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Tuesday, October 5, 2010

Foreign Direct Investment

Foreign Direct Investment (FDI) may be either through Automatic Route or Approval route (with prior approval of FIPB).

If the investor has existing venture or tie-up in India as on 12.01.2005, through investment/ Technical collaboration/ Trademark Agreement in the same field in which the Indian Company, whose share are being  issued, is engaged, he has to obtain the prior permission of the SIA/FIPB to acquire the shares. This restriction is, however not applicable to:

1.       The issue of shares for investments to be made by Venture Capital Funds registered with SEBI.
2.       Investments by multinational financial institutions
3.       Where in existing Joint ventures, investments by either of the parties is less than 3%
4.       Where existing JV / collaboration is defunct or sick
5.       Issue of shares of Indian company engaged in IT or mining sector, if JV/Technical collaboration/ Trademark agreement of the person to whom the shares has to be issued are also in the same IT or mining sector for the same area or mineral.

Eligibility for Investment:

1.       A person resident outside India (other than citizen of Pakistan)
2.       Entity incorporated outside India (other than those incorporated in Pakistan)
3.       Person / Entity incorporated in Bangladesh can invest with the prior approval of the FIPB

Type of Instruments:

1.       Equity, fully and mandatorily convertible debentures and fully & mandatorily convertible preference shares subject to the pricing guidelines of FEMA.
2.       Other types of preference shares in accordance with ECB guidelines. Since these instruments are denominated in Rupees, interest rates will be based on the swap equivalent to LIBOR + spead permissible to ECB for the corresponding maturity.

Investment in Micro & Small Enterprise (MSE) :

A company reckoned as MSE in terms of MSMED Act, 2006, including EOU, FTZ,EPZ, STP or EHTP, which is not engaged in any activity specified in Annex 1 to the Master circularcan issue shares or convertible debentures to the eligible persons subject to the limit under FDI policy.

An Industrial undertaking (other than MSE) having industrial licence under IDRA Act, 1951 for manufacturing items reserved for MSE may issue shares to the eligible persons to the extent of 24% of the paid up capital under Automatic Route.

Investment in Public Sector Banks:

FDI & Portfolio investment in nationalized banks are subject to overall statutory limit of 20% as provided under Sec. 3(2D) of the Banking Companies (Acquisition & Transfer of undertakings) Acts 1970/80.




Investments from Bhutan & Nepal:

NRI, residents as well as citizens of Nepal & Bhutan are permitted to invest under FDI scheme provided consideration for the investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.

Right / Bonus issue:

FEMA provisions allow the right / bonus issue to non-residents subject to sectoral cap and compliance with other status such as Companies Act, SEBI rules etc. Prices offered to non-residents on right basis shall be:

1.       In case of listed company, at prices as determined by the company
2.       In case of unlisted company, at price not less than the price offered to resident shareholders.

Additional allotment in addition to the right can be made out of unsubscribed portion subject to sectoral cap.

Acquisition of shares under the scheme of  Merger / Amalgamation:

In case of Merger / Amalgamation, transferee / new company is allowed to issue shares to the shareholders of transferor company subject to sectoral cap and transferor/transferee/new company is not engaged in activities prohibited under FDI policy.

Issue of shares under ESOP:

1.       List Company can issue shares under ESOP to its employees to employees of JV/WOS abroad who are resident outside India, directly or through trust as per SEBI regulations and face value of the shares allotted to non-resident employees does not exceed 5% of paid up capital.
2.       Unlisted company has to comply with the provisions of the Companies Act.
3.       The issuing company has to submit details of issue within 30 days from the date of issue to the regional office of the RBI.

Reporting of FDI:

An Indian company receiving the investment from outside India under FDI, should report the details of consideration to regional office of the RBI through AD category I bank within 30 days from the date of receipt of amount of consideration together with FIRC copyand KYC report. The report would be acknowledged by the regional office concerned, which will allot Unique Identification Number.

Issue of Shares:

The equity instruments should be issued within 180 days from the date of receipt of inward remittance or by debit to NRE / FCNR (B) account of the non-resident investor. If not issued within the due date, entire amount should be refunded through outward remittance through normal banking channels or by credit to NRE / FCNR (B) account. In exceptional case, RBI may on merit basis, permit to issue shares after 180 days from the date of receipt of inward remittance.

Reporting of Issue:

Within 30 days from the date of issue, FC-GPR Part A (along with CS certificate & Merchant banker category I/CA certificate regarding manner of arriving the price of share)has to be filed with RBI through AD category I bank.

Issue Price:

Price of shares allotted to persons resident outside India under FDI scheme shall be on the basis of SEBI guidelines for listed companies. In case of unlisted companies, valuation of shares has to done by SEBI registered category I Merchant Banker or Chartered Accountant as per Discounted Cash Flow method (DCF). In case of issue of shares on preferential allotment the price shall not be less that the price as applicable to transfer of shares from resident to non-residents.

Transfer of shares & Convertible debentures:

1.       A person resident outside India (other than NRI or OCB) may transfer by way of sale or gift, the shares or convertible debentures to any person resident outside India (including NRI).
2.       NRI may transfer by way of sale or gift, the shares or convertible debentures to another NRI.

In both cases, if the transferee has existing tie-up/venture in India as on 12.01.2005in the same field in which the Indian company whose shares are being transferred, is engaged prior permission of SIA/FIPB has to be obtained for acquiring the shares.

3.       A person resident outside India can transfer any security to a person resident in India by way of gift.
4.       Non-residents can sell the shares/convertible debentures of a listed company through stock broker or a Merchant banker registered with SEBI.
5.       A resident of India can sell the shares/debentures of Indian company to non-residents & viceversa under private arrangement subject the guidelines specified in Annex – 3 of the master circular. However this general permission is not available if the entity is in financial service sector such as Banks, NBFC, ARC etc.


Reporting of transfer of shares/debentures from residents to non-residents & viceversa is to be made in FC-TRS within 60 days of receipt of consideration through AD category I bank.

Prior permission of the RBI for certain transfers:

1.       Transfer of shares/debenture of company engaged in financial service sector
2.       Transactions attract SAST Regulations
3.       Activity of the Indian company falls outside automatic route and requires FIPB approval for transfer.
4.       Transfer taken at a price, which falls outside the guidelines of RBI
5.       Deferement of payment of consideration by the non-resident acquirer.

Transfer of security by way of gift by rent to non-resident requires prior approval of RBI. Application for this purpose has to be made along with documents mentioned in Annex 4 to the master circular. RBI will consider following factors while processing the applications:


a.       Proposed transferee is eligible to hold securities.
b.      Gift doesnot exceed 5% of paid up capital of the company
c.       Within Sectoral limit
d.      Transferor & proposed transferee are close relatives as per sec.6 of the Companies Act
e.      Value of securities already transferred along with proposed transfer doesnot exceed USD 25,000/- in a calendar year.
f.        Other conditions as may be stipulated from time to time.


Conversion of ECB/Lumpsum Fee/Royalty/ Import of capital goods by SEZ to equity:

         i.            General permission has been granted to India companies to convert ECB to shares/preference shares subject to following terms & conditions:

a)      The activity covered under Automatice route for FDI or Government approval has been obtained.
b)      Foreign equity after conversion is within the sectoral cap.
c)       Pricing is as per SEBI guidelines/DCF method for Listed/Unlisted companies.
d)      Compliance with other Laws

       ii.            General permission also available for issue of shares/preference shares against Lumpsum technical knowhow Fee / Royalty under Automatic route/Govt.approval subject to pricing guidelines (SEBI/DCF).
      iii.            SEZ units permitted to issue equity shares to non-residents against import of capital goods subject to the valuation done by a committee consisting of Development Commisioner or appropriate customs officer.

     iv.            Reporting

a.       In case of full conversion of ECB to shares, details should be reported in  FC-GPR to Regional office of RBI and Form ECB – 2 to the Dept. of statistics & information Management of RBI within 7 working days from the date of close of the month to which it relates. The words “ECB wholly converted to Equity” should be clearly indicated on the top of the ECB – 2.
b.      In case of partial conversion of ECB to shares, details should be reported in  FC-GPR and Form ECB – 2 clearly distinguishing the converted portion from non-converted portion. The words “ECB partially converted to Equity” should be clearly indicated on the top of the ECB – 2.
c.       SEZ units issuing equity should report in FC-GPR.




Remittance of sale proceeds:

AD category I banks can allow the remittance of sales proceeds (net of tax) to the seller of share resident outside India, provided security has been held on repatriation basis, provided sales is in accordance with guidelines and NOC/tax clearance certificate has been obtained.

Remittance on Winding up/ Liquidation of Company:

AD category I bank is allowed to remit the proceeds subject to payment of taxes and order to Courts / Official liquidator (in case of voluntary winding up) provided applicant submits:

a.       NOC / tax clearance certificate from IT dept.
b.      Auditors certificate confirming that all liabilities in India have been fully paid or adequately provided for.
c.       Auditors certificate to the effect that winding up is in accordance with the provisions of the Companies Act, 1956.
d.      In case of winding up other than by court, an auditors certificate to the effect that there is no legal proceedings pending in any court in India against the applicant or the company under liquidation and there is no legal impediment in permitting the remittance.

Investment in Partnership Firm / Proprietary Concern

1.       Investment by NRO / PIO

NRI or Person of Indian Origin (PIO) resident outside India can invest by way of contribution to the capital of Firm /proprietorship concern in India on non-repatriation basis provided:

a.       Amount invested by way of inward remittance or by NRE/FCNR(B)/NRO Account maintained with AD/Authorized Banks.
b.      Firm/Concern is not engaged in Agricultural, Plantation, real estate or Print media.
c.       Amount invested shall not be eligible for repatriation outside India.

NRI/PIO may seek prior permission of the RBI for investment in Firm/Concern on repatriation basis. The application will be decided in consultation with the Govt. of India.  Application should be addressed to Chief GM-in charge, RBI, Foreign Exchange Dept., Foreign Investment Division, Central Office, Mumbai.

2.       Investment by Non-residents:

Non-resident may make application & seek prior approval of the RBI for making investment in Firm/Concern or any association of persons in India. The application will be decided in consultation with the Govt. of India. Application should be addressed to Chief GM-in charge, RBI, Foreign Exchange Dept., Foreign Investment Division, Central Office, Mumbai.


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