FDI Regime: A investor friendly look

Introduction to Draft Press Note on FDI Regulatory Framework

A striking and commendable move by DIPP: to come out with consolidated and comprehensive FDI Regulatory Framework. Foreign Direct Investments by non-resident in resident entities through transfer or issue of security to person resident outside India is a ‘Capital account transaction’ and Government of India and Reserve bank of India regulate this under the FEMA 1999 and its various regulations. Keeping in view the current requirements, the Government comes up from time to time with new regulation, amends/changes in existing one through order/allied rules, Press Notes, etc. The current FDI law is spread over FCRA, FEMA, various circulars, guidelines and press notes; the DIPP has issued about 177 Press Notes, covering various aspects of FDI policy, including cross border investment, policy liberalisation, policy rationalisation and foreign technology collaborations, Industrial Policy. Hence there was a need for consolidation of the FDI policy to make it more transparent, predictable, understandable, simple and clear; thus reducing the regulatory burden and promoting foreign direct investment.

At the very onset, the press note clarifies that it does not make any change in the existing law and any matters not covered in the press note will be continued to be dealt in the manner as under the existing laws. Thus the FDI law is kept intact, and this Press note is an attempt to consolidate the various Acts, Regulations, Press Notes, Press Releases, Clarifications, etc issued and enacted over the past years.

The draft consolidated document released on 24th December 2009 is open for comments until January 31, 2010 and a final document will be released by April 1st 2010. The Government proposes to issue Press Note on FDI Regulatory Framework twice a year in April and October which would be the current regulatory framework on that date; hence incorporating and reflecting all the changes in the regulations during the intervening period of six months. The new system of continuous consolidation and updation is primarily evinced as a measure of investor and investment friendliness.

This Press Note when comes into force will have the effect of rescinding all previous Press Notes on FDI issued by DIPP, and any action taken under the rescinded Press Notes shall in so far as it is not inconsistent with this Press Note be deemed to have been taken under the corresponding provisions of this Press Note.

FDI Regulations: Brief

FDI plays a important role in the accelerated economic growth of a country, and so it does for India which is now fast integrating with the global economy. Over the past years FDI regime has been directed more and more towards liberalisation, allowing free FDI flow in India. The article makes an attempt to capture some of the salient features of the current FDI Regime in a consolidated manner as also reflected in the new draft press note.

Eligibility of Sources of foreign investment

The eligibility criteria for various sources of foreign capital in Indian companies is stated below:

Eligibility of Sources of foreign capital

Eligibility of Resident entities and Instruments

The resident entities which are eligible to receive foreign investment may be classified as follows:

Eligibility of Resident entities and type of instruments

Investments can be made by non-residents in the shares/convertible debentures/preference shares of an Indian company, through two routes; the Automatic Route and the Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. Under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required.

Investment would be subject to the ‘Previous/existing venture/tie-up condition’. Foreign investment include all types of foreign investments i.e. FDI, investment by FIIs, NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds (FCCB), convertible debentures and preference shares.

Direct and Indirect Foreign Investment

Any non-resident investment in an Indian company is direct foreign investment. An Indian company would have indirect foreign investment if the Indian investing company is owned and controlled by non-residents. An Indian company is said to be ‘Owned and Controlled’ by ‘non-resident entities’, if more than 50% of the equity interest in it is beneficially owned by non-residents or if non-residents have the power to appoint a majority of its directors.

Illustraton for Indirect Foreign investment

The entire investment of Indian company owned and controlled by non residents is considered indirect foreign investment (as demonstrated through Illustration 1), except where the investment is made in a wholly owned subsidiary(WOS) of the Indian company, then the downstream investment in the WOS of such Indian company would be a mirror image of the holding company(as demonstrated through Illustration 2); i.e. if non resident investment in the Indian company is 75%, then the indirect foreign investment in the WOS of Indian company would be 75%.

Any indirect foreign investment would be required to follow the same norms as a direct foreign investment such as entry route, conditionalities and sectoral caps. For the purpose of computation of indirect foreign investment, Foreign Investment in Indian company shall include all types of foreign investments i.e. FDI, investment by FIIs(holding as on March 31), NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds (FCCB) and convertible preference shares, convertible Currency Debentures.

Remittance and Repatriation

The AD Category I bank can allow remittance of sale proceeds/remittance on winding up/Liquidation of Companies of a security (net of applicable taxes) to the seller of shares resident outside India, provided-

  • the security has been held on repatriation basis
  • the sale of security has been made in accordance with the prescribed guidelines and
  • NOC / tax clearance certificate from the Income Tax Department has been produced

Dividends are freely repatriable without any restrictions, subject to Foreign Exchange Management (Current Account Transactions) Rules, 2000, as amended from time to time.

Author: Neha Singhi

Contact: +91-33-40083385

Date: January 15, 2010

[1] Stakeholders include shareholders, creditors, financiers, consumers, government, employees and public at large.

One reply on “FDI Regime: A investor friendly look”

One query in the context of the Consolidated FDI Circular:1. The Circular aollws FVCI’s to invest into DVCF’s under the automatic route.2. In the event the FVCI holds > 51% of the units of the DVCF (assuming DVCF is set up as trust), will the downstream by the DVCF considered as FDI and hence subject to the same restrictions?3. The policy as such seems to apply only to companies and not trusts, also in these cases FVCIs do not really control the DVCF. The control is with the trustee/managerAny thoughts? Any real life FIPB comments that anyone may share? Thanks.

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