Foreign Direct Investment (FDI) plays an important role in the long-term economic development of a country not only as a source

of capital but also for enhancing competitiveness of the domestic economy through transfer of technology, strengthening infrastructure, raising productivity and generating new employment opportunities. FDI also has an important role in enhancing exports. We in India see FDI as a developmental tool.

The policy of the Government of India is to strive to maximize the developmental impact and spinoffs of FDI. While the Government encourages, and indeed, welcomes FDI in all the sectors where it is permitted, we are especially looking for large FDI inflows in the development of infrastructure, technological upgradation of Indian industry through greenfield investments in manufacturing, and in projects having the potential for creating employment opportunities on a large scale.

India, the largest democracy and 4th largest economy (in terms of purchase power parity) in the world. India is also the tenth most industrialized country in the world. With its consistent growth performance and abundant high-skilled manpower, India provides enormous opportunities for investment, both domestic and foreign.

Since the beginning of economic reforms in 1991, major reform initiatives have been taken in the fields of investment, trade, financial sector, exchange control simplification of procedures, enactment of competition and amendments in the intellectual property rights laws, etc. India provides a liberal, attractive, and investor friendly investment climate

India has among the most liberal and transparent policies on FDI among the emerging economies. FDI up to 100% is allowed under the automatic route in all activities/sectors except certain categories which require prior approval of the Government

FDI policy is reviewed on continued basis and changes in sectoral policy/sectoral equity cap are notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy & Promotion (DIPP). FDI Policy is also notified by Reserve Bank of India (RBI) under Foreign Exchange Management Act (FEMA) 1999 through the Notifications issued under and AP( DIR Series) Circulars issued by Reserve Bank of India.

Government Approval
Petroleum Refining, Investing companies in Infrastructure & Services Sector, Defence and Strategic Industries, Print Media, Broadcasting, Postal services, Courier Services, Asset Reconstruction Companies

List of activities or items FDI is prohibited

1. Retail Trading 2. Atomic Energy 3. Lottery Business 4. Gambling and Betting 5. Housing and Real Estate business 6. Agriculture (excluding Floriculture, (excluding Horticulture, Development of seeds, Animal Husbandry, Pisiculture and Cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and 7.Plantations (Other than Tea plantations) (Other plantations)

Activities Automatic Route Not Available

1. Petroleum Refining (except for private sector oil refining), Natural Gas / LNG Pipelines 2. Investing companies in Infrastructure & Services Sector 3. Defence and Strategic Industries 4. Atomic Minerals 5. Print Media 6. Broadcasting 7. Postal services 8. Courier Services 9. Establishment and Operation of satellite 10. Development of Integrated Township 11. Tea Sector 12 Asset Reconstruction Companies

Automatic Route Sector Private Sector Banking Cap 74 Conditions Subject to guidelines issued by RBI from time to time RBI / SEBI/ IRDA IRDA

NBFC Insurance Petroleum Refining (Private Sector Telecommunications Housing and Real Estate 100

100 26 100 74 100

Only NRIs / PIOs

Automatic Route

Trading

51

Power

Primarily export activities, Star trading houses Subject to EXIM policy 100 FIPB approval 100 E Commerce; Such companies would engage only in business to business (B2B) e-commerce eand not in retail trading 100 Other than atomic reactor

Hotel & Tourism 100

Automatic Route
Drugs & Pharamceuticals Roads & Highways , Ports and harbours Hotel & Tourism Advertising Films Airports Mass Rapid Transport Systems 100 100 100 100 10 74 100 > 74 FIPB Other than DNA technology

Automatic Route
Air Transport Domestic airlines 100 NRIs; Other than NRIs 49% Press Note 2 of 2005 guidelines

Townships, housing, built- 100 builtup infrastructure and construction - development projects Any other Sector/ Activity 100

Venture Capital Fund and Venture Capital Company

100

Elsewhere not included; other than items under FIPB RBI / SEBI guidelines

Foreign Investments in India

1. Foreign Direct Investment (Automatic Route and Approval Route) 2. Foreign Portfolio Investments (FIIs and NRIs / PIOs) through stock exchanges 3. Foreign Venture Capital Investments (SEBI regd FVCIs Venture Capital Units 4. Other investments: Govt Securities FIIs , NRIs / PIOs can invest

5. Investments on non-repatriable basis nononly NRIs / PIOs

FEMA Regulations and FDI

In exercise of the powers conferred by clause (b) of sub-section (3) of Section 6 and Section 47 of subthe Foreign Exchange Management Act, 1999 ( 42 of 1999), the Reserve Bank makes the 1999), regulations to prohibit, restrict or regulate, transfer or issue security by a person resident outside India. India.

Eligibility Investing in India

Entity incorporated outside India an entity incorporated/registered under the relevant statutes, laws of the host country". other than an entity incorporated in Pakistan. (Ref FEMA 100 dated October 3, 2003) A person resident outside India (other than a citizen of Pakistan) A person who is a citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Scheme, with prior approval of FIPB.

Erstwhile OCBs: FDI Incorporated outside India and are not under adverse notice of Reserve Bank / SEBI as incorporated non-resident entities, Prior approval of Government / RBI
(Ref FEMA 101 dated December 8, 2003)

Type of Instruments under FDI

Equity Shares Preference Shares / Debentures  Foreign Direct equity for the purposes of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. Preference shares / option. Debentures structured without such conversion option fall outside the foreign direct equity cap. cap.
Ref: Ref: AP (DIR Series) Circular No 73 and 74 dated August 8, 2007

Type of Instruments under FDI

Any foreign investment as non-convertible or optionally convertible or partially convertible preference shares as on and up to 30/4/ 2007 would continue to be outside the sectoral cap till their current maturity. Foreign investment coming as any other type of preference shares {non- convertible, optionally convertible or partially convertible) on or after 01/05/2007 would be considered as debt and shall require conforming to ECB guidelines / ECB caps.

Reporting of FDI
Mode of payment for shares issued to persons resident outside India Paragraph 8 of Schedule 1 of Notification No FEMA 20 dated May 3, 2000 1) Inward remittances through normal banking channels or Debit to the NRE/FCNR account of person concerned maintained in an authorized dealer/authorized bank. 2) Issue of equity to non-residents against other modes of FDI inflows or nonin kind is not permissible. 3) Issue of equity shares against lump-sum fee and royalty payable for lumptechnology collaborations and external commercial borrowings (ECBs) in convertible foreign currency which are permitted under the automatic route subject to meeting all applicable tax liabilities and sector specific guidelines. guidelines.
Ref Notification No.125 dated November 27, 2004

Reporting of FDI
Paragraph 9.1.A of Schedule 1 of FEMA 20 Advance remittance against receipt of consideration of issue of equity instruments Company should submit a report to Reserve Bank, not later than 30 days Paragraph 9.1.B of Schedule 1 of FEMA 20 Not later than 30 days from the date of issue of shares, a report in form FCGPR together with, (i) a certificate from the Company Secretary of the company accepting investment from persons resident outside India (ii) a certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

Issue Price / Valuation of Equity Shares Paragraph 5 of Schedule 1 of FEMA 20. Price of shares issued to persons resident outside India under this Schedule, shall not be less than  (a) the price worked out in accordance with the SEBI guidelines, where the issuing company is listed on any recognized stock exchange in India, and  (b) fair valuation of shares done by a chartered accountant as per the guidelines issued by the erstwhile Controller of Capital Issues, in all other cases.

Time frame within which shares have to be issued

The equity instruments are to be issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, In exceptional cases, refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt will be considered by the Reserve Bank on the merits of the case.

As on November 28, 2007, 180 days have elapsed since receipt of funds and the equity instruments have not been issued, the companies are required to approach the Foreign Exchange Department of the Regional Office concerned of the Reserve Bank through their AD with a definite action plan either for allotment of equity instruments or for refund of the advance, with full details, for specific approval.
Ref No. (AP DIR Series) Circular No. 20 dated December 14, 2007

Issue of Bonus / Rights Shares freely issue Rights / Bonus shares to existing non-resident shareholders, subject to adherence to sectoral cap The price of shares offered on rights basis to non-resident share holders shall not be lower than the price at which such shares are offered to resident shareholders. Ref: Regulation 6 of FEMA 20

Notification No.FEMA. 94 dated 18th June 2003 (Bonus Shares)

Shares issued under ESOP Scheme

Regulation 8 of FEMA 20 company may issue shares under the Employees Stock Options Scheme to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India. face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5% of the paid-up capital of the issuing company. Company should report in Form FC GPR within 30 from the date of issue.

Transfer of Shares

Notification No FEMA 20, FEMA 131 and FEMA 137 (Gift of Shares) AP (DIR Series) Circular No. 16 dated October 4, 2004 A.P. (DIR Series) Circular No. 08 August 25, 2005 (Transfer of security by way of gift Procedure)

Transfer of Shares other than financial sector

Remarks

Resident to Non Resident General Permission (Resident to NRI / Foreign Company FC TRS required incorporated out side India) Non Resident to Resident (NRI / Foreign Company to Resident) Non Resident (other than NRI / OCB) to Non- Resident (including NRI) (NRI to NRI only) Foreign Company to Foreign Company General Permission FC TRS required General Permission. No Reporting mechanism. Information to be submitted to Regional Office General Permission Information to be submitted to Regional Office Prior Approval of RBI

NRI to Foreign Company

Transfer of Shares in financial sector Resident to Non Resident (Resident to NRI / Foreign Company incorporated out side India) Non Resident to Resident (NRI / Foreign Company to Resident) Non Resident (other than NRI / OCB) to NonResident (including NRI) (NRI to NRI only) Foreign Company to Foreign Company NRI to Foreign Company

Remarks Prior Approval of RBI FC TRS required General Permission FC TRS required General Permission. No Reporting mechanism. Information to be submitted to Regional Office General Permission Information to be submitted to Regional Office Prior Approval of RBI

Remittance of Sale proceeds

Regulation 11 of FEMA 20 An authorized dealer may allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India: the security was held by the seller on repatriation basis; basis; either the security has been sold on a recognized stock exchange in India through a stock broker at the ruling market price as determined on the floor of the exchange, or the Reserve Banks approval has been obtained in other cases for sale of the security and remittance of the sale proceeds thereof; and a no objection/tax clearance certificate from the Income Tax authority has been produced.

FDI in Construction and Development Sector

Govt has permitted FDI upto 100% under the Automatic Route Ref: Press Note 2 (2005) Series dated March 3, 2000 RBI Notification No 136 dated July 19, 2005 AP (DIR Series) Circular No. 7 August 17, 2005 townships, housing, built-up infrastructure and construction development projects, (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure)

FDI in Construction and Development Sector

Investment is subject to guidelines: 1. Minimum area 10 Hectors 2. Construction and Development 50,000 SMT 3. Minimum Capitalization: WoS USD 10 mil JV USD 5 mil 4. Lock in period of original investment: 3 Yrs For exit < 3 Yrs FIPB approval 5. Necessary State Govt / Bodies approval 6 For investment by NRIs, the conditions mentioned in Press Note 2 / 2005 are not applicable

NBFC Sector
(Press Note No. 2 (2001 Series) dated 17th

April, 2001.) FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of RBI RBI would issue appropriate guidelines in this regard

NonNon-Banking Financial Companies

Merchant Banking Under writing Portfolio Management Services Investment Advisory Services Financial Consultancy StockStock-broking Asset Management Venture Capital Custodial Services

NonNon-Banking Financial Companies

Factoring Credit Rating Agencies Leasing & Finance Housing Finance ForexForex-broking Credit Card Business MoneyMoney-changing Business MicroMicro-credit Rural credit Credit Reference Agencies (Deleted PN 1 2008)

ECB
ECB refer to commercial loans *bank loans, *buyers credit, *suppliers credit, *securitized instruments (e.g. floating rate notes and fixed rate bonds) availed from nonresident lenders with minimum average maturity of 3 years.

ECB
Foreign Currency Convertible Bonds (FCCBs) issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency.

ECBECB-Foreign Currency Exchangeable Bonds(FCEB)

The Issuing Company shall be part of the promoter group of the Offered Company and shall hold the equity share/s being offered at the time of issuance of Foreign Currency Exchangeable Bond. RBI approval is required

ECB Eligible borrowers

Corporates (registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible to raise ECB. Individuals, Trusts and Non-Profit making Organizations are not eligible to raise ECB

Amount and Maturity

The maximum amount of ECB which can be raised by a corporate is USD 500 million or equivalent during a financial year. NGOs engaged in micro finance activities can raise ECB up to USD 5 million during a financial year Infrastructure approval route up to USD 100 million for Rupee expenditure Others USD 50 million for Rupee expenditure

ECB All-in-cost ceilings

Three years and up to five years 200 basis points More than five years 350 basis points End Uses Not permitted: on-lending or # investment in capital market or acquiring a company real estate, working capital, general corporate purpose and repayment of existing Rupee loans.

Parking of ECB
ECB proceeds shall be parked overseas until actual requirement in India parked overseas can be invested in the following liquid assets (a) deposits or Certificate of Deposit or other products offered by banks conversion of ECB into equity allowed Pre-payment allowed crystallization their foreign exchange liability arising out of guarantees

ECB under Services Sector

RBI Approval Route service sector viz. hotels, hospitals and software companies up to USD 100 million, per financial year purpose of import of capital goods ECB policy will apply