FDI Sector Specific Issues NBFC/ Real Estate / Trading / Media - Anup P. Shah 20 th August, 2011 2 Days Conference on FEMA
FDI & Instruments PRAVIN P. SHAH & CO. 2
Relevant Regulations Consolidated FDI Policy DIPP, Ministry of Commerce AP Dir Circulars RBI s changes from time to time FEMA Regulations Mode of Investments + Reporting PRAVIN P. SHAH & CO. 3
Relevant Regulators Part of Commerce Ministry DIPP Formulates FDI Policy FIPB Cases requiring Govt. Approval Part of Finance Ministry RBI Nodal Regulatory Authority PRAVIN P. SHAH & CO. 4
Key Types of Foreign Invst. Invst by PROI in Capital of an Indian Co. Foreign Investment Purchase by PROI of Shs. Of Indian Co. Primary - FDI Secondary Direct Downstream Portfolio Off-Market Repatriable FIIs Non-repatriable NRIs / PIOs PRAVIN P. SHAH & CO. 5
FDI Prohibited FDI in following Sectors is Banned: Chit Fund / Nidhi Agricultural / Plantation (except certain areas) Real Estate business / Trading in TDRs Lottery / Gambling/ Betting / Casinos Atomic Energy Manufacturing of Tobacco & related products Sectors not yet opened to Private Sectors PRAVIN P. SHAH & CO. 6
Types of FDI Foreign Direct Investment Automatic Approval No Permission MoF/FIPB Inflows up to Rs.1200 cr. CCEA Inflows above Rs. 1200 cr. PRAVIN P. SHAH & CO. 7
Instruments Foreign Direct Investment Equity Hybrid Warrants Voting Non-Voting CCDs CCPS PRAVIN P. SHAH & CO. 8
Equity Shares Consideration must be for Cash All other cases FIPB approval Issue Price of FDI Shares Listed Cos. Unlisted Cos. Must be issued within 180 days of funds PRAVIN P. SHAH & CO. 9
Equity Shares DCF Valuation No Guidelines specified Discretion to Valuer in selection of: No. of Years Forecast Discount Rate / WACC Growth Rate Method of Calculation of Terminal Value / Perpetuity Q. Cos. where DCF is difficult? PRAVIN P. SHAH & CO. 10
CCDs Quasi-equity Instruments Subject to ECB restrictions? Cap on Rate of Interest? All-in-cost ceilings like ECBs? Tax Deduction benefits to Investee Co. Can be redeemed / bought back by Co.? Time limit for conversion into Equity? PRAVIN P. SHAH & CO. 11
CCDs Circular 1/2011 Issue Price or Conversion Formula to be specified upfront at time of issue Price @ Conversion Date > FMV @ Issue Date FMV = DCF OR Preferential issue Pricing under ICDR Earlier Issue Price was required Flexibility in Earn-out Formula Deals Beneficial for PE / VCF Deals Co. gets higher Value if performance good PRAVIN P. SHAH & CO. 12
CCDs FIPB has granted time for extending conversion of Convertible Instruments into Shares Milestone-linked conversion of CCDs PRAVIN P. SHAH & CO. 13
NVR Shares Issue of NVR Shares possible? When Useful? If Public Company? Examples PRAVIN P. SHAH & CO. 14
Preference Shares Part of Sectoral Caps Only if CCPS If RPS / OCPS treated as ECBs Must be converted within a reasonable timeframe Plain redemption / buyback possible? Max. Dividend Rate PRAVIN P. SHAH & CO. 15
Others Issue of Warrants? Partly Paid-up Shares Flip-flop in Policy Recent Reports - Proposal Paid-up portion - a part of Capital 25% paid-up upfront Balance within 12 months PRAVIN P. SHAH & CO. 16
FDI in LLPs FDI allowed in LLPs: Only with FIPB Approval and in sectors where Auto Route FDI is allowed Not in sectors where FDI requires FIPB approval Not in sectors linked with performance conditions: RE / NBFC / Trading / Agro/ Print Media Downstream Invst. not possible from LLP FIPB approval reqd. for: Conversion of Co. with FDI into LLP PRAVIN P. SHAH & CO. 17
FDI in LLPs FDI allowed in LLPs: LLPs cannot access ECBs FIIs / FVCIs cannot invest in LLPs Indian Co. with FDI can make a downstream in LLP Both Co. & LLP must be in auto-route sectors Both must not be in performance related sectors Thus, no downstream in RE/ NBFC Foreign Capital in LLP only by way of cash LLP Act permits Other than Cash also PRAVIN P. SHAH & CO. 18
Other Types of Foreign Invst. Type of Invst. Approval Conditions Issue on Merger of Indian Cos. Issue on Demerger of Indian Cos. Share Swap ODI by Issue of Shares ESOP to NR Employees Rights / Bonus Issue Cross-Border Merger PRAVIN P. SHAH & CO. 19
FDI in NBFCs PRAVIN P. SHAH & CO. 20
Specified Activities FDI Prohibited in: Chit Fund Nidhi Company 100% FDI permissible in 18 specified Activities under Automatic Route PRAVIN P. SHAH & CO. 21
Specified Activities 18 Activities under 100% Automatic Route Merchant Banking Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Money Changing Business Venture Capital Custodian Services Factoring Credit Rating Agencies Leasing and Finance Housing Finance Forex broking Credit Card Business Micro Credit Rural Credit PRAVIN P. SHAH & CO. 22
Specified Activities FDI in Commodity Broking Permissible? Is it an NBFC activity? FDI by Banks in Com. Broking? FDI in Wealth Management Services? PRAVIN P. SHAH & CO. 23
Specified Activities FDI in Investing Companies Requires FIPB Approval Irrespective of Ownership & Control of Investment Co. If Investing Co. is a CIC Comply with CIC Regulations of RBI FDI in Shell Co. Prior FIPB Approval Comply with sectoral caps for Downstream Invst PRAVIN P. SHAH & CO. 24
Specified Activities FDI in Investment Companies? Prohibited? Different from Investing Cos. Investing Co.: Definition Other than for Trading of Such Shares What if not for Trading? RBI Act NBFC definition FEMA Regulations 18 Activities Dual stance? PRAVIN P. SHAH & CO. 25
Specified Activities FIPB has several times disallowed FDI in Invst Cos. Does not fall within 18 activities Several FDI Proposals rejected: Nomura Financial s Case FDI for proprietary trading by a NBFC Distinct from FDI for Investment Activities? RBI s views? PRAVIN P. SHAH & CO. 26
Other Financial Cos. Activity FDI Cap Remarks Infrastructure Cos. In Securities Mkt.: St. Ex. (BSE) Depositories (CDSL) Clearing Corp. (NSECCL) Credit Information Cos. (CIBIL) Composite Cap 49% FDI 26% FII 23% Composite Cap 49% FDI 25% FII 24% FDI by Approval Route only SEBI Regs. for St Ex Single For. Investor can hold only 5% FII through secondary markets FDI by Approval Route only + RBI clearance FII through secondary markets PRAVIN P. SHAH & CO. 27
Other Financial Cos. Activity FDI Cap Remarks Commodity (MCX / NCDEX) Exch. Composite Cap 49% FDI 26% FII 23% FDI by Approval Route only + FMC clearance FII through secondary markets ARCs (ARCIL) 49% FDI Cap FDI by Approval Route only FII prohibited investment PRAVIN P. SHAH & CO. 28
Capitalisation Norms NBFC Fund- Based Activities Non- fund based activities PRAVIN P. SHAH & CO. 29
Capitalisation Norms-Fund Based 3 Tiers for Fund based Activities Up to 51% of Capital: US $0.5 M upfront More than 51% - 75% of Capital: upfront US$5M More than 75% of Capital: US $50M out of which US $7.5M. upfront immediately and balance US$42.5 M within 24 months PRAVIN P. SHAH & CO. 30
Capitalisation Norms:Non-Fund Based Activities classified as Non- fund based are 1. Investment Advisory Service 2. Financial Consultancy 3. Forex Broking 4. Money changing business 5. Credit rating agencies PRAVIN P. SHAH & CO. 31
Capitalisation Norms:Non-Fund Based US $ 0.5 M upfront for any amount of investment Prohibition on: Setting up Subsidiary for Activity other than in which Holding Company is engaged Participation in any equity of NBFC holding / Operating Company PRAVIN P. SHAH & CO. 32
Capitalisation Norms Requests to FIPB for relaxation of Cap Norms: Turned down in a host of cases Waiver of norms tantamounts to dilution of Press Notes Despite recession, requests for dilution of capitalisation norms have been rejected PRAVIN P. SHAH & CO. 33
Capitalisation Norms What constitutes Capital Only Equity CCPS / CCDs? Share Premium? PRAVIN P. SHAH & CO. 34
Downstream Invst. by NBFCs Type of NBFC which would be Holdco Fund- based activities Non- fund based Joint Venture- NBFC 100% FDI Min. Cap. US $ 50M No Min. Cap. for Subsidiaries Sub in same activity as Holdco 75% or less FDI Min Cap. for Holdco & Sub. both PRAVIN P. SHAH & CO. 35 35
Contrary Provisions Circular 1/2010 & FEMA Regulations FEMA Regs. & Para 5 of Cir. Para 4.6.4 of Cir. (Press Note 4) Current Position? PRAVIN P. SHAH & CO. 36
Compliance NBFCs which have FDI must submit to RBI a Compliance Certificate for Min. Capitalisation norms & Other Terms Certificate on Half Yearly (Sept or March) basis Within 1 month from the close of the Half Year PRAVIN P. SHAH & CO. 37
FDI in Real Estate PRAVIN P. SHAH & CO. 38
FDI in Real Estate General Prohibitions Real Estate Business Construction of Farm House Trading in Transferable Development Rights (TDRs) Real Estate Business : Meaning Assignment of Development Agreements? Leasing? PRAVIN P. SHAH & CO. 39
FDI in Real Estate Guidelines 100% FDI allowed under Automatic Route subject to conditions in Construction & Development Projects Projects Permitted Housing Commercial Premises Resorts Educational Institutions Recreational Facilities City & Regional Level Infrastructure Townships PRAVIN P. SHAH & CO. 40
Conditions Minimum Area Serviced Housing Plots 10 hectares/25 acres Built-up area: 50,000 sq. mtrs. or 5,38,200 s.ft. Combination Project Any one of above 2 conditions What is built-up area? What is included and what is excluded in it? PRAVIN P. SHAH & CO. 41
Conditions Investment Minimum Capitalisation In case of WOS US $10M In case of JV US $ 5M FDI in a JV in 99:1 between Foreign & Indian Partner What should be the min. capital? Securities Premium included in Min. Cap? Whether Preference Shares included? PRAVIN P. SHAH & CO. 42
Conditions Funds to be brought within 6 months of commencement of business What is Commencement of Business? Would it be date when Co. buys land as its SIT Would it be date of approval by Local Authority? What if delay in getting Min. Cap.? PRAVIN P. SHAH & CO. 43
Conditions Original Investment locked-in for 3 years Entire Invst. or only what is brought in initially? If Invst. in Tranches? Is Invst. In excess of Min. Cap. also locked-in? 50% project must be developed in 5 years from date of obtaining all statutory clearances PRAVIN P. SHAH & CO. 44
Conditions Lock-in of Initial Investment Can Foreign Investor sell to another NR within 3 years? No outflow /remittance from Co. Is lock-in on Investor or on Investment? Can Foreign Investor sell to Domestic Investor within 3 years? PRAVIN P. SHAH & CO. 45
Conditions Investor cannot sell Undeveloped Plots Undeveloped Plots means road, water supply, street lighting, drainage, sewerage, etc. not made available Developer to provide infrastructure and obtain CC before disposing serviced housing plots All Conditions should be mandatorily fulfilled Earlier Exit? PRAVIN P. SHAH & CO. 46
FDI in Real Estate Issues Whether Agricultural Land can be acquired for developing serviced housing plots? If FDI & non-fdi compliant projects, can Co. get FDI? FIPB planning to monitor end-use of funds on a Qtly basis PRAVIN P. SHAH & CO. 47
FDI in Real Estate Issues Whether Service Provider to Developer needs to comply with conditions of P.Note? Proposal for Lock-in on infrastructure for educational ventures PRAVIN P. SHAH & CO. 48
Investment by NRIs and PIOs Prohibited Investments Agricultural Property, Plantations & Farm Houses Trading in Real Estate and TDRs RE Conditions applicable? Can invest in smaller size projects? Specified Categories of Invst.: Devlp. of serviced plots & Built-up Res. Premises Const. of Res.& Comm l. Premises / Townships Urban Infrastructure facilities ~roads, bridges Mfg. of Building Materials Invst. in Participatory ventures in above Hsg Finance Inst. PRAVIN P. SHAH & CO. 49
PIS by FIIs Can FIIs purchase shares of Listed RE Cos. Under PIS DLF/Unitech / Oberoi? What if Listed Cos. have non-fdi compliant projects? Any limit? Can FIIs buy under IPO? Conditions for RE FDI applicable? What about Pre-IPO Placements? PRAVIN P. SHAH & CO. 50
FDI in Infrastructure & Other Real Estate-based Projects PRAVIN P. SHAH & CO. 51
FDI in Hotels & Hospitals 100% FDI under Auto Route in Hotels & Tourism Hotels includes: Restaurants Beach Resorts Other Tourist Complexes Convention centres, seminar units 100% FDI under Auto. Route also allowed in Hospitals RE Conditions applicable to Hotels & Hospitals? RBI s Proposal? What if Mixed Use Projects? DIPP Proposal? PRAVIN P. SHAH & CO. 52
FDI in Industrial Parks 100% FDI allowed under the Automatic Route FDI in Setting up of IPs and also in Established IPs STPs, IT Parks, Bio-tech parks, etc RE Conditions applicable? Conditions for FDI Minimum 10 Units and No Single Unit occupying more than 50% of the allocable area Minimum 66% of the total allocable area for Industrial Activity PRAVIN P. SHAH & CO. 53
FDI in Industrial Parks Must have Infrastructure Facilities: Must have Common Facilities: Must be for Industrial Activities: Tax Benefits under Industrial Park Scheme, 2008 Difference between IPS 2008 and Circular 1/2011 Which is more liberal PRAVIN P. SHAH & CO. 54
FDI in SEZs 100% FDI allowed under the Automatic Route in Development of : SEZs Free Trade Warehousing Zones RE Conditions Applicable? Conditions of SEZ Act should be fulfilled What about Transfer of Shares of an SEZ Developer? Recent Stand of BoA PRAVIN P. SHAH & CO. 55
FDI in Trading PRAVIN P. SHAH & CO. 56
FDI in Trading - Guidelines FDI in Trading Automatic Route Approval Route Prohibited Wholesale trading Cash & Carry WT Trading for Exports E- commerce Single Brand Retailing Trading Companies engaged in specified activities Multi Brand Retailing PRAVIN P. SHAH & CO. 57 57
Cash & Carry Wholesale Trading Definition Sale of goods to: Retailers Industrial/ commercial/ institutional / other professional business users. Other wholesalers Related subordinated service providers Sales not for personal Consumption PRAVIN P. SHAH & CO. 58 58
Cash & Carry Wholesale Trading Definition Includes: Resale Processing and Sale Bulk imports with Export Warehouses B2B E-Commerce Type of Customer relevant Size / volume of sales immaterial PRAVIN P. SHAH & CO. 59 59
Cash & Carry Wholesale Trading Guidelines for WT Requisite license / registration/ permits should be in place for undertaking WT Sale should be to valid business customers which fulfill at least one of the foll.: Entities holding VAT / Excise registration Entities holding Trade Licenses Entities holding Permits/ licenses for retail trade Institutions having registration as a society/ public trust PRAVIN P. SHAH & CO. 60 60
Cash & Carry Wholesale Trading Guidelines for WT Full records of daily WT sales should be kept WT is permitted within the same group of Companies but only up to 25% of total turnover of WT venture Wholesale Trader cannot open a retail shop to sell directly to consumers REMOVED: PRAVIN P. SHAH & CO. 61 61
Cash & Carry Wholesale Trading Issues What is meant by same group How does one compute total turnover? PRAVIN P. SHAH & CO. 62 62
Cash & Carry Wholesale Trading Issues No distinction between Strategic Investors & PEs Vishal Retail PRAVIN P. SHAH & CO. 63 63
Cash & Carry Wholesale Trading Existing Model of several Cos. Indian JV company with stakes by Foreign & Indian retailer Role of JV Co. Front-end retailing? PRAVIN P. SHAH & CO. 64
Cash & Carry Wholesale Trading Example of Current Structures Walmart Bharti 50% 100% JV Sale Retail Co. Sale Retail Consumers Cash & Carry WT SCM / Systems PRAVIN P. SHAH & CO. 65
Cash & Carry Wholesale Trading Difference in 2006 & 2010 Guidelines: 2006 FIPB Route Master Supplier Entity Group Cos. would then sell on Retail Basis 2010 Auto Route Not more than 25% allowed for WT among same Group Cos. Difficult to set up Retail Front-end Cos. PRAVIN P. SHAH & CO. 66
Single Brand Retail Trading 51% FDI under Approval route: Product should be of single brand Branding must be globally also Products must be branded during manufacturing only Can cover multiple product categories PRAVIN P. SHAH & CO. 67 67
Retail Trading Application to SIA DIPP Must demonstrate that application attracts invst. In production and marketing Enhances competitiveness of Indian Cos. By accessing Global designs FIPB doesn t allow PEs to invest Only wants Brand Owners to invest in JVs Insists that Brand Owners must operate retail stores in at least couple of other countries PRAVIN P. SHAH & CO. 68 68
Retail Trading Restriction on No. of JVs by same Partner? Can Indian Partner have multiple JVs with different Foreign Retail Partners? Can one Foreign Partner have different JVs with different Indian partners for separate product lines? PRAVIN P. SHAH & CO. 69 69
Retail Trading Different lines of same JV possible? But different JVs for different products not alld.? Can NRI Franchisee Partner invest in JV? Approved by FIPB in past? PRAVIN P. SHAH & CO. 70 70
FDI in Media & Entertainment PRAVIN P. SHAH & CO. 71
FDI in M & E Sectors FDI in M & E Advertising & Films Hardware / Uplinking / Teleports Broadcasting Print Media 100% Automatic Route Sectorwise Conditions Sectorwise Conditions News - 26% Scientific 100% Facsimile 100% PRAVIN P. SHAH & CO. 72 72
FDI in Broadcasting Sectors Broadcasting Terrestial / FM Cable DTH HeadEnd In The Sky 20% FDI+PIS Approval MIB Cond. 49% FDI+PIS Approval MIB Cond. 20%FDI + 29%PIS Approval MIB Cond. 49% Auto + up to 74% FIPB MIB Cond. PRAVIN P. SHAH & CO. 73 73
FDI in Hardware Facilities Hardware Uplinking Hubs / teleports Uplinking Non-news Uplinking News 49% FDI+ FII Approval 100% Approval 26% FDI + FII Approval PIS not from a PAC PRAVIN P. SHAH & CO. 74 74
FDI in Print Media Type of Media % FDI Conditions Newspapers dealing with News & Current Affairs 26% FDI + FII Approval Route Earlier all Invst Banned Indian editions of Foreign Magazines on News 26% FDI + FII Approval Route MIB Conditions Scientific & technical Mag. 100% Approval Route MIB Conditions Facsimile Edition of Foreign Newspapers 100% Approval Route MIB Conditions PRAVIN P. SHAH & CO. 75
Exit Routes PRAVIN P. SHAH & CO. 76
Exit Options for FDI Investors Some popular Exit Options for FDI Investors: IPO Buyback by Co. Buyout by Promoters PRAVIN P. SHAH & CO. 77
IPO - SEBI DIP G/L SEBI ICDR Regs: In case of IPO/ Offer for Sale All Convertibles CCDs / CCPS should be converted or they lapse on DRHP Pre-IPO capital locked in for 1 year N.A. to a VCF holding shs. for 1 yr. as on DRHP N.A. to pre-ipo shs. held for 1 year as on DRHP and Offered For Sale PRAVIN P. SHAH & CO. 78
Buyback by Co. Limits under Cos. Act 25% of Eq. + Free Reserves 25% of Eq. Capital per FY Can use Free Reserves, Sh. Premium Auto. Route of RBI (for Foreign PE) if: Not in Financial services sector Pricing G/L for Unlisted Max. as per DCF Form FC-TRS PRAVIN P. SHAH & CO. 79
Buyout of PE by Promoters Automatic Route of RBI? Pricing Guidelines? Capital Gains Tax in hands of PE Put Option given to Foreign Investor to sell CCDs to Promoters Fixed Price Put Option RBI s Query Fixed Price IRR? What if Put Option subject to Pricing Guidelines? PRAVIN P. SHAH & CO. 80
Buyout of PE by Promoters Put Option given to Foreign Investor to sell CCDs to Promoters Is Put Option legally valid in a Public Company Amdt. to SCRA SEBI s View Bombay HC Decisions PRAVIN P. SHAH & CO. 81
Thank You!! anup@ppsco.in