Foreign Direct Investment - Emerging Issues & Recent Developments

Ravi Shingari

24 December 2011

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• Slow rate of growth

• Bureaucratic

• Protected and slow

• Small consumer markets

• Weak infrastructure

India Transformed!!

…Yesterday

…Today

• Strong macro economic fundamentals

• Encouraging foreign investment

• Outsourcing destination

• Growing consumerism

• Impetus on infrastructure development

India -- the largest Democracy - one of the fastest growing economies in the

World!

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Foreign Direct Investment Policy

• Foreign Direct Investment – cross border investment with an objective to establish ‘lasting interest’

• Objective - to encourage FDI to promote industrial & socio-economic development; supplement domestic capital/ technology

• Administrative and compliance aspects of FDI monitored by Reserve Bank of India (‘RBI’)

Since 1991, policy has been liberalized substantially to facilitate foreign investment

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Foreign Direct Investment in IndiaA snapshot

→ Mauritius and Singapore are the favorite jurisdictions for investment into India

→ Foreign investment from Mauritius constituting 41%* of India’s total FDI

* April 2011 – September 2011

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Foreign Direct Investment in IndiaSector-wise - April 2000 – September 2011

FDI in Retail

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Current FDI Guidelines - Snapshot

Cash and carry whole sale trading;E-commerce – B2B only

100% FDI permitted under automatic route

FDI permitted with prior government approval

Multi-brand retail tradingFDI still prohibited

Formats used by foreign brands to enter India

Pizza Hut, McdonaldsFranchise model

Metro, Wal-mart, TescoCash And Carry Wholesale Trading

Marks & Spencer

Foreign investment upto 51% for Single brand retail trading;Single brand retail trading can be for multiple productsSubject to the following conditions:

• Products to be sold should be of a ‘Single Brand‘ only• Products should be sold under the same brand internationally• Products which are branded during manufacturing• The foreign investor should be the owner of the brand

Single brand

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Current FDI Guidelines - Emerging Issues

Wholesale trading between ‘Same Group’should not exceed 25%

“Same Group” not defined in the FDI policy

Discrepancy between RBI & DIPP circular over

trading of goods manufactured by Small

Scale Industries

FDI in Single-Brand retail restricted to 51%

FDI in Multi-Brand retail prohibited

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Proposed Change

− 50 percent of foreign investment to be invested in back-end infrastructure (manufacturing facility, processing, design, quality control, warehousing, packaging, logistics and storage);

− Stores may be set-up in cities with population of 1 million or more;

− Pre-condition of 30 percent procurement/ manufacturing/ processing from Small Scale Industries (units with investment in plant and machinery not exceeding USD 1 million);

− Government would have the first right to procure agriculture products;

− Self-certification by the Companies to ensure adherence to guidelines, and these may be cross-checked by the Government, if required

• 100% FDI proposed in Single Brand Retail subject to conditions

• No additional conditions to be imposed other than before

• 51% FDI proposed in Multi Brand Retail under Approval Route

• Key conditions likely to be introduced (as currently available in the public domain):

− All branded items are likely to be covered within the ambit of multi-brand retailing. Additionally, unbranded items being fresh agriculture produce, fruits, vegetables, flowers, groceries and meat products are likely to be covered;

− Minimum foreign investment is likely to be USD 100 million;

Government has recently announced the above proposed changes, however, the same have resulted in severe criticism from opposition parties and nation-wide protests; Under pressure from the opposition parties, the Government has currently put the proposed regulation “on hold” until further discussion in the Parliament

FDI in Real Estate

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Real Estate - Regulations

Conditions•Minimum area to be developed under each project (minimum land area of 10 hectares for serviced housing plots and minimum built-up area of 50,000 square meters for construction-development projects);

•Minimum capitalisation of USD 10 million for a wholly-owned subsidiary and USD 5 million for a joint venture with an Indian partner;

•Minimum 3-year lock in (original investment cannot be repatriated) from completion of minimum capitalisation;

•Funds must be brought into India within 6 months of commencement of business;

•Undeveloped plots are not permitted to be sold; and

•50% of the project must be developed within 5 years from the date of obtaining all statutory clearances

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Real Estate – Issues

FDI permitted in Greenfield projects only

Meaning of the term “commencement of

business”

Meaning of the term “built-up area”

FDI in Insurance

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Insurance - Regulations

Proposal to increase the cap on FDI from 26% to

49% - rejected

Transfer of shares from resident to non-resident

require Government approval

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Presentation byRavi Shingari+919810300390rshingari@kpmg.com