstwhile OCBs who are noteligible to invest in India andentities prohibited from buying,selling or dealing in securities bySEBI will not be eligible to subscribeto ADRs / GDRs issued by Indian

companies.


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(viii)The pricing of ADR / GDR issuesshould be made at a pricedetermined under the provisions of

the Scheme of issue of ForeignCurrency Convertible Bonds andOrdinary Shares (throughDepository Receipt Mechanism)

Scheme, 1993 and guidelines issuedby the Government of India anddirections issued by the ReserveBank, from time to time.


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Pricing of sponsoredADRs/GDRs

ix) The pricing of sponsored ADRs/GDRswould be determined under theprovisions of the Scheme of issue of

Foreign Currency Convertible Bonds andOrdinary Shares (Through DepositoryReceipt Mechanism) Scheme, 1993 andguidelines issued by the Government of

India and directions issued by theReserve Bank, from time to time.


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Two-way FunctionalScheme:A (i) limited two-way Functional scheme has

been put in place by the Government ofIndia for ADRs / GDRs. Under this Scheme,a stock broker in India, registered withSEBI, can purchase shares of an Indiancompany from the market for conversioninto ADRs/GDRs based on instructionsreceived from overseas investors.

Re-issuance of ADRs / GDRs would bepermitted to the extent of ADRs / GDRswhich have been redeemed into underlyingshares and sold in the Indian market.


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Sponsored ADR/GDRissue

(ii) Sponsored ADR/GDR issue:An Indian company can alsosponsor an issue of ADR / GDR.

Under this mechanism, thecompany offers its residentshareholders a choice to submit

their shares back to the company sothat on the basis of such shares,

ADRs / GDRs can be issued abroad.


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The proceeds of the ADR / GDR issue areremitted back to India and distributedamong the resident investors who had

offered their Rupee denominated sharesfor conversion. These proceeds can bekept in Resident Foreign Currency(Domestic) accounts in India by the

resident shareholders who have tenderedsuch shares for conversion into ADRs /GDRs.


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The capital instruments should be issuedwithin 180 days from the date of receipt ofthe inward remittance or by debit to theNRE/FCNR (B) account of the non-resident

investor. In case, the capital instrumentsare not issued within 180 days from thedate of receipt of the inward remittance ordate of debit to the NRE/FCNR (B)account, the amount of consideration so

received should be refunded immediatelyto the non-resident investor by outwardremittance through normal bankingchannels or by credit to the NRE/FCNR (B)account, as the case may be.


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Issue price of shares

Issue price of shares to personsresident outside India under the FDIPolicy, shall be on the basis of SEBIguidelines in case of listedcompanies. In case of unlistedcompanies, valuation of shares has

to be done by a CharteredAccountant in accordance with theguidelines issued by the erstwhileController of Capital Issues (CCI).


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Foreign CurrencyAccount

Indian companies which are eligibleto issue shares to persons residentoutside India under the FDI Policymay be allowed to retain the sharesubscription amount in a ForeignCurrency Account, with the prior

approval of RBI.


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Transfer of shares andconvertible debentures

(i) Subject to FDI sectoral policy, foreign investorscan also invest in Indian companies bypurchasing/acquiring existing shares from Indianshareholders or from other non-residentshareholders.

General permission has been granted to non-residents/NRIs for acquisition of shares by way oftransfer subject to the following:

(a) A person resident outside India (other than NRIand erstwhile OCB) may transfer by way of sale orgift, the shares or convertible debentures to any

person resident outside India (including NRIs). (b) NRIs may transfer by way of sale or gift the

shares or convertible debentures held by them toanother NRI.


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(c) A person resident outside India cantransfer any security to a personresident in India by way of gift.

(d) A person resident outside Indiacan sell the shares and convertibledebentures of an Indian company on a

recognized Stock Exchange in Indiathrough a stock broker registered withstock exchange or a merchant bankerregistered with SEBI.


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The Form FC-TRS should besubmitted to the AD Category-IBank, within 60 days from the dateof receipt of the amount ofconsideration. The onus ofsubmission of the Form FC-TRS

within the given timeframe wouldbe on the transferor/transferee,resident in India.


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(ii) The sale consideration in respectof equity instruments purchased bya person resident outside India,

remitted into India through normalbanking channels, shall besubjected to a Know Your Customer

(KYC) check by the remittancereceiving AD Category I bank atthe time of receipt of funds.


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In case, the remittance receiving ADCategory I bank is different fromthe AD Category I bank handling

the transfer transaction, the KYCcheck should be carried out by theremittance receiving bank and the

KYC report be submitted by thecustomer to the AD Category Ibank carrying out the transactionalong with the Form FCTRS.


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