FOREIGN EXCHANGE MANAGEMENT ACT RECENT DEVELOPMENTS FOREIGN DIRECT INVESTMENTS (FDI)

Transcription

1 FOREIGN EXCHANGE MANAGEMENT ACT RECENT DEVELOPMENTS IN FOREIGN DIRECT INVESTMENTS (FDI) Presented By: S.Dhanapal Senior Partner S DHANAPAL & ASSOCIATES Practising Company Secretaries

2 Regulatory Framework Foreign investment in India is governed by sub-section (3) of Section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time. Foreign Direct Investment (FDI) in India is undertaken in accordance with the FDI Policy which is formulated and announced by the Government of India. The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India issues a Consolidated FDI Policy Circular on an yearly basis on March 31 of each year (since 2010) elaborating the policy and the process in respect of FDI in India. S DHANAPAL & ASSOCIATES Practising Company Secretaries

3 Regulatory Framework DIPP makes policy pronouncements on FDI through Press Notes/ Press Releases which are notified by the RBI as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No. FEMA 20/2000RB dated May 3, 2000). The procedural instructions are issued by the Reserve Bank of India vide A.P. Dir. (series) Circulars. The regulatory framework, over a period of time, thus, consists of Acts, Regulations, Press Notes, Press Releases, Master Directions, Clarifications, etc. S DHANAPAL & ASSOCIATES Practising Company Secretaries

4 Modes of Foreign Investment S DHANAPAL & ASSOCIATES Practising Company Secretaries

5 S DHANAPAL & ASSOCIATES

6 HISTORY OF FDI IN INDIA FDI in India can be traced with the establishment of East India Company of Britain Japanese companies entered Indian market After Second World War U.K. remained the most dominant investor in India After Independence issues like foreign capital, operations of MNCs, gained attention of the policy makers. S DHANAPAL & ASSOCIATES Practising Company Secretaries

7 Meaning and objective of 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 As per the consolidated FDI policy issued by DIPP on , the intent and objective of the Government of India to attract and promote foreign direct investment is in order to supplement domestic capital, technology and skills and for accelerated economic growth. S DHANAPAL & ASSOCIATES

8 Entry Routes for FDI S DHANAPAL &

9 Who can Invest in India? A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited To explain in detail - S DHANAPAL & ASSOCIATES

10 Entities in which investment can be made S DHANAPAL & ASSOCIATES

11 Entities in which investment can be made FDI in Venture Capital Fund (VCF) FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs) /Venture Capital Funds (VCFs) /other companies. If a domestic VCF is set up as a trust, a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF subject to approval of the FIPB. If a domestic VCF is set-up as an incorporated company under the Companies Act, 1956/2013, then a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF under the automatic route of FDI Scheme, subject to the pricing guidelines, reporting requirements, mode of payment, minimum capitalization norms, etc. S DHANAPAL & ASSOCIATES

12 Entities in which investment can be made FDI in Trusts: FDI in Trusts other than VCF and Real Estate Investment Trusts is not permitted FDI in Limited Liability Partnerships (LLPs) Sectors covered under Automatic Route FDI in other Entities: FDI in resident entities other than those mentioned above is not permitted. S DHANAPAL & ASSOCIATES

13 ELIGIBLE INSTRUMENTS Other types of Preference shares/debentures i.e. non-convertible, optionally convertible or partially convertible for issue of which funds have been received on or after May 1, 2007 are considered as debt. The inward remittance received by the Indian company vide issuance of Depository Receipts and FCCBs are treated as FDI and counted towards FDI. S DHANAPAL & ASSOCIATES

14 Conditions for making Investment CAPS ON INVESTMENTS - 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. The caps in various sector(s) are discussed in subsequent slides. ENTRY CONDITIONS ON INVESTMENT - Investments by non-residents can be 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. The entry conditions in various sectors/activities are discussed in subsequent slides. OTHER CONDITIONS ON INVESTMENT BESIDES ENTRY CONDITIONS - 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. S DHANAPAL & ASSOCIATES

15 SECTOR SPECIFIC CONDITIONS PROHIBITED SECTORS Lottery Business including Government /private lottery, online lotteries, etc. Gambling and Betting including casinos etc. Business of Chit funds Nidhi company Trading in Transferable Development Rights (TDRs) Real Estate Business or Construction of Farm Houses 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). S DHANAPAL & ASSOCIATES

16 PERMITTED SECTORS In sectors/activities covered under automatic route in which FDI is permitted upto 100% under the automatic route without conditionalities. In the following sectors/activities, FDI up to the limit indicated against each sector/activity is allowed, subject to applicable laws/ regulations, security and other conditionalities. S DHANAPAL ASSOCIATES &

17 FDI in Real estate S DHANAPAL ASSOCIATES &

18 HISTORICAL TRANSITION At the time when FEMA came into existence, Press Note 2 (2000 series) was governing the Real Estate Sector. As per Press Note 2 (2000 sr.) FDI was not permitted in Housing and Real Estate Sector. NRIs and OCBs were allowed to invest in certain specific fields S DHANAPAL & ASSOCIATES Practising Company Secretaries

19 HISTORICAL HISTORICAL TRANSITION TRANSITION Contd.. Contd.. Thereafter, Press Note 4 (2001 Series) revised the guidelines for real estate sector. It inter-alia, permitted the following: FDI upto 100% was permitted with Government Approval for development of integrated townships, including housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, MRTS and manufacture of building materials. S DHANAPAL ASSOCIATES &

20 HISTORICAL TRANSITION Contd.. Although the FDI policy was changed, no amendment was made in the FEM (Transfer or Issue of security by a person Resident Outside India) Regulations Press Note 3 (2002 Series) brought out the guidelines in regard to development of integrated townships including housing and building development. It provided for certain minimum requirements. After this, the famous Press Note 2 (2005 Series) came which substantially liberalized the FDI policy relating to construction-development projects. S DHANAPAL ASSOCIATES &

21 Press Note 2 (2005 Series) 100% FDI under automatic route permitted in townships, housing, built up infrastructure and construction development projects. Objective was opportunities and infrastructure. infrastructure to create new add to housing stock employment and built up It included a specific as well as more comprehensive and exhaustive list of permitted activities. Changes introduced in development and investment criteria as well as other conditions to avail benefit of Press Note 4(2001 series) S DHANAPAL ASSOCIATES &

22 Press Note 2 (2005 Series) Contd.. Item No. 23 included in Annexure B of FEMA Regulations 23. Townships, housing, built-up infrastructure and construction development projects. The sector would include but not restricted to housing, commercial premises, hotels, resorts, hospitals, educational facilities, city and regional level infrastructure. S DHANAPAL ASSOCIATES &

23 POSITION AT PRESENT S DHANAPAL ASSOCIATES &

24 *Subject to conditions S DHANAPAL ASSOCIATES &

25 Conditions to be satisfied S DHANAPAL ASSOCIATES &

26 Other Important Points Conditions pertaining to investment and development criteria and development of at least 50% project within 5 years are not applicable to: S DHANAPAL ASSOCIATES &

27 New requirements as per consolidated FDI Policy (Effective from June 07, 2016) Construction-development projects (which would include development of townships, construction of residential/commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure, townships are all considered as permitted activities under Automatic approval upto 100%.

28 Each phase of the construction development project would be considered as a separate project for the purposes of FDI policy. Investment will be subject to the following conditions: (A) (i) The investor will be permitted to exit on completion of the project or after development of trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage. (ii)notwithstanding anything contained at (A) (i) above, a foreign investor will be permitted to exit and repatriate foreign investment before the completion of project under automatic route, provided that a lock-in-period of three years, calculated with reference to each tranche of foreign investment has been completed. Further, transfer of stake from one non-resident to another non-resident, without repatriation of investment will neither be subject to any lock-in period nor to any government approval.

29 (B) The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/Municipal/Local Body concerned. (C) The Indian investee company will be permitted to sell only developed plots. For the purposes of this policy developed plots will mean plots where trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage, have been made available. (D) The Indian investee company shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/byelaws/regulations of the State Government/Municipal/Local Body concerned. (E)The State Government/Municipal/Local Body concerned, which approves the building/development plans, will monitor compliance of the above conditions by the developer.

30 Note: (i)it is clarified that FDI is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in transferable development rights (TDRs). (ii) Real estate business means dealing in land and immovable property with a view to earning profit there from and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning of rent/ income on lease of the property, not amounting to transfer, will not amount to real estate business. (iii)condition of lock-in period at (A) above will not apply to Hotels &Tourist Resorts Hospitals Special Economic Zones (SEZs), Educational Institutions, Old Age Homes and investment by NRIs. (iv)completion of the project will be determined as per the local bye-laws/rules and other regulations of State Governments. ( Obtaining Completion Ceritificate) (v)it is clarified that 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres. Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted. However, there would be a lock-in-period of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period.

31 S DHANAPAL ASSOCIATES &

32 Wrap up on Real Estate Huge systematic and regulatory changes required at State Level. Varied legal framework of each Indian State inhibits free flow of FDI Availability of land for this sector is constrained by various laws, example Land Reforms Act. S DHANAPAL & ASSOCIATES

33 S DHANAPAL & ASSOCIATES

34 PRIMER ON RETAIL TRADE India Being signatory to WTO s General Agreement on Trade in Services had to open up retail trade to FDI. Reservations due to fear of job losses, competition, loss of entrepreneurial opportunities etc. 1997, FDI in cash and carry (wholesale) trade was opened up to 100% under Government Route. In 2006 it was brought under Automatic Route. S DHANAPAL & ASSOCIATES

35 MEANING OF RETAIL In 2004, The High Court of Delhi defined the term Retail as A sale for final consumption in contrast to a sale for further sale of processing. A sale to ultimate consumer. Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. S DHANAPAL & ASSOCIATES

36 DIVISION OF RETAIL INDUSTRY

37 ENTRY ROUTES PRIOR TO FDI POLICY S DHANAPAL & ASSOCIATES Practising Company Secretaries

38 Objectives of FDI In Retail Trade Foreign Investment in retail trading is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices S DHANAPAL & ASSOCIATES

39 SITUATION AT PRESENT As per the Consolidated FDI Policy effective from June 7, 2016 S DHANAPAL & ASSOCIATES

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58 Post your reflections to S DHANAPAL (B.COM, B.A.B.L., F.C.S) Senior Partner S Dhanapal& Associate s (a Firm of Practising Company Secretaries) Suite No.103, First Floor, Kaveri Complex, 96/104, Nungambakkam High Road, (Next to NABARD & ICICI Bank), Nungambakkam, Chennai Land-line / 0257 Dir Cell