Highlights of FDI Policy

Issued on 01.04.2010

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HIGHLIGHTS OF FDI POLICY Page 1

 INTENT BEHIND CONSOLIDATION
Consolidated FDI policy as issued by Department of Industrial Policy
and Promotion, Ministry of Commerce and Industry and
Government of India on 1st April 2010, consolidated all earlier Press
Notes/ Press Release/ Clarifications on FDI issued by DIPP into
Single Circular and submitted into one. Government has clarified
that this consolidation is not intended to make changes in the
extant regulations.
Government has also clarified that the policy pronouncement on
FDI by Press Notes/ Press Releases shall take effect from the date of
press notes/ press releases regardless of the procedural instructions
which shall be issued by the Reserve Bank of India (RBI) vide
relevant A.P. DIR series circular for amending Foreign Exchange
Management (Transfer or Issue of Security by a Person Resident
Outside India) Regulations, 2000.
The Circular has been issued with the sunset clause of six months. A
new Circular consolidating all amendments to the FDI Policy shall be
issued on September 30, 2010 superseding the present Circular.
HIGHLIGHTS OF FDI POLICY
INSERTION AND ELBORATION OF DEFINITONS
Few definitions have been inserted and few are elaborated further
through the FDI policy:
Definition of Capital is elaborated
From the definition of capital instruments like warrants, partly paid
shares etc are specifically excluded and such instruments cannot be
issued to person resident outside India.
Definition of Investing Company is elaborated
Investing company means Indian company holding only investments
in another Indian company, directly or indirectly, other than for
trading of such holdings/ securities.
Definition of Joint Venture (JV) is newly inserted
JV in India means an Indian entity incorporated in accordance with
the laws and regulations in India in whose capital a foreign entity
makes an investment. Earlier there is no such definition exists.
Definition of Owned by resident Indian citizens is elaborated
A company is considered as ‘owned’ by resident citizens if more
than 50% of the capital in it is beneficially owned by resident Indian
citizens and / or Indian companies, which are ultimately owned and
controlled by resident Indian citizens.
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Definition of Transferable Development Rights (TDR) is newly
inserted
TDR means certificates issued in respect of category of land
acquired for public purposes either by the Central or State
Government in consideration of surrender of land by the owner
monetary compensation, which are transferable in part or whole.
Earlier no such definition is given anywhere.
Definition of Lottery Business is elaborated
Now lottery business includes Government/ Private Lottery, Online
Lotteries, etc.
Definition of Gambling and Betting is elaborated
Now Gambling and Betting includes casinos etc.
SALIENT FEATURES OF FOREIGN DIRECT INVESTMENT
Under the new FDI Policy, Indian companies can issue equity shares,
fully, compulsorily and mandatorily convertible debentures (FCD’s)
and compulsorily and mandatorily convertible preference shares
(CCPS) to the non residents subject to pricing guidelines/ valuation
norms as prescribed under FEMA from time to time. Also it has
been further clarified that for FCD’s/ CCPS, pricing of the
instruments would need to be decided/ determined upfront at the
time of issue of these instruments.
HIGHLIGHTS OF FDI POLICY
Now, warrants and partly paid shares are specifically excluded from
the ambit of capital. Before this amendment RBI suggests to take
post facto approval from FIPB if not earlier taken by the concerned
company. From now onwards, without obtaining prior approval
from foreign investment promotion Board (FIPB) warrants, partly
paid shares cannot be issued to person resident outside India.
FIIs are permitted to invest in the capital of an Indian company
either under the Foreign Direct Investment (FDI) Scheme or under
the Portfolio Investment Scheme (PIS).
Now onwards prior approval of FIPB followed by permission from
RBI would be required for transfer of equity shares/ FCD’s/ CCPS
from residents to non residents by way of sale or otherwise where
Indian company is engaged in any sectors falling under Government
route.
Also a person resident outside India other than
NRIs/ PIO may make an application and seek
prior approval of Reserve Bank for making investment by way of
contribution to the capital of a firm or a proprietorship concern of
any association of persons in India.
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It has clearly mentioned that FDI in Trusts other than Venture
capital fund is also not permitted.
A Foreign Venture Capital Investor may contribute upto 100% of the
capital of a Venture Capital Fund / Indian Venture Capital
Undertaking and may also set up a domestic asset management
company to manage the fund under Automatic Route subject to
SEBI & RBI regulations and FDI policy. However, FVCIs are also
allowed to invest as non-resident entities in other companies
subject to FDI Policy. Earlier such investment was regulated under
RBI approval.
Already in existence Non Convertible, Optionally Convertible or
Partially Convertible Preference Shares and Debentures, all such
instruments are to be considered as debt on or after May 01, 2007.
Such instruments would be regulated by applicable External
Commercial Borrowings (ECB) Guidelines.
Any kind of inward remittance received by the Indian company vide
issuance of Deposit Receipts (DRs) and Foreign Currency Convertible
Bonds (FCCBs) are treated as FDI and reckoned towards FDI.
Erstwhile OCBs as derecognized as class of foreign investor w.e.f
September 16, 2003 who are not eligible to invest in India and
HIGHLIGHTS OF FDI POLICY
entities prohibited from buying, selling or dealing in securities by
SEBI will not be eligible to subscribe to ADRs/ GDRs issued by Indian
companies.
Two way Fungibility Scheme
A registered stock broker in India can now purchase shares of Indian
company from market for conversion into ADRs/ GDRs based on
instructions received from overseas investors. Re issuance of ADRs/
GDRs would be permitted to the extent of ADRs/ GDRs which have
been redeemed into underlying shares and sold in Indian Market.
SECTORAL MODIFICATIONS IN BREIF
Non Banking Financial Services (NBFC)
Classification of Non-Fund Based activities under NBFC head,
(i) Investment Advisory Services
(ii) Financial Consultancy
(iii) Forex Broking
(iv) Money Changing Business
(v) Credit Rating Agencies
Classification of Credit Card Business under NBFC
Likewise credit card business includes issuance, sales, marketing &
design of various payment products such as credit cards, charge
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cards, debit cards, stored value cards, smart card, value added cards
etc.
Security Agencies in Private Sector
In accordance with the provisions of Private Security Agencies
(Regulation) Act, 2005 FDI upto 49% is permitted under approval
route, subject to licensing conditions specified therein. Earlier there
were no guidelines regarding foreign investment in security
agencies.
Storage and Warehousing Services is newly inserted
Government has expanded fund limits of participants
Engaged in Storage and Warehouse Services and hence fore allowed
100% FDI under the Automatic Route in this sector which also
includes warehousing of agricultural products with refrigeration
(cold storage). Earlier there were no such provisions exists.
Clarification in regard to Cash and Carry Wholesale Trading
In order to clarify the meaning of cash and carry wholesale trading
Government has defined the term “Cash and Carry Wholesale
Trading’ to mean sale of goods/ merchandise to retailers, industrial,
commercial, institutional or other professional business users or to
other wholesalers and related subordinated service providers.
Wholesale trading would, accordingly, be sales for the purpose of
trade, business and profession, as opposed to sales for the purpose
of personal consumption.
HIGHLIGHTS OF FDI POLICY
Hence any sale to fulfill personal consumption would not be
considered as ‘Cash and Carry Wholesale Trading’. To determine
whether the sale is wholesale or not, consideration would be given
to the type of customers to whom the sale is made and not the size
and volume of sales.
Wholesale trading would include resale, processing and thereafter
sale, bulk imports with ex-port/ ex-bonded warehouse business
sales and B2B e-commerce.
Guidelines to be followed to undertake Cash & Carry Wholesale
Trading/ Wholesale Trading (WT):-
Requisite Licenses/ Registration/ Permits, as specified under the
relevant Acts/ Regulations/ Rules/ Orders of the State Government/
Government Body/ Government Authority.
Except in sale to Government, sales made by the wholesaler would
be considered as ‘cash & carry wholesale trading/wholesale trading’
with valid business customers, only when wholesale trading are
made to the following entities:
1. Entities holding valid sales tax/VAT registration/service
tax/excise duty registration; or
2. Entities holding trade license or
3. Entities holding permits /license etc or
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4. Institutions having certificate of incorporation or registration as
a society or registration as public trust for their self
consumption.
Trading for exports is sub classified as E-commerce activities
Earlier there were no sub classification exists. E- Commerce
activities refer to the activity of buying and selling by a company
through the e-commerce platform. Such companies would engage
only in Business to Business (B2B) e-commerce and not in retail
trading. Hence, FDI existing restriction in domestic trading would be
applicable to e-commerce activities also.
Transport and Transport Support Services is newly inserted
FDI is allowed under 100% Automatic Route for the following
activities:
1. Pipeline transport, Ocean and water transport, inland water
transport
2. Transport Support Services
Research and Development Services is newly inserted
FDI is allowed under 100% Automatic Route excluding
basic Research and setting of R & D/ academic institutions which
would award degrees/ diplomas/ certificates. Earlier there were no
category exists.
New Sector (Advertising and Films) under Services Sector is
introduced
HIGHLIGHTS OF FDI POLICY
In both the activities 100% FDI under the Automatic Route is
allowed. Here Film Industry includes film financing, production,
distribution, exhibition, and marketing and associated activities
related to film industry.
Headend-In-The-Sky (HITS) is added in the Broadcasting Service
The total direct and indirect foreign investment including portfolio
and foreign direct investment in HITS shall not exceed 74%. FDI upto
49% would be on automatic Route and beyond that under approval
route. HITS Broadcasting Service refers to the multichannel down
linking and distribution of television programme in C-Band or Ku
Band wherein all the pay channels are downlinked at a central
facility (Hub/teleport) and again uplinked to a satellite after
encryption of channel. Foreign Investment would be subject to
guidelines/ conditions as specified by Ministry of Information and
Broadcasting.
Business Services is also newly inserted
FDI is allowed up to 100% under the Automatic Route in data
processing, software development and computer consultancy
services, software supply services, Business and management
consultancy services, market research services, technical testing &
analysis services.
Health and Medical Services is newly inserted
FDI is allowed up to 100% under the automatic route.
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Certain conditions are introduced for foreign banks operating in
India
Foreign subsidiary in India shall be subject to following conditions:
1) Foreign banks will be permitted to either have branches or
subsidiaries but not both.
2) Foreign banks regulated by banking supervisory authority in the
home country and meeting Reserve Bank’s licensing criteria will
be allowed to hold 100 % paid up capital to enable them to set
up a wholly owned subsidiary in India.
3) A foreign may operate in India through only one of the three
available channels i.e. (Branches; A wholly owned subsidiary
and a subsidiary with aggregate foreign investment up to a
maximum of 74 % in a private bank.
I. Foreign Banks are allowed to establish a wholly owned
subsidiary either through conversion of existing branches
into subsidiary or through conversion of existing branches
into subsidiary or through fresh banking license.
II. A subsidiary of Foreign Bank shall be subject to the licensing
requirements and conditions broadly consistent with those
for new private sector banks.
III. No person holding shares, in respect of any share held by
him, shall exercise voting rights on poll in excess of ten per
cent of the total voting rights of all the share holders.
HIGHLIGHTS OF FDI POLICY
Additional conditions are prescribed for companies dealing with
development of Transgenic Seeds/ Vegetables, which are as
follows:
1) Genetically modified seeds or planting material are to be dealt
in compliance with safety requirements prescribed under the
Environment (Protection) Act.
2) Any import of genetically modified shall be subject to the
conditions specified under Foreign Trade (Development and
Regulation) Act, 1992.
3) The company shall also comply with any other Law, Regulation
or Policy governing genetically modified material.
4) Company can undertake the business activities involving the use
of genetically engineered cells and material after obtaining
requisite approvals from Genetic Engineering Approval
Committee (GEAC) and Review Committee on Genetic
manipulation (RCGM).
5) Import of material shall be in accordance with National Seeds
Policy.
Government has allowed 100% FDI for companies dealing in
genetically modified seeds in conformity with various safety
standards and environment protection laws.
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 GUIDELINES FOR DELIBERATION BY FIPB FOR FDI PROPOSALS
A guideline has been laid down by FIPB to consider the proposals for
FDI and to formulate its recommendations. FDI proposals should be
considered by board keeping in view the time frame of 30 days for
communicating of its decision. While considering proposals, FIPB
may prioritize the following:
(i) Proposals for infrastructure sector,
(ii) Proposals having export potential,
(iii) Proposals with employment prospect especially for rural people,
(iv) Proposals with backward linkage - agro business/ farm sector,
(v) Proposals having greater social relevance,
(vi) Proposals which help in induction of technology/ capital
Following should be specifically considered by Board during the
scrutiny and consideration of proposals:
 The extent of foreign equity proposed to be held in the company,
 Purpose behind the proposal i.e. whether for fresh induction
offerings/ NRI equity and or enlargement of foreign/ NRI equity.
 Proposal is considered with Board Resolution and shareholders
agreement or not.
 Issue/ Transfer/ Pricing of shares will be as per SEBI/ RBI
Guidelines.
 Is an industrial or a service activity or combination of both?
 Items of activity involve any restrictions by way of reservation for
the Micro or Small Enterprises sector.
 Whether there is any sectoral restriction on the activity.
 Whether proposal involve import of items that are hazardous,
banned or detrimental to environment.

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