Summary Of The Consolidated FDI Policy, April 2010

The Government of India released the new document on FDI policy on March 31, 2010 whereby this document now consolidates all existing regulations related to FDI contained in the Foreign Exchange Management Act (FEMA), RBI Circulars and various press notes issued at various points in time. The comprehensive policy document came into effect from April 1, 2010 and would be replaced every 6 months after incorporating the changes which have been effected during the said period. All earlier Press Notes/Press Releases/Clarifications on FDI issued by DIPP in force and effective as on March 31, 2010 stand rescinded as on March 31, 2010 and are accordingly consolidated and subsumed in the present Circular.

The Circular has six chapters dealing with the issues related to (i) intent and objective (ii) definitions (iii) origin, type, eligibility, conditions and issue/transfer of investment (iv) calculation, entry route, caps, entry conditions of investment (v) policy on route and sectoral caps and (vi) remittance, reporting and violations related to FDI.

Under the Consolidated circular “Capital” is defined as equity shares, fully & compulsorily convertible preference shares and fully & compulsorily convertible debentures.

It is mentioned that instruments such as warrants, partly paid up shares etc are not considered as capital and hence cannot be issued to a person resident outside India. Hitherto, there was no explicit guidance on the status of warrants and partly paid up shares and applications were considered by the FIPB on a case-by-case basis. According to the FIPB Review 2009, the DIPP is in the process of working out a policy on warrants and partly paid shares. It is unclear whether the window for FIPB approval would continue to be available.

Important Features Under Each Chapter
1. Intent and Objective
With the issue of consolidated FDI policy, all earlier Press Notes / Press Release / Clarifications on FDI issued by DIPP stand rescinded and subsumed in the present Circular.

Government has clarified that the policy pronouncement on FDI by Press Notes/ Press Releases shall take effect from the date of issue of press notes/ press releases regardless of the procedural instructions which shall be issued by the Reserve Bank of India (RBI) vide relevant A.P. DIR series circulars for amending Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.

The Circular has been issued with the sunset clause of six months. A new Circular consolidating all amendments to the FDI Policy shall be issued on September 30, 2010 superseding the present Circular.

2. Origin, Type, Eligibility, Conditions and Issue / Transfer of Investments
Foreign Institutional Investors (Flls) are permitted to invest in the capital of an Indian company either under the FDI Scheme or under the Portfolio Investment Scheme. It has been specifically provided that 10% individual limit and 24% aggregate limit for Fll investment would be applicable even if the Flls investment is made under the FDI scheme.

Under the extant FDI Policy, Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures (FCD’s) and compulsorily and mandatorily convertible preference shares (CCPS) to the non residents subject to pricing guidelines/valuation norms prescribed under FEMA. It has been specifically clarified that for FCD’s/ CCPS, pricing of the instruments would need to be decided / determined upfront at the time of issue of these instruments.

Also, issue of warrants, partly paid shares etc. are not considered as capital and hence cannot be issued to person resident outside India, without obtaining prior approval of Foreign Investment Promotion Board (FIPB).

Issue of non-convertible, optionally convertible or partially convertible preference shares / debentures would need to comply the External Commercial Borrowing (ECB) Guidelines. Since these instruments are denominated in Rupees, the rupee interest rate will be based on the swap equivalent of London Interbank offered Rate (LIBOR) plus the spread permissible for ECBs of corresponding maturity.

It has been clarified that prior approval of FIPB followed by permission from RBI would be required for transfer of equity shares / FCD’s/ CCPS from residents to non residents by way of sale or otherwise if the Indian company is engaged in any sectors falling under the Government route.

Prior permission from RBI would also be required if the transfer of equity shares / FCD’s/ CCPS from residents to non residents by way of sale is at a price which is not in accordance with the pricing guidelines specified by RBI.

3. Guidelines for consideration of FDI proposals by FIPB
Government’s decisions on FDI Proposals would be communicated by the FIPB within a time frame of thirty (30) days. While considering proposals, FIPB can prioritize the following:
# Proposals for infrastructure sector.
# Proposals having export potential.
# Proposals with large scale employment potential especially for rural areas.
# Proposals that are directly or indirectly related to agro business/farm sector.
# Proposals having greater social relevance such as hospitals, human resource development, life saving drugs and equipment.
# Proposals resulting in induction of technology or infusion of capital.

4. Sectoral Caps and Conditions:
Prohibition of FDI in India:
FDI is prohibited in the following activities/sectors:
(a) Retail Trading (except single brand product retailing)

(b) Atomic Energy

(c) Lottery Business including Government /private lottery, online lotteries,etc.

(d) Gambling and Betting including casinos etc.

(e) Business of chit fund

(f) Nidhi company

(g) Trading in Transferable Development Rights (TDRs)

(h) Real Estate Business or Construction of Farm Houses

(i) Activities / sectors not opened to private sector investment.

1.Agriculture and Animal Husbandry:
100% FDI is allowed under Automatic route which includes only Floriculture, Horticulture, Development of seeds, Animal husbandry, Pisciculture, Aquaculture and cultivation of vegetables and Mushrooms under controlled conditions and services related to agro and altered sectors.

2.Tea Plantation:
100% FDI is allowed under Government route subjected to following conditions:
1. Compulsory divestment of 26% equity of the company in favour of an Indian Partner within five years
2. Prior approval of state Government in case of acquiring any land in future.

3.Mining:
100% FDI is allowed under automatic route.

4.Alcohol – Distillation and Brewing:
100% FDI is allowed under automatic route.

5.Cigars and Cigarettes Manufacturing:
100% FDI is allowed under Government route.

6.Coffee and Rubber Processing and Ware housing:
100% FDI is allowed under automatic route.

7.Defence Industry:
26% FDI is allowed under Government route.

8.Hazardous Chemicals:
100% FDI is allowed under automatic route.

9.Industrial Explosives:
100% FDI is allowed under Government route.

10. Drugs and Pharmaceuticals including those involving use of recombinant technology:
100% FDI is allowed under automatic route.

11. Electric Generation, Transmission, Distribution and Trading:
FDI upto 100% is permitted under automatic route subject to the provisions of the Electricity Act 2003.

12. Advertising and Films:
100% FDI under the automatic route is allowed in Advertising sector

13. Airports:
(a) Greenfield projects- FDI upto 100% is allowed under the automatic route.
(b) Existing projects- FDI upto 100% is allowed. The investment upto 74% is under the automatic route and beyond 74% under the Government route.

14. Air Transport Services:
(a) Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline - FDI up to 49% and investment by Non-resident Indians (NRI) up to 100% allowed on the automatic route.
(b) Non-Scheduled Air Transport Service/ Non-Scheduled airlines, Chartered airlines, and Cargo airlines- FDI up to 74% and investment by Non-resident Indians (NRI) up to 100% allowed. FDI in on the automatic route upto 49% and on the Government route beyond 49% and upto 74%.
(c) Helicopter services/seaplane services requiring DGCA approval- FDI up to 100% allowed on the automatic route.

15. Banking –Private sector:
FDI limit in Private Sector Banks is 74 % including investment by FIIs. FDI as above upto 49% is under the automatic route and beyond that upto 74% on the Government route.

16. Banking- Public Sector:
FDI and Portfolio Investment in nationalized Banks are subject to overall statutory limit of 20% under Government route as per section 3(2D) of the Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80.

17. Terrestrial Broadcasting FM (FM Radio):
Foreign investment, including FDI, NRI and PIO investments and portfolio investments are permitted up to 20% equity for FM Radio’s Broadcasting Services with prior approval of the Government subject to such terms and conditions as specified from time to time by Ministry of Information and Broadcasting for grant of permission for setting up of FM Radio Stations.

18. Cable Network:
Foreign investment, including FDI, NRI and PIO investments and portfolio investments are permitted up to 49% for Cable Networks under Government route subject to Cable Television Network Rules, 1994

19. Direct –to-Home:
Foreign investment, including FDI, NRI and PIO investments andportfolio investments are permitted up to 49% for Direct to Home under Government route. Within the limit of 49%, FDI will not exceed 20%.

20. Headend-In-The-Sky (HITS) Broadcasting Service:
The total direct and indirect foreign investment including portfolio and foreign direct investment in HITS shall not exceed 74%. FDI upto 49% would be on automatic route and beyond that under government route.

21. Business Services-
100% FDI under the automatic route is allowed in Data processing, software development and computer consultancy services; Software supply services; Business and management consultancy services, Market Research Services, Technical testing& Analysis services.

22. Construction and maintenance:
100% FDI is allowed under the automatic route in Construction and maintenance of-roads, rail-beds, bridges, tunnels, pipelines, ropeways, runways, waterways & water reservoirs, hydroelectric projects, power plants and industrial plants.

23. Ports and Harbours:
100% FDI is allowed under the automatic route FDI up to 100% under the automatic route in townships, housing, built-up infrastructure and construction-development projects.

24. Courier services for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898:
100% FDI is allowed under the Government route. Indian Post Office Act 1898

25. Credit Information Companies (CIC):
Foreign investment consisting of FDI and FII upto 49% is permitted under the Government route, subject to regulatory clearance from RBI. Such FII investment would be permitted subject to the conditions that:
(a) No single entity should directly or indirectly hold more than 10% equity.
(b) Any acquisition in excess of 1% will have to be reported to RBI as a mandatory requirement; and
(c) FIIs investing in CICs shall not seek a representation on the Board of Directors based upon their shareholding.

26. Health and Medical Services:
100% FDI is allowed under the automatic route

27. Hotels and Tourism related Industry:
100% Foreign Investment is allowed under automatic route.

28. Industrial Parks - both setting up and already established Industrial Parks:
FDI up to 100% is permitted under the automatic route in Industrial Parks.

29. Insurance:
FDI up to 26% in the Insurance sector, as prescribed in the Insurance Act, 1999, is allowed under the automatic route.

30. Non-Banking Finance Companies (NBFC):
100% foreign investment in NBFC is allowed under the automatic route in the following activities:

1. Merchant Banking
2. Under Writing
3. Portfolio Management Services
4. Investment Advisory Services
5. Financial Consultancy
6. Stock Broking
7. Asset Management
8. Venture Capital
9. Custodian Services
10. Factoring
11. Credit Rating Agencies
12. Leasing & Finance
13. Housing Finance
14. Forex Broking
15.Credit Card Business
16. Money Changing Business
17. Micro Credit
18. Rural Credit


31. Venture Capital Fund (VCF):
A Foreign Venture Capital Investor(FVCI) may contribute upto 100% of the capital of an Indian Venture Capital Undertaking and may also set up a domestic asset management company to manage the fund.

32. Petroleum & Natural Gas Sector:
FDI up to 100% under the automatic route is permitted in exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products, actual trading and marketing of petroleum products, petroleum product pipelines, natural gas/LNG pipelines, market study and formulation and Petroleum refining in the private sector.

33. Print Media
Publishing of Newspaper and periodicals dealing with news and current affairs: Foreign investment, including FDI and investment by NRIs/PIOs/FII, up to 26%, is permitted under the Government route.

34. Research and Development Services excluding basic Research and setting of R&D/ academic institutions which would award degrees/diplomas/certificates:
100% FDI is allowed under the automatic route

35. Security agencies in Private Sector:
In accordance with the provisions of Private Security Agencies (Regulation) Act, 2005, FDI upto 49% is permitted under approval route, subject to licensing conditions specified therein. Earlier there were no guidelines regarding foreign investment in security agencies.

36. Satellites – Establishment and operation:
FDI upto 74% is allowed under Government route subjected to the sectoral guidelines of Department of Space/ISRO.

37. Storage and Warehouse Services:
100% FDI is allowed under the automatic route in Storage and Warehousing including warehousing of agricultural products with refrigeration (cold storage).

38. Telecom services:
Foreign Direct Investment limit in telecom services is 74 percent. FDI up to 49 percent is on the automatic route and beyond that on the Government route.

39. Trading:
100% FDI is permitted under the automatic route for trading companies

40. Transport and Transport Support Services:

4. Remittance
Sale proceeds of shares and securities and their remittance is ‘remittance of asset’ governed by The Foreign Exchange Management (Remittance of Assets) Regulations 2000. AD Category – I bank[1] can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis. They are also been allowed to remit winding up proceeds of companies in India, which are under liquidation, subject to payment of applicable taxes.

5. Reporting
Reporting of Inflow
An Indian company receiving investment from outside India for issuing shares / convertible debentures / preference shares under the FDI Scheme, should report the details of the amount of consideration to the Regional Office concerned of the Reserve Bank not later than 30 days from the date of receipt.

Indian companies are required to report the details of the receipt of the amount of consideration for issue of shares / convertible debentures, through an AD Category – I bank. The report would be acknowledged by the Regional Office concerned, which will allot a Unique Identification Number (UIN) for the amount reported.

Reporting of issue of shares
After issue of shares, fully, mandatorily & compulsorily convertible debentures / fully, mandatorily & compulsorily convertible preference shares, the Indian company has to file Form FC-GPR, not later than 30 days from the date of issue of shares.

Reporting of transfer of shares
Reporting of transfer of shares between residents and non-residents and vice- versa is to be done in Form FC-TRS to the AD Category I bank within 60 days from the date of receipt of the amount of consideration.

Reporting of Non-Cash
Details of issue of shares against conversion of ECB have to be reported to the Regional Office concerned of the RBI both in case of full conversion and partial conversion or utilized abroad as per the extant Reserve Bank guidelines.

6. Repatriation
Dividends are freely repatriable without any restrictions. The repatriation is governed by the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, as amended from time to time. Interest on fully, mandatorily & compulsorily convertible debentures is also freely repatriable without any restrictions (net of applicable taxes). The repatriation is governed by the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, as amended from time to time.

7. Penalty
FDI is a capital account transaction and thus any violation of FDI is covered by the penal provisions of the FEMA. Any contravention of FDI Regulations including any press note / press release / guidelines / direction issued by the Government shall be liable for a penalty as provided under FEMA which could be thrice the sum involved in such contraventions where such amount is quantifiable, or up to Rupees 200,000 where the amount is not quantifiable, and where such contraventions is a continuing one, further penalty which may extend to Rupees 5,000 for every day during which the contraventions continues may be imposed.

Conclusion
The Circular is a convenient compendium of the FDI Policy of the Government of India. Some of the salient features highlighted in this alert reflect changes in interpretation of FDI Policy. Also clearer guidance has been provided with regard to the intent of the FDI policy. It is likely that some of these changes may have an impact on existing foreign investments, which would need to be reviewed on a case specific basis.
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[1] AD Category-I Bank’ means a bank( Scheduled Commercial, State or Urban Cooperative) which are authorized under Section 10(1) of FEMA to undertake all current and capital account transactions according to the directions issued by the RBI from time to time

The  author can be reached at: mohanroy@legalserviceindia.com