Amarchand & Mangaldas & Suresh A. Shroff & Co. Amarchand Towers, 216, Okhla Industrial Estate, Phase-III, New Delhi -  Tel...
Outline <ul><li>Foreign Investment Policy: A Historical Overview </li></ul><ul><li>Foreign Investment: Facts and Figures <...
FOREIGN INVESTMENT POLICY  A HISTORICAL OVERVIEW Privileged & Confidential
A Historical Overview: Pre-2000 <ul><li>Pre-1991 </li></ul><ul><ul><li>“ Careful regulation” of foreign capital and enterp...
A Historical Overview: Pre-2000 <ul><li>1996-97 </li></ul><ul><ul><li>FIPB set up - facilitation of expeditious approvals ...
A Historical Overview: Post-2000 <ul><li>Sectoral classification </li></ul><ul><ul><li>Prohibited List </li></ul></ul><ul>...
FOREIGN INVESTMENT: FACTS AND FIGURES Privileged & Confidential
Foreign Investment:  Facts and Figures Privileged & Confidential + Source:  IMF Statistics 2008  *Source : DIPP Factsheet ...
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 ...
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 <ul><li>Multiple entry routes for foreign investment into India </li></ul><ul><ul><li>FDI...
Legal Framework:  Government Agencies Privileged & Confidential Ministry of Finance  Minister: Mr. Pranab Mukerjee Ministr...
Legal Framework:  Routes Privileged & Confidential FDI FII FVCI <ul><li>No special registration </li></ul><ul><li>Investme...
Legal Framework:  FDI Entry Norms <ul><li>Automatic Route </li></ul><ul><ul><li>No Cap or Conditions (Eg:  Manufacturing )...
Legal Framework:  FDI Entry Norms <ul><li>Automatic cum Approval Route </li></ul><ul><ul><li>Eg:  Telecom  automatic upto ...
PRESS NOTE 2 OF 2009 Privileged & Confidential
Press Note 2:  Holding Structure Privileged & Confidential Son Father Grandfather Overseas India Direct Indirect The New V...
Press Note 2:  Key Concepts <ul><li>New norms for computation of foreign investment </li></ul><ul><li>Direct foreign inves...
Press Note 2:  Some Issues <ul><li>Definition of ownership? </li></ul><ul><ul><li>Beneficial ownership - 187 C declaration...
Privileged & Confidential Press Note 2: Snapshot  Indian Owned & Controlled  Indian “Father” No. Rule of foreign investmen...
Press Note 2: Snapshot Foreign Owned or Controlled Privileged & Confidential Foreign “Father” No. Rule of foreign investme...
Press Note 2: Illustrations Privileged & Confidential Son Father Indian Foreign 49% Case I – Indian Owned & Controlled 74%...
Press Note 2: Illustrations Privileged & Confidential Son Father Indian Foreign Foreign Investment = 74% 74% 49% (with con...
Press Note 2: Illustrations Privileged & Confidential Son Father Indian Foreign 51% Case VI – WOS by a Foreign Father 100%...
Press Note 2: Illustrations:  Insurance Privileged & Confidential Pre & Post PN 2 Pre & Post PN 2 Insurance JV JV Partner ...
Press Note 2: Illustrations:  Defense Privileged & Confidential Son Father Indian Group Foreign 26% (without control) 51% ...
Press Note 2: Illustrations:  Telecom Privileged & Confidential Son Father Indian Son Father Foreign 49% 49% 74% Foreign I...
Press Note 2: Illustrations:  Telecom Privileged & Confidential Son Father Indian Son Father Foreign 51% 51% 74% Foreign I...
<ul><ul><li>PRESS NOTE 3 OF 2009 </li></ul></ul>Privileged & Confidential
Press Note 3: Key Concepts <ul><li>Applies to Sectors where FDI upto 100% not permitted under automatic route  </li></ul><...
Press Note 3: Key Concepts <ul><li>Sectors directly impacted  </li></ul><ul><ul><li>Scheduled air transport, ground handli...
Privileged & Confidential PRESS NOTE 4 OF 2009
Press Note 4: Key Concepts <ul><li>“ Guiding principle” is that foreign investment by foreign Father would be governed by ...
Press Note 4: Key Concepts <ul><li>Current FIPB issue in relation to prior approval for foreign investment in operating cu...
Press Note 4: Key Concepts <ul><li>SEBI / RBI pricing norms for issue and transfer apply to downstream investment in Son  ...
THANK YOU Privileged & Confidential © Amarchand & Mangaldas & Suresh A. Shroff & Co. August 26, 2009
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Foreign Investment Shroff

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Foreign Investment Shroff

  1. 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. 2. Outline <ul><li>Foreign Investment Policy: A Historical Overview </li></ul><ul><li>Foreign Investment: Facts and Figures </li></ul><ul><li>Legal Framework Governing Foreign Investment </li></ul><ul><li>Press Note 2 of 2009 – 13 th Feb 2009 </li></ul><ul><li>Press Note 3 of 2009 – 13 th Feb 2009 </li></ul><ul><li>Press Note 4 of 2009 – 25 th Feb 2009 </li></ul>Privileged & Confidential
  3. 3. FOREIGN INVESTMENT POLICY A HISTORICAL OVERVIEW Privileged & Confidential
  4. 4. A Historical Overview: Pre-2000 <ul><li>Pre-1991 </li></ul><ul><ul><li>“ Careful regulation” of foreign capital and enterprise – FERA </li></ul></ul><ul><ul><li>Hardly any foreign inflows, mostly reliance on foreign debt </li></ul></ul><ul><li>1991-92 </li></ul><ul><ul><li>Balance of payments crisis led to IMF-induced liberalization </li></ul></ul><ul><ul><li>Automatic route (Annexure III) – FI <= 51% permitted in various sectors </li></ul></ul><ul><ul><li>Portfolio investment by FIIs allowed </li></ul></ul>Privileged & Confidential
  5. 5. A Historical Overview: Pre-2000 <ul><li>1996-97 </li></ul><ul><ul><li>FIPB set up - facilitation of expeditious approvals through nodal agency </li></ul></ul><ul><ul><li>Automatic route expanded with increase in sectoral caps </li></ul></ul><ul><li>1999 </li></ul><ul><ul><li>FEMA - Fundamental shift in philosophy and liberalization </li></ul></ul>Privileged & Confidential
  6. 6. A Historical Overview: Post-2000 <ul><li>Sectoral classification </li></ul><ul><ul><li>Prohibited List </li></ul></ul><ul><ul><li>Approval Route – with / without sectoral caps </li></ul></ul><ul><ul><li>Automatic Route - with / without sectoral caps ( most sectors) </li></ul></ul><ul><ul><ul><li>Shift from ‘Positive List’ to ‘Negative List’ </li></ul></ul></ul><ul><li>FDI sectoral caps exclusive of FII investment </li></ul><ul><ul><li>Per recommendations of Expert Committees (2004 & 2005) </li></ul></ul><ul><li>Some Grey Areas </li></ul><ul><ul><li>“ Opco Holdco” issue </li></ul></ul><ul><ul><li>FIPB approval for issue of warrants </li></ul></ul><ul><ul><li>FII v. FDI </li></ul></ul><ul><ul><li>FVCI regime </li></ul></ul>Privileged & Confidential
  7. 7. FOREIGN INVESTMENT: FACTS AND FIGURES Privileged & Confidential
  8. 8. Foreign Investment: Facts and Figures Privileged & Confidential + Source: IMF Statistics 2008 *Source : DIPP Factsheet on FDI (May 2009) <ul><li>Goldman Sachs BRIC Report 2007: “… if India can fulfill its growth potential, it can become a motor for the world economy. ” </li></ul><ul><ul><li>2 nd fastest growing economy in the world </li></ul></ul><ul><li>4 th largest economy in the world in terms of PPP + </li></ul><ul><li>Foreign Investment from August 1991 to May 2009 = USD 110 Billion* </li></ul>
  9. 9. Facts and Figures: FDI inflow (1970 – 2009) Privileged & Confidential (In USD Bn) Source : RBI Bulletins
  10. 10. Facts and Figures: FDI Inflow - India v. China Privileged & Confidential (FDI in USD Bn) Source : RBI Bulletins, US-China Business Council Statistics
  11. 11. Facts and Figures: Inflows - FDI v. FII Privileged & Confidential (In USD Bn) Source : RBI Bulletins
  12. 12. Facts and Figures: Sectoral Distribution of FDI in 2008 Privileged & Confidential Source : DIPP Factsheet on FDI (May 2009)
  13. 13. LEGAL FRAMEWORK GOVERNING FOREIGN INVESTMENT Privileged & Confidential
  14. 14. Legal Framework: Sources of Law <ul><li>Multiple entry routes for foreign investment into India </li></ul><ul><ul><li>FDI / FII / FVCI </li></ul></ul><ul><li>FDI framework is governed by </li></ul><ul><ul><li>FEMA 1999 - rules and regulations thereunder, primarily FEMA 20 </li></ul></ul><ul><ul><li>FDI Policy and Press Notes </li></ul></ul><ul><ul><li>Primarily regulated by FIPB and RBI </li></ul></ul><ul><ul><li>FDI in certain financial services activities regulated by SEBI / RBI </li></ul></ul><ul><li>FII </li></ul><ul><ul><li>SEBI FII Regulations, 1995 & FEMA 20 </li></ul></ul><ul><li>FVCI </li></ul><ul><ul><li>SEBI FVCI Regulations, 1996 & FEMA 20 </li></ul></ul><ul><li>Sector specific regulators: IRDA, TRAI, DoT </li></ul>Privileged & Confidential
  15. 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. 16. Legal Framework: Routes Privileged & Confidential FDI FII FVCI <ul><li>No special registration </li></ul><ul><li>Investment limits per sector specific rules </li></ul><ul><li>Entry/Exit price regulated </li></ul><ul><li>Entry on market not permitted </li></ul><ul><li>Pre IPO-lock in </li></ul><ul><li>Most commonly used entry route </li></ul><ul><li>SEBI & RBI Registration </li></ul><ul><li>Aggregate investment up to 24% or FDI sectoral caps (with shareholder approval) </li></ul><ul><li>Maximum of 10% per FII or 5% per sub account per target </li></ul><ul><li>Entry - direct or on market </li></ul><ul><li>Exit on market </li></ul><ul><li>Pre IPO – lock in </li></ul><ul><li>Registration 4-6 weeks </li></ul><ul><li>SEBI & RBI Registration </li></ul><ul><li>Recent RBI limitation to 10 sectors </li></ul><ul><li>Can invest whole corpus in DVCF </li></ul><ul><li>Pricing flexibility </li></ul><ul><li>Takeover Code exemption </li></ul><ul><li>No Pre-IPO lock in if held for 6 months </li></ul><ul><li>Registration 6-8 weeks or longer </li></ul>
  17. 17. Legal Framework: FDI Entry Norms <ul><li>Automatic Route </li></ul><ul><ul><li>No Cap or Conditions (Eg: Manufacturing ) </li></ul></ul><ul><ul><li>No Cap but with Conditions or Soft Caps </li></ul></ul><ul><ul><ul><li>Eg: minimum capitalizations norms for NBFCs, Real Estate </li></ul></ul></ul><ul><ul><li>With Cap (no express see through) (Eg. Scheduled Air Transport Services ) </li></ul></ul><ul><ul><li>With Cap (see through under specific statute / rules) (Eg: Insurance ) </li></ul></ul><ul><li>Approval Route </li></ul><ul><ul><li>No Cap (Eg: Tea, Courier ) </li></ul></ul><ul><ul><li>With Cap (no express see through) (Eg: Single-brand Retail ) </li></ul></ul><ul><ul><li>With Cap (see through under specific rules) (Eg: Broadcasting ) </li></ul></ul>Privileged & Confidential
  18. 18. Legal Framework: FDI Entry Norms <ul><li>Automatic cum Approval Route </li></ul><ul><ul><li>Eg: Telecom automatic upto 49%, approval to go up to 74% </li></ul></ul><ul><li>Prohibited Sectors (Eg: Multi-brand Retail ) </li></ul>Privileged & Confidential
  19. 19. PRESS NOTE 2 OF 2009 Privileged & Confidential
  20. 20. Press Note 2: Holding Structure Privileged & Confidential Son Father Grandfather Overseas India Direct Indirect The New Vocabulary
  21. 21. Press Note 2: Key Concepts <ul><li>New norms for computation of foreign investment </li></ul><ul><li>Direct foreign investment </li></ul><ul><ul><li>All investment directly by a non-resident entity </li></ul></ul><ul><li>Indirect foreign investment </li></ul><ul><ul><li>‘ Father’ owned and controlled by resident Indians - NO see through </li></ul></ul><ul><ul><li>‘ Father’ owned or controlled by non-residents – FULL see through </li></ul></ul><ul><ul><ul><ul><li>Case 1: Majority foreign shareholding and / or foreign control </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Case 2: 50:50 ownership / joint control </li></ul></ul></ul></ul><ul><ul><ul><li>Exception WOS (100% subsidiaries) </li></ul></ul></ul><ul><ul><li>Review of inter-se agreements </li></ul></ul><ul><li>“ Grandfathering” of existing investments </li></ul>Privileged & Confidential
  22. 22. Press Note 2: Some Issues <ul><li>Definition of ownership? </li></ul><ul><ul><li>Beneficial ownership - 187 C declaration / pledged shares </li></ul></ul><ul><ul><li>Convertible instruments* </li></ul></ul><ul><ul><li>Widely held companies without promoters? </li></ul></ul><ul><li>Effect / rationale for exclusion of public sector banks and financial institutions for I&B and Defense sector (numerator, denominator or both?) </li></ul><ul><li>* DIPP officials have indicated that convertible instrument would be counted only upon conversion </li></ul>Privileged & Confidential
  23. 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. 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. 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. 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. 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. 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% <ul><li>Foreign Investment = 26% (Automatic Route) </li></ul><ul><li>Other Foreign Co. investment ignored. </li></ul><ul><li>Based on FIPB ratified market practice </li></ul>Insurance JV JV Partner Indian promoter 10% 17% 83% 90% <ul><li>Foreign Investment = 17% + 10% of 83% = 25.3% (Automatic Route) </li></ul>Indian Co. Nothing’s Changed
  29. 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 <ul><li>Additional conditions for I&B and Defense </li></ul><ul><li>51% single Indian shareholder / group </li></ul><ul><li>Excludes public sector banks and public financial institutions </li></ul><ul><li>Binding agreement to exercise control collectively </li></ul>
  30. 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. 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. 32. <ul><ul><li>PRESS NOTE 3 OF 2009 </li></ul></ul>Privileged & Confidential
  33. 33. Press Note 3: Key Concepts <ul><li>Applies to Sectors where FDI upto 100% not permitted under automatic route </li></ul><ul><li>FIPB / Government approval required when: </li></ul><ul><ul><li>Indian company established with foreign ownership or control </li></ul></ul><ul><ul><li>Ownership or control of Indian company acquired by non-resident </li></ul></ul><ul><ul><ul><li>Consequent upon Transfer of shares </li></ul></ul></ul><ul><li>Foreign investment includes all types </li></ul>Privileged & Confidential
  34. 34. Press Note 3: Key Concepts <ul><li>Sectors directly impacted </li></ul><ul><ul><li>Scheduled air transport, ground handling service, banking – private </li></ul></ul><ul><ul><li>Insurance, telecom, non-scheduled air transport (to the extent foreign shareholders acquire control through shareholder arrangements) </li></ul></ul><ul><li>Impact on open offers under the SEBI Takeover Regulations </li></ul>Privileged & Confidential
  35. 35. Privileged & Confidential PRESS NOTE 4 OF 2009
  36. 36. Press Note 4: Key Concepts <ul><li>“ Guiding principle” is that foreign investment by foreign Father would be governed by same norms as applicable to direct foreign investment </li></ul><ul><ul><li>You can only do indirectly what you can do directly </li></ul></ul><ul><li>“ Operating’ & ‘Investing” Companies defined </li></ul><ul><li>“ Operating cum Investing” company – amalgam of 2 </li></ul><ul><ul><li>No threshold of operations or investment prescribed </li></ul></ul><ul><li>Sectoral caps and other requirements apply both at the level of “foreign Father” and Son </li></ul>Privileged & Confidential
  37. 37. Press Note 4: Key Concepts <ul><li>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) </li></ul><ul><li>Foreign Investment irrespective of amount or extent in “Investing Companies” (Indian or foreign Father) requires prior FIPB approval </li></ul><ul><ul><li>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) </li></ul></ul><ul><li>Post facto notification requirements prescribed (para 6) </li></ul>Privileged & Confidential
  38. 38. Press Note 4: Key Concepts <ul><li>SEBI / RBI pricing norms for issue and transfer apply to downstream investment in Son </li></ul><ul><li>Bar against leverage by foreign Father if it is an Investing Company – continuation of policy </li></ul><ul><li>Old Press Note 9 (1999) and para 11 of Press Note 3 (1997) is DELETED!! </li></ul>Privileged & Confidential VERDICT – GREAT NEWS!!
  39. 39. THANK YOU Privileged & Confidential © Amarchand & Mangaldas & Suresh A. Shroff & Co. August 26, 2009

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