New FDI Policy April 2013
Department of Industrial Policy and Promotion, Government of India (DIPP) has notified the new consolidated policy on Foreign Direct Investment (FDI) on 5th April, 2013. This policy supersedes all earlier policies, circulars, press notes issued on FDI by DIPP.
Barring few changes, this policy is more of a compilation of circulars issued by Reserve Bank of India in the past one year. The key features of new FDI policy are as follows:
Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP)
The Consolidated FDI Policy permits an Indian Company having FDI to be converted into the LLP with prior approval of FIPB/Government but subject to various conditions. One of the conditions, prior to introduction of FDI Policy dated 5th April, 2013 was that Foreign Capital participation in LLPs will be allowed only by way of cash consideration, received by inward remittance, through normal banking channels or by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank. In case of Conversion of an Indian Company into LLP, the said condition has been dispensed with by introducing new Consolidated FDI Policy dated 5th April, 2013.
Conversion of ECB/Lump sum Fee/Royalty etc. into Equity
As per the FDI Policy, the companies are allowed to issue equity shares against the import of capital goods/ machinery/ equipment (excluding second-hand machinery), subject to compliance with the various conditions specified therein. One of the conditions in the FDI policy was mandatory requirement of independent valuation of the capital goods/machinery/equipments (including second-hand machinery) by a third party entity, preferably by an independent valuer from the country of import along with production of copies of documents/certificates issued by the customs authorities towards assessment of the fair-value of such imports. The said condition has been dispensed with through introduction of the new Consolidated FDI Policy dated 5th April, 2013.
Change in Form FC GPR
Every company, making allotment to any foreign individual or company incorporated outside India, is required to report to Reserve Bank of India (RBI) in form FC GPR within 30 days from the date of allotment. Apart from the various declarations in Form FC GPR, following two declarations have been deleted from the Form FC GPR with the introduction of new Consolidated FDI Policy dated 5th April, 2013.
- A. Foreign entity/entities—(other than individuals), to whom we have issued shares have existing joint venture or technology transfer or trade mark agreement in India in the same field and Conditions stipulated at Para 4.2 of Consolidated FDI policy Circular of Government of India have been complied with.
- Foreign entity/entities—(other than individuals), to whom we have issued shares do not have any existing joint venture or technology transfer or trade mark agreement in India in the same field.
- For the purpose of the 'same' field, 4 digit NIC 1987 code would be relevant.
- B. We are not an Industrial Undertaking manufacturing items reserved for small sector.
- We are an Industrial Undertaking manufacturing items reserved for small sector and the investment limit of 24 % of paid-up capital has been observed/ requisite approvals have been obtained.
Transfer of shares/convertible debentures from Resident to Non-Resident
Transfer of shares or convertible debentures by Resident to Non-Resident is allowed subject to various terms and conditions. The ‘Person Resident outside India’ now includes incorporated non-resident entity, foreign national, NRI, FII other than erstwhile OCB. The foreign national, NRI, FII were earlier excluded from the definition of the ‘Person Resident outside India’ for the purposes of transfer of shares/convertible debentures from resident to the non-residents.
Foreign Investment in Asset Reconstruction Companies (ARCs)
The overall investment limit for investment in ARCs has been increased to 74% from 49% under the Government Route. The increased limit is overall limit for both investment by way of FDI & FII. Earlier Person residents outside India were not allowed to invest in ARCs through FII mode. Moreover, the conditions for investment in the ARCs have been changed as follows:
No sponsor may hold more than 50% of the shareholding in an ARC either by way of FDI or by routing it through an FII controlled by the single sponsor.
The total shareholding of an individual FII shall not exceed 10% of the total paid-up capital.
AMENDMENTS THROGH DIFFERENT NOTIFICATIONS, CIRCULARS, AND PRESS NOTES DURING THE PERIOD i.e. from 10.04.2012 to 05.04.2013 HAS BEEN INCORPORATED IN NEW CONSOLIDATED FDI POLICY
Who can Invest in India
Reserve Bank of India vide A. P. (DIR Series) Circular No. 16 dated 22nd August, 2012 has allowed citizen / entity incorporated in Pakistan to Invest in the equity capital of the Indian entity after getting Government Approval. In respect to the said amendment Department of Industrial Policy and Promotion has also issued Press Note no. 3 2012.
Issue Price of Shares
The Reserve Bank of India vide A.P. (DIR Series) Circular No. 36 dated 26th September, 2012 has changed the pricing criteria for the shares subscribed under the Memorandum of Association. It has dispensed with the condition of DFCF method in case of subscription shares and has allowed that in cases where the shares are subscribed under the Memorandum of Association by the non-resident including NRIs such investment may be made at face value subject to the eligibility to invest under the FDI scheme.
Annual Return of Foreign Liabilities and Assets
Reserve Bank of India vide A.P. (DIR Series) Circular No.133 dated 20th June, 2012 has prescribed new format (excel) for Annual return on Foreign Liabilities and Assets Reporting by Indian Companies which is required to be filed to Reserve bank through email at email@example.com.
FDI in Single brand, Multi-brand, Civil Aviation Sector, Broadcasting Sector, Power Exchanges
Department of Industrial Policy and Promotion (DIPP) issued various Press notes i.e. Press Note no. 4 2012 – FDI in single brand, Press Note no. 5 2012 – FDI in Multi brand, Press Note no. 8 2012 - FDI in Power exchange, Press Note no. 7 2012 – FDI in broadcasting sector, Press Note No. 6 2012 - FDI in civil aviation sector, through which certain amendments in foreign investment policy in sectors such as Single–Brand Product Retail Trading, Multi-Brand Retail Trading, Civil Aviation Sector, Broadcasting Sector, and Power Exchanges had been done. Those amendments have been incorporated in the New FDI Consolidated Policy dated 5th April, 2013.
Relaxation in setting up subsidiaries by Foreign owned NBFCs
Chapter 6 of Consolidated Policy provides about the Sector Specific Condition on FDI which is divided into two Para 6.1 & 6.2. 6.1 states the prohibited sectors and 6.2 states about permitted sectors. Under 6.2.24 of the permitted sectors the government has allowed NBFCs to have 100% FDI under Automatic Route subject to different minimum capitalization norms.
The NBFC with 100% foreign capital are also allowed to set up step down subsidiary for specific NBFC activities without any restriction on the number of operating subsidiaries and without bringing in additional capital subject to the condition of minimum capitalization of US$ 50 million.
The Department of Industrial Policy and Promotion has revised the policy vide press note dated 3rd October, 2012 and has allowed NBFC with 75% and up to 100% to set up step down subsidiary for specific NBFC activities without any restriction on the number of operating subsidiaries and without bringing in additional capital subject to the condition of minimum capitalization of US$ 50 million.
This means now the Indian investing company registered as NBFC and having minimum 75% and up to 100% FDI can now set up any number of step down subsidiaries with minimum capitalization of US$ 50 million.
Downstream investment by a banking company incorporated in India, which is owned and /or controlled by non-resident/ a non- resident entity/non-resident entities - insertion of note
As per Consolidated FDI Policy, the companies incorporated in India and is owned or controlled by non-resident entity/ies are allowed to further invest in another Indian company. Such investment by the Indian company owned or controlled by non-resident entities is called as downstream investment.
While doing the downstream investment it is prescribed that the entire investment by the investing Indian company owned or controlled by non-resident entity/ies would be considered as indirect foreign investment. The Government of India, vide press note no. 2 dated 31st July, 2012, has reviewed the policy and has prescribed that while making the downstream investment by the banking company incorporated in India owned or controlled by non-resident entities, shall not count as indirect foreign investment where the downstream investment is done under either corporate debt restructuring or other loan restructuring mechanism or in trading books or for acquisition of shares due to defaults in loan.
QFIs are allowed to invest in Debt securities and i.e. through single non-interest bearing rupee
Vide A. P. (DIR Series) Circular No. 7 dated 16th July, 2012 , the Reserve Bank of India has issued Scheme for Investment by Qualified Foreign Investors (QFIs) in Indian corporate debt securities earlier to which QFIs were not allowed to invest in Corporate debt securities. Also dividend payments on equity shares held by QFIs are permitted to be remitted to the designated overseas bank accounts of QFIs or to the single non-interest bearing rupee account which could earlier be credited to the single rupee pool bank account.