Foreign Source Funding Options

Foreign Source Funding Options 28 October, 2017

Index Inbound Investments FDI Policy Legal Framework & Regulators Typical Foreign Investment Windows FDI Policy at a glance Eligible Investors Foreign Funding Sources Typical investment instruments Equity Preference shares / Debentures ESOP External Commercial Borrowing Overview Masala Bonds FCCBs Convertible Notes Start-ups FDI in LLP

Inbound Investments

FDI Policy Legal Framework and Regulators Press Notes FEMA 20 RBI Circulars / Notifications FDI Policy (2017) Department of Industrial Policy & Promotion (DIPP) Foreign Investment Facilitation Portal (FIFP) Reserve Bank of India (RBI) Securities Exchange Board of India (SEBI) Administrative Ministries

Typical Foreign Investment Windows FDI RFPI The Scheme Automatic route DIPP/ Concerned Ministry approval Subject to sectoral caps Allows NRI Repat Investment Three categories prescribed by SEBI For Stock Market Purchases/ Private placements of securities to be listed Shares, Convertible debentures Individual - 10% / Aggregate ceiling - 24% / Subject to sectoral cap P Notes Regulator DIPP/Ministry/ RBI SEBI/ RBI

Typical Foreign Investment Windows NRI Portfolio/ Repatriable Investment Market Purchases- Shares, Convertible Preference & Debentures, Units of an investment vehicle Individual - 5%/ Aggregate ceiling - 10% ; extension - 24% The Scheme Subject to FDI policy Non-Repatriation No limit Treated as domestic investment Covers NRI including a Company, Trust, Partnership firm incorporated outside India and owned and controlled by such non - residents Equity shares, Convertible Preference Shares & Debentures, Units representing beneficial interest in investment vehicle All sectors except real estate, Nidhi & agriculture Regulator RBI

Typical Foreign Investment Windows FVCI LLP Other Investment Vehicles The Scheme Investment in unlisted ventures with exit on listing Equity or Equity linked instruments/ Debt instruments of an Indian Company identified in 10 sectors, Start up Company Category one AIF Contribution to the Capital/ Acquisition or transfer of profit shares Automatic route: Permissible in sectors where 100% FDI allowed under automatic route and there are no FDI linked performance conditions Pricing guidelines applicable NRI, RFPI, Investment in units of vehicles like REITs, InvITs, AIFs Downstream investment shall be regarded as foreign investment on fulfillment of conditions if the sponsor /Manager is not Indian owned and controlled Regulator SEBI/ RBI RBI SEBI/ RBI

FDI Policy at a Glance Permitted Restricted Prohibited 100% FDI permitted without approvals in most sectors Approval required for Licensed Industries Hazardous Chemicals Defence Equipment Some Sectors FDI Cap Private Banking 74% Civil Aviation 100% Insurance 49% Multi Brand Retail 51% Single Brand Retail 100% Print Media 26% Broadcasting and Cable Networks 100% Defence sector 100% Agriculture (some exceptions) Gambling & Lottery Chit Funds, Nidhi Company and Trading in Transferable Development Rights Real estate (except construction development and REIT) Tobacco products Govt. sector only Railways Atomic Energy FIPB abolished DIPP to refer applications to related Ministry through online Foreign Investment Facilitation Portal (FIFP)

Eligible Investors Person registered outside India Entity Incorporated Outside India Regulated / Restricted Investors Person or entity of Pakistan / Bangladesh prior Ministry of Home Affairs (MHA) and DIPP approval NRIs / Citizens of Nepal and Bhutan investment in free foreign exchange through normal banking channels Non-resident / NRI / PIO investment on repatriation basis in capital of Sole Proprietorship / Partnership RBI approval Prohibited sectors : agricultural /plantation, real estate, print media

FOREIGN FUNDING SOURCES

Typical investment instruments Capital Debt Equity Shares Compulsorily Convertible Preference Shares Compulsorily Convertible Debentures Partially/ Non-Convertible/ Redeemable Preference Shares Partially/ Non- Convertible/ Redeemable Debentures Foreign Currency Convertible Bonds Convertible notes ECB

Typical investment instruments Equity Shares Fully paid shares for cash Pricing guidelines Listed companies As per SEBI guidelines Unlisted companies - not less than fair value of shares as per any internationally accepted pricing methodology on arm s length basis. Partly paid up shares Pricing to be determined upfront 25% (including share premium) to be received upfront Balance to be received within 12 months (not in case where issue size is greater than 500 Cr and as per SEBI regulations) DIPP approval required to capitalize imported capital goods (within 180 days of shipment) / machinery/ pre-operative/ pre-incorporation expenses RBI has allowed buy back option on Equity shares/ CCPs /CCDs Minimum lock-in period of one year or as applicable under FDI regulations; Exit - Without assured return on such buy back listed company - At the prevailing market price at recognised stock exchanges; Unlisted company - Price as per any internationally accepted pricing methodology on arm s length basis.

Typical investment instruments Preference Shares / Debentures Fully and mandatorily convertible preference shares / debentures Required to be fully paid-up The price/ conversion formula to be determined upfront at the time of issue Pricing not to be lower than fair market value determined at the time of issue Optionality clause allowed subject to conditions: minimum lock-in period of one year eligible to exit without any assured return, as per pricing/valuation guidelines issued by RBI Non-convertible/ optionally convertible/ partially convertible preference shares / debentures Treated as debt ECB conditions to apply Interest rate LIBOR + spread as permissible for ECBs of corresponding maturity

Typical investment instruments Preference Shares / Debentures (contd ) Reporting of Inflows Preference shares/convertible debentures within 30 days from the receipt to regional office of RBI FIRC and KYC report of non-resident investor Reporting of Shares Within 30 days from the issue of shares file FC-GPRS with AD Annual return on Foreign Liabilities and Assets with RBI by 15th July every year Taxability of convertible debentures / convertible preference shares Conversion of debenture into shares of the company Not taxable Conversion of preference shares into equity shares of that company Not taxable introduced in Finance Act 2017 Taxable at time of sale of equity shares The period for which convertible instruments are held shall be included for computing period of holding of resulting equity shares

Typical investment instruments ESOPs / Sweat Equity Issued to employees/directors of company/holding co/ joint venture/ wholly owned subsidiary who are resident outside India Subject to sectoral cap Where employee is a citizen of Bangladesh/Pakistan prior approval of Government Furnish Return as per Form-ESOP - to the RBI Regional Office within 30 days from the date of issue of ESOP

Rights and Bonus issue Issue of rights shares/ debentures Indian Co can make right issue to NR provided: It does not result in increase in percentage of foreign equity approved/ permissible Issue and allotment does not exceed sectoral cap Original shares/ debentures are held in accordance with regulations Listed cos: Rights offer at a price determined by the co. Non-Listed cos: price not less than the price offered to resident shareholders Additional allocation out of unsubscribed portion; subject to sectoral cap Share/ debentures to be subject to same conditions as original shares/ debentures Issue of Bonus shares Indian Co can issue bonus shares to NR provided: Original shares held in accordance with the regulations Bonus shares to be subject to same conditions as original shares

Amalgamation and Arrangement Issue of shares under amalgamation/ merger Transferee Co/ New Co to issue shares to NR shareholder of transferor Co provided: Scheme of amalgamation/ merger is duly approved by NCLT Percentage of NR shareholding does not exceed sectoral cap Transferor/ transferees/ New Co not engaged in prohibited sectors W.e.f. 06 January 2014, issue of non-convertible/ redeemable bonus preference shares or debentures, allowed under automatic route, provided - They are issued as bonus out of general reserve, under Scheme of Arrangement approved by the Court; and Subject to NOC from Income Tax Authorities

Conversion of ECB, other entitlements General Permission available for Conversion of ECB into equity/ preference shares provided: Co is engaged in automatic sector or has obtained prior approval Post conversion Foreign equity is within sectoral caps Pricing guidelines for shares complied Compliance with other statutes/ regulations Issue of shares against lump sum fee/ royalty subject to pricing guidelines and compliance with applicable tax laws Govt Approval Route for Issue of shares against Import of capital goods (excl second hand machinery) Pre-operative / pre incorporation expenses

Transfer of Shares Resident to Non-Resident General permission, except Sectors falling under approval route Stock market purchases NOT permissible under automatic route Non-Resident to Resident General permission Pricing norms Maximum of Internationally accepted valuation methodology / price as per SEBI guidelines NR to NR Automatic route No pricing norms RBI approval required if transfer from NRI to NR RBI approval required if: Transfer by way of gift Deferred consideration Pricing norms Minimum of Internationally accepted valuation methodology / SEBI guidelines for IPO/book-building, open offer, delisting, etc.) Reporting in form FC-TRS on e-biz portal within 60 days from the date of receiving consideration Onus on submission lies on resident (irrespective of transferor/transferee) KYC report of person resident outside India to be submitted to AD

Transfer of Shares deferred consideration Introduced by RBI vide amendment to FEM(Transfer or Issue of Security by a Person Resident outside India) (7th Amendment) Regulations, 2016 on May 20th, 2016 Applicable for transfer of shares between R buyer and NR seller or vice-versa Deferred consideration permitted upto 25% of the transaction value To be deposited in an escrow account within a period of 18 months from the date of transfer agreement Applicable only for shares and subject to pricing guidelines

EXTERNAL COMMERCIAL BORROWINGS

An Overview Accessibility under two routes - automatic and approval route; ECBs divided into 3 tracks - ECB Track1 Track II Track III Term Type Medium long Medium Denomination Foreign Currency Indian rupee Min Maturity Average 3-5 years 10 years 3 5 years ECB that can be raised in a financial year under the automatic route - USD 750 million - Infrastructure and manufacturing sectors, NBFC-IFCs, NBFC- AFCs, Holding Companies and Core Investment Companies; USD 200 million - Software development sector; USD 100 million - Micro finance activities USD 500 million - Remaining entities

Eligible Borrowers Track I Track II Track III Companies in manufacturing and software development sectors Shipping and airlines companies. Small Industries Development Bank of India (SIDBI). Units in Special Economic Zones Exim Bank (only under the approval route) Companies in infrastructure sector, NBFC-IFCs, NBFC- AFCs, Holding Companies and Core Investment Companies (CICs) All entities listed under Track I Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) as per SEBI framework. All entities listed under Track I & Track II. NBFCs under RBI framework Not for Profit companies, Societies, trusts and cooperatives, NGOs which are engaged in micro finance activities Companies engaged in miscellaneous services - R&D, training (other than educational institutes), companies supporting infrastructure, companies providing logistics services. Developers of SEZs, National Manufacturing and Investment Zones (NMIZs)

Recognized Lenders International Banks, Capital Markets RECOGNIZED LENDERS Foreign Collaborators- Overseas long Term Investors/ Branches or subsidiaries of Indian Banks Multilateral Financial Institutions Export credit agencies Foreign equity holders Suppliers of equipment Minimum direct equity holding of 25% to qualify as "recognized lender" Debt Equity ratio (DE) norms for ECB/ FCCB more than USD 5 million Automatic route : DE ratio of 4:1 Approval route : DE ratio > 4:1 and upto 7:1

Maturity period and Interest cap Particulars Track1 Track II Track III Maturity Period < USD 50 million (earlier USD 20 million): 3 years > USD 50 million: 5 years 5 years for eligible borrowers* irrespective of the amount of borrowing 5 years for FCCBs/ FCEBs irrespective of the amount of borrowing 10 years - irrespective of amount Exactly as Track I Interest rate Cap (Average Maturity) 3-5 years: 300 bps + 6 month LIBOR > 5 years: 450 bps + 6 month LIBOR Max spread of 500 bps p.a (over applicable benchmark) As per market conditions * Infrastructure and manufacturing sectors, NBFC-IFCs, NBFC-AFCs, Holding Companies and Core Investment Companies

Permitted End Use Track I Track II Track III Under Automatic Route: Capital Expenditures SIDBI - on-lending to the borrowers in the Micro, Small and Medium Enterprises, Units of SEZs - only for their own requirements Shipping and airlines companies - only for import of vessels and aircrafts respectively ECB proceeds can be used for general corporate purpose NBFC-IFCs and NBFCs-AFCs - only for financing infrastructure Holding Companies and CICs - only for on-lending to infrastructure Special Purpose Vehicles (SPVs). Under Approval route: Import of second hand goods as per DGFT) guidelines & On-lending by EXIM Bank Can be used for all purpose excluding: Real estate activities; Investing in capital market; Using the proceeds for equity investment domestically; On-lending to other entities with any of the above objectives Purchase of land For NBFCs : On-lending to infrastructure Sector; Providing capital goods/ equipment to domestic entities by way of lease / hire purchase; Developers of SEZs/ NMIZsonly for providing infrastructure facilities within SEZ/ NMIZ Micro finance sector: on lending to self-help groups or for micro credit or for bonafide micro finance activity including capacity building Other eligible entities - Can be used for all purpose excluding Same as in TRACK II

Masala Bonds - An Regulatory Overview Rupee denominated bonds issued by Indian entities in foreign markets; Applications for issue of bonds by eligible entities to be submitted to Foreign Exchange Department. Interest and principal made in Rupees (attractive for foreign investors due to higher interest arbitrage); Guidelines on masala bonds designed within the overarching principles of ECB Eligible borrowers, Cap amount per annum and end-use restrictions based on ECB guidelines Other points: Min Org Maturity upto USD 50 million - 3 yrs; >USD 50 million 5 yrs All in cost ceiling - 300 basis points above Govt securities rates Related Party (as per IND-AS 24) cannot subscribe/ invest/ purchase these bonds

Taxability Interest on rupee denominated bonds subject to a lower withholding tax rate (5%) Non-resident companies eligible to opt for lower w.h.t rate as per applicable DTAA Treaty Benefit of lower withholding tax rate extended till 01 st July 2020 in Finance Act, 2017 No Capital gains applicable for transfer of Masala bonds from one Non-resident to another Non-resident w.e.f 01 st April 2018

Foreign Currency Convertible Bonds Can be issued subject to sectorial caps; Minimum maturity of 5 years; The call & put option, if any, shall not be exercisable prior to 5 years; Issuance without any warrants attached; Issue related expenses not exceeding 4 per cent of issue size (in case of private placement, not exceeding 2 per cent); ECB regulations applicable to FCCB.

Convertible Notes Available only for "Startup Companies" as defined under Companies Act, 2013 Instrument to be treated as debt to be re-paid or converted into equity shares within 5 years Recognized as a start-up by DIPP All Non-Resident entities/individuals (other than Pakistan or Bangladesh) eligible to purchase Min subscription is Rs.25 lakhs or more in a single tranche Startup cos engaged in sectors falling approval route to obtain Govt approval for issuing Convertible Notes NRIs eligible to purchase Convertible Notes under Non-repatriation route

ECB for Startups - An Overview Entity recognized by Central Govt eligible to access ECB Maturity: Min Avg maturity of 3 years Permissible limit: Borrowings upto USD 3 million per FY either in INR or convertible foreign currency or combination of both No end use restrictions with regard to business use All-in-cost: As per agreed terms between Borrower and Lender Conversion into Equity: freely permitted subject to FDI sectoral guidelines Security: Choice left to borrowing entity Other restrictions: Recognized Lenders must be a FATF member. Overseas branches of Indian Banks not permitted as recognized lenders

Startups FVCI Window Start-ups can issue equity or equity linked instruments or debt instruments to FVCI "Startup " defined to include an entity under Companies Act, 2013 or LLP Act, 2008 - Less than 5 years old - Turnover < Rs.25 crores in preceding FY - engaged in development, commercialization of new products or services driven by technology Additional requirement under FVCI - Splitting up, re-construction of existing business not permitted Turnover as defined under Companies Act, 2013

FDI in LLPs 100% FDI allowed subject to following conditions : Sectors currently eligible for 100% FDI under automatic route Sectors with FDI Linked performance conditions (NBFCs/ Construction Development Projects etc.), agricultural/ plantation activity, print media, real estate business not permitted Indian LLPs engaged in sectors with 100% FDI under automatic route permitted to make downstream investment (w.e.f 3 rd March 2017) Indian Company with 100% FDI under automatic route permitted to convert into LLP (w.e.f 3 rd March 2017) FII/ FVCI/QFI/ a citizen/entity of Pakistan & Bangladesh not eligible to invest Prohibition for LLPs to employ ECBs has been deleted from FEMA. However, suitable amendment in ECB guidelines not yet notified.

FDI in LLPs RBI notification of operational guidelines Foreign Capital participation in LLPs allowed by way of capital contribution/ acquisition of profit share Reinvestment of earnings permitted Investment subject to pricing guidelines- internationally accepted/adopted as per market practice valuation norm Reporting through AD within 30 days of receipt of contribution in Form FDI- LLP (I) Disinvestment/transfer of capital or profit share permitted b/w R to NR and vice versa (FDI-LLP (II) with in 60 days of receipt of funds) All LLPs having fresh FDIs in a FY to file return in Form FLA with RBI on or before 15 th July every year

Thank You R Sridhar Partner, Grant Thornton India LLP Email: Sridhar.r@in.gt.com Mobile : +91 9940083183