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Foreign Direct Investment- Supplementing Indian Capital


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‘FDI’ means investment by non-resident entity/person resident outside India in the capital of an Indian company as per FEMA Regulations.

Investments can be made by non-residents in the equity shares/ fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, through the Automatic Route or the Government Route. Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment. Under the Government Route, prior approval of the Government of India is required. Proposals for foreign investment under Government route are considered by FIPB.

Published in: Economy & Finance, Business

Foreign Direct Investment- Supplementing Indian Capital

  1. 1. Foreign Direct InvestmentSupplementing Indian
  2. 2. Primary Secondary Market Market Foreign Investments in
  3. 3. Foreign Investments in India Foreign Investments Non Repatriation Repatriation Basis Basis Foreign Foreign Foreign Direct Venture Capital Other NRIs, PIO Portfolio Investments Investments Investments Investments Automatic NRI,PIO SEBI regd. NRIs,PIO,Q Govt Route FIIs FIIs Route ,QFIs FVCIs FIs PROI VCF,
  4. 4. What is FDI FDI Means investment by Non-resident Entity/Person resident outside India in the capital of an Indian Company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000. Consolidated FDI Policy Issued by Department of Industrial Policy and Promotion(DIPP), Ministry of Commerce and Industry annually along with Press Notes/Press releases, rules and Regulations, A.P. Dir. (series) Circulars determine the modalities of Foreign Direct Investment in
  5. 5. Eligibility for FDI in India A non-resident entity or PROI NRIs resident in Nepal and Qualified Foreign Investors Bhutan as well as citizens of Nepal and Bhutan SEBI registered Foreign Erstwhile Overseas Venture Capital Investor Commercial Bodies SEBI registered Foreign Institutional
  6. 6. Eligibility for FDI in India • It covers all persons resident outside India. • Citizen of or an entity incorporated in Bangladesh can invest only under the Government route. Non Resident • *A citizen of or an entity incorporated in Pakistan can invest, Entity only under the Government route, in sectors/activities other than defence, space and atomic energy. *Amended by Press Note No.3 (2012 Series) on August 1, 2012 issued by DIPP NRIs or • Invest in the capital of Indian companies on repatriation basis, Citizens of subject to the condition that the amount of consideration for Nepal and such investment shall be paid only by way of inward remittance Bhutan in free foreign exchange through normal banking
  7. 7. Eligibility for FDI in India • Derecognized as class of investors in India w.e.f. September 16, Erstwhile 2003. Overseas • Can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of GOI, if investment Commercial is through Government route; and with prior approval of RBI, if Bodies investment is through Automatic route. For those incorporated outside India and are not under the adverse notice of RBI • FII means an entity established or incorporated outside India which proposes to make investment in India and which is registered as a FII in accordance with the Foreign SEBI (FII) Regulations 1995) Institutional • SEBI registered FII can invest directly in Indian Investors(FII) company under FDI Policy • Can also invest though a registered broker on recognized Exchange
  8. 8. Eligibility for FDI in India • SEBI registered FVCIs are also allowed to invest under the FDI Scheme, as non-resident entities subject to FDI Policy and Foreign FEMA regulations in Venture • SEBI registered IVCU Capital Fund • SEBI registered IVCF • Other companies as per FDI policy • QFIs can invest through SEBI registered DP(for listed Qualified companies), equity shares of other Indian companies which Foreign are offered to public in India Investors • Individual & aggregate investment limit is 5% and 10% respectively of the paid up capital of an Indian
  9. 9. Entities Into Which FDI Can Be Made Partnership Venture Indian Firm/ Capital Trusts LLPs Company Proprietorsh Funds ip
  10. 10. Indian Company Indian Company Can issue capital against FDI, i.e. Equity shares, Fully and mandatorily convertible preference shares, Fully and mandatorily convertible Debentures, ADRs/
  11. 11. Partnership Firm/ Proprietary Concern Non Repatriation Repatriation NRI or PIO resident outside NRIs/PIO only with prior India can invest approval of RBI Investment by Inward remittance or out of NRE/FCNR/NRO account Note: 1) An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business or print media. 2) Other than NRI/PIO can invest with prior approval of
  12. 12. Venture Capital Fund FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs) /Venture Capital Funds (VCFs) /other companies. A person resident outside India can invest in Domestic VCF set up as a trust, subject to approval of the FIPB. A person resident outside India can invest in a domestic VCF is set-up as an incorporated company under the Companies Act, 1956 under the automatic
  13. 13. Trusts and Limited Liability Partnerships Limited Liability Trusts Partnerships FDI in Trusts other than VCF is not FDI is permitted, subject to certain permitted
  14. 14. Entry routes for FDI in India Automatic Approval Route Route Foreign investor or the Foreign investor or the Indian company should Indian company doesnt obtain prior approval of require any approval from Foreign Investment RBI or GOI Promotion Board (FIPB)
  15. 15. Types of Instruments Fully & Fully & Compulsorily ADRs/GDRs/ Compulsorily Equity Shares convertible convertible FCCBs preference debentures
  16. 16. Pricing Guidelines • Listed Companies- SEBI guidelines Fresh Issue of • Unlisted Companies- Not less than fair value determined by SEBI registered Merchant shares Banker or a Chartered Accountant as per DFCF Preferential • Issue Price shall not be less that the price as applicable to transfer of shares from resident Allotment to
  17. 17. Pricing Guidelines • Company listed on recognised stock exchange - At a price as determined by the company Right Shares • For others- At a price which is not less than the price at which the offer on right basis is made to the resident shareholders • Companies listed on recognized stock exchange- negotiated price for shares, which shall not be less than the price at which the preferential allotment of shares can be made under the SEBI Acquisition/ guidelines, as applicable. transfer of existing • Price per share arrived at certified by a SEBI registered Merchant shares (private Banker or a Chartered Accountant. arrangement) • Companies not listed on recognized stock exchange- negotiated price for shares, which shall not be less than the fair value to be determined by a SEBI registered Merchant Banker or a Chartered Accountant as per
  18. 18. Total Foreign Investment in Indian Company Indirect Foreign Direct Foreign Investment by Total Foreign Investment by Resident Indian Investment in non resident entity, having Indian entity into Foreign Company Indian company
  19. 19. Direct Foreign Investment in Indian Company forfurther Investment Direct Foreign Investment in Indian Company for further Investment Operating cum Investing Investing Company Non Operating Company Company Sectoral Caps and Pricing Approval of FIPB for Guidelines etc. to be formation of investing Approval of FIPB is required complied with, as per FDI company with FDI
  20. 20. Calculation of Direct and Indirect Foreign Investment Direct Foreign Investment All investment directly by a non-resident entity into the Indian
  21. 21. Calculation of Direct and Indirect Foreign Investment Indirect foreign Investment Investment by Indian companies owned and controlled by resident Indian citizens and/or Indian Companies which are owned and controlled by resident Indian citizens- This would not be considered for calculation of the indirect foreign investment. Cases where condition (a) above is not satisfied or if the Indian investing company is owned or controlled by ‗non resident entities- the entire investment would be considered as indirect foreign investment. Exception: 100% owned subsidiaries of operating-cum-investing/investing companies, will be limited to the foreign investment in the operating-cum- investing/ investing companyNote: A company is considered as Controlled by resident Indian citizens if the resident Indian citizens and Indian companies,which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors in that companyA company is considered as Owned‘ by resident Indian citizens if more than 50% of the capital in it is beneficially owned byresident Indian citizens and / or Indian companies, which are ultimately owned and controlled by resident Indian
  22. 22. Down Stream Investment Invests 49% in Y Ltd Y Ltd, Indian Company Foreign Company Total Indirect X Ltd, Indian Company Foreign Investment Less than 50% Investment in X Ltd is
  23. 23. Down Stream Investment Invests 15% in Y Ltd Y Ltd, Indian Company Foreign Company Total Indirect X Ltd, Indian Company Foreign Investment More than 50% Investment in X Ltd is
  24. 24. Down Stream Investment Invests 90% in Y Ltd Y Ltd, Indian Company Foreign Company X Ltd, Indian Company Total Indirect More than 50% Foreign Investment Investment in X Ltd is
  25. 25. Down Stream Investment Invests 100% in Y Ltd Y Ltd, Foreign Company Wholly Owned Subsidiary of X Ltd X Ltd, Indian Company Total Indirect 75% Investment in Foreign Investment X Ltd is
  26. 26. Modes of Investment under FDI Modes of Investment Conversion of ECB / Lumpsum Fee / Transfer of Royalty / Import Acquisition of existing shares of capital shares under Issue of fresh Issue of Rights by Person goods by SEZs Scheme of shares / Bonus shares resident in or into Equity/ Merger / outside India Import Amalgamation payables / Pre incorporation
  27. 27. Issue of Fresh Shares & Swap • Indian company may issue fresh shares /convertible Issue of Fresh debentures under FDI Scheme to PROI (who is eligible for Shares investment in India) subject to compliance with FDI policy and FEMA Regulations • Issue can be done in lieu for the consideration which has to Issue of shares to a be paid for shares acquired in the overseas company, with non-resident prior approval of FIPB and in compliance of pricing against shares swap
  28. 28. Issue of Rights / Bonus shares An Indian company may issue Rights / Bonus shares to existing non-resident shareholders, subject to adherence to sectoral cap, reporting requirements, etc. Issue of Right • Right Shares- Specific prior permission from RBI. /Bonus shares to • Bonus shares- Without prior approval of RBI. Should not Erstwhile OCBs be in the adverse list of RBI. Additional • Investee company can allot the additional rights shares allocation of rights out of unsubscribed portion, subject to the condition that the overall issue of shares to non-residents in the total share by residents paid-up capital of the company does not exceed the to non-residents sectoral
  29. 29. Conversion of ECB / Lumpsum Fee / Royalty /Import of capital goods by SEZs into Equity/ Importpayables / Pre incorporation expenses Conversion of Lump-sum Import of Import of Pre-operative / ECB into technical capital goods capital goods / pre – shares / know-how by units in machinery / incorporation convertible fee/royalty SEZs equipment expenses debentures General Can issue equity permission shares to non Allowed under Allowed under General under automatic residents, Government Government Permission route or SIA / subject to route route FIPB route
  30. 30. Acquisition of shares under Scheme of Merger /Amalgamation Mergers & Amalgamations of companies in India are usually governed by an order issued by a competent Court. The transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject to following conditions Percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap, and Transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI
  31. 31. Transfer of Shares Transfers of Transfer where Transfers where existing shares by FIPB Approval RBI Approval is PRI to PROI or vice required required versa By Gift By
  32. 32. Transfers of existing shares by PRI to PROI orvice versa by way of Gift By Gift Non Resident to Non Non Resident to Resident to Non Resident Resident resident Comply with Sectoral General Approval of RBI General Caps/Pricing Permission is with specific Permission Guidelines/ granted conditions Reporting
  33. 33. Transfers of existing shares by way of Sale Non Resident to Non Non Resident to Resident Resident General General Permission, if sale through Permission recognised Stock Exchange granted Where transfer is under SEBI guidelines and pricing guidelines are not met, provided following conditions are met Comply with Pricing Compliance FDI policy and complies with CA certificate is with reporting FEMA relevant SEBI obtained and other regulations regulations
  34. 34. Transfers of existing shares by way of Sale Resident to Non Resident General Certain Permission Adhere to conditions to be FIPB approval NOC from granted, if sale SEBI(SAST) fulfilled if pricing where required regulators through Stock Regulations guidelines are Exchange not met Comply with Pricing is CA Certificate of FDI Policy and compliant with compliance of FEMA specific SEBI regulations regulations
  35. 35. Transfer of Shares by Resident to NonResident requiring FIPB approval Transfer of shares from residents to non-residents by way of sale or otherwise Transfer of shares resulting in Transfer of shares of companies foreign investments in the Indian engaged in sector falling under the company, breaching the sectoral Government Route. cap
  36. 36. Prior permission of the Reserve Bank in certain cases for acquisition / transfer of security Deferment of payment PRI who intends to Transfer of shares from of the amount of transfer any security, NRI to NR consideration by way of gift to
  37. 37. Investments other than FDI Investments other than FDI Foreign Venture Other Investments on Foreign Portfolio Capital investments (G- non-repatriable Investments Investments Sec, NCDs, etc)
  38. 38. Foreign investments under Portfolio InvestmentScheme (PIS) Transfer of shares Prior Investment in acquired intimation to Entities listed Indian under PIS Reserve Bank companies under private of India
  39. 39. Entities • Eligible to purchase shares and convertible debentures FIIs registered with SEBI issued by Indian companies. • Eligible to purchase shares and convertible debentures , if permitted by designated branch of any AD Category - I NRIs bank (which has been authorized by RBI to administer the PIS) SEBI approved sub accounts of FIIs (sub • General permission granted accounts) • Not permitted to invest. Erstwhile Overseas • OCBs which have already made investments under the PIS Commercial Bodies are allowed to continue holding such shares / convertible debentures till such time these are sold on stock
  40. 40. Investment in Listed Companies FIIs An Individual FII/ SEBI approved sub Total holdings of all FIIs / accounts SEBI approved sub accounts of FIIs Limit of 24% can be The limit would increased to the Maximum 10% include shares held Shall not exceed 24 sectoral cap / investment of paid- by SEBI registered % of paid-up capital statutory limit, by up capital or paid-up FII/ sub accounts of or paid-up value of passing a Board value of each series FII under PIS as well each series of resolution followed of convertible as shares acquired convertible by a special debentures by SEBI registered debentures. resolution and FII subject to prior approval from
  41. 41. Reporting of FDI By Company Conversion of Equity Fresh issue of Shares Transfer of Shares into equity ESOPs for allotment of ADRs/GDRs equity
  42. 42. Fresh Issue of Shares Reporting of Inflow • Details of amount of consideration within 30 days from the date of receipt in Advance Reporting Form. • Equity instruments shall be issued within 180 days, and have to file Form FC-GPR within 30 days from the date of issue • FC-GPR for Issue of bonus/rights shares or shares on conversion of stock options issued under ESOP to persons resident outside India directly or on amalgamation / merger with an existing Indian company, as well as issue of shares on conversion of ECB / royalty / lumpsum technical know-how fee / import of capital goods by units in
  43. 43. Transfer of shares Reporting of FDI for Transfer of shares route • Reporting of transfer of shares between residents and non-residents and vice- versa is to be made in Form FC-TRS • It should be submitted to the AD Category – I bank, within 60 days from the date of receipt of the amount of consideration. • Onus of submission of the Form FC-TRS within the given timeframe would be on the transferor / transferee, resident in India. • The sale consideration in respect of equity instruments purchased by a person resident outside India, remitted into India through normal banking channels, shall be subjected to a KYC check by the remittance receiving AD Category – I bank at the time of receipt of
  44. 44. Conversion of ECB into equity Reporting of conversion of ECB into equity • Details of issue of shares against conversion of ECB has to be reported to concerned Regional Office of RBI • In case of full conversion of ECB into equity, the company shall report the conversion in Form FC-GPR as well as in Form ECB-2. • In case of partial conversion of ECB, converted portion in Form FC-GPR well as in Form ECB-2 clearly differentiating the converted portion from the non-converted
  45. 45. ESOPs Reporting of ESOPs for allotment of equity shares • The issuing company is required to report the details of issuance of ESOPs to its employees within 30 days from the date of issue of ESOPs. • At the time of conversion of options into shares in FC-GPR, within 30 days of allotment of such
  46. 46. ADRs/GDRs Reporting of ADR/GDR Issues • Indian company issuing ADRs / GDRs has to furnish full details of such issue in the Form DR, within 30 days from the date of closing of the issue. • Company should also furnish a quarterly return in the Form-DR Quarterly, within 15 days of the close of the calendar
  47. 47. Prohibited Sectors Lottery Business including Government /private lottery, online lotteries, etc. Retail Trading (except single brand product retailing) Real Estate Business or Construction of Farm Houses Trading in Transferable Development Rights (TDRs) Nidhi
  48. 48. Prohibited Sectors Chit funds Gambling and Betting including casinos etc. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems)
  49. 49. Foreign Investment Promotion Board FIPB Secretaries to Government Department of Chairperson- Department of Industrial Policy Economic Department of Commerce, Ministry of & Promotion, Relations, Economic Ministry of Overseas Indian Ministry of Ministry of Affairs, Ministry Commerce & Affairs Commerce & External Affairs of Finance Industry
  50. 50. Levels of Approvals for cases under GovernmentRoute Cabinet Committee on Economic Minister of Finance Affairs (CCEA) Would consider recommendations of FIPB on proposals with total foreign In-charge of FIPB equity inflow of more than Rs. 1200 crore Would consider the recommendations of It would also consider proposals which FIPB on proposals with total foreign may be referred to it by the FIPB/ the equity inflow of and below Rs.1200 Minister of Finance
  51. 51. Cases which do not require Fresh Approval(For bringing in additional foreign investment into the same entity) Required FIPB/CCFI/CCEA approval was obtained at the time of initial foreign investment, and the activity was subsequently came under automatic route Prior approval of FIPB/CCFI/CCEA was obtained for activities with sectoral caps at the time of initial foreign investment, and the caps were removed/increased and the activities placed under the automatic route. Additional investment alongwith the initial/original investment shall not exceed the sectoral caps Prior approval of FIPB/CCFI/CCEA had been obtained at the time of original foreign investment due to requirements of Press Note 18/1998 or Press Note 1 of 2005 and prior approval of the Government under the FDI policy is not required for any other reason/
  52. 52. Compounding of Offences under FEMA Compounding • Under Section 13(1) of the FEMA, 1999, an applicant under FEMA can seek compounding voluntarily • Contravention of any provision of FEMA, 1999,or any What can be rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes compounded any condition subject to which an authorization is issued by RBI • RBI empowered to compound contraventions of all sections of FEMA, 1999, except Section 3(a) of the Act Powers of • Directorate of Enforcement empowered to compound Compounding contraventions under Section 3(a) of FEMA, 1999 (dealing essentially with Hawala transactions)
  53. 53. Type of Contravention Technical and/or Material Serious/ Sensitive minor Money Laundering, Needs only an National and Security Compounding of the administrative concerns involving contravention cautionary advice serious infringement of regulatory frameworkNote: Master Circular dated July 2, 2012 issued by RBI reserves the right to classifythe contraventions as stated above and neither the contravener nor others have any rightto classify any contravention as technical suo-
  54. 54. Process of Compounding • To be submitted with Compounding Authority on being advised of a contravention under FEMA, 1999, either through a memorandum or suo moto on being made or on becoming aware of the contravention Application • After completion of proceedings, order to be issued by the authority within 180 days from the date of the receipt of application Order • Authority may call for any additional information, to be submitted within specified period Additional
  55. 55. Process of Compounding • Application will be examined to assess whether the contravention is compoundable and the amount of contravention is quantified. Examination & Assessment • Penalty up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees Two lakh, where the amount is not quantifiable • If contravention is a continuing one, further penalty which may extend to Rs. 5000/-for every day after the first day during which the contravention continues. • FE (Compounding Proceedings) Rules, 2000, prescribes the power to compound the contravention with regard to the sum involved in such contravention. Penalty • No contravention shall be compounded unless the amount involved in the contravention is
  56. 56. Thank You! Arun Gupta Corporate Professionals, D-28, South Ex-Part-1, New Delhi - 110 049, India, (B): 09810275571, +91 11 40622214 Our Gamut of Services Investment Banking | Corporate Restructuring | Stock Exchange Services | Securities Laws & Capital Market Advisory | Corporate Compliances & Due Diligence | Global Business Setup | Corporate Taxation | Forex & Overseas Transactions | Corporate Finance |