Inbound FDI and FEMA Policy WIRC ICAI 27 th Regional Conference 31 August 2012, Mumbai CA. Shabbir Motorwala
Agenda An Overview - FDI Policy and FEMA 20 FDI Structural Framework FDI Key reporting / compliance requirements Some recent key liberalizations and issues FDI in LLPs framework and issues Q & A 1
An Overview - Consolidated FDI Policy and FEMA 20 The FDI policy in India is formulated by the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry The DIPP earlier regulated FDI through Press Notes The Consolidated FDI policy Consolidation of all press notes/press releases/clarifications twice a year So far, sunset date of six months (Effective from 1 April and 1 October) First Consolidated FDI Policy was effective 1 April 2010 vide Circular 1 of 2010 Current Consolidated FDI policy is effective 10 April 2012 vide Circular 1 of 2012 of even date The FEMA 1999 and FEMA Notification No. 20 continue to be the statutory framework / legal edifice Master Circular (1 July) and Circulars issued by Reserve Bank of India also relevant FDI scheme is structurally different from Portfolio Investment Schemes under FEMA (Notification No. 20) NRIs, FIIs, QFIs, FVCI NRIs, FIIs and FVCI can also choose to invest under FDI Scheme
Sectoral Policy for FDI into an Indian Company Joint Venture / WOS FDI Policy has been continuously liberalized Automatic Route (Illustrative) Manufacturing sector IT / ITes Financial services (a) Insurance (26 % cap) (a) Real Estate (a) Special Economic Zones Infrastructure Shipping Hotels and tourism NBFC (minimum capitalization norms) Cash and Carry / Wholesale Trading Pharmaceutical Greenfield Note: (a) Sector specific guidelines Prior Approval (Illustrative) Pharmaceutical (existing companies / brownfield) Existing Airports beyond 74% Asset Reconstruction Companies 49% Atomic / specified Minerals 100% Broadcasting (a) Courier Services 100% Print Media (a) Single Brand Product Retail Trading 100% - (subject to conditions) Negative List (Illustrative) Agriculture Atomic Energy Lottery Betting, Gambling and Casinos Cigarettes, etc Retail Trading (except Single Brand Product Retail Trading up to 100%) 3
FDI Structural Framework (1 of 2) Most sectors / activities fall under the Automatic Route of FDI Policy Consistent relaxation of Policy over last two decades Automatic Route not available to: Non-incorporated Non-Resident Entities Citizens / Entities incorporated in Pakistan and Bangladesh (FDI from Pakistan recently allowed under Approval Route subject to conditions) Transfer of shares to Non-Residents in regulated sectors / in certain cases and situations Prior approval may also be required of the Reserve Bank of India Approval Route - Application to the Foreign Investment Promotion Board, Ministry of Finance Indirect FDI for downstream investments by Indian Companies having FDI (also foreign investment) Concept of owned and / or control for Indian Company - By Resident(s) or Non-Resident(s) Indirect FDI computation mechanism different then mathematical apportionment method Industrial License condition is an independent requirement and also relevant for FDI 4
FDI Structural Framework (2 of 2) Concept of Equity / Equity Convertible Instruments Equity, Compulsory Convertible Preference Shares (CCPS) and Compulsory Convertible Debentures (CCDs) treated on par with each other Optionally and / or Non-convertible Preference Shares treated as External Commercial Borrowings (ECB) Non-Convertible Debentures not a fully recognized FDI instruments Concept of fair value for issue / transfer of shares (except for rights / bonus shares) Fair value for issue of shares DCF method for unlisted shares / SEBI Guidelines for listed shares Even transfer of shares between Residents and Non-Residents to comply with fair value thresholds Pricing not relevant for transfer between two Non-Residents for both legs under FDI scheme Convertible Instruments conversion price to be fixed upfront fixed or formula base cannot be lower than fair value as per prescribed method on date of issue Automatic Route Issues of shares against inward remittance through banking channel into Indian Company, conversion of External Commercial Borrowings, against payables towards lump-sum know-how / technical Royalties, etc as well as merger / amalgamation, etc 5
FDI Key reporting / compliance requirements Issue of Shares - Intimation to Reserve Bank of India through Banker / Authorised Dealer Receipt of FDI / share application money within 30 days from receipt KYC of overseas investor in prescribed format required from remitting overseas bank Issue of shares / convertible instruments - Report to RBI in Form FC-GPR (Part A) within 30 days from issue along with prescribed documents (CA - fair valuation report) Shares / convertible instruments to be issued within 180 days from the date of receipt of funds RBI allots UIN No. and Regn. No. This is very critical for all future transactions Transfer of shares between Residents and Non-Residents Form FC-TRS formalities through AD / Banker Pledge is transfer permitted only as stipulated Filing of Annual Return on Foreign Liabilities and Assets to RBI by 15 July every year Reporting for downstream investments to Government / DIPP Within 30 days from downstream investments in stipulated format / per conditionalities specified 6
Some recent key liberalizations Consolidated FDI Policy w.e.f 1 April 2011 Issue of warrants / Partly Paid up Shares expressly covered under Approval Route Prior FIPB Approval requirement for all previous venture cases done away with Issue of equity / convertible instruments permitted under Approval Route Against import of capital goods / machinery / equipments subject to conditions Permitted earlier against second hand machinery but subsequently prohibited from 10 April 2012 under the later consolidated FDI policy Against pre-operative and pre-incorporation expenses subject to conditions FDI in Domestic VCF in the nature of Trust expressly covered under Approval Route Consolidated FDI Policy w.e.f 1 October 2011 Real Estate Development - exemption from conditions for old age homes and educational sector Consolidated FDI Policy w.e.f. 10 April 2012 Only finance lease (and not operating lease) covered under NBFC activities 7
Some recent key issues Single Brand Retail Trading Several conditions - Foreign Investor to be the Brand Owner and Brand to be an International Brand For FDI beyond 51%, stringent mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian small industries/ village and cottage industries, artisans and craftsmen. Wholesale Trading WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture Pharmaceutical Sector No guidance on Greenfield and Brownfield projects and approval parameters Real Estate Exits for various abandoned projects in recent scenario? NBFC Minimum Capitalization norms Relaxation in recent recession / economic scenario? Multi-Brand Retail Trading the wait continues! FDI proposed at 51% under Approval Route - several conditions : minimum FDI of USD 100 mn, 30% local sourcing from small industries, 50 % of the foreign investment to be invested in back-end infrastructure, etc 8
FDI in LLP PN 1 of 2011 dated 20 May 2011 FDI now permitted in LLP with prior FIPB approval What is permitted Allowed in sectors where 100% FDI is permitted under Automatic Route and there are no FDI-linked performance related conditions Examples of sectors with FDI-linked performance related conditions are NBFC, Development of Townships, Housing, Built up infrastructure and Construction-development projects, etc. Downstream investment by an Indian Company with FDI, into a LLP permitted, if Indian company and LLP both operate as above i.e. Automatic Route with no FDI-Linked performance related conditions Important points FDI in LLP not permitted in Agricultural / Plantation activity, Print Media and Real Estate business Investments in LLP by FII / FVCI not permitted Designated Partner to be Indian company or person resident in India Capital contribution only in cash by way of inward remittances / through NRE / FCNR accounts No downstream investment by LLP with FDI permitted LLP not permitted to avail External Commercial Borrowings (ECB) Conversion of Company with FDI into LLP permitted 9
Current Foreign Investor unfriendly environment surrounding FDI in LLP Key Issues surrounding FDI in LLPs Whether all categories of Foreign Investors covered (Individual / Firms / Corporate / Trust)? Will the conditions under the respective legislations for certain sectors (e.g. Mining, Petroleum, Power, etc) be interpreted to mean FDI-linked performance related conditions resulting? Whether foreign company can be a designated partner in LLP through an individual nominee? Whether overseas investment by an Indian LLP with FDI is permitted? Key issues surrounding awaited RBI Guidelines Post FIPB, whether any secondary approval required from RBI? Nature of filings / compliances for receipt of FDI in LLP Guidelines surrounding Partners Capital infusion / withdrawal Partners Share in LLP - Valuation parameters / compliances - Admission / Retirement / Transfer / realignment? Permissibility of Interest on Capital as in the Incometax Act? Other guidelines surrounding: What are the evaluating parameters of the FIPB approval process? Conversion of Indian Company with FDI into LLP Restructuring of LLPs (Merger of LLP, etc) Closure of LLPs Other items (E.g. Expatriate Secondment, etc) 10
& Answers Questions 11
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