BCAS - Study Course on FEMA - Sector specific FDI (Real Estate, Retail Trading, Financial Sector) - 13.06.2009


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BCAS - Study Course on FEMA - Sector specific FDI (Real Estate, Retail Trading, Financial Sector) - 13.06.2009

  1. 1. Foreign Direct Investment (FDI) including Sector specific FDI (Real Estate/Retail trading/Financial Sector) Presented by: Mr. Paresh P. Shah P.P. Shah & Associates Chartered Accountants Email: paresh@bom3.vsnl.net.in BCAS Study Course on FEMA
  2. 2. Overview of Presentation Meaning of Foreign Investment Foreign Direct Investment (FDI) FDI in companies engaged in real estate activity FDI in Companies engaged in Retail trading FDI in Financial Service Sector Companies
  3. 3. Foreign Direct Investment History & Liberalisation Industrial Development (Regulation) Act, 1951 regulates the overall industrial development through Foreign Direct Investment Policy – Public Sector, Locational Policy, Licensing Within the overall framework, regulatory provisions relating to foreign direct investment in Indian Company/ies are pronounced as Notification No. FEMA 20/2000-RB dt. 3 rd May 2000 Meaning of Foreign Direct Investment (FDI) – Not defined under notification Rationale for restricting FDI/Sectoral Cap
  4. 4. Entry into India Liaison Office & Branch (Notification No. FEMA 22/ 2000-RB dt. 3 rd May 2000) Incorporation of company in India (Notification No. FEMA 20/2000-RB dt. 3 rd May 2000) Partnership & Proprietary business (Notification No. FEMA 24/2000-RB dt. 3 rd May 2000) Citizen & Entities of Pakistan not permitted (Notf. No. 20, Regulation 5)
  5. 5. Prohibited / Restricted Sectors Business of chit fund Nidhi Company Agricultural or plantation activities Real estate business or construction of farm houses Trading in Transferable Development Rights (TDRs) Retail Trading Atomic Energy Lottery Business Gambling and Betting Housing and Real Estate business
  6. 6. Prohibited / Restricted Sectors SSI sector only upto 24% Government approval (Annexure A, List A) Sectoral Cap – Auto Route/Government Route for investment above the cap Automatic Route – Conditions
  7. 7. Foreign Direct Investment - Policy Conditions for FDI under automatic route (Schedule I to Notf. No. 20, Regulation 5) Indian Company not engaged in Annexure A activity Activities that require prior approval of FIPB Activities that are prohibited Subject to the percentage of capital limit specified in Annexure B for PROI Small scale industrial unit which is not engaged in Annexure A activities, may issue shares or convertible debentures upto 24% of its paid-up capital. However it may issue in excess of 24% if it has given up its small scale status; it is not engaged or does not propose to engage in manufacture of items reserved for small scale sector, and it complies with the ceilings specified in Annexure B
  8. 8. Foreign Direct Investment - Policy Conditions (Contd..) Securities are not issued with a view to acquire existing shares of an Indian Company Issue shares or debentures out of fresh capital for financing expansion programme, to undertake activities mentioned in Annex B, up to limit specified therein Investment through inward remittance from outside India Issue of shares within 180 days of receipt Adhere to the pricing guidelines Listed Companies: SEBI Guidelines Unlisted Companies: CCI Guidelines/Fair Value
  9. 9. Foreign Direct Investment - Policy Conditions (Contd..) Does not have an existing joint venture or technology/ trademark agreement [Notf. No. 179 dt. 22/08/08] Press Note No. 18 of 1998 Series – Emphasis was on same or allied field Press Note No. 1 & 3 of 2005 Series – only in the same field FIPB approval may not be required in following cases Declaration to the effect that investor does not have a previous JV or technology/trademark agreement in same or allied field or Foreign investor/technology supplier & Indian partner should justify that new proposal would not in anyway jeopardize the interests of the existing partner or If Investments is to be made by VCFs registered with SEBI or Investment in existing JV by either of the parties is < 3% or Existing venture / collaboration is defunct or sick
  10. 10. Foreign Direct Investment - Reporting Reporting of FDI Reporting of inward remittances Reporting of allotment Annual Reporting Annexure B ceilings to be adhered qua project Indian Company engaged in trading activities – Special conditions are now found in Government policy both under auto route & FIPB route Mode of Receipt of investment – Inward Remittance through Ads/debit to FCNR or NRE A/c Investment in a sector on a non repatriation basis can be converted to repatriation basis (PN 4 of 2005) provided The original investment was made in foreign exchange The sector/activity in which investment is proposed to be converted is now under the automatic route of FDI
  11. 11. Direct & Indirect Foreign Investment Rules for computation of direct & indirect foreign investment in Indian Companies (PN 2 of 2009) Direct Foreign Investment : Investment directly by a non resident entity into Indian Company, direct foreign investment = % of equity held Indirect Foreign Investment: Investment through Indian Companies Owned and Controlled by resident Indian citizens and/or Indian Companies which are owned and controlled by resident Indian citizens, i.e. more than 50% equity and power to appoint majority of directors with residents, Indirect FDI = Nil Owned and Controlled by non resident entities as WOS: Indirect FDI = % of equity held in investing Indian Company Other:Indirect FDI = % of equity held by investing Indian Company Foreign Investment in Indian Companies shall include all types of foreign investments, except FDI by NRIs on non repatriation basis (Schedule 5 to Notf. 20)
  12. 12. Computation of Direct Foreign Investment 20% Foreign Investment in B Co Direct - 20% Indirect – 26% NRE: Non Resident Entity NRE A Co B Co 75% 26%
  13. 13. Computation of Indirect Foreign Investment Indirect FI NIL 26% 80% 75% NRE: Non Resident Entity FI: Foreign Investment NRE A Co B Co 49% 100% NRE A Co B Co 75% 26% NRE A Co B Co 75% 80% NRE A Co B Co 75% 100%
  14. 14. Rules for Downstream Investment Investing Indian Company is Operating Company Comply with the relevant sectoral conditions on entry route, conditionalities & caps Operating cum investing Company Comply with the relevant sectoral conditions on entry route, conditionalities & caps Downstream Investments to comply with relevant sectoral conditions & caps Investing Company Require prior approval of Government or FIPB Downstream Investments to comply with relevant sectoral conditions & caps
  15. 15. Rules for Downstream Investment Neither Investing nor Operating Company Require prior approval of Government or FIPB As & when such company commences business(s) or makes downstream investments, will have to comply with relevant sectoral conditions & caps Procedure for downstream investment by Indian Company Notify SIA, DIPP & FIPB within 30 days of investment Investment in existing company to be supported by board resolution Comply with the valuation guidelines of SEBI/RBI Funds to be brought in from outside India and not leveraged from domestic market
  16. 16. Rules for Transfer of shares Under automatic route [Regl 9 of Ntf. No. 20] From Non resident (other than NRIs) to Non resident by way of sale or gift* From NRI to NRI by way of sale or gift* * Transferee does not have any previous JV or tie up in India Non resident (NR) to Resident (R) by way of gift NR can sell on a recognised stock exchange in India
  17. 17. Rules for Transfer of shares Transfer from R to NR of shares of Indian Companies with Sectoral cap, shall require Government approval (Press Note 3 of 2009), in cases where Indian Company is owned or controlled by NRE Ownership or control of existing Indian company will be/is being transferred to NRE as a consequence of transfer of shares through amalgamation, merger, acquisition etc. Auto route in cases where transfer is from R to NR, where 100% FDI is allowed Compliances in case of auto route of transfer Reporting through filing form FC-TRS and related documents Adhering to the pricing guidelines
  18. 18. Rules for Transfer of shares RBI approval From R to NR by way of gift, upto rupee equivalent of USD 25,000 per calendar year From R to NR, in case companies engaged in financial sector where SEBI (Substantial Acquisition & Takeover) regulation is attracted * As per PN 4 of 2006, it is automatic Government approval in following cases In case of companies engaged in sectors falling under Government approval route In case of transfer breaching applicable sectoral cap In case of non resident having previous JV or tie up in India
  19. 19. FDI in Real Estate Sector
  20. 20. FDI in Real Estate Sector Acquisition of Property (Ntf 21) v/s acquisition of shares of companies engaged in real estate sector (Ntf 20) Housing & Real Estate Business is prohibited According to Notf. No. 20 real estate business shall not include development of township, construction of residential/ commercial premises, roads, bridges, etc. Special guidelines for investment in SEZs (SEZ Act 2005), Hotels & Tourism sector (PN 4 of 2001) and Hospital sector (PN 2 of 2000)
  21. 21. FDI in Real Estate Sector – NRIs Only NRIs can invest in Companies engaged in following activities Development of serviced plots and construction of built-up residential premises Investment in real estate covering construction of residential and commercial premises including business centres and offices Development of townships City and regional level urban infrastructure facilities, including both roads and bridges Investment in manufacture of building materials Investment in participatory ventures in five activities stated above Investment in housing finance institutions which is also opened to FDI as an NBFC
  22. 22. FDI in Real Estate Sector - Foreigners Activities specified in Press Note 2 of 2005 are open for investment by foreigners Townships, housing, built-up infrastructure & construction developed projects (including housing, commercial premises, resorts, educational institutions, recreational facilities, city & regional level infrastructure) Foreign nationals can invest only in companies engaged in Press Note 2 compliant projects Minimum Capitalisation of US$ 10 mn for WOS & US$ 5 mn for JVs (Capitalisation norms qua company v/s qua project) Funds to be brought in within six months of commencement of business of the Company (What if funds to be invested in the existing company which has commenced business)
  23. 23. FDI in Real Estate Sector - Foreigners Lock in period for investment upto three years from completion of minimum capitalisation. May exit earlier with prior approval of FIPB (Lock in period also applicable to investments above minimum capitalisation) Minimum area to be developed under each project 10 hectares in case of serviced plots Built up area of 50,000 sq. mtrs in case of construction development project (Meaning of Built up area - as approved by local authority) Any of above in case of a combination project Area to be developed to be located at one place or can be at different places At least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances Investor cannot sell undeveloped plot
  24. 24. FDI in Retail Trading
  25. 25. FDI in Retail Trading FDI in Retail trading – prohibited Distinction between wholesale & retail trading Meaning of cash & carry wholesale trading Foreign Investment in Companies engaged in Retail trading under other Schedules Retailing to predetermined business customers or B2B Commerce Single Brand retailing: Upto 51% with Government approval Product sold should be of ‘Single Brand’ only Products should be sold under same brand internationally Products should be branded during manufacturing Application should indicate product categories to be sold Retail trading by SSIs – Brand Licencing & distribution
  26. 26. FDI in Retail Trading FDI through holding structure Impact of Press Note No. 2, 3 & 4 of 2009 Non resident entity (NRE) can enter multi brand retail sector by investing in Indian Companies owned & controlled by resident Indian citizens Can effectively control upto 49%
  27. 27. FDI in Financial Service Sector
  28. 28. FDI in Financial Service Sector NBFC activities as specified and other financial services Investment in Financial Service Sector strictly monitored for financial security Meaning of Financial Service Sector Paragraph 21(e) of Master Cir. No. 2 dt. 01/07/08 Financial Sector i.e. Banks, NBFC, Insurance, ARCs and infrastructure companies in the securities market viz. Stock Exchanges, Clearing Corporations and Depositories Explanation to Regulation 10(A)(b) of Notification No. 20 “ Financial Services” shall mean service rendered by banking and non-banking companies regulated by the Reserve Bank, insurance, companies regulated by Insurance Regulatory and Development Authority (IRDA) and other companies regulated by any other Financial regulator as the case may be.
  29. 29. FDI in Financial Service Sector - NBFC NBFCs are regulated by the Reserve Bank of India Act, 1934 As per Sec 45-I(f) ‘NBFC’ means A financial institution which is a company; A non banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; Such other non banking institution or class of such institutions as the RBI may, with the previous approval of the Central Government and by notification in the Official Gazette, specify Financial Institution is defined in sec 45-I(c) of the RBI Act, 1934
  30. 30. FDI in Financial Service Sector - NBFC As per Prudential Norms of RBI, a company in order to be classified as an NBFC, will have to satisfy the following two tests of asset and income The financial asset should be more than 50% of the total assets (Netted off by Intangible assets) The income from financial assets should be more than 50% of gross total income. Both these tests need to be satisfied for a company to be regarded as NBFC. NBFCs: FDI Upto 100% in 18 specified activities on complying with minimum capitalisation norms (only ordinary shares) as under Merchant Banking Under writing Portfolio Management Services Investment Advisory Services
  31. 31. FDI in Financial Service Sector - NBFC NBFC Services (Contd..) Financial Consultancy Stock-broking Asset Management Venture Capital Custodial Services Factoring Credit Rating Agencies Leasing & Finance Housing Finance Forex-broking Credit Card Business Money-changing Business Micro-credit Rural credit
  32. 32. FDI in Financial Service Sector - NBFC Capitalisation Norms for NBFC Fund based NBFCs FDI upto 51%: US$ 0.5 mn FDI above 51% & upto 75%: US$ 5 mn FDI above 75%: US$ 50 mn of which US$ 7.5 mn upfront & balance in 24 months Non Fund based NBFCs – US$ 0.5 mn NBFCs with FDI upto 75% are allowed to set up NBFC subsidiaries subject to NBFCs complying with the applicable minimum capital inflow (different from PN 4 of 2009 guidelines) Foreign investor can hold 100% capital subject to bringing in US$ 50 mn without any restriction on number of operating subsidiaries without additional capital
  33. 33. FDI in Financial Service Sector - Others FDI upto ceiling specified in Annexure B, which may be summarised as under Banks Public Sector Banks: FDI + Portfolio – 20% Private Sector Banks: 74% ARCs FDI: Upto 49% with FIPB approval FIIs in Security Receipts: 10% individually, 49% overall cap Commodity Exchange FDI: Upto 26% with FIPB approval FII: Upto 23%
  34. 34. FDI in Financial Service Sector - Others Infrastructure Companies in Securities Market FDI: Upto 26% with FIPB approval FII: Upto 23% Credit Information Companies FDI + FII: 49% FDI with approval of FIPB FII: 10% individually, 24% overall cap; No representation on board; acquisition in excess of 1% reported to RBI Insurance: Upto 26%. Insurance sector is regulated by The Insurance Act, 1938 Investing Companies in Infrastructure or Services Sector: Upto 100% with FIPB approval
  35. 35. Regulations for Transfer of Shares Chronology of Regulations Cir. No. 16 dt. 04/10/04 – Auto route not available for R to NR or NR to R Press note 4 of 2006 – Auto route allowed for R to NR or NR to R Notification No. 179 dt. 22/08/08 – RBI approval required for transfer by R to NR in financial sector In case of transfer by R to NR, Press Note 4 of 2006 provides for auto route. However Master Cir. & Notification No. 179 dt. 22/08/08 provides RBI approval Press Note 3 of 2009 – Government approval in case of transfer of shares by R to NR in case of Indian companies with sectoral caps, if owned or controlled by NREs or ownership or control will be/is being transferred to NREs
  36. 36. Thank You