FEMA FDI RELATED ASPECTS ICSI Indore Harry Parikh April 2018
WHY THE NEED? Why is it important to understand this regulation? $ 209 BN of FDI in India from April 2014 to Dec 2017 Out of which ~ 30 % FDI inflows worth USD 60.1 billion in 2016-17 Continuous liberalisation of the Indian economy India Inc is going for international funding Why is FDI important for India Inc? Access to cheaper capital Increase in employment Access to advanced technology and upgradation in quality WHY DO WE NEED TO UNDWHY DO WE NEED TO UNDERSTAND FDI? Source : Economic times, Wikipedia 2
WHAT WILL WE COVER TODAY? Sectors Capital Instruments Eligible entities FDI Sectoral Caps + FDI linked performance conditions Acquisition and Transfer conditions Other aspects 3
SECTORS
PROHIBITED - SECTORS Lottery Business including Government/ private lottery, online lotteries Gambling and betting including casinos Chit funds NRIs and OCIs can invest in Chit funds on a nonrepatriation basis Nidhi company Trading in TDRs Real Estate Business or Construction of Farm Houses Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes Atomic energy and Railway operations Does not include permitted real estate development and earning rental or maintenance income 5
PROHIBITED - INVESTORS Requires prior Government Approval FDI not allowed in Convertible Notes issued by Indian Startup company FDI in LLP not allowed FDI from Bangladesh Requires prior Government Approval FDI not allowed in: defence, space, atomic energy and prohibited sectors FDI not allowed in Convertible Notes issued by Indian Startup company FDI in LLP not allowed FDI from Pakistan 6
SECTOR SNAPSHOT 100% Automatic route Party Automatic Agriculture & Animal Husbandry Exploration, marketing of oil and natural gas fields, products, pipelines; LNG Regasification infrastructure Manufacturing Teleports, Direct to Home, Cable Networks Civil Aviation Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline (for NRIs and OCIs) Regional Air Transport Service (for NRIs and OCIs) Petroleum refining Defence Terrestrial Broadcasting FM (FM Radio) Up-Linking of News & Current Affairs TV Channels Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline Regional Air Transport Service Telecom services (including Telecom Infrastructure Providers Category-l) Multi Brand Retail Trading Government approval for any investment Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities Publishing/ printing of Scientific and Technical Magazines/ specialty journals/periodicals Publication of facsimile edition of foreign newspapers Satellites - Establishment and operation 7
SECTOR SNAPSHOT 100% Automatic route Party Automatic Construction Development: Townships, Housing, Built-up infrastructure Industrial Parks Cash and Carry Wholesale Trading/ Wholesale Trading (including sourcing from MSEs) Up-linking of Non-'News & Current Affairs' TV Channels/ Downlinking of TV Channels Asset Reconstruction Companies Credit Information Companies Other Financial Services Pharmaceuticals (Brownfield) Banking - Private sector Banking - Public Sector Pension Sector Private Security Agencies + ANY OTHER SECTORS WHICH ARE NOT PROHIBITED 8
CAPITAL INSTRUMENTS
CAPITAL INSTRUMENTS Equity shares Preference shares Debentures Warrants Fully paid up equity shares Partly paid up equity shares 25% to be received upfront and subject to other conditions of calling the money in 12 months Fully, compulsorily and mandatorily convertible preference shares covered Conversion lock in for minimum 1 year Fully, compulsorily and mandatorily convertible debentures covered Conversion lock in for minimum 1 year Issued on or after July 8, 2014 25% consideration to be received upfront and balance within 18 months Forfeit the balance amount on non payment Equity shares Preference shares Debentures Warrants Any other types of equity shares or share application money pending over 60 days Non-convertible/ optionally convertible/ partially convertible preference shares funds for which have been received on or after May 1, 2007 shall be treated as debt and shall conform to ECB guidelines Non-convertible/ optionally convertible/ partially convertible debenture shall be treated as debt and shall conform to ECB guidelines Not meeting above conditions 10
ELIGIBLE ENTITIES
ENTITIES ELIGIBLE FOR FDI Companies Unlisted companies Listed companies (with 10% minimum investment) Limited Liability Partnerships (only for sectors where no FDI linked conditions are specified) AIFs REITS INViTS FVCIs VCFs Proprietorships (except for NRI) Partnerships, other than LLPs (except for NRI) Society 12
DOWNSTREAM INVESTMENT Person Resident outside India FDI Downstream investment Outside India India Indian company 100% 49% Subsidiary Indian company Subsidiary 13
DOWNSTREAM INVESTMENT Downstream investment For downstream investment, funds to be brought from abroad and not use funds borrowed in the domestic markets. Can be made through internal accruals. Comply with the entry route, sectoral caps, pricing guidelines and other FDI linked performance conditions as applicable for foreign investment. 14
DOWNSTREAM INVESTMENT Downstream investment Downstream investment by an LLP which is FOCC can invest in another Indian company operating in sectors where foreign investment up to 100% is permitted under automatic route and there are no FDI linked performance conditions. Indirect foreign Investment is permitted in an LLP in sectors where foreign investment is allowed 100% under automatic route and there are no FDI linked performance conditions. For AIF / REIT / INViT, if the sponsors/ managers/ investment managers is not FOCC, then no downstream investment rules apply 15
ACQUISITION AND TRANSFER
ACQUISITON AND TRANSFER CONDITIONS Mode of funding for all FDI investment Inward remittance from abroad through banking channels + Out of funds held in NRE/ FCNR(B)/ Escrow account + Issue of equity shares by an Indian company against any funds payable by it to the investor + Swap of capital instruments where the Indian investee company is engaged in an automatic route sector Does not cover ECB related dues Only fully paid up shares can be issued Permitted for pre-incorporation expenses / Pre operative expenses ONLY FOR WOS Only upto 5% of Authorised capital or USD 500,000 (whichever is less) 17
Capital instruments ACQUISITON AND TRANSFER CONDITIONS Person Resident outside India Pricing guidelines Outside India India MINIMUM FAIR MARKET VALUE FDI $$$ $$$ Person Resident in India 18
Exit To Investor ACQUISITON AND TRANSFER CONDITIONS Person Resident outside India $$$ Pricing guidelines Outside India India Capital instruments MAXIMUM FAIR MARKET VALUE Person Resident in India 19
ACQUISITON AND TRANSFER CONDITIONS Pricing guidelines Timing? What is fully diluted basis? Valuation to be given by CA or Merchant Banker or Cost Accountant In case of listed companies, as per SEBI rules 20
ACQUISITON AND TRANSFER CONDITIONS Pricing guidelines No guaranteed / assured exit price at the time of making such investment/ agreement Exit at the price prevailing at the time of exit What about subscription shares? What about swap of shares? 21
ACQUISITON AND TRANSFER CONDITIONS Pricing guidelines Valuation of interest in LLP Pricing in case of convertible instruments (Formula to be fixed upfront or mechanism to be fixed) In case of Investment on Non Repat basis? Transfer of Capital Instruments between two Persons Outside India 22
ACQUISITON AND TRANSFER CONDITIONS Routes for acquisition Rights / Bonus issues Offer in compliance in CO 2013 Should not breach sectoral cap Original investment if as per FEMA Right and / or Bonus share have same repat conditions Rights issue price to be not less than price offered to Indian persons (in case of unlisted companies) Renunciation of rights is allowed, subject to same conditionalities applicable to original allottee 23
ACQUISITON AND TRANSFER CONDITIONS Routes for acquisition ESOPs ESOPS scheme is in compliance with CO 2013 Government approval required depending on sector Government approval required if PROI is resident of Bangladesh / Pakistan 24
ACQUISITON AND TRANSFER CONDITIONS Routes for acquisition Other methods Acquisition on account of merger demerger of Indian companies - Sector of amalgamated company to be checked Foreign merger / demerger 25
ACQUISITON AND TRANSFER CONDITIONS Routes for acquisition Other key points Investing in India using an intermediary company Can consideration be kept as deferred? Investment on non repatriation basis 26
TRANSFER OF CAPITAL INSTRUMENTS Transferor Transferee By way of Remarks PROI (not being NRI OCI OCB) PROI Sale / gift Includes transfer of capital instruments of an Indian company pursuant to merger, demerger and amalgamation of entities / companies incorporated outside India NRI / OCI PROI Sale / gift Held by transferor on repatriation basis NRI / OCI / FOCC NRI / OCI Gift PROI PRII NRI / OCI / PRII / FOCC PROI Sale Sale / gift / Sale on Stock Exchange in India PROI PROI / PRII Sale / Gift FOCC = Company / Trust / Partnership Firm incorporated outside India and owned and controlled by NRI or OCI Held by Transferor and acquired by transferee on nonrepatriation basis If held by PROI on non-repatriation basis, then pricing guidelines, documentation and reporting requirements will not apply Sale in stock exchange in the manner prescribed by SEBI Held by transferor on non-repatriation basis If transferee is NRI / OCI / FOCC who acquires on nonrepatriation basis then entry routes, investment limits, pricing guidelines etc will not apply Capital Instruments having optionality clause Complying pricing guidelines Minimum Lock in Period = one year or according to FEMA 20(R) 27
FDI LINKED PERFORMANCE CONDTIONS
FDI LINKED CONDITIONS GENERAL What does this mean? Can a company be formed in India before meeting these conditions? FDI linked performance conditions What if the company is a dormant company? When is Government approval required? What if the Indian company is engaged only in business of investing into other Companies? 29
E-COMMERCE What is E-Commerce? E-commerce is buying and selling of goods and services including digital products over digital & electronic network. X Inventory based model of e - commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly. Market place model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller. Not permit > 25 % sales value one vendor or their group companies 30
REAL ESTATE BUSINESS Dealing in land and immovable property Construction of Farm Houses Trading in TDRs X Development of townships Construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships Rental income Operating and maintenance services 31
CONSTRUCTION DEVELOPMENT Townships, Housing, Built-up infrastructure Investor Indian company Permitted to exit on completion of the project or after development of trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage. Three year lock in (except transfer to another non resident) Permitted to sell only developed plots 32
REPORTING REQUIREMENTS
REPORTING REQUIREMENTS FDI Infusion Within 30 Days of receipt of money File form ARF Allot Capital instruments within 60 days File form FC GPR within 30 days of allotment Onus of filing is on the Indian company Transfer of shares File form FCTRS in 60 days of receipt of funds Onus is on Indian resident transferor / transferee Indian company File FLA by 15 July Intimate RBI of downstream investment in 30 days of investment 34
FAQS Is Services sectors covered under 100% automatic route? Can I change the terms of CCPS / CCDS? How do I achieve valuation difference between Income tax and FEMA? Using LLPs for Construction and Real estate business Can foreign entity invest in a unregistered partnership? Can anyone invest in Indian listed company? Can FDI be done at discount? 35
THANK YOU HARRY PARIKH Associate Partner Transaction Tax Tax & Regulatory Services BDO India LLP harryparikh@bdo.in +91 98672 66712
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