FOREIGN DIRECT INVESTMENT IN INDIA

Presentation by: Hitender Mehta Sr. Associate & Head Vaish Associates Advocates Gurgaon, India

GENERAL BACKGROUND

FOREIGN DIRECT INVESTMENT PROHIBITED SECTORS

Foreign direct investment (FDI) is prohibited in the following cases:
Gambling and Betting Lottery Business Retail Trading (except single brand retail trading-not provided in Master Circular) Atomic Energy Housing and Real Estates Agriculture (with certain exceptions) and Plantations (Other than Tea plantations)

ROUTES FOR FOREIGN DIRECT INVESTMENT

Routes available for FDI: Automatic Route - No prior Government approval is required if the investment to be made falls within the sectoral caps specified for the listed activities. Only filings have to be made by the Indian company with the concerned regional office of the Reserve Bank of India (RBI) within 30 days of receipt of remittance and within 30 days of issuance of shares FIPB Route - Investment proposals falling outside the automatic route would require prior Government approval. Foreign Investment requiring Government approvals are considered and approved by the Foreign Investment Promotion Board (FIPB). Decision of the FIPB usually conveyed in 4-6 weeks. Thereafter, filings have to be made by the Indian company with the RBI

ROUTES FOR FOREIGN DIRECT INVESTMENT

CCFI Route - Investment proposals falling outside the automatic route and having a project cost of Rs. 6,000 million or more would require prior approval of Cabinet Committee of Foreign Investment (CCFI). Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings have to be made by the Indian company with the RBI - Investment proposals falling within the automatic route and having a project cost of Rs. 6,000 million or more do not require to be approved by CCFI

PROPOSALS REQUIRING GOVERNMENT APPROVAL

Automatic Route is not available for the following proposals and Government approval has to be obtained:
Proposals involving foreign investment by unincorporated foreign entities (Not Found in the Policy) Proposals involving foreign investment being more than 24% in equity capital of units manufacturing items reserved for small scale industries Proposals in which foreign collaborator has an existing joint venture or technology transfer /trademark agreement in the 'same' field in India (Press Note No.1 dated 12th January, 2005)

PROPOSALS REQUIRING GOVERNMENT APPROVAL

Press Note No.1 dated 12th January, 2005 applies to cases where the foreign investor has or had an existing joint venture or technology transfer agreement or trade mark agreement as of 12th January, 2005 in respect of another Indian company whose activity falls in the same field as that of proposed foreign investment Wholly owned subsidiaries or branch are not hit by Press Note no. 1 (in so far as the mining sector is concerned, subject to a declaration from the applicant that he has no existing joint venture for the same area and/ or the particular mineral)
Press Note no. 1 will not apply where (a) the collaboration is defunct or (b) the shareholding in the existing joint venture of the foreign collaborator is less than 3% or (c) the foreign investment is by a venture capital fund or (d) the foreign investment is in the information technology sector or (e) the foreign investment is by a multinational financial institution or

PROPOSALS REQUIRING GOVERNMENT APPROVAL

(f) the foreign investment is in the mining sector subject to a declaration that there is no existing joint venture for the same area/ particular mineral To determine whether the activity is in the same field 4 digit National Industrial Classification (NIC) Code (1987 Series) is required to be seen Whether Press Note no. 1 should be seen in the context of the activities of the holding company and its subsidiaries or only the holding company, is a grey area (This is a comment by Mr. Daruwaala and not a part of any regulation/policy)

LIST OF INDUSTRIES FOR WHICH INDUSTRIAL LICENSING IS COMPULSORY

Distillation and brewing of alcoholic drinks

Cigars and Cigarettes of Tobacco and Manufactured Tobacco substitutes

Electronic, Aerospace and defense equipment: all types Industrial explosives including detonating fuses, safety fuses, gun powder, nitrocellulose and matches Hazardous chemicals Drugs and Pharmaceuticals (according to modified Drug Policy issued in September, 1994 and subsequently amended in February, 1999)

RELATED EXCHANGE CONTROL REGULATIONS

EXCHANGE REGULATION
The Exchange Control Department of the RBI administers the Foreign Exchange Management Act (FEMA) The general permission of the RBI is available for the following activities under FEMA: Indian Companies are permitted to issue Rights/Bonus shares subject to certain conditions A company is permitted to issue shares to non residents pursuant to a scheme of merger/ amalgamation provided the shareholding of the non resident shareholders does not exceed the sectoral caps

EXCHANGE REGULATION
A company may issue shares upto 5% of its paid up capital under Employee Stock Option Scheme, to its employees or employees of its joint venture or wholly owned subsidiary abroad, other than citizens of Pakistan and Bangladesh, who are resident outside India, directly or through a Trust, subject to Securities and Exchange Board of India (SEBI) regulations in this regard and within 30 days from the date of issue of shares the issuing company will report the details thereof and submit a stipulated certificate to the RBI Indian Companies are allowed to raise foreign currency resources abroad through the issue of American Depository Receipts/ Global Depository Receipts (ADRs/GDRs) under the automatic route up to 49% subject to conditions prescribed in Press Note 5 of 2005 . Such investment are treated as FDI.

EXCHANGE REGULATION
All foreign investments are freely repatriable except in cases where nonresident Indians (NRIs) choose to invest specifically under non-repatriable schemes Non-residents can sell shares on stock except (those those purchased by NRIs under PIS) without prior approval of RBI and repatriate the proceeds through a bank subject to deduction of applicable tax at source Non-residents can sell shares to a resident through a private arrangement subject to necessary filings with the authorized dealer Non resident can sell shares to a non resident through a private arrangement provided that the transferee company is not hit by Press Note No. 1 of 2005

EXCHANGE REGULATION
Non-residents can purchase the shares from a resident through a private arrangement subject to necessary filings with the authorized dealer provided that the foreign investment in the Indian company is permitted under the automatic route Foreign investment can be made only by cash contribution or capitalization of royalty/lump sum fee payable for technical know-how or conversion of foreign currency loans

SPECIAL CLASS OF FOREIGN INVESTORS

VENTURE CAPITAL FUNDS

SEBI registered foreign venture capital investor can invest in an Indian venture capital undertaking (IVCU) or venture capital fund (VCF) It can purchase equity/equity linked instruments/debt instruments, debentures of an IVCU or VCF through initial public offer or private placement or in units of schemes/funds set up by VCF The purchase/sale of shares, debentures and units can be at a price that is mutually acceptable to the buyer and the seller/issuer

FOREIGN INSTITUTIONAL INVESTOR

Foreign Institutional Investors (FIIs) can individually purchase upto 10% and collectively upto 24% of the paid-up share capital of an Indian company This limit of 24% can be increased to sectoral cap/ statutory limit applicable to the Indian company by passing a board resolution/shareholder resolution FIIs can purchase shares through open offers/private placement/stock exchange Shares purchased by FII through stock exchange cannot be sold through a private arrangement

FOREIGN INSTITUTIONAL INVESTOR

Proprietary funds, foreign corporates account and invest limits of 10% / 5% accounts foreign individuals and can register as a subthrough the FII. Separate is available for the sub-

FIIs can raise money through participatory notes or offshore derivative instruments for investment in the underlying Indian securities
FIIs in addition to investment under the FII route can invest under FDI route

NON RESIDENT INDIANS

General policy and facility for FDI available to NRIs Following additional applicable to NRIs: concessions specifically

NRI Investment in Construction Development Projects inclusive of housing sector upto 100% wherein conditions prescribed under Press Note 2 of 2005 are not applicable NRI investment in domestic airlines sector upto 100%. Further NRIs are permitted to invest on repatriable basis in partnership firms and proprietary concerns on prior approval of the Reserve Bank of India (Master Circular on Foreign Investment in India 01 July, 2006)

TECHNICAL COLLABORATION

TECHNICAL COLLABORATION
Foreign Technical Collaboration is permitted either through automatic route or with prior approval from the Government

Payment for foreign technology collaboration by Indian companies under automatic route subject to the following limits:
Lump sum payment not exceeding USD 2 million Royalty is subject to a ceiling of 5 per cent for domestic sales and 8 per cent for exports without any restriction on the duration of the royalty payments in case of such domestic sales/export being from a wholly owned subsidiary to an offshore parent company (Clause IV of Press Note 9 of 2000).

TECHNICAL COLLABORATION
Royalty for use of trademark and brand name without technology transfer is allowed upto 2% for exports and 1% for domestic sales. In case of technology transfer, no separate royalty can be paid for trade marks & brand name Remittance upto USD 1 million per project for consultancy service procured from outside India is permitted under the automatic route

VALUATION, PRICING & TRANSFER OF SHARES

VALUATION & PRICING OF SHARES

Subscription of shares of a Indian company by a nonresident investor shall be at a price not less than:

Price worked out in accordance with SEBI guidelines, where the issuing company is listed;
Fair valuation of shares done by a Chartered Accountant as per the guidelines issued by the erstwhile Controller of Capital Issues, where the issuing company is unlisted The above pricing guidelines will also apply to transfer of shares of an Indian company from a resident to a non resident

TRANSFER OF SHARES
Pricing guidelines do not apply in case of (a) a rights issue, (b) shares issued under the Employee Stock Option Scheme, (c) bonus shares, (d) shares issued pursuant to a scheme of amalgamation or de-merger and (e) shares acquired by foreign venture capital funds Transfer of shares from non-resident to non-resident is not subject to pricing guidelines Transfer of shares under a private arrangement by a non resident to a resident can be made at the ruling market price +/- 5% (in case of listed companies) or at a price which is the higher of the price arrived at by two valuers, one of them being the auditor of the Indian company (in case of unlisted companies)

ENTRY STRATEGIES

ENTRY STRATEGIES FOR FOREIGN INVESTOR

Foreign Company has the following options to set up business operations in India : By incorporating a company under the Companies Act, 1956 A wholly owned subsidiary Joint venture company - existing company or new company with domestic partner As an unincorporated entity Liaison Office Project Office Branch Office

LIAISON OFFICE
Liaison office not permitted to undertake commercial/trading/industrial activity any

The role of the liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers and acting as a communication channel between the parent company and Indian Companies.
It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company/Group companies and companies in India Approval for establishing a liaison office in India is granted by RBI

PROJECT OFFICE
General permission to foreign entities to establish Project / Site Offices (temporary in nature) Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project General permission also for remitting surplus funds after completion of project on production of the following documents: Certified copy of the final audited project accounts; A Chartered Accountants certificate showing the manner of arriving at the remittable surplus;

Income tax assessment order or other documentary evidence showing payment of income-tax and other applicable taxes, or a chartered accountants certificate stating that sufficient funds have been set aside for meeting all Indian Tax liabilities; Auditors certificate stating that no statutory liabilities in respect of the Project are outstanding.

BRANCH OFFICE
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for specified purposes Branch Offices are established with the approval of RBI Permitted to remit outside India profit of the branch

No approval required from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities

SPECIAL INVESTMENT AVENUES

ELECTRONIC HARDWARE AND SOFTWARE TECHNOLOGY PARKS

100 percent foreign investment under automatic route is allowed in electronics and software industries set up exclusively for exports Such units are eligible to purchase, free of customs duty/ excise duty, their entire requirement of capital goods, raw materials and components, spares and consumables, office equipments etc. Income tax exemption on exports for a block of 10 years of its operation under Section 10A and eligible up to Assessment Year 2009-10 (till 31.03. 2009)

Such units are permitted to supply upto 50% of production in the domestic market in value terms subject to net foreign exchange earnings

Permission to issue of shares or convertible debentures to a person resident outside India in excess of 24% subject to specific sectoral caps on investments by person resident outside India. (Annexure 2 of Master Circular on Foreign investments in India Dated 1.07.2006)

EXPORT ORIENTED UNITS

100% foreign equity (is permitted through Automatic Route similar to SEZ units) in Export Oriented Units (EOUs) even if it is manufacturing an item reserved for the small scale sector

Project with minimum investment of Rs.10 million and above in building, plant and machinery qualify to be considered under EOU scheme - This shall not apply in case of certain industries like agriculture, floriculture, information technology, services, hand made jewellery, etc. Goods and services exported from units in DTA and units in EOU, remission of service tax levied shall be allowed.
EOUs enjoy several privileges like duty exemption on import and domestic procurement and also Income tax exemption till 31.03. 2009 EOUs, other than gems and jewellary, are permitted to supply upto 50% of FOB value of exports in the domestic market, subject to fulfillment of positive NFE on payment of concessional duties.

100% of the export earnings can be retained in EEFC A/C. Exemption of Industrial Licensing for manufacture of items reserved for SSI sectors. Exemption from payment of Income tax under Section 10A and 10 B of Income tax Act, 1961. Permission to issue of shares or convertible debentures to a person resident outside India in excess of 24% subject to specific sectoral caps on investments by person resident outside India. (Annexure 2 of Master Circular on Foreign investments in India Dated 1.07.2006)

SPECIAL ECONOMIC ZONE

Special Economic Zone (SEZ) is deemed to be foreign territory for the purposes of trade operations and duties and tariffs No cap on Foreign investment for manufacturing items reserved for SSI as well as exemption from industrial licensing

SEZ unit can be set up in the designated SEZ areas which is supported with all services and utilities
Unlike a EOU unit, an SEZ unit can be set up to undertake trading activities in addition to manufacturing of goods and rendering of services

SPECIAL ECONOMIC ZONE

No minimum investment criteria is applicable for establishment of units under the SEZ scheme

SEZ units have to be foreign exchange positive

On exports, SEZ units entitled to 100% income tax exemption for first five years, 50% income tax exemption for the next five years and 50% income tax exemption for the next five years subject to creation of reserves For the Domestic Tariff Area (DTA) units, goods and services going into SEZ area are treated as exports and goods coming from the SEZ area into the DTA are treated as imports

SPECIAL ECONOMIC ZONE

No excise duty or customs duty or service tax is applicable for supply of goods from outside India/ within India to a SEZ unit State Governments are passing legislations for relaxing the applicability of labor laws, providing exemption/ reduction in the stamp duty, etc. for SEZ units Exemption from capital gains tax on transfer of assets in cases of shifting of industrial undertaking from urban area to any SEZ under Section 54GA of Income Tax Act, 1961.

Foreign companies can set up branch operations in the SEZ in accordance with provisions of Foreign Exchange Management (Foreign exchange derivatives contracts) Regulations, 2000. Developer and entrepreneur entitled to exemption from the securities transaction tax leviable under section 98 of the Finance (No.2) Act, 2004 in case the taxable securities transactions are entered into by a non-resident through the International Financial Service Centre.

FDI
SECTORAL GUIDELINES

AIRPORTS
Foreign Investment upto 100% is allowed in green field projects under automatic route Foreign Direct Investment is allowed in existing projects - upto 74% under automatic route - beyond 74% and upto 100% subject to Government approval

TELECOM
FDI in basic and cellular, unified access services, national/ international long distance, V-Sat, public mobile radio trunk services (PMRTS), global mobile personal communications services (GMPCS), other value added telecom services and ISP with gateways - Automatic upto 49% - FIPB beyond 49% but upto 74% (this limit is inclusive of FII, NRI, FCCBs, ADR,GDR, Convertible preference shares and proportionate foreign equity in Indian promoters/Investing companies) subject to guidelines notified in the PN 5 (2005 Series). ISP with gateways, radio paging, end-to-end bandwidth - Automatic up to 49% - FIPB beyond 49% up to 74% (Subject to licensing and security requirements notified by the Department of Telecommunications)

 ISP without gateway, infrastructure provider providing dark fibre, electronic mail and voice mail - Automatic upto 49% - FIPB beyond 49% but upto 100% (Subject to the condition that such company shall divest 26% of their equity in favor of Indian public in 5 years, if these companies are listed in other parts of the world. They are also subject to licensing and security requirements, where required) Manufacture of telecom equipments - Automatic upto 100% (Subject to sectoral requirements).

DOMESTIC AIRLINES

FDI upto 49% (40%) permitted under automatic route

Automatic Route is not available However, a foreign airlines are not allowed to have any direct or indirect equity participation

100% investment by NRIs/OCBs

DRUGS & PHARMACEUTICALS

FDI upto 100% is permitted under the automatic route for manufacture of drugs and pharmaceuticals (The following is the current position)

[i. FDI upto 74% in the case of bulk drugs, their intermediates Pharmaceuticals and formulations (except those produced by the use of recombinant DNA technology) would be covered under automatic route. ii. FDI above 74% for manufacture of bulk drugs will be considered by the Government on case to case basis for manufacture of bulk drugs from basic stages and their intermediates and bulk drugs produced by the use of recombinant DNA technology as well as the specific cell/tissue targeted formulations provided it involves manufacturing from basic stage.]

INSURANCE
FDI upto 26% allowed on the automatic route

However, license from the Insurance Regulatory & Development Authority (IRDA) has to be obtained
There is a proposal to increase this limit to 49%(Not found any data to substantiate this statement)

MINING
Coal & Lignite mining for captive consumption by power projects, and for iron & steel and cement production - Automatic upto 100% Mining covering exploration and mining of diamonds and precious stones, gold, silver and minerals Automatic upto 100% Subject to Mines & Minerals (Development and Regulation) Act, 1957.
Press Note 18 (1998) and Press Note 1 (2005) are not applicable for setting up 100% owned subsidiaries in so far as the mining sector is concerned, subject to a declaration from the applicant that he has no existing joint venture for the same area and/or the particular mineral.

PETROLEUM
Petroleum and natural gas sector, other than refining and including market study and formulation; setting up infrastructure for marketing - Automatic upto 100% For petroleum refining activity 100% FDI is permitted in Indian Private Companies under automatic route and upto 26% FDI is permitted in Public Sector Undertakings with Government approval

PRIVATE SECTOR BANKING

Foreign Investment upto 74% is permitted from all sources (FDI +FII) under the automatic route subject to guidelines for setting up of branches/subsidiaries of foreign banks issued by RBI from time to time.

TRADING
Wholesale / cash & carry trading - Automatic upto 100%

Trading for exports - Automatic upto 100%

Trading of items sourced from small scale sector 100% with Government approval Test marketing of such items for which the Indian company has approval for manufacture - 100% with Government approval

Single Brand product retailing - 51% with Government approval

HOUSING, REAL ESTATE & TOWNSHIP DEVELOPMENT

FDI under the automatic route is allowed upto 100% in townships, housing, built-up infrastructure and construction development projects subject to conditions notified vide Press Note 2 (2005 Series) including: a. minimum capitalization of US$ 10 million for wholly owned subsidiaries and US$ 5 million for joint venture. The funds would have to be brought within six months of commencement of business of the Indian company b. Minimum area to be developed under each project10 hectares in case of development of serviced housing plots; and built-up area of 50,000 sq. mts. in case of construction development project; and any of the above in case of a combination project

HOUSING, REAL ESTATE & TOWNSHIP DEVELOPMENT

The conditions notified vide Press Note 2 (2005 Series) do not apply to NRIs./OCBs are allowed to invest upto 100% under automatic route in: Development of serviced plots and construction of built up residential premises Investment in real estate covering construction of residential and commercial premises including business centers and offices Development of townships City and regional level urban infrastructure facilities,including both roads and bridges Investment in manufacture of building materials, which is also open to FDI Investment in Participatory Ventures in the areas mentioned above Investment in Housing Finance Institutions

PRINT MEDIA
FDI upto 100% in publishing/printing scientific & technical magazines, periodicals & journals FDI upto 26% in publishing news papers and periodicals dealing in news and current affairs subject to verification of antecedents of foreign investor and keeping editorial and management control in the hands of resident Indians All investments are subject to the guidelines issued by the Ministry of Information and Broadcasting

(No FDI/NRI/OBC permitted)

investment

is

BROADCASTING
FDI permitted for setting up hardware facilities such as up-linking, HUB, etc upto 49% under Government approval route FDI permitted in Cable Network upto 49% under Government approval route Foreign Investment (FDI/FII) upto 49% allowed under Government approval route in Direct to Home Service Providers. FDI limited to 20% FDI permitted in FM radio upto 20% under Government approval route

(No FDI/NRI/OBC investment is permitted)

INFRASTRUCTURE
100% FDI is permitted for the following activities: Electricity Generation (except Atomic energy) Electricity Transmission Electricity Distribution Mass Rapid Transport System Roads & Highways Toll Roads Vehicular Bridges Ports & Harbors Hotel & Tourism

FDI in Investing companies in infrastructure/service sector (except telecom sector) will not be counted towards sectoral cap provided: - Such investment is up to 49% & - The management of the company is in Indian hands. FDI in such companies will be through the FIPB route

Illustrative List of Sectors Under Automatic Route for FDI upto 100%
Most manufacturing activities Non-banking financial services Drugs and pharmaceuticals Food processing Electronic hardware Software development Film industry Advertising Hospitals Pollution control and management Management consultancy Computer related Services

Illustrative List of Sectors Under Automatic Route for FDI upto 100%
Research and Development Services Construction and related Engineering Services Pollution Control and Management Services Health related & Social Services Travel related services

ADVANTAGES INDIA
Stable democratic environment over 55 years of independence

Large and growing market

World class manpower scientific, technical and managerial

Cost-effective and highly skilled labor

Abundance of natural resources

Large English speaking population

ADVANTAGES INDIA
Well-established judiciary legal system with independent

Developed banking system and vibrant capital market Well developed accountancy, consultancy profession legal, actuarial and

Surveys by leading organizations rate India among the top three investment hot spots and one of the fastest growing economies in the world

THANK YOU