Foreign Direct Investment Policy and Schedule I. Moin Ladha, Associate Partner, Khaitan & Co 15 December 2017

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1 Foreign Direct Investment Policy and Schedule I Moin Ladha, Associate Partner, Khaitan & Co 15 December 2017

2 About Us Heritage Firm Trusted lawyers to leading business houses, MNCs and government since Asialaw Asia-Pacific Legal Practice Awards 2017 Law Firm of the Year India Law Firm of the Year South Asia Full Service Law Firm Pan-India presence Relationship driven approach Specialist teams Country desks Almost 500 professionals (including 113 partners and directors) with top skills and experience of high-profile engagements. Widespread clientele serviced from offices in Mumbai, Delhi, Bengaluru and Kolkata. Proactive assistance on critical business issues across life-cycle and supply-chain. Jurisdictional and sector domain knowledge to provide effective solutions. Support on cross-border client needs and network of international law firms. Ranked as Tier I Indian Law Firm Antitrust / Competition, Corporate & M&A, Private Equity and Tax Ranked as Tier I Indian Law Firm Antitrust / Competition, Banking & Finance, Capital Markets, Corporate & M&A Dispute Resolution, Insurance, Investment Funds, Labour and Employment Projects and Energy, Real Estate, Tax, White Collar Crime Rich talent pool Knowledge bank driven by the philosophy of modern, fair and respected environment. Most ranked lawyers by Legal (49 lawyers). Ranked as Tier I Indian Law Firm - Corporate & M&A - Capital Markets Copyright Khaitan & Co

3 Khaitan & Co: Full Service Firm Mergers & Acquisitions Capital Markets & Fund Raising General Corporate Advisory Banking and Finance Intellectual Property Direct and Indirect Taxation Competition and Anti-trust Energy, Infrastructure Resources White Collar Crime Telecommunication Labour & Employment Real Estate Environment Litigations and Disputes Hospitality Copyright Khaitan & Co

4 INDEX 1. History of FDI in India and Evolution of Indian economy 2. Overview and Some Key Concepts 3. Legal Regime and Regulatory Framework 4. Eligible Investors and Eligible Investee Entities 5. Investment Routes, 6. Downstream Investment 7. Investment Instruments 8. Other Modes of Investment 9. Payment Modes 10. Pricing Guidelines 11. Treatment of Startups 12. Merger, Demerger and Amalgamation 13. Reporting Requirements 14. Sectoral Analysis 15. Compounding of Offences Copyright Khaitan & Co

5 History of FDI in India (1/6) India: Pre 1991 Fiscal indiscipline - fiscal deficit at 13% of GDP (highest since Independence) Very low growth rate Hindu Rate of Growth (stagnant at 2-4%) Rise in external debt balance of payment crisis, inability to finance imports Loss of investor confidence long term finance rating at its lowest Excessive interference of the Government red tape, policy paralysis Virtually no private sector - License Raj Liberalisation Reforms of 1991 Systemic shift to an open economy end of License Raj Magnified role of private sector de-regularisation and privatisation of industries Trade liberalisation, financial liberalisation address balance of payment problem and structural rigidities Major economic reforms to liberalise foreign investment in India foundations laid for an investor friendly climate Copyright Khaitan & Co

6 History of FDI in India (2/6) Department of Industrial Policy and Promotion ( DIPP ) was established 1995 DIPP was established to administer the industrial sector. DIPP has played a key role in formulating and promoting FDI policy in India. Its role has gradually evolved from being solely concerned with regulating the industrial sector to facilitating investment and technology flows and monitoring industrial development in the context of a liberalized foreign investment environment. Currently, DIPP releases the Annual FDI policy every year which lays down and updates the regulatory framework for incoming foreign investment and also coordinates government initiatives such as Make in India Copyright Khaitan & Co

7 History of FDI in India (3/6) Foreign Exchange Controls From FERA to FEMA 1999 With liberalization the need for an enabling foreign exchange regime became imminent. The Foreign Exchange Regulation Act, 1973 ( FERA ) was based on protectionist post-independence policies which restricted everything unless expressly permitted. Thus, the Foreign Exchange Management Act, 1999 ( FEMA ) was enacted with the intent of creating an enabling regime. Current account transactions were liberalized while restriction could be imposed on capital account transactions. The Reserve Bank of India became one of the chief regulators and policy making bodies under FEMA. Copyright Khaitan & Co

8 History of FDI in India (4/6) Over time, various regulations including FEMA 20 have been notified under the FEMA that lay down the regulatory framework for foreign exchange management Some of the major regulations are as follows: Foreign Exchange Management (Current Account Transactions) Rules, 2000 Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 Foreign Exchange Management (Transfer or Issue of any Foreign Security) regulations, 2004 Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2000 Foreign Exchange Management (Acquisition and transfer of immovable property in India) regulations, 2000 Foreign Exchange Management (Establishment in India of branch or office or other place of business) regulations, 2000 Copyright Khaitan & Co

9 History of FDI in India (5/6) Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 Foreign Exchange Management (Establishment in India of branch or office or other place of business) regulations, 2000 Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2000 Foreign Exchange Management (Export of Goods and Services) Regulations, 2000 Foreign Exchange Management (Realisation, repatriation and surrender of Foreign Exchange)regulations, 2000 Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000 Foreign Exchange (Compounding Proceedings) rules, 2000 Copyright Khaitan & Co

10 History of FDI in India (6/6) Foreign Investment Promotion Board ( FIPB ) FIPB was set up as an agency of the Government of India in 1992 and was housed in the Department of Economic Affairs, Ministry of Finance. It provided a single-window clearance for foreign investment in various sectors of the economy. It s membership comprised secretaries form various government ministries. More than 18+ members; approvals were time consuming and required excessive government liaison FIPB has now been abolished and its responsibilities have been transferred to individual ministries which have been identified as sectoral regulators Applications must beprocessed by relevant department within 8-10 weeks from date of application No rejection or imposition of additional conditions without consent of the Department of Industrial Policy & Promotion which is perceived as a highly business friendly government department Copyright Khaitan & Co

11 Evolution of the Indian Economy Population: 1.30 billion GDP: USD2.09 trillion GDP (PPP) % World GDP: 7.02 Growth at 7.8% in FY 2019 World Bank Report Expected to be the 3 rd largest consumer economy, consumption to triple to USD 4 trillion by Boston Consulting Group report Estimated to surpass USA to become the 2 nd largest economy in terms of PPP by 2040 PricewaterhouseCoop ers report Indian economy likely to grow 7.6% in FY 2018 World Bank Report Copyright Khaitan & Co

12 Foreign Direct Investment (FDI) Overview Complimentary role in overall capital formation Fills gap between domestic savings and investment Flows into primary market; stable source of capital Macro: critical driver of economic growth, major source of non-debt financial resource FDI Micro: boost output; create jobs; technology transfer resource; better management practices Copyright Khaitan & Co

13 FDI Some Key Concepts (1/3) Definition Investment by non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of FEMA 20 Instruments Equity shares CCDs CCPS Warrants Partly paid up shares Convertible notes (for start-ups) Resident Resident and Non-resident Person residing in India for more than 182 days during the preceding financial year (subject to certain exceptions for employment etc) Any person or body corporate registered or incorporated in India Anoffice, branch or agency in India owned or controlled by a person resident outside India Anoffice, branch or agency outside India owned or controlled by a person resident in India Non-Resident A person who is not resident in India Copyright Khaitan & Co

14 FDI Some Key Concepts (2/3) Guaranteed returns Guaranteed returns are not permitted (as the RBI sees them as circumventing its debt rules) and all hybrid instruments must convert into equity Indian obligors cannot normally take refuge under Indian laws for contractually agreed put options at assured returns. DCF replaced with any internationally accepted pricing methodology Pricing guidelines No guaranteed returns Non-resident cannot acquire securities from a resident below FMV Non-resident cannot sell securities to a resident above FMV Deferred consideration Deferred consideration (and escrow) permitted for upto 18 months from the date of the transfer agreement, and indemnities permitted for upto 18 months from the date of the payment of full consideration, both for a maximum amount of 25% of the full consideration, without RBI approval Considerably simplifies deal structuring and may help in evolution of completion accounts/ pure holdback Copyright Khaitan & Co

15 FDI Some Key Concepts (3/3) Optionality Clauses Permitted subject to 1 year lock-in (or higher period prescribed by regulator) No assured return. Exit price to be determined using internationally accepted pricing methodology Warrants and partly paid shares Partly paid equity shares and warrants (for listed companies) permitted for companies in automatic sector 25% of consideration to be paid upfront, balance to be brought in 12 months (for partly paid equity shares) and 18 months (for warrants) Price/ conversion to be determined upfront Total price of equity shares and conversion price of warrants to comply with pricing mechanism Copyright Khaitan & Co

16 FDI Legal Regime (1/2) The legal regimes governing FDI inindia consists of: FEMA, 1999 (Related FEMA regulations including FEMA 20) The consolidated FDI Policy released by the DIPP every year, the most recent being FDI Policy The FDI Policy subsumes and supersedes all Press Notes/Press Releases/Clarifications/Circulars issued by DIPP as of August 27, The policy pronouncement are made by the DIPP through press notes/press releases - notified by the RBI as amendments to FEMA 20. However, since FEMA 20 constitutes legal regulation, in case of any conflict with the FDI Policy, the provisions of FEMA 20 shall prevail. Most recently, the RBI has notified the newly amended Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2017 (notification no. FEMA 20(4)/2017-RB) Copyright Khaitan & Co

17 FDI Legal Regime (2/2) Applicable Provisions Regulation 5 (1) of FEMA 20 provides for instruments in capital instruments and states that the same is subject to conditions specified in Schedule I. The Annual FDI Policy and FEMA 20 mirror each other Copyright Khaitan & Co

18 Regulatory Framework for FDI Government of India Ministry of Finance Ministry of Commerce and Industry Department of Economic Affairs RBI Department of Industrial Policy and Promotion Relevant ministry/ department to provide approval* Foreign Exchange Department Secretariat for Industrial Assistance * Earlier through FIPB. Copyright Khaitan & Co

19 Eligible Investors Non-residents FPIs can invest under Schedule 2 of FEMA 20 A company, trust and partnership firm incorporated outside India and owned and controlled by NRIs Overseas Corporate Bodies (OCBs) have been de-recognized since Existing OCBs can invest in India with prior approval from Government (approval route) or RBI (automatic route). Treatment of NRIs Non-Resident Indian (NRI) means an individual resident outside India who is citizen of India; Investments by NRI s under Schedule 4 of FEMA 20 considered to be at par with domestic investment and is deemed to be domestic investment Company, trust and partnership firm incorporated outside India and owned and controlled by non-resident Indians will be eligible for investments under Schedule 4 of FEMA 20 and such investment will also be deemed domestic investment at par with the investment made by residents. Copyright Khaitan & Co

20 Eligible Investee Entities (1/2) Foreign Entity Companies Trusts Partnerships LLPs Incorporated Entity Unincorporated Entity Joint Venture Wholly Owned Subsidiary Approval of RBI Activities permitted under FEMA Treated as Foreign company Application with ROC for registration and incorporation Subject to Indian laws and regulations Branch Office Liaison Office Project Office Undertake permitted commercial activities Cannot undertake commercial activity Promote import/export Facilitate collaboration Specific projects Temporary project/ site offices Copyright Khaitan & Co

21 Eligible Investee Entities (2/2) ENTITY ADDITIONAL CONDITIONS Indian company Partnership Firm/ Proprietary Concern Can be as joint ventures or wholly owned subsidiaries NRI or person of Indian origin can invest subject to conditions on repatriation, remittance mode. Such entities cannot be in agricultural/ plantation or real estate business or print media engaged Trusts and Investment Vehicles Not permitted in Trusts other than in VCFs registered and regulated by SEBI as an investment vehicle. Investment vehicles under the relevant SEBI regulations such as REITs, Invits or AIFs are permitted to receive foreign investment LLPs FDI is permitted under the automatic route in Limited Liability Partnerships (LLPs) for sectors/activities where 100% FDI is permitted and where there are no FDI linked performance conditions, downstream investment by an Indian company or LLP is also permitted in companies in sectors with 100% FDI under automatic route. Startups Startup Companies can issue equity linked instruments or debt instruments to FVCIs against receipt of foreign remittance. Additionally, startups can also issue convertible notes to persons resident outside India provided consideration is receive through banking channels or by debit to the NRE/FCNR (B)/ Escrow account Investment in entities other than what is explicitly mentioned in the policy is not permitted. Copyright Khaitan & Co

22 Investment Routes (1/2) Investments can be made by non-residents in the capital of a resident entity only to the extent of the percentage of the total capital as specified in the FDI policy Investments by non-residents are permitted in the capital of a resident entity in certain sectors/activity with entry conditions. Such conditions may include norms for minimum capitalization, lock-in period, etc on certain sectors. Besides the entry conditions on foreign investment, the investment/investors are required to comply with all relevant sectoral laws, regulations, rules, security conditions, and state/local laws/regulations. Copyright Khaitan & Co

23 Investment Routes (2/2) Automatic Route Residual category applies to all sectors in which investments are not prohibited and are not under approval route. If a sector is not listed in the FDI policy, it falls under this route Approval Route Foreign Investment requires the prior approval of the relevant ministry / department (for investment in sectors above a certain threshold) Investment Routes Prohibited Sectors Negative list of sectors in which no foreign investment is permitted Copyright Khaitan & Co

24 Downstream Investment (1/4) Downstream Investment mean investment by an Indian entity of investment vehicle in another Indian entity Indirect foreign investment means when downstream investment is received from: (a) (b) an entity which is not owned or controlled by an Indian citizen or is owned or controlled by a person resident outside India an investment vehicle whose sponsor or manager is not is not owned or controlled by an Indian citizen or is owned or controlled by a person resident outside India Ownership refers to holding more than 50% share instruments while control refers to the right to appoint majority of the directors or to control the management or policy decisions Such investment is subject to sectoral caps Copyright Khaitan & Co

25 Downstream Investment (2/4) Illustration 1: No Indirect Foreign Investment Foreign Shareholder Resident Indian Citizens Resident Indian Citizens (A) 55% / 5% + Right to Appoint Majority on Board Indian Shareholder Company (A) + (B) = 45% / 95% (B) Indian Investing Company 80% Indian Investee Company Foreign Holding in the Investee Company = 80% Copyright Khaitan & Co

26 Downstream Investment (3/4) Illustration 2: 75% Indirect Foreign Investment Foreign Shareholder Resident Indian Citizens Resident Indian Citizens (A) 55% / 5%+Right to Appoint Majority on Board (A) + (B) = 45% / 95% Indian Shareholder Company (B) Indian Investing Company 100% Indian Investee Company Foreign Holding in the Investee Company = 55% / 5% Copyright Khaitan & Co

27 Downstream Investment (4/4) Illustration 3: 51% Indirect Foreign Investment Foreign Shareholder Resident Indian Citizens Resident Indian Citizens (A) 50% (A) + (B) = 50% Indian Shareholder Company (B) Indian Investing Company 80% Indian Investee Company Foreign Holding in the Investee Company =? (Policy uses phrase for cases where condition (a) above is not satisfied Implication?) Copyright Khaitan & Co

28 Investment Instruments foreign direct investment for companies, Foreign Direct Investment (FDI) means investment through capital instruments by a person resident outside India in an unlisted Indian company; or in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company; Various Capital Investments under FDI are:- Equity Shares Compulsory Convertible Debentures Compulsory Convertible Preference Shares Warrants (Listed Companies) at least 25% consideration will be paid upfront and rest within 18 months from the date of issuance of warrants Partly Paid-up Shares - fully called-up within 12 months, 25% consideration paid upfront Convertible Notes (Start-ups) Copyright Khaitan & Co

29 Other Modes of Investment (1/2) RIGHTS ISSUE Regulation 6 of FEMA 20 provides for acquisition through a rights issue or a bonus issue subject to the following conditions: Issue shouldn t lead to breach in sectoral cap Shareholding, on the basis of which the issue is being made must have been acquired as per FEMA regulations For listed companies the rights issue shall be at a price determined by the company For unlisted companies the rights issue shall be at a price less than the price offered to persons resident in India Remittance will be through banking channels ACQUISITION ON STOCK EXCHANGES BY NON-RESIDENTS Schedule I of FEMA 20provides that a non-resident is permitted to acquirer capital instruments on Indian stock exchanges provided that: It has already acquired control and continues to hold control over such company. Consideration is also permitted to be paid out of dividends payable by an Indian company provided the non-resident is in control of such company and dividend amount has been credited to a specially designated non-interest bearing rupee account *Control has the meaning under SEBI Takeover Regulations. Copyright Khaitan & Co

30 Other Modes of Investment (2/2) ESOPS Regulation 7 of FEMA 20provides for issue of shares under Employee Stock Options Scheme to persons resident outside India An Indian company may issue employee s stock option and/or sweat equity shares to the employees/directors or employees/directors who are resident outside India. There should be compliance with relevant SEBI Regulations and Companies (Share Capital and Debentures) Rules, 2014 Employee s stock option/sweat equity shares soissued should be in compliance with sectoral caps applicable to the said company Issue will require government approval in a company which is under the government route GOVERNMENT APPROVAL Swap of capital instruments if the Indian investee company is engaged in a sector under Government route Import of capital goods/ machinery/ equipment (excluding second-hand machinery) subject to compliance with the conditions specified by the Central Government and Pre-operative/ pre-incorporation expenses (including payments of rent etc.), subject to compliance with the conditions specified by the Central Government and the Reserve Bank from time to time the RBI Copyright Khaitan & Co

31 Payment Modes Inward remittance from abroad through banking channels or out of funds held in NRE/ FCNR(B)/ Escrow account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, This includes: Issue of equity shares by an Indian company against any funds payable by it to the investor Swap of capital instruments For issuances, the instrument should be issued within 60 days of remittance Copyright Khaitan & Co

32 Pricing Guidelines (1/2) Pricing guidelines as per Regulation 11 of FEMA Pricing guidelines have been provided in Regulation 11 of FEMA 20. They are applicable both for the issue to non-residents and transfer of securities involving both residents and non-residents. For issuance of shares to non-residents or transfer from resident to non-resident, the price cannot be less than the fair price mentioned below: Listed - the price worked out in accordance with the relevant Securities and Exchange Board of India guidelines in case of a listed Indian company or in case of a company going through a delisting process as per the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; Unlisted - the valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm s length basis duly certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company. Copyright Khaitan & Co

33 Pricing Guidelines (2/2) For transfer from non-resident to resident, the price cannot be more than the fair price. For transfer from resident to non-resident, the price cannot be less than the fair price. Fair price is calculated as under: (2) transferred from a person resident in India to a person resident outside India shall not be less than: (a) the price worked out in accordance with the relevant Securities and Exchange Board of India guidelines in case of a listed Indian company; (b) the price at which a preferential allotment of shares can be made under the Securities and Exchange Board of India Guidelines, as applicable, in case of a listed Indian company or in case of a company going through a delisting process as per the Securities and Exchange Board of India (Delisting of Equity Shares) regulations, 2009; (c) the valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm s length basis duly certified by a Chartered Accountant or a Securities and Exchange Copyright Khaitan & Co

34 Treatment of Start-ups under FDI Policy (1/5) Introduction Classic convertible note (Note) was one of the most preferred instruments for early stage funding of startups in Silicon Valley and other 'advanced startup ecosystems. It represented a debt which converted into equity only upon the occurrence of a contingent event (for instance, the issuing startup receiving the next round of funding). If such an event did not take place, the Note continued to represent the debt, which was repayable by the issuing startup. On 10 January 2017, the Reserve Bank of India (RBI) notified the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Fifteenth Amendment) Regulations 2016 (Amendment). Under the Regulations, until now, foreign direct investment (FDI) in Indian startup companies could only be made by persons resident outside India (Foreign Investors) by subscribing to equity instruments and other instruments that were considered on par with equity instruments (such as mandatorily and fully convertible debentures / preference shares and warrants) of such investee companies. Copyright Khaitan & Co

35 Treatment of Start-ups under FDI Policy (2/5) Regulation 8 of FEMA 20 provides for the issue of Convertible Notes by an Indian Startup Company subject to the following major conditions: Issue of convertible notes will be in compliance with sectoral caps, pricing guidelines and other conditions to foreign investment. Government approval in case the sector falls under government approval route will be required Amount of consideration may be received by the start-up company by inward remittance through banking channels or by debit to the NRE/ FCNR (B)/ Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, A NRI or an OCI may acquire convertible notes on non-repatriation basis in accordance with Schedule 4 of these Regulations. person resident outside India may acquire or transfer by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the entry routes and pricing guidelines as prescribed for capital instruments Copyright Khaitan & Co

36 Treatment of Start-ups under FDI Policy (3/5) Relevant Definitions under Regulations Convertible Note means an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument (Regulation 2(vi)); Startup means an entity which complies with the conditions laid down in Notification No. G.S.R 180(E) dated February 17, 2016 issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (Regulation 2(xli)); Copyright Khaitan & Co

37 Treatment of Start-ups under FDI Policy (4/5) Startup company means a private company incorporated under the Companies Act, 2013 and recognised as such in accordance with notification number G.S.R. 180(E) dated February 17, 2016 issued by the Department of Industrial Policy (Regulation 2(xli)). Under the DIPP the same is defined as: Startup means an entity, incorporated or registered in India : Not prior to seven years, however for Biotechnology Startups not prior to ten years, With annual turnover not exceeding INR 25 crore in any preceding financial year, and Copyright Khaitan & Co

38 Treatment of Start-ups under FDI Policy (5/5) Working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation Provided that such entity is not formed by splitting up, or reconstruction, of a business already in existence. Provided also that an entity shall cease to be a Startup if its turnover for the previous financial years has exceeded INR 25 crore or it has completed 7 years and for biotechnology startups 10 years from the date of incorporation/ registration. Provided further that a Startup shall be eligible for tax benefits only after it has obtained certification from the Inter-Ministerial Board, setup for such purpose. Copyright Khaitan & Co

39 Merger or demerger or amalgamation of Indian Companies (1/2) Regulation 9 provides for Merger or demerger or amalgamation: Provides for situations where a scheme of merger or amalgamation between two or more companies or reconstruction by way of demerger of an Indian company is taking place which has been approved by the National Company Law Tribunal/Competent Authority In such cases the new company or the transferee company may issue capital instruments to the existing holders of the transferor company resident outside India However, this should be in compliance with entry routes, sectoral caps and investment limits as the case may be The transferor or the transferee company should not engage in any sector prohibited for investment Copyright Khaitan & Co

40 Merger or demerger or amalgamation of Indian Companies (2/2) Upon approval by NCLT/Competent Authority the Indian company can also issue non-convertible redeemable preference shares or non-convertible redeemable debentures out of its general reserves by way of distribution as bonus to the shareholders resident outside India here again, the original investment should be in compliance with the Regulations sector should not be a prohibited sector said issue should be in accordance with provisions of company law or any other relevant approvals Copyright Khaitan & Co

41 Reporting Requirements (1/2) Regulatory reporting requirements as per Regulation 13 of FEMA Advance Remittance Form (ARF) form to be filed with regional office of the RBI within30 days of receipt of consideration by an Indian company for issue of capital instruments considered as foreign direct investment under these regulations Form Foreign Currency-Gross Provisional Return (FC-GPR) - form to be filed with the regional office of the RBI within 30 days of the issue of capital instruments considered as foreign direct investment by an Indian company to a foreign entity Annual Return on Foreign Liabilities and Assets (FLA) An Indian company or LLP which has received investment by way of capital contribution in the previous years including current years should submit FLA to the RBI before 15 th day of July every year Form Foreign Currency Transfer of Shares (FC-TRS) Applicable to a transfer of capital instruments to a foreign resident Copyright Khaitan & Co

42 Reporting Requirements (2/2) Form Employees Stock Option Applicable to an Indian Company issuing employees stock option to persons resident outside Indian who are its employees/directors Form Depository Receipt Return (DRR): Domestic Custodian to report in Form DRR Form LLP (I) LLP receiving amount of consideration for capital contribution and acquisition of profit shares shall submit Form LLP(I) Form LLP(II) Disinvestment/transfer of capital contribution or profit share between a resident and a non-resident shall be reported in Form LLP (II) Form LEC (FII) AD Banks shall report to the RBI in Form LEC (FII) the purchase/transfer of capital instruments by FPIs on the stock exchanges in India LEC (NRI) Applicable to AD Banks for the purchase/transfer by NRI/OCI Form Convertible Note Indian Startup Company to report to AD Bank Copyright Khaitan & Co

43 Automatic Route AUTOMATIC ROUTE Manufacturing Development of Housing Asset Reconstruction Companies (Up to 100%) Agriculture & Animal Husbandry Pharmaceuticals- Brownfield (Up to 74%) Single Brand Product Retail trading (Up to 49%) Mining of metal, non-metal ores and Coal & Lignite Defence (up to 49%) E-commerce Petroleum / Natural Gas Plantations Telecom Services (Up to 49%) Courier Service Power Exchanges (Up to 49%) Industrial Parks Air Transport Services Duty Free Shops Construction Development Greenfield Pharmaceutical Insurance Company (Up to 49%) Broadcasting IT / ITES / SEZs Credit Information Companies Teleports (setting up of up-linking HUBs/ Teleports); Trading Commodity Exchange (Up to 49%) Maintenance of Aircrafts Railway Infrastructure Ground Handling Services Insurance (Up to 49%) Greenfield Airports Air Transport Services Banking - Private Sector (Up to 49%) Cable Networks D2H & Mobile TV Copyright Khaitan & Co

44 Approval Route GOVERNMENT ROUTE Mining of Titanium Insurance (beyond 49%) Trading, including through e-commerce, in respect of food products manufactured and/ or produced in India Defence (beyond 49%) Banking - Public Sector (up to 20%) Telecom (beyond 49%) Terrestrial Broadcasting FM (up to 49%) Banking Private Sector (beyond 49% and up to 74%), Up-Linking of News & Current Affairs TV Channels (up to 49%) Print Media (up to 26%) Multi Brand Retail (Up to 51%) Single Brand Retail (beyond 49%), Multi Brand Retail Trading (MBRT) up to 51%) Publishing Private Security Agencies (up to 49%) Satellites Establishment and operation Brownfield Pharmaceuticals (beyond 74%) Telecom Services (Beyond 49%) Copyright Khaitan & Co

45 Approval Process Application for approval to be placed before the relevant sectoral authority specified under the FDI Policy. In case of any doubt about the relevant authority, DIPP is empowered to determine the relevant authority. In case an approval is rejected or additional conditions are imposed by an authority, concurrence of DIPP is required. Proposals involving FDI of more than INR 5000 crore to be place before Cabinet Committee of Economic Affairs. Applications can be filed online. In case the application is not digitally signed, then a physical copy required to be sent. Comments to be uploaded by the authority within 4 weeks of receipt of application (except in some cases) failing which it is deemed that they have no comments. Certain sectors (such as broadcasting, telecom, defence, civil aviation, mining) also require comments from Ministry of Home Affairs Applications may be sent by the authority to DIPP for clarifications in relation to questions on FDI Policy. Copyright Khaitan & Co

46 Sector Analysis Foreign Investment is prohibited in the sectors mentioned below Investment is capped in the sectors where foreign investment is permitted, with a composite cap applicable to foreign portfolio investments and foreign direct investments Sector specific conditions to be adhered to, over and above the sector caps PROHIBITED Lottery Business Chit Funds Trading in Transferable Development Rights (TRDs) Gambling and Betting Nidhi Company Atomic Energy, Railway Operations Manufacturing of cigars, cheroots, cigarillos and cigarettes, or tobacco or tobacco substitutes Real Estate Business or Construction of Farm Houses Foreign technology collaboration Copyright Khaitan & Co

47 Sectoral Regulators under the FDI Policy Key Sectoral Regulators under the FDI Policy are as follows: Defence Ministry of Defence Broadcasting I&B Ministry Telecommunications Dept. of Telecommunications Banking Dept. Financial Services Financial Services not regulated by any financial sector regulator/cics Department of Economic Affairs Private Security Agencies and investments from Countries of Concern Ministry of Home Affairs Trading (Single brand, Multi brand, Food product retail trading DIPP Pharmaceuticals Department of Pharmaceuticals Copyright Khaitan & Co

48 Sectoral Caps I Examples (1/3) Some examples of major sectors are as follows: MANUFACTURING 100% under automatic route A manufacturer is permitted to sell its products manufactured in India through wholesale and/ or retail, including through e-commerce without Government approval. Notwithstanding the provisions of these regulations on trading sector, 100 percent foreign investment under Government approval route is allowed for trading, including through e-commerce, in respect of food products manufactured and/ or produced in India. Applications for foreign investment in food products retail trading would be processed in the Department of Industrial Policy & Promotion before being considered by the Government for approval. Copyright Khaitan & Co

49 Sectoral Caps I Examples (2/3) E-COMMERCE B2B E-commerce activities 100% - Automatic o Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well. Marketplace model of e-commerce 100% - Automatic Copyright Khaitan & Co

50 Sectoral Caps I Examples (3/3) CERTAIN FINANCIAL SERVICES Asset Reconstruction Companies 100% - Automatic subject to provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Banking Private Sector 74% - Automatic up to 49% Government route beyond 49% and up to 74%. This is also subject to conditions such as at all times, at least 26% of the capital will have to be held by residents except in regard to a wholly owned subsidiary of a foreign bank Other Financial Services 100% - Automatic - Activities regulated by financial sector regulators, viz., RBI, SEBI, IRDA, PFRDA, NHB or any other financial sector regulator as may be notified by the Government of India Copyright Khaitan & Co

51 COMPOUNDING OF OFFENCES (1/2) Penalty Provisions under FEMA Person contravening FEMA provisions is liable to pay penalty on adjudication Penalty Amount: up to 3 times sum involved If continuing: additional Rs 3000 per day Adjudicating Officer may also direct: Confiscation of property involved; or Direct property to be brought into India / retained overseas Compounding of Contravention Person contravening may file application for compounding in specified form Contravention cannot be compounded if appeal is filed before Special Director (Appeals) / Appellate Tribunal Application has to be disposed of in 180 days of application receipt Once compounded no proceeding to be initiated / continued for same contravention Copyright Khaitan & Co

52 COMPOUNDING OF OFFENCES (2/2) FOREIGN EXCHANGE (COMPOUNDING PROCEEDINGS) RULES, 2000 Only those contraventions that are quantifiable can be compounded Broad Classification Contraventions involving dealing in or transfer of forex / foreign security to persons other than authorised person to be compounded by Directorate of Enforcement Contraventions other than the above to be compounded by Reserve Bank of India Procedure Authority may call for any information etc. relevant to the compounding proceedings Applicant is given an opportunity of being heard Authority passes an order within 180 days from date of application Post Compounding Post compounding, amount has to be paid within 15 days from the date of the order Post compounding similar contravention by same person cannot be compounded for 3 years Specific guidelines have now been prescribed for calculation of amounts to be paid for compounding of offences. Copyright Khaitan & Co

53 Khaitan & Co asserts its copyright as the author of this presentation. The contents of this presentation are for informational purposes only. Khaitan & Co disclaims all liability to any person for any loss or damage caused by reliance on any part of this presentation.