study-9 seting up business units in india fdi.doc

8/14/2019 STUDY-9 SETING UP BUSINESS UNITS IN INDIA FDI.doc

1/13

1. What do you mean by Foreign direct investment? JUNE2010

Ans: Foreign direct investment in its c!assic de"inition isde"ined as a company from one country making a physicalinvestment into building a factory in another country.

Foreign direct investment (FDI) plays an extraordinary and growingrole in global business. It can provide a firm with new markets andmarketing channels, cheaper production facilities, access to newtechnology, products, skills and financing. For a host country or theforeign firm which receives the investment, it can provide a sourceof new technologies, capital, processes, products, organi ationaltechnologies and management skills, and as such can provide astrong impetus to economic development.

Foreign Direct Investment, or FDI, is a measure of foreignownership of domestic productive assets such as factories,land and organizations. Foreign direct investments have becomethe major economic driver of globalization, accounting for over hadof all cross-border investments.

1


2/13

2. #istinguish bet$een the %Financia! co!!aboration& and %technica!co!!aboration

Ans$er 2: Financia! 'o!!aboration v. (echnica! 'o!!aborationFinancia! co!!aboration involves Foreign Direct Investments in the form of !"uity,F##$s, etc., and in (echnica! co!!aboration in involves payment of royalty,

technical know%how fee etc. $oth forms of investment may take place underautomatic route where post facto approval of &$I is obtained when the investment 'payments are within the limits. hen it exceeds the specified limits, it re"uires priorapproval of central government.Foreign #irect )nvestment *Financia! 'o!!aboration+

Foreign Direct Investments (FDI) can be made under the following two routes . *utomatic &oute and

+. overnment &oute'*pproval &oute.

-nder the *utomatic &oute, the foreign investor or the Indian company does notre"uire any approval from the &eserve $ank or Foreign Investment romotion $oardfor the investment.

-nder the overnment &oute, prior approval Foreign Investment romotion $oard(FI $) is re"uired.

Foreign #irect )nvestment in )ndia is a!!o$ed underautomatic route e,ce-t under the "o!!o$ingcircumstances . (i) roposals that re"uire an industrial licence (ii) #ases where foreign investment is more than +/0in the e"uity capital of unitsmanufacturing items reserved for 11Is. (iii) roposals in which the foreign collaborator has a previous venture'tie%up inIndia. (iv) roposals relating to ac"uisition of shares in an existing Indian #ompany in

favour of Foreign'2&I'3#$ investor. (v) roposals falling outside notified sectoral caps (vi) 1ectors where FDI is not permitted. (vii) Investor chooses not to avail automatic route.

(echnica! co!!aboration *Foreign (echno!ogy Agreements+For promoting technological capability and competitiveness of theIndian Industry, ac"uisition of foreign technology is encouragedthrough foreign collaboration agreements. Induction of know%howthrough such collaborations is permitted either through automaticroute or with prior government approval.

*a+ Under FE A /egu!ationsayment of foreign technology collaboration by Indian #ompanies areallowed under automatic route sub4ect to the following limits . the lump sum payments not exceeding -15 + million +. &oyalty payable is being limited to 60 for domestic sales and70 for exports, without restriction on duration of royalty payments.

8he royalty limits are net of taxes and are calculated according tostandard conditions.

2


3/13

9. ayment of royalty upto +0 for exports and 0 for domesticsales is allowed under automatic route for use of trademarks andbrand name of the foreign collaborator without technology transfer.*b+ Under 'om-etition Act 2002*i+ icencing agreements

8he provisions relating to anti%competitive agreements under the#ompetition *ct, +::+ does not restrict the right of any person, torestrain any infringement of intellectual property rights or to imposesuch reasonable conditions as may be necessary for the purposes ofprotecting any of his rights which have been or may be conferred uponhim under the following legislations relating to intellectual propertyright; ; the #opyright *ct, ; the atents *ct, ; the 8rade and ?erchandise ?arks *ct,


4/13

the FDI 1cheme provided they are not under the adverse notice of&eserve $ank ' 1!$I

4. What are the instruments used "or Foreign #irect)nvestment?AN3: 8ype of Instruments available for Foreign Direct Investment!"uity shares ' convertible debentures and preference shares areeligible under Foreign Direct Investment.3ther instruments such as preference shares (non%convertible,optionally convertible or partially convertible) are considered as debtand guidelines applicable for !xternal #ommercial $orrowing (!#$) willapply to such issues.*s far as Debentures are concerned, only those which are fully andmandatorily convertible into e"uity, within a specified time would be

reckoned as part of e"uity under the FDI olicy.5. 'an )ndian com-anies issue Foreign 'urrency 'onvertib!e

5onds *F''5s+?

Ans. F##$s can be issued by Indian companies in the overseasmarket in accordance with the 1cheme for Issue of Foreign #urrency#onvertible $onds and 3rdinary 1hares (8hrough Depository &eceipt?echanism) 1cheme,


5/13

Ans. Bes. Debentures which are fully and mandatorily convertible intoe"uity within a specified time would be reckoned as part of e"uityunder the FDI olicy.

8. What are the "orms in $hich business can be conductedby a "oreign com-any in )ndia?

Ans. * foreign company planning to set up business operations inIndia mayC

Incorporate a company under the #ompanies *ct,


6/13


7/13

11. %hat is the procedure to (e followed after investment is made under the AutomaticRoute or with Government approval)

Ans. ) two stage reporting procedure has to be followed 7!

? *n receipt of share application money :

@ithin 50 days of receipt of share application money/amount of consideration from the nonresident investor, the Indian company is re"uired to report to the #egional 4ffice concerned of the#eserve $an% of India, under whose Aurisdiction its #egistered 4ffice is located, the )dvance#eporting Form, containing the following details 7

.ame and address of the foreign investor/sB Date of receipt of funds and the #upee e"uivalentB .ame and address of the authorised dealer through whom the funds have been receivedB Details of the overnment approval, if anyB and 23+ report on the non resident investor from the overseas ban% remitting the amount of

consideration!

? +pon issue of shares to non$resident investors :

ithin 9: days from the date of issue of shares, a report in Form F#% &% *&8 *together with the following documents should be filed with the &egional 3fficeconcerned of the &eserve $ank of India.

#ertificate from the #ompany 1ecretary of the company acceptinginvestment from persons resident outside India certifying thatC

8he company has complied with the procedure for issue of shares as laiddown under the FDI scheme as indicated in the 2otification 2o. F!?*

+:'+:::%&$ dated 9rd ?ay +:::, as amended from time to time!

8he investment is within the sectoral cap ' statutory ceiling permissible underthe *utomatic &oute of the &eserve $ank and it fulfills all the conditions laiddown for investments under the *utomatic &oute, namely%

a) 2on%resident entity'ies % (other than individuals), to whom it has issued shareshave existing 4oint venture or technology transfer or trade mark agreement in India inthe same field and #onditions stipulated at aragraph /.+ of the #onsolidated FDIpolicy #ircular of overnment of India have been complied with.

7/

2on%resident entity' ies % (other than individuals), to whom it has issued shares donot have any existing 4oint venture or technology transfer or trade mark agreementin India in the same field.

Note G For the purpose of the HsameH field, / digit 2I#


8/13


9/13

; 2egotiation C It is appropriate that negotiations be conducted at thelevel of more senior management.; *ttitude C 2egotiations for alliances should not be entered into withan adverse approach to the opposing party.; ?3- C 8he next step is to prepare memorandum of understanding,

setting out the ob4ectives of the 4oint venture prior to finalising the 4oint venture agreement. 8he ?3- may set out the key features of the proposed 4oint venturearrangements and can represent a broad outline of the definitiveagreement.

; Due Diligence C *fter the parties have agreed on the basic terms ofthe 4oint venture arrangement a fixed period of time is often set inwhich to conduct a detailed and comprehensive review of all

information pertinent to the proposed business venture prior to theexecution of the 4oint venture agreement. 8his process is referred toas Jdue diligenceK.

3E(()N8 U6 7F 5/AN'9 )A)37N 6/7JE'( 7FF)'E3

$-1I2!11 -2I81 I2 I2DI*

)N'7/67/A(E# UN)( UN)N'7/67/A(E# UN)(3

J7)N( W97 7WNE# 5/AN'9 6/7JE'()AN37N

EN(U/E3 3U53)#)/)E3 7FF)'E 7FF)'E 7FF)'E

1 . What are the "unctions o" iaison7""ice;/e-resentative 7""ice 6ro


10/13

indirectly and can not, therefore, earn any income in India. Its role islimited to collecting information about possible market opportunitiesand providing information about the company and its products toprospective Indian customers. It can promote export'import from'toIndia and also facilitate technical' financial collaboration between

parent company and companies in India. *pproval for establishing aliaison office in India is granted by &eserve $ank of India (&$I).

Foreign #ompanies planning to execute specific pro4ects in India canset up temporary pro4ect'site offices in India. &$I has now grantedgeneral permission to foreign entities to establish 6ro


11/13

$hich inc!ude branches;subsidiaries o" its -arent o""ice in)ndia.*pplication for setting up @iaison 3ffice' ro4ect 3ffice' $ranch 3fficemay be submitted in "orm FN' 1 , along with the followingdocumentsC

; !nglish version of the #ertificate'&egistration or ?emorandumand *rticles of *ssociation attested by Indian !mbassy'2otary ublic inthe country of &egistration.

; @atest *udited $alance 1heet of the applicant entity.

FA,-

,. . ow can foreign companies open 0iaison /!ranch office in India)

Ans.

A. @ith effect from February 1, ;010, foreign companies/entities desirous of setting up of -iaison4ffice / $ranch 4ffice &-4/$4' are re"uired to submit their application in Form F.+ along withthe documents mentioned therein to Foreign Investment Division, Foreign (xchange Department,#eserve $an% of India, +entral 4ffice, *umbai through an )uthorised Dealer ban%! his form isavailable at www!rbi!org!in

!. he applications from such entities in Form F.+ will be considered by the #eserve $an%under two routes7

Reserve !an# Route @here principal business of the foreign entity falls under sectorswhere 100 per cent Foreign Direct Investment &FDI' is permissible under the automaticroute!

Government Route @here principal business of the foreign entity falls under thesectors where 100 per cent FDI is not permissible under the automatic route! )pplicationsfrom entities falling under this category and those from .on overnment 4rganisations /.on Profit 4rganisations / overnment $odies / Departments are considered by the#eserve $an% in consultation with the *inistry of Finance, overnment of India!

1. he following additional criteria are also considered by the #eserve $an% while sanctioning-iaison/$ranch 4ffices of foreign entities 7

? 2rac# Record

For $ranch 4ffice C a profit ma%ing trac% record during the immediately preceding fivefinancial years in the home country!

11
http://www.rbi.org.in/http://www.rbi.org.in/http://www.rbi.org.in/


12/13

For -iaison 4ffice C a profit ma%ing trac% record during the immediately preceding threefinancial years in the home country!

3 4et %orth total of paid up capital and free reserves, less intangible assets as per the latest )udited $alance Eheet or )ccount Etatement certified by a +ertified Public )ccountant or any#egistered )ccounts Practitioner by whatever name !

For $ranch 4ffice C not less than GED 100,000 or its e"uivalent! For -iaison 4ffice C not less than GED >0,000 or its e"uivalent!

&. Permission to set up such offices is initially granted for a period of 5 years and this may beextended from time to time by the )uthorised Dealer in whose Aurisdiction the office is set up! he$ranch / -iaison offices established with the #eserve $an%Hs approval will be allotted a +ni"ueIdentification 4um(er &GI.' & www!rbi!org!in/scripts/Fema!aspx '! he $4s / -4s shall alsoobtain Permanent )ccount .umber &P).' from the Income ax )uthorities on setting up theoffices in India!

E. -iaison/$ranch offices have to file an )nnual )ctivity +ertificate &))+s' from the )uditors, asat end of *arch 51, along with the audited $alance Eheet on or before Eeptember 50 of that year,stating that the -iaison 4ffice has underta%en only those activities permitted by #eserve $an% ofIndia! In case the annual accounts of the -4/ $4 are finali ed with reference to a date other than*arch 51, the ))+ along with the audited $alance Eheet may be submitted within six monthsfrom the due date of the $alance Eheet!

,.5. %hat are the permitted activities of 0iaison *ffice/ Representative *ffice)

Ans. ) -iaison 4ffice &also %nown as #epresentative 4ffice' can underta%e only liaison activities,i!e! it can act as a channel of communication between 8ead 4ffice abroad and parties in India! Itis not allowed to underta%e any business activity in India and cannot earn any income in India!(xpenses of such offices are to be met entirely through inward remittances of foreign exchangefrom the 8ead 4ffice outside India! he role of such offices is, therefore, limited to collecting

information about possible mar%et opportunities and providing information about the companyand its products to the prospective Indian customers! ) -iaison 4ffice can underta%e the followingactivities in India 7

i! #epresenting in India the parent company / group companies!ii! Promoting export / import from / to India!

iii! Promoting technical/financial collaborations between parent/groupcompanies and companies in India!

iv! )cting as a communication channel between the parent company and Indiancompanies!

E337N /7UN#@U6Foreign investment in India is governed by Foreign Direct Investment

olicy and sub%section (9) of section of the Foreign !xchange?anagement *ct,


13/13

Foreign investment in India is freely permitted in almost all sectorsexcept for specified prohibited sectors.Foreign Direct Investments (FDI) can be made under *utomatic &outeand overnment &oute'*pproval &oute.

Eoint enture in India can be either by setting up a new company or in

an existing company.-tate whether the following statement is 62rue7 or 6False74ne of the %ey attractions of Aoint ventures is their non flexibility!? rue? False1orrect answer: False

1hoose the correct answerEetting up of wholly owned subsidiaries &@4E' and

study-9 seting up business units in india fdi.doc

Documents