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Press Note 6 (2009)
Foreign Direct Investment
(FDI) into a Small Scale Industrial Undertaking
(SSI)/ Micro & Small Enterprises (MSE) and
in Industrial Undertaking manufacturing items
reserved for SSI/ MSE clarification
It has been clarified that:
- The present policy on Foreign Direct Investment
(FDI) in micro and small enterprises (MSE) permits
FDI subject only to the sectoral equity caps,
entry routes,and other relevant sectoral regulations.
- Any industrial undertaking, with or without
Foreign Direct Investment (FDI) which is not
a micro and small enterprises (MSE), manufacturing
items reserved for manufacture in the MSE sector
(presently 21 items) as per the Industrial Policy,
would require an Industrial Licence under the
Industries (Development & Regulation) Act
1951, for such manufacture. Such an industrial
undertaking would also require prior approval
of the Government (FIPB) where foreign investment
is more than 24 percent in the equity capital.
Press Note 5 (2009 Series)
Guidelines for Foreign investment
in Commodity Exchanges
Government of India had laid the guidelines for
foreign investment in Commodity Exchanges vide
Press Note 2(2008) dated 12th March 2008. As per
the guidelines, a composite ceiling for foreign
investment of 49% was allowed with prior Government
approval, subject to the condition that investment
under the Portfolio Investment Scheme will be
limited to 23% and that under the FDI Scheme will
be limited to 26%. Further, no foreign investor/entity
including persons acting in concert will hold
more than 5% of the equity in these companies.
It had been brought to the notice of the Government
that some of the existing Commodity Exchanges
had foreign investment above the permitted level,
as on the date of issue of the said Press Note
and, consequently, the Commodity Exchange(s) would
be required to divest foreign equity, equal to
the amount by which the cap was being exceeded,
in accordance with Press Note 2(2008). Commodity
Exchanges were permitted to avail of transition/complying/correction
time for this purpose, up to 30th June 2009, vide
Press Note 8 of 2008 dated 19th August, 2008.
Difficulties have been brought to the notice
of the government in complying with the provisions
of the Press Note within the stipulated time frame.
The Government, on consideration and in order
to facilitate the existing Commodity Exchanges
to comply with the guidelines notified vide Press
Note 2(2008), has now been decided to allow a
further transition/complying/correction time to
the existing Commodity exchange(s) beyond 30th
June 2009. Accordingly, all such Commodity Exchanges
are hereby advised to adhere to the conditions
of Press Note 2(2008) by 30th September 2009.
All Commodity Exchanges shall furnish a compliance
report informing the foreign investment in the
Commodity Exchange as on 30th September 2009,
along with details of equity structure, to the
Department of Industrial Policy & Promotion,
Department of Consumer Affairs, Foreign Investment
Promotion Board, the Forward Market Commission
and SEBI.
Non-compliance of the conditions of Press Note
2(2008) after 30.9.2009 would be a violation of
the Foreign Exchange Management Act, 1999.
Press Note 4 (2009 Series)
Policy for downstream investment
by Investing Indian Companies
The guidelines clarify the need for obtaining
government/FIPB approval (or otherwise) for foreign
investment into Indian companies, which can be
either:
- Operating companies or
- Investing companies or
- Operating-cum-investing companies or
- Neither of the above
It has been clarified that operating companies,
as well as operating-cum-investing companies,
need to comply with relevant sectoral conditions
on entry route, conditionalities and sectoral
caps.
Investing companies, as well as companies which
are neither investing nor operating companies,
require prior Government/FIPB approval for infusion
of foreign investment, regardless of the amount
or extent of foreign investment.
Downstream investments by investing companies,
as well as operating-cum-investing companies,
would need to comply with relevant sectoral conditions
on entry route, conditionalities and sectoral
caps.Downstream investments by investing companies,
as well as operating-cum-investing companies,
would need to comply with relevant sectoral conditions
on entry route, conditionalities and sectoral
caps.
Press Note 3 (2009 Series)
Guidelines for transfer of
ownership or control of Indian companies in sectors
with caps resident Indian citizens to non-resident
entities
Salient features
Government/FIPB approval will be required in
sectors with caps where:
- An Indian company is being established with
foreign investment and is owned by a non-resident
entity; or
- An Indian company is being established with
foreign investment and is controlled by a non resident entity; or
- The control of an existing Indian company,
currently owned or controlled by resident Indian
citizens and Indian companies, which are owned
or controlled by resident Indian citizens, will
be/is being transferred/passed on to a non-resident
entity, as a consequence of transfer of shares
to non-resident entities through amalgamation,
merger, acquisition etc; or
- The ownership of an existing Indian company,
currently owned or controlled by resident Indian
citizens and Indian companies, which are owned
or controlled by resident Indian citizens, will
be/is being transferred/passed on to a non-resident
entity as a consequence of transfer of shares
to non-resident entities through amalgamation,
merger, acquisition etc.
Press Note 2 (2009 Series)
Guidelines
for calculation of total foreign investment i.e.
direct and indirect foreign investment in Indian
companies
Salient
features
All investment directly by a non-resident entity
into the Indian company would be counted towards
foreign investment.
The foreign investment through the investing
Indian company would not be considered for calculation
of the indirect foreign investment in case of
Indian companies which are 'owned and controlled'
by resident Indian citizens and Indian Companies
which are owned and controlled ultimately by resident
Indian citizens .
For cases where this condition is not satisfied
or if the investing company is owned or controlled
by 'non resident entities', the entire investment
by the investing company into the subject Indian
Company would be considered as indirect foreign
investment.
As an exception, the indirect foreign investment
in only the 100 percent owned subsidiaries of
operating cum-investing/ investing companies
will be limited to the foreign investment in the
operating-cum investing/ investing company.
This exception has been made since the downstream
investment of a 100 percent owned subsidiary of
the holding company is akin to investment made
by the holding company and the downstream investment
should be· a mirror image of the holding
company.
In the I& B and Defence sectors where the
sectoral cap is less than 49 percent, the company
would need to be 'owned and controlled' by resident
Indian citizens and Indian companies, which are
owned and controlled by resident Indian citizens.
For this purpose, the equity held by the largest
Indian shareholder would have to be at least 51
percent of the total equity.
Any foreign investment already made in accordance
with the guidelines in existence prior to issue
of this Press Note would not require any modification
to conform to these guidelines. All other investments,
past and future, would come under the ambit of
these new guidelines.
Press Note 1 (2009)
Foreign investment in Print
Media dealing with news and current affairs
(a) FDI up to 100 percent is permitted with prior
approval of the Government in publication of facsimile
edition of foreign newspapers provided the FDI
is by the owner of the original foreign newspaper(s)
whose facsimile edition is proposed to be brought
out in India subject to the following conditions:
- the entity is incorporated or registered in
India under the Companies Act, 1956; and
- the entity would be subject to the Guidelines
for publication of newspapers and periodicals
dealing with news and current affairs and publication
of facsimile edition of foreign newspapers issued
by Ministry of I&B.
(b) Foreign investment, including FDI and investment
by NRls/PIOs/FII, up to 26 percent, is permitted
with prior approval of the Government for publication
of Indian editions of foreign magazines dealing
and news and current affairs.
Circulars
Circular No. 2 (2011 Series)
The following major changes have been incorporated in the latest consolidated FDI policy released on 30th September 2011:
(i) Exemption of construction-development activities in the education sector and in old-age homes, from the general conditionalities in the construction-development sector:
FDI into construction development activities in the education sector and in respect of old-age homes has been exempted from the conditionalities imposed on FDI in the construction development sector in general i.e. minimum area and built-up area requirement; minimum capitalization requirement; and lock-in period. These conditionalities perhaps posed a constraint to FDI coming into these areas since educational institutions like schools, colleges, universities etc. as well as old-age homes have their own special requirements which do not necessarily fit these conditionalities. This step should augment the educational infrastructure in the country and bring it up to global standards. Similarly, with growing urbanisation, there is an increasing demand for old-age homes to cater to the needs of senior citizens. The physical infrastructure in this area also is short of the requirements. Hence, it has also been decided to exempt old-age homes also from the general conditionalities applicable to the construction development sector.
(ii) Inclusion of ‘apiculture’, under controlled conditions, under the agricultural activities permitted for FDI:
FDI has been allowed upto 100% under the automatic route in apiculture under controlled conditions. Apiculture is an important agro-based industry and has the potential of bringing in high economic returns with comparatively low levels of investment. Being a decentralized activity, it does not bring pressure on land and can flourish as a household activity in villages. The activity has the potential of large scale income generation with some infusion of capital and technology. This liberalization would not only provide the desired thrust to the sector but would also bring in international best practices to upgrade the product and the methods of production.
(iii) Inclusion of ‘basic and applied R&D on bio-technology pharmaceutical sciences/life sciences’, as an ‘industrial activity’, under industrial parks:
FDI, up to 100%, under the automatic route, is permitted in existing and new industrial parks. Under the existing regime, industrial parks cover specified sectors.
The coverage has been expanded to specifically include research and development in bio-technology, pharmaceutical and life sciences, given the urgent need to augment research and development infrastructure in these areas as also expand the production facilities.
(iv) Notification of the revised limit of 26% for foreign investment in Terrestrial Broadcasting/ FM radio:
The foreign investment limit for FM radio has been enhanced to 26% from the earlier 20%. This change ensures conformity of the foreign investment limit in this sector with other similar activities in the Information & Broadcasting sector.
(v) Liberalisation of conversion of imported capital goods/machinery and pre-operative/pre-incorporation expenses to equity instruments:
Conversion of imported capital goods/machinery and pre-operative/pre-incorporation expenses to equity instruments had been permitted in the last Circular on FDI policy, effective 1 April, 2011. It was stipulated that such conversions must be made within a period of 180 days of the date of shipment of capital goods/machinery or retention of advance against equity and that payments made through third parties would not be allowed. This conveyed the sense that the onus of conversion is on the investor with no allowance for the FIPB process involved. This has been clarified through the present amendment, under which the time limit for making applications for such conversions will be 180 days. Further, payments for pre-operative/incorporation expenses can now be made directly by the foreign investor to the company or through a bank account, opened by the foreign investor, as provided under the FEMA regulations.
(vi) Introduction of provisions on ‘pledging of shares’ and opening of non-interest bearing escrow accounts, subject to specified conditions:
The policy has been amended to provide for pledge of shares of an Indian company which has raised external commercial borrowings, or that of its associate resident companies for the purpose of securing the ECB raised by the borrowing company, subject to conditions. The policy also now provides for opening and maintaining AD Category – I banks without the prior approval of RBI, non-interest bearing Escrow accounts in Indian Rupees in India, on behalf of non-residents, towards payment of share purchase consideration and/or for keeping securities to facilitate FDI transactions, subject to the terms and conditions specified by RBI. This will streamline the process for bringing in FDI and provide the investors with options.
Circular No. 1 (2011 Series)
The following major changes have been incorporated in the latest consolidated FDI policy released on 31st March 2011:
(i) Pricing of Convertible instruments
(paragraph 3.2.1 of FDI policy released on 31st March 2011):
Instead of specifying the price of convertible instruments upfront, companies will now have the option of prescribing a conversion formula, subject to the FEMA/ SEBI guidelines on pricing. This would help the recipient companies in obtaining a better valuation based upon their performance.
(ii) Inclusion of fresh items for issue of shares against non-cash considerations
(paragraph 3.4.6 of FDI policy released on 31st March 2011 ):
The existing policy provides for conversion of only ECB/lump-sum fee/Royalty into equity.After stakeholder consultations, Government has now decided to permit issue of equity, under the Government route, in the following cases, subject to specific conditions:
(a) import of capital goods/ machinery/ equipment (including second-hand machinery)
(b) pre-operative/ pre-incorporation expenses (including payments of rent etc.)
This measure, which liberalises conditions for conversion of non-cash items into equity, is expected to significantly ease the conduct of business.
(iii) Removal of the condition of prior approval in case of existing joint ventures/ technical collaborations in the ‘same field”
(paragraph 4.2.2 of FDI policy released on 31st March 2011):
There is a felt need to attract fresh investment and technology inflows into the country, as also to reduce the levels of State intervention in the commercial sphere. Keeping in view the above, Government has decided to abolish this condition. It is expected that this measure will promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI and technology inflows into the country.
(iv) Guidelines relating to down-stream investments
(paragraph 4.6 of FDI policy released on 31st March 2011 ):
The guidelines have been comprehensively simplified and rationalised. Companies have now been classified into only two categories – ‘companies owned or controlled by foreign investors’ and ‘companies owned and controlled by Indian residents’. The earlier categorisation of ‘investing companies’, ‘operating companies’ and ‘investing-cum-operating companies’ has been done away with.
(v) Development of Seeds
(paragraph 5.2.1 of FDI policy released on 31st March 2011):
In the agriculture sector, FDI will now be permitted in the development and production of seeds and planting material, without the stipulation of having to do so under ‘controlled conditions’.
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