FOREIGN DIRECT INVESTMENT IN INDIA Amit Aggarwal, Partner Sumit Phatela, Senior Associate SNG & PARTNERS, INDIA
WHAT IS FOREIGN DIRECT INVESTMENT? Investment by non-resident entity/person resident outside India in the capital of Indian entities as permitted under the applicable laws Establishing a lasting interest in an enterprise that is resident in an economy other than that of the investor
GOVERNING LAWS Foreign Exchange Management Act, 1999 & Rules/Regulations thereunder; Foreign Direct Investment Policy; Press notes/ releases by Department of Industrial Policy and Promotion/ Ministry of Commerce and Industry Circulars issued by the Reserve Bank of India (RBI) Securities & Exchange Board of India Act, 1992 and Rules/Regulations thereunder Competition Act, 2002
AGENCIES
VEHICLES FOR ENTRY
CONNOTATION OF CAPITAL In case of a company, investment may be made ina) equity shares; b) fully, compulsorily & mandatorily convertible preference shares or debentures. Investment in capital may be by way of subscription of fresh capital/shares or purchase of existing capital/shares.
CONNOTATION OF CAPITAL (CONTD.) In case of LLP or partnership firm- Investment may be made simply by infusion of fresh capital or purchase of existing capital (including any goodwill); In case of a trust - Investment may be by way of contribution to the corpus of the trust.
MODES OF PAYMENT Investment in company may be in cash through normal banking channels or in kind (subject to pricing guidelines); Investment in other forms/ vehicles to always be in cash through normal banking channels.
PRICING GUIDELINES
WHO CAN INVEST?
ENTRY ROUTES ENTRY ROUTES AUTOMATIC ROUTE APPROVAL ROUTE (through approval of FIPB)
AUTOMATIC ROUTE
AUTOMATIC ROUTE (CONTD.) No specific approval required from any agency; Reporting requirements to the RBI in relation to receipt of funds and issue of securities.
APPROVAL ROUTE
APPROVAL ROUTE (CONTD.) LEVELS OF APPROVALS Minister of Finance considers the recommendations of FIPB on proposals with total foreign equity inflow of and below INR 12000 million. CCEA considers- recommendations of FIPB on proposals with total foreign equity inflow of more than INR 12000 million proposals referred to it by the FIPB/ the Minister of Finance Application for approval may be filed online.
REPORTING & COMPLIANCES Reporting of Inflow: FIRCs to be filed within 30 days of date of receipt of Investment Shares to be issued within 180 days of receipt of the remittance Reporting of Issue of Shares: Within 30 days in Form FC-GPR Reporting of transfer: Within 60 days of receipt of consideration (Form FC-TRS)
PROHIBITED SECTORS Lottery Business including Government /private lottery, online lotteries, etc.; Gambling and Betting including casinos etc.; 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). Note - Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.
PERMITTED SECTORS Agriculture & Animal Husbandry Tea plantation MINING AND PETROLEUM & NATURAL GAS MANUFACTURING Manufacture of items reserved for production in Micro and Small Enterprises (MSEs) Defence SERVICES SECTOR Broadcasting Print Media Civil Aviation Courier Services Construction Development: Townships, Housing, Built-up infrastructure Industrial Parks new and existing Satellites Establishment and operation Private Security Agencies Telecom Sector Trading FINANCIAL SERVICES Asset Reconstruction Companies Banking Private sector Banking- Public Sector Commodity Exchanges Credit Information Companies (CIC) Infrastructure Company in the Securities Market Insurance Non-Banking Finance Companies (NBFC) Pharmaceuticals IN ALL OTHER SECTORS/ ACTIVITIES, 100% FDI PERMITTED UNDER AUTOMATIC ROUTE.
DOWNSTREAM INVESTMENT Investment by an Indian company owned and/or controlled by non-resident entity- Into another Indian company; or Into LLP Treated as FDI and subject to identical laws and restrictions Owned by NREs if majority shareholding with NREs Controlled by NREs if majority directors appointed by NREs
DOWNSTREAM INVESTMENT (CONTD.) Calculation of Total FDI = Direct FDI + Indirect FDI Indirect FDI = Downstream Investment by companies owned and/or controlled by NREs (100% of investment of the Indian company treated as FDI, except in case of WOS) Different requirements for indirect FDI in case of Investing companies, Operating companies and Investing-cum-Operating Companies
ADDITIONAL AVENUES FOR FDI
REPATRIATION OF INCOME Dividends on shares and Interest on fully, mandatorily & compulsorily convertible debentures is freely repatriable without any restrictions (net after Tax deduction at source or Dividend Distribution Tax, if any) Governed by Foreign Exchange Management (Current Account Transactions) Rules, 2000
REPATRIATION OF INVESTMENT Permitted sans any restrictions, whether it is by buy-back, transfer or on dissolution/winding-up of the investee entity Sale proceeds of a security (net of applicable taxes) may be remitted, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate from the Income Tax Department has been obtained.
REPATRIATION OF INVESTMENT (CONTD.) Remittance in case of winding up proceeds of companies in India allowed, subject to payment of applicable taxes, provided NOC / tax clearance certificate obtained, auditor's certificate confirming that all liabilities in India have been either fully paid or adequately provided for and winding up is in accordance with the provisions of the Companies Act, 1956. In case of winding-up otherwise than by a court, an auditor's certificate to the effect that there are no legal proceedings pending in any court in India against the applicant or the company under liquidation and there is no legal impediment in permitting the remittance.
TRANSFER OF SHARES Permitted sans restrictions, if made by a nonresident to another non-resident Transfer by non-resident to Indian resident (subject to pricing guidelines)
WHY COMPANIES SCORE OVER LLPS CRITERIA COMPANY LLP Entry Route Through the automatic route or approval route, subject to sectoral caps and FDI linked conditions Who may invest Any non-resident entity, individual resident outside India, any person or body corporate registered or incorporated outside India, Partnership Firm/Proprietary Concern, NRIs, FIIs, Foreign Venture Capital Investor (FVCI), Trusts other than VCF Only through the approval route, in activities/ sectors where 100% FDI is allowed through the automatic route and FDI Linked conditions. Any individual resident outside India and a company incorporated outside India Who cannot invest Citizen of Pakistan/ Bangladesh or an entity incorporated in Pakistan/ Bangladesh only through approval route; cannot make investments in defence, space and atomic energy. FIIs and FCVIs, a LLP incorporated outside India, a trust registered outside India
WHY COMPANIES SCORE OVER LLPS (CONTD.) CRITERIA COMPANY LLP Prohibited Sectors Lottery business, gambling and betting, including casinos, Business of chit fund, Nidhi company, Trading in Transferable Development Rights, Real Estate Business or Construction of Farm Houses, Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes, Activities/sectors not opened to private sector investment including Atomic Energy and Railway Transport. Agricultural/plantation activity, print media or real estate business. Activities allowed through Government approval route Activities where there are FDI linked performance related conditions All the activities where 100% FDI is not allowed through the automatic route Consideration Both cash and non-cash considerations are permitted Only cash considerations are permissible for FDI in LLPs Downstream Investment Downstream investments in companies is allowed subject to conditions specified in the FDI Policy LLPs with FDI will not be eligible to make any downstream investments. An Indian company, having FDI, will be permitted to make downstream investment in an LLP only if both-the company, as well as the LLP- are operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.
GERMAN INVESTMENT IN INDIA Each year Germany has featured in the top ten list of investing countries in India. Since liberalization, Germany has been the 8 th most important investing country for India, during the financial year (2010-2011). It ranked 10 th in the list of top investing countries. Germany s investment into India during April 10 to March 11 amounted to US $200 million, accounting for 1% of total investment in India in that year.
GERMAN FDI INFLOWS (CONTD.) The Service sector with investment worth US $ 45.76 mil. was the top sector with maximum inflows in the last year (apr 10-mar 11) The last were metallurgical and miscellaneous industries, industrial machinery,textiles, printing of books.
SECTOR - WISE BREAK UP OF GERMAN FDI INFLOWS (APR' 10-MAR'11)
FDI AND FTC APPROVED FOR GERMANY S.NO NAME OF SECTOR Amount of Foreign Direct Investment % with FDI Approved 1) Cement and gypsum 7.06 77.50 2) Defence industries 1.72 18.86 3) Tranportation Industry 0.33 3.58 4) Chemicals 0.00 0.00 5) Trading 0.00 0.00 6) Miscellaneous 0.01 0.07
GERMAN INVESTMENT INFLOWS SINCE 2000 YEAR From Germany US$ mil. From all other countries US$ mil. 2000-01 123.34 2907.52 4.2 2001-02 113.48 4221.89 2.7 2002-03 143.91 3133.85 4.6 2003-04 81.17 2634.21 4.6 2004-05 145.35 3758.94 3.9 2005-06 302.82 5545.94 5.5 2006-07 119.95 15,726.19 0.1 2007-08 513.61 24,580 2.1 2008-09 629.22 27,330.41 2.3 2009-10 626.14 25,834.41 2.4 2010-11 199.74 19,426.90 1.0 Total 2998.73 131,101.30 2.2 % share of investment
GERMAN INVESTMENT INFLOWS (CONTD.) 700 General Investments into India since 2000 (in US$ mil.) 600 500 400 300 200 100 0 2000 01 2001 02 2002 03 2003 04 2004 05 2005 06 2006 07 2007 08 2008 09 2009 10 2010 11 Year
GERMAN INVESTMENT INFLOWS (CONTD.) Since the year 2000,Germany has invested nearly US$ 3 billion accounting for 2.2 %of total investment into India. During the period from 2000 to 2010, the German investments show several crests and troughs. After declining in 2006-07,the following year saw German investments sharply rise posting a growth of 328%. The financial years for German years 2008-09 and 2009-10 were also fairly good years for German investments. Automotive sector that was able to increase sales numbers again in 2010/2011 by nearly 30% up to 3.2 million cars. All major German car manufacturers as well as suppliers have already entered the market to secure their future share of one of the most promising markets in Asia besides Japan, China and South Korea.