The decision of the Government in all cases is usually conveyed by the DEA within 30 days.
1.9 FDI Prohibited
FDI is not permissible in Gambling and Betting, or Lottery Business, Business of chit fund, Nidhi Company, Housing and Real Estate business, Trading in Transferable Development Rights (TDRs), Retail Trading, Atomic Energy Agricultural or plantation activities or Agriculture (excluding Floriculture, 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 Plantations(other than Tea plantations)
1.10 General permission of RBI under FEMA
RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect of proposals approved by the Government. Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors.
The companies are, however, required to notify the Regional office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and to file the required documents with the concerned Regional offices of the RBI within 30 days after issue of shares to the foreign investors or NRIs.
1.11 Besides new companies, automatic route for FDI/NRI investment is also available to the existing companies proposing to induct foreign equity. For existing companies with an expansion programme, the additional requirements include:
- the increase in equity level resulting from the expansion of the equity base of the existing company without the acquisition of existing shares by NRI/foreign investors,
- the money to be remitted should be in foreign currency and
- proposed expansion programme should be in the sector(s) under automatic route. Otherwise, the proposal would need Government approval through the FIPB. For this a Board Resolution of the existing Indian company must support the proposal.
1.12 For existing companies without an expansion programme, the additional requirements for eligibility for automatic approval are
- that they are engaged in the industries under automatic route;
- the increase in equity level must be from expansion of the equity base and
- the foreign equity must be in foreign currency.
1.13 The earlier SEBI requirement, applicable to public limited companies, that shares allotted on preferential basis shall not be transferable in any manner for a period of 5 years from the date of their allotment has now been modified to the extent that not more than 20 per cent of the entire contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.
1.14 Equity participation by international financial institutions such as ADB, IFC,
CDC, DEG, etc. in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and sector specific cap on FDI
1.15 ADR/GDR
An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:
- the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time
- The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or
notification issued by the Ministry of Finance, and
- There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets.
- The FCCB issue proceeds need to conform to external commercial borrowing end use requirements; in addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring
- Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations.
- There is no limit upto which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy.
1.16 A company engaged in the manufacture of items covered under Automatic route, whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the percentage limits under the automatic route, or which is implementing a project falling under Government approval route, would need to obtain prior Government clearance through FIPB before seeking final approval from the Ministry of Finance.
1.17 Foreign currency convertible Bonds
FCCBs are issued in accordance with the scheme [the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993] and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments;
1.18 Eligibility
The eligibility for issue of Convertible Bonds or Ordinary Shares of Issuing Company is given as under:
- An issuing company desirous of raising foreign funds by issuing Foreign
Currency Convertible Bonds or ordinary shares for equity issues through
Global Depositary Receipt
- Can issue FCCBs upto USD 50 Million under the Automatic route,
- From USD 50 -100 Million, the companies have to take RBI approval,
- From USD 100 Million and above, prior permission of the Department of
Economic Affairs is required.
1.19 Preference Shares
Foreign investment through preference shares is treated as foreign direct investment. Proposals are processed either through the automatic route or FIPB as the case may be, as per the following guidelines:
- Foreign investment in preference share is considered as part of share capital and fall outside the External Commercial Borrowing (ECB) guidelines/cap.
- Preference shares to be treated as foreign direct equity for purpose of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. Preference shares structured without such conversion option fall outside the foreign direct equity cap.
- Duration for conversion shall be as per the maximum limit prescribed under the Companies Act or what has been agreed to in the shareholders agreement whichever is less.
- The dividend rate would not exceed the limit prescribed by the Ministry of Finance.
- Issue of preference shares should conform to guidelines prescribed by the SEBI and RBI and other statutory requirements.
FDI in EOUs/SEZs/Industrial Park/EHTP/STP
1.20 Special Economic Zones
100% FDI is permitted under automatic route for setting up of Special Economic Zone.
Units in SEZ qualify for approval through automatic route subject to sectoral norms. Details about the type of activities permitted are available in the Foreign Trade Policy issued by Department of Commerce. Proposals not covered under the automatic route require approval by FIPB. The procedure mentioned in para 1.8 will be applicable for seeking requisite approval.
1.21 Export Oriented Units (EOUs)
100% FDI is permitted under automatic route for setting up 100% EOU, subject to sectoral norms. Proposals not covered under the automatic route would be considered and approved by FIPB. The procedure mentioned in para 1.8 will be applicable for seeking requisite approval.
1.22 Industrial Park
100% FDI is permitted under automatic route for setting up of Industrial Park. The procedure mentioned in Para 1.3 will be applicable.
1.23 Electronic Hardware Technology Park (EHTP) Units
All proposals for FDI/NRI investment in EHTP Units are eligible for approval under automatic route subject to parameters listed in Para 1.1. For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB, as per the procedure outlined in Para 1.8.
1.24 Software Technology Park Units
All proposals for FDI/NRI investment in STP Units are eligible for approval under automatic route subject to parameters listed in Para 1.1. For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB, as per the procedure outlined in Para 1.8.
Capitalization of Import Payables
1.25 FDI inflows are required to be under the following modes:
- By inward remittances through normal banking channels or
- By debit to the specified account of person concerned maintained in an authorized dealer/authorized bank.
Issue of equity to non-residents against other modes of FDI inflows or in kind is not permissible.
However, Issue of equity shares against lump sum fee, royalty payable and external commercial borrowings (ECBs) in convertible foreign currency are permitted, subject to meeting all applicable tax liabilities and sector specific guidelines.
ENTRY OPTIONS FOR FOREIGN INVESTOR
2.1 Entry options
A foreign company planning to set up business operations in India has the
following options:
Incorporated Entity
i) By incorporating a company under the Companies Act,1956 through
- Joint Ventures; or
- Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.
Unincorporated Entity
i) As a foreign Company through
- Liaison Office/Representative Office
- Project Office
- Branch Office
Such offices can undertake activities permitted under the Foreign Exchange Management (Establishment in India of branch or office of other place of business) Regulations,2000.
2.2 Incorporation of company
For registration and incorporation, an application has to be filed with Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to
other domestic Indian companies.
For details please visit the website of Ministry of Company Affairs at :
http://dca.nic.in
2.3 Liaison Office/ Representative Office
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. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India. Liaison office can not undertake any commercial activity directly or indirectly and can not, therefore, earn any income in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).
2.4 Project Office
Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices can not undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been
granted by the RBI.
2.5 Branch Office
Foreign companies engaged in manufacturingand trading activities abroad are allowed to set up Branch Offices in India for the following purposes:
- Export/Import of goods
- Rendering professional or consultancy services
- Carrying out research work, in which the parent company is engaged.
- Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
- Representing the parent company in India and acting as buying/selling agents in India.
- Rendering services in Information Technology and development of software in India.
- Rendering technical support to the products supplied by the parent/ group companies.
- Foreign airline/shipping company.
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer.
Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).
2.6 Branch office on 'stand alone basis' in SEZ
Such Branch Offices would be isolated and restricted to the Special Economic zone (SEZ) alone and no business activity/transaction will be allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India.
No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities subject to specified conditions.
Application for setting up Liaison Office/ Project Office/ Branch Office may be submitted in form FNC 1 (available at RBI website at
www.rbi.org.in)
2.7 Investment in a firm or a propriety concern by NRIs
A non-resident Indian or a person of Indian origin resident outside India
may invest by way of contribution to the capital of a firm or a proprietary concern in
India on non-repatriation basis provided
- Amount is invested by inward remittance or out of NRE/FCNR/NRO account maintained with AD
- The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business i.e. dealing in land and immovable property with a view to earning profit or earning income there from.
- Amount invested shall not be eligible for repatriation outside India NRIs/PIO may invest in sole proprietorship concerns/ partnership firms with repatriation benefits with the approval of Government /RBI.
2.8 Investment in a firm or a propriety concern by other than NRIs
No person resident outside India other than NRIs/PIO shall make any investment by way of contribution to the capital of a firm or a proprietorship concern or any association of persons in India. The RBI may, on an application made to it, permit a person resident outside India to make such investment subject to such terms and conditions as may be considered necessary.
EXCHANGE CONTROL MANAGEMENT
3.1 FEMA
The Reserve Bank of India's Exchange Control Department, administers Foreign Exchange Management Act, 1999, (FEMA) which has replaced the earlier act , FERA, with effect from June 1, 2000. The new legislation is for "facilitating external trade" and "promoting the orderly development and maintenance of foreign exchange market in India". FEMA extends to the whole of India. Under FEMA an Indian company with foreign equity participation is treated at par with other locally incorporated companies. Accordingly, the exchange control laws and regulations for residents apply to foreign-invested companies as well.
3.2 FDI in Indian Company
In terms of Section 6(3)(b) of Foreign Exchange Management Act. 1999 Reserve Bank regulates transfer or issue of any security by a person resident outside India read with Notification No. FEMA 20/2000-RB dated May 3,2000
GENERAL PERMISSION UNDER FEMA
3.3 Issue of Rights/ Bonus Shares
General permission is available to Indian companies to issue Right/Bonus shares subject to certain conditions.Entitlement of rights shares is not automatically available to investors who have been allotted such shares as OCBs. Such issuing companies would have to seek specific permission from RBI, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai for issue of shares on right basis to erstwhile OCBs. However, bonus shares can be issued to OCBs.
3.4 Issue of shares under merger/amagamation
Where a Scheme of merger or amalgamation of two or more Indian companies has been approved by a court in India, the transferee company may issue shares to the shareholders of the transferor company, resident outside India subject to ensuring that the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the percentage specified in the approval granted by the Central Government or the Reserve Bank
3.5 Issue of shares under ESOS scheme
A company may issue shares under this Scheme, to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India, directly or through a Trust subject to the condition that the scheme has been drawn in terms of relevant regulations issued by the SEBI; and 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.
3.6 Issue of shares under merger/amagamation
An Indian corporate can raise foreign currency resources abroad through
the issue of ADRs or GDRs. Regulation 4 of Schedule I of FEMA Notification no. 20
allows an Indian company to issue its Rupee denominated shares to a person
resident outside India being a depository for the purpose of issuing GDRs and/ or
ADRs, subject to the conditions that:
- the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time
- The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and
- Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations.
3.7 Repatriation of investment Capital and profits Earned in India
- All foreign investments are freely repatriable except for the cases where NRIs choose to invest specifically under non-repatriable schemes. Dividends declared on foreign investments can be remitted freely through an Authorised Dealer.
- Non-residents can sell shares on stock exchange without prior approval of RBI and repatriate through a bank the sale proceeds if they hold the shares on repatriation basis and if they have necessary NOC/tax clearance certificate issued by Income Tax authorities.
- For sale of shares through private arrangements, Regional offices of RBI grant permission for recognized units of foreign equity in Indian company in terms of guidelines indicated in Regulation 10.B of Notification No. FEMA.20/2000 RB dated 3rd May 2000. The sale price of shares on recognised units is to be determined in accordance with the guidelines prescribed under Regulation 10B(2) of the above Notification.
- Profits, dividends, etc. (which are remittances classified as current account transactions) can be freely repatriated.
3.8 Transfer of shares/debentures
- A person resident outside India ( Other than NRI and OCB) may transfer by way of sale or gift the shares or convertible debentures to any person resident outside India ( including NRIs); provided transferee has obtained prior permission of SIA/FIPB to acquire the shares if he has previous venture or tie-up in India in same field or allied field
- NRI or OCB may transfer by way of sale or gift the shares or convertible debentures held by him or it to another non-resident Indian; provided transferee has obtained prior permission of Central Government to acquire the shares if he has previous venture or tie-up in India in the same field or allied field
- The person resident outside India may transfer any security to a person resident in India by way of gift.
- A person resident outside India may sell the shares and convertible debentures of an Indian company on a ecognized Stock Exchange in India through a registered broker.
3.9 Current Account transactions
Prior approval of the RBI is required for acquiring foreign currency above
certain limits for the following purposes:
- Holiday travel over US$ 10,000 p.a.
- Gift / donation over US$ 5,000 / US$ 10,000 per beneficiary p.a.
- Business travel over US$ 25,000 per person
- Foreign studies as per estimate of institution or US$ 100,000 per academic year
- Architectural / consultancy services procured from abroad over US$ 1,000,000 per project
- Remittance for purchase of Trade Mark / Franchise
- Reimbursement of pre incorporation expenses over US$ 100,000
- Remittances exceeding US$ 25,000 p.a. (over and above ceilings prescribed for other remittances mentioned above) by a resident individual for any current account or capital account transaction.
In certain specified cases, prior approval of the ministry concerned is needed for withdrawal of foreign exchange, such as: -
- Remittance of freight of vessel chartered by a PSU,
- Payment of import through ocean transport by a Govt. Department or a PSU on C.I.F basis,
- Multi-modal transport operators making remittance to their agents abroad.
3.10 Acquisition of Immovable propert by Non-resident
A person resident outside India, who has been permitted by Reserve Bank to establish a branch, or office, or place of business in India( excluding a Laison Office), has general permission of Reserve Bank to acquire immovable property in India , which is necessary for, or incidental to, the activity. However, in such cases a declaration , in prescribed form (IPI), is required to be filed with the Reserve Bank, within 90 days of the acquisition of immovable property.
Foreign nationals of non-Indian origin who have acquired immovable property in India with the specific approval of the Reserve Bank can not transfer such property without prior permission from the Reserve Bank of India.
3.11 Acquistion of Immovable property by NRI
An Indian citizen resident outside India (NRI) can acquire by way of purchase any immovable property in India other than agricultural/ plantation /farm house.He may transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India or a person resident in India.
PORTFOLIO INVESTMENT SCHEME
4.1 PIS
Foreign Institutional Investors(FIIs) registered with SEBI and Non-resident Indians are eligible to purchase the shares and convertible debentures under the Portfolio Investment Scheme. The FII should apply to the designated AD who may then grant permission to FII for opening a foreign currency account and/or a Non Resident Rupee Account
4.2 Foreign Institutional Investors (FIIS)
FIIs include Asset Management Companies, Pension Funds, Mutual Funds, Investment Trusts as Nominee Companies, Incorporated/Institutional Portfolio Managers or their Power of Attorney holders, University Funds, Endowment Foundations, Charitable Trusts and Charitable Societies.
4.3 Regulations Governing PIS
Investment by Foreign Institutional Investors( FIIs) is regulated under SEBI (FII) Regulations , 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3,2000. SEBI acts as the nodal point in the entire process of FII registration. FIIs are required to apply to SEBI in a common application form in duplicate.. RBI approval is also required under FEMA to enable an FII to buy/sell securities on Stock Exchanges and open foreign currency and Indian Rupee accounts with a designated bank branch.
4.4 Policy on FII Investments
Main features of the policy on investment by FII are
FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt instruments.
FIIs can buy/sell securities on Stock Exchanges. They can also invest in listed and unlisted securities outside Stock Exchanges where the price has been approved by RBI.
No individual FII/sub-account can acquire more than 10% of the paid up capital of an Indian company.
All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company.
Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body in terms of Press Release dated Sept.20,2001 and FEMA Notification No.45 dated Sept. 20,2001.
No permission from RBI is needed so long as the FIIs purchase and sell on recognized stock exchange. All non-stock exchange sales/purchases require RBI permission.
4.5 Portfolio Investments by NRIs
NRIs/PIOs are permitted to purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply to a designated branch of a Bank which deals in Portfolio Investment. All the sale/purchase transaction are routed through the designated branch.
An NRI can purchase shares up to 5% of the paid up capital of an Indian company. All NRIs taken together cannot purchase more than 10% of the paid up value of the company. This limit can be increased by the Indian company to 24% by passing a General Body resolution.
Investment can be made both on repatriation basis or non-repatriation basis The sale of shares will be subject to payment of applicable taxes. For details regarding portfolio investment scheme visit the website of RBI at
www.rbi.org.in and Security & Exchange Board of India(SEBI) at
www.sebi.gov.in.