Consolidated FDI Policy 2014- Changes vis-à-vis policy of 2013 The following article summarizes key changes in FDI policy of 2014 vis-à-vis FDI policy of 2013. The article also captures relevant A.P. (Dir Series) Circular issued by RBI giving effect to changes in FEMA. 1. Change in Definition of Control : Prior to the FDI policy of 2014, control was defined as 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 company. The scope has been significantly expanded and the new definition is reproduced as under- Control shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. 2. New Definition of Group Company: Group Company means two or more enterprises which, directly or indirectly, are in a position to: Exercise twenty-six percent or more of voting rights in other enterprises; or Appoint more than fifty percent of members of board of directors in the other enterprises. 3. Unlisted companies allowed to raise capital abroad: Unlisted companies shall be allowed to raise capital abroad by way of issue of FCCB/ADR/GDR without the requirement of prior or subsequent listing in India initially for a period of two years w.e.f 11th October, 2013, subject to the following conditions: Unlisted companies shall list abroad only on exchanges in IOSCO/FATF compliant jurisdictions or those with which SEBI has signed bilateral agreements; The Companies shall file a copy of the return which they submit to the proposed exchange/regulators also to SEBI for the purpose of Prevention of Money Laundering Act (PMLA). They shall comply with SEBI s disclosure requirements in addition to that of the primary exchange prior to the listing abroad; While raising resources abroad, the listing company shall be fully compliant with the FDI policy in force; The capital raised abroad may be utilized for retiring outstanding overseas debt or for bona fide operations abroad including for acquisitions; In case the funds raised are not utilized abroad as stipulated above, such companies shall remit the money back to India within 15 days from the date of raising of funds and such money shall be parked only in AD Category-1 banks recognized by RBI and may be used domestically;
The ADRs/GDRs shall be issued subject to sectoral cap, entry route, minimum capitalization norms, pricing norms, etc. as applicable as per FDI regulations notified from time to time The pricing of such ADRs/GDRs to be issued to a person resident outside India shall be determined in accordance with the provisions of the scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme 1993, and guidelines issued by the government of India and directions issued by the Reserve Bank of India, from time to time; The number of underlying equity shares offered for issuance of ADRs/GDRs to be kept with the local custodian shall be determined upfront and ratio of ADRs/GDRs to equity shares shall be decided upfront based on applicable FDI pricing norms of equity shares of unlisted company; The unlisted Indian company shall comply with the instructions on downstream investment as notified from time to time; The criteria of eligibility of unlisted company raising funds through ADRs/GDRs shall be as prescribed by Government of India; 4. Transfer of shares: As per the earlier FDI policy, in case of transfer of shares from Residents to Non- Residents where the investee company is in the financial services sector, NOC was required to be obtained from the respective financial sector regulator(s) of the investee company as well as transferor and transferee entities and such NOC(s) was required to be filed with form FC-TRS to the AD bank. However, in current FDI policy, the requirement of obtaining of NOC has been waived off, instead the requirement of 'fit and proper due diligence' of non-resident investor is required to be complied with. These changes have also been introduced vide A. P. (DIR Series) circular No. 72 dated November 11, 2013. A person resident outside India including a Non-Resident Indian investor who has already acquired and continues to hold the control in accordance with the SEBI (Substantial Acquisition of Shares and Takeover) Regulations can acquire shares of a listed Indian company on the stock exchange through a registered broker under FDI scheme provided that the original and resultant investments are in line with the extant FDI policy and FEMA regulations in respect of sectoral cap, entry route, mode of payment, reporting requirement, documentation, etc. (In this connection RBI has issued A. P. (DIR Series) circular No. 127 dated May 2, 2014, stating that where the NR investor including an NRI acquire shares on the stock exchanges, the investee company would have to file form FC-TRS with the AD category-i bank). 5. Issue of Non convertible / redeemable bonus preference shares or debentures [A. P. (DIR SERIES)Circular No. 84 dated January 6, 2014]: Indian companies are allowed to issue non-convertible/redeemable preference shares or debentures to non-resident shareholders, including the depositories that act as trustees for the ADR/GDR holders, by way of distribution as bonus from its general reserves under a Scheme of Arrangement approved by a Court in India under the provisions of the Companies Act, as applicable, subject to no-objection from the Income Tax Authorities.
6. Types of instruments: FDI Policy of 2014 reiterates the view of RBI of not allowing exit to investor at an assured return. Accordingly it states that, Equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares without any option/right to exit at an assured price shall be reckoned as eligible capital instruments. Optionality clause however, can be attached to instruments, provided that it does not result in assured return to Non Resident investor. Accordingly, FDI policy of 2014 does allow optionality clauses in equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, subject to the following conditions [A. P. (DIR SERIES) Circular No. 86 dated January 9, 2014]: There is a minimum lock-in period of one year or a minimum lock-in period as prescribed under FDI Regulations, whichever is higher (e.g. defence and construction development sector where the lock-in period of three years has been prescribed). The lock-in period shall be effective from the date of allotment of such capital instruments or as prescribed under the FDI Policy, e.g for defence and construction development sectors, etc. After the completion of lock-in period, as applicable above, and subject to FDI Policy provisions, if any, in this regard, the non-resident investor exercising option/right shall be eligible to exit without any assured return, at following price: i. In case of listed companies: at the market price of such security, prevailing at recognised stock exchange. ii. iii. In case of unlisted companies: for exit from investment in equity shares, at a price not exceeding the price determined on the basis of Return on Equity (ROE) as per the latest audited balance sheet. (For the above purpose, ROE shall mean Profit After Tax / Net Worth; Net Worth would include all free reserves and paid up capital). For exit from investment in CCDs and CCPs: at a price determined as per internationally accepted pricing methodology. The price so determined, is required to be certified by chartered accountant or a merchant banker registered with SEBI. 7. Sectoral changes: Pharmaceutical Sector: Non compete clause would not be allowed except in special circumstances with approval of FIPB. Prospective investor and investee are required to provide a certificate along with FIPB application as per Annex 11. Defence Sector: Entry Route: Upto 26% - government route. Above 26% to Cabinet Committee on Security (CCS) on case to case basis, wherever it is likely to result in access to modern and state of art technology in the country.
Investment by FPIs/FIIs (through portfolio investment) is not permitted. FPI/FII(through portfolio investment) in companies holding defence licence as on 22 August, 2013 (date of issue of Press Note 6 of 2013) will remain capped at the level existing as on the said date. No fresh FPI/FII(through portfolio investment) is permitted even if the level of such investment falls below the capped level subsequently. Telecom Sector: The scope of telecom sector has been enlarged by increasing the FDI up to 100% with 49% on the automatic route and beyond 49% on the government route subject to observance of licensing and security conditions by licensee as well as investors as notified by the Department of Telecommunications (DoT) from time to time, expect Other Service Providers, which are allowed 100% FDI on the automatic route. Tea Plantation Sector: The condition for compulsory divestment of 26% of equity of the company in favour of Indian partner / Indian public within a period of 5 years is dispensed off. Test Marketing: Test marketing (of such items for which company has approval for manufacture, provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facility commences simultaneously with test marketing) industry for which FDI cap was already 100% under government route, the same has been made automatic by deletion of very paragraph relating to FDI cap in new FDI Policy. Single Brand product Retail Trading: FDI cap of 100% which was earlier under government route has been changed and now onwards upto 49% under automatic route and beyond 49% under government route. Multi Brand Retail Trading: The condition of At least 50% of total FDI brought in shall be invested in 'backend infrastructure' of the company receiving FDI within three years of receiving the first tranche of FDI. The same has been modified and now vide new FDI policy at least 50% of total FDI brought in the first tranche of US $ 100 million, shall be invested in 'back-end infrastructure' within three years. Subsequent investment in backend infrastructure would be made by the MBRT retailer as needed, depending upon its business requirements. The other significant change in FDI policy with regard to the MBRT addresses the issue of minimum mandatory sourcing requirement. The MBRT companies with FDI were earlier required to source at least 30% of the value of procurement of the manufactured/processed products from Indian micro, small and medium enterprises ( small industries ) which have total investment of not increasing USD 1 Million in Plant & Machinery. This requirement has been revised with respect to the limit on total investment in small industries which has now been increased to a maximum of USD 2 Million. It is interesting to note that the small industry status would be reckoned only at the time of first engagement with the retailer and such industry shall continue to qualify as a small industry for this
purpose even if it outgrows the said investment of USD 2 Million during the course of its relationship with the said retailer. Hence, effectively, if once an industry qualifies as a small industry, it will continue to remain so for that particular retailer, even if it crosses the prescribed limit of USD 2 million. Amendments to list of states allowing FDIs - Two states namely Himachal Pradesh and Karnataka implement the FDI policy on MBRT in their states. Asset reconstruction Company: FDI cap has been revised to 100% (from 74 %) of paid up capital of ARC for FDI/FII/FPI. (Entry route upto 49% automatic route and beyond 49% government route). Credit Information Companies: FDI cap has been revised to 74% from 49%. (Entry route for the same has been made automatic as against previous route for prior approval of government). In the sectors relating to Petroleum and Natural Gas, Courier services, Commodity Exchange, Infrastructure companies in the Securities Market (namely stock exchanges, depositories and clearing corporations, in compliance with SEBI regulations)and Power Exchanges, the government has eased the FDI norms by doing away with the approval procedure from the government route and the investments can now be brought through automatic route. Reporting of Issue of shares: Indian Companies, post issue of shares to the foreign investors, are required to file Form FC GPR along with a certificate from chartered accountant. As per the Consolidated FDI policy, the companies with the paid up capital of Rs. 5 crore or more are required to obtain certificate from SEBI registered Merchant Banker or Chartered Accountant. Earlier, such companies were allowed to obtain such certificate either from Statutory Auditor or from a Chartered Accountant.