Nabin Ballodia

July 9, 2011

Foreign Direct Investment in India

2

Agenda

Entry Route

Sectoral Caps

Downstream Investment

Swap of shares

Shares for non-cash consideration

Overview

3

Overview

4

FDI Policy

• Objective of India’s FDI Policy to invite and encourage foreign investment in India

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

• The Department of Industrial Policy & Promotion (DIPP), the Foreign Investment Promotion Board (FIPB) and Secretariat of Industrial Assistance (SIA) regulate the FDI Policy

• The administrative and compliance aspects of FDI are monitored by the RBI

• Consolidated half yearly policy document - subsumes all Press notes etc

5

Entry Routes

6

Entry Routes

Only for cases other than Automatic Route and those mentioned in sectoral policy

Applies to investment over 24% in SSI reserved items

Investments by citizens / entity incorporated in Bangladesh

Government Route

Allowed for Most sectors

Limits : Sectoral caps/ stipulated sector specific guidelines

Inward remittances through proper banking channels

Pricing valuations prescribed

Post facto filing with 30 days of fund receipt

Filings within 30 days of share allotment

Includes Technical Collaboration/ Brand Name/ Royalty

Automatic Route

FDI Guidelines for Investing in India

Foreign Investment Promotion Board (FIPB)

No Prior Regulatory Approval but only Post Facto Filings to RBI, through

AD

7

Entry Routes

Existing Airports

100%

Asset Reconstruction Companies

49%

Titanium Minerals

100%

Broadcasting (a)

Courier

100%

Print Media (a)

26%

Single brand retailing

51%

Agriculture (b)

Atomic energy

Retail trading (except single brand up to 51%)

Lottery, betting and gambling

Chit fund, Nidhi company

Trading in Transferable Development Rights

Cigars & Cigarettes

Negative List

(Illustrative)

Government Route

(Illustrative)

NBFC (minimum capitalization norms)

IT / ITes

Financial services(a)

Telecom Sector (74% cap)(a)

Insurance (26 % cap)(a)

Real Estate(a)

Special Economic Zones

Infrastructure

Shipping

Manufacturing sector

Hotels and tourism

Automatic Route

(Illustrative)

Note: (a) Sector specific guidelines (b) Subject to certain exceptions

FDI limits – Illustrative list

8

FDI Policy – Procedural Aspects

• Applications can be filed online/physically – mandatory preliminary application

• Intimation of receipt of share application money – within 30 days

• Allotment of shares within 180 days of receipt of funds

• Funds against which shares not allotted to be refunded

• For transfer of shares file Form FC-TRS within 60 days of receipt of consideration

• Downstream investment by Indian companies to be notified to SIA, DIPP and FIPB within 30 days of investment

• Onus on transferor/ transferee, resident in India

9

Sector Specific Caps

10

Snapshot of Certain Specific Sectors

Sector / Activity % of FDI Cap / Equity Route

Real estate i.e. ( Development of Townships, Housing, Built-up infrastructure and Construction-development projects)

100% Automatic

Trading(i)Cash & Carry Wholesale Trading / Wholesale Trading

(ii)Single Brand Product Trading

100%

51%

Automatic

Government

NBFC 100% Automatic

Defence 26% Government

11

Real Estate

• For business of development of townships, housing, built-up infrastructure and construction-development projects

• Illustrative list

Commercial premises,

Hotels & resorts

Hospitals,

Educational institutions,

Recreational facilities,

City and regional level infrastructure

• FDI is not allowed in Real Estate business, construction of farm houses

12

Real Estate

• Real Estate Investment subject to the following conditions:

Parameter Condition

1. Area For development of serviced housing plots

Minimum 10 Hectare

Construction development projects Minimum 50,000sq.mtrs

2. Capitalization WOS Minimum USD 10 Million

JV with Indian partner Minimum USD 5 Million

3. Repatriation of Original Investment

Lock in of 3 years

4. Timeline for development 50% of project, within 5 years of statutory clearances – restriction on undeveloped projects

5. Norms and standard To conform as laid by respective local/state authorities

6. Responsibility for seeking approval

On the investor / investee company

Conditions (1) to (4) would not apply to Hotel & Tourism, Hospitals and SEZs as well as investment by NRIs

13

Trading- Cash & Carry Wholesale trading/ Wholesale trading (WT)

Sale of goods/merchandise to

• Retailers,

• Industrial users,

• Commercial users,

• Institutional users,

• Other professional business users,

• Other wholesalers and related subordinated service providers,

• Resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales, or

• B2B e-Commerce

Type of customers to whom the sale is made

Cash & Carry Wholesale trading/

Wholesale trading

Sale to qualify for WT, it should primarily be for the purpose of

trade, business or profession and not personal consumption

Yardstick for Determination whether sale is WT

Size and volume of sales

14

• Requisite licenses/registration under the relevant State / Central legislations

• Sales by the wholesaler (except to Government) to qualify as above if made to entities :

Holding sales tax/ VAT /service tax/excise registrations; or

Holding trade licenses under Shops and Establishment Act; or

Holding license for undertaking retail trade (like tehbazari and similar license for

hawkers); or

Registered as a society or public trust for their self consumption

• Maintenance of full records indicating all the details of such sales on a day to day basis

• WT to group companies - limited to 25% of the total turnover of the wholesale venture

• WT as per normal business practice - including extending credit facilities

• Restriction on opening retail shops to sell to the consumer directly.

Trading- Cash & Carry Wholesale trading/ Wholesale trading (WT)

15

Trading- Single Brand product trading

• Conditions to be satisfied

Products to be sold should be of a ‘Single Brand’ only

Products should be sold under the same brand internationally

Covers only products which are branded during manufacturing

• Application to indicate product/ product categories - any additions require a fresh

approval

16

NBFC

• FDI in NBFC is allowed under the automatic route in only the following activities:

x. Factoring

xi. Credit Rating Agencies

xii. Leasing & Finance

xiii. Housing Finance

xiv. Forex Broking

xv. Credit Card Business*

xvi. Money Changing Business

xvii.Micro Credit

xviii.Rural Credit

i. Merchant Banking

ii. Under Writing

iii. Portfolio Management Services

iv. Investment Advisory Services

v. Financial Consultancy

vi. Stock Broking

vii. Asset Management

viii. Venture Capital

ix. Custodian Services

* Credit Card business includes issuance, sales, marketing & design of various payment products such as credit cards, charge cards, debit cards, stored value cards, smart card, value added cards etc.

17

NBFC

• Investment would be subject to the following minimum capitalisation norms:

• 100% foreign NBFCs with minimum USD 50 million can set up step down subsidiaries for specific NBFC activities,

No restriction on the number of operating subsidiaries/minimum capital.

• NBFCs with 75% or less FDI can also set up subsidiaries for undertaking other NBFC activities

Subsidiaries should also comply with the min cap norms stated above

Foreign Capital Share Minimum Amount of Funds

i. Upto 51% USD 0.5 Million, to be brought upfront

ii. More than 51% but up to 75% USD 5 Million, to be brought upfront

iii. More than 75% USD 50 Million, out of which USD 7.5 million to be brought upfront ; balance in 24 months.

18

NBFC – Non- Fund based activities

• Investment in Non-Fund based activities would be subject to the following -

• Such NBFC is not permitted

to set up any subsidiary for any other activity, nor

to participate in any equity of an NBFC holding/operating company

• Following activities classified as Non-Fund based activities:

Investment Advisory Services

Financial Consultancy

Forex Broking

Money Changing Business

Credit Rating Agencies

Foreign Capital Share Minimum Amount of FundsIrrespective of share USD 0.5 Million to be brought upfront for all permitted non-fund

based NBFCs irrespective of the level of foreign investment

FDI in NBFC is subject to compliance with guidelines by RBI and other relevant regulators

19

Defence

• Applications to be considered by the DIPP, MoCI and MoD

• Applicant should be an Indian company/firm.

• Management of applicant in Indian hands [Board / Chief Executives Indian resident)

• Full particulars of the Directors / Chief Executives to be furnished along with the

applications.

• Government to verify the background of foreign collaborators / domestic promoters

including

• No minimum capitalization, however adequate Net Worth of foreign investor

important

• Three-year lock-in period for transfer of equity from one NR to another

Such transfer would be subject to prior approval of the FIPB

20

Indirect & Downstream Investment

21

Downstream Investment

• FDI in a company can be in two forms

Direct : A non-resident investing directly in an Indian company, or

Indirect : Investment by one Indian company into another, wherein the former has

foreign investment in it.

• Indirect can also be a cascading investment i.e. through multi-layered structure

• For the purpose of FDI, Foreign Investment shall include all types of foreign investments

i.e.

• FDI

• Investment by FIIs; NRIs; ADRs; GDRs; FCCB;

• Fully, compulsorily and mandatorily convertible preference shares and

• Fully, compulsorily and mandatorily convertible Debentures.

22

Downstream Investment

• FI in pure investing company – Approval route

• For other companies – Foreign investment subject to sectoral FDI policy conditions

• Reporting requirements within 30 days of investment with DIPP/ FIPB introduced

• Issue / transfer / pricing / valuation as per SEBI / RBI guidelines

• Indian company making downstream investment not permitted to leverage funds

from domestic market

23

Calculation of Indirect FDI

F Co.

I Co1

Overseas

India

I Co1

Overseas

India

I Co2

F Co.

Direct FI

Direct Foreign Investment

Indirect Foreign Investment

Indirect FI

Total FI is sum of Direct FI and Indirect FI

24

Calculation of Indirect FDI

RIC means:

•‘Resident Indian Citizen’ as interpreted / in line with the definition of ‘person resident in India’ as per FEMA 1999, read in conjunction with the Indian Citizenship Act; and/or

•Indian Companies (Companies registered / incorporated in India) which are ultimately owned and controlled by ‘Resident Indian Citizens’

Non Resident Entity (NRE) means:

•A ‘person resident outside India’ as defined under FEMA 1999

‘Owned’ by RIC means:

•If more than 50% of capital in Indian Company is beneficially owned by RIC/ICO owned and controlled by RIC

Owned by NRE means:

•If more than 50% of capital in Indian Company is beneficially owned by non-residents

‘Controlled by’ means:

•Power to appoint majority of directors in the Indian Company

25

Calculation of Indirect FDI

I Co1

Overseas

India

I Co2

NRE

If ICO2 & ICO1 owned and controlled by RIC, investment by ICO1 in ICO2 is not indirect FDI

1

If ICO1 is owned or controlled by NRE, investment by ICO1 in ICO2 is considered indirect FDI

2

• FI to include all types of foreign investments

• For RIC own and control are cumulative conditions; for NRE these are non-cumulative

• The methodology to apply to every stage of investment at Indian company

If ICO1 holds 100% in ICO2, NRE investment in ICO1 is considered indirect FDI in ICO2

3

26

Calculation of Indirect FDI

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

Non Resident Entity (‘NRE’)

I Co1 (Owned and Controlled by RIC)

I Co2 (Owned and Controlled by RIC)

Overseas

India40%

10%

39%

Rule 1

Direct FI in I Co2 = 39%

Indirect FI in I Co2 = 10%

Total FI in I Co2 = 49%

NRE

I Co1 (Owned or Controlled by NRE)

I Co2 (Owned and Controlled by RIC)

51%

10%

39%

Rule 2

27

Calculation of Indirect FDI

Indirect FI in I Co2 = 75%

Non Resident Entity (‘NRE’)

I Co1 (Investing/ operating cum

investing company)

I Co2

Overseas

India75%

100% RIC

25%

Indirect FI in I Co2 = NIL or 26%?

Non Resident Entity (‘NRE’)

I Co1 (Investing/ operating cum

investing company)

I Co2

Overseas

India26%

100%

74%

What is indirect FDI in near 100% say 99% held companies?

Rule 3

28

Investment by way of Swap of Shares

29

Swap of Shares

F Co 1

I Co

F Co 2

India

Issue of shares

Transfer of sharesOutside India

Existing Structure

F Co 1

I Co

F Co 2

Equity

Resulting Structure

Equity

Mechanics

• To start with - F Co 1 holds shares in F Co 2, I Co not in structure

• I Co acquires the shares of F Co 2 from F Co 1

• As a consideration, I Co issues its own shares to F Co 1

30

Swap of Shares

• Approval required from the FIPB for such transaction

• Irrespective of the amount, valuation of shares to done either by

by a Category I Merchant Banker registered with SEBI, or

An Investment Banker outside India registered with the appropriate authority

of the host country

• Share valuation norms to be complied under both the legs: ODI and the FDI

• Overseas investment to comply with ODI guidelines and inward issue of shares to FDI

policy

31

Issue of shares for Non-cash consideration

32

Shares for Non-cash consideration

• Shares to be issued to a non-resident against receipt of funds through normal banking channels

• If the funds not received through normal banking channels, prior approval of the Government required

• Exception to the above condition

Shares are to be issued against ECB and/or

Shares are to be issued against royalty payments (including lump-sum technical know-how fees)

• Issue of shares for non-cash consideration also extended under the approval route for following -

Import of capital goods/ machinery/ equipment (including second-hand machinery), subject to conditions

Pre-operative/ Pre-incorporation expenses (including payments of rent etc.), subject to conditions

33

Shares for Non-cash consideration

• For import of capital goods/ machinery/ equipment -

Import as per the Export / Import Policy as notified by the DGFT and RBI

Independent valuation by a third party entity from importing country with documents

Application to indicate beneficial ownership and identity of importer / exporter

All such conversions should be completed within 180 days from the date of shipment of goods.

• For pre-operative/ pre-incorporation expenses -

Submission of FIRC for remittance of funds

Verification / certification of the pre-incorporation/ pre-operative expenses by statutory auditor;

Payments to be made directly by the foreign investor to the company.; and

Capitalization be completed within the stipulated period of 180 days

• Special Resolution to be passed by the company for conversion• Government approval subject to pricing guidelines of RBI and appropriate tax

clearance

34

Shares for Non-cash consideration

Pre-incorporation

Incorporated but not operational(Pre-operational)

Set-up or Commencement of business

Indian Company not in existence– Payment cannot be made to the Indian Company

Payments to be directly made to Indian Company’s bank account and FIRCs to explicit mention that funds remitted to meet “pre-operative” expenses

Shares cannot be issued in lieu of payment made by Foreign Investor towards “Pre-incorporation” expenses

Shares can be issued in lieu of foreign direct inward remittances made by Foreign Investor towards “Pre-operative” expenses

Issue

Definition / meaning of pre-operative / pre-incorporation expenses not provided

Trigger point for time period of 180 days for issue of shares not clear

Past transactions may not get covered

Bank Account opened subsequent to issue of PAN

Nabin Ballodia

July 9, 2011

Thank You

36

Calculation of Indirect FDI

Different methods of computing Indirect FI prescribed for different sectors. E.g.- Telecom : Proportionate method

- Investing companies in Infrastructure sector : Management + Ownership Test

F Co.

I Co1

Overseas

India

Telecom sector

I Co2

90%

60%

FI in I Co2 is 54% (90*60%)

I Co1*

Overseas

India

Infrastructure sector

I Co2

49%

100%

FI in I Co2 is NIL

F Co.

*Management of I Co1 with Indians

Erstwhile Regulations