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Foreign Investment Shroff

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  • 1. Amarchand & Mangaldas & Suresh A. Shroff & Co. Amarchand Towers, 216, Okhla Industrial Estate, Phase-III, New Delhi - Tel: (91-11) 2492-0500 Fax:(91-11) 2692-4900 Email: shardul.shroff@amarchand.com By Shardul Shroff Privileged & Confidential FOREIGN INVESTMENT IN INDIA The Impact of Press Notes 2, 3 and 4 of 2009 August 26, 2009
  • 2. Outline
    • Foreign Investment Policy: A Historical Overview
    • Foreign Investment: Facts and Figures
    • Legal Framework Governing Foreign Investment
    • Press Note 2 of 2009 – 13 th Feb 2009
    • Press Note 3 of 2009 – 13 th Feb 2009
    • Press Note 4 of 2009 – 25 th Feb 2009
    Privileged & Confidential
  • 3. FOREIGN INVESTMENT POLICY A HISTORICAL OVERVIEW Privileged & Confidential
  • 4. A Historical Overview: Pre-2000
    • Pre-1991
      • “ Careful regulation” of foreign capital and enterprise – FERA
      • Hardly any foreign inflows, mostly reliance on foreign debt
    • 1991-92
      • Balance of payments crisis led to IMF-induced liberalization
      • Automatic route (Annexure III) – FI <= 51% permitted in various sectors
      • Portfolio investment by FIIs allowed
    Privileged & Confidential
  • 5. A Historical Overview: Pre-2000
    • 1996-97
      • FIPB set up - facilitation of expeditious approvals through nodal agency
      • Automatic route expanded with increase in sectoral caps
    • 1999
      • FEMA - Fundamental shift in philosophy and liberalization
    Privileged & Confidential
  • 6. A Historical Overview: Post-2000
    • Sectoral classification
      • Prohibited List
      • Approval Route – with / without sectoral caps
      • Automatic Route - with / without sectoral caps ( most sectors)
        • Shift from ‘Positive List’ to ‘Negative List’
    • FDI sectoral caps exclusive of FII investment
      • Per recommendations of Expert Committees (2004 & 2005)
    • Some Grey Areas
      • “ Opco Holdco” issue
      • FIPB approval for issue of warrants
      • FII v. FDI
      • FVCI regime
    Privileged & Confidential
  • 7. FOREIGN INVESTMENT: FACTS AND FIGURES Privileged & Confidential
  • 8. Foreign Investment: Facts and Figures Privileged & Confidential + Source: IMF Statistics 2008 *Source : DIPP Factsheet on FDI (May 2009)
    • Goldman Sachs BRIC Report 2007: “… if India can fulfill its growth potential, it can become a motor for the world economy. ”
      • 2 nd fastest growing economy in the world
    • 4 th largest economy in the world in terms of PPP +
    • Foreign Investment from August 1991 to May 2009 = USD 110 Billion*
  • 9. Facts and Figures: FDI inflow (1970 – 2009) Privileged & Confidential (In USD Bn) Source : RBI Bulletins
  • 10. Facts and Figures: FDI Inflow - India v. China Privileged & Confidential (FDI in USD Bn) Source : RBI Bulletins, US-China Business Council Statistics
  • 11. Facts and Figures: Inflows - FDI v. FII Privileged & Confidential (In USD Bn) Source : RBI Bulletins
  • 12. Facts and Figures: Sectoral Distribution of FDI in 2008 Privileged & Confidential Source : DIPP Factsheet on FDI (May 2009)
  • 13. LEGAL FRAMEWORK GOVERNING FOREIGN INVESTMENT Privileged & Confidential
  • 14. Legal Framework: Sources of Law
    • Multiple entry routes for foreign investment into India
      • FDI / FII / FVCI
    • FDI framework is governed by
      • FEMA 1999 - rules and regulations thereunder, primarily FEMA 20
      • FDI Policy and Press Notes
      • Primarily regulated by FIPB and RBI
      • FDI in certain financial services activities regulated by SEBI / RBI
    • FII
      • SEBI FII Regulations, 1995 & FEMA 20
    • FVCI
      • SEBI FVCI Regulations, 1996 & FEMA 20
    • Sector specific regulators: IRDA, TRAI, DoT
    Privileged & Confidential
  • 15. Legal Framework: Government Agencies Privileged & Confidential Ministry of Finance Minister: Mr. Pranab Mukerjee Ministry of Commerce and Industry Minister: Mr. Anand Sharma Government of India FIPB Unit: approves FDI proposals, encourages FDI, reviews FDI policy and offers suggestions to the DIPP Director: Mr. Prabodh Saxena DIPP : Promotes and formulates FDI policies Secretary: Ajay Shankar Joint Secretary: Mr. Gopal Krishna FIIA : facilitates implementation of FDI approvals, addresses concerns of investors FIPC : attracts FDI into the country Department of Economic Affairs Joint Secretary: Dr. Anup K. Pujari
  • 16. Legal Framework: Routes Privileged & Confidential FDI FII FVCI
    • No special registration
    • Investment limits per sector specific rules
    • Entry/Exit price regulated
    • Entry on market not permitted
    • Pre IPO-lock in
    • Most commonly used entry route
    • SEBI & RBI Registration
    • Aggregate investment up to 24% or FDI sectoral caps (with shareholder approval)
    • Maximum of 10% per FII or 5% per sub account per target
    • Entry - direct or on market
    • Exit on market
    • Pre IPO – lock in
    • Registration 4-6 weeks
    • SEBI & RBI Registration
    • Recent RBI limitation to 10 sectors
    • Can invest whole corpus in DVCF
    • Pricing flexibility
    • Takeover Code exemption
    • No Pre-IPO lock in if held for 6 months
    • Registration 6-8 weeks or longer
  • 17. Legal Framework: FDI Entry Norms
    • Automatic Route
      • No Cap or Conditions (Eg: Manufacturing )
      • No Cap but with Conditions or Soft Caps
        • Eg: minimum capitalizations norms for NBFCs, Real Estate
      • With Cap (no express see through) (Eg. Scheduled Air Transport Services )
      • With Cap (see through under specific statute / rules) (Eg: Insurance )
    • Approval Route
      • No Cap (Eg: Tea, Courier )
      • With Cap (no express see through) (Eg: Single-brand Retail )
      • With Cap (see through under specific rules) (Eg: Broadcasting )
    Privileged & Confidential
  • 18. Legal Framework: FDI Entry Norms
    • Automatic cum Approval Route
      • Eg: Telecom automatic upto 49%, approval to go up to 74%
    • Prohibited Sectors (Eg: Multi-brand Retail )
    Privileged & Confidential
  • 19. PRESS NOTE 2 OF 2009 Privileged & Confidential
  • 20. Press Note 2: Holding Structure Privileged & Confidential Son Father Grandfather Overseas India Direct Indirect The New Vocabulary
  • 21. Press Note 2: Key Concepts
    • New norms for computation of foreign investment
    • Direct foreign investment
      • All investment directly by a non-resident entity
    • Indirect foreign investment
      • ‘ Father’ owned and controlled by resident Indians - NO see through
      • ‘ Father’ owned or controlled by non-residents – FULL see through
          • Case 1: Majority foreign shareholding and / or foreign control
          • Case 2: 50:50 ownership / joint control
        • Exception WOS (100% subsidiaries)
      • Review of inter-se agreements
    • “ Grandfathering” of existing investments
    Privileged & Confidential
  • 22. Press Note 2: Some Issues
    • Definition of ownership?
      • Beneficial ownership - 187 C declaration / pledged shares
      • Convertible instruments*
      • Widely held companies without promoters?
    • Effect / rationale for exclusion of public sector banks and financial institutions for I&B and Defense sector (numerator, denominator or both?)
    • * DIPP officials have indicated that convertible instrument would be counted only upon conversion
    Privileged & Confidential
  • 23. Privileged & Confidential Press Note 2: Snapshot Indian Owned & Controlled Indian “Father” No. Rule of foreign investment in Son FIPB approval Change 1. No sectoral cap No Yes (PN 4)  2. Sectoral cap (under automatic route) No (filing may be required) Yes (PN 4)  ? 3. With prior Government approval Yes (if inter-se agreement) Yes  4. Banned (eg. Retail, non-compliant Real Estate) ??? Yes ???
  • 24. Press Note 2: Snapshot Foreign Owned or Controlled Privileged & Confidential Foreign “Father” No. Rule of foreign investment in Son FIPB approval Change 1. No sectoral cap No No  2. Sectoral cap (under automatic route) No (if within caps & no change of control) Yes  (full see-through) 3. With prior government approval Yes (plus filing inter-se agreement) Yes  (full see-through, no prorating) 4. Banned (eg. Retail, non-compliant Real Estate) Not permitted No
  • 25. Press Note 2: Illustrations Privileged & Confidential Son Father Indian Foreign 49% Case I – Indian Owned & Controlled 74% Foreign Investment = 0 51% with control Son Father Indian Foreign Foreign Investment = 74% 74% 49% Case II – Foreign Owned Father 51% (without control)
  • 26. Press Note 2: Illustrations Privileged & Confidential Son Father Indian Foreign Foreign Investment = 74% 74% 49% (with control) 51% Case IV – Foreign Controlled Father Case III – Indian Foreign 50:50 JV Son Father 50% Indian Foreign Foreign Investment = 74% 74% 50%
  • 27. Press Note 2: Illustrations Privileged & Confidential Son Father Indian Foreign 51% Case VI – WOS by a Foreign Father 100% Foreign Investment = 51% 49% (with or without control) Son Father Indian Foreign Foreign Investment = 74% 74% 49% Case V – Foreign Owned & Controlled 51% (with control)
  • 28. Press Note 2: Illustrations: Insurance Privileged & Confidential Pre & Post PN 2 Pre & Post PN 2 Insurance JV JV Partner Other Foreign Co. Indian Co. Indian promoter 10% 26% 74% 90%
    • Foreign Investment = 26% (Automatic Route)
    • Other Foreign Co. investment ignored.
    • Based on FIPB ratified market practice
    Insurance JV JV Partner Indian promoter 10% 17% 83% 90%
    • Foreign Investment = 17% + 10% of 83% = 25.3% (Automatic Route)
    Indian Co. Nothing’s Changed
  • 29. Press Note 2: Illustrations: Defense Privileged & Confidential Son Father Indian Group Foreign 26% (without control) 51% (with control) 49% 51% Foreign Investment = 26% (FIPB Approval) After PN 2
    • Additional conditions for I&B and Defense
    • 51% single Indian shareholder / group
    • Excludes public sector banks and public financial institutions
    • Binding agreement to exercise control collectively
  • 30. Press Note 2: Illustrations: Telecom Privileged & Confidential Son Father Indian Son Father Foreign 49% 49% 74% Foreign Investment = 49% of 74% = 36.26% Indian Foreign Foreign Investment = 0%  74% 51% (with control) 51% Before After Indian Father
  • 31. Press Note 2: Illustrations: Telecom Privileged & Confidential Son Father Indian Son Father Foreign 51% 51% 74% Foreign Investment = 51% of 74% = 37.74% Indian Foreign Foreign Investment = 74%  74% 49% 49% Before After Foreign Father
  • 32.
      • PRESS NOTE 3 OF 2009
    Privileged & Confidential
  • 33. Press Note 3: Key Concepts
    • Applies to Sectors where FDI upto 100% not permitted under automatic route
    • FIPB / Government approval required when:
      • Indian company established with foreign ownership or control
      • Ownership or control of Indian company acquired by non-resident
        • Consequent upon Transfer of shares
    • Foreign investment includes all types
    Privileged & Confidential
  • 34. Press Note 3: Key Concepts
    • Sectors directly impacted
      • Scheduled air transport, ground handling service, banking – private
      • Insurance, telecom, non-scheduled air transport (to the extent foreign shareholders acquire control through shareholder arrangements)
    • Impact on open offers under the SEBI Takeover Regulations
    Privileged & Confidential
  • 35. Privileged & Confidential PRESS NOTE 4 OF 2009
  • 36. Press Note 4: Key Concepts
    • “ Guiding principle” is that foreign investment by foreign Father would be governed by same norms as applicable to direct foreign investment
      • You can only do indirectly what you can do directly
    • “ Operating’ & ‘Investing” Companies defined
    • “ Operating cum Investing” company – amalgam of 2
      • No threshold of operations or investment prescribed
    • Sectoral caps and other requirements apply both at the level of “foreign Father” and Son
    Privileged & Confidential
  • 37. Press Note 4: Key Concepts
    • Current FIPB issue in relation to prior approval for foreign investment in operating cum investing companies has ended prospectively, but no “grandfathering” – compounding issue seems to continue for existing structures (para 7 PN 2)
    • Foreign Investment irrespective of amount or extent in “Investing Companies” (Indian or foreign Father) requires prior FIPB approval
      • This requirement cannot be got around by using shell companies for downstream investment on the basis that they will commence operations in future (paras 4.2.2, 4.2.3 & 5)
    • Post facto notification requirements prescribed (para 6)
    Privileged & Confidential
  • 38. Press Note 4: Key Concepts
    • SEBI / RBI pricing norms for issue and transfer apply to downstream investment in Son
    • Bar against leverage by foreign Father if it is an Investing Company – continuation of policy
    • Old Press Note 9 (1999) and para 11 of Press Note 3 (1997) is DELETED!!
    Privileged & Confidential VERDICT – GREAT NEWS!!
  • 39. THANK YOU Privileged & Confidential © Amarchand & Mangaldas & Suresh A. Shroff & Co. August 26, 2009