Foreign Investment Shroff

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

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
Privileged & Confidential

FOREIGN INVESTMENT POLICY A HISTORICAL OVERVIEW Privileged & Confidential

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

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

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

FOREIGN INVESTMENT: FACTS AND FIGURES Privileged & Confidential

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*

Facts and Figures: FDI inflow (1970 – 2009) Privileged & Confidential (In USD Bn) Source : RBI Bulletins

Facts and Figures: FDI Inflow - India v. China Privileged & Confidential (FDI in USD Bn) Source : RBI Bulletins, US-China Business Council Statistics

Facts and Figures: Inflows - FDI v. FII Privileged & Confidential (In USD Bn) Source : RBI Bulletins

Facts and Figures: Sectoral Distribution of FDI in 2008 Privileged & Confidential Source : DIPP Factsheet on FDI (May 2009)

LEGAL FRAMEWORK GOVERNING FOREIGN INVESTMENT Privileged & Confidential

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

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

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

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 )

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 )

PRESS NOTE 2 OF 2009 Privileged & Confidential

Press Note 2: Holding Structure Privileged & Confidential Son Father Grandfather Overseas India Direct Indirect The New Vocabulary

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

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 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 ???

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

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)

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%

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)

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

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

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

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

PRESS NOTE 3 OF 2009

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

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 PRESS NOTE 4 OF 2009

“ 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

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)

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!!

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Foreign Investment Shroff

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Foreign Investment Shroff — Presentation Transcript