foreign direct investment

I. Foreign Direct Investment (FDI)

Q. 1. What are the forms in which business can be conducted by a foreign company in India?

Ans. A foreign company planning to set up business operations in India may:

Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.
Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

Q.2. What is the procedure for receiving Foreign Direct Investment in an Indian company?

Ans. An Indian company may receive Foreign Direct Investment under the two routes as given under :

i. Automatic Route

FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes for Investment' issued by the Government of India from time to time, are attracted.

FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India.

ii. Government Route

FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.

Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve Bank of India for receiving inward remittance and for the issue of shares to the non-resident investors.

The Indian company having received FDI either under the Automatic route or the Government route is required to report in the Advance Reporting Form, the details of the receipt of the amount of consideration for issue of equity instrument viz. shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares through an AD Category –I Bank, together with copy/ ies of the FIRC evidencing the receipt of inward remittances along with the Know Your Customer (KYC) report on the non-resident investors from the overseas bank remitting the amount, to the Regional Office concerned of the Reserve Bank of India within 30 days from the date of receipt of inward remittances.

Further, the Indian company is required to issue the equity instrument within 180 days, from the date of receipt of inward remittance or debit to NRE/FCNR (B) account in case of NRI/ PIO.

After issue of shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares, the Indian company has to file the required documents along with Form FC-GPR with the Regional Office concerned of the Reserve Bank of India within 30 days of issue of shares to the non-resident investors.

The form can also be downloaded from the Reserve Bank's website at the following address :
http://www.rbi.org.in/Scripts/BSViewFemaForms.aspx

Q.3. Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route?

Ans. FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

i) Retail Trading (except single brand product retailing)

ii) Atomic Energy

iii) Lottery Business

iv) Gambling and Betting

v) Business of Chit Fund

vi) Nidhi Company

vii) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) (cf. Notification No. FEMA 94/2003-RB dated June 18, 2003).

viii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).

ix) Trading in Transferable Development Rights (TDRs).

x ) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.

Q.4. What is the procedure to be followed after investment is made under the Automatic Route or with Government approval?

Ans. A two-stage reporting procedure has to be followed :.

• On receipt of share application money :

Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Regional Office concerned of the Reserve Bank of India, under whose jurisdiction its Registered Office is located, the Advance Reporting Form, containing the following details :

Name and address of the foreign investor/s;
Date of receipt of funds and the Rupee equivalent;
Name and address of the authorised dealer through whom the funds have been received;
Details of the Government approval, if any; and
KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.

• Upon issue of shares to non-resident investors :

Within 30 days from the date of issue of shares, a report in Form FC-GPR- PART A together with the following documents should be filed with the Regional Office concerned of the Reserve Bank of India.

Certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that:
The company has complied with the procedure for issue of shares as laid down under the FDI scheme as indicated in the Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.
The investment is within the sectoral cap / statutory ceiling permissible under the Automatic Route of the Reserve Bank and it fulfills all the conditions laid down for investments under the Automatic Route, namely-

a) Non-resident entity/ies - (other than individuals), to whom it has issued shares have existing joint venture or technology transfer or trade mark agreement in India in the same field and Conditions stipulated at Paragraph 4.2 of the Consolidated FDI policy Circular of Government of India have been complied with.

OR

Non-resident entity/ ies - (other than individuals), to whom it has issued shares do not have any existing joint venture or technology transfer or trade mark agreement in India in the same field.

Note – For the purpose of the 'same' field, 4 digit NIC 1987 code would be relevant.

b) The company is not an Industrial Undertaking manufacturing items reserved for small sector.

OR

The company is an Industrial Undertaking manufacturing items reserved for the small sector and the investment limit of 24 per cent of paid-up capital has been observed/ requisite approvals have been obtained.

c) Shares issued on rights basis to non-residents are in conformity with Regulation 6 of the RBI Notification No FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.

OR

Shares issued are bonus shares.

OR

Shares have been issued under a scheme of merger and amalgamation of two or more Indian companies or reconstruction by way of de-merger or otherwise of an Indian company, duly approved by a court in India.

OR

Shares are issued under ESOP and the conditions regarding this issue have been satisfied.

• Shares have been issued in terms of SIA/FIPB approval No. --------------------- dated --------------------

• Certificate from Statutory Auditors/ SEBI registered Category - I Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

Q.5. What are the guidelines for transfer of existing shares from non-residents to residents or residents to non-residents?

Ans. A. Transfer of shares/ fully and mandatorily convertible debentures from Non-Resident to Resident:

The term ‘transfer’ is defined under FEMA as including "sale, purchase, acquisition, mortgage, pledge, gift, loan or any other form of transfer of right, possession or lien” {Section 2 (ze) of FEMA, 1999}.

The FEMA Regulations give specific permission covering the following forms of transfer i.e. transfer by way of sale and gift. These permissions are discussed below :

i. Transfer of shares/ fully and mandatorily convertible debentures by way of sale :

A person resident outside India can freely transfer shares/ fully and mandatorily convertible debenture by way of sale to a person resident in India as under :

Any person resident outside India (not being a NRI or an erstwhile OCB), can transfer by way of sale the shares/ fully and mandatorily convertible debentures to any person resident outside India or an NRI may transfer by way of sale, the shares/ fully and mandatorily convertible debentures held by him to another NRI only provided that the person to whom the shares are being transferred has obtained prior permission of the Central Government to acquire the shares if he has previous venture or tie up in India through investment in shares or debentures or a technical collaboration or a trade mark agreement or investment by whatever name called in the same field or allied field in which the Indian company whose shares are being transferred is engaged.
Any person resident outside India may sell shares/ fully and mandatorily convertible debenture acquired in accordance with the FEMA Regulations, on a recognized Stock Exchange in India through a registered broker.
Any person resident outside India may also sell share or convertible debenture of an Indian company to a resident subject to adherence to pricing guidelines, documentation and reporting requirements as specified from time to time.
Shares/convertible debentures of Indian companies purchased under Portfolio Investment Scheme by NRIs and erstwhile OCBs cannot be transferred, by way of sale under private arrangement.

ii. Transfer of shares/ fully and mandatorily convertible debentures by way of Gift :

A person resident outside India can freely transfer shares/ fully and mandatorily convertible debentures by way of gift to a person resident in India as under :

Any person resident outside India, (not being a NRI or an erstwhile OCB), can transfer by way of gift the shares/ fully and mandatorily convertible debentures to any person resident outside India;
a NRI may transfer by way of gift, the shares/convertible debentures held by him to another NRI only, provided that the person to whom the shares are being transferred has obtained prior permission of the Central Government to acquire the shares if he has previous venture or tie up in India through investment in shares or debentures or a technical collaboration or a trade mark agreement or investment by whatever name called in the same field or allied field in which the Indian company whose shares are being transferred is engaged.
Any person resident outside India may transfer share/ fully and mandatorily convertible debentures to a person resident in India by way of gift.

B. Transfer of shares/ fully and mandatorily convertible debentures from Resident to Non-Resident :

i. Transfer of shares/ fully and mandatorily convertible debentures by way of sale - General Permission under Regulation 10 of Notification No. FEMA 20/2000-RB dated May 3, 2000

A person resident in India may transfer by way of sale to a person resident outside India any shares/ fully and mandatorily convertible debenture of an Indian company whose activities (other than financial service sector activities¹) fall under the Automatic Route of the FDI Scheme provided the parties concerned comply with the FDI sectoral limits, pricing guidelines, documentation and reporting requirements for such transfers, as may be specified by the Reserve Bank of India, from time to time.

However, the above general permission is not available where :

a) The transfer of shares/ fully and mandatorily convertible debentures falls within the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended from time to time.

b) The transfer of shares/ fully and mandatorily convertible debentures is at a price which does not adhere to the pricing guidelines specified by the Reserve Bank of India from time to time

c) The activity of the Indian investee company falls outside the automatic route and where FIPB approval has been obtained for the said transfer.

Q.6. Can a person resident in India transfer security by way of gift to a person resident outside India?

Ans. A person resident in India who proposes to transfer security by way of gift to a person resident outside India [other than an erstwhile OCBs] shall make an application to the Central Office of the Foreign Exchange Department, Reserve Bank of India furnishing the following information, namely:

Name and address of the transferor and the proposed transferee
Relationship between the transferor and the proposed transferee
Reasons for making the gift.
In case of Government dated securities, treasury bills and bonds, a certificate issued by a Chartered Accountant on the market value of such securities.
In case of units of domestic mutual funds and units of Money Market Mutual Funds, a certificate from the issuer on the Net Asset Value of such security.
In case of shares/ fully and mandatorily convertible debentures, a certificate from a Chartered Account on the value of such securities according to the guidelines issued by the Securities & Exchange Board of India or the Discount Free Cash Flow Cash (DCF) method with regard to listed companies and unlisted companies, respectively.
Certificate from the Indian company concerned certifying that the proposed transfer of shares/convertible debentures, by way of gift, from resident to the non-resident shall not breach the applicable sectoral cap/ FDI limit in the company and that the proposed number of shares/convertible debentures to be held by the non-resident transferee shall not exceed 5 per cent of the paid up capital of the company.

The transfer of security by way of gift may be permitted by the Reserve bank provided :

(i) The donee is eligible to hold such security under Schedules 1, 4 and 5 to Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.

(ii) The gift does not exceed 5 per cent of the paid up capital of the Indian company/ each series of debentures/ each mutual fund scheme

(iii) The applicable sectoral cap/ foreign direct investment limit in the Indian company is not breached

(iv) The donor and the donee are relatives as defined in section 6 of the Companies Act, 1956.

(v) The value of security to be transferred by the donor together with any security transferred to any person residing outside India as gift in the calendar year does not exceed the rupee equivalent of USD 25,000.

(vii) Such other conditions as considered necessary in public interest by the Reserve Bank.

Q.7. What if the transfer of shares from resident to non-resident does not fall under the above categories?

Ans. In case the transfer does not fit into any of the above categories, either the transferor (resident) or the transferee (non-resident) can make an application to the Reserve Bank for permission for the transfer of shares. The application has to be accompanied with the following documents:

A copy of the FIPB approval (if required).
Consent letter from transferor and transferee clearly indicating the number of shares, name of the investee company and the price at which the transfer is proposed to be effected.
The present/post transfer shareholding pattern of the Indian investee company showing the equity participation by residents and non-residents category-wise.
Copies of the Reserve Bank of India's approvals/ acknowledged copies of FC-GPR evidencing the existing holdings of the non-residents.
If the sellers/ transferors are NRIs / OCBs, the copies of the Reserve Bank of India's approvals evidencing the shares held by them on repatriation / non-repatriation basis.
Open Offer document filed with the SEBI if the acquisition of shares by non-resident is under SEBI Takeover Regulations.
Fair Valuation Certificate from the SEBI registered Category-I-Merchant Banker or Chartered Accountant indicating the value of shares as per the following guidelines :

a) where shares of an Indian company are listed on a recognized stock exchange in India, the price of shares transferred by way of sale shall not be less than the price at which a preferential allotment of shares can be made under the SEBI Guidelines, as applicable, provided that the same is determined for such duration as specified therein, preceding the relevant date, which shall be the date of purchase or sale of shares.

(b) where the shares of an Indian company are not listed on a recognized stock exchange in India, the transfer of shares shall be at a price not less than the fair value to be determined by a SEBI registered Category – I - Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow (DCF) method.

Q8. What are the reporting obligations in case of transfer of shares between resident and non-resident ?

Ans. The transaction should be reported by submission of form FC-TRS to the AD Category – I bank, within 60 days from the date of receipt/remittance of the amount of consideration. The onus of submission of the form FC-TRS within the given timeframe would be on the resident in India, the transferor or transferee, as the case may be.

Q.9. What is the method of payment and remittance/credit of sale proceeds in case of transfer of shares between resident and non-resident ?

Ans. The sale consideration in respect of the shares purchased by a person resident outside India shall be remitted to India through normal banking channels. In case the buyer is a Foreign Institutional Investor (FII), payment should be made by debit to its Special Non-Resident Rupee Account. In case the buyer is a NRI, the payment may be made by way of debit to his NRE/FCNR (B) accounts. However, if the shares are acquired on non-repatriation basis by NRI, the consideration shall be remitted to India through normal banking channel or paid out of funds held in NRE/FCNR (B)/NRO accounts.

The sale proceeds of shares (net of taxes) sold by a person resident outside India) may be remitted outside India. In case of FII the sale proceeds may be credited to its special Non-Resident Rupee Account. In case of NRI, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to his NRE/FCNR(B) accounts and if the shares sold were held on non repatriation basis, the sale proceeds may be credited to his NRO account subject to payment of taxes. The sale proceeds of shares (net of taxes) sold by an erstwhile OCB may be remitted outside India directly if the shares were held on repatriation basis and if the shares sold were held on non-repatriation basis, the sale proceeds may be credited to its NRO (Current) Account subject to payment of taxes, except in the case of erstwhile OCBs whose accounts have been blocked by Reserve Bank.

Q. 10. Are the investments and profits earned in India repatriable?

Ans. All foreign investments are freely repatriable (net of applicable taxes) except in cases where:

i) the foreign investment is in a sector like Construction and Development Projects and Defence wherein the foreign investment is subject to a lock-in-period; and

ii) NRIs choose to invest specifically under non-repatriable schemes.

Further, dividends (net of applicable taxes) declared on foreign investments can be remitted freely through an Authorised Dealer bank.

Q.11. What are the guidelines on issue and valuation of shares in case of existing companies?

Ans. A. The price of shares issued to persons resident outside India under the FDI Scheme shall not be less than :

the price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company is listed on any recognised stock exchange in India;
the fair valuation of shares done by a SEBI registered Category - I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company is not listed on any recognised stock exchange in India; and
the price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment.

B. The price of shares transferred from resident to a non-resident and vice versa should be determined as under:

i) Transfer of shares from a resident to a non-resident:

a) In case of listed shares, at a price which is not less than the price at which a preferential allotment of shares would be made under SEBI guidelines.

b) In case of unlisted shares at a price which is not less than the fair value as per the Discount Free Cash Flow (DCF) Method to be determined by a SEBI registered Category-I- Merchant Banker/Chartered Accountant.

ii) Transfer of shares from a non-resident to a resident - The price should not be more than the minimum price at which the transfer of shares would have been made from a resident to a non-resident.

In any case, the price per share arrived at as per the above method should be certified by a SEBI registered Category-I-Merchant Banker / Chartered Accountant.

Q. 12. What are the regulations pertaining to issue of ADRs/ GDRs by Indian companies?

Ans.

Indian companies can raise foreign currency resources abroad through the issue of ADRs/ GDRs, 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 Government of India thereunder from time to time.

A company can issue ADRs / GDRs, if it is eligible to issue shares to persons resident outside India under the FDI Scheme. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs.

Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market, would require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments. Unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier.

After the issue of ADRs/GDRs, the company has to file a return in Form DR as indicated in the RBI Notification No. FEMA.20/ 2000-RB dated May 3, 2000, as amended from time to time. The company is also required to file a quarterly return in Form DR- Quarterly as indicated in the RBI Notification ibid.

There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets.

Erstwhile OCBs which are not eligible to invest in India and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian companies.

The pricing of ADR / GDR issues including sponsored ADRs / GDRs should be made at a price determined under the provisions of the Scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India and directions issued by the Reserve Bank, from time to time.

Q.13. What is meant by Sponsored ADR & Two-way fungibility Scheme of ADR/ GDR?

Ans. Sponsored ADR/GDR: An Indian company may sponsor an issue of ADR/ GDR with an overseas depository against shares held by its shareholders at a price to be determined by the Lead Manager. The operative guidelines for the same have been issued vide A.P. (DIR Series) Circular No.52 dated November 23, 2002.

Two-way fungibility Scheme : Under the limited Two-way fungibility Scheme, a registered broker in India can purchase shares of an Indian company on behalf of a person resident outside India for the purpose of converting the shares so purchased into ADRs/ GDRs. The operative guidelines for the same have been issued vide A.P. (DIR Series) Circular No.21 dated February 13, 2002. The Scheme provides for purchase and re-conversion of only as many shares into ADRs/ GDRs which are equal to or less than the number of shares emerging on surrender of ADRs/ GDRs which have been actually sold in the market. Thus, it is only a limited two-way fungibility wherein the headroom available for fresh purchase of shares from domestic market is restricted to the number of converted shares sold in the domestic market by non-resident investors. So long the ADRs/ GDRs are quoted at discount to the value of shares in domestic market, an investor will gain by converting the ADRs/ GDRs into underlying shares and selling them in the domestic market. In case of ADRs/ GDRs being quoted at premium, there will be demand for reverse fungibility, i.e. purchase of shares in domestic market for re-conversion into ADRs/ GDRs. The scheme is operationalised through the Custodians of securities and stock brokers under SEBI.

Q.14. Can Indian companies issue Foreign Currency Convertible Bonds (FCCBs)?

Ans. FCCBs can be issued by Indian companies in the overseas market in accordance with the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.

The FCCB being a debt security, the issue needs to conform to the External Commercial Borrowing guidelines, issued by RBI vide Notification No. FEMA 3/2000-RB dated May 3, 2000, as amended from time to time.

Q.15. Can a foreign investor invest in Preference Shares? What are the regulations applicable in case of such investments?

Ans. Yes. Foreign investment through preference shares is treated as foreign direct investment. However, the preference shares should be fully and mandatorily convertible into equity shares within a specified time to be reckoned as part of share capital under FDI. Investment in other forms of preference shares requires to comply with the ECB norms.

Q.16. Can a company issue debentures as part of FDI ?

Ans. Yes. Debentures which are fully and mandatorily convertible into equity within a specified time would be reckoned as part of equity under the FDI Policy.

Q.17. Can shares be issued against Lumpsum Fee, Royalty and ECB?

Ans. An Indian company eligible to issue shares under the FDI policy and subject to pricing guidelines as specified by the Reserve Bank from time to time, may issue shares to a person resident outside India :

being a provider of technology / technical know-how, against Royalty / Lumpsum fees due for payment; and
against External Commercial Borrowing (ECB) (other than import dues deemed as ECB or Trade Credit as per RBI Guidelines).

Provided, that the foreign equity in the company, after the conversion of royalty / lumpsum fee / ECB into equity, is within the sectoral cap notified, if any.

Q.18. What are the other modes of issues of shares for which general permission is available under RBI Notification No. FEMA 20 dated May 3, 2000?

Ans.

Issue of shares under ESOP by Indian companies to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India directly or through a Trust up to 5% of the paid up capital of the company.
Issue and acquisition of shares by non-residents after merger or de-merger or amalgamation of Indian companies.
Issue shares or preference shares or convertible debentures on rights basis by an Indian company to a person resident outside India.

Q.19. Can a foreign investor invest in shares issued by an unlisted company in India?

Ans. Yes. As per the regulations/guidelines issued by the Reserve Bank of India/Government of India, investment can be made in shares issued by an unlisted Indian company.

Q. 20. Can a foreigner set up a partnership/ proprietorship concern in India?

Ans. No. Only NRIs/PIOs are allowed to set up partnership/proprietorship concerns in India on non-repatriation basis.

Q.21. Can a foreign investor invest in Rights shares issued by an Indian company at a discount?

Ans. There are no restrictions under FEMA for investment in Rights shares issued at a discount by an Indian company, provided the rights shares so issued are being offered at the same price to residents and non-residents. The offer on right basis to the persons resident outside India shall be :

(a) in the case of shares of a company listed on a recognized stock exchange in India, at a price as determined by the company; and

(b) in the case of shares of a company not listed on a recognized stock exchange in India, at a price which is not less than the price at which the offer on right basis is made to resident shareholders.

II. Foreign Technology Collaboration Agreement

Whether the payment in terms of foreign technology collaboration agreement' can be made by an Authorised Dealer (AD) bank?

Ans. Yes, RBI has delegated the powers, to make payments for royalty, lumpsum fee for transfer of technology and payment for use of trademark/brand name in terms of the foreign technology collaboration agreement entered by the Indian company with its foreign partners, to the AD banks subject to compliance with the provisions of Foreign Exchange Management (Current Account Transactions) Rules, 2000. Further, the requirement of registration of the agreement with the Regional Office of Reserve Bank of India has also been done away with.

III. Foreign Portfolio Investment

Q.1. What are the regulations regarding Portfolio Investments by SEBI registered Foreign Institutional Investors (FIIs)?

Ans.

Investment by SEBI registered FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000, as amended from time to time. 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.

SEBI acts as the nodal point in the registration of FIIs. The Reserve Bank of India has granted general permission to SEBI Registered FIIs to invest in India under the Portfolio Investment Scheme (PIS).

Investment by SEBI registered FIIs and its sub accounts cannot exceed 10per cent of the paid up capital of the Indian company. However, in case of foreign corporates or High Networth Individuals (HNIs) registered as sub accounts of an FII, their investment shall be restricted to 5 per cent of the paid up capital of the Indian company. All FIIs and their sub-accounts taken together cannot acquire more than 24 per cent of the paid up capital of an Indian Company. An Indian company can raise the 24 per cent 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 their General Body. The Indian company has to intimate the raising of the FII limit to the Reserve Bank to enable the Bank to notify the same on its website for larger public dissemination.

Q.2. What are the regulations regarding Portfolio Investments by NRIs/PIOs?

Ans.

Non- Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can purchase or sell shares/ fully and mandatorily convertible debentures of Indian companies on the Stock Exchanges under the 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 sale/ purchase transactions are to be routed through the designated branch.
An NRI or a PIO can purchase shares up to 5 per cent of the paid up capital of an Indian company. All NRIs/PIOs taken together cannot purchase more than 10 per cent of the paid up value of the company. This limit can be increased by the Indian company to 24 per cent by passing a General Body resolution. The Indian company has to intimate the raising of the FII limit to the Reserve Bank to enable the Bank to notify the same on its website for larger public dissemination.
The sale proceeds of the repatriable investments can be credited to the NRE/ NRO, etc. accounts of the NRI/ PIO, whereas the sale proceeds of non-repatriable investment can be credited only to NRO accounts.
The sale of shares will be subject to payment of applicable taxes.

IV. Investment in other securities

Q.1. Can a Non-resident Indian(NRI) and SEBI registered Foreign Institutional Investor (FII) invest in Government Securities/ Treasury bills and Corporate debt?

Ans. Under the FEMA Regulations, only NRIs andSEBI registered FIIs are permitted to purchase Government Securities/Treasury bills and Corporate debt. The details are as under :

A. A Non-resident Indian can purchase without limit,

(1) on repatriation basis

i) Dated Government securities (other than bearer securities) or treasury bills or units of domestic mutual funds;
ii) Bonds issued by a public sector undertaking (PSU) in India; and
iii) Shares in Public Sector Enterprises being disinvested by the Government of India.

(2) on non-repatriation basis

Dated Government securities (other than bearer securities) or treasury bills or units of domestic mutual funds;
Units of Money Market Mutual Funds in India; and
National Plan/Savings Certificates.

B. A SEBI registered FII may purchase, on repatriation basis, dated Government securities/ treasury bills, listed non-convertible debentures/ bonds issued by an Indian company and units of domestic mutual funds either directly from the issuer of such securities or through a registered stock broker on a recognised stock exchange in India.

The FII investment in Government securities and Corporate debt is subject to a ceiling decided in consultation with the Government of India. Investment limit for the FIIs as a group in Government securities currently is USD 10 billion and in Corporate debt is USD 20 billion.

Q.2. Can a NRI and SEBI registered FII invest in Tier I and Tier II instruments issued by banks in India?

Ans . SEBI registered FIIs and NRIs have been permitted to subscribe to the Perpetual Debt instruments (eligible for inclusion as Tier I capital) and Debt Capital instruments (eligible for inclusion as upper Tier II capital), issued by banks in India and denominated in Indian Rupees, subject to the following conditions :

a. Investment by all FIIs in Rupee denominated Perpetual Debt instruments (Tier I) should not exceed an aggregate ceiling of 49 per cent of each issue and investment by individual FII should not exceed the limit of 10 per cent of each issue.

b. Investments by all NRIs in Rupee denominated Perpetual Debt instruments (Tier I) should not exceed an aggregate ceiling of 24 per cent of each issue and investments by a single NRI should not exceed 5 percent of each issue.

c. Investment by FIIs in Rupee denominated Debt Capital instruments (Tier II) shall be within the limits stipulated by SEBI for FII investment in corporate debt instruments.

d. Investment by NRIs in Rupee denominated Debt Capital instruments (Tier II) shall be in accordance with the extant policy for investment by NRIs in other debt instruments.

e. Investment by FIIs in Rupee denominated Upper Tier II Instruments raised in Indian Rupees will be within the limit prescribed by the SEBI for investment in corporate debt instruments. However, investment by FIIs in these instruments will be subject to a separate ceiling of USD 500 million.

f. The details of the secondary market sales / purchases by FIIs and the NRIs in these instruments on the floor of the stock exchange are to be reported by the custodians and designated Authorised Dealer banks respectively, to the Reserve Bank through the soft copy of the Forms LEC (FII) and LEC (NRI).

Q.3. Can a NRI and SEBI registered FIIinvest in Indian Depository Receipts (IDRs)?

Ans. NRI and SEBI registered FIIs have been permitted to invest, purchase, hold and transfer IDRs of eligible companies resident outside India and issued in the Indian capital market, subject to the following conditions :

(i) The purchase, hold and transfer of IDRs is in accordance with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 notified vide Notification No. FEMA 20 / 2000-RB dated May 3, 2000, as amended from time to time.

(ii) Automatic fungibility of IDRs is not permitted.

(iii) IDRs shall not be redeemable into underlying equity shares before the expiry of one year period from the date of issue of the IDRs.

(iv) At the time of redemption / conversion of IDRs into the underlying shares, the Indian holders (persons resident in India) of IDRs shall comply with the provisions of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 notified vide Notification No. FEMA 120 / RB-2004 dated July 7 2004, as amended from time to time.

(v) The FEMA provisions shall not apply to the holding of the underlying shares, on redemption of IDRs by the FIIs including SEBI approved sub-accounts of the FIIs and NRIs.

Q.4. Can aperson resident in India invest in the Indian Depository Receipts (IDRs)? What is the procedure for redemption of IDRs held by persons resident in India?

Ans. A person resident in India may purchase, hold and transfer IDRs of eligible companies resident outside India and issued in the Indian capital market. The FEMA Regulations shall not be applicable to persons resident in India as defined under section 2(v) of FEMA, 1999, for investing in IDRs and subsequent transfer arising out of a transaction on a recognized Stock Exchange in India. However, at the time of redemption / conversion of IDRs into underlying shares, the Indian holders (persons resident in India) of IDRs shall comply with the provisions of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 notified vide Notification No. FEMA 120 / RB-2004 dated July 7 2004, as amended from time to time. The following guidelines shall be followed on redemption of IDRs by persons resident in India:

i. Listed Indian companies may either sell or continue to hold the underlying shares subject to the terms and conditions as per Regulations 6B and 7 of Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time.

ii. Indian Mutual Funds, registered with SEBI may either sell or continue to hold the underlying shares subject to the terms and conditions as per Regulation 6C of Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time.

iii. Other persons resident in India including resident individuals are allowed to hold the underlying shares only for the purpose of sale within a period of 30 days from the date of conversion of the IDRs into underlying shares.

V. Foreign Venture Capital Investment

Q.5. What are the regulations for Foreign Venture Capital Investment?

Ans.

A SEBI registered Foreign Venture Capital Investor has general permission from the Reserve Bank of India to invest in a Venture Capital Fund (VCF) or an Indian Venture Capital Undertaking (IVCU), in the manner and subject to the terms and conditions specified in Schedule 6 of RBI Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time. These investments by SEBI registered FVCI, would be subject to the SEBI regulation and sector specific caps of FDI.

FVCIs can purchase equity / equity linked instruments / debt / debt instruments, debentures of an IVCU or of a VCF through initial public offer or private placement in units of schemes / funds set up by a VCF. At the time of granting approval, the Reserve Bank permits the FVCI to open a Foreign Currency Account and/ or a Rupee Account with a designated branch of an AD Category – I bank.

The purchase / sale of shares, debentures and units can be at a price that is mutually acceptable to the buyer and the seller.

AD Category – I banks can offer forward cover to FVCIs to the extent of total inward remittance. In case the FVCI has made any remittance by liquidating some investments, original cost of the investments has to be deducted from the eligible cover to arrive at the actual cover that can be offered.

VI. Branch/ Project/ Liaison Office of a foreign company in India

Q.1. How can foreign companies open Liaison /Branch office in India?

Ans.

A. With effect from February 1, 2010, foreign companies/entities desirous of setting up of Liaison Office / Branch Office (LO/BO) are required to submit their application in Form FNC along with the documents mentioned therein to Foreign Investment Division, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai through an Authorised Dealer bank. This form is available at www.rbi.org.in

B. The applications from such entities in Form FNC will be considered by the Reserve Bank under two routes:

Reserve Bank Route - Where principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment (FDI) is permissible under the automatic route.
Government Route - Where principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from entities falling under this category and those from Non - Government Organisations / Non - Profit Organisations / Government Bodies / Departments are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.

C. The following additional criteria are also considered by the Reserve Bank while sanctioning Liaison/Branch Offices of foreign entities :

• Track Record

For Branch Office — a profit making track record during the immediately preceding five financial years in the home country.
For Liaison Office — a profit making track record during the immediately preceding three financial years in the home country.

• Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name].

For Branch Office — not less than USD 100,000 or its equivalent.
For Liaison Office — not less than USD 50,000 or its equivalent.

D. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Authorised Dealer in whose jurisdiction the office is set up. The Branch / Liaison offices established with the Reserve Bank's approval will be allotted a Unique Identification Number (UIN) ( www.rbi.org.in/scripts/Fema.aspx ). The BOs / LOs shall also obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up the offices in India.

E. Liaison/Branch offices have to file an Annual Activity Certificate (AACs) from the Auditors, as at end of March 31, along with the audited Balance Sheet on or before September 30 of that year, stating that the Liaison Office has undertaken only those activities permitted by Reserve Bank of India. In case the annual accounts of the LO/ BO are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted within six months from the due date of the Balance Sheet.

Q.2. What are the permitted activities of Liaison Office/ Representative Office?

Ans. A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers. A Liaison Office can undertake the following activities in India :

i. Representing in India the parent company / group companies.

ii. Promoting export / import from / to India.

iii. Promoting technical/financial collaborations between parent/group companies and companies in India.

iv. Acting as a communication channel between the parent company and Indian companies.

Q.3. Can Foreign Insurance Companies / Banks set up Liaison Office in India?

Ans. Foreign Insurance companies can establish Liaison Offices in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA). Similarly, foreign banks can establish Liaison Offices in India only after obtaining approval from the Department of Banking Operations and Development (DBOD), Reserve Bank of India.

Q. 4. What is the procedure for setting up Branch office?

Ans. Permission for setting up branch offices is granted by the Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai. Reserve Bank of India considers the track record of the applicant company, existing trade relations with India, the activity of the company proposing to set up office in India as well as the financial position of the company while scrutinising the application. The application in Form FNC should be submitted to the Reserve Bank through the Authorised Dealer bank.

Q.5. What are the permitted activities of Branch Office?

Ans. Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Such Branch Offices are permitted to represent the parent / group companies and undertake the following activities in India :

i. Export / Import of goods².
ii. Rendering professional or consultancy services.
iii. Carrying out research work, in areas in which the parent company is engaged.
iv. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
v. Representing the parent company in India and acting as buying / selling agent in India.
vi. Rendering services in information technology and development of software in India.
vii. Rendering technical support to the products supplied by parent/group companies.
viii. Foreign airline / shipping company.

Normally, the Branch Office should be engaged in the activity in which the parent company is engaged.

Note :

Retail trading activities of any nature is not allowed for a Branch Office in India.
A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.
Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.

Q.6. Whether Branch Offices are permitted to remit profit outside India?

Ans. Branch Offices are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of the following documents to the satisfaction of the Authorised Dealer through whom the remittance is effected :

a. A Certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year;

b. A Chartered Accountant’s certificate certifying -

i . the manner of arriving at the remittable profit
ii. that the entire remittable profit has been earned by undertaking the permitted activities
iii. that the profit does not include any profit on revaluation of the assets of the branch.

Q.7 What are the documents to be submitted to the AD bank at the time of closure of the Liaison/ Branch Office?

Ans. At the time of winding up of Branch/Liaison offices, the company has to approach the designated AD Category - I bank with the following documents:

a) Copy of the Reserve Bank's permission/ approval from the sectoral regulator(s) for establishing the BO / LO.

b) Auditor’s certificate - i) indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets;

ii) confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc., of the Office have been either fully met or adequately provided for; and

iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India.

c) No-objection / Tax Clearance Certificate from Income-Tax authority for the remittance/s.

d) Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance.

e) A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 1956, in case of winding up of the Office in India.

f) Any other document/s, specified by the Reserve Bank while granting approval.

Q.8. What is the procedure for setting up Project Office?

Ans. The Reserve Bank has granted general permission to foreign companies to establish Project Offices in India, provided they have secured a contract from an Indian company to execute a project in India, and

the project is funded directly by inward remittance from abroad; or
the project is funded by a bilateral or multilateral International Financing Agency; or
the project has been cleared by an appropriate authority; or
a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.

However, if the above criteria are not met or if the parent entity is established in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, such applications have to be forwarded to the Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai for approval.

Q.9. What are the bank accounts permitted to a Project Office?

Ans. AD Category – I banks can open non-interest bearing Foreign Currency Account for Project Offices in India subject to the following:

The Project Office has been established in India, with the general / specific permission of Reserve Bank, having the requisite approval from the concerned Project Sanctioning Authority concerned.
The contract, under which the project has been sanctioned, specifically provides for payment in foreign currency.
Each Project Office can open two Foreign Currency Accounts, usually one denominated in USD and other in home currency, provided both are maintained with the same AD category–I bank.
The permissible debits to the account shall be payment of project related expenditure and credits shall be foreign currency receipts from the Project Sanctioning Authority, and remittances from parent/ group company abroad or bilateral / multilateral international financing agency.
The responsibility of ensuring that only the approved debits and credits are allowed in the Foreign Currency Account shall rest solely with the branch concerned of the AD. Further, the Accounts shall be subject to 100 per cent scrutiny by the Concurrent Auditor of the respective AD banks.
The Foreign Currency accounts have to be closed at the completion of the Project.

Q.10. What are the general conditions applicable to Liaison / Branch / Project Office of foreign entities in India?

Ans. The general conditions applicable to Liaison/Branch/Project Office of foreign entities in India are as under;

(i) Without prior permission of the Reserve Bank, no person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China can establish in India, a Branch or a Liaison Office or a Project Office or any other place of business.

(ii) Partnership / Proprietary concerns set up abroad are not allowed to establish Branch /Liaison/Project Offices in India.

(iii) Entities from Nepal are allowed to establish only Liaison Offices in India.

(iv) Branch/Project Offices of a foreign entity, excluding a Liaison Office are permitted to acquire property for their own use and to carry out permitted/incidental activities but not for leasing or renting out the property. However, entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan or China are not allowed to acquire immovable property in India even for a Branch Office. These entities are allowed to lease such property for a period not exceeding five years.

(v) Branch / Liaison / Project Offices are allowed to open non-interest bearing INR current accounts in India. Such Offices are required to approach their Authorised Dealers for opening the accounts.

(vi) Transfer of assets of Liaison / Branch Office to subsidiaries or other Liaison/Branch Offices is allowed with specific approval of the Central Office of the Reserve Bank.

(viii) Authorised Dealers can allow term deposit account for a period not exceeding 6 months in favor of a branch/office of a person resident outside India provided the bank is satisfied that the term deposit is out of temporary surplus funds and the branch / office furnishes an undertaking that the maturity proceeds of the term deposit will be utilised for their business in India within 3 months of maturity. However, such facility may not be extended to shipping/airline companies.

¹ financial services sector means service rendered by banking and non-banking finance companies regulated by the Reserve Bank of India, insurance companies regulated by the Insurance Regulatory and Development Authority (IRDA) and other companies regulated by any other financial regulator, as the case may be.

²Procurement of goods for export and sale of goods after import are allowed only on wholesale basis.

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Consolidated FDI Policy Of India 2012 By DIPP: Objectives

Perry4Law and Perry4Law Techno Legal Base (PTLB) would like to inform that the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India (GOI) has issued the Consolidated FDI Policy of India 2012. The same would be effective from April 10, 2012.

The consolidated FDI policy of India 2012 reflects the intent and objective of the GOI to attract and promote foreign direct investment (FDI) in order to supplement domestic capital, technology and skills, for accelerated economic growth. FDI, as distinguished from portfolio investment, has the connotation of establishing a lasting interest in an enterprise that is resident in an economy other than that of the investor.

To achieve this objective, the Indian Government has put in place a policy framework on FDI, which is transparent, predictable and easily comprehensible. This policy framework has been incorporated in the Consolidated FDI Policy of India 2012, which may be updated every year, to capture and keep pace with the regulatory changes, effected in the interregnum.

DIPP, Ministry of Commerce and Industry, GOI makes policy pronouncements on FDI through Press Notes/ Press Releases which are notified by the Reserve Bank of India (RBI) as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No.FEMA 20/2000-RB dated May 3, 2000). These notifications take effect from the date of issue of Press Notes/ Press Releases, unless specified otherwise therein. In case of any conflict, the relevant FEMA Notification will prevail. The procedural instructions are issued by the Reserve Bank of India vide A.P. Dir. (series) Circulars. The regulatory framework, over a period of time, thus, consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.

The present consolidation subsumes and supersedes all Press Notes/Press Releases/Clarifications/ Circulars issued by DIPP, which were in force as on April 09, 2012, and reflects the FDI Policy as on April 10, 2012. This Circular accordingly will take effect from April 10, 2012. Reference to any statute or legislation made in this Circular shall include modifications, amendments or re-enactments thereof.

Notwithstanding the rescission of earlier Press Notes/Press Releases/Clarifications/Circulars, anything done or any action taken or purported to have been done or taken under the rescinded Press Notes/Press Releases/Clarifications/Circulars prior to April 10, 2012, shall, in so far as it is not inconsistent with those Press Notes/Press Releases/Clarifications/Circulars, be deemed to have been done or taken under the corresponding provisions of this circular and shall be valid and effective.

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Consolidated FDI Policy Of India 2012 By DIPP: Definitions

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India (GOI) has released the Consolidated FDI Policy of India 2012. The FDI policy 2012 has become effective from April 10, 2012.

The FDI policy 2012 has provided certain crucial definitions that must be well known to all concerned. Some of the definitions that have been selected by Perry4Law and Perry4Law Techno Legal Base (PTLB) to be shared with their viewers are:

(a) 2.1.5- Capital means equity shares; fully, compulsorily and mandatorily convertible preference shares; fully, compulsorily and mandatorily convertible debentures. However, warrants and partly paid shares can be issued to person/ (s) resident outside India only after approval through the Government route. This is so because review of FDI policy to include warrants and partly-paid shares is under consideration of the Indian Government.

(b) 2.1.6- Capital account transaction means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6 of FEMA.

(c) 2.1.7-A company is considered as “Controlled” by resident Indian citizens if the resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors in that company .

(d) 2.1.8- Depository Receipt (DR) means a negotiable security issued outside India by a Depository bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian bank in India. DRs are traded on Stock Exchanges in the US, Singapore, Luxembourg, etc. DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded anywhere/elsewhere are known as Global Depository Receipts (GDRs).

(e) 2.1.9- Erstwhile Overseas Corporate Body (OCB) means a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least sixty percent by non-resident Indian and includes overseas trust in which not less than sixty percent beneficial interest is held by non-resident Indian directly or indirectly but irrevocably and which was in existence on the date of commencement of the Foreign Exchange Management (Withdrawal of General Permission to Overseas Corporate Bodies (OCBs) ) Regulations, 2003 (the Regulations) and immediately prior to such commencement was eligible to undertake transactions pursuant to the general permission granted under the Regulations.

(f) 2.1.11- FDI means investment by non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000.

(g) 2.1.14-Foreign Institutional Investor (FII) means an entity established or incorporated outside India which proposes to make investment in India and which is registered as a FII in accordance with the SEBI (FII) Regulations 1995.

(h) 2.1.15- Foreign Venture Capital Investor (FVCI) means an investor incorporated and established outside India, which is registered under the Securities and Exchange Board of India (Foreign Venture Capital Investor) Regulations, 2000 {SEBI(FVCI) Regulations} and proposes to make investment in accordance with these Regulations.

(i) 2.1.16- Government route means that investment in the capital of resident entities by non-resident entities can be made only with the prior approval of Government (FIPB, Department of Economic Affairs (DEA), Ministry of Finance or Department of Industrial Policy & Promotion, as the case may be).

(j) 2.1.17- Holding Company‘ would have the same meaning as defined in Companies Act 1956.

(k) 2.1.18- Indian Company means a company incorporated in India under the Companies Act, 1956.

(l) 2.1.19- Indian Venture Capital Undertaking (IVCU) means an Indian company:─

(i) Whose shares are not listed in a recognised stock exchange in India;

(ii) Which is engaged in the business of providing services, production or manufacture of articles or things, but does not include such activities or sectors which are specified in the negative list by the SEBI, with approval of Central Government, by notification in the Official Gazette in this behalf.

(m) 2.1.20- Investing Company means an Indian Company holding only investments in other Indian company/ (ies), directly or indirectly, other than for trading of such holdings/securities.

(n) 2.1.21- Investment on repatriable basis means investment, the sale proceeds of which, net of taxes, are eligible to be repatriated out of India and the expression investment on non-repatriable basis shall be construed accordingly.

(o) 2.1.22- Joint Venture (JV) means an Indian entity incorporated in accordance with the laws and regulations in India in whose capital a non-resident entity makes an investment.

(p) 2.1.26- A company is considered as 'Owned‘ by resident Indian 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;

(q) 2.1.27- Person includes

(i) an individual
(ii) a Hindu undivided family,
(iii) a company
(iv) a firm
(v) an association of persons or a body of individuals whether incorporated or not,
(vi) every artificial juridical person, not falling within any of the preceding sub-clauses, and
(vii) any agency, office, or branch owned or controlled by such person.

(r) 2.1.29- Person resident in India means -
(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include –
(A) A person who has gone out of India or who stays outside India, in either case-
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
(B) A person who has come to or stays in India, in either case, otherwise than-
(a) for or on taking up employment in India; or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
(ii) any person or body corporate registered or incorporated in India,
(iii) an office, branch or agency in India owned or controlled by a person resident outside India,
(iv) an office, branch or agency outside India owned or controlled by a person resident in India.

(s) 2.1.32- A Qualified Foreign Investor (QFI) means a non-resident investor (other than SEBI registered FII and SEBI registered FVCI) who meets the KYC requirements of SEBI for the purpose of making investments in accordance with the regulations/orders/circulars of RBI/SEBI.

(t) 2.1.39- Transferable Development Rights (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 without monetary compensation, which are transferable in part or whole.

(u) 2.1.40- Venture Capital Fund (VCF) means a Fund established in the form of a Trust, a company including a body corporate and registered under Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996, which

(i) has a dedicated pool of capital;
(ii) raised in the manner specified under the Regulations; and
(iii) invests in accordance with the Regulations.

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Government Approvals for Foreign Companies Doing Business in India

or Investment Routes for Investing in India, Entry Strategies for Foreign Investors

India's foreign trade policy has been formulated with a view to invite and encourage FDI in India. The Reserve Bank of India has prescribed the administrative and compliance aspects of FDI. A foreign company planning to set up business operations in India has the following options:

investment under automatic route; and
investment through prior approval of Government.

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.

List of activities or items for which automatic route for foreign investment is not available, include the following:

Banking
NBFC's Activities in Financial Services Sector
Civil Aviation
Petroleum Including Exploration/Refinery/Marketing
Housing & Real Estate Development Sector for Investment from Persons other
than NRIs/OCBs.
Venture Capital Fund and Venture Capital Company
Investing Companies in Infrastructure & Service Sector
Atomic Energy & Related Projects
Defense and Strategic Industries
Agriculture (Including Plantation)
Print Media
Broadcasting
Postal Services

Procedure under Government approval

FDI in activities not covered under the automatic route, requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB). Approvals of composite proposals involving foreign investment/foreign technical collaboration are also granted on the recommendations of the FIPB. Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance. Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy & Promotion.

Investment by way of Share Acquisition

A foreign investing company is entitled to acquire the shares of an Indian company without obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines. If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange, it would require the approval of the Security Exchange Board of India.

New investment by an existing collaborator in India

A foreign investor with an existing venture or collaboration (technical and financial) with an Indian partner in particular field proposes to invest in another area, such type of additional investment is subject to a prior approval from the FIPB, wherein both the parties are required to participate to demonstrate that the new venture does not prejudice the old one.

General Permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.

Participation by International Financial Institutions

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.

FDI In Small Scale Sector (SSI) Units

A small-scale unit cannot have more than 24 per cent equity in its paid up capital from any industrial undertaking, either foreign or domestic. If the equity from another company (including foreign equity) exceeds 24 per cent, even if the investment in plant and machinery in the unit does not exceed Rs 10 million, the unit looses its small-scale status and shall require an industrial license to manufacture items reserved for small-scale sector. See also FDI in Small Scale Sector in India Further Liberalized

Sector wise Regulation in Foreign Investment

i) Automatic route for specified activities subject to Sectoral cap and conditions.

Sectors	Cap
Airports Existing Greenfie	74% 100%
Air Transport Services Non Resident Indians Other	100% 49%
Alcohol distillation and brewing	100%
Banking (Private Sector)	74%
Coal and Lignite mining (specified)	100%
Coffee, Rubber processing and warehousing	100%
Construction and Development (Specified projects)	100%
Floriculture, Horticulture and Animal Husbandry	100%
Specified Hazardous chemicals	100%
Industrial Explosives Manufacturing	100%
Insurance	26%
Mining (Precious metals, Diamonds and stones)	100%
Non banking finance companies ( conditional)	100%
Petroleum and Natural gas Refining (private companies) Other areas	100% 100%
Power generation, transmission, distribution	100%
Trading Wholesale cash and carry Trading of Exports	100% 100%
SEZ’s and Free Trade Warehousing Zones	100%
Telecommunication Basic and cellular services ISP with gateways, radio paging, end-end bandwith ISP without gateway (specified) Manufacture of telecom equipment	49% 49% 49% 100%

Prior Approval from FIPB where investment is above Sectoral caps for activities listed below.

Sectors	Cap
New Investment by a foreign investor in a field in which the investor already has an existing joint venture or collaboration with another Indian partner
New investment sought to be made in manufacture of items reserved for Small Scale Industries
Existing Airports	74% to 100%
Asset reconstruction companies	49%
Atomic Minerals	74%
Broadcasting
FM Radio Cable network Direct-To-Home (DTH) Setting up hardware facilities Uplinking news and current affairs Uplinking non-news, current affairs TV channel	20% 49% 49% 49% 26% 100%
Cigarette manufacturing	100 %
Courier services other than those under the ambit of Indian Post Office Act, 1898	100 %
Defense production	26 %
Investment companies in infrastructure / service sector (except telecom)	49 %
Petroleum and natural gas refining (PSU)	26 %
Tea Sector – including Tea plantation	100 %
Trading items sourced from Small scale sector	100 %
Test marketing for equipment for which company has approval for manufacture	100 %
Single brand retailing	51 %
Satellite establishment and operations	74 %
Print Media
Newspapers and periodicals dealing with news and current affairs Publishing of scientific magazines / specialty journals periodicals	26 % 100 %
Telecommunication
Basic and unified access services ISP with gateways, radio paging, end to end bandwidth ISP with gateway (specified)	49 % to 74 % 49 % to 74 % 49 % to 100 %

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Department of Industrial Policy and

Promotion

Ministry of Commerce and Industry

Government of India

CONSOLIDATED FDI POLICY

(EFFECTIVE FROM APRIL 10, 2012)1

Government of India

Ministry of Commerce & Industry

Department of Industrial Policy & Promotion

(FC Section)

CIRCULAR 1 OF 2012

SUBJECT: CONSOLIDATED FDI POLICY.

The ―Consolidated FDI Policy‖ is attached.

2. This circular will take effect from April 10, 2012.

(Anjali Prasad)

Joint Secretary to the Government of India

D/o IPP F. No. 5(2)/2012-FC-I Dated 10.04.2012

Copy forwarded to:

1. Press Information Officer, Press Information Bureau- for giving wide publicity to the

above circular.

2. BE Section for uploading the circular on DIPP's website.

3. Department of Economic Affairs, Ministry of Finance, New Delhi

4. Reserve Bank of India, Mumbai

5. Hindi Section for Hindi Translation2

I N D E X

DESCRIPTION PAGE

NUMBER

CHAPTER-1 INTENT AND OBJECTIVE 5

1.1 Intent And Objective 5

CHAPTER-2 DEFINITIONS 7

2.1 Definitions 7

CHAPTER-3 GENERAL CONDITIONS ON FDI 13

3.1 Who can invest in India? 13

3.2. Entities into which FDI can be made 15

3.3 Types of Instruments 17

3.4 Issue/Transfer of Shares 20

3.5 Specific conditions in certain cases 27

3.6 Entry routes for Investment 31

3.7 Caps on Investments 32

3.8 Entry conditions on investment 32

3.9 Other conditions on Investment besides entry conditions 32

3.10 Foreign Investment into/Downstream Investment by Indian Companies 33

CHAPTER-4 CALCULATION OF FOREIGN

INVESTMENT

4.1 Total Foreign Investment i.e. Direct and Indirect Foreign Investment in

Indian Companies

CHAPTER-5 FOREIGN INVESTMENT PROMOTION

BOARD (FIPB)

5.1 Constitution of FIPB 39

5.2 Levels of approval for cases under Government Route 39

5.3 Cases which do not require fresh Approval 39

5.4 Online filing of applications for FIPB/Government‘s approval 40

CHAPTER-6 SECTOR SPECIFIC CONDITIONS ON FDI 41

6.1 PROHIBITED SECTORS 41

6.2 PERMITTED SECTORS 41

AGRICULTURE 42

6.2.1 Agriculture & Animal Husbandry 42

6.2.2 Tea plantation 44

MINING AND PETROLEUM & NATURAL GAS 44

6.2.3 Mining 443

6.2.4 Petroleum & Natural Gas 47

MANUFACTURING 47

6.2.5 Manufacture of items reserved for production in Micro and Small

Enterprises (MSEs)

6.2.6 Defence 48

SERVICES SECTOR 51

6.2.7 Broadcasting 51

6.2.8 Print Media 52

6.2.9 Civil Aviation 53

6.2.10 Courier Services 56

6.2.11 Construction Development: Townships, Housing, Built-up infrastructure 56

6.2.12 Industrial Parks new and existing 58

6.2.13 Satellites – Establishment and operation 60

6.2.14 Private Security Agencies 60

6.2.15 Telecom Sector 60

6.2.16 Trading 65

FINANCIAL SERVICES 69

6.2.17 Asset Reconstruction Companies 69

6.2.18 Banking –Private sector 70

6.2.19 Banking- Public Sector 72

6.2.20 Commodity Exchanges 73

6.2.21 Credit Information Companies (CIC) 74

6.2.22 Infrastructure Company in the Securities Market 75

6.2.23 Insurance 75

6.2.24 Non-Banking Finance Companies (NBFC) 75

6.2.25 Pharmaceuticals 78

CHAPTER-7 REMITTANCE, REPORTING AND

VIOLATION

7.1 Remittance and Repatriation 79

7.2 Reporting of FDI 80

7.3 Adherence to Guidelines/Orders and Consequences of Violation

Penalties

Adjudication and Appeals

Compounding Proceedings

ANNEXURES

Annex-1 Form FC-GPR 85

Annex-2 Terms and conditions for transfer of capital instruments from resident to

non-resident and vice-versa

Annex-3 Documents to be submitted by a person resident in India for transfer of

shares to a person resident outside India by way of gift

964

Annex-4 Definition of "relative" as given in Section 6 of Companies Act, 1956 97

Annex-5 Report by the Indian company receiving amount of consideration for

issue of shares / convertible debentures under the FDI scheme

Annex-6 Know Your Customer (KYC) Form in respect of the non-resident

investor

100

Annex-7 Form Annual Return on Foreign Liabilities and Assets 101

Annex-8 Form FC-TRS 114

Annex-9 Form DR 119

Annex-10 Form DR - Quarterly 1215

CHAPTER 1:INTENT AND OBJECTIVE

1.1 INTENT AND OBJECTIVE

1.1.1 It is the intent and objective of the Government of India to attract and promote foreign

direct investment in order to supplement domestic capital, technology and skills, for accelerated

economic growth. Foreign Direct Investment, as distinguished from portfolio investment, has

the connotation of establishing a ‗lasting interest‘ in an enterprise that is resident in an economy

other than that of the investor.

1.1.2 The Government has put in place a policy framework on Foreign Direct Investment,

which is transparent, predictable and easily comprehensible. This framework is embodied in the

Circular on Consolidated FDI Policy, which may be updated every year, to capture and keep

pace with the regulatory changes, effected in the interregnum. The Department of Industrial

Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes

policy pronouncements on FDI through Press Notes/ Press Releases which are notified by the

Reserve Bank of India as amendments to the Foreign Exchange Management (Transfer or Issue

of Security by Persons Resident Outside India) Regulations, 2000 (notification No.FEMA

20/2000-RB dated May 3, 2000). These notifications take effect from the date of issue of Press

Notes/ Press Releases, unless specified otherwise therein. In case of any conflict, the relevant

FEMA Notification will prevail. The procedural instructions are issued by the Reserve Bank of

India vide A.P. Dir. (series) Circulars. The regulatory framework, over a period of time, thus,

consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.

1.1.3 The present consolidation subsumes and supersedes all Press Notes/Press

Releases/Clarifications/ Circulars issued by DIPP, which were in force as on April 09, 2012, and

reflects the FDI Policy as on April 10, 2012. This Circular accordingly will take effect from

April 10, 2012. Reference to any statute or legislation made in this Circular shall include

modifications, amendments or re-enactments thereof.6

1.1.4 Notwithstanding the rescission of earlier Press Notes/Press

Releases/Clarifications/Circulars, anything done or any action taken or purported to have been

done or taken under the rescinded Press Notes/Press Releases/Clarifications/Circulars prior to

April 10, 2012, shall, in so far as it is not inconsistent with those Press Notes/Press

Releases/Clarifications/Circulars, be deemed to have been done or taken under the corresponding

provisions of this circular and shall be valid and effective. 7

CHAPTER 2: DEFINITIONS

2.1 DEFINITIONS

2.1.1 ‗AD Category-I Bank‘ means a bank( Scheduled Commercial, State or Urban

Cooperative) which is authorized under Section 10(1) of FEMA to undertake all

current and capital account transactions according to the directions issued by

the RBI from time to time.

2.1.2 ‗Authorized Bank‘ means a bank including a co-operative bank (other than an

authorized dealer) authorized by the Reserve Bank to maintain an account of a

person resident outside India

2.1.3 ‗Authorized Dealer‘ means a person authorized as an authorized dealer under

sub-section (1) of section 10 of FEMA.

2.1.4 ‗Authorized Person‘ means an authorized dealer, money changer, offshore

banking unit or any other person for the time being authorized under Subsection (a) of Section 10 of FEMA to deal in foreign exchange or foreign

securities.

2.1.5 ‗Capital‘ means equity shares; fully, compulsorily & mandatorily convertible

preference shares; fully, compulsorily & mandatorily convertible debentures.

Note : Warrants and partly paid shares can be issued to person/ (s) resident

outside India only after approval through the Government route

2.1.6 ‗Capital account transaction‘ means a transaction which alters the assets or

liabilities, including contingent liabilities, outside India of persons resident in

India or assets or liabilities in India of persons resident outside India, and

includes transactions referred to in sub-section (3) of section 6 of FEMA.

2.1.7 A company is considered as ―Controlled‖ by resident Indian citizens if the

resident Indian citizens and Indian companies, which are owned and controlled

by resident Indian citizens, have the power to appoint a majority of its directors

in that company .

2.1.8 ‗Depository Receipt‘ (DR) means a negotiable security issued outside India by

Review of FDI policy to include warrants and partly-paid shares is under consideration of the Government.8

a Depository bank, on behalf of an Indian company, which represent the local

Rupee denominated equity shares of the company held as deposit by a

Custodian bank in India. DRs are traded on Stock Exchanges in the US,

Singapore, Luxembourg, etc. DRs listed and traded in the US markets are

known as American Depository Receipts (ADRs) and those listed and traded

anywhere/elsewhere are known as Global Depository Receipts (GDRs).

2.1.9 ‗Erstwhile Overseas Corporate Body‘ (OCB) means a company, partnership

firm, society and other corporate body owned directly or indirectly to the extent

of at least sixty percent by non-resident Indian and includes overseas trust in

which not less than sixty percent beneficial interest is held by non-resident

Indian directly or indirectly but irrevocably and which was in existence on the

date of commencement of the Foreign Exchange Management (Withdrawal of

General Permission to Overseas Corporate Bodies (OCBs) ) Regulations, 2003

(the Regulations) and immediately prior to such commencement was eligible to

undertake transactions pursuant to the general permission granted under the

Regulations.

2.1.10 ‗Foreign Currency Convertible Bond‘(FCCB) means a bond issued by an

Indian company expressed in foreign currency, the principal and interest of

which is payable in foreign currency. FCCBs are issued in accordance with the

Foreign Currency Convertible Bonds and ordinary shares (through depository

receipt mechanism) Scheme 1993 and subscribed by a non-resident entity in

foreign currency and convertible into ordinary shares of the issuing company in

any manner, either in whole, or in part.

2.1.11 ‗FDI‘ means investment by non-resident entity/person resident outside India in

the capital of an Indian company under Schedule 1 of Foreign Exchange

Management (Transfer or Issue of Security by a Person Resident Outside India)

Regulations 2000 (Original notification is available

athttp://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=174. Subsequent

amendment notifications are available at

http://rbi.org.in/Scripts/BS_FemaNotifications.aspx)

2.1.12 ‗FEMA‘ means the Foreign Exchange Management Act 1999 (42 of 1999)9

(http://finmin.nic.in/law/index.asp).

2.1.13 ‗FIPB‘ means the Foreign Investment Promotion Board constituted by the

Government of India.

2.1.14 ‗Foreign Institutional Investor‘(FII) means an entity established or incorporated

outside India which proposes to make investment in India and which is

registered as a FII in accordance with the SEBI (FII) Regulations 1995.

2.1.15 ‗Foreign Venture Capital Investor‘ (FVCI) means an investor incorporated and

established outside India, which is registered under the Securities and Exchange

Board of India (Foreign Venture Capital Investor) Regulations, 2000

{SEBI(FVCI) Regulations} and proposes to make investment in accordance

with these Regulations

2.1.16 ‗Government route‘ means that investment in the capital of resident entities by

non-resident entities can be made only with the prior approval of Government

(FIPB, Department of Economic Affairs (DEA), Ministry of Finance or

Department of Industrial Policy & Promotion, as the case may be).

2.1.17 ‗Holding Company‘ would have the same meaning as defined in Companies

Act 1956.

2.1.18 ‗Indian Company‘ means a company incorporated in India under the

Companies Act, 1956.

2.1.19 ‗Indian Venture Capital Undertaking‘ (IVCU) means an Indian company:─

(i) whose shares are not listed in a recognised stock exchange in India;

(ii) which is engaged in the business of providing services, production or

manufacture of articles or things, but does not include such activities or sectors

which are specified in the negative list by the SEBI, with approval of Central

Government, by notification in the Official Gazette in this behalf.

2.1.20 ‗Investing Company‘ means an Indian Company holding only investments in

other Indian company/ (ies), directly or indirectly, other than for trading of such

holdings/securities.

2.1.21 ‗Investment on repatriable basis‘ means investment, the sale proceeds of which,

net of taxes, are eligible to be repatriated out of India and the expression

‗investment on non-repatriable basis‘ shall be construed accordingly.10

2.1.22 ‗Joint Venture‘ (JV) means an Indian entity incorporated in accordance with the

laws and regulations in India in whose capital a non-resident entity makes an

investment.

2.1.23 "Limited Liability Partnership" means a Limited Liability Partnership firm,

formed and registered under the Limited Liability Partnership Act, 2008.

2.1.24 ‗Non resident entity‘ means a ‗person resident outside India‘ as defined under

FEMA.

2.1.25 ‗Non Resident Indian‘ (NRI) means an individual resident outside India who is

a citizen of India or is a person of Indian origin.

2.1.26 A company is considered as 'Owned‘ by resident Indian 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;

2.1.27 ‗Person‘ includes

(i) an individual

(ii) a Hindu undivided family,

(iii) a company

(iv) a firm

(v) an association of persons or a body of individuals whether

incorporated or not,

(vi) every artificial juridical person, not falling within any of the

preceding sub-clauses, and

(vii) any agency, office, or branch owned or controlled by such person.

2.1.28 ‗Person of Indian Origin‘ (PIO) means a citizen of any country other than

Bangladesh or Pakistan, if

(i) he at any time held Indian Passport

(ii) he or either of his parents or any of his grandparents was a citizen of

India by virtue of the Constitution of India or the Citizenship Act, 1955

(57 of 1955); or

(iii) the person is a spouse of an Indian citizen or a person referred to in subclause (i) or (ii).11

2.1.29 ‗Person resident in India‘ means -

(i) a person residing in India for more than one hundred and eighty-two

days during the course of the preceding financial year but does not

include –

(A)A person who has gone out of India or who stays outside India, in

either case-

(a) for or on taking up employment outside India, or

(b) for carrying on outside India a business or vocation outside

India, or

his intention to stay outside India for an uncertain period;

(B) A person who has come to or stays in India, in either case, otherwise

than-

(a) for or on taking up employment in India; or

(b) for carrying on in India a business or vocation in India, or

his intention to stay in India for an uncertain period;

(ii) any person or body corporate registered or incorporated in India,

(iii) an office, branch or agency in India owned or controlled by a person

resident outside India,

(iv)an office, branch or agency outside India owned or controlled by a

person resident in India.

2.1.30 ‗Person resident outside India‘ means a person who is not a Person resident in

India.

2.1.31 ‗Portfolio Investment Scheme‘ means the Portfolio Investment Scheme referred

to in Schedules 2 & 3 of FEM (Transfer or Issue of Security by a Person

Resident Outside India) Regulations 2000.

2.1.32 ‗A Qualified Foreign Investor (QFI)‘ means a non-resident investor (other than

SEBI registered FII and SEBI registered FVCI) who meets the KYC

requirements of SEBI for the purpose of making investments in accordance

with the regulations/orders/circulars of RBI/SEBI. 12

2.1.33 ‗RBI‘ means the Reserve Bank of India established under the Reserve Bank of

India Act, 1934.

2.1.34 ‗Resident Entity‘ means ‗Person resident in India‘ excluding an individual.

2.1.35 ‗Resident Indian Citizen‘ shall be interpreted in line with the definition of

‗person resident in India‘ as per FEMA, 1999, read in conjunction with the

Indian Citizenship Act, 1955.

2.1.36 ‗SEBI‘ means the Securities and Exchange Board of India established under the

Securities and Exchange Board of India Act, 1992.

2.1.37 ‗SEZ‘ means a Special Economic Zone as defined in Special Economic Zone

Act, 2005.

2.1.38 ‗SIA‘ means Secretariat of Industrial Assistance in DIPP, Ministry of

Commerce & Industry, Government of India.

2.1.39 ‗Transferable Development Rights‘ (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 without

monetary compensation, which are transferable in part or whole.

2.1.40 ‗Venture Capital Fund‘ (VCF) means a Fund established in the form of a Trust,

a company including a body corporate and registered under Securities and

Exchange Board of India (Venture Capital Fund) Regulations, 1996, which

(i) has a dedicated pool of capital;

(ii) raised in the manner specified under the Regulations; and

(iii) invests in accordance with the Regulations.13

CHAPTER 3: GENERAL CONDITIONS ON FDI

3.1 WHO CAN INVEST IN INDIA?

3.1.1 A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan)

can invest in India, subject to the FDI Policy. A citizen of Bangladesh or an entity incorporated

in Bangladesh can invest only under the Government route.

3.1.2 NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted

to invest in the capital of Indian companies on repatriation basis, subject to the condition that the

amount of consideration for such investment shall be paid only by way of inward remittance in

free foreign exchange through normal banking channels.

3.1.3 OCBs have been derecognized as a class of investors in India with effect from September

16, 2003. Erstwhile OCBs which are incorporated outside India and are not under the adverse

notice of RBI can make fresh investments under FDI Policy as incorporated non-resident entities,

with the prior approval of Government of India if the investment is through Government route;

and with the prior approval of RBI if the investment is through Automatic route.

3.1.4 (i) An FII may invest in the capital of an Indian Company under the Portfolio Investment

Scheme which limits the individual holding of an FII to 10% of the capital of the

company and the aggregate limit for FII investment to 24% of the capital of the company.

This aggregate limit of 24% can be increased to the sectoral cap/statutory ceiling, as

applicable, by the Indian Company concerned through a resolution by its Board of

Directors followed by a special resolution to that effect by its General Body and subject

to prior intimation to RBI. The aggregate FII investment, in the FDI and Portfolio

Investment Scheme, should be within the above caps.

(ii) The Indian company which has issued shares to FIIs under the FDI Policy for which the

payment has been received directly into company‘s account should report these figures

separately under item no. 5 of Form FC-GPR (Annex-1).14

(iii) A daily statement in respect of all transactions (except derivative trade) has to be

submitted by the custodian bank in floppy / soft copy in the prescribed format directly to

RBI.

3.1.5 Only SEBI registered FII and NRIs as per Schedules 2 and 3 respectively of Foreign

Exchange Management (Transfer or Issue of Security by a Person Resident Outside India)

Regulations 2000, can invest/trade through a registered broker in the capital of Indian Companies

on recognised Indian Stock Exchanges.

3.1.6 A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to 100%

of the capital of an Indian Venture Capital Undertaking (IVCU) and may also set up a domestic

asset management company to manage the fund. All such investments can be made under the

automatic route in terms of Schedule 6 to Notification No. FEMA 20. A SEBI registered FVCI

can invest in a domestic venture capital fund registered under the SEBI (Venture Capital Fund)

Regulations, 1996. Such investments would also be subject to the extant FEMA regulations and

extant FDI policy including sectoral caps, etc. SEBI registered FVCIs are also allowed to invest

under the FDI Scheme, as non-resident entities, in other companies, subject to FDI Policy and

FEMA regulations.

Further, FVCIs are allowed to invest in the eligible securities (equity, equity linked

instruments, debt, debt instruments, debentures of an IVCU or VCF, units of schemes / funds set

up by a VCF) by way of private arrangement / purchase from a third party also, subject to terms

and conditions as stipulated in Schedule 6 of Notification No. FEMA 20 / 2000 -RB dated May

3, 2000 as amended from time to time. It is also being clarified that SEBI registered FVCIs

would also be allowed to invest in securities on a recognized stock exchange subject to the

provisions of the SEBI (FVCI) Regulations, 2000, as amended from time to time, as well as the

terms and conditions stipulated therein.

3.1.7 Qualified Foreign Investors (QFls) investment in equity shares:

3.1.7.1 QFls are permitted to invest through SEBI registered Depository Participants

(DPs) only in equity shares of listed Indian companies through recognized brokers on recognized

stock exchanges in India as well as in equity shares of Indian companies which are offered to 15

public in India in terms of the relevant and applicable SEBI guidelines/regulations. QFls are also

permitted to acquire equity shares by way of right shares, bonus shares or equity shares on

account of stock split / consolidation or equity shares on account of amalgamation, demerger or

such corporate actions subject to the prescribed investment limits. QFIs are allowed to sell the

equity shares so acquired subject to the relevant SEBI guidelines.

3.1.7.2 The individual and aggregate investment limits for the QFls shall be 5% and 10%

respectively of the paid up capital of an Indian company. These limits shall be over and above

the FII and NRI investment ceilings prescribed under the Portfolio Investment Scheme for

foreign investment in India. Further, wherever there are composite sectoral caps under the extant

FDI policy, these limits for QFI investment in equity shares shall also be within such overall FDI

sectoral caps.

3.1.7.3 Dividend payments on equity shares held by QFls can either be directly remitted

to the designated overseas bank accounts of the QFIs or credited to the single rupee pool bank

account. In case dividend payments are credited to the single rupee pool bank account they shall

be remitted to the designated overseas bank accounts of the QFIs within five working days

(including the day of credit of such funds to the single rupee pool bank account). Within these

five working days, the dividend payments can be also utilized for fresh purchases of equity

shares under this scheme, if so instructed by the QFI.

3.2 ENTITIES INTO WHICH FDI CAN BE MADE

3.2.1 FDI in an Indian Company: Indian companies can issue capital against FDI.

3.2.2 FDI in Partnership Firm / Proprietary Concern:

(i) A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India

can invest in the capital of a firm or a proprietary concern in India on non-repatriation

basis provided;

(a) Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account

maintained with Authorized Dealers / Authorized banks.

(b) The firm or proprietary concern is not engaged in any agricultural/plantation or real

estate business or print media sector.

(ii) Investments with repatriation option: NRIs/PIO may seek prior permission of Reserve

Bank for investment in sole proprietorship concerns/partnership firms with repatriation

option. The application will be decided in consultation with the Government of India.

(iii)Investment by non-residents other than NRIs/PIO: A person resident outside India other

than NRIs/PIO may make an application and seek prior approval of Reserve Bank for

making investment in the capital of a firm or a proprietorship concern or any association

of persons in India. The application will be decided in consultation with the Government

of India.

(iv)Restrictions: An NRI or PIO is not allowed to invest in a firm or proprietorship concern

engaged in any agricultural/plantation activity or real estate business or print media.

3.2.3 FDI in Venture Capital Fund (VCF): FVCIs are allowed to invest in Indian

Venture Capital Undertakings (IVCUs) /Venture Capital Funds (VCFs) /other companies, as

stated in paragraph 3.1.6 of this Circular. If a domestic VCF is set up as a trust, a person resident

outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF

subject to approval of the FIPB. However, if a domestic VCF is set-up as an incorporated

company under the Companies Act, 1956, then a person resident outside India (non-resident

entity/individual including an NRI) can invest in such domestic VCF under the automatic route

of FDI Scheme, subject to the pricing guidelines, reporting requirements, mode of payment,

minimum capitalization norms, etc.

3.2.4 FDI in Trusts: FDI in Trusts other than VCF is not permitted.

3.2.5 FDI in Limited Liability Partnerships (LLPs): FDI in LLPs is permitted, subject to the

following conditions:

(a) FDI will be allowed, through the Government approval route, only in LLPs operating in

sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDIlinked performance conditions (such as 'Non Banking Finance Companies' or 'Development of

Townships, Housing, Built-up infrastructure and Construction-development projects' etc.).

(b) LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media

or real estate business.17

LLP only if both-the company, as well as the LLP- are operating in sectors where 100% FDI is

allowed, through the automatic route and there are no FDI-linked performance conditions.

(d) LLPs with FDI will not be eligible to make any downstream investments.

(e) 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.

(f) Investment in LLPs by Foreign Institutional Investors (FIls) and Foreign Venture Capital

Investors (FVCIs) will not be permitted. LLPs will also not be permitted to avail External

Commercial Borrowings (ECBs).

(g) In case the LLP with FDI has a body corporate that is a designated partner or nominates an

individual to act as a designated partner in accordance with the provisions of Section 7 of the

LLP Act, 2008, such a body corporate should only be a company registered in India under the

Companies Act, 1956 and not any other body, such as an LLP or a trust.

(h) For such LLPs, the designated partner "resident in India", as defined under the

'Explanation' to Section 7(1) of the LLP Act, 2008, would also have to satisfy the definition of

"person resident in India", as prescribed under Section 2(v)(i) of the Foreign Exchange

Management Act, 1999.

(i) The designated partners will be responsible for compliance with all the above conditions and

also liable for all penalties imposed on the LLP for their contravention, if any.

(j) Conversion of a company with FDI, into an LLP, will be allowed only if the above

stipulations are met and with the prior approval of FIPB/Government.

3.2.6 FDI in other Entities: FDI in resident entities other than those mentioned above is not

permitted.

3.3 TYPES OF INSTRUMENTS.

3.3.1 Indian companies can issue equity shares, fully, compulsorily and mandatorily

convertible debentures and fully, compulsorily and mandatorily convertible preference shares

subject to pricing guidelines/valuation norms prescribed under FEMA Regulations. The price/

conversion formula of convertible capital instruments should be determined upfront at the time

of issue of the instruments. The price at the time of conversion should not in any case be lower 18

than the fair value worked out, at the time of issuance of such instruments, in accordance with

the extant FEMA regulations [the DCF method of valuation for the unlisted companies and

valuation in terms of SEBI (ICDR) Regulations, for the listed companies].

3.3.2 Other types of Preference shares/Debentures i.e. non-convertible, optionally convertible

or partially convertible for issue of which funds have been received on or after May 1, 2007 are

considered as debt. Accordingly all norms applicable for ECBs relating to eligible borrowers,

recognized lenders, amount and maturity, end-use stipulations, etc. shall apply. Since these

instruments would be denominated in rupees, the rupee interest rate will be based on the swap

equivalent of London Interbank Offered Rate (LIBOR) plus the spread as permissible for ECBs

of corresponding maturity.

3.3.3 The inward remittance received by the Indian company vide issuance of DRs and FCCBs

are treated as FDI and counted towards FDI.

3.3.4 Issue of shares by Indian Companies under FCCB/ADR/GDR

(i) Indian companies can raise foreign currency resources abroad through the issue of

FCCB/DR (ADRs/GDRs), 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 Government of India there under from time to

time.

(ii) A company can issue ADRs / GDRs if it is eligible to issue shares to persons resident

outside India under the FDI Policy. However, an Indian listed company, which is not

eligible to raise funds from the Indian Capital Market including a company which has

been restrained from accessing the securities market by the Securities and Exchange

Board of India (SEBI) will not be eligible to issue ADRs/GDRs.

(iii) Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital

in the international market, would require prior or simultaneous listing in the domestic

market, while seeking to issue such overseas instruments. Unlisted companies, which

have already issued ADRs/GDRs in the international market, have to list in the domestic

market on making profit or within three years of such issue of ADRs/GDRs, whichever is

earlier. ADRs / GDRs are issued on the basis of the ratio worked out by the Indian 19

company in consultation with the Lead Manager to the issue. The proceeds so raised have

to be kept abroad till actually required in India. Pending repatriation or utilization of the

proceeds, the Indian company can invest the funds in:-

(a) Deposits, Certificate of Deposits or other instruments offered by banks rated by

Standard and Poor, Fitch, IBCA ,Moody's, etc. with rating not below the rating

stipulated by Reserve Bank from time to time for the purpose;

(b) Deposits with branch/es of Indian Authorized Dealers outside India; and

of one year or less.

(iv) There are no end-use restrictions except for a ban on deployment / investment of such

funds in real estate or the stock market. There is no monetary limit up to which an Indian

company can raise ADRs / GDRs.

(v) The ADR / GDR proceeds can be utilized for first stage acquisition of shares in the

disinvestment process of Public Sector Undertakings / Enterprises and also in the

mandatory second stage offer to the public in view of their strategic importance.

(vi) Voting rights on shares issued under the Scheme shall be as per the provisions of

Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on

ADR/GDR issues shall be consistent with the Company Law provisions. Voting rights in

the case of banking companies will continue to be in terms of the provisions of the

Banking Regulation Act, 1949 and the instructions issued by the Reserve Bank from time

to time, as applicable to all shareholders exercising voting rights.

(vii) Erstwhile OCBs who are not eligible to invest in India and entities prohibited from

buying, selling or dealing in securities by SEBI will not be eligible to subscribe to ADRs/

GDRs issued by Indian companies.

(viii)The pricing of ADR / GDR issues should be made at a price determined under the

provisions of the Scheme of issue of Foreign Currency Convertible Bonds and Ordinary

Shares (through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by

the Government of India and directions issued by the Reserve Bank, from time to time.

(ix)The pricing of sponsored ADRs/GDRs would be determined under the provisions of the

Scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through 20

Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government

of India and directions issued by the Reserve Bank, from time to time.

3.3.5 (i) Two-way Fungibility Scheme: A limited two-way Fungibility scheme has been put

in place by the Government of India for ADRs / GDRs. Under this Scheme, a stock broker in

India, registered with SEBI, can purchase shares of an Indian company from the market for

conversion into ADRs/GDRs based on instructions received from overseas investors. Reissuance of ADRs / GDRs would be permitted to the extent of ADRs / GDRs which have been

redeemed into underlying shares and sold in the Indian market.

(ii) Sponsored ADR/GDR issue: An Indian company can also sponsor an issue of ADR / GDR.

Under this mechanism, the company offers its resident shareholders a choice to submit their

shares back to the company so that on the basis of such shares, ADRs / GDRs can be issued

abroad. The proceeds of the ADR / GDR issue are remitted back to India and distributed among

the resident investors who had offered their Rupee denominated shares for conversion. These

proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the resident

shareholders who have tendered such shares for conversion into ADRs / GDRs.

3.4 ISSUE/TRANSFER OF SHARES

3.4.1 The capital instruments should be issued within 180 days from the date of receipt of the

inward remittance received through normal banking channels including escrow account opened

and maintained for the purpose or by debit to the NRE/FCNR (B) account of the non-resident

investor. In case, the capital instruments are not issued within 180 days from the date of receipt

of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of

consideration so received should be refunded immediately to the non-resident investor by

outward remittance through normal banking channels or by credit to the NRE/FCNR (B)

account, as the case may be. Non-compliance with the above provision would be reckoned as a

contravention under FEMA and would attract penal provisions. In exceptional cases, refund of

the amount of consideration outstanding beyond a period of 180 days from the date of receipt

may be considered by the RBI, on the merits of the case.

3.4.2 Issue price of shares – Price of shares issued to persons resident outside India under the

FDI Policy, shall not be less than -21

a. the price worked out in accordance with the SEBI guidelines, as applicable, where the

shares of the company is listed on any recognised stock exchange in India;

b. the fair valuation of shares done by a SEBI registered Category - I Merchant Banker or a

Chartered Accountant as per the discounted free cash flow method, where the shares of

the company is not listed on any recognised stock exchange in India ; and

c. the price as applicable to transfer of shares from resident to non-resident as per the

pricing guidelines laid down by the Reserve Bank from time to time, where the issue of

shares is on preferential allotment.

3.4.3 Foreign Currency Account – Indian companies which are eligible to issue shares to

persons resident outside India under the FDI Policy may be allowed to retain the share

subscription amount in a Foreign Currency Account, with the prior approval of RBI.

3.4.4 Transfer of shares and convertible debentures –

(i) Subject to FDI sectoral policy (relating to sectoral caps and entry routes), applicable laws

and other conditionalities including security conditions, non-resident investors can also

invest in Indian companies by purchasing/acquiring existing shares from Indian

shareholders or from other non-resident shareholders. General permission has been

granted to non-residents/NRIs for acquisition of shares by way of transfer subject to the

following:

(a) A person resident outside India (other than NRI and erstwhile OCB) may transfer by

way of sale or gift, the shares or convertible debentures to any person resident outside

India (including NRIs).

(b) NRIs may transfer by way of sale or gift the shares or convertible debentures held by

them to another NRI.

by way of gift.

(d) A person resident outside India can sell the shares and convertible debentures of an

Indian company on a recognized Stock Exchange in India through a stock broker

registered with stock exchange or a merchant banker registered with SEBI.22

(e) A person resident in India can transfer by way of sale, shares/convertible debentures

(including transfer of subscriber‘s shares), of an Indian company under private

arrangement to a person resident outside India, subject to the guidelines given in para

3.4.5.2 and Annex-2.

(f) General permission is also available for transfer of shares/convertible debentures, by

way of sale under private arrangement by a person resident outside India to a person

resident in India, subject to the guidelines given in para 3.4.5.2 and Annex-2.

(g) The above General Permission also covers transfer by a resident to a non-resident of

shares/convertible debentures of an Indian company, engaged in an activity earlier

covered under the Government Route but now falling under Automatic Route, as well

as transfer of shares by a non-resident to an Indian company under buyback and/or

capital reduction scheme of the company.

(h) The Form FC-TRS should be submitted to the AD Category-I Bank, within 60 days

from the date of receipt of the amount of consideration. The onus of submission of

the Form FC-TRS within the given timeframe would be on the transferor/transferee,

resident in India.

(ii) The sale consideration in respect of equity instruments purchased by a person resident

outside India, remitted into India through normal banking channels, shall be subjected to

a Know Your Customer (KYC) check by the remittance receiving AD Category-I bank

at the time of receipt of funds. In case, the remittance receiving AD Category-I bank is

different from the AD Category-I bank handling the transfer transaction, the KYC check

should be carried out by the remittance receiving bank and the KYC report be submitted

by the customer to the AD Category-I bank carrying out the transaction along with the

Form FC-TRS.

(iii) Escrow: AD Category-I banks have been given general permission to open Escrow

account and Special account of non-resident corporate for open offers / exit offers and

delisting of shares. The relevant SEBI (SAST) Regulations or any other applicable SEBI

Regulations/ provisions of the Companies Act, 1956 will be applicable. AD Category-I

banks have also been permitted to open and maintain, without prior approval of RBI,

non-interest bearing Escrow accounts in Indian Rupees in India on behalf of residents

and/or non-residents, towards payment of share purchase consideration and/or provide 23

Escrow facilities for keeping securities to facilitate FDI transactions subject to the terms

and conditions specified by RBI. SEBI authorised Depository Participants have also

been permitted to open and maintain, without prior approval of RBI, Escrow accounts for

securities subject to the terms and conditions as specified by RBI. In both cases, the

Escrow agent shall necessarily be an AD Category- I bank or SEBI authorised Depository

Participant (in case of securities‘ accounts). These facilities will be applicable for both

issue of fresh shares to the non- residents as well as transfer of shares from / to the nonresidents.

3.4.5 Prior permission of RBI in certain cases for transfer of capital instruments

3.4.5.1 Except cases mentioned in paragraph 3.4.5.2 below, the following cases require prior

approval of RBI:

(i) Transfer of capital instruments from resident to non-residents by way of sale where :

(a) Transfer is at a price which falls outside the pricing guidelines specified by the

Reserve Bank from time to time and the transaction does not fall under the exception

given in para 3.4.5.2.

(b) Transfer of capital instruments by the non-resident acquirer involving deferment of

payment of the amount of consideration. Further, in case approval is granted for a

transaction, the same should be reported in Form FC-TRS, to an AD Category-I bank

for necessary due diligence, within 60 days from the date of receipt of the full and

final amount of consideration.

(ii) Transfer of any capital instrument, by way of gift by a person resident in India to a person

resident outside India. While forwarding applications to Reserve Bank for approval for transfer

of capital instruments by way of gift, the documents mentioned in Annex-3 should be enclosed.

Reserve Bank considers the following factors while processing such applications:

(a) The proposed transferee (donee) is eligible to hold such capital instruments under

Schedules 1, 4 and 5 of Notification No. FEMA 20/2000-RB dated May 3, 2000, as

amended from time to time.

(b) The gift does not exceed 5 per cent of the paid-up capital of the Indian company/each

series of debentures/each mutual fund scheme.

(d) The transferor (donor) and the proposed transferee (donee) are close relatives as

defined in Section 6 of the Companies Act, 1956, as amended from time to time. The

current list is reproduced in Annex-4.

(e) The value of capital instruments to be transferred together with any capital

instruments already transferred by the transferor, as gift, to any person residing

outside India does not exceed the rupee equivalent of USD 50,000 during the

financial year.

(f) Such other conditions as stipulated by Reserve Bank in public interest from time to

time.

(iii) Transfer of shares from NRI to non-resident .

3.4.5.2 In the following cases, approval of RBI is not required:

A. Transfer of shares from a Non Resident to Resident under the FDI scheme where the

pricing guidelines under FEMA, 1999 are not met provided that :-

i. The original and resultant investment are in line with the extant FDI policy and FEMA

regulations in terms of sectoral caps, conditionalities (such as minimum capitalization,

etc.), reporting requirements, documentation, etc.;

ii. The pricing for the transaction is compliant with the specific/explicit, extant and relevant

SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit,

open offer/ substantial acquisition / SEBI SAST, buy back); and

iii. Chartered Accountants Certificate to the effect that compliance with the relevant SEBI

regulations / guidelines as indicated above is attached to the form FC-TRS to be filed

with the AD bank.

B. Transfer of shares from Resident to Non Resident:

i) where the transfer of shares requires the prior approval of the FIPB as per the extant FDI

policy provided that :

a) the requisite approval of the FIPB has been obtained; and25

b) the transfer of share adheres with the pricing guidelines and documentation requirements as

specified by the Reserve Bank of India from time to time.

ii) where the transfer of shares attract SEBI (SAST) guidelines subject to the adherence with

the pricing guidelines and documentation requirements as specified by Reserve Bank of India

from time to time.

iii) where the transfer of shares does not meet the pricing guidelines under the FEMA, 1999

provided that:-

a) The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in terms

of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements,

documentation etc.;

b) The pricing for the transaction is compliant with the specific/explicit, extant and relevant

SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open

offer/ substantial acquisition / SEBI SAST); and

c) Chartered Accountants Certificate to the effect that compliance with the relevant SEBI

regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the

AD bank.

iv) where the investee company is in the financial sector provided that :

a) NOCs are obtained from the respective financial sector regulators/ regulators of the investee

company as well as transferor and transferee entities and such NOCs are filed along with the

form FC-TRS with the AD bank; and

b). The FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as

minimum capitalization, pricing, etc.), reporting requirements, documentation etc., are complied

with.26

3.4.6 Conversion of ECB/Lumpsum Fee/Royalty etc. into Equity

(i) Indian companies have been granted general permission for conversion of External

Commercial Borrowings (ECB) (excluding those deemed as ECB) in convertible foreign

currency into equity shares/fully compulsorily and mandatorily convertible preference

shares, subject to the following conditions and reporting requirements.

(a) The activity of the company is covered under the Automatic Route for FDI or the

company has obtained Government approval for foreign equity in the company;

(b) The foreign equity after conversion of ECB into equity is within the sectoral cap, if

any;

(d) Compliance with the requirements prescribed under any other statute and regulation

in force; and

(e) The conversion facility is available for ECBs availed under the Automatic or

Government Route and is applicable to ECBs, due for payment or not, as well as

secured/unsecured loans availed from non-resident collaborators.

(ii) General permission is also available for issue of shares/preference shares against lump

sum technical know-how fee, royalty, subject to entry route, sectoral cap and pricing

guidelines (as per the provision of para 3.4.2 above) and compliance with applicable tax

laws.

(iii) Issue of equity shares under the FDI policy is allowed under the Government route for

the following:

(I) import of capital goods/ machinery/ equipment (excluding second-hand machinery),

subject to compliance with the following conditions:

(a) Any import of capital goods/machinery etc., made by a resident in India, has to be

in accordance with the Export/ Import Policy issued by Government of India/as

defined by DGFT/FEMA provisions relating to imports.

(b) There is an 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 27

documents/certificates issued by the customs authorities towards assessment of the

fair-value of such imports.

Importer Company as well as overseas entity.

(d) Applications complete in all respects, for conversions of import payables for

capital goods into FDI being made within 180 days from the date of shipment of

goods.

(II) pre-operative/ pre-incorporation expenses (including payments of rent etc.), subject to

compliance with the following conditions:

(a) Submission of FIRC for remittance of funds by the overseas promoters for the

expenditure incurred.

(b) Verification and certification of the pre-incorporation/pre-operative expenses by

the statutory auditor.

through the bank account opened by the foreign investor as provided under FEMA

Regulations.

(d) The applications, complete in all respects, for capitalization being made within the

period of 180 days from the date of incorporation of the company

General conditions:

(i) All requests for conversion should be accompanied by a special resolution of the

company.

(ii) Government‘s approval would be subject to pricing guidelines of RBI and

appropriate tax clearance.

3.5 SPECIFIC CONDITIONS IN CERTAIN CASES

3.5.1 Issue of Rights/Bonus Shares – FEMA provisions allow Indian companies to freely

issue Rights/Bonus shares to existing non-resident shareholders, subject to adherence to sectoral

cap, if any. However, such issue of bonus / rights shares has to be in accordance with other

laws/statutes like the Companies Act, 1956, SEBI (Issue of Capital and Disclosure

Requirements) Regulations, 2009 (in case of listed companies), etc. The offer on right basis to

the persons resident outside India shall be:28

(a) in the case of shares of a company listed on a recognized stock exchange in India, at a price

as determined by the company;

(b) in the case of shares of a company not listed on a recognized stock exchange in India, at a

price which is not less than the price at which the offer on right basis is made to resident

shareholders.

3.5.2 Prior permission of RBI for Rights issue to erstwhile OCBs- OCBs have been derecognised as a class of investors from September 16, 2003. Therefore companies desiring to

issue rights share to such erstwhile OCBs will have to take specific prior permission from RBI.

As such, entitlement of rights share is not automatically available to erstwhile OCBs. However

bonus shares can be issued to erstwhile OCBs without the approval of RBI.

3.5.3 Additional allocation of rights share by residents to non-residents – Existing nonresident shareholders are allowed to apply for issue of additional shares/ fully, compulsorily and

mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference

shares over and above their rights share entitlements. The investee company can allot the

additional rights share out of unsubscribed portion, subject to the condition that the overall issue

of shares to non-residents in the total paid-up capital of the company does not exceed the

sectoral cap.

3.5.4 Acquisition of shares under Scheme of Merger/Demerger/Amalgamation –

Mergers/demergers/ amalgamations of companies in India are usually governed by an order

issued by a competent Court on the basis of the Scheme submitted by the companies undergoing

merger/demerger/amalgamation. Once the scheme of merger or demerger or amalgamation of

two or more Indian companies has been approved by a Court in India, the transferee company or

new company is allowed to issue shares to the shareholders of the transferor company resident

outside India, subject to the conditions that:

(i) the percentage of shareholding of persons resident outside India in the transferee or new

company does not exceed the sectoral cap, and

(ii) the transferor company or the transferee or the new company is not engaged in activities

which are prohibited under the FDI policy .29

3.5.5 Issue of shares under Employees Stock Option Scheme (ESOPs) –

(i) Listed Indian companies are allowed to issue shares under the Employees Stock Option

Scheme (ESOPs), to its employees or employees of its joint venture or wholly owned

subsidiary abroad, who are resident outside India, other than to the citizens of Pakistan.

ESOPs can be issued to citizens of Bangladesh with the prior approval of FIPB. Shares

under ESOPs can be issued directly or through a Trust subject to the condition that:

(a) The scheme has been drawn in terms of relevant regulations issued by the SEBI, and

(b) The face value of the shares to be allotted under the scheme to the non-resident

employees does not exceed 5 per cent of the paid-up capital of the issuing company.

(ii) Unlisted companies have to follow the provisions of the Companies Act, 1956. The

Indian company can issue ESOPs to employees who are resident outside India, other than

to the citizens of Pakistan. ESOPs can be issued to the citizens of Bangladesh with the

prior approval of the FIPB.

(iii)The issuing company is required to report (plain paper reporting) the details of granting

of stock options under the scheme to non-resident employees to the Regional Office

concerned of the Reserve Bank and thereafter the details of issue of shares subsequent to

the exercise of such stock options within 30 days from the date of issue of shares in Form

FC-GPR.

3.5.6 Share Swap: In cases of investment by way of swap of shares, irrespective of the

amount, valuation of the shares will have to be made by a Category I Merchant Banker registered

with SEBI or an Investment Banker outside India registered with the appropriate regulatory

authority in the host country. Approval of the Foreign Investment Promotion Board (FIPB) will

also be a prerequisite for investment by swap of shares.

3.5.7 Pledge of Shares:

(A) A person being a promoter of a company registered in India (borrowing company), which

has raised external commercial borrowings, may pledge the shares of the borrowing company or

that of its associate resident companies for the purpose of securing the ECB raised by the

borrowing company, provided that a no objection for the same is obtained from a bank which is

an authorised dealer. The authorized dealer, shall issue the no objection for such a pledge after

having satisfied itself that the external commercial borrowing is in line with the extant FEMA

regulations for ECBs and that : 30

i). the loan agreement has been signed by both the lender and the borrower,

ii) there exists a security clause in the Loan Agreement requiring the borrower to create

charge on financial securities, and

iii) the borrower has obtained Loan Registration Number (LRN) from the Reserve Bank:

and the said pledge would be subject to the following conditions :

a). the period of such pledge shall be co-terminus with the maturity of the underlying ECB;

b). in case of invocation of pledge, transfer shall be in accordance with the extant FDI Policy

and directions issued by the Reserve Bank;

c). the Statutory Auditor has certified that the borrowing company will utilized / has

utilized the proceeds of the ECB for the permitted end use/s only.

(B) Non-resident holding shares of an Indian company, can pledge these shares in favour of the

AD bank in India to secure credit facilities being extended to the resident investee company for

bonafide business purpose, subject to the following conditions:

(i) in case of invocation of pledge, transfer of shares should be in accordance with the FDI

policy in vogue at the time of creation of pledge;

(ii) submission of a declaration/ annual certificate from the statutory auditor of the investee

company that the loan proceeds will be / have been utilized for the declared purpose;

(iii) the Indian company has to follow the relevant SEBI disclosure norms; and

(iv) pledge of shares in favour of the lender (bank) would be subject to Section 19 of the

Banking Regulation Act, 1949.

overseas bank to secure the credit facilities being extended to the non-resident investor / nonresident promoter of the Indian company or its overseas group company, subject to the

following:

(i) loan is availed of only from an overseas bank;

(ii) loan is utilized for genuine business purposes overseas and not for any investments either

directly or indirectly in India;

(iii)overseas investment should not result in any capital inflow into India;

(iv)in case of invocation of pledge, transfer should be in accordance with the FDI policy in

vogue at the time of creation of pledge; and 31

(v) submission of a declaration/ annual certificate from a Chartered Accountant/ Certified

Public Accountant of the non-resident borrower that the loan proceeds will be / have

been utilized for the declared purpose.

3.6 ENTRY ROUTES FOR INVESTMENT:

3.6.1 Investments can be made by non-residents in the equity shares/fully, compulsorily and

mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference

shares of an Indian company, through the Automatic Route or the Government Route. Under the

Automatic Route, the non-resident investor or the Indian company does not require any approval

from Government of India for the investment. Under the Government Route, prior approval of

the Government of India is required. Proposals for foreign investment under Government route,

are considered by FIPB.

3.6.2 Guidelines for establishment of Indian companies/ transfer of ownership or control

of Indian companies, from resident Indian citizens to non-resident entities, in sectors with

caps:

In sectors/activities with caps, including inter-alia defence production, air transport services,

ground handling services, asset reconstruction companies, private sector banking, broadcasting,

commodity exchanges, credit information companies, insurance, print media,

telecommunications and satellites, Government approval/FIPB approval would be required in all

cases where:

(i) An Indian company is being established with foreign investment and is owned by a nonresident entity or

(ii) An Indian company is being established with foreign investment and is controlled by a nonresident entity or

(iii) 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

and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger,

acquisition etc. or 32

(iv) 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 and/or fresh issue of shares to non-resident entities through amalgamation,

merger/demerger, acquisition etc.

(v) It is clarified that these guidelines will not apply to sectors/activities where there are no

foreign investment caps, that is, 100% foreign investment is permitted under the automatic route.

(vi) It is also clarified that Foreign investment shall include all types of foreign investments i.e.

FDI, investment by FIIs, NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds (FCCB) and

fully, mandatorily & compulsorily convertible preference shares/debentures, regardless of

whether the said investments have been made under Schedule 1, 2, 3 and 6 of FEMA (Transfer

or Issue of Security by Persons Resident Outside India) Regulations.

3.7 CAPS ON INVESTMENTS

3.7.1 Investments can be made by non-residents in the capital of a resident entity only to the

extent of the percentage of the total capital as specified in the FDI policy. The caps in various

sector(s) are detailed in Chapter 6 of this circular.

3.8 ENTRY CONDITIONS ON INVESTMENT

3.8.1 Investments by non-residents can be permitted in the capital of a resident entity in certain

sectors/activity with entry conditions. Such conditions may include norms for minimum

capitalization, lock-in period, etc. The entry conditions in various sectors/activities are detailed

in Chapter 6 of this circular.

3.9 OTHER CONDITIONS ON INVESTMENT BESIDES ENTRY CONDITIONS

3.9.1 Besides the entry conditions on foreign investment, the investment/investors are required

to comply with all relevant sectoral laws, regulations, rules, security conditions, and state/ local

laws/ regulations.33

3.10 FOREIGN INVESTMENT INTO/ DOWNSTREAM INVESTMENT BY INDIAN

COMPANIES

3.10.1 The Guidelines for calculation of total foreign investment, both direct and indirect in an

Indian company, at every stage of investment, including downstream investment, have been

detailed in Paragraph 4.1.

3.10.2 For the purpose of this chapter,

(i) ‗Downstream investment‘ means indirect foreign investment, by one Indian company,

into another Indian company, by way of subscription or acquisition, in terms of

Paragraph 4.1. Paragraph 4.1.3 provides the guidelines for calculation of indirect foreign

investment, with conditions specified in paragraph 4.1.3 (v).

(ii) ‗Foreign Investment‘ would have the same meaning as in Paragraph 4.1

3.10.3 Foreign investment into an Indian company engaged only in the activity of investing

in the capital of other Indian company/ies (regardless of its ownership or control):

3.10.3.1 Foreign investment into an Indian company, engaged only in the activity of investing in

the capital of other Indian company/ies, will require prior Government/FIPB approval, regardless

of the amount or extent of foreign investment. Foreign investment into Non-Banking Finance

Companies (NBFCs), carrying on activities approved for FDI, will be subject to the conditions

specified in paragraph 6.2.24 of this Circular.

3.10.3.2 Those companies, which are Core Investment Companies (CICs), will have to

additionally follow RBI‘s Regulatory Framework for CICs.

3.10.3.3 For infusion of foreign investment into an Indian company which does not have any

operations and also does not have any downstream investments, Government/FIPB approval

would be required, regardless of the amount or extent of foreign investment. Further, as and

when such a company commences business(s) or makes downstream investment, it will have to

comply with the relevant sectoral conditions on entry route, conditionalities and caps.

Note: Foreign investment into other Indian companies would be in accordance/ compliance with

the relevant sectoral conditions on entry route, conditionalities and caps. 34

3.10.4 Downstream investment by an Indian company which is owned and/or controlled by

non resident entity/ies:

3.10.4.1 Downstream investment by an Indian company, which is owned and/ or controlled by

non-resident entity/ies, into another Indian company, would be in accordance/compliance with the

relevant sectoral conditions on entry route, conditionalities and caps, with regard to the sectors in

which the latter Indian company is operating.

3.10.4.2 Downstream investments by Indian companies will be subject to the following

conditions:

(i) Such a company is to notify SIA, DIPP and FIPB of its downstream investment in the form

available at http://www.fipbindia.com within 30 days of such investment, even if capital

instruments have not been allotted along with the modality of investment in new/existing ventures

(with/without expansion programme);

(ii) downstream investment by way of induction of foreign equity in an existing Indian Company

to be duly supported by a resolution of the Board of Directors as also a shareholders Agreement, if

any;

(iii) issue/transfer/pricing/valuation of shares shall be in accordance with applicable SEBI/RBI

guidelines;

(iv) For the purpose of downstream investment, the Indian companies making the downstream

investments would have to bring in requisite funds from abroad and not leverage funds from the

domestic market. This would, however, not preclude downstream companies, with operations,

from raising debt in the domestic market. Downstream investments through internal accruals are

permissible, subject to the provisions of paragraphs 3.10.3 and 3.10.4.1.35

CHAPTER 4: CALCULATION OF FOREIGN INVESTMENT

4.1 TOTAL FOREIGN INVESTMENT i.e. DIRECT AND INDIRECT FOREIGN

INVESTMENT IN INDIAN COMPANIES.

4.1.1 Investment in Indian companies can be made both by non-resident as well as resident

Indian entities. Any non-resident investment in an Indian company is direct foreign investment.

Investment by resident Indian entities could again comprise of both resident and non-resident

investment. Thus, such an Indian company would have indirect foreign investment if the Indian

investing company has foreign investment in it. The indirect investment can also be a cascading

investment i.e. through multi-layered structure.

4.1.2 For the purpose of computation of indirect Foreign investment, Foreign Investment in

Indian company shall include all types of foreign investments i.e. FDI; investment by

FIIs(holding as on March 31); NRIs; ADRs; GDRs; Foreign Currency Convertible Bonds

(FCCB); fully, compulsorily and mandatorily convertible preference shares and

fully,compulsorily and mandatorily convertible Debentures regardless of whether the said

investments have been made under Schedule 1, 2, 3 and 6 of FEM (Transfer or Issue of Security

by Persons Resident Outside India) Regulations, 2000.

4.1.3 Guidelines for calculation of total foreign investment i.e. direct and indirect foreign

investment in an Indian company.

(i) Counting the Direct Foreign Investment: All investment directly by a non-resident

entity into the Indian company would be counted towards foreign investment.

(ii) Counting of indirect foreign Investment:

(a) 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/or

Indian Companies which are owned and controlled by resident Indian citizens .

(b)For cases where condition (a) above is not satisfied or if the investing company is

owned or controlled by ‗non resident entities‘, the entire investment by the investing 36

company into the subject Indian Company would be considered as indirect foreign

investment,

provided that, as an exception, the indirect foreign investment in only the 100%

owned subsidiaries of operating-cum-investing/investing companies, will be limited

to the foreign investment in the operating-cum-investing/ investing company. This

exception is made since the downstream investment of a 100% 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. This

exception, however, is strictly for those cases where the entire capital of the

downstream subsidiary is owned by the holding company.

Illustration

To illustrate, if the indirect foreign investment is being calculated for Company X which

has investment through an investing Company Y having foreign investment, the

following would be the method of calculation:

(A) where Company Y has foreign investment less than 50%- Company X would not be

taken as having any indirect foreign investment through Company Y.

(B) where Company Y has foreign investment of say 75% and:

(I) invests 26% in Company X, the entire 26% investment by Company Y would be

treated as indirect foreign investment in Company X;

(II) Invests 80% in Company X, the indirect foreign investment in Company X would

be taken as 80%

(III) where Company X is a wholly owned subsidiary of Company Y (i.e. Company Y

owns 100% shares of Company X), then only 75% would be treated as indirect

foreign equity and the balance 25% would be treated as resident held equity. The

indirect foreign equity in Company X would be computed in the ratio of 75: 25 in

the total investment of Company Y in Company X.

(iii)The total foreign investment would be the sum total of direct and indirect foreign

investment.

(iv) The above methodology of calculation would apply at every stage of investment in

Indian companies and thus to each and every Indian company. 37

(v) Additional conditions:

(a) The full details about the foreign investment including ownership details etc. in Indian

company(s) and information about the control of the company(s) would be furnished by

the Company(s) to the Government of India at the time of seeking approval.

(b) In any sector/activity, where Government approval is required for foreign investment and

in cases where there are any inter-se agreements between/amongst share-holders which

have an effect on the appointment of the Board of Directors or on the exercise of voting

rights or of creating voting rights disproportionate to shareholding or any incidental

matter thereof, such agreements will have to be informed to the approving authority. The

approving authority will consider such inter-se agreements for determining ownership

and control when considering the case for approval of foreign investment.

investment cap, would specifically be beneficially owned by/held with/in the hands of

resident Indian citizens and Indian companies, owned and controlled by resident Indian

citizens.

(d) In the I& B and Defence sectors where the sectoral cap is less than 49%, 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.

(A) For this purpose, the equity held by the largest Indian shareholder would have to be

at least 51% of the total equity, excluding the equity held by Public Sector Banks and

Public Financial Institutions, as defined in Section 4A of the Companies Act, 1956.

The term ‗largest Indian shareholder‘, used in this clause, will include any or a

combination of the following:

(I) In the case of an individual shareholder,

(aa) The individual shareholder,

(bb) A relative of the shareholder within the meaning of Section 6 of the

Companies Act, 1956.

(cc) A company/ group of companies in which the individual shareholder/HUF to

which he belongs has management and controlling interest.

(II) In the case of an Indian company,

(aa) The Indian company 38

(bb) A group of Indian companies under the same management and ownership

control.

(B) For the purpose of this Clause, ―Indian company‖ shall be a company which must

have a resident Indian or a relative as defined under Section 6 of the Companies Act,

1956/ HUF, either singly or in combination holding at least 51% of the shares.

(C) Provided that, in case of a combination of all or any of the entities mentioned in SubClauses (I) and (II) of clause 4.1.3(v)(d)(A) above, each of the parties shall have

entered into a legally binding agreement to act as a single unit in managing the

matters of the applicant company.

(e) If a declaration is made by persons as per section 187C of the Indian Companies Act

about a beneficial interest being held by a non resident entity, then even though the

investment may be made by a resident Indian citizen, the same shall be counted as

foreign investment.

4.1.4 The above mentioned policy and methodology would be applicable for determining the

total foreign investment in all sectors, except in sectors where it is specified in a statute or rule

there under. The above methodology of determining direct and indirect foreign investment

therefore does not apply to the Insurance Sector which will continue to be governed by the

relevant Regulation.

4.1.5 Any foreign investment already made in accordance with the guidelines in existence prior

to February 13, 2009 (date of issue of Press Note 2 of 2009) 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. 39

CHAPTER 5: FOREIGN INVESTMENT PROMOTION BOARD

(FIPB)

5.1 CONSTITUTION OF FIPB:

5.1.1 FIPB comprises of the following Secretaries to the Government of India:

(i) Secretary to Government, Department of Economic Affairs, Ministry of Finance

– Chairperson

(ii) Secretary to Government, Department of Industrial Policy & Promotion, Ministry

of Commerce & Industry

(iii)Secretary to Government, Department of Commerce, Ministry of Commerce &

Industry

(iv)Secretary to Government, Economic Relations, Ministry of External Affairs

(v) Secretary to Government, Ministry of Overseas Indian Affairs.

5.1.2 The Board would be able to co-opt other Secretaries to the Central Government

and top officials of financial institutions, banks and professional experts of Industry and

Commerce, as and when necessary.

5.2 LEVELS OF APPROVALS FOR CASES UNDER GOVERNMENT ROUTE

5.2.1 The Minister of Finance who is in-charge of FIPB would consider the recommendations

of FIPB on proposals with total foreign equity inflow of and below Rs.1200 crore.

5.2.2 The recommendations of FIPB on proposals with total foreign equity inflow of more than

Rs. 1200 crore would be placed for consideration of CCEA.

5.2.3 The CCEA would also consider the proposals which may be referred to it by the FIPB/

the Minister of Finance (in-charge of FIPB).

5.3 CASES WHICH DO NOT REQUIRE FRESH APPROVAL

5.3.1 Companies may not require fresh prior approval of the Government i.e. Minister incharge of FIPB/CCEA for bringing in additional foreign investment into the same entity, in the

following cases: 40

(i) Entities the activities of which had earlier required prior approval of FIPB/CCFI/CCEA

and which had, accordingly, earlier obtained prior approval of FIPB/CCFI/CCEA for their initial

foreign investment but subsequently such activities/sectors have been placed under automatic

route;

(ii) Entities the activities of which had sectoral caps earlier and which had, accordingly,

earlier obtained prior approval of FIPB/CCFI/CCEA for their initial foreign investment but

subsequently such caps were removed/increased and the activities placed under the automatic

route; provided that such additional investment alongwith the initial/original investment does not

exceed the sectoral caps; and

(iii) Additional foreign investment into the same entity where prior approval of

FIPB/CCFI/CCEA had been obtained earlier for the initial/original foreign investment due to

requirements of Press Note 18/1998 or Press Note 1 of 2005 and prior approval of the

Government under the FDI policy is not required for any other reason/purpose.

5.4 ONLINE FILING OF APPLICATIONS FOR FIPB /GOVERNMENT’S

APPROVAL

5.4.1 Guidelines for e-filing of applications, filing of amendment applications and instructions

to applicants are available at FIPB‘s website (http://finmin.nic.in/) and

(http://www.fipbindia.com).41

CHAPTER 6: SECTOR SPECIFIC CONDITIONS ON FDI

6.1 PROHIBITED SECTORS.

FDI is prohibited in:

(a) Retail Trading (except single brand product retailing)

(b) Lottery Business including Government /private lottery, online lotteries, etc.

(d) Chit funds

(e) Nidhi company

(f) Trading in Transferable Development Rights (TDRs)

(g) Real Estate Business or Construction of Farm Houses

(h) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco

substitutes

(i) Activities / sectors not open to private sector investment e.g. Atomic Energy and

Railway Transport (other than Mass Rapid Transport Systems).

Foreign technology collaboration in any form including licensing for franchise,

trademark, brand name, management contract is also prohibited for Lottery Business and

Gambling and Betting activities.

6.2 PERMITTED SECTORS

In the following sectors/activities, FDI up to the limit indicated against each sector/activity is

allowed, subject to applicable laws/ regulations; security and other conditionalities. In

sectors/activities not listed below, FDI is permitted upto 100% on the automatic route, subject to

applicable laws/ regulations; security and other conditionalities.

Wherever there is a requirement of minimum capitalization, it shall include share premium

received along with the face value of the share, only when it is received by the company upon

issue of the shares to the non-resident investor. Amount paid by the transferee during post-issue

transfer of shares beyond the issue price of the share, cannot be taken into account while

calculating minimum capitalization requirement; 42

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

AGRICULTURE

6.2.1 Agriculture & Animal Husbandry

a) Floriculture, Horticulture,

Apiculture and Cultivation of

Vegetables & Mushrooms under

controlled conditions;

b) Development and production of

Seeds and planting material;

c) Animal Husbandry (including

breeding of dogs), Pisciculture,

Aquaculture, under controlled

conditions; and

d) services related to agro and allied

sectors

Note: Besides the above, FDI is not

allowed in any other agricultural

sector/activity

100% Automatic

6.2.1.1 Other conditions:

I. For companies dealing with development of transgenic seeds/vegetables,

the following conditions apply:

(i) When dealing with genetically modified seeds or planting material the

company shall comply with safety requirements in accordance with laws

enacted under the Environment (Protection) Act on the genetically modified

organisms.

(ii) Any import of genetically modified materials if required shall be

subject to the conditions laid down vide Notifications issued under Foreign

Trade (Development and Regulation) Act, 1992.

(iii) The company shall comply with any other Law, Regulation or Policy

governing genetically modified material in force from time to time.

(iv) Undertaking of business activities involving the use of genetically

engineered cells and material shall be subject to the receipt of approvals from 43

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

Genetic Engineering Approval Committee (GEAC) and Review Committee

on Genetic Manipulation (RCGM).

(v) Import of materials shall be in accordance with National Seeds Policy.

II. The term ―under controlled conditions‖ covers the following:

 ‗Cultivation under controlled conditions‘ for the categories of

Floriculture, Horticulture, Cultivation of vegetables and

Mushrooms is the practice of cultivation wherein rainfall,

temperature, solar radiation, air humidity and culture medium are

controlled artificially. Control in these parameters may be effected

through protected cultivation under green houses, net houses, poly

houses or any other improved infrastructure facilities where microclimatic conditions are regulated anthropogenically.

 In case of Animal Husbandry, scope of the term ‗under controlled

conditions‘ covers –

o Rearing of animals under intensive farming systems with stallfeeding. Intensive farming system will require climate systems

(ventilation, temperature/humidity management), health care

and nutrition, herd registering/pedigree recording, use of

machinery, waste management systems.

o Poultry breeding farms and hatcheries where micro-climate is

controlled through advanced technologies like incubators,

ventilation systems etc.

 In the case of pisciculture and aquaculture, scope of the term

‗under controlled conditions‘ covers –

o Aquariums

o Hatcheries where eggs are artificially fertilized and fry are

hatched and incubated in an enclosed environment with

artificial climate control.

 In the case of apiculture, scope of the term ‗under controlled 44

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

conditions‘ covers –

o Prodution of honey by bee-keeping, except in forest/wild, in

designated spaces with control of temperatures and climatic

factors like humidity and artificial feeding during lean seasons.

6.2.2 Tea Plantation

6.2.2.1 Tea sector including tea plantations

Note: Besides the above, FDI is not

allowed in any other plantation

sector/activity

100% Government

6.2.2.2 Other conditions:

(i) Compulsory divestment of 26% equity of the company in favour of an

Indian partner/Indian public within a period of 5 years

(ii) Prior approval of the State Government concerned in case of any

future land use change.

6.2.3 MINING

6.2.3.1 Mining and Exploration of metal

and non-metal ores including

diamond, gold, silver and precious

ores but excluding titanium bearing

minerals and its ores; subject to the

Mines and Minerals (Development &

Regulation) Act, 1957.

100% Automatic

6.2.3.2 Coal and Lignite

(1) Coal & Lignite mining for captive

consumption by power projects, iron

& steel and cement units and other

eligible activities permitted under

and subject to the provisions of Coal

Mines (Nationalization) Act, 1973

100% Automatic

(2) Setting up coal processing plants

like washeries subject to the

100% Automatic45

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

condition that the company shall not

do coal mining and shall not sell

washed coal or sized coal from its

coal processing plants in the open

market and shall supply the washed

or sized coal to those parties who are

supplying raw coal to coal processing

plants for washing or sizing.

6.2.3.3 Mining and mineral separation of titanium bearing minerals and ores, its

value addition and integrated activities

6.2.3.3.1 Mining and mineral separation of

titanium bearing minerals & ores, its

value addition and integrated

activities subject to sectoral

regulations and the Mines and

Minerals (Development and

Regulation Act 1957)

100% Government

6.2.3.3.2 Other conditions:

India has large reserves of beach sand minerals in the coastal stretches

around the country. Titanium bearing minerals viz. Ilmenite, rutile and

leucoxene, and Zirconium bearing minerals including zircon are some of the

beach sand minerals which have been classified as ―prescribed substances‖

under the Atomic Energy Act, 1962.

Under the Industrial Policy Statement 1991, mining and production of

minerals classified as ―prescribed substances‖ and specified in the Schedule to

the Atomic Energy (Control of Production and Use) Order, 1953 were

included in the list of industries reserved for the public sector. Vide

Resolution No. 8/1(1)/97-PSU/1422 dated 6

October 1998 issued by the

Department of Atomic Energy laying down the policy for exploitation of 46

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

beach sand minerals, private participation including Foreign Direct

Investment (FDI), was permitted in mining and production of Titanium ores

(Ilmenite, Rutile and Leucoxene) and Zirconium minerals (Zircon).

Vide Notification No. S.O.61(E) dated 18.1.2006, the Department of

Atomic Energy re-notified the list of ―prescribed substances‖ under the

Atomic Energy Act 1962. Titanium bearing ores and concentrates (Ilmenite,

Rutile and Leucoxene) and Zirconium, its alloys and compounds and

minerals/concentrates including Zircon, were removed from the list of

―prescribed substances‖.

(i) FDI for separation of titanium bearing minerals & ores will be subject to

the following additional conditions viz.:

(A) value addition facilities are set up within India along with transfer of

technology;

(B) disposal of tailings during the mineral separation shall be carried out

in accordance with regulations framed by the Atomic Energy Regulatory

Board such as Atomic Energy (Radiation Protection) Rules, 2004 and the

Atomic Energy (Safe Disposal of Radioactive Wastes) Rules, 1987.

(ii) FDI will not be allowed in mining of ―prescribed substances‖ listed in

the Notification No. S.O. 61(E) dated 18.1.2006 issued by the Department of

Atomic Energy.

Clarification: (1) For titanium bearing ores such as Ilmenite, Leucoxene and

Rutile, manufacture of titanium dioxide pigment and titanium sponge

constitutes value addition. Ilmenite can be processed to produce 'Synthetic

Rutile or Titanium Slag as an intermediate value added product.

(2) The objective is to ensure that the raw material available in the country is

utilized for setting up downstream industries and the technology available

internationally is also made available for setting up such industries within the

country. Thus, if with the technology transfer, the objective of the FDI Policy 47

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

can be achieved, the conditions prescribed at (i) (A) above shall be deemed to

be fulfilled.

6.2.4 Petroleum & Natural Gas

6.2.4.1 Exploration activities of oil and

natural gas fields, infrastructure

related to marketing of petroleum

products and natural gas, marketing

of natural gas and petroleum

products, petroleum product

pipelines, natural gas/pipelines, LNG

Regasification infrastructure, market

study and formulation and Petroleum

refining in the private sector, subject

to the existing sectoral policy and

regulatory framework in the oil

marketing sector and the policy of

the Government on private

participation in exploration of oil and

the discovered fields of national oil

companies

100% Automatic

6.2.4.2 Petroleum refining by the Public

Sector Undertakings (PSU), without

any disinvestment or dilution of

domestic equity in the existing PSUs.

49% Government

MANUFACTURING

6.2.5 Manufacture of items reserved for production in Micro and Small

Enterprises (MSEs)

6.2.5.1 FDI in MSEs (as defined under Micro, Small And Meduim Enterprises

Development Act, 2006 (MSMED, Act 2006)) will be subject to the sectoral

caps, entry routes and other relevant sectoral regulations. Any industrial 48

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

undertaking which is not a Micro or Small Scale Enterprise, but manufactures

items reserved for the MSE sector would require Government route where

foreign investment is more than 24% in the capital. Such an undertaking

would also require an Industrial License under the Industries (Development &

Regulation) Act 1951, for such manufacture. The issue of Industrial License is

subject to a few general conditions and the specific condition that the

Industrial Undertaking shall undertake to export a minimum of 50% of the

new or additional annual production of the MSE reserved items to be achieved

within a maximum period of three years. The export obligation would be

applicable from the date of commencement of commercial production and in

accordance with the provisions of section 11 of the Industries (Development

& Regulation) Act 1951.

6.2.6 DEFENCE

6.2.6.1 Defence Industry subject to Industrial

license under the Industries

(Development & Regulation) Act

1951

26% Government

6.2.6.2 Other conditions:

(i) Licence applications will be considered and licences given by the

Department of Industrial Policy & Promotion, Ministry of Commerce

& Industry, in consultation with Ministry of Defence.

(ii) The applicant should be an Indian company / partnership firm.

(iii)The management of the applicant company / partnership should be in

Indian hands with majority representation on the Board as well as the

Chief Executives of the company / partnership firm being resident

Indians.

(iv) Full particulars of the Directors and the Chief Executives should be

furnished along with the applications.

(v) The Government reserves the right to verify the antecedents of the 49

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

foreign collaborators and domestic promoters including their financial

standing and credentials in the world market. Preference would be

given to original equipment manufacturers or design establishments,

and companies having a good track record of past supplies to Armed

Forces, Space and Atomic energy sections and having an established R

& D base.

(vi) There would be no minimum capitalization for the FDI. A proper

assessment, however, needs to be done by the management of the

applicant company depending upon the product and the technology.

The licensing authority would satisfy itself about the adequacy of the

net worth of the non-resident investor taking into account the category

of weapons and equipment that are proposed to be manufactured.

(vii) There would be a three-year lock-in period for transfer of equity from

one non-resident investor to another non-resident investor (including

NRIs & erstwhile OCBs with 60% or more NRI stake) and such

transfer would be subject to prior approval of the Government.

(viii) The Ministry of Defence is not in a position to give purchase

guarantee for products to be manufactured. However, the planned

acquisition programme for such equipment and overall requirements

would be made available to the extent possible.

(ix)The capacity norms for production will be provided in the licence

based on the application as well as the recommendations of the

Ministry of Defence, which will look into existing capacities of similar

and allied products.

(x) Import of equipment for pre-production activity including development

of prototype by the applicant company would be permitted.

(xi) Adequate safety and security procedures would need to be put in place

by the licensee once the licence is granted and production commences.

These would be subject to verification by authorized Government 50

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

agencies.

(xii) The standards and testing procedures for equipment to be produced

under licence from foreign collaborators or from indigenous R & D

will have to be provided by the licensee to the Government nominated

quality assurance agency under appropriate confidentiality clause. The

nominated quality assurance agency would inspect the finished

product and would conduct surveillance and audit of the Quality

Assurance Procedures of the licensee. Self-certification would be

permitted by the Ministry of Defence on case to case basis, which may

involve either individual items, or group of items manufactured by the

licensee. Such permission would be for a fixed period and subject to

renewals.

(xiii) Purchase preference and price preference may be given to the Public

Sector organizations as per guidelines of the Department of Public

Enterprises.

(xiv) Arms and ammunition produced by the private manufacturers will be

primarily sold to the Ministry of Defence. These items may also be

sold to other Government entities under the control of the Ministry of

Home Affairs and State Governments with the prior approval of the

Ministry of Defence. No such item should be sold within the country

to any other person or entity. The export of manufactured items would

be subject to policy and guidelines as applicable to Ordnance Factories

and Defence Public Sector Undertakings. Non-lethal items would be

permitted for sale to persons / entities other than the Central of State

Governments with the prior approval of the Ministry of Defence.

Licensee would also need to institute a verifiable system of removal of

all goods out of their factories. Violation of these provisions may lead

to cancellation of the licence. 51

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

(xv) Government decision on applications to FIPB for FDI in defence

industry sector will be normally communicated within a time frame of

10 weeks from the date of acknowledgement.

SERVICES SECTOR

INFORMATION SERVICES

6.2.7 Broadcasting

6.2.7.1 Terrestrial Broadcasting FM (FM

Radio) subject to such terms and

conditions as specified from time to

time by Ministry of Information and

Broadcasting for grant of permission

for setting up of FM Radio Stations

26% (FDI, NRI &

PIO investments and

portfolio

investment)

Government

6.2.7.2 Cable Network, subject to Cable

Television Network Rules, 1994 and

other conditions as specified from

time to time by Ministry of

Information and Broadcasting

49% (FDI, NRI &

PIO investments and

portfolio

investment)

Government

6.2.7.3 Direct–to-Home subject to such

guidelines/terms and conditions as

specified from time to time by

Ministry of Information and

Broadcasting

49% (FDI, NRI &

PIO investments and

portfolio

investment)

Within this limit,

FDI component not

to exceed

20%

Government

6.2.7.4 Headend-In-The-Sky (HITS) Broadcasting Service refers to the

multichannel downlinking and distribution of television programme in CBand 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. At the cable headend these encrypted pay channels are downlinked

using a single satellite antenna, transmodulated and sent to the subscribers by

using a land based transmission system comprising of infrastructure of

cable/optical fibres network.

6.2.7.4.1 FDI limit in (HITS) Broadcasting

Service is subject to such

guidelines/terms and conditions as

specified from time to time by

Ministry of Information and

74% (total direct and

indirect foreign

investment including

portfolio and FDI)

Automatic up

to 49%

Government

route beyond 52

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

Broadcasting. 49% and up to

74%

6.2.7.5 Setting up hardware facilities such

as up-linking, HUB etc.

(1) Setting up of Up-linking HUB/

Teleports

49% (FDI & FII) Government

(2) Up-linking a Non-News &

Current Affairs TV Channel

100% Government

(3) Up-linking a News & Current

Affairs TV Channel subject to the

condition that the portfolio

investment from FII/ NRI shall not

be ―persons acting in concert‖ with

FDI investors, as defined in the

SEBI(Substantial Acquisition of

Shares and Takeovers) Regulations,

1997

26% (FDI & FII) Government

6.2.7.5.1 Other conditions:

(i) All the activities at (1), (2) and (3) above will be further subject to the

condition that the Company permitted to uplink the channel shall

certify the continued compliance of this requirement through the

Company Secretary at the end of each financial year.

(ii) FDI for Up-linking TV Channels will be subject to compliance with

the Up-linking Policy notified by the Ministry of Information &

Broadcasting from time to time.

6.2.8 Print Media

6.2.8.1 Publishing of Newspaper and

periodicals dealing with news and

current affairs

26% (FDI and

investment by

NRIs/PIOs/FII)

Government

6.2.8.2 Publication of Indian editions of

foreign magazines dealing with news

and current affairs

26% (FDI and

investment by

NRIs/PIOs/FII)

Government

6.2.8.2.1 Other Conditions:

(i) ‗Magazine‘, for the purpose of these guidelines, will be defined as a

periodical publication, brought out on non-daily basis, containing

public news or comments on public news.

(ii) Foreign investment would also be subject to the Guidelines for

Publication of Indian editions of foreign magazines dealing with news 53

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

and current affairs issued by the Ministry of Information &

Broadcasting on 4.12.2008.

6.2.8.3 Publishing/printing of Scientific and

Technical Magazines/specialty

journals/ periodicals, subject to

compliance with the legal framework

as applicable and guidelines issued in

this regard from time to time by

Ministry of Information and

Broadcasting.

100% Government

6.2.8.4 Publication of facsimile edition of

foreign newspapers

100% Government

6.2.8.4.1 Other Conditions:

(i) FDI should be made by the owner of the original foreign newspapers

whose facsimile edition is proposed to be brought out in India.

(ii) Publication of facsimile edition of foreign newspapers can be

undertaken only by an entity incorporated or registered in India under

the provisions of the Companies Act, 1956.

(iii) Publication of facsimile edition of foreign newspaper would also 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 Information &

Broadcasting on 31.3.2006, as amended from time to time.

6.2.9 Civil Aviation

6.2.9.1

The Civil Aviation sector includes Airports, Scheduled and Non-Scheduled

domestic passenger airlines, Helicopter services / Seaplane services, Ground

Handling Services, Maintenance and Repair organizations; Flying training

institutes; and Technical training institutions.

For the purposes of the Civil Aviation sector:

(i) ―Airport‖ means a landing and taking off area for aircrafts, usually with 54

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

runways and aircraft maintenance and passenger facilities and includes

aerodrome as defined in clause (2) of section 2 of the Aircraft Act, 1934;

(ii) "Aerodrome" means any definite or limited ground or water area

intended to be used, either wholly or in part, for the landing or departure

of aircraft, and includes all buildings, sheds, vessels, piers and other

structures thereon or pertaining thereto;

(iii)"Air transport service" means a service for the transport by air of

persons, mails or any other thing, animate or inanimate, for any kind of

remuneration whatsoever, whether such service consists of a single

flight or series of flights;

(iv)"Air Transport Undertaking" means an undertaking whose business

includes the carriage by air of passengers or cargo for hire or reward;

(v) "Aircraft component" means any part, the soundness and correct

functioning of which, when fitted to an aircraft, is essential to the

continued airworthiness or safety of the aircraft and includes any item of

equipment;

(vi)"Helicopter" means a heavier-than -air aircraft supported in flight by the

reactions of the air on one or more power driven rotors on substantially

vertical axis;

(vii) "Scheduled air transport service" means an air transport service

undertaken between the same two or more places and operated

according to a published time table or with flights so regular or frequent

that they constitute a recognizably systematic series, each flight being

open to use by members of the public;

(viii) ―Non-Scheduled Air Transport service‖ means any service which is

not a scheduled air transport service and will include Cargo airlines;

(ix)―Cargo airlines‖ would mean such airlines which meet the conditions as

given in the Civil Aviation Requirements issued by the Ministry of Civil

Aviation; 55

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Entry Route

(x) "Seaplane" means an aeroplane capable normally of taking off from and

alighting solely on water;

(xi)―Ground Handling‖ means (i) ramp handling , (ii) traffic handling both

of which shall include the activities as specified by the Ministry of Civil

Aviation through the Aeronautical Information Circulars from time to

time, and (iii) any other activity specified by the Central Government to

be a part of either ramp handling or traffic handling.

6.2.9.2 Airports

(a) Greenfield projects 100% Automatic

(b) Existing projects 100% Automatic up

to 74%

Government

route beyond

74%

6.2.9.3 Air Transport Services

(a) Air Transport Services would include Domestic Scheduled Passenger

Airlines; Non-Scheduled Air Transport Services, helicopter and

seaplane services.

(b) No foreign airlines would be allowed to participate directly or indirectly

in the equity of an Air Transport Undertaking engaged in operating

Scheduled and Non-Scheduled Air Transport Services except Cargo

airlines.

operating Cargo airlines, helicopter and seaplane services.

(1) Scheduled Air Transport Service/

Domestic Scheduled Passenger

Airline

49% FDI

(100% for NRIs)

Automatic

(2) Non-Scheduled Air Transport

Service

74% FDI

(100% for NRIs)

Automatic up

to 49%

Government

route beyond

49% and up to 56

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

74%

(3) Helicopter services/seaplane

services requiring DGCA approval

100% Automatic

6.2.9.4 Other services under Civil Aviation sector

(1) Ground Handling Services

subject to sectoral regulations and

security clearance

74% FDI

(100% for NRIs)

Automatic up

to 49%

Government

route beyond

49% and up to

74%

(2) Maintenance and Repair

organizations; flying training

institutes; and technical training

institutions

100% Automatic

6.2.10 Courier services for carrying

packages, parcels and other items

which do not come within the

ambit of the Indian Post Office

Act, 1898 and excluding the

activity relating to the distribution

of letters.

100% Government

6.2.11 Construction Development: Townships, Housing, Built-up infrastructure

6.2.11.1 Townships, housing, built-up

infrastructure and constructiondevelopment projects (which would

include, but not be restricted to,

housing, commercial premises,

hotels, resorts, hospitals, educational

institutions, recreational facilities,

city and regional level infrastructure)

100% Automatic

6.2.11.2 Investment will be subject to the following conditions:

(1) Minimum area to be developed under each project would be as under:

(i) In case of development of serviced housing plots, a minimum land

area of 10 hectares

(ii) In case of construction-development projects, a minimum built-up area

of 50,000 sq.mts 57

Sl.No. Sector/Activity % of FDI

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(iii)In case of a combination project, any one of the above two conditions

would suffice

(2) Minimum capitalization of US$10 million for wholly owned subsidiaries

and US$ 5 million for joint ventures with Indian partners. The funds would

have to be brought in within six months of commencement of business of the

Company.

(3) Original investment cannot be repatriated before a period of three years

from completion of minimum capitalization. Original investment means the

entire amount brought in as FDI. The lock-in period of three years will be

applied from the date of receipt of each installment/tranche of FDI or from the

date of completion of minimum capitalization, whichever is later. However,

the investor may be permitted to exit earlier with prior approval of the

Government through the FIPB.

(4) At least 50% of each such project must be developed within a period of

five years from the date of obtaining all statutory clearances. The

investor/investee company would not be permitted to sell undeveloped plots.

For the purpose of these guidelines, ―undeveloped plots‖ will mean where

roads, water supply, street lighting, drainage, sewerage, and other

conveniences, as applicable under prescribed regulations, have not been made

available. It will be necessary that the investor provides this infrastructure

and obtains the completion certificate from the concerned local body/service

agency before he would be allowed to dispose of serviced housing plots.

(5) The project shall conform to the norms and standards, including land use

requirements and provision of community amenities and common facilities, as

laid down in the applicable building control regulations, bye-laws, rules, and

other regulations of the State Government/Municipal/Local Body concerned.

(6) The investor/investee company shall be responsible for obtaining all

necessary approvals, including those of the building/layout plans, developing 58

Sl.No. Sector/Activity % of FDI

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Entry Route

internal and peripheral areas and other infrastructure facilities, payment of

development, external development and other charges and complying with all

other requirements as prescribed under applicable rules/bye-laws/regulations

of the State Government/ Municipal/Local Body concerned.

(7) The State Government/ Municipal/ Local Body concerned, which approves

the building / development plans, would monitor compliance of the above

conditions by the developer.

Note:

(i) The conditions at (1) to (4) above would not apply to Hotels & Tourism,

Hospitals, Special Economic Zones (SEZs), Education Sector, Old age

Homes and investment by NRIs.

(ii) FDI is not allowed in Real Estate Business.

6.2.12 Industrial Parks – new and existing

100% Automatic

6.2.12.1 (i) ―Industrial Park‖ is a project in which quality infrastructure in the

form of plots of developed land or built up space or a combination

with common facilities, is developed and made available to all the

allottee units for the purposes of industrial activity.

(ii) ―Infrastructure‖ refers to facilities required for functioning of units

located in the Industrial Park and includes roads (including approach

roads), water supply and sewerage, common effluent treatment

facility, telecom network, generation and distribution of power, air

conditioning.

(iii)―Common Facilities‖ refer to the facilities available for all the units

located in the industrial park, and include facilities of power, roads

(including approach roads), water supply and sewerage, common

effluent treatment, common testing, telecom services, air conditioning,

common facility buildings, industrial canteens, convention/conference

halls, parking, travel desks, security service, first aid center, 59

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

ambulance and other safety services, training facilities and such other

facilities meant for common use of the units located in the Industrial

Park.

(iv)―Allocable area‖ in the Industrial Park means-

(a) in the case of plots of developed land- the net site area available for

allocation to the units, excluding the area for common facilities.

(b) in the case of built up space- the floor area and built up space

utilized for providing common facilities.

(c) in the case of a combination of developed land and built-up spacethe net site and floor area available for allocation to the units

excluding the site area and built up space utilized for providing

common facilities.

(v) ―Industrial Activity‖ means manufacturing; electricity; gas and water

supply; post and telecommunications; software publishing,

consultancy and supply; data processing, database activities and

distribution of electronic content; other computer related activities;

basic and applied R&D on bio-technology, pharmaceutical

sciences/life sciences, natural sciences and engineering; business and

management consultancy activities; and architectural, engineering and

other technical activities.

6.2.12.2 FDI in Industrial Parks would not be subject to the conditionalities applicable

for construction development projects etc. spelt out in para 6.2.11 above,

provided the Industrial Parks meet with the under-mentioned conditions:

(i) it would comprise of a minimum of 10 units and no single unit shall

occupy more than 50% of the allocable area;60

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(ii) the minimum percentage of the area to be allocated for industrial

activity shall not be less than 66% of the total allocable area.

6.2.13 Satellites – Establishment and operation

6.2.13.1 Satellites – Establishment and

operation, subject to the sectoral

guidelines of Department of

Space/ISRO

74% Government

6.2.14 Private Security Agencies 49 % Government

6.2.15 Telecom Services

Investment caps and other conditions for specified services are given below.

However, licensing and security requirements notified by the Department of

Telecommunications will need to be complied with for all services.

6.2.15.1 (i) Telecom services 74% Automatic up

to 49%

Government

route beyond

49% and up to

74%

6.2.15.1.1 Other conditions:

(1) General Conditions:

(i) This is applicable in case of Basic, Cellular, Unified Access Services,

National/ International Long Distance, V-Sat, Public Mobile Radio

Trunked Services (PMRTS), Global Mobile Personal Communications

Services (GMPCS) and other value added Services.

(ii) Both direct and indirect foreign investment in the licensee company

shall be counted for the purpose of FDI ceiling. Foreign Investment

shall include investment by Foreign Institutional Investors (FIIs), Nonresident Indians (NRIs), Foreign Currency Convertible Bonds

(FCCBs), American Depository Receipts (ADRs), Global Depository

Receipts (GDRs) and convertible preference shares held by foreign 61

Sl.No. Sector/Activity % of FDI

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Entry Route

entity. In any case, the `Indian‘ shareholding will not be less than 26

percent.

(iii) FDI in the licensee company/Indian promoters/investment companies

including their holding companies shall require approval of the

Foreign Investment Promotion Board (FIPB) if it has a bearing on the

overall ceiling of 74 percent. While approving the investment

proposals, FIPB shall take note that investment is not coming from

countries of concern and/or unfriendly entities.

(iv) The investment approval by FIPB shall envisage the conditionality

that Company would adhere to licence Agreement.

(v) FDI shall be subject to laws of India and not the laws of the foreign

country/countries.

(2) Security Conditions:

(i) The Chief Officer In-charge of technical network operations and the

Chief Security Officer should be a resident Indian citizen.

(ii) Details of infrastructure/network diagram (technical details of the

network) could be provided on a need basis only to telecom equipment

suppliers/manufacturers and the affiliate/parents of the licensee

company. Clearance from the licensor (Department of

Telecommunications) would be required if such information is to be

provided to anybody else.

(iii)For security reasons, domestic traffic of such entities as may be

identified /specified by the licensor shall not be hauled/routed to any

place outside India.

(iv)The licensee company shall take adequate and timely measures to

ensure that the information transacted through a network by the

subscribers is secure and protected.62

Sl.No. Sector/Activity % of FDI

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(v) The officers/officials of the licensee companies dealing with the lawful

interception of messages will be resident Indian citizens.

(vi)The majority Directors on the Board of the company shall be Indian

citizens.

(vii) The positions of the Chairman, Managing Director, Chief Executive

Officer (CEO) and/or Chief Financial Officer (CFO), if held by

foreign nationals, would require to be security vetted by Ministry of

Home Affairs (MHA). Security vetting shall be required periodically

on yearly basis. In case something adverse is found during the

security vetting, the direction of MHA shall be binding on the

licensee.

(viii) The Company shall not transfer the following to any person/place

outside India:-

(a) Any accounting information relating to subscriber (except for

international roaming/billing) (Note: it does not restrict a

statutorily required disclosure of financial nature) ; and

(b) User information (except pertaining to foreign subscribers

using Indian Operator‘s network while roaming).

(ix)The Company must provide traceable identity of their subscribers.

However, in case of providing service to roaming subscriber of foreign

Companies, the Indian Company shall endeavour to obtain traceable

identity of roaming subscribers from the foreign company as a part of

its roaming agreement.

(x) On request of the licensor or any other agency authorised by the

licensor, the telecom service provider should be able to provide the

geographical location of any subscriber (BTS location) at a given point

of time.63

Sl.No. Sector/Activity % of FDI

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Entry Route

(xi)The Remote Access (RA) to Network would be provided only to

approved location(s) abroad through approved location(s) in India.

The approval for location(s) would be given by the Licensor (DOT)

in consultation with the Ministry of Home Affairs.

(xii) Under no circumstances, should any RA to the

suppliers/manufacturers and affiliate(s) be enabled to access Lawful

Interception System(LIS), Lawful Interception Monitoring(LIM),

Call contents of the traffic and any such sensitive sector/data, which

the licensor may notify from time to time.

(xiii) The licensee company is not allowed to use remote access facility for

monitoring of content.

(xiv) Suitable technical device should be made available at Indian end to

the designated security agency /licensor in which a mirror image of

the remote access information is available on line for monitoring

purposes.

(xv) Complete audit trail of the remote access activities pertaining to the

network operated in India should be maintained for a period of six

months and provided on request to the licensor or any other agency

authorised by the licensor.

(xvi) The telecom service providers should ensure that necessary

provision (hardware/software) is available in their equipment for

doing the Lawful interception and monitoring from a centralized

location.

(xvii)The telecom service providers should familiarize/train Vigilance

Technical Monitoring (VTM)/security agency officers/officials in

respect of relevant operations/features of their systems.

(xviii) It shall be open to the licensor to restrict the Licensee Company 64

Sl.No. Sector/Activity % of FDI

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from operating in any sensitive area from the National Security angle.

(xix) In order to maintain the privacy of voice and data, monitoring shall

only be upon authorisation by the Union Home Secretary or Home

Secretaries of the States/Union Territories.

(xx) For monitoring traffic, the licensee company shall provide access of

their network and other facilities as well as to books of accounts to

the security agencies.

(xxi) The aforesaid Security Conditions shall be applicable to all the

licensee companies operating telecom services covered under this

circular irrespective of the level of FDI.

(xxii)Other Service Providers (OSPs), providing services like Call

Centres, Business Process Outsourcing (BPO), tele-marketing, teleeducation, etc, and are registered with DoT as OSP. Such OSPs

operate the service using the telecom infrastructure provided by

licensed telecom service providers and 100% FDI is permitted for

OSPs. As the security conditions are applicable to all licensed

telecom service providers, the security conditions mentioned above

shall not be separately enforced on OSPs.

(3) The above General Conditions and Security Conditions shall also be

applicable to the companies operating telecom service(s) with the FDI cap of

49%.

(4) All the telecom service providers shall submit a compliance report on

the aforesaid conditions to the licensor on 1

day of July and January on six

monthly basis.

6.2.15.2 (a) ISP with gateways

(b) ISP‘s not providing gateways i.e.

without gate-ways (both for satellite

74% Automatic up

to 49%

Government

route beyond

49% and up to 65

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

and marine cables)

Note: The new guidelines of

August 24, 2007 Department of

Telecommunications provide for

new ISP licenses with FDI up to

74%.

(d) End-to-End bandwidth

74%

6.2.15.3 (a) Infrastructure provider

providing dark fibre, right of way,

duct space, tower (IP Category I)

(b)Electronic Mail

Note: Investment in all the above

activities is subject to the conditions

that such companies will divest 26%

of their equity in favour of Indian

public in 5 years, if these companies

are listed in other parts of the world.

100% Automatic up

to 49%

Government

route beyond

49%

6.2.16 TRADING

6.2.16.1 (i) Cash & Carry Wholesale

Trading/ Wholesale Trading

(including sourcing from MSEs)

100% Automatic

6.2.16.1.1 Definition: Cash & Carry Wholesale trading/Wholesale trading, would 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. The yardstick to determine whether the

sale is wholesale or not would be the type of customers to whom the sale is

made and not the size and volume of sales. Wholesale trading would include 66

Sl.No. Sector/Activity % of FDI

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Entry Route

resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded

warehouse business sales and B2B e-Commerce.

6.2.16.1.2 Guidelines for Cash & Carry Wholesale Trading/Wholesale Trading

(WT):

(a) For undertaking WT, requisite licenses/registration/ permits, as

specified under the relevant Acts/Regulations/Rules/Orders of the

State Government/Government Body/Government Authority/Local

Self-Government Body under that State Government should be

obtained.

(b) Except in case of sales to Government, sales made by the wholesaler

would be considered as ‗cash & carry wholesale trading/wholesale

trading‘ with valid business customers, only when WT are made to

the following entities:

(I) Entities holding sales tax/ VAT registration/service

tax/excise duty registration; or

(II) Entities holding trade licenses i.e. a license/registration

certificate/membership certificate/registration under Shops and

Establishment Act, issued by a Government Authority/ Government

Body/ Local Self-Government Authority, reflecting that the

entity/person holding the license/ registration certificate/ membership

certificate, as the case may be, is itself/ himself/herself engaged in a

business involving commercial activity; or

(III) Entities holding permits/license etc. for undertaking retail

trade (like tehbazari and similar license for hawkers) from

Government Authorities/Local Self Government Bodies; or

(IV) Institutions having certificate of incorporation or

registration as a society or registration as public trust for their self

consumption.

Note: An Entity, to whom WT is made, may fulfill any one of 67

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the 4 conditions.

( c) Full records indicating all the details of such sales like name of entity,

kind of entity, registration/license/permit etc. number, amount of sale

etc. should be maintained on a day to day basis.

(d) WT of goods would be permitted among companies of the same group.

However, such WT to group companies taken together should not

exceed 25% of the total turnover of the wholesale venture

(e) WT can be undertaken as per normal business practice, including

extending credit facilities subject to applicable regulations.

(f) A Wholesale/Cash & carry trader cannot open retail shops to sell to the

consumer directly.

6.2.16.2 E-commerce activities 100% Automatic

6.2.16.2.1

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, inter-alia

implying that existing restrictions on FDI in domestic trading would be

applicable to e-commerce as well.

6.2.16.3 Test marketing of such items for

which a company has approval for

manufacture, provided such test

marketing facility will be for a period

of two years, and investment in

setting up manufacturing facility

commences simultaneously with test

marketing.

100% Government

6.2.16.4 Single Brand product retail

trading

100% Government

(1) Foreign Investment in Single Brand product retail trading is aimed at 68

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Entry Route

attracting investments in production and marketing, improving the availability

of such goods for the consumer, encouraging increased sourcing of goods

from India, and enhancing competitiveness of Indian enterprises through

access to global designs, technologies and management practices.

(2) FDI in Single Brand product retail trading would be subject to the

following conditions:

(a) Products to be sold should be of a ‗Single Brand‘ only.

(b) Products should be sold under the same brand internationally i.e.

products should be sold under the same brand in one or more countries

other than India.

are branded during manufacturing.

(d) The foreign investor should be the owner of the brand.

(e) In respect of proposals involving FDI beyond 51%, mandatory

sourcing of at least 30% of the value of products sold would have to be

done from Indian ‗small industries/ village and cottage industries,

artisans and craftsmen‘. 'Small industries' would be defined as industries

which have a total investment in plant & machinery not exceeding US $

1.00 million. This valuation refers to the value at the time of installation,

without providing for depreciation. Further, if at any point in time, this

valuation is exceeded, the industry shall not qualify as a 'small industry'

for this purpose. The compliance of this condition will be ensured

through self-certification by the company, to be subsequently checked,

by statutory auditors, from the duly certified accounts, which the

company will be required to maintain.

(3) Application seeking permission of the Government for FDI in retail trade

of ‗Single Brand‘ products would be made to the Secretariat for Industrial

Assistance (SIA) in the Department of Industrial Policy & Promotion. The

application would specifically indicate the product/ product categories which 69

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are proposed to be sold under a ‗Single Brand‘. Any addition to the product/

product categories to be sold under ‗Single Brand‘ would require a fresh

approval of the Government.

(4) Applications would be processed in the Department of Industrial Policy &

Promotion, to determine whether the products proposed to be sold satisfy the

notified guidelines, before being considered by the FIPB for Government

approval.

FINANCIAL SERVICES

Foreign investment in other financial services , other than those indicated

below, would require prior approval of the Government:

6.2.17 Asset Reconstruction Companies

6.2.17.1 ‗Asset Reconstruction Company‘

(ARC) means a company registered

with the Reserve Bank of India under

Section 3 of the Securitisation and

Reconstruction of Financial Assets

and Enforcement of Security Interest

Act, 2002 (SARFAESI Act).

49% of paid-up

capital of ARC

Government

6.2.17.2 Other conditions:

(i) Persons resident outside India, other than Foreign Institutional Investors

(FIIs), can invest in the capital of Asset Reconstruction Companies (ARCs)

registered with Reserve Bank only under the Government Route. Such

investments have to be strictly in the nature of FDI. Investments by FIIs are

not permitted in the equity capital of ARCs.

(ii) However, FIIs registered with SEBI can invest in the Security Receipts

(SRs) issued by ARCs registered with Reserve Bank. FIIs can invest up to 49

per cent of each tranche of scheme of SRs, subject to the condition that

investment by a single FII in each tranche of SRs shall not exceed 10 per cent 70

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of the issue.

(iii)Any individual investment of more than 10% would be subject to

provisions of section 3(3) (f) of Securitization and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002.

6.2.18 Banking –Private sector

6.2.18.1 Banking –Private sector 74% including

investment by FIIs

Automatic up

to 49%

Government

route beyond

49% and up to

74%

6.2.18.2 Other conditions:

(1) This 74% limit will include investment under the Portfolio Investment

Scheme (PIS) by FIIs, NRIs and shares acquired prior to September 16, 2003

by erstwhile OCBs, and continue to include IPOs, Private placements,

GDR/ADRs and acquisition of shares from existing shareholders.

(2) The aggregate foreign investment in a private bank from all sources will

be allowed up to a maximum of 74 per cent of the paid up capital of the Bank.

At all times, at least 26 per cent of the paid up capital will have to be held by

residents, except in regard to a wholly-owned subsidiary of a foreign bank.

(3) The stipulations as above will be applicable to all investments in existing

private sector banks also.

(4) The permissible limits under portfolio investment schemes through stock

exchanges for FIIs and NRIs will be as follows:

(i) In the case of FIIs, as hitherto, individual FII holding is restricted to 10

per cent of the total paid-up capital, aggregate limit for all FIIs cannot

exceed 24 per cent of the total paid-up capital, which can be raised to

49 per cent of the total paid-up capital by the bank concerned through

a resolution by its Board of Directors followed by a special resolution

to that effect by its General Body. 71

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(a) Thus, the FII investment limit will continue to be within 49 per

cent of the total paid-up capital.

(b) In the case of NRIs, as hitherto, individual holding is restricted to 5

per cent of the total paid-up capital both on repatriation and nonrepatriation basis and aggregate limit cannot exceed 10 per cent of

the total paid-up capital both on repatriation and non-repatriation

basis. However, NRI holding can be allowed up to 24 per cent of

the total paid-up capital both on repatriation and non-repatriation

basis provided the banking company passes a special resolution to

that effect in the General Body.

joint venture/subsidiary in insurance sector may be addressed to

the Reserve Bank of India (RBI) for consideration in consultation

with the Insurance Regulatory and Development Authority (IRDA)

in order to ensure that the 26 per cent limit of foreign shareholding

applicable for the insurance sector is not being breached.

(d) Transfer of shares under FDI from residents to non-residents will

continue to require approval of RBI and Government as per para

3.6.2 above as applicable.

(e) The policies and procedures prescribed from time to time by RBI

and other institutions such as SEBI, D/o Company Affairs and

IRDA on these matters will continue to apply.

(f) RBI guidelines relating to acquisition by purchase or otherwise of

shares of a private bank, if such acquisition results in any person

owning or controlling 5 per cent or more of the paid up capital of

the private bank will apply to non-resident investors as well.

(ii) Setting up of a subsidiary by foreign banks

(a) Foreign banks will be permitted to either have branches or 72

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Entry Route

subsidiaries but not both.

(b) Foreign banks regulated by banking supervisory authority in the

home country and meeting Reserve Bank‘s licensing criteria will

be allowed to hold 100 per cent paid up capital to enable them to

set up a wholly-owned subsidiary in India.

channels viz., (i) branches (ii) a wholly-owned subsidiary and (iii)

a subsidiary with aggregate foreign investment up to a maximum

of 74 per cent in a private bank.

(d) A foreign bank will be permitted to establish a wholly-owned

subsidiary either through conversion of existing branches into a

subsidiary or through a fresh banking license. A foreign bank will

be permitted to establish a subsidiary through acquisition of shares

of an existing private sector bank provided at least 26 per cent of

the paid capital of the private sector bank is held by residents at all

times consistent with para (i) (b) above.

(e) A subsidiary of a foreign bank will be subject to the licensing

requirements and conditions broadly consistent with those for new

private sector banks.

(f) Guidelines for setting up a wholly-owned subsidiary of a foreign

bank will be issued separately by RBI

(g) All applications by a foreign bank for setting up a subsidiary or for

conversion of their existing branches to subsidiary in India will

have to be made to the RBI.

(iii) At present there is a limit of ten per cent on voting rights in respect of

banking companies, and this should be noted by potential investor.

Any change in the ceiling can be brought about only after final policy

decisions and appropriate Parliamentary approvals.

6.2.19 Banking- Public Sector

6.2.19.1 Banking- Public Sector subject to 20% (FDI and Government73

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Entry Route

Banking Companies (Acquisition &

Transfer of Undertakings) Acts

1970/80. This ceiling (20%) is also

applicable to the State Bank of India

and its associate Banks.

Portfolio

Investment)

6.2.20 Commodity Exchanges

6.2.20.1 1 Futures trading in commodities are regulated under the Forward Contracts

(Regulation) Act, 1952. Commodity Exchanges, like Stock Exchanges, are

infrastructure companies in the commodity futures market. With a view to

infuse globally acceptable best practices, modern management skills and latest

technology, it was decided to allow foreign investment in Commodity

Exchanges.

2 For the purposes of this chapter,

(i) ―Commodity Exchange‖ is a recognized association under the

provisions of the Forward Contracts (Regulation) Act, 1952, as

amended from time to time, to provide exchange platform for trading

in forward contracts in commodities.

(ii) ―recognized association‖ means an association to which recognition

for the time being has been granted by the Central Government under

Section 6 of the Forward Contracts (Regulation) Act, 1952

(iii) ―Association‖ means any body of individuals, whether incorporated or

not, constituted for the purposes of regulating and controlling the

business of the sale or purchase of any goods and commodity

derivative.

(iv)―Forward contract‖ means a contract for the delivery of goods and

which is not a ready delivery contract.

(v) ―Commodity derivative‖ means-

 a contract for delivery of goods, which is not a ready delivery contract;

or74

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

 a contract for differences which derives its value from prices or indices

of prices of such underlying goods or activities, services, rights,

interests and events, as may be notified in consultation with the

Forward Markets Commission by the Central Government, but does

not include securities.

6.2.20.2 Policy for FDI in Commodity

Exchange

49% (FDI & FII)

[Investment by

Registered FII under

Portfolio Investment

Scheme (PIS) will

be limited to 23%

and Investment

under FDI Scheme

limited to 26% ]

Government

(For FDI)

6.2.20.3 Other conditions:

(i) FII purchases shall be restricted to secondary market only and

(ii) No non-resident investor/ entity, including persons acting in

concert, will hold more than 5% of the equity in these

companies.

6.2.21 Credit Information Companies (CIC)

6.2.21.1 Credit Information Companies 49% (FDI & FII) Government

6.2.21.2 Other Conditions:

(1) Foreign investment in Credit Information Companies is subject to the

Credit Information Companies (Regulation) Act, 2005.

(2) Foreign investment is permitted under the Government route, subject to

regulatory clearance from RBI.

(3) Investment by a registered FII under the Portfolio Investment Scheme

would be permitted up to 24% only in the CICs listed at the Stock Exchanges,

within the overall limit of 49% for foreign investment.

(4) Such FII investment would be permitted subject to the conditions that:

(a) No single entity should directly or indirectly hold more than 10%

equity.75

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

(b) Any acquisition in excess of 1% will have to be reported to RBI as a

mandatory requirement; and

of Directors based upon their shareholding.

6.2.22 Infrastructure Company in the Securities Market

6.2.22.1 Infrastructure companies in

Securities Markets, namely, stock

exchanges, depositories and clearing

corporations, in compliance with

SEBI Regulations

49% (FDI & FII)

[FDI limit of 26 per

cent and an FII limit

of 23 per cent of the

paid-up capital ]

Government

(For FDI)

6.2.22.2 Other Conditions:

6.2.22.2.1 FII can invest only through purchases in the secondary market

6.2.23 Insurance

6.2.23.1 Insurance 26% Automatic

6.2.23.2 Other Conditions:

(1) FDI in the Insurance sector, as prescribed in the Insurance Act, 1938, is

allowed under the automatic route.

(2) This will be subject to the condition that Companies bringing in FDI shall

obtain necessary license from the Insurance Regulatory & Development

Authority for undertaking insurance activities.

6.2.24 Non-Banking Finance Companies (NBFC)

6.2.24.1 Foreign investment in NBFC is

allowed under the automatic route in

only the following activities:

(i) Merchant Banking

(ii) Under Writing

(iii) Portfolio Management

Services

(iv)Investment Advisory Services

(v) Financial Consultancy

100% Automatic76

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

(vi)Stock Broking

(vii) Asset Management

(viii) Venture Capital

(ix) Custodian Services

(x) Factoring

(xi) Credit Rating Agencies

(xii) Leasing & Finance

(xiii) Housing Finance

(xiv) Forex Broking

(xv) Credit Card Business

(xvi) Money Changing Business

(xvii) Micro Credit

(xviii) Rural Credit

6.2.24.2 Other Conditions:

(1) Investment would be subject to the following minimum capitalisation

norms:

(i) US $0.5 million for foreign capital up to 51% to be brought upfront

(ii) US $ 5 million for foreign capital more than 51% and up to 75% to be

brought upfront

(iii)US $ 50 million for foreign capital more than 75% out of which US$

7.5 million to be brought upfront and the balance in 24 months.

(iv)100% foreign owned NBFCs with a minimum capitalisation of US$ 50

million can set up step down subsidiaries for specific NBFC activities,

without any restriction on the number of operating subsidiaries and

without bringing in additional capital. The minimum capitalization

condition as mandated by para 3.10.4.1, therefore, shall not apply 77

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

to downstream subsidiaries.

(v) Joint Venture operating NBFCs that have 75% or less than 75%

foreign investment can also set up subsidiaries for undertaking other

NBFC activities, subject to the subsidiaries also complying with the

applicable minimum capitalisation norm mentioned in (i), (ii) and (iii)

above and (vi) below.

(vi)Non- Fund based activities : US $0.5 million to be brought upfront for

all permitted non-fund based NBFCs irrespective of the level of

foreign investment subject to the following condition:

It would not be permissible for such a company to set up any

subsidiary for any other activity, nor it can participate in any equity

of an NBFC holding/operating company.

Note: The following activities would be classified as Non-Fund Based

activities:

(a) Investment Advisory Services

(b) Financial Consultancy

(d) Money Changing Business

(e) Credit Rating Agencies

(vii) This will be subject to compliance with the guidelines of RBI.

Note: (i) Credit Card business includes issuance, sales, marketing & design of

various payment products such as credit cards, charge cards, debit cards,

stored value cards, smart card, value added cards etc.

(ii) Leasing & Finance covers only financial leases and not operating leases. 78

Sl.No. Sector/Activity % of FDI

Cap/Equity

Entry Route

(2) The NBFC will have to comply with the guidelines of the relevant

regulator/ s, as applicable

6.2.25 Pharmaceuticals

6.2.25.1 Greenfield 100% Automatic

6.2.25.2 Existing Companies 100% Government79

CHAPTER 7: REMITTANCE, REPORTING AND VIOLATION

7.1 REMITTANCE AND REPATRIATION

7.1.1 Remittance of sale proceeds/Remittance on winding up/Liquidation of Companies:

(i) Sale proceeds of shares and securities and their remittance is ‗remittance of asset‘

governed by The Foreign Exchange Management (Remittance of Assets) Regulations

2000 under FEMA.

(ii) AD Category-I bank can allow the remittance of sale proceeds of a security (net of

applicable taxes) to the seller of shares resident outside India, provided the security has

been held on repatriation basis, the sale of security has been made in accordance with the

prescribed guidelines and NOC / tax clearance certificate from the Income Tax

Department has been produced.

(iii) Remittance on winding up/liquidation of Companies

AD Category-I banks have been allowed to remit winding up proceeds of companies in

India, which are under liquidation, subject to payment of applicable taxes. Liquidation

may be subject to any order issued by the court winding up the company or the

official liquidator in case of voluntary winding up under the provisions of the

Companies Act, 1956. AD Category-I banks shall allow the remittance provided the

applicant submits:

a. No objection or Tax clearance certificate from Income Tax Department for

the remittance.

b. Auditor's certificate confirming that all liabilities in India have been either fully

paid or adequately provided for.

c. Auditor's certificate to the effect that the winding up is in accordance with

the provisions of the Companies Act, 1956.

d. In case of winding up otherwise than by a court, an auditor's certificate to the

effect that there are 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.80

7.1.2 Repatriation of Dividend: Dividends are freely repatriable without any restrictions (net

after Tax deduction at source or Dividend Distribution Tax, if any, as the case may be). The

repatriation is governed by the provisions of the Foreign Exchange Management (Current

Account Transactions) Rules, 2000, as amended from time to time.

7.1.3 Repatriation of Interest: Interest on fully, mandatorily & compulsorily convertible

debentures is also freely repatriable without any restrictions (net of applicable taxes). The

repatriation is governed by the provisions of the Foreign Exchange Management (Current

Account Transactions) Rules, 2000, as amended from time to time.

7.2. REPORTING OF FDI

7.2.1 Reporting of Inflow

(i) An Indian company receiving investment from outside India for issuing shares /

convertible debentures / preference shares under the FDI Scheme, should report the

details of the amount of consideration to the Regional Office concerned of the Reserve

Bank not later than 30 days from the date of receipt in the Advance Reporting Form

enclosed as Annex-5.

(ii) Indian companies are required to report the details of the receipt of the amount of

consideration for issue of shares / convertible debentures, through an AD Category-I

bank, together with a copy/ies of the FIRC/s evidencing the receipt of the remittance

along with the KYC report (enclosed as Annex-6) on the non-resident investor from the

overseas bank remitting the amount. The report would be acknowledged by the Regional

Office concerned, which will allot a Unique Identification Number (UIN) for the amount

reported.

7.2.2 Reporting of issue of shares

(i) After issue of shares (including bonus and shares issued on rights basis and shares issued

under ESOP)/fully, mandatorily & compulsorily convertible debentures / fully,

mandatorily & compulsorily convertible preference shares, the Indian company has to file

Form FC-GPR, enclosed in Annex-1, not later than 30 days from the date of issue of

shares.

(ii) Form FC-GPR has to be duly filled up and signed by Managing

Director/Director/Secretary of the Company and submitted to the Authorized Dealer of 81

the company, who will forward it to the Reserve Bank. The following documents have to

be submitted along with the form:

(a) A certificate from the Company Secretary of the company certifying that:

(A) all the requirements of the Companies Act, 1956 have been complied with;

(B) terms and conditions of the Government‘s approval, if any, have been complied

with;

(D) the company has all original certificates issued by authorized dealers in India

evidencing receipt of amount of consideration.

Note: For companies with paid up capital with less than Rs.5 crore, the above

mentioned certificate can be given by a practicing company secretary.

(b) A certificate from Statutory Auditor or Chartered Accountant indicating the manner

of arriving at the price of the shares issued to the persons resident outside India.

by the AD Category-I bank to the Regional Office concerned of the Reserve Bank

under whose jurisdiction the registered office of the company is situated.

(d) Annual return on Foreign Liabilities and Assets (Annex 7) should be filed on an

annual basis by the Indian company, directly with the Reserve Bank. This is an

annual return to be submitted by 31st of July every year, pertaining to all investments

by way of direct/portfolio investments/reinvested earnings/other capital in the Indian

company made during the previous years (i.e. the information submitted by 31st July

will pertain to all the investments made in the previous years up to March 31). The

details of the investments to be reported would include all foreign investments made

into the company which is outstanding as on the balance sheet date. The details of

overseas investments in the company both under direct / portfolio investment may be

separately indicated.

(e) Issue of bonus/rights shares or stock options to persons resident outside India directly

or on amalgamation / merger/demerger with an existing Indian company, as well as

issue of shares on conversion of ECB / royalty / lumpsum technical know-how fee /

import of capital goods by units in SEZs, has to be reported in Form FC-GPR.82

7.2.3 Reporting of transfer of shares

Reporting of transfer of shares between residents and non-residents and vice- versa is to

be done in Form FC-TRS (Annex 8). The Form FC-TRS should be submitted to the AD

Category-I bank, within 60 days from the date of receipt of the amount of consideration. The

onus of submission of the Form FC-TRS within the given timeframe would be on the transferor /

transferee, resident in India. The AD Category-I bank, would forward the same to its link office.

The link office would consolidate the Form FC-TRS and submit a monthly report to the Reserve

Bank.

7.2.4 Reporting of Non-Cash

Details of issue of shares against conversion of ECB have to be reported to the Regional

Office concerned of the RBI, as indicated below:

(i) In case of full conversion of ECB into equity, the company shall report the conversion in

Form FC-GPR to the Regional Office concerned of the Reserve Bank as well as in Form

ECB-2 to the Department of Statistics and Information Management (DSIM), Reserve

Bank of India, Bandra-Kurla Complex, Mumbai – 400 051, within seven working days

from the close of month to which it relates. The words "ECB wholly converted to equity"

shall be clearly indicated on top of the Form ECB-2. Once reported, filing of Form ECB-

2 in the subsequent months is not necessary.

(ii) In case of partial conversion of ECB, the company shall report the converted portion in

Form FC-GPR to the Regional Office concerned as well as in Form ECB-2 clearly

differentiating the converted portion from the non-converted portion. The words "ECB

partially converted to equity" shall be indicated on top of the Form ECB-2. In the

subsequent months, the outstanding balance of ECB shall be reported in Form ECB-2 to

DSIM.

7.2.5 Reporting of FCCB/ADR/GDR Issues

The Indian company issuing ADRs / GDRs has to furnish to the Reserve Bank, full

details of such issue in the Form enclosed as Annex 9, within 30 days from the date of closing of

the issue. The company should also furnish a quarterly return in the Form enclosed as Annex 10,

to the Reserve Bank within 15 days of the close of the calendar quarter. The quarterly return has

to be submitted till the entire amount raised through ADR/GDR mechanism is either repatriated

to India or utilized abroad as per the extant Reserve Bank guidelines.83

7.3 ADHERENCE TO GUIDELINES/ORDERS AND CONSEQUENCES OF

VIOLATION

FDI is a capital account transaction and thus any violation of FDI regulations are covered

by the penal provisions of the FEMA. Reserve Bank of India administers the FEMA and

Directorate of Enforcement under the Ministry of Finance is the authority for the enforcement of

FEMA. The Directorate takes up investigation in any contravention of FEMA.

7.3.1 Penalties

(i) If a person violates/contravenes any FDI Regulations, by way of breach/nonadherence/non-compliance/contravention of any rule, regulation, notification, press note,

press release, circular, direction or order issued in exercise of the powers under FEMA or

contravenes any conditions subject to which an authorization is issued by the

Government of India/FIPB/Reserve Bank of India, he shall, upon adjudication, be liable

to a penalty up to thrice the sum involved in such contraventions where such amount is

quantifiable, or up to two lakh Rupees where the amount is not quantifiable, and where

such contraventions is a continuing one, further penalty which may extend to five

thousand Rupees for every day after the first day during which the contraventions

continues.

(ii) Where a person committing a contravention of any provisions of this Act or of any rule,

direction or order made there under is a company (company means any body corporate

and includes a firm or other association of individuals as defined in the Companies Act),

every person who, at the time the contravention was committed, was in charge of, and

was responsible to, the company for the conduct of the business of the company as well

as the company, shall be deemed to be guilty of the contravention and shall be liable to be

proceeded against and punished accordingly.

(iii) Any Adjudicating Authority adjudging any contraventions under 6.3.1(i), may, if he

thinks fit in addition to any penalty which he may impose for such contravention direct

that any currency, security or any other money or property in respect of which the

contravention has taken place shall be confiscated to the Central Government.

7.3.2 Adjudication and Appeals

(i) For the purpose of adjudication of any contravention of FEMA, the Ministry of Finance

as per the provisions contained in the Foreign Exchange Management (Adjudication 84

Proceedings and Appeal) Rules, 2000 appoints officers of the Central Government as the

Adjudicating Authorities for holding an enquiry in the manner prescribed. A reasonable

opportunity has to be given to the person alleged to have committed contraventions

against whom a complaint has been made for being heard before imposing any penalty.

(ii) The Central Government may appoint as per the provisions contained in the Foreign

Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000, an

Appellate Authority/ Appellate Tribunal to hear appeals against the orders of the

adjudicating authority.

7.3.3 Compounding Proceedings

Under the Foreign Exchange (Compounding Proceedings) Rules 2000, the Central

Government may appoint ‗Compounding Authority‘ an officer either from Enforcement

Directorate or Reserve Bank of India for any person contravening any provisions of the FEMA.

The Compounding Authorities are authorized to compound the amount involved in the

contravention to the Act made by the person. No contravention shall be compounded unless the

amount involved in such contravention is quantifiable. Any second or subsequent contravention

committed after the expiry of a period of three years from the date on which the contravention

was previously compounded shall be deemed to be a first contravention. The Compounding

Authority may call for any information, record or any other documents relevant to the

compounding proceedings. The Compounding Authority shall pass an order of compounding

after affording an opportunity of being heard to all the concerns as expeditiously and not later

than 180 days from the date of application made to the Compounding Authority. Compounding

Authority shall issue order specifying the provisions of the Act or of the rules, directions,

requisitions or orders made there under in respect of which contravention has taken place along

with details of the alleged contraventions. 85

Annex – 1

FC-GPR

(To be filed by the company through its Authorised Dealer Category-I bank with the Regional Office of the RBI

under whose jurisdiction the Registered Office of the company making the declaration is situated as and when

shares / convertible debentures are issued to the foreign investor, along with the documents mentioned in item No. 4

of the undertaking enclosed to this Form)

Permanent Account Number (PAN)

of the investee company given by the

Income Tax Department

Date of issue of shares / convertible

debentures

No.

Particulars (In Block Letters)

1. Name

Address of the Registered Office

State

Registration No. given by Registrar of

Companies

Whether existing company or new

company (strike off whichever is not

applicable)

Existing company / New company

If existing company, give registration

number allotted by RBI for FDI, if any

Telephone

Fax

e-mail86

2. Description of the main business

activity

NIC Code

Location of the project and NIC code

for the district where the project is

located

Percentage of FDI allowed as per FDI

policy

State whether FDI is allowed under

Automatic Route or Approval Route

(strike out whichever is not applicable)

Automatic Route / Approval Route

3 Details of the foreign investor / collaborator



Name

Address

Country

Constitution / Nature of the investing

Entity

[Specify whether

1. Individual

2. Company

3. FII

4. FVCI

5. Foreign Trust

6. Private Equity Fund

7. Pension / Provident Fund

8. Sovereign Wealth Fund (SWF)

9. Partnership / Proprietorship Firm

10. Financial Institution

11. NRIs / PIO

12. Others (please specify)]

Date of incorporation

4 Particulars of Shares / Convertible Debentures Issued



If there is more than one foreign investor/collaborator, separate Annex may be included for items 3 and 4 of the

Form.

SWF means a Government investment vehicle which is funded by foreign exchange assets, and which manages those assets

separately from the official reserves of the monetary authorities.87

(a) Nature and date of issue

Nature of issue Date of issue Number of shares/

convertible debentures

01 IPO / FPO

02 Preferential allotment /

private placement

03 Rights

04 Bonus

05 Conversion of ECB

06 Conversion of royalty

(including lump sum payments)

07 Conversion against import of

capital goods by units in SEZ

08 ESOPs

09 Share Swap

10 Others (please specify)

Total

(b) Type of security issued

No. Nature of

security

Number Maturity Face

value

Premium Issue Price

per share

Amount of

inflow*

01 Equity

02 Compulsorily

Convertible

Debentures

03 Compulsorily

Convertible

Preference

04 Others (please

specify)

Total

i) In case the issue price is greater than the face value please give break up of the premium received.

ii) * In case the issue is against conversion of ECB or royalty or against import of capital goods by units in SEZ, a

Chartered Accountant's Certificate certifying the amount outstanding on the date of conversion

Control Premium

Non competition fee

Others

Total

please specify the nature

(d) Total inflow (in Rupees) on account of issue of

shares / convertible debentures to non-residents

(including premium, if any) vide 88

(i) Remittance through AD:

(ii) Debit to NRE/FCNR A/c with

Bank_________

(iii) Others (please specify)

Date of reporting of (i) and (ii) above to RBI

under Para 9 (1) A of Schedule I to Notification

No. FEMA 20 /2000-RB dated May 3, 2000, as

amended from time to time.

(e) Disclosure of fair value of shares issued**

We are a listed company and the market value of

a share as on date of the issue is*

We are an un-listed company and the fair value

of a share is*

** before issue of shares *(Please indicate as applicable)

5. Post issue pattern of shareholding

Equity Compulsorily

convertible

Preference Shares/

Debentures

Investor category

No.

Amount

(Face Value)

Rs.

No.

Amount

(Face Value)

Rs.

a) Non-Resident

01 Individuals

02 Companies

03 FIIs

04 FVCIs

05 Foreign Trusts

06 Private Equity Funds

07 Pension/ Provident Funds

08 Sovereign Wealth Funds

09 Partnership/ Proprietorship Firms

10 Financial Institutions

11 NRIs/PIO

12 Others (please specify)

Sub Total

b) Resident

Total89

DECLARATION TO BE FILED BY THE AUTHORISED REPRESENTATIVE OF THE INDIAN

COMPANY: (Delete whichever is not applicable and authenticate)

We hereby declare that:

1. We comply with the procedure for issue of shares / convertible debentures as laid down under the FDI

scheme as indicated in Notification No. FEMA 20/2000-RB dated 3

May 2000, as amended from time to

time.

2. The investment is within the sectoral cap / statutory ceiling permissible under the Automatic Route of

RBI and we fulfill all the conditions laid down for investments under the Automatic Route namely (strike

off whichever is not applicable).

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.

c) Shares issued on rights basis to non-residents are in conformity with Regulation 6 of the RBI

Notification No FEMA 20/2000-RB dated 3

May 2000, as amended from time to time.

Shares issued are bonus.

Shares have been issued under a scheme of merger and amalgamation of two or more Indian

companies or reconstruction by way of de-merger or otherwise of an Indian company, duly

approved by a court in India.

Shares are issued under ESOP and the conditions regarding this issue have been satisfied 90

3. Shares have been issued in terms of SIA /FIPB approval No.___________________ dated

____________________

4. We enclose the following documents in compliance with Paragraph 9 (1) (B) of Schedule 1 to

Notification No. FEMA 20/2000-RB dated May 3, 2000:

(i) A certificate from our Company Secretary certifying that

(a) all the requirements of the Companies Act, 1956 have been complied with;

(b) terms and conditions of the Government approval, if any, have been complied

with;

(d) the company has all original certificates issued by authorised dealers in India

evidencing receipt of amount of consideration in accordance with paragraph 8 of

Schedule 1 to Notification No. FEMA 20/2000-RB dated May 3, 2000.

(ii) A certificate from Statutory Auditors / SEBI registered Category I Merchant Banker /

Chartered Accountant indicating the manner of arriving at the price of the shares issued

to the persons resident outside India.

5. Unique Identification Numbers given for all the remittances received as consideration for issue of

shares/ convertible debentures (details as above), by Reserve Bank.

(Signature of the Applicant)* :___________________________________________

(Name in Block Letters) :___________________________________________

(Designation of the signatory) :___________________________________________

Place:

Date:

(* To be signed by Managing Director/Director/Secretary of the Company)

R91

CERTIFICATE TO BE FILED BY THE COMPANY SECRETARY

OF THE INDIAN

COMPANY ACCEPTING THE INVESTMENT:

(As per Para 9 (1) (B) (i) of Schedule 1 to Notification No. FEMA 20/2000-RB dated May 3, 2000)

In respect of the abovementioned details, we certify the following :

1. All the requirements of the Companies Act, 1956 have been complied with.

2. Terms and conditions of the Government approval, if any, have been complied with.

3. The company is eligible to issue shares / convertible debentures under these Regulations.

4. The company has all original certificates issued by AD Category-I banks in India, evidencing receipt

of amount of consideration in accordance with paragraph 8 of Schedule 1 to Notification No. FEMA

20/2000-RB dated May 3, 2000.

(Name & Signature of the Company Secretary) (Seal)

FOR USE OF THE RESERVE BANK ONLY:

Registration Number for the FC-GPR:

Unique Identification Number allotted to the

Company at the time of reporting receipt of remittance

If the company doesn‘t have a full time Company Secretary, a certificate from a practicing Company Secretary

may be submitted.

R92

Annex - 2

Terms and conditions for Transfer of Shares /Convertible Debentures, by way of Sale, from a

Person Resident in India to a Person Resident Outside India and from a Person Resident Outside

India to a Person Resident in India

1.1 In order to address the concerns relating to pricing, documentation, payment/ receipt and

remittance in respect of the shares/ convertible debentures of an Indian company, in all sectors,

transferred by way of sale, the parties involved in the transaction shall comply with the guidelines set out

below.

1.2 Parties involved in the transaction are (a) seller (resident/non-resident), (b) buyer

(resident/non-resident), (c) duly authorized agent/s of the seller and/or buyer, (d) Authorised Dealer bank

(AD) branch and (e) Indian company, for recording the transfer of ownership in its books.

2. Pricing Guidelines

2.1 The under noted pricing guidelines are applicable to the following types of transactions:

i. Transfer of shares, by way of sale under private arrangement by a person resident in India to a

person resident outside India.

ii. Transfer of shares, by way of sale under private arrangement by a person resident outside India to

a person resident in India.

2.2 Transfer by Resident to Non-resident (i.e. to incorporated non-resident entity other than

erstwhile OCB, foreign national, NRI, FII)

Price of shares transferred by way of sale by resident to a non-resident where the shares of an Indian

company are:

(a) listed on a recognized stock exchange in India ,shall not be less than the price at which the

preferential allotment of shares can be made under the SEBI guidelines , as applicable, provided

the same is determined for such duration as specified therein, preceding the relevant date, which

shall be the date pf purchase or sale of shares,

(b) not listed on a recognized stock exchange in India ,shall not be less than the fair value to be

determined by a SEBI registered Category I Merchant Banker or a Chartered Accountant as per

the discounted free cash flow method.

The price per share arrived at should be certified by a SEBI registered Category I Merchant Banker or a

Chartered Accountant.

2.3 Transfer by Non-resident (i.e. by incorporated non-resident entity, erstwhile OCB, foreign

national, NRI, FII) to Resident93

Sale of shares by a non-resident to resident shall be in accordance with Regulation 10 B (2) of

Notification No. FEMA 20/2000-RB dated May 3, 2000 which shall not be more than the minimum price

at which the transfer of shares can be made from a resident to a non-resident as given at para 2.2 above.

3. Responsibilities / Obligations of the parties

All the parties involved in the transaction would have the responsibility to ensure that the relevant

regulations under FEMA are complied with and consequent on transfer of shares, the relevant individual

limit/sectoral caps/foreign equity participation ceilings as fixed by Government are not breached.

Settlement of transactions will be subject to payment of applicable taxes, if any.

4. Method of payment and remittance/credit of sale proceeds

4.1 The sale consideration in respect of the shares purchased by a person resident outside India shall

be remitted to India through normal banking channels. In case the buyer is a Foreign Institutional Investor

(FII), payment should be made by debit to its Special Non-Resident Rupee Account. In case the buyer is a

NRI, the payment may be made by way of debit to his NRE/FCNR (B) accounts. However, if the shares

are acquired on non-repatriation basis by NRI, the consideration shall be remitted to India through normal

banking channel or paid out of funds held in NRE/FCNR (B)/NRO accounts.

4.2. The sale proceeds of shares (net of taxes) sold by a person resident outside India may be remitted

outside India. In case of FII, the sale proceeds may be credited to its special Non-Resident Rupee

Account. In case of NRI, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes)

may be credited to his NRE /FCNR(B) accounts and if the shares sold were held on non repatriation basis,

the sale proceeds may be credited to his NRO account subject to payment of taxes.

4.3 The sale proceeds of shares (net of taxes) sold by an OCB may be remitted outside India directly

if the shares were held on repatriation basis and if the shares sold were held on non-repatriation basis, the

sale proceeds may be credited to its NRO (Current) Account subject to payment of taxes, except in the

case of OCBs whose accounts have been blocked by Reserve Bank.

5. Documentation

Besides obtaining a declaration in the enclosed Form FC-TRS (in quadruplicate), the AD branch should

arrange to obtain and keep on record the following documents:

5.1 For sale of shares by a person resident in India

i. Consent Letter duly signed by the seller and buyer or their duly appointed agent indicating

the details of transfer i.e. number of shares to be transferred, the name of the investee 94

company whose shares are being transferred and the price at which shares are being

transferred. In case there is no formal Sale Agreement, letters exchanged to this effect may be

kept on record.

ii. Where Consent Letter has been signed by their duly appointed agent, the Power of Attorney

Document executed by the seller/buyer authorizing the agent to purchase/sell shares.

iii. The shareholding pattern of the investee company after the acquisition of shares by a person

resident outside India showing equity participation of residents and non-residents categorywise (i.e. NRIs/OCBs/foreign nationals/incorporated non-resident entities/FIIs) and its

percentage of paid up capital obtained by the seller/buyer or their duly appointed agent from

the company, where the sectoral cap/limits have been prescribed.

iv. Certificate indicating fair value of shares from a Chartered Accountant.

v. Copy of Broker‘s note if sale is made on Stock Exchange

vi. Undertaking from the buyer to the effect that he is eligible to acquire shares/ convertible

debentures under FDI policy and the existing sectoral limits and Pricing Guidelines have been

complied with.

vii. Undertaking from the FII/sub account to the effect that the individual FII/ Sub account

ceiling as prescribed by SEBI has not been breached.

5.2. For sale of shares by a person resident outside India

i. Consent Letter duly signed by the seller and buyer or their duly appointed agent indicating

the details of transfer i.e. number of shares to be transferred, the name of the investee

company whose shares are being transferred and the price at which shares are being

transferred.

ii. Where the Consent Letter has been signed by their duly appointed agent the Power of

Attorney Document authorizing the agent to purchase/sell shares by the seller/buyer. In case

there is no formal Sale Agreement, letters exchanged to this effect may be kept on record.

iii. If the sellers are NRIs/OCBs, the copies of RBI approvals evidencing the shares held by them

on repatriation/non-repatriation basis. The sale proceeds shall be credited NRE/NRO account,

as applicable.

iv. Certificate indicating fair value of shares from a Chartered Accountant.

v. No Objection / Tax Clearance Certificate from Income Tax authority/Chartered Account.

vi. Undertaking from the buyer to the effect that the Pricing Guidelines have been adhered to.

6. Reporting requirements

6.1 Reporting of transfer of shares between residents and non-residents and vice versa is to be done in

Form FC-TRS. The Form FC-TRS should be submitted to the AD Category-I bank, within 60 days from 95

the date of receipt of the amount of consideration. The onus of submission of the Form FC-TRS within

the given timeframe would be on the transferor / transferee, resident in India. The AD Category-I bank,

would forward the same to its link office. The link office would consolidate the Forms and submit a

monthly report to the Reserve Bank

For the purpose the Authorized Dealers may designate branches to specifically handle such transactions.

These branches could be staffed with adequately trained staff for this purpose to ensure that the

transactions are put through smoothly. The ADs may also designate a nodal office to coordinate the work

at these branches and also ensure the reporting of these transactions to the Reserve Bank.

6.2 When the transfer is on private arrangement basis, on settlement of the transactions, the

transferee/his duly appointed agent should approach the investee company to record the transfer in their

books along with the certificate in the Form FC-TRS from the AD branch that the remittances have been

received by the transferor/payment has been made by the transferee. On receipt of the certificate from the

AD, the company may record the transfer in its books.

6.3 The actual inflows and outflows on account of such transfer of shares shall be reported by the AD

branch in the R-returns in the normal course.

6.4 In addition the AD branch should submit two copies of the Form FC-TRS received from their

constituents/customers together with the statement of inflows/outflows on account of remittances

received/made in connection with transfer of shares, by way of sale, to IBD/FED/or the nodal office

designated for the purpose by the bank in the enclosed proforma (which is to be prepared in MS-Excel

format). The IBD/FED or the nodal office of the bank will in turn submit a consolidated monthly

statement in respect of all the transactions reported by their branches together with copies of the FC-TRS

Forms received from their branches to Foreign Exchange Department, Reserve Bank, Foreign Investment

Division, Central Office, Mumbai in soft copy (in MS- Excel) by e-mail to fdidata@rbi.org.in

6.5 Shares purchased / sold by FIIs under private arrangement will be by debit /credit to their Special

Non Resident Rupee Account. Therefore, the transaction should also be reported in Form LEC (FII) by

the designated bank of the FII concerned.

6.6 Shares/convertible debentures of Indian companies purchased under Portfolio Investment

Scheme by NRIs, OCBs cannot be transferred, by way of sale under private arrangement.

6.7 On receipt of statements from the AD, the Reserve Bank may call for such additional details or

give such directions as required from the transferor/transferee or their agents, if need be.

To the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign

Investment Division, Central Office, Mumbai96

Annex- 3

Documents to be submitted by a person resident in India for transfer of shares to a person resident

outside India by way of gift

i. Name and address of the transferor (donor) and the transferee (donee).

ii. Relationship between the transferor and the transferee.

iii. Reasons for making the gift.

iv. In case of Government dated securities and treasury bills and bonds, a certificate issued

by a Chartered Accountant on the market value of such security.

v. In case of units of domestic mutual funds and units of Money Market Mutual Funds, a

certificate from the issuer on the Net Asset Value of such security.

vi. In case of shares and convertible debentures, a certificate from a Chartered Accountant

on the value of such securities according to the guidelines issued by Securities &

Exchange Board of India or DCF method for listed companies and unlisted companies,

respectively.

vii. Certificate from the concerned Indian company certifying that the proposed transfer of

shares/ convertible debentures by way of gift from resident to the non-resident shall not

breach the applicable sectoral cap/ FDI limit in the company and that the proposed

number of shares/convertible debentures to be held by the non-resident transferee shall

not exceed 5 per cent of the paid up capital of the company.

viii. An undertaking from the resident transferor that the value of security to be transferred

together with any security already transferred by the transferor, as gift, to any person

residing outside India does not exceed the rupee equivalent of USD 50,000 during a

financial year*.

* RBI‘s A.P. (DIR Series) Circular No. 14 Dated 15.09.201197

Annex - 4

Definition of "relative" as given in Section 6 of Companies Act, 1956.

A person shall be deemed to be a relative of another, if, and only if:

(a) they are members of a Hindu undivided family ; or

(b) they are husband and wife ; or

1. Father.

2. Mother (including step-mother).

3. Son (including stepson).

4. Son's wife.

5. Daughter (including step-daughter).

6. Father's father.

7. Father's mother.

8. Mother's mother.

9. Mother's father.

10. Son's son.

11. Son's son's wife.

12. Son's daughter.

13. Son's daughter's husband.

14. Daughter's husband.

15. Daughter's son.

16. Daughter's son's wife.

17. Daughter's daughter.

18. Daughter's daughter's husband.

19. Brother (including step-brother).

20. Brother's wife.

21. Sister (including step-sister).

22. Sister's husband.

*****************************98

Annex - 5

Report by the Indian company receiving amount of consideration for issue of shares / Convertible

debentures under the FDI Scheme

( To be filed by the company through its Authorised Dealer Category-I bank, with the Regional

Office of the Reserve Bank under whose jurisdiction the Registered Office of the company making

the declaration is situated, not later than 30 days from the date of receipt of the amount of

consideration, as specified in para 9 (I) (A) of Schedule I to Notification No. FEMA 20/2000- RB

dated May 3, 2000 )

Permanent Account

Number (PAN) of the

investee company given by

the IT Department

No. Particulars (In Block Letters)

1. Name of the Indian company

Address of the Registered Office

Fax

Telephone

e-mail

2 Details of the foreign investor/ collaborator

Name

Address

Country

3. Date of receipt of funds

4. Amount In foreign currency In Indian Rupees

5. Whether investment is under Automatic

Route or Approval Route

If Approval Route, give details (ref. no.

of approval and date)

Automatic Route / Approval Route99

6. Name of the AD through whom the

remittance is received

7. Address of the AD

A Copy of the FIRC evidencing the receipt of consideration for issue of shares/ convertible debentures as

above is enclosed.

(Authorised signatory of

the investee company)

(Stamp)

(Authorised signatory of

the AD)

(Stamp)

FOR USE OF THE RESERVE BANK ONLY:

Unique Identification Number for the remittance received: 100

Annex – 6

Know Your Customer (KYC) Form in respect of the non-resident investor

Registered Name of the Remitter / Investor

(Name, if the investor is an Individual)

Registration Number (Unique Identification

Number* in case remitter is an Individual)

Registered Address (Permanent Address if

remitter Individual)

Name of the Remitter‘s Bank

Remitter‘s Bank Account No.

Period of banking relationship with the remitter

* Passport No., Social Security No, or any Unique No. certifying the bonafides of the remitter

as prevalent in the remitter‘s country

We confirm that all the information furnished above is true and accurate as provided by the

overseas remitting bank of the non-resident investor.

(Signature of the Authorised Official

of the AD bank receiving the remittance)

Date : Place:

Stamp :101

Annex – 7

Annual Return on Foreign Liabilities and Assets

(Return to be filled under A.P. (DIR Series) Circular No.45 dated March 15, 2011

to the Department of Statistics and Information Management, RBI, Mumbai)

Please read the guidelines/definitions carefully before filling-in the Return

Section I: Identification Particulars

For RBI’s use

1. Name and Address of the Indian Company

City: Pin:

State:_______________________________________________

2. Income-Tax allotted PAN Number of Company:

3. Registration No given by the Registrar of Companies:

4. Name of the CONTACT PERSON : ______________________DESIGNATION:____________________

Tel.No. (with STD code): _____________________Fax:______________

e-mail:______________________

5. Account closing date: (dd/mm/yy) Web-site (if any):_________________________

6. In case of change in Company Name and\or activity, specify the old and new Company Name and activity:

Old Company Name :_________________________New Company Name _________________________

Effective Date ______________________________

Old Activity:_______________________________ New Activity _________________________

7. Nature of Business: Please tick (  ) the appropriate group of activity to which your principal line of

business pertains and also mention, if possible, the NIC code in the bracket.

Industry Revenue

(%)

Industry Revenue

(%)

Industry Revenue

(%)

Industry Revenue

(%)

1. Power

( )

2. Electrical &

Electronics

3. Non - financial

services

4. Financial Services

( )

COMPANY CODE102

( ) ( )

5.Telecom

( )

6. Hotels &

Tourism

( )

7. Metallurgical

Industry &

Mining

( )

8. Food Processing

Industry

( )

9. Transportation

( )

10. Petroleum &

Natural Gas

( )

11. Chemicals

(other than

fertilizers)

( )

12. Construction

( )

13. Software and

ITES/BPO

( )

14. Pharmaceutical

( )

15. Other

( )

For RBI’s use (Industry Code)

8. Whether your company is listed in India [please tick (  )]?

9. Whether your company has any Foreign Collaboration?

If yes, please indicate whether it is (please tick the appropriate one)

(a) Technical collaboration (b) Financial collaboration

(foreign equity

participation)

Block 1A : Total Paid up Capital of Indian Company

Item

End-March of previous FY End-March current FY

Number of Shares

Amount in `

lakh

Number of Shares

Amount in `

lakh

1.0 Total Paid-up Capital

[(i)+(ii)]

(i) Ordinary/Equity Share

(ii) Preference Share [(a)+(b)]

(a) Participating

(b) Non-participating

2.0 Non-resident Equity

Holdings

1 Individuals

2 Companies

3 FIIs

4 FVCIs

5 Foreign Trusts

6 Private Equity Funds

7 Pension/ Provident Funds

Yes No

Yes No103

8 Sovereign Wealth Fund (SWF)

9 Partnership/ Proprietorship firms

10 Financial Institutions

11 NRIs/PIO

12 Others (please specify)

Note: FY: Financial Year

Block 1B : Free Reserves & Surplus and Retained Profit

Item Amount in ` lakh as at the end – March of

Previous FY Current FY

3.1 Free Reserves & Surplus as at the end

Amount in ` lakh

During Previous FY During Current FY

3.2 Profit (+) / Loss (-) after tax

3.3 Dividend Declared (excluding tax on

dividend)

3.4 Retained Profit / loss ( 3.4 = 3.2 -3.3)

Section II

FOREIGN LIABILITIES

2. Investments made under Foreign Direct Investment (FDI) scheme in India:

In case of listed companies, equity should be valued using share price on closing date of reference period,

while in case of unlisted companies, Own Fund of Book Value (OFBV) Method should be used

(see the attached guidelines for details)

Block 2A: Foreign Direct Investment in India (10% or more Equity Participation)

[Please furnish here the outstanding investments made under the FDI Scheme in India by Non-resident Direct investors, who

were individually holding 10 per cent or more ordinary/equity shares of your company on the reporting date]

If this block is Non-NIL, then please give the Name & Addresses of your subsidiary in India, if any, in BLOCK 9.

Name of the

non-resident

Company/

Individual

Type of Capital

Country of

non-resident

investor

Equity

holding

(%)

Amount in ` lakh as at the end of

March

Previous FY

December

Current FY

March

Current FY

1.0 Equity Capital (1.0 = 1.2-1.1)

1.1 Claims on Direct Investor

1.2 Liabilities to Direct Investor

2.0 Other Capital(2.0 = 2.2-2.1) 104

2.1 Claims on Direct Investor

2.2 Liabilities to Direct Investor

3.0 Disinvestments in India during the year

Note: (i) if investor is a company, then country is the country of incorporation;

(ii) Please use different sheet using same format to report different non-resident company/individual.

Block 2B: Foreign Direct Investment in India (Less than 10% Equity Holding)

[Please furnish here the outstanding investments made under the FDI Scheme in India by Non-resident Direct investors, who

were individually holding less than 10 per cent ordinary/ equity shares of your company on the reporting date]

Name of the

non-resident

Company/

Individual

Type of Capital

Country of

non-resident

investor

Equity

holding

(%)

Amount in ` lakh as at the end of

March

Previous FY

December

Current FY

March

Current FY

1.0 Equity Capital (1.0 = 1.2-1.1)

1.1 Claims on Direct Investor

1.2 Liabilities to Direct Investor

2.0 Other Capital(2.0 = 2.2-2.1)

2.1 Claims on Direct Investor

2.2 Liabilities to Direct Investor

3.0 Disinvestments in India during the year

Note: (i) if investor is a company, then country is the country of incorporation;

(ii) Please use different sheet using same format to report different non-resident company/individual.

3. Portfolio and Other Liabilities to Non-residents (i.e. position with unrelated parties)

Block 3A: Portfolio Investment

Please furnish here the outstanding investments by non-resident investors made under the Portfolio

Investment Scheme in India. In case of listed companies, equity should be valued using share price on

closing date of reference period, while in case of unlisted companies, Own Fund of Book Value (OFBV) Method

should be used. (see the attached guidelines for details)

Portfolio Investment

Country of nonresident investor

Amount in ` lakh as at the end of

March Previous FY March Current FY

1.0 Equity Securities

2.0 Debt Securities(2.0 = 2.1+2.2)

2.1 Bonds and Notes (original maturity more than 1year)

2.2 Money Market Instruments (original maturity upto1year)

3.0 Disinvestments in India during the year105

Note: Data pertaining to each type of investment are to be reported consolidating the information country

wise. If more countries are involved to report the data for the particular type(s) of investment, it should be

reported in the same format using additional sheets separately for each country.

Block 3B: Financial Derivatives (with non-resident entities only)

Please furnish here the outstanding foreign liabilities on account of financial derivatives contract entered

into with non-residents.

Financial Derivatives

Country of non-resident

investor

Amount in ` lakh as at the end of

March Previous FY March Current FY

(i) Notional Value

(ii) Mark to market value

Note: If more countries are involved to report the data for the particular type(s) of investment, it should be

reported in the same format using additional sheets separately for each country.

Block 3C: Other Investments:

This is a residual category that includes all financial outstanding not considered as direct investment or

portfolio investment (outstanding liabilities with Unrelated Parties)

Other Investment

Country of non-resident

lender

Amount in ` lakh as at the end of

March Previous FY March Current FY

4.0 Trade Credit (4.0 = 4.1+4.2)

4.1 Short Term (4.1= 4.1.1+4.1.2)

4.1.1. Up to 6 Months

4.1.2. 6 Months to 1 Year

4.2. Long Term

5.0 Loans (5.0 = 5.1+5.2)

5.1 Short Term

5.2 Long Term

6.0 Other Liabilities (6.0 = 6.1+6.2)

6.1 Short Term (Up to 1 yr.)

6.2 Long Term

Note: (i) Data pertaining to each type of investment are to be reported consolidating the information country

wise. If more countries are involved to report the data for the particular type(s) of investment, it should

be reported in the same format using additional sheets separately for each country.

(ii) At item 5.0, loan should include the ECB loan other than those taken from non-resident parent

company. ECB loan taken from parent company abroad should be shown under Other Capital of Block

2A.

Section –III

FOREIGN ASSETS

1. Please use the exchange rate as at end-March/end-December (as applicable) of reporting year while

reporting the foreign assets in ` lakh.106

2. In case, the overseas company is listed, equity should be valued using share price on closing date of

reference period, while in case of unlisted company, use Own Fund of Book Value (OFBV) method for

valuation of equity (see the attached guidelines for details)

Block 4: Direct Investment Abroad under Overseas Direct Investment Scheme

Block 4A: Direct Investment Abroad (10 % or more Equity holding)

[Please furnish here your outstanding investments in Non-resident enterprises [Direct Investment Enterprises

(DIE)], made under the Overseas Direct Investment Scheme, in each of which your company hold 10 per cent

or more Equity shares on the reporting date]. If this block is Non-NIL, then please furnish the information in

BLOCK 6.

Name of the

non-resident

Direct

Investment

Enterprise

(DIE)

Type of Capital

Country of

non-resident

DIE

Equity

holding

(%)

Amount in ` lakh as at the end of

March

December

Current

March

Current

1.0 Equity Capital (1.0 = 1.1-1.2)

1.1 Claims on Direct Investment Enterprise

1.2 Liabilities to Direct Investment Enterprise

2.0 Other Capital(2.0 = 2.1-2.2)

2.1 Claims on Direct Investment Enterprise

2.2 Liabilities to Direct Investment Enterprise

3.0 Disinvestments made abroad during the

year

Note: Please use separate sheets in the above format to report for separate DIEs

Block 4B: Foreign Direct Investment Abroad (Less than 10 % Equity holding)

[Please furnish here your outstanding investments in non-resident enterprises (Direct Investment Enterprises DIE), made

under the Overseas Direct Investment Scheme, in each of which your company holds less than 10 per cent Equity shares

on the reporting date].

Name of the nonresident enterprises Type of Capital

Country of nonresident

enterprises

Amount in ` lakh as at the end of

March

December

Current FY

March

Current

1.0 Equity Capital (1.0 = 1.1-1.2)

1.1 Claims on non-resident Enterprise abroad

1.2 Liabilities to non-resident Enterprise abroad

2.0 Other Capital (2.0 = 2.1-2.2)

2.1 Claims on non-resident Enterprise abroad

2.2 Liabilities to non-resident Enterprise abroad

3.0 Disinvestments made abroad during the

year107

Note: Please use separate sheets in the above format to report different non-resident fellow enterprises.

Portfolio and Other Assets Abroad (i.e., position with unrelated parties)

Block 5A: Portfolio Investment Abroad

1. Please furnish here the outstanding investments in non-resident enterprises, other than those made under

Overseas Direct Investment Scheme in India (i.e., other than those reported in Block 4A & 4B).

2. In case overseas companies are listed, equity should be valued using share price on closing date of

reference period, while in case of unlisted companies, use Own Fund of Book Value Method (OFBV) (see the

attached guidelines for details)

Portfolio Investment

Country of

non-resident

enterprise

Amount in ` lakh as at the end of

March Previous

December

Current FY

March

Current FY

1.0 Equity Securities

2.0 Debt Securities (2.0=2.1+2.2)

2.1 Bonds and Notes (original maturity more than

1year)

2.2 Money Market Instruments (original maturity up to

1year)

3.0 Disinvestments Abroad during the year

Note: Data pertaining to each type of investment are to be reported consolidating the

information country wise. If particular type(s) of investment spreads over more than one

country, it should be reported in the above format using separate additional sheet for each

country.

Block 5B: Financial Derivatives (with non-resident entities only)

Please furnish here the outstanding claims on non-residents on account of financial derivatives contract

entered into with Non-residents.

Financial Derivatives

Country of non-resident

enterprise

Amount in ` lakh as at the end of

March Previous FY March Current FY

(i) Notional Value

(ii) Mark to market value

Note: If particular type(s) of investment spreads over more than one country, it should be reported in the

above format using separate additional sheet for each country.

Block 5C: Other Investment (Outstanding claims on Unrelated Parties):

This is a residual category that includes all financial outstanding claims not considered as direct

investment or portfolio investment.

Other Investment

Country of

non-resident

enterprise

Amount in ` lakh as at the end of

March Previous FY March Current FY

4.0 Trade Credit (4.0=4.1+4.2)

4.1 Short Term (4.1=4.1.1+4.1.2)

4.1.1. Up to 6 Months

4.1.2. 6 Months to 1 Year108

4.2 Long Term

5.0 Loans (5.0=5.1+5.2)

5.1 Short Term (Up to 1 year)

5.2 Long Term

6.0 Other Assets (6.0=6.1+6.2)

6.1 Currency & Deposits

6.2 Others

Note: (i) Data pertaining to each type of investment are to be reported consolidating the

information country wise. If particular type(s) of investment spreads over more than one country, it

should be reported in the above format using separate additional sheet for each country.

Block 6: Equity Capital, Free Reserves & Surplus of Direct Investment Enterprise Abroad

[Please report here the total equity, the equity held by your company and the total free reserves & surplus of those nonresident enterprises in each of which your company held 10 per cent or more shares on the reporting date].

If this block is Non-NIL then please make sure that you have provided the relevant information in BLOCK 4A.

Name of the DIE Item Currency

Amount in Foreign Currency

as at the end of (in actual)

March Previous

March Current

(1) (2) (3) (4) (5)

1. Total Equity of DIE

2. Equity of DIE held by you

3. Free Reserves & Surplus of DIE

4. Dividend Received by you during the year

5. Amount of your Profit retained by DIE

during the year

Note: If your company is a Direct Investor in more than one DIE, the data should be provided in the same format in respect of

each such DIE using additional sheets.

Block 7: Contingent Foreign Liabilities

[Please report here the relevant details about the contingent foreign liabilities of your company]

Description of Contingent Liability Country Currency

Amount in Foreign Currency as

at the end of (in actual)

March Previous

March Current

(1) (2) (3) (4) (5)

Note: # Currency of denomination of the contingent foreign liability should be mentioned in Col. 3. Refer to the

details on Contingent liabilities given in Annex. 109

Block 8: Employee Information of reporting Indian company

BLOCK 9: Name(s) & Address (es) of your subsidiary in India

Sr.

Nos.

Name of Subsidiary in India*

Your Equity

holding in

subsidiary

% Address

Retained profit/ loss

of your subsidiary in

India during the

current FY

(Amount in ` lakh )

Certificate

We hereby certify that all the facts and figures furnished in this schedule reflect the accurate position of

the company and reported after understanding all the items of all the blocks of the schedule.

Place :

Signature and Name of the Authorised person

Date :

As at the end-March of

Previous FY Current FY

No. of Employees on Payroll110

Concepts & Definitions to be used while filling-in the Annual Return on Foreign Liabilities

and Assets

Residence of Enterprises

An enterprise is said to have a center of economic interest and to be a resident unit of a country

(economic territory) when the enterprise is engaged in a significant amount of production of

goods and/or services there or when it owns land or buildings located there. The enterprise must

maintain at least one production establishment in the country and must plan to operate the

establishment indefinitely or over a long period of time.

Free Reserves and Surplus (Block 1B, Item 3.1)

Free Reserves and Surplus should include all unencumbered reserves such as

i) General Reserve net of losses, if any

ii) Capital Reserve

iii) Development Rebate Reserve

iv) Premium on shares

v) Dividend Equalization Reserve

vi) Investment Allowance (utilized) Reserve.

Free Reserves and Surplus should exclude Tax provisions and other items such as

i) provision for deferred taxation

ii) Tax Equalization Reserve

iii) Investment Allowance (unutilized) and

iv) Revaluation Reserve

Retained Profit (Block 1B, Item 3.4)

Retained profit = Profit after tax – Dividend declared (excluding tax on dividend)

(i.e. Item 3.4 = Item3.2 minus Item 3.3, of Block 1B)

A. Direct Investment:

Direct investment is a category of international investment in which a resident entity in one

economy (direct investor (DI) acquires a lasting interest in an enterprise resident in another

economy (Direct Investment Enterprise (DIE). It consists of two components, viz., Equity capital

and Other Capital.

(i) Equity Capital under Direct Investment

It covers (1) Equity in branches and all shares (except non-participating preferred shares) in

subsidiaries and associates; (2) Contributions such as the provision of machinery, land &

building(s) by a direct investor to a DIE by equity participation; (3) Acquisition by a DIE of

shares in its direct investor, termed as Reserve investment (i.e. claims on DI).

(a) Foreign Direct Investment in India (Block 2A, 2B)

If the Indian company has issued the shares to non-resident entities under the FDI scheme in

India, then it should be reported under the Foreign Direct Investment in India (Liabilities),

Section II of the return. If the non-resident entity holds the 10 per cent or more equity/ ordinary

shares in the reporting Indian company, then it should reported under Block 2A (item 1.2,

liabilities to direct investment). However, if the non-resident entity holds less than 10 per cent111

of the equity capital of reporting Indian company, then it should be reported under Block 2B

(item 1.2, liabilities to direct investment). In both the cases, the investing non-resident entity is

called as the Direct Investor (DI) while the reporting Indian company is called as Direct

Investment Enterprise (DIE).

If the reporting Indian company also holds the equity shares in its DI company abroad and if

its share is less than 10 per cent of equity capital of DI company, then it is called as reverse

investment and same should be reported under item 1.1 (claim on direct investor) of the

respective block i.e. Block 2A or 2B.

(b) Foreign Direct Investment abroad by Indian companies (Block 4A and 4B)

If the reporting Indian company invest in equity shares of non-resident company, under the

Overseas Direct Investment scheme in India, i.e. investment in Joint venture or Wholly owned

subsidiaries abroad, then it should be reported under the Foreign Direct Investment abroad,

Section III. If the equity holding of Indian company in non-resident company is 10 per cent or

more, then it should be reported under Block 4A (item 1.1 claim on DIE), otherwise, it should

be reported under Block 4B (item 1.1, claim on DIE). In both the cases, Indian company is called

as the Direct Investor (DI) while the non-resident company is called as Direct Investment

Enterprise (DIE).

If the non-resident DIE also holds the equity shares in Indian reporting company (DI) and if

its share is less than 10 per cent of equity capital of reporting company, then it is called as

reverse investment and same should be reported under item 1.2 (liabilities to DIE) of the

respective block i.e. Block 4A or 4B.

(ii) Other Capital under Direct Investment (Block 2A, 2B, 4A and 4B)

The other capital (inter-company debt transactions) component of direct investment covers the

outstanding liabilities or claims arising due borrowing and lending of funds, investment in

debt securities including non-participating preference shares, trade credits, financial

leasing, share application money, between direct investors and DIEs and between two DIEs

that share the same Direct Investor. Non-participating preferred shares owned by the direct

investor are treated as debt securities & should be included in Other Capital.

B. Portfolio Investment:

(i) Portfolio Investment (Block 3A & 5A)

It covers external claims by or liabilities to reporting Indian company in equity and debt

securities other than those included in direct investment (Block 2A, 2B and 4A, 4B). Debt

securities include long-term bonds and notes, short-term money market instruments.

Any investment is made by the non-resident entities in Indian company under the Portfolio

Scheme in India should be should be reported under Block 3A (Portfolio liabilities).

Any investment made by the Indian company in foreign shares and / or debt securities, apart

from the investment made under the Overseas Direct Investment Scheme, should be

reported under Block 5A (Portfolio assets).

(ii) Equity Securities (Block 3A & 5A, Item 1.0)

Equity securities are instruments acknowledging the holders' claim to the residual income of the

issuing enterprise after the claims of all creditors have been met. These include ordinary shares,

stocks, participating preference shares, depository receipts (ADRs/GDRs) denoting ownership of 112

equity securities issued to non-residents, shares/units in mutual funds & investment trusts, equity

securities that are sold under repurchase agreement, equity securities that are sold under

securities lending arrangement.

(iii) Debt Securities (Block 3A & 5A, Item 2.0)

These include bonds and notes, money market instruments.

(iv) Bonds and Notes (Block 3A & 5A, Item 2.1)

This category includes debt securities with original contractual maturities of more than one year

(long-term). It includes the long-term securities such as Debentures, Non-participating

preference shares, Convertible bonds, Negotiable certificates of deposit, Perpetual bonds,

Collateralized mortgage obligations, Dual currency, Zero coupon and other Deep discounted

bonds, Floating rate bonds and Index-linked bonds.

(v) Money Market Instruments (Block 3A & 5A, Item 2.2)

These short-term instruments include treasury bills, commercial paper, banker‘s acceptances,

short-term negotiable certificates of deposit and short-term notes issued under note issuance

facilities. It may be noted that the instruments that share the characteristics of money market

instruments but are issued with maturities of more than one year are classified as Bonds and

Notes.

C. Financial Derivatives (Block 3B and 5B)

Financial derivatives are linked to a specific financial instrument, indicator, or commodity and

through which specific financial risks can be traded in the financial markets in their own right.

Derivative instruments include futures, interest and cross-currency swaps, forward rate

agreements, forward foreign exchange contracts, credit derivatives and various types of options.

D. Other Investments: (Block 3C and 5C)

This is a residual category that includes all financial outstanding not considered as direct

investment or portfolio investment such as:

(i) Trade Credits (Block 3C & 5C, Item 4.0)

Trade credits are assets and liabilities that arise from the direct extension of credit from a

supplier to a buyer for transactions in goods and services and advance payments by buyers

for transactions in goods and services and for work in progress. Trade credit assets are advance

payments made by importer (you) for (your) imports or credit extended by exporter (you)

directly to (your) importer. Trade credit liabilities are advance payment received by the

exporter (you) for (your) exports or credit received by importer (you) directly from (your)

exporter. It may be noted here that funding provided by an enterprise other than the supplier

for the purpose of purchasing goods or services is treated as a loan and not as trade credit.

(ii) Loans (Block 3C & 5C, Item 5.0)

Loans are direct lending of funds by a creditor to a debtor through arrangements. These include,

loans to finance trade (i.e. Buyers‘ credit in which a bank or a financial institution or an export

credit agency in the exporting country extends a loan directly to a foreign buyer or to a bank in

the importing country to pay for the purchase of goods and services), mortgages, and other loans

and advances. Financial leases and repurchase agreements are also considered loans.

Note that loan received from the non-resident direct investor should be reported under Other

Capital of Block 2A or 2B while loan extended to your subsidiaries/ associates abroad

should be reported under Other Capital of block 4A or 4B. These outstanding loans should be

reported under the loan item of Block 3C or 5C. 113

(iii) Other Liabilities and Assets (Block 3C & 5C, Item 6.0)

These are the residual items that include all external financial liabilities and assets not recorded

elsewhere in the liabilities/assets. These are miscellaneous accounts receivable and payable such

as accounts relating to interest payments in arrears, loan payments in arrears, wages and salaries

outstanding, prepayments of insurance premiums, taxes outstanding & the like.

(iv) Long-term and Short-term Investment (Block 3C & 5C)

Long-term investment is defined as investment with an original contractual maturity of more

than one year. Short-term investment includes currency, investment payable on demand or with

an original contractual maturity of one year or less.

E. Disinvestments in India and Abroad (Item 3.0 in Block 2A, 2B, 3A, 4A, 4B & 5A)

Any disinvestments made by non-resident direct investor of the reporting Indian company during

the year should be reported in Block 2A and Block 2B and portfolio disinvestments in Block 3A.

Likewise, any disinvestment made by the reporting Indian company in its DIE abroad during the

year should be reported in Block 4A and 4B and portfolio disinvestments by reporting company

should be reported in Block 5A.

F. Contingent Liabilities (Block 7)

Contingent liabilities are obligations that arise from a particular discrete event(s), which may

or may not occur. Contingent liabilities are (i) explicit - arise from a legal or contractual

arrangement (Loan & other payment guarantees, credit guarantees, Contingent credit

availability guarantees, exchange rate guarantees, etc) and (ii) implicit - do not arise from a

legal or contractual source, but recognized after a condition or event is realized.

If the Indian company has extended a guarantee to a loan taken by non-resident entity (may be its

subsidiary abroad), such guarantees are part of contingent foreign liabilities. In this case, under

column1 of block 7, ―Loan Guarantee‖ needs to be mentioned.

Country should relate to the country of location of the non-resident creditor involved in the

transaction. To illustrate, as mentioned above, if the contingent foreign liability is in connection

with guarantees on loans, the country of location of the non-resident creditor to whom such

guarantees are given, needs to be reported in column 2.

Seal/114

Annex - 8

Form FC-TRS

Declaration regarding transfer of shares / compulsorily and mandatorily convertible

preference shares (CMCPS) / debentures by way of sale from resident to non resident / nonresident to resident

(to be submitted to the designated AD branch in quadruplicate within 60 days from the date

of receipt of funds)

The following documents are enclosed

For sale of shares / compulsorily and mandatorily convertible preference shares / debentures

by a person resident in India

i. Consent Letter duly signed by the seller and buyer or their duly appointed agent and

in the latter case the Power of Attorney Document.

ii. The shareholding pattern of the investee company after the acquisition of shares by a

person resident outside India.

iii. Certificate indicating fair value of shares from a Chartered Accountant.

iv. Copy of Broker's note if sale is made on Stock Exchange.

v. Declaration from the buyer to the effect that he is eligible to acquire shares /

compulsorily and mandatorily convertible preference shares / debentures under FDI

policy and the existing sectoral limits and Pricing Guidelines have been complied

with.

vi. Declaration from the FII/sub account to the effect that the individual FII / Sub account

ceiling as prescribed has not been breached.

Additional documents in respect of sale of shares / compulsorily and mandatorily

convertible preference shares / debentures by a person resident outside India

vii. If the sellers are NRIs/OCBs, the copies of RBI approvals, if applicable, evidencing

the shares held by them on repatriation/non-repatriation basis.

viii. No Objection/Tax Clearance Certificate from Income Tax Authority/ Chartered

Account.

1 Name of the company 115

Address (including e-mail ,

telephone Number, Fax no)

Activity

NIC Code No.

2 Whether FDI is allowed under

Automatic route

Sectoral Cap under FDI Policy

3 Nature of transaction

(Strike out whichever is not

applicable)

Transfer from resident to non resident /

Transfer from non resident to resident

4 Name of the buyer

Constitution / Nature of the

investing Entity

Specify whether

1. Individual

2. Company

3. FII

4. FVCI

5. Foreign Trust

6. Private Equity Fund

7. Pension/ Provident Fund

8. Sovereign Wealth Fund

(SWF



)

9. Partnership /

Proprietorship firm

10. Financial Institution

11. NRIs / PIOs

12. others

Date and Place of Incorporation



SWF means a Government investment vehicle which is funded by foreign exchange assets, and which manages those assets

separately from the official reserves of the monetary authorities.116

Address of the buyer (including

e-mail, telephone number. Fax

no.)

Name of the seller

Constitution / Nature of the

disinvesting entity

Specify whether

1. Individual

2. Company

3. FII

4. FVCI

5. Foreign Trust

6. Private Equity Fund

7. Pension/ Provident Fund

8. Sovereign Wealth Fund

(SWF



)

9. Partnership/

Proprietorship firm

10. Financial Institution

11. NRIs/PIOs

12. others

Date and Place of Incorporation

Address of the seller (including

e-mail, telephone Number Fax

no)

6 Particulars of earlier Reserve

Bank / FIPB approvals

7 Details regarding shares / compulsorily and mandatorily convertible preference shares

(CMCPS) / debentures to be transferred

Date of the transaction Number of

CMCPS /

debentures

Face

value in

Rs.

Negotiated

Price for the

transfer**in

Rs.

Amount of

consideration

in Rs.



SWF means a Government investment vehicle which is funded by foreign exchange assets, and which manages those assets

separately from the official reserves of the monetary authorities.117

8 Foreign Investments in the

company

No. of shares Percentage

Before the

transfer

After the

transfer

9 Where the shares / CMCPS /

debentures are listed on Stock

Exchange

Name of the Stock exchange

Price Quoted on the Stock

exchange

Where the shares / CMCPS /

debentures are Unlisted

Price as per Valuation

guidelines*

Price as per Chartered

Accountants

* / ** Valuation report (CA

Certificate to be attached)

Declaration by the transferor / transferee

I / We hereby declare that :

i. The particulars given above are true and correct to the best of my/our knowledge and

belief.

ii. I/ We, was/were holding the shares compulsorily and mandatorily convertible preference

shares / debentures as per FDI Policy under FERA/ FEMA Regulations on repatriation/non

repatriation basis.

iii. I/ We, am/are eligible to acquire the shares compulsorily and mandatorily convertible

preference shares / debentures of the company in terms of the FDI Policy. It is not a

transfer relating to shares compulsorily and mandatorily convertible preference shares /

debentures of a company engaged in financial services sector or a sector where general

permission is not available.

iv. The Sectoral limit under the FDI Policy and the pricing guidelines have been adhered to. 118

Signature of the Declarant or

his duly authorised agent

Date:

Note:

In respect of the transfer of shares / compulsorily and mandatorily convertible preference shares /

compulsorily and mandatorily convertible debentures from resident to non resident the

declaration has to be signed by the non resident buyer, and in respect of the transfer of shares /

compulsorily and mandatorily convertible preference shares / compulsorily and mandatorily

convertible debentures from non-resident to resident the declaration has to be signed by the nonresident seller.

Certificate by the AD Branch

It is certified that the application is complete in all respects.

The receipt /payment for the transaction are in accordance with FEMA Regulations / Reserve

Bank guidelines.

Signature

Name and Designation of the Officer

Date: Name of the AD Branch

AD Branch Code 119

Annex-9

Form DR

[Refer to paragraph 4(2) of Schedule 1]

Return to be filed by an Indian Company who has arranged issue of GDR/ADR

Instructions : The Form should be completed and submitted to the Reserve Bank of India, Foreign

Investment Division, Central Office, Mumbai.

1. Name of the Company

2. Address of Registered Office

3. Address for Correspondence

4. Existing Business (please give the NIC Code of

the activity in which the company is

predominantly engaged)

5. Details of the purpose for which GDRs/ADRs

have been raised. If funds are deployed for

overseas investment, details thereof

6. Name and address of the Depository abroad

7. Name and address of the Lead Manager/

Investment/Merchant Banker

8. Name and address of the Sub-Managers to the

issue

9. Name and address of the Indian Custodians

10. Details of FIPB approval (please quote the

relevant NIC Code if the GDRs/ADRs are being

issued under the Automatic Route)

11. Whether any overall sectoral cap for foreign

investment is applicable. If yes, please give

details

12. Details of the Equity Capital Before Issue After Issue

(a) Authorised Capital

(b) Issued and Paid-up Capital

(i) Held by persons Resident in India

(ii) Held by foreign investors other than

FIIs/NRIs/PIOs/ OCBs (a list of 120

foreign investors holding more than

10 percent of the paid-up capital and

number of shares held by each of

them should be furnished)

(iii) Held by NRIs/PIOs/OCBs

(iv) Held by FIIs

Total Equity held by non-residents

to total paid-up capital

13. Whether issue was on private placement basis. If

yes, please give details of the investors and

GDRs/ADRs issued to each of them

14. Number of GDRs/ADRs issued

15. Ratio of GDRs/ADRs to underlying shares

16. Issue Related Expenses

(a) Fee paid/payable to Merchant Bankers/Lead

Manager

(i) Amount (in US$)

(ii) Amount as percentage to the total

issue

(b) Other expenses

17. Whether funds are kept abroad. If yes, name and

address of the bank

18. Details of the listing arrangement

Name of Stock Exchange

Date of commencement of trading

19. The date on which GDRs/ADRs issue was

launched

20. Amount raised (in US $)

21. Amount repatriated (in US $)

Certified that all the conditions laid down by Government of India and Reserve Bank of India have

been complied with.

Sd/-

Chartered Accountant

Sd/-

Authorised Signatory of the Company121

Annex - 10

Form DR - Quarterly

[Refer to paragraph 4(3) of Schedule 1]

Quarterly Return

(to be submitted to the Reserve Bank of India, Foreign Investment Division, Central Office,

Mumbai)

1. Name of the Company

2. Address

3. GDR/ADR issue launched on

4. Total No. of GDRs/ADRs issued

5. Total amount raised

6. Total interest earned till end of quarter

7. Issue expenses and commission etc.

8. Amount repatriated

9. Balance kept abroad - Details

(i) Banks Deposits

(ii) Treasury Bills

(iii) Others (please specify)

10. No. of GDRs/ADRs still outstanding

11. Company's share price at the end of the

quarter

12. GDRs/ADRs price quoted on overseas stock

exchange as at the end of the quarter

Certified that the funds raised through GDRs/ADRs have not been invested in stock market or real

estate.

Sd/-

Chartered Accountant

Sd/-

Authorised Signatory of the Company

==========================================================================================

================================================================================================

(1) Who Can Invest In India: A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy. A citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route.

NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.

OCBs have been derecognized as a class of investors in India with effect from September 16, 2003. Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government route; and with the prior approval of RBI if the investment is through Automatic route.

An FII may invest in the capital of an Indian Company under the Portfolio Investment Scheme which limits the individual holding of an FII to 10% of the capital of the company and the aggregate limit for FII investment to 24% of the capital of the company. This aggregate limit of 24% can be increased to the sectoral cap/statutory ceiling, as applicable, by the Indian Company concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body and subject to prior intimation to RBI. The aggregate FII investment, in the FDI and Portfolio Investment Scheme, should be within the above caps.

The Indian company which has issued shares to FIIs under the FDI Policy for which the payment has been received directly into company‘s account should report these figures separately under item no. 5 of Form FC-GPR. A daily statement in respect of all transactions (except derivative trade) has to be submitted by the custodian bank in floppy / soft copy in the prescribed format directly to RBI.

Only SEBI registered FII and NRIs as per Schedules 2 and 3 respectively of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000, can invest/trade through a registered broker in the capital of Indian Companies on recognised Indian Stock Exchanges.

A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to 100% of the capital of an Indian Venture Capital Undertaking (IVCU) and may also set up a domestic asset management company to manage the fund. All such investments can be made under the automatic route in terms of Schedule 6 to Notification No. FEMA 20. A SEBI registered FVCI can invest in a domestic venture capital fund registered under the SEBI (Venture Capital Fund) Regulations, 1996. Such investments would also be subject to the extant FEMA regulations and extant FDI policy including sectoral caps, etc. SEBI registered FVCIs are also allowed to invest under the FDI Scheme, as non-resident entities, in other companies, subject to FDI Policy and FEMA regulations.

Further, FVCIs are allowed to invest in the eligible securities (equity, equity linked instruments, debt, debt instruments, debentures of an IVCU or VCF, units of schemes / funds set up by a VCF) by way of private arrangement / purchase from a third party also, subject to terms and conditions as stipulated in Schedule 6 of Notification No. FEMA 20 / 2000 -RB dated May 3, 2000 as amended from time to time. It is also being clarified that SEBI registered FVCIs would also be allowed to invest in securities on a recognized stock exchange subject to the provisions of the SEBI (FVCI) Regulations, 2000, as amended from time to time, as well as the terms and conditions stipulated therein.

(2) Qualified Foreign Investors (QFls) investment in equity shares: QFls are permitted to invest through SEBI registered Depository Participants (DPs) only in equity shares of listed Indian companies through recognized brokers on recognized stock exchanges in India as well as in equity shares of Indian companies which are offered to public in India in terms of the relevant and applicable SEBI guidelines/regulations. QFls are also permitted to acquire equity shares by way of right shares, bonus shares or equity shares on account of stock split / consolidation or equity shares on account of amalgamation, demerger or such corporate actions subject to the prescribed investment limits. QFIs are allowed to sell the equity shares so acquired subject to the relevant SEBI guidelines.

The individual and aggregate investment limits for the QFls shall be 5% and 10% respectively of the paid up capital of an Indian company. These limits shall be over and above the FII and NRI investment ceilings prescribed under the Portfolio Investment Scheme for foreign investment in India. Further, wherever there are composite sectoral caps under the extant FDI policy, these limits for QFI investment in equity shares shall also be within such overall FDI sectoral caps.

Dividend payments on equity shares held by QFls can either be directly remitted to the designated overseas bank accounts of the QFIs or credited to the single rupee pool bank account. In case dividend payments are credited to the single rupee pool bank account they shall be remitted to the designated overseas bank accounts of the QFIs within five working days (including the day of credit of such funds to the single rupee pool bank account). Within these five working days, the dividend payments can be also utilized for fresh purchases of equity shares under this scheme, if so instructed by the QFI.

(3) Entities Into Which FDI Can Be Made:

(a) FDI in an Indian Company: Indian companies can issue capital against FDI.

(b) FDI in Partnership Firm / Proprietary Concern: A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest in the capital of a firm or a proprietary concern in India on non-repatriation basis provided;

(i) Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers / Authorized banks.
(ii) The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business or print media sector.
(iii) Amount invested shall not be eligible for repatriation outside India.

(c) Investments with repatriation option: NRIs/PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns/partnership firms with repatriation option. The application will be decided in consultation with the Government of India.

(d) Investment by non-residents other than NRIs/PIO: A person resident outside India other than NRIs/PIO may make an application and seek prior approval of Reserve Bank for making investment in the capital of a firm or a proprietorship concern or any association of persons in India. The application will be decided in consultation with the Government of India.

(e) Restrictions: An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business or print media.

(f) FDI in Venture Capital Fund (VCF): FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs) /Venture Capital Funds (VCFs) /other companies, as stated in paragraph 3.1.6 of this Circular. If a domestic VCF is set up as a trust, a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF subject to approval of the FIPB. However, if a domestic VCF is set-up as an incorporated company under the Companies Act, 1956, then a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF under the automatic route of FDI Scheme, subject to the pricing guidelines, reporting requirements, mode of payment, minimum capitalization norms, etc.

(g) FDI in Trusts: FDI in Trusts other than VCF is not permitted.

(h) FDI in Limited Liability Partnerships (LLPs): FDI in LLPs is permitted, subject to the following conditions:

(i) FDI will be allowed, through the Government approval route, only in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions (such as 'Non Banking Finance Companies' or 'Development of Townships, Housing, Built-up infrastructure and Construction-development projects' etc.).

(ii) LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business.

(iii) An Indian company, having FDI, will be permitted to make downstream investment in an LLP only if both-the company, as well as the LLP- are operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.

(iv) LLPs with FDI will not be eligible to make any downstream investments.

(v) 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.

(vi) Investment in LLPs by Foreign Institutional Investors (FIls) and Foreign Venture Capital Investors (FVCIs) will not be permitted. LLPs will also not be permitted to avail External Commercial Borrowings (ECBs).

(vii) In case the LLP with FDI has a body corporate that is a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of Section 7 of the LLP Act, 2008, such a body corporate should only be a company registered in India under the Companies Act, 1956 and not any other body, such as an LLP or a trust.

(viii) For such LLPs, the designated partner "resident in India", as defined under the
'Explanation' to Section 7(1) of the LLP Act, 2008, would also have to satisfy the definition of "person resident in India", as prescribed under Section 2(v)(i) of the Foreign Exchange Management Act, 1999.

(ix) The designated partners will be responsible for compliance with all the above conditions and also liable for all penalties imposed on the LLP for their contravention, if any.

(x) Conversion of a company with FDI, into an LLP, will be allowed only if the above stipulations are met and with the prior approval of FIPB/Government.

(i) FDI in other Entities: FDI in resident entities other than those mentioned above is not permitted.

(4) Types Of Instruments: Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA Regulations. The price/ conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [the DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies.

Other types of Preference shares/Debentures i.e. non-convertible, optionally convertible or partially convertible for issue of which funds have been received on or after May 1, 2007 are considered as debt. Accordingly all norms applicable for ECBs relating to eligible borrowers, recognized lenders, amount and maturity, end-use stipulations, etc. shall apply. Since these instruments would be denominated in rupees, the rupee interest rate will be based on the swap equivalent of London Interbank Offered Rate (LIBOR) plus the spread as permissible for ECBs of corresponding maturity.

The inward remittance received by the Indian company vide issuance of DRs and FCCBs are treated as FDI and counted towards FDI.

(a) Issue of Shares by Indian Companies under FCCB/ADR/GDR:

(i) Indian companies can raise foreign currency resources abroad through the issue of FCCB/DR (ADRs/GDRs), 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 Government of India there under from time to time.

(ii) A company can issue ADRs / GDRs if it is eligible to issue shares to persons resident outside India under the FDI Policy. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs.

(iii) Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market, would require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments. Unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier. ADRs / GDRs are issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager to the issue. The proceeds so raised have to be kept abroad till actually required in India. Pending repatriation or utilization of the proceeds, the Indian company can invest the funds in:-
(a) Deposits, Certificate of Deposits or other instruments offered by banks rated by Standard and Poor, Fitch, IBCA ,Moody's, etc. with rating not below the rating stipulated by Reserve Bank from time to time for the purpose;

(b) Deposits with branch/es of Indian Authorized Dealers outside India; and

(c) Treasury bills and other monetary instruments with a maturity or unexpired maturity of one year or less.

(iv) There are no end-use restrictions except for a ban on deployment / investment of such funds in real estate or the stock market. There is no monetary limit up to which an Indian company can raise ADRs / GDRs.

(v) The ADR / GDR proceeds can be utilized for first stage acquisition of shares in the disinvestment process of Public Sector Undertakings / Enterprises and also in the mandatory second stage offer to the public in view of their strategic importance.

(vi) Voting rights on shares issued under the Scheme shall be as per the provisions of Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues shall be consistent with the Company Law provisions. Voting rights in the case of banking companies will continue to be in terms of the provisions of the Banking Regulation Act, 1949 and the instructions issued by the Reserve Bank from time to time, as applicable to all shareholders exercising voting rights.

(vii) Erstwhile OCBs who are not eligible to invest in India and entities prohibited from buying, selling or dealing in securities by SEBI will not be eligible to subscribe to ADRs/ GDRs issued by Indian companies.

(viii) The pricing of ADR / GDR issues should be made at a price determined under the provisions of the Scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India and directions issued by the Reserve Bank, from time to time.

(ix) The pricing of sponsored ADRs/GDRs would be determined under the provisions of the Scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India and directions issued by the Reserve Bank, from time to time.

(b) Two-way Fungibility Scheme: A limited two-way Fungibility scheme has been put in place by the Government of India for ADRs / GDRs. Under this Scheme, a stock broker in India, registered with SEBI, can purchase shares of an Indian company from the 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 the Indian market.

(c) Sponsored ADR/GDR issue: An Indian company can also sponsor an issue of ADR / GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs / GDRs can be issued abroad. The proceeds of the ADR / GDR issue are remitted back to India and distributed among the resident investors who had offered their Rupee denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the resident shareholders who have tendered such shares for conversion into ADRs / GDRs.

(5) Issue/Transfer Of Shares:

(a) Capital Instrument: The capital instruments should be issued within 180 days from the date of receipt of the inward remittance received through normal banking channels including escrow account opened and maintained for the purpose or by debit to the NRE/FCNR (B) account of the non-resident investor. In case, the capital instruments are not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be. Non-compliance with the above provision would be reckoned as a contravention under FEMA and would attract penal provisions. In exceptional cases, refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt may be considered by the RBI, on the merits of the case.

(b) Issue Price of Shares: Price of shares issued to persons resident outside India under the FDI Policy, shall not be less than –

(i) the price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company is listed on any recognised stock exchange in India;

(ii) the fair valuation of shares done by a SEBI registered Category - I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company is not listed on any recognised stock exchange in India ; and

(iii) the price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment.

(c) Foreign Currency Account: Indian companies which are eligible to issue shares to persons resident outside India under the FDI Policy may be allowed to retain the share subscription amount in a Foreign Currency Account, with the prior approval of RBI.

(d) Transfer of Shares and Convertible Debentures:

(i) Subject to FDI sectoral policy (relating to sectoral caps and entry routes), applicable laws and other conditionalities including security conditions, non-resident investors can also invest in Indian companies by purchasing/acquiring existing shares from Indian shareholders or from other non-resident shareholders. General permission has been granted to non-residents/NRIs for acquisition of shares by way of transfer subject to the following:

(a) A person resident outside India (other than NRI and erstwhile OCB) may transfer by way of sale or gift, the shares or convertible debentures to any person resident outside India (including NRIs).
(b) NRIs may transfer by way of sale or gift the shares or convertible debentures held by them to another NRI.
(c) A person resident outside India can transfer any security to a person resident in India by way of gift.
(d) A person resident outside India can sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a stock broker registered with stock exchange or a merchant banker registered with SEBI.
(e) A person resident in India can transfer by way of sale, shares/convertible debentures (including transfer of subscriber‘s shares), of an Indian company under private arrangement to a person resident outside India, subject to these guidelines.
(f) General permission is also available for transfer of shares/convertible debentures, by way of sale under private arrangement by a person resident outside India to a person resident in India, subject to these guidelines.
(g) The above General Permission also covers transfer by a resident to a non-resident of shares/convertible debentures of an Indian company, engaged in an activity earlier covered under the Government Route but now falling under Automatic Route, as well as transfer of shares by a non-resident to an Indian company under buyback and/or capital reduction scheme of the company.
(h) The Form FC-TRS should be submitted to the AD Category-I Bank, within 60 days from the date of receipt of the amount of consideration. The onus of submission of the Form FC-TRS within the given timeframe would be on the transferor/transferee, resident in India.

(ii) The sale consideration in respect of equity instruments purchased by a person resident outside India, remitted into India through normal banking channels, shall be subjected to a Know Your Customer (KYC) check by the remittance receiving AD Category-I bank at the time of receipt of funds. In case, the remittance receiving AD Category-I bank is different from the AD Category-I bank handling the transfer transaction, the KYC check should be carried out by the remittance receiving bank and the KYC report be submitted by the customer to the AD Category-I bank carrying out the transaction along with the Form FC-TRS.

(iii) Escrow: AD Category-I banks have been given general permission to open Escrow account and Special account of non-resident corporate for open offers / exit offers and delisting of shares. The relevant SEBI (SAST) Regulations or any other applicable SEBI Regulations/ provisions of the Companies Act, 1956 will be applicable. AD Category-I banks have also been permitted to open and maintain, without prior approval of RBI, non-interest bearing Escrow accounts in Indian Rupees in India on behalf of residents and/or non-residents, towards payment of share purchase consideration and/or provide Escrow facilities for keeping securities to facilitate FDI transactions subject to the terms and conditions specified by RBI. SEBI authorised Depository Participants have also been permitted to open and maintain, without prior approval of RBI, Escrow accounts for securities subject to the terms and conditions as specified by RBI. In both cases, the Escrow agent shall necessarily be an AD Category- I bank or SEBI authorised Depository Participant (in case of securities‘ accounts). These facilities will be applicable for both issue of fresh shares to the non- residents as well as transfer of shares from / to the non- residents.

(5) Prior Permission of RBI in certain cases for Transfer of Capital Instruments

Except cases mentioned in subsequent paragraph below, the following cases require prior approval of RBI:

(i) Transfer of capital instruments from resident to non-residents by way of sale where:

(a) Transfer is at a price which falls outside the pricing guidelines specified by the Reserve Bank from time to time and the transaction does not fall under the exception given in subsequent para.
(b) Transfer of capital instruments by the non-resident acquirer involving deferment of payment of the amount of consideration. Further, in case approval is granted for a transaction, the same should be reported in Form FC-TRS, to an AD Category-I bank for necessary due diligence, within 60 days from the date of receipt of the full and final amount of consideration.

(ii) Transfer of any capital instrument, by way of gift by a person resident in India to a person resident outside India. While forwarding applications to Reserve Bank for approval for transfer of capital instruments by way of gift, relevant documents should be enclosed. Reserve Bank considers the following factors while processing such applications:

(a) The proposed transferee (donee) is eligible to hold such capital instruments under Schedules 1, 4 and 5 of Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.
(b) The gift does not exceed 5 per cent of the paid-up capital of the Indian company/each series of debentures/each mutual fund scheme.
(c) The applicable sectoral cap limit in the Indian company is not breached.
(d) The transferor (donor) and the proposed transferee (donee) are close relatives as defined in Section 6 of the Companies Act, 1956, as amended from time to time.
(e) The value of capital instruments to be transferred together with any capital instruments already transferred by the transferor, as gift, to any person residing outside India does not exceed the rupee equivalent of USD 50,000 during the financial year.
(f) Such other conditions as stipulated by Reserve Bank in public interest from time to time.

(iii) Transfer of Shares from NRI to Non-Resident

In the following cases, approval of RBI is not required:

(a) Transfer of shares from a Non Resident to Resident under the FDI scheme where the pricing guidelines under FEMA, 1999 are not met provided that :-

(i) The original and resultant investment are in line with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation, etc.;
(ii) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST, buy back); and
(iii) Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.

(b) Transfer of shares from Resident to Non Resident:

(i) Where the transfer of shares requires the prior approval of the FIPB as per the extant FDI policy provided that:

(a) The requisite approval of the FIPB has been obtained; and
(b) the transfer of share adheres with the pricing guidelines and documentation requirements as specified by the Reserve Bank of India from time to time.

(ii) where the transfer of shares attract SEBI (SAST) guidelines subject to the adherence with the pricing guidelines and documentation requirements as specified by Reserve Bank of India from time to time.

(iii) where the transfer of shares does not meet the pricing guidelines under the FEMA, 1999 provided that:-

(a) The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation etc.;

(b) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST); and

(c) Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.

(iv) where the investee company is in the financial sector provided that :

(a) NOCs are obtained from the respective financial sector regulators/ regulators of the investee company as well as transferor and transferee entities and such NOCs are filed along with the form FC-TRS with the AD bank; and

(b). The FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, pricing, etc.), reporting requirements, documentation etc., are complied with.

(iv) Conversion of ECB/Lumpsum Fee/Royalty etc. into Equity

(i) Indian companies have been granted general permission for conversion of External Commercial Borrowings (ECB) (excluding those deemed as ECB) in convertible foreign currency into equity shares/fully compulsorily and mandatorily convertible preference shares, subject to the following conditions and reporting requirements.

(a) The activity of the company is covered under the Automatic Route for FDI or the company has obtained Government approval for foreign equity in the company;
(b) The foreign equity after conversion of ECB into equity is within the sectoral cap, if any;
(c) Pricing of shares is as per the specified provision;
(d) Compliance with the requirements prescribed under any other statute and regulation in force; and
(e) The conversion facility is available for ECBs availed under the Automatic or Government Route and is applicable to ECBs, due for payment or not, as well as secured/unsecured loans availed from non-resident collaborators.

(ii) General permission is also available for issue of shares/preference shares against lump sum technical know-how fee, royalty, subject to entry route, sectoral cap and pricing guidelines and compliance with applicable tax laws.

(iii) Issue of equity shares under the FDI policy is allowed under the Government route for the following:

(v) Import of capital goods/ machinery/ equipment (excluding second-hand machinery), subject to compliance with the following conditions:

(a) Any import of capital goods/machinery etc., made by a resident in India, has to be in accordance with the Export/ Import Policy issued by Government of India/as defined by DGFT/FEMA provisions relating to imports.
(b) There is an 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.
(c) The application clearly indicating the beneficial ownership and identity of the Importer Company as well as overseas entity.
(d) Applications complete in all respects, for conversions of import payables for capital goods into FDI being made within 180 days from the date of shipment of goods.

(vi) Pre-operative/ pre-incorporation expenses (including payments of rent etc.), subject to compliance with the following conditions:

(a) Submission of FIRC for remittance of funds by the overseas promoters for the expenditure incurred.
(b) Verification and certification of the pre-incorporation/pre-operative expenses by the statutory auditor.
(c) Payments should be made by the foreign investor to the company directly or through the bank account opened by the foreign investor as provided under FEMA Regulations.
(d) The applications, complete in all respects, for capitalization being made within the period of 180 days from the date of incorporation of the company

General conditions:

(i) All requests for conversion should be accompanied by a special resolution of the company.
(ii) Government‘s approval would be subject to pricing guidelines of RBI and appropriate tax clearance.

(6) Specific Conditions In Certain Cases:

(a) Issue of Rights/Bonus Shares – FEMA provisions allow Indian companies to freely issue Rights/Bonus shares to existing non-resident shareholders, subject to adherence to sectoral cap, if any. However, such issue of bonus / rights shares has to be in accordance with other laws/statutes like the Companies Act, 1956, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (in case of listed companies), etc. The offer on right basis to the persons resident outside India shall be:

(a) in the case of shares of a company listed on a recognized stock exchange in India, at a price as determined by the company;
(b) in the case of shares of a company not listed on a recognized stock exchange in India, at a price which is not less than the price at which the offer on right basis is made to resident shareholders.

(b) Prior permission of RBI for Rights issue to erstwhile OCBs- OCBs have been de-recognised as a class of investors from September 16, 2003. Therefore companies desiring to issue rights share to such erstwhile OCBs will have to take specific prior permission from RBI. As such, entitlement of rights share is not automatically available to erstwhile OCBs. However bonus shares can be issued to erstwhile OCBs without the approval of RBI.
(c) Additional allocation of rights share by residents to non-residents – Existing non-resident shareholders are allowed to apply for issue of additional shares/ fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares over and above their rights share entitlements. The investee company can allot the additional rights share out of unsubscribed portion, subject to the condition that the overall issue of shares to non-residents in the total paid-up capital of the company does not exceed the sectoral cap.

(d) Acquisition of shares under Scheme of Merger/Demerger/Amalgamation – Mergers/demergers/ amalgamations of companies in India are usually governed by an order issued by a competent Court on the basis of the Scheme submitted by the companies undergoing merger/demerger/amalgamation. Once the scheme of merger or demerger or amalgamation of two or more Indian companies has been approved by a Court in India, the transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject to the conditions that:

(i) the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap, and

(ii) the transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy.

(e) Issue of shares under Employees Stock Option Scheme (ESOPs) –

(i) Listed Indian companies are allowed to issue shares under the Employees Stock Option Scheme (ESOPs), to its employees or employees of its joint venture or wholly owned subsidiary abroad, who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued to citizens of Bangladesh with the prior approval of FIPB. Shares under ESOPs can be issued directly or through a Trust subject to the condition that:

(a) The scheme has been drawn in terms of relevant regulations issued by the SEBI, and
(b) The face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5 per cent of the paid-up capital of the issuing company.

(ii) Unlisted companies have to follow the provisions of the Companies Act, 1956. The Indian company can issue ESOPs to employees who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued to the citizens of Bangladesh with the prior approval of the FIPB.

(iii)The issuing company is required to report (plain paper reporting) the details of granting of stock options under the scheme to non-resident employees to the Regional Office concerned of the Reserve Bank and thereafter the details of issue of shares subsequent to the exercise of such stock options within 30 days from the date of issue of shares in Form FC-GPR.
(f) Share Swap: In cases of investment by way of swap of shares, irrespective of the amount, valuation of the shares will have to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of the Foreign Investment Promotion Board (FIPB) will also be a prerequisite for investment by swap of shares.
3.5.7 Pledge of Shares:

(a) A person being a promoter of a company registered in India (borrowing company), which has raised external commercial borrowings, may pledge the shares of the borrowing company or that of its associate resident companies for the purpose of securing the ECB raised by the borrowing company, provided that a no objection for the same is obtained from a bank which is an authorised dealer. The authorized dealer, shall issue the no objection for such a pledge after having satisfied itself that the external commercial borrowing is in line with the extant FEMA regulations for ECBs and that:

(i). the loan agreement has been signed by both the lender and the borrower,
(ii) there exists a security clause in the Loan Agreement requiring the borrower to create charge on financial securities, and
(iii) the borrower has obtained Loan Registration Number (LRN) from the Reserve Bank: and the said pledge would be subject to the following conditions :

(a). the period of such pledge shall be co-terminus with the maturity of the underlying ECB;
(b). in case of invocation of pledge, transfer shall be in accordance with the extant FDI Policy and directions issued by the Reserve Bank;
(c). the Statutory Auditor has certified that the borrowing company will utilized / has utilized the proceeds of the ECB for the permitted end use/s only.

(b) Non-resident holding shares of an Indian company, can pledge these shares in favour of the AD bank in India to secure credit facilities being extended to the resident investee company for bonafide business purpose, subject to the following conditions:

(i) in case of invocation of pledge, transfer of shares should be in accordance with the FDI policy in vogue at the time of creation of pledge;
(ii) submission of a declaration/ annual certificate from the statutory auditor of the investee company that the loan proceeds will be / have been utilized for the declared purpose;
(iii) the Indian company has to follow the relevant SEBI disclosure norms; and
(iv) pledge of shares in favour of the lender (bank) would be subject to Section 19 of the Banking Regulation Act, 1949.

(c) Non-resident holding shares of an Indian company, can pledge these shares in favour of an overseas bank to secure the credit facilities being extended to the non-resident investor / non-resident promoter of the Indian company or its overseas group company, subject to the following:

(i) loan is availed of only from an overseas bank;
(ii) loan is utilized for genuine business purposes overseas and not for any investments either directly or indirectly in India;
(iii)overseas investment should not result in any capital inflow into India;
(iv) in case of invocation of pledge, transfer should be in accordance with the FDI policy in vogue at the time of creation of pledge; and
(v) submission of a declaration/ annual certificate from a Chartered Accountant/ Certified Public Accountant of the non-resident borrower that the loan proceeds will be / have been utilized for the declared purpose.

(7) Entry Routes For Investment:

(a) Investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, through the Automatic Route or the Government Route. Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment. Under the Government Route, prior approval of the Government of India is required. Proposals for foreign investment under Government route, are considered by FIPB.

(b) Guidelines for establishment of Indian companies/ transfer of ownership or control of Indian companies, from resident Indian citizens to non-resident entities, in sectors with caps:

In sectors/activities with caps, including inter-alia defence production, air transport services, ground handling services, asset reconstruction companies, private sector banking, broadcasting, commodity exchanges, credit information companies, insurance, print media, telecommunications and satellites, Government approval/FIPB approval would be required in all cases where:

(i) An Indian company is being established with foreign investment and is owned by a non-resident entity or
(ii) An Indian company is being established with foreign investment and is controlled by a non-resident entity or
(iii) 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 and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc. or
(iv) 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 and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc.
(v) It is clarified that these guidelines will not apply to sectors/activities where there are no foreign investment caps, that is, 100% foreign investment is permitted under the automatic route.
(vi) It is also clarified that Foreign investment shall include all types of foreign investments i.e. FDI, investment by FIIs, NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds (FCCB) and fully, mandatorily & compulsorily convertible preference shares/debentures, regardless of whether the said investments have been made under Schedule 1, 2, 3 and 6 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations.

(8) Caps On Investment: Investments can be made by non-residents in the capital of a resident entity only to the extent of the percentage of the total capital as specified in the FDI policy. The caps in various sector(s) are detailed in this circular.

(9) Entry Conditions On Investment: Investments by non-residents can be permitted in the capital of a resident entity in certain sectors/activity with entry conditions. Such conditions may include norms for minimum capitalization, lock-in period, etc. The entry conditions in various sectors/activities are detailed in this circular.

(10) Other Conditions On Investment Besides Entry Conditions: The entry conditions on foreign investment, the investment/investors are required to comply with all relevant sectoral laws, regulations, rules, security conditions, and state/ local laws/ regulations.

(11) Foreign Investment Into/Downstream Investment By Indian Companies:

(a) The Guidelines for calculation of total foreign investment, both direct and indirect in an Indian company, at every stage of investment, including downstream investment, have been detailed in this circular.

(b) For the purpose of this chapter downstream investment means indirect foreign investment, by one Indian company, into another Indian company, by way of subscription or acquisition, in terms of this circular. The circular provides the guidelines for calculation of indirect foreign investment, with conditions specified therein.

(c) Foreign investment into an Indian company engaged only in the activity of investing in the capital of other Indian company/ies (regardless of its ownership or control):

(i) Foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian company/ies, will require prior Government/FIPB approval, regardless of the amount or extent of foreign investment. Foreign investment into Non-Banking Finance Companies (NBFCs), carrying on activities approved for FDI, will be subject to the conditions specified in paragraph 6.2.24 of this Circular.

(ii) Those companies, which are Core Investment Companies (CICs), will have to additionally follow RBI‘s Regulatory Framework for CICs.
(iii) For infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments, Government/FIPB approval would be required, regardless of the amount or extent of foreign investment. Further, as and when such a company commences business(s) or makes downstream investment, it will have to comply with the relevant sectoral conditions on entry route, conditionalities and caps.

Note: Foreign investment into other Indian companies would be in accordance/ compliance with the relevant sectoral conditions on entry route, conditionalities and caps.

(d) Downstream investment by an Indian company which is owned and/or controlled by non resident entity/ies:

(i) Downstream investment by an Indian company, which is owned and/ or controlled by non-resident entity/ies, into another Indian company, would be in accordance/compliance with the relevant sectoral conditions on entry route, conditionalities and caps, with regard to the sectors in which the latter Indian company is operating.

(ii) Downstream investments by Indian companies will be subject to the following conditions:

(a) Such a company is to notify SIA, DIPP and FIPB of its downstream investment in the form available at http://www.fipbindia.com within 30 days of such investment, even if capital instruments have not been allotted along with the modality of investment in new/existing ventures (with/without expansion programme);
(b) downstream investment by way of induction of foreign equity in an existing Indian Company to be duly supported by a resolution of the Board of Directors as also a shareholders Agreement, if any;
(c) issue/transfer/pricing/valuation of shares shall be in accordance with applicable SEBI/RBI guidelines;
(d) For the purpose of downstream investment, the Indian companies making the downstream investments would have to bring in requisite funds from abroad and not leverage funds from the domestic market. This would, however, not preclude downstream companies, with operations, from raising debt in the domestic market. Downstream investments through internal accruals are permissible, subject to the provisions of this circular.

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FDI In Limited Liability Partnerships (LLPs) In India 2012

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Permissible Direct And Indirect Foreign Investment In An Indian Company

This is the fifth article of the series. The previous articles in this regard are consolidated FDI policy of India 2012 by DIPP: objectives, consolidated FDI policy of India 2012 by DIPP: definitions,consolidated FDI policy of India 2012 by DIPP: general provisions, FDI in limited liability partnerships (LLPs) in India 2012.

In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss calculation of foreign investment, total foreign investment limits, direct and indirect foreign investment in Indian companies, etc.

As per the consolidated FDI circular 2012 issued by DIPP:

(1) Investment in Indian companies can be made both by non-resident as well as resident Indian entities. Any non-resident investment in an Indian company is direct foreign investment. Investment by resident Indian entities could again comprise of both resident and non-resident investment. Thus, such an Indian company would have indirect foreign investment if the Indian investing company has foreign investment in it. The indirect investment can also be a cascading investment i.e. through multi-layered structure.

(2) For the purpose of computation of indirect Foreign investment, Foreign Investment in Indian company shall include all types of foreign investments i.e. FDI; investment by FIIs (holding as on March 31); NRIs; ADRs; GDRs; Foreign Currency Convertible Bonds (FCCB); fully, compulsorily and mandatorily convertible preference shares and fully,compulsorily and mandatorily convertible Debentures regardless of whether the said investments have been made under Schedule 1, 2, 3 and 6 of FEM (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000.

(3) Guidelines for calculation of total foreign investment i.e. direct and indirect foreign investment in an Indian company.

(i) Counting the Direct Foreign Investment: All investment directly by a non-resident entity into the Indian company would be counted towards foreign investment.

(ii) Counting of indirect foreign Investment:

(a) 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/or Indian Companies which are owned and controlled by resident Indian citizens.

(b) For cases where condition (a) above 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,

provided that, as an exception, the indirect foreign investment in only the 100% owned subsidiaries of operating-cum-investing/investing companies, will be limited to the foreign investment in the operating-cum-investing/ investing company. This exception is made since the downstream investment of a 100% 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. This exception, however, is strictly for those cases where the entire capital of the downstream subsidiary is owned by the holding company.

Illustration

To illustrate, if the indirect foreign investment is being calculated for Company X which has investment through an investing Company Y having foreign investment, the following would be the method of calculation:

(a) Where Company Y has foreign investment less than 50%- Company X would not be taken as having any indirect foreign investment through Company Y.

(b) Where Company Y has foreign investment of say 75% and:

(i) invests 26% in Company X, the entire 26% investment by Company Y would be treated as indirect foreign investment in Company X;
(ii) Invests 80% in Company X, the indirect foreign investment in Company X would be taken as 80%
(iii) Where Company X is a wholly owned subsidiary of Company Y (i.e. Company Y owns 100% shares of Company X), then only 75% would be treated as indirect foreign equity and the balance 25% would be treated as resident held equity. The indirect foreign equity in Company X would be computed in the ratio of 75: 25 in the total investment of Company Y in Company X.

(c)The total foreign investment would be the sum total of direct and indirect foreign investment.

(d) The above methodology of calculation would apply at every stage of investment in Indian companies and thus to each and every Indian company.

(e) Additional conditions:

(i) The full details about the foreign investment including ownership details etc. in Indian company(s) and information about the control of the company(s) would be furnished by the Company(s) to the Government of India at the time of seeking approval.

(ii) In any sector/activity, where Government approval is required for foreign investment and in cases where there are any inter-se agreements between/amongst share-holders which have an effect on the appointment of the Board of Directors or on the exercise of voting rights or of creating voting rights disproportionate to shareholding or any incidental matter thereof, such agreements will have to be informed to the approving authority. The approving authority will consider such inter-se agreements for determining ownership and control when considering the case for approval of foreign investment.

(iii) In all sectors attracting sectoral caps, the balance equity i.e. beyond the sectoral foreign investment cap, would specifically be beneficially owned by/held with/in the hands of resident Indian citizens and Indian companies, owned and controlled by resident Indian citizens.

(iv) In the I& B and Defence sectors where the sectoral cap is less than 49%, 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% of the total equity, excluding the equity held by Public Sector Banks and Public Financial Institutions, as defined in Section 4A of the Companies Act, 1956. The term largest Indian shareholder‘, used in this clause, will include any or a combination of the following:

(i) In the case of an individual shareholder,

(a) The individual shareholder,
(b) A relative of the shareholder within the meaning of Section 6 of the Companies Act, 1956.
(c) A company/ group of companies in which the individual shareholder/HUF to which he belongs has management and controlling interest.

(ii) In the case of an Indian company,

(a) The Indian company

(b) A group of Indian companies under the same management and ownership control.

For the purpose of this Clause, Indian company shall be a company which must have a resident Indian or a relative as defined under Section 6 of the Companies Act, 1956/ HUF, either singly or in combination holding at least 51% of the shares.

(iii) Provided that, in case of a combination of all or any of the entities mentioned in Sub-Clauses (i) and (ii) of clause 4.1.3(v)(d)(A) above, each of the parties shall have entered into a legally binding agreement to act as a single unit in managing the matters of the applicant company.
If a declaration is made by persons as per section 187C of the Indian Companies Act about a beneficial interest being held by a non resident entity, then even though the investment may be made by a resident Indian citizen, the same shall be counted as foreign investment.

(4) The above mentioned policy and methodology would be applicable for determining the total foreign investment in all sectors, except in sectors where it is specified in a statute or rule there under. The above methodology of determining direct and indirect foreign investment therefore does not apply to the Insurance Sector which will continue to be governed by the relevant Regulation.

(5) Any foreign investment already made in accordance with the guidelines in existence prior to February 13, 2009 (date of issue of Press Note 2 of 2009) 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.

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Permissible Direct And Indirect Foreign Investment In An Indian Company

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Foreign Investment Promotion Board (FIPB) And FDI Policy Of India 2012

This is the sixth article of the series. The previous articles in this regard are consolidated FDI policy of India 2012 by DIPP: objectives, consolidated FDI policy of India 2012 by DIPP: definitions,consolidated FDI policy of India 2012 by DIPP: general provisions, FDI in limited liability partnerships (LLPs) in India 2012, permissible direct and indirect foreign investment in an Indian company.

In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the provisions pertaining to foreign investment promotion board (FIPB) under the FDI policy of India 2012. These are as follows:

(1) Constitution Of FIPB: FIPB comprises of the following Secretaries to the Government of India:

(a) Secretary to Government, Department of Economic Affairs, Ministry of Finance – Chairperson.
(b) Secretary to Government, Department of Industrial Policy & Promotion, Ministry of Commerce & Industry.
(c) Secretary to Government, Department of Commerce, Ministry of Commerce & Industry.
(d) Secretary to Government, Economic Relations, Ministry of External Affairs.
(e) Secretary to Government, Ministry of Overseas Indian Affairs.

The Board would be able to co-opt other Secretaries to the Central Government and top officials of financial institutions, banks and professional experts of Industry and Commerce, as and when necessary.

(2) Levels Of Approvals For Cases Under Government Route: The Minister of Finance who is in-charge of FIPB would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs.1200 crore.

The recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 1200 crore would be placed for consideration of CCEA.

The CCEA would also consider the proposals which may be referred to it by the FIPB/ the Minister of Finance (in-charge of FIPB).

(3) Cases Which Do Not Require Fresh Approval: Companies may not require fresh prior approval of the Government i.e. Minister in-charge of FIPB/CCEA for bringing in additional foreign investment into the same entity, in the following cases:

(i) Entities the activities of which had earlier required prior approval of FIPB/CCFI/CCEA and which had, accordingly, earlier obtained prior approval of FIPB/CCFI/CCEA for their initial foreign investment but subsequently such activities/sectors have been placed under automatic route;

(ii) Entities the activities of which had sectoral caps earlier and which had, accordingly, earlier obtained prior approval of FIPB/CCFI/CCEA for their initial foreign investment but subsequently such caps were removed/increased and the activities placed under the automatic route; provided that such additional investment alongwith the initial/original investment does not exceed the sectoral caps; and

(iii) Additional foreign investment into the same entity where prior approval of FIPB/CCFI/CCEA had been obtained earlier for the initial/original foreign investment due to requirements of Press Note 18/1998 or Press Note 1 of 2005 and prior approval of the Government under the FDI policy is not required for any other reason/purpose.

(4) Online Filing Of Applications For FIPB/Government Approval: Guidelines for e-filing of applications, filing of amendment applications and instructions to applicants are available at FIPB‘s website.

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Prohibited Sectors Under The Consolidated FDI Policy Of India 2012

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FDI In Agriculture And Animal Husbandry Under Consolidated FDI Policy Of India 2012

This is in continuance of our series on consolidated FDI policy of India 2012 by DIPP. The previous articles in this regard are

(1) Consolidated FDI policy of India 2012 by DIPP: objectives,

(2) Consolidated FDI policy of India 2012 by DIPP: definitions,

(3) Consolidated FDI policy of India 2012 by DIPP: general provisions,

(4) FDI in limited liability partnerships (LLPs) in India 2012,

(5) Permissible direct and indirect foreign investment in an Indian company,

(6) Foreign investment promotion board (FIPB) and FDI policy of India 2012,

(7) Prohibited sectors under the consolidated FDI policy of India 2012.

In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the provisions pertaining to FDI in Agriculture and Animal Husbandry under consolidated FDI policy of India 2012.

A 100% FDI through automatic route is available regarding the following:

(a) Floriculture, Horticulture, Apiculture and Cultivation of Vegetables & Mushrooms under controlled conditions;

(b) Development and production of Seeds and planting material;

(c) Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture, under controlled conditions; and

(d) Services related to agro and allied sectors

Besides the above, FDI is not allowed in any other agricultural sector/activity. Further, other conditions are also required to be complied with in this regard. These include:

(a) For companies dealing with development of transgenic seeds/vegetables, the following conditions apply:

(i) When dealing with genetically modified seeds or planting material the company shall comply with safety requirements in accordance with laws enacted under the Environment (Protection) Act on the genetically modified organisms.

(ii) Any import of genetically modified materials if required shall be subject to the conditions laid down vide Notifications issued under Foreign Trade (Development and Regulation) Act, 1992.

(iii) The company shall comply with any other Law, Regulation or Policy governing genetically modified material in force from time to time.

(iv) Undertaking of business activities involving the use of genetically engineered cells and material shall be subject to the receipt of approvals fromGenetic Engineering Approval Committee (GEAC) and Review Committee on Genetic Manipulation (RCGM).

(v) Import of materials shall be in accordance with National Seeds Policy.

(b) The term “under controlled conditions” covers the following:

(i) Cultivation under controlled conditions for the categories of Floriculture, Horticulture, Cultivation of vegetables and Mushrooms is the practice of cultivation wherein rainfall, temperature, solar radiation, air humidity and culture medium are controlled artificially. Control in these parameters may be effected through protected cultivation under green houses, net houses, poly houses or any other improved infrastructure facilities where micro-climatic conditions are regulated anthropogenically.

(ii) In case of Animal Husbandry, scope of the term under controlled conditions covers –

(a) Rearing of animals under intensive farming systems with stall-feeding. Intensive farming system will require climate systems (ventilation, temperature/humidity management), health care and nutrition, herd registering/pedigree recording, use of machinery, waste management systems.

(b) Poultry breeding farms and hatcheries where micro-climate is controlled through advanced technologies like incubators, ventilation systems etc.

(iii) In the case of pisciculture and aquaculture, scope of the term under controlled conditions covers –

(a) Aquariums

(b) Hatcheries where eggs are artificially fertilized and fry are hatched and incubated in an enclosed environment with artificial climate control.

(iv) In the case of apiculture, scope of the term under controlled conditions covers –

(a) Production of honey by bee-keeping, except in forest/wild, in designated spaces with control of temperatures and climatic factors like humidity and artificial feeding during lean seasons.
For tea sector including tea plantations, a FDI of 100% through Government route is permissible. Besides this, FDI is not allowed in any other plantation sector/activity. Further, the following conditions also apply in this case:

(i) Compulsory divestment of 26% equity of the company in favour of an Indian partner/Indian public within a period of 5 years

(ii) Prior approval of the State Government concerned in case of any future land use change.

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FDI In Mining Sector Of India Under Consolidated FDI Policy Of India 2012

This is in continuance of our series on consolidated FDI policy of India 2012 by DIPP. The previous articles in this regard are

(1) Consolidated FDI policy of India 2012 by DIPP: objectives,

(2) Consolidated FDI policy of India 2012 by DIPP: definitions,

(3) Consolidated FDI policy of India 2012 by DIPP: general provisions,

(4) FDI in limited liability partnerships (LLPs) in India 2012,

(5) Permissible direct and indirect foreign investment in an Indian company,

(6) Foreign investment promotion board (FIPB) and FDI policy of India 2012,

(7) Prohibited sectors under the consolidated FDI policy of India 2012,

(8) FDI in agriculture and animal husbandry under consolidated FDI policy of India 2012,

In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the provisions pertaining to FDI in mining sector of India under consolidated FDI policy of India 2012.

As per the FDI policy of India 2012, FDI in mining and exploration of metal and non-metal ores including diamond, gold, silver and precious ores but excluding titanium bearing minerals and its ores; subject to the Mines and Minerals (Development & Regulation) Act, 1957 is allowed upto 100% through automatic route.

Similarly, FDI in coal and lignite mining for captive consumption by power projects, iron and steel and cement units and other eligible activities permitted under and subject to the provisions of Coal Mines (Nationalization) Act, 1973 is allowed upto 100% through automatic route.

FDI for setting up coal processing plants like washeries subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing is allowed upto 100% through automatic route.

FDI in mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities subject to sectoral regulations and the Mines and Minerals (Development and Regulation Act 1957) is allowed upto 100% through government approval route.

India has large reserves of beach sand minerals in the coastal stretches around the country. Titanium bearing minerals viz. Ilmenite, rutile and leucoxene, and Zirconium bearing minerals including zircon are some of the beach sand minerals which have been classified as “prescribed substances” under the Atomic Energy Act, 1962.

Under the Industrial Policy Statement 1991, mining and production of minerals classified as “prescribed substances” and specified in the Schedule to the Atomic Energy (Control of Production and Use) Order, 1953 were included in the list of industries reserved for the public sector. Vide Resolution No. 8/1(1)/97-PSU/1422 dated 6th October 1998 issued by the Department of Atomic Energy laying down the policy for exploitation of beach sand minerals, private participation including Foreign Direct Investment (FDI), was permitted in mining and production of Titanium ores (Ilmenite, Rutile and Leucoxene) and Zirconium minerals (Zircon).

Vide Notification No. S.O.61(E) dated 18.1.2006, the Department of Atomic Energy re-notified the list of “prescribed substances” under the Atomic Energy Act 1962. Titanium bearing ores and concentrates (Ilmenite, Rutile and Leucoxene) and Zirconium, its alloys and compounds and minerals/concentrates including Zircon, were removed from the list of “prescribed substances”.

(i) FDI for separation of titanium bearing minerals and ores will be subject to the following additional conditions viz.:

(a) Value addition facilities are set up within India along with transfer of technology;

(b) Disposal of tailings during the mineral separation shall be carried out in accordance with regulations framed by the Atomic Energy Regulatory Board such as Atomic Energy (Radiation Protection) Rules, 2004 and the Atomic Energy (Safe Disposal of Radioactive Wastes) Rules, 1987.

(ii) FDI will not be allowed in mining of “prescribed substances” listed in the Notification No. S.O. 61(E) dated 18.1.2006 issued by the Department of Atomic Energy.

Clarification: (1) For titanium bearing ores such as Ilmenite, Leucoxene and Rutile, manufacture of titanium dioxide pigment and titanium sponge constitutes value addition. Ilmenite can be processed to produce 'Synthetic Rutile or Titanium Slag as an intermediate value added product.

The objective is to ensure that the raw material available in the country is utilized for setting up downstream industries and the technology available internationally is also made available for setting up such industries within the country. Thus, if with the technology transfer, the objective of the FDI Policy can be achieved, the conditions prescribed at (i) (a) above shall be deemed to be fulfilled.

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FDI In Petroleum And Natural Gas Sector Of India Under Consolidated FDI Policy Of India 2012

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FDI In Petroleum And Natural Gas Sector Of India Under Consolidated FDI Policy Of India 2012

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FDI in defence industry subject to Industrial license under the Industries (Development and Regulation) Act 1951 would be allowed up to 26% through government approval route.

The following conditions must be satisfied in this regard:

(i) Licence applications will be considered and licences given by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, in consultation with Ministry of Defence.

(ii) The applicant should be an Indian company / partnership firm.

(iii) The management of the applicant company / partnership should be in Indian hands with majority representation on the Board as well as the Chief Executives of the company / partnership firm being resident Indians.

(iv) Full particulars of the Directors and the Chief Executives should be furnished along with the applications.

(v) The Government reserves the right to verify the antecedents of the foreign collaborators and domestic promoters including their financial standing and credentials in the world market. Preference would be given to original equipment manufacturers or design establishments, and companies having a good track record of past supplies to Armed Forces, Space and Atomic energy sections and having an established R & D base.

(vi) There would be no minimum capitalization for the FDI. A proper assessment, however, needs to be done by the management of the applicant company depending upon the product and the technology. The licensing authority would satisfy itself about the adequacy of the net worth of the non-resident investor taking into account the category of weapons and equipment that are proposed to be manufactured.

(vii) There would be a three-year lock-in period for transfer of equity from one non-resident investor to another non-resident investor (including NRIs & erstwhile OCBs with 60% or more NRI stake) and such transfer would be subject to prior approval of the Government.

(viii) The Ministry of Defence is not in a position to give purchase guarantee for products to be manufactured. However, the planned acquisition programme for such equipment and overall requirements would be made available to the extent possible.

(ix) The capacity norms for production will be provided in the licence based on the application as well as the recommendations of the Ministry of Defence, which will look into existing capacities of similar and allied products.

(x) Import of equipment for pre-production activity including development of prototype by the applicant company would be permitted.

(xi) Adequate safety and security procedures would need to be put in place by the licensee once the licence is granted and production commences. These would be subject to verification by authorized Government agencies.

(xii) The standards and testing procedures for equipment to be produced under licence from foreign collaborators or from indigenous R & D will have to be provided by the licensee to the Government nominated quality assurance agency under appropriate confidentiality clause. The nominated quality assurance agency would inspect the finished product and would conduct surveillance and audit of the Quality Assurance Procedures of the licensee. Self-certification would be permitted by the Ministry of Defence on case to case basis, which may involve either individual items, or group of items manufactured by the licensee. Such permission would be for a fixed period and subject to renewals.

(xiii) Purchase preference and price preference may be given to the Public Sector organizations as per guidelines of the Department of Public Enterprises.

(xiv) Arms and ammunition produced by the private manufacturers will be primarily sold to the Ministry of Defence. These items may also be sold to other Government entities under the control of the Ministry of Home Affairs and State Governments with the prior approval of the Ministry of Defence. No such item should be sold within the country to any other person or entity. The export of manufactured items would be subject to policy and guidelines as applicable to Ordnance Factories and Defence Public Sector Undertakings. Non-lethal items would be permitted for sale to persons / entities other than the Central of State Governments with the prior approval of the Ministry of Defence. Licensee would also need to institute a verifiable system of removal of all goods out of their factories. Violation of these provisions may lead to cancellation of the licence.

(xv) Government decision on applications to FIPB for FDI in defence industry sector will be normally communicated within a time frame of 10 weeks from the date of acknowledgement.

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FDI in terrestrial broadcasting FM (FM Radio) subject to such terms and conditions as specified from time to time by Ministry of Information and Broadcasting for grant of permission for setting up of FM Radio Stations would be allowed up to 26% (FDI, NRI & PIO investments and portfolio investment) through government approval route.

FDI in Cable Network, subject to Cable Television Network Rules, 1994 and other conditions as specified from time to time by Ministry of Information and Broadcasting would be allowed up to 49% (FDI, NRI & PIO investments and portfolio investment) through government approval route.

FDI in Direct–to-Home subject to such guidelines/terms and conditions as specified from time to time by Ministry of Information and Broadcasting would be allowed up to 49% (FDI, NRI & PIO investments and portfolio investment) (Within this limit, FDI component not to exceed 20%) with government approval route.

Headend-In-The-Sky (HITS) Broadcasting Service refers to the multichannel downlinking 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. At the cable headend these encrypted pay channels are downlinked using a single satellite antenna, transmodulated and sent to the subscribers by using a land based transmission system comprising of infrastructure of cable/optical fibres network.

FDI limit in (HITS) Broadcasting Service is subject to such guidelines/terms and conditions as specified from time to time by Ministry of Information and Broadcasting. FDI is allowed up to 74% (total direct and indirect foreign investment including portfolio and FDI) where FDI up to 49% would be through automatic route and beyond 49% but up to 74% it would be allowed through government approval route.

For setting up of Up-linking HUB/ Teleports FDI would be allowed up to 49% (FDI & FII) with government approval route. For Up-linking a Non-News and Current Affairs TV Channel FDI would be allowed up to 100% through government approval route. For Up-linking a News and Current Affairs TV Channel subject to the condition that the portfolio investment from FII/ NRI shall not be ―persons acting in concert with FDI investors, as defined in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, FDI would be allowed up to 26% (FDI & FII) through government approval route.

The following conditions must also be satisfied:

(i) All the activities mentioned above will be further subject to the condition that the Company permitted to uplink the channel shall certify the continued compliance of this requirement through the Company Secretary at the end of each financial year.

(ii) FDI for Up-linking TV Channels will be subject to compliance with the Up-linking Policy notified by the Ministry of Information and Broadcasting from time to time.

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FDI in publishing of newspaper and periodicals dealing with news and current affairs is allowed upto 26% (FDI and investment by NRIs/PIOs/FII) through government approval route.

FDI in publication of Indian editions of foreign magazines dealing with news and current affairs is allowed upto 26% (FDI and investment by NRIs/PIOs/FII) through government approval route.

The following is also worth considering in this regard:

(i) Magazine, for the purpose of these guidelines, will be defined as a periodical publication, brought out on non-daily basis, containing public news or comments on public news.

(ii) Foreign investment would also be subject to the Guidelines for Publication of Indian editions of foreign magazines dealing with news and current affairs issued by the Ministry of Information & Broadcasting on 4.12.2008.

FDI in publishing/printing of Scientific and Technical Magazines/specialty journals/ periodicals, subject to compliance with the legal framework as applicable and guidelines issued in this regard from time to time by Ministry of Information and Broadcasting, is allowed upto 100% through government approval route.

FDI in publication of facsimile edition of foreign newspapers is allowed upto 100% through government approval route.

The following conditions must also be satisfied in this regard:

(i) FDI should be made by the owner of the original foreign newspapers whose facsimile edition is proposed to be brought out in India.

(ii) Publication of facsimile edition of foreign newspapers can be undertaken only by an entity incorporated or registered in India under the provisions of the Companies Act, 1956.

(iii) Publication of facsimile edition of foreign newspaper would also 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 Information & Broadcasting on 31.3.2006, as amended from time to time.

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FDI In Civil Aviation Sector Of India Under Consolidated FDI Policy Of India 2012

The Civil Aviation sector includes Airports, Scheduled and Non-Scheduled domestic passenger airlines, Helicopter services / Seaplane services, Ground Handling Services, Maintenance and Repair organizations; Flying training institutes; and Technical training institutions.

For the purposes of the Civil Aviation sector:

(i) Airport means a landing and taking off area for aircrafts, usually with runways and aircraft maintenance and passenger facilities and includes aerodrome as defined in clause (2) of section 2 of the Aircraft Act, 1934;

(ii) Aerodrome means any definite or limited ground or water area intended to be used, either wholly or in part, for the landing or departure of aircraft, and includes all buildings, sheds, vessels, piers and other structures thereon or pertaining thereto;

(iii) Air transport service means a service for the transport by air of persons, mails or any other thing, animate or inanimate, for any kind of remuneration whatsoever, whether such service consists of a single flight or series of flights;

(iv) Air Transport Undertaking means an undertaking whose business includes the carriage by air of passengers or cargo for hire or reward;

(v) Aircraft component means any part, the soundness and correct functioning of which, when fitted to an aircraft, is essential to the continued airworthiness or safety of the aircraft and includes any item of equipment;

(vi) Helicopter means a heavier-than -air aircraft supported in flight by the reactions of the air on one or more power driven rotors on substantially vertical axis;

(vii) Scheduled air transport service means an air transport service undertaken between the same two or more places and operated according to a published time table or with flights so regular or frequent that they constitute a recognizably systematic series, each flight being open to use by members of the public;

(viii) Non-Scheduled Air Transport service means any service which is not a scheduled air transport service and will include Cargo airlines;

(ix) Cargo airlines would mean such airlines which meet the conditions as given in the Civil Aviation Requirements issued by the Ministry of Civil Aviation;

(x) Seaplane means an aeroplane capable normally of taking off from and alighting solely on water;

(xi) Ground Handling means (i) ramp handling , (ii) traffic handling both of which shall include the activities as specified by the Ministry of Civil Aviation through the Aeronautical Information Circulars from time to time, and (iii) any other activity specified by the Central Government to be a part of either ramp handling or traffic handling.

FDI in Airports is allowed in the following categories:

(a) Greenfield projects: FDI is allowed up to 100% through automatic route.

(b) Existing projects: FDI is allowed upto 100% where FDI upto 74% is allowed through automatic route and beyond 74% FDI is allowed through government approval route.

Regarding Air Transport Services:

(a) Air Transport Services would include Domestic Scheduled Passenger Airlines; Non-Scheduled Air Transport Services, helicopter and seaplane services.

(b) No foreign airlines would be allowed to participate directly or indirectly in the equity of an Air Transport Undertaking engaged in operating Scheduled and Non-Scheduled Air Transport Services except Cargo airlines.

(c) Foreign airlines are allowed to participate in the equity of companies operating Cargo airlines, helicopter and seaplane services.

FDI in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline is allowed upto 49% (100% for NRIs) through automatic route. FDI in Non-Scheduled Air Transport Service is allowed upto 74% (100% for NRIs) where upto 49% is allowed through automatic route and beyond 49% and upto 74% through government approval route.

FDI in Helicopter services/seaplane services requiring DGCA approval is allowed upto 100% through automatic route.

Other services under Civil Aviation sector are as follows:

(1) FDI in Ground Handling Services subject to sectoral regulations and security clearance is allowed upto 74% (100% for NRIs) where upto 46% can be through automatic route and beyond 49% but upto 74% can be made through government approval route.

(2) FDI in Maintenance and Repair organizations; flying training institutes; and technical training institutions is allowed upto 100% through automatic approval route.

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FDI In Courier Services Sector Of India Under Consolidated FDI Policy Of India 2012

the FDI in courier services sector of India under consolidated FDI policy of India 2012. FDI in courier services for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898 and excluding the activity relating to the distribution of letters would be allowed upto 100% through government approval route.

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FDI In Construction Development Sector Of India Under Consolidated FDI Policy Of India 2012

FDI in Townships, housing, built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) would be allowed upto 100% through automatic approval route.

Investment will be subject to the following conditions:

(1) Minimum area to be developed under each project would be as under:

(i) In case of development of serviced housing plots, a minimum land area of 10 hectares

(ii) In case of construction-development projects, a minimum built-up area of 50,000 sq.mts.

(iii) In case of a combination project, any one of the above two conditions would suffice.

(2) Minimum capitalization of US$10 million for wholly owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the Company.

(3) Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. Original investment means the entire amount brought in as FDI. The lock-in period of three years will be applied from the date of receipt of each installment/tranche of FDI or from the date of completion of minimum capitalization, whichever is later. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPB.

(4) At least 50% of each such project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor/investee company would not be permitted to sell undeveloped plots. For the purpose of these guidelines, undeveloped plots will mean where roads, water supply, street lighting, drainage, sewerage, and other conveniences, as applicable under prescribed regulations, have not been made available. It will be necessary that the investor provides this infrastructure and obtains the completion certificate from the concerned local body/service agency before he would be allowed to dispose of serviced housing plots.

(5) The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/Municipal/Local Body concerned.

(6) The investor/investee company shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/bye-laws/regulations of the State Government/ Municipal/Local Body concerned.

(7) The State Government/ Municipal/ Local Body concerned, which approves the building / development plans, would monitor compliance of the above conditions by the developer.

The conditions at (1) to (4) above would not apply to Hotels and Tourism, Hospitals, Special Economic Zones (SEZs), Education Sector, Old age Homes and investment by NRIs. Further, FDI is not allowed in Real Estate Business.

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FDI In Industrial Parks Segment Of India Under Consolidated FDI Policy Of India 2012

FDI in industrial parks, new and existing, is allowed upto 100% through automatic route.

(i) Industrial Park is a project in which quality infrastructure in the form of plots of developed land or built up space or a combination with common facilities, is developed and made available to all the allottee units for the purposes of industrial activity.

(ii) Infrastructure refers to facilities required for functioning of units located in the Industrial Park and includes roads (including approach roads), water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning.

(iii) Common Facilities refer to the facilities available for all the units located in the industrial park, and include facilities of power, roads (including approach roads), water supply and sewerage, common effluent treatment, common testing, telecom services, air conditioning, common facility buildings, industrial canteens, convention/conference halls, parking, travel desks, security service, first aid center, ambulance and other safety services, training facilities and such other facilities meant for common use of the units located in the Industrial Park.

(iv) Allocable area in the Industrial Park means-

(a) In the case of plots of developed land- the net site area available for allocation to the units, excluding the area for common facilities.

(b) In the case of built up space- the floor area and built up space utilized for providing common facilities.

(c) In the case of a combination of developed land and built-up space- the net site and floor area available for allocation to the units excluding the site area and built up space utilized for providing common facilities.

(v) Industrial Activity means manufacturing; electricity; gas and water supply; post and telecommunications; software publishing, consultancy and supply; data processing, database activities and distribution of electronic content; other computer related activities; basic and applied R&D on bio-technology, pharmaceutical sciences/life sciences, natural sciences and engineering; business and management consultancy activities; and architectural, engineering and other technical activities.

FDI in Industrial Parks would not be subject to the conditionalities applicable for construction development projects etc. provided the Industrial Parks meet with the under-mentioned conditions:

(i) It would comprise of a minimum of 10 units and no single unit shall occupy more than 50% of the allocable area;

(ii) The minimum percentage of the area to be allocated for industrial activity shall not be less than 66% of the total allocable area.

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FDI In Satellites And Private Security Agencies Sectors Of India Under Consolidated FDI Policy Of India 2012

FDI in satellites, including their establishment and operation and subject to the sectoral guidelines of Department of Space/ISRO, is permissible upto 74% through government approval route.

Further, FDI in private security agencies is allowed upto 49 % through government approval route.

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FDI In Telecom Sector Of India And National Security Issues

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FDI In Telecom Services, ISPs And Telecom Infrastructure Providing Sectors Of India Under Consolidated FDI Policy Of India 2012

Telecom service providers, ISPs and telecom infrastructure providers must comply with licensing and security requirements notified by the Department of Telecommunications for all services in order to make FDI in India.

FDI in telecom services is allowed upto 74% where upto 49% FDI can be made through automatic route and beyond 49% but upto 74%, FDI can be made through government approval route.

The following conditions must also be fulfilled in this regard:

(1) General Conditions:

(i) This is applicable in case of Basic, Cellular, Unified Access Services, National/ International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added Services.

(ii) Both direct and indirect foreign investment in the licensee company shall be counted for the purpose of FDI ceiling. Foreign Investment shall include investment by Foreign Institutional Investors (FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and convertible preference shares held by foreign entity. In any case, the Indian shareholding will not be less than 26 percent.

(iii) FDI in the licensee company/Indian promoters/investment companies including their holding companies shall require approval of the Foreign Investment Promotion Board (FIPB) if it has a bearing on the overall ceiling of 74 percent. While approving the investment proposals, FIPB shall take note that investment is not coming from countries of concern and/or unfriendly entities.

(iv) The investment approval by FIPB shall envisage the conditionality that Company would adhere to licence Agreement.

(v) FDI shall be subject to laws of India and not the laws of the foreign country/countries.

(2) Security Conditions:

(i) The Chief Officer In-charge of technical network operations and the Chief Security Officer should be a resident Indian citizen.

(ii) Details of infrastructure/network diagram (technical details of the network) could be provided on a need basis only to telecom equipment suppliers/manufacturers and the affiliate/parents of the licensee company. Clearance from the licensor (Department of Telecommunications) would be required if such information is to be provided to anybody else.

(iii) For security reasons, domestic traffic of such entities as may be identified /specified by the licensor shall not be hauled/routed to any place outside India.

(iv) The licensee company shall take adequate and timely measures to ensure that the information transacted through a network by the subscribers is secure and protected.

(v) The officers/officials of the licensee companies dealing with the lawful interception of messages will be resident Indian citizens.

(vi) The majority Directors on the Board of the company shall be Indian citizens. Recently, theHome Ministry of India blocked Telenor’s FIPB application on certain grounds, including absence of resident directors, and this condition has made the license conditions even more stringent.

(vii) The positions of the Chairman, Managing Director, Chief Executive Officer (CEO) and/or Chief Financial Officer (CFO), if held by foreign nationals, would require to be security vetted by Ministry of Home Affairs (MHA). Security vetting shall be required periodically on yearly basis. In case something adverse is found during the security vetting, the direction of MHA shall be binding on the licensee.

(viii) The Company shall not transfer the following to any person/place outside India:-

(a) Any accounting information relating to subscriber (except for international roaming/billing) (Note: it does not restrict a statutorily required disclosure of financial nature); and

(b) User information (except pertaining to foreign subscribers using Indian Operator‘s network while roaming).

(ix) The Company must provide traceable identity of their subscribers. However, in case of providing service to roaming subscriber of foreign Companies, the Indian Company shall endeavour to obtain traceable identity of roaming subscribers from the foreign company as a part of its roaming agreement.

(x) On request of the licensor or any other agency authorised by the licensor, the telecom service provider should be able to provide the geographical location of any subscriber (BTS location) at a given point of time.

(xi) The Remote Access (RA) to Network would be provided only to approved location(s) abroad through approved location(s) in India. The approval for location(s) would be given by the Licensor (DOT) in consultation with the Ministry of Home Affairs.

(xii) Under no circumstances, should any RA to the suppliers/manufacturers and affiliate(s) be enabled to access Lawful Interception System(LIS), Lawful Interception Monitoring(LIM), Call contents of the traffic and any such sensitive sector/data, which the licensor may notify from time to time.

(xiii) The licensee company is not allowed to use remote access facility for monitoring of content.

(xiv) Suitable technical device should be made available at Indian end to the designated security agency /licensor in which a mirror image of the remote access information is available on line for monitoring purposes.

(xv) Complete audit trail of the remote access activities pertaining to the network operated in India should be maintained for a period of six months and provided on request to the licensor or any other agency authorised by the licensor.

(xvi) The telecom service providers should ensure that necessary provision (hardware/software) is available in their equipment for doing the Lawful interception and monitoring from a centralized location.

(xvii) The telecom service providers should familiarize/train Vigilance Technical Monitoring (VTM)/security agency officers/officials in respect of relevant operations/features of their systems.

(xviii) It shall be open to the licensor to restrict the Licensee Company from operating in any sensitive area from the National Security angle.

(xix) In order to maintain the privacy of voice and data, monitoring shall only be upon authorisation by the Union Home Secretary or Home Secretaries of the States/Union Territories.

(xx) For monitoring traffic, the licensee company shall provide access of their network and other facilities as well as to books of accounts to the security agencies.

(xxi) The aforesaid Security Conditions shall be applicable to all the licensee companies operating telecom services covered under this circular irrespective of the level of FDI.

(xxii) Other Service Providers (OSPs), providing services like Call Centres, Business Process Outsourcing (BPO), tele-marketing, tele-education, etc, and are registered with DoT as OSP. Such OSPs operate the service using the telecom infrastructure provided by licensed telecom service providers and 100% FDI is permitted for OSPs. As the security conditions are applicable to all licensed telecom service providers, the security conditions mentioned above shall not be separately enforced on OSPs.

(3) The above General Conditions and Security Conditions shall also be applicable to the companies operating telecom service(s) with the FDI cap of 49%.

(4) All the telecom service providers shall submit a compliance report on the aforesaid conditions to the licensor on 1st day of July and January on six monthly basis.

(a) FDI in ISP with gateways is allowed upto 74% where FDI upto 49% would be through automatic route and FDI beyond 49% but upto 74% would be through government approval route.

(b) FDI in ISP‘s not providing gateways i.e. without gate-ways (both for satellite and marine cables) would be allowed upto 74% where FDI upto 49% would be through automatic route and FDI beyond 49% but upto 74% would be through government approval route.

The new guidelines of August 24, 2007 Department of Telecommunications provide for new ISP licenses with FDI up to 74%.

(c) Radio paging

(d) End-to-End bandwidth

(a) FDI for infrastructure providers providing dark fiber, right of way, duct space, tower (IP Category I) is allowed upto 100% where FDI upto 49% would be through automatic route and FDI beyond 49% shall be through government approval route.

(b) Electronic Mail

(c) Voice Mail

Investment in all the above activities is subject to the conditions that such companies will divest 26% of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world.

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FDI In Wholesale Trading And E-Commerce Sectors Of India Under Consolidated FDI Policy Of India 2012

FDI in cash and carry wholesale trading/ wholesale trading (including sourcing from MSEs), would be allowed upto 100% through automatic route.

Cash and Carry wholesale trading/Wholesale trading would 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. The yardstick to determine whether the sale is wholesale or not would be 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.

The following Guidelines for Cash and Carry Wholesale Trading/Wholesale Trading (WT) would apply:

(a) For undertaking WT, requisite licenses/registration/ permits, as specified under the relevant Acts/Regulations/Rules/Orders of the State Government/Government Body/Government Authority/Local Self-Government Body under that State Government should be obtained.

(b) Except in case of sales to Government, sales made by the wholesaler would be considered as cash and carry wholesale trading/wholesale trading with valid business customers, only when WT are made to the following entities:

(i) Entities holding sales tax/ VAT registration/service tax/excise duty registration; or

(ii) Entities holding trade licenses i.e. a license/registration certificate/membership certificate/registration under Shops and Establishment Act, issued by a Government Authority/ Government Body/ Local Self-Government Authority, reflecting that the entity/person holding the license/ registration certificate/ membership certificate, as the case may be, is itself/ himself/herself engaged in a business involving commercial activity; or

(iii) Entities holding permits/license etc. for undertaking retail trade (like tehbazari and similar license for hawkers) from Government Authorities/Local Self Government Bodies; or

(iv) Institutions having certificate of incorporation or registration as a society or registration as public trust for their self consumption.

An Entity, to whom WT is made, may fulfill any one of the 4 conditions.

(c) Full records indicating all the details of such sales like name of entity, kind of entity, registration/license/permit etc. number, amount of sale etc. should be maintained on a day to day basis.

(d) WT of goods would be permitted among companies of the same group. However, such WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture

(e) WT can be undertaken as per normal business practice, including extending credit facilities subject to applicable regulations.

(f) A Wholesale/Cash and carry trader cannot open retail shops to sell to the consumer directly.

FDI in E-commerce activities is allowed upto 100% through Automatic route. 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, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.

FDI in test marketing of such items for which a company has approval for manufacture is allowed upto 100% through government approval route, provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facility commences simultaneously with test marketing.

FDI in Single Brand product retail trading is allowed upto 100% through government approval route. For this purpose:

(1) Foreign Investment in Single Brand product retail trading is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices.

(2) FDI in Single Brand product retail trading would be subject to the following conditions:

(a) Products to be sold should be of a Single Brand only.

(b) Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.

(d) The foreign investor should be the owner of the brand.

(e) In respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian small industries/ village and cottage industries, artisans and craftsmen‘. 'Small industries' would be defined as industries which have a total investment in plant and machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. The compliance of this condition will be ensured through self-certification by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts, which the company will be required to maintain.

(3) Application seeking permission of the Government for FDI in retail trade of Single Brand products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy and Promotion. The application would specifically indicate the product/ product categories which are proposed to be sold under a Single Brand. Any addition to the product/ product categories to be sold under Single Brand would require a fresh approval of the Government.

(4) Applications would be processed in the Department of Industrial Policy and Promotion, to determine whether the products proposed to be sold satisfy the notified guidelines, before being considered by the FIPB for Government approval.

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FDI In Asset Reconstruction Companies Of India Under Consolidated FDI Policy Of India 2012

This is in continuance of our series on Consolidated FDI Policy of India 2012 by DIPP. In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the FDI in asset reconstruction companies of India under the consolidated FDI policy of India 2012.

Foreign investment in other financial services, other than those discussed in the present and subsequent articles would require prior approval of the Government. For the purposes of FDI, Asset Reconstruction Company (ARC) means a company registered with the Reserve Bank of India (RBI) under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

FDI in ARC is allowed up to 49% of paid-up capital of ARC through government approval route.

The following other conditions must be satisfied in this regard:

(i) Persons resident outside India, other than Foreign Institutional Investors (FIIs), can invest in the capital of Asset Reconstruction Companies (ARCs) registered with Reserve Bank only under the Government Route. Such investments have to be strictly in the nature of FDI. Investments by FIIs are not permitted in the equity capital of ARCs.

(ii) However, FIIs registered with SEBI can invest in the Security Receipts (SRs) issued by ARCs registered with Reserve Bank. FIIs can invest up to 49 per cent of each tranche of scheme of SRs, subject to the condition that investment by a single FII in each tranche of SRs shall not exceed 10 per cent of the issue.

(iii) Any individual investment of more than 10% would be subject to provisions of section 3(3) (f) of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

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FDI In Banking Sector Of India Under Consolidated FDI Policy Of India 2012

This is in continuance of our series on Consolidated FDI Policy of India 2012 by DIPP. In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the FDI in banking sector of India under the consolidated FDI policy of India 2012.

FDI in private banking sector of India is allowed up to 74% where FDI up to 49% is allowed through automatic route and FDI beyond 49% but up to 74% is allowed through government approval route.

These conditions must also be satisfied in this regard:

(1) This 74% limit will include investment under the Portfolio Investment Scheme (PIS) by FIIs, NRIs and shares acquired prior to September 16, 2003 by erstwhile OCBs, and continue to include IPOs, Private placements, GDR/ADRs and acquisition of shares from existing shareholders.

(2) The aggregate foreign investment in a private bank from all sources will be allowed up to a maximum of 74 per cent of the paid up capital of the Bank. At all times, at least 26 per cent of the paid up capital will have to be held by residents, except in regard to a wholly-owned subsidiary of a foreign bank.

(3) The stipulations as above will be applicable to all investments in existing private sector banks also.

(4) The permissible limits under portfolio investment schemes through stock exchanges for FIIs and NRIs will be as follows:

(i) In the case of FIIs, as hitherto, individual FII holding is restricted to 10 per cent of the total paid-up capital, aggregate limit for all FIIs cannot exceed 24 per cent of the total paid-up capital, which can be raised to 49 per cent of the total paid-up capital by the bank concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body.

(a) Thus, the FII investment limit will continue to be within 49 per cent of the total paid-up capital.

(b) In the case of NRIs, as hitherto, individual holding is restricted to 5 per cent of the total paid-up capital both on repatriation and non-repatriation basis and aggregate limit cannot exceed 10 per cent of the total paid-up capital both on repatriation and non-repatriation basis. However, NRI holding can be allowed up to 24 per cent of the total paid-up capital both on repatriation and non-repatriation basis provided the banking company passes a special resolution to that effect in the General Body.

(c) Applications for foreign direct investment in private banks having joint venture/subsidiary in insurance sector may be addressed to the Reserve Bank of India (RBI) for consideration in consultation with the Insurance Regulatory and Development Authority (IRDA) in order to ensure that the 26 per cent limit of foreign shareholding applicable for the insurance sector is not being breached.

(d) Transfer of shares under FDI from residents to non-residents will continue to require approval of RBI and Government as per para 3.6.2 above as applicable.

(e) The policies and procedures prescribed from time to time by RBI and other institutions such as SEBI, D/o Company Affairs and IRDA on these matters will continue to apply.

(f) RBI guidelines relating to acquisition by purchase or otherwise of shares of a private bank, if such acquisition results in any person owning or controlling 5 per cent or more of the paid up capital of the private bank will apply to non-resident investors as well.

(ii) Setting up of a subsidiary by foreign banks

(a) Foreign banks will be permitted to either have branches or subsidiaries but not both.

(b) Foreign banks regulated by banking supervisory authority in the home country and meeting Reserve Bank‘s licensing criteria will be allowed to hold 100 per cent paid up capital to enable them to set up a wholly-owned subsidiary in India.

(c) A foreign bank may operate in India through only one of the three channels viz., (i) branches (ii) a wholly-owned subsidiary and (iii) a subsidiary with aggregate foreign investment up to a maximum of 74 per cent in a private bank.

(d) A foreign bank will be permitted to establish a wholly-owned subsidiary either through conversion of existing branches into a subsidiary or through a fresh banking license. A foreign bank will be permitted to establish a subsidiary through acquisition of shares of an existing private sector bank provided at least 26 per cent of the paid capital of the private sector bank is held by residents at all times consistent with para (i) (b) above.

(e) A subsidiary of a foreign bank will be subject to the licensing requirements and conditions broadly consistent with those for new private sector banks.

(f) Guidelines for setting up a wholly-owned subsidiary of a foreign bank will be issued separately by RBI.

(g) All applications by a foreign bank for setting up a subsidiary or for conversion of their existing branches to subsidiary in India will have to be made to the RBI.

(iii) At present there is a limit of ten per cent on voting rights in respect of banking companies, and this should be noted by potential investor. Any change in the ceiling can be brought about only after final policy decisions and appropriate Parliamentary approvals.

FDI in public banking sector of India is allowed up to 20% (FDI and Portfolio Investment) through government approval route subject to Banking Companies (Acquisition and Transfer of Undertakings) Acts 1970/80. This ceiling (20%) is also applicable to the State Bank of India and its associate Banks.

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FDI In Commodity Exchanges Sector Of India Under Consolidated FDI Policy Of India 2012

This is in continuance of our series on Consolidated FDI Policy of India 2012 by DIPP. In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the FDI in commodity exchanges sector of India under the consolidated FDI policy of India 2012.

(1) Futures trading in commodities are regulated under the Forward Contracts (Regulation) Act, 1952. Commodity Exchanges, like Stock Exchanges, are infrastructure companies in the commodity futures market. With a view to infuse globally acceptable best practices, modern management skills and latest technology, it was decided to allow foreign investment in Commodity Exchanges.

(2) For the purposes of this chapter/article,

(i) Commodity Exchange is a recognised association under the provisions of the Forward Contracts (Regulation) Act, 1952, as amended from time to time, to provide exchange platform for trading in forward contracts in commodities.

(ii) Recognised association means an association to which recognition for the time being has been granted by the Central Government under Section 6 of the Forward Contracts (Regulation) Act, 1952

(iii) Association means any body of individuals, whether incorporated or not, constituted for the purposes of regulating and controlling the business of the sale or purchase of any goods and commodity derivative.

(iv) Forward contract means a contract for the delivery of goods and which is not a ready delivery contract.

(v) Commodity derivative means-

(a) A contract for delivery of goods, which is not a ready delivery contract; or

(b) A contract for differences which derives its value from prices or indices of prices of such underlying goods or activities, services, rights, interests and events, as may be notified in consultation with the Forward Markets Commission by the Central Government, but does not include securities.

FDI in commodity exchanges is allowed up to 49% (FDI & FII) [Investment by Registered FII under Portfolio Investment Scheme (PIS) will be limited to 23% and Investment under FDI Scheme limited to 26% ] through government approval route (FDI).

The other conditions in this regard are as follow:

(i) FII purchases shall be restricted to secondary market only and

(ii) No non-resident investor/ entity, including persons acting in concert, will hold more than 5% of the equity in these companies.

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FDI In Credit Information Companies (CIC) Of India Under Consolidated FDI Policy Of India 2012

This is in continuance of our series on Consolidated FDI Policy of India 2012 by DIPP. In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the FDI in credit information companies (CIC) sector of India under the consolidated FDI policy of India 2012.

FDI in Credit Information Companies (CIC) is allowed up to 49% (FDI and FII) through government approval route.

The other conditions in this regard are:

(1) Foreign investment in Credit Information Companies is subject to the Credit Information Companies (Regulation) Act, 2005.

(2) Foreign investment is permitted under the Government route, subject to regulatory clearance from RBI.

(3) Investment by a registered FII under the Portfolio Investment Scheme would be permitted up to 24% only in the CICs listed at the Stock Exchanges, within the overall limit of 49% for foreign investment.

(4) Such FII investment would be permitted subject to the conditions that:

(a) No single entity should directly or indirectly hold more than 10% equity.

(b) Any acquisition in excess of 1% will have to be reported to RBI as a mandatory requirement; and

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FDI In Infrastructure Company In The Securities Market Of India Under Consolidated FDI Policy Of India 2012

This is in continuance of our series on Consolidated FDI Policy of India 2012 by DIPP. In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the FDI in infrastructure company in the securities market sector of India under the consolidated FDI policy of India 2012.

FDI in Infrastructure Company in the Securities Market, namely, stock exchanges, depositories and clearing corporations, in compliance with SEBI Regulations, is allowed up to 49% (FDI & FII) [FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital] through government approval route.

Further, FII can invest only through purchases in the secondary market.

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FDI In Insurance Sector Of India Under Consolidated FDI Policy Of India 2012

This is in continuance of our series on Consolidated FDI Policy of India 2012 by DIPP. In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the FDI in the insurance sector of India under the consolidated FDI policy of India 2012.

FDI in Insurance sector is allowed up to 26% through automatic route. The following conditions must also be fulfilled in this regard:

(1) FDI in the Insurance sector, as prescribed in the Insurance Act, 1938, is allowed under the automatic route.

(2) This will be subject to the condition that Companies bringing in FDI shall obtain necessary license from the Insurance Regulatory and Development Authority for undertaking insurance activities.

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FDI In Non-Banking Finance Companies (NBFC) Sector Of India Under Consolidated FDI Policy Of India 2012

This is in continuance of our series on Consolidated FDI Policy of India 2012 by DIPP. In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the FDI in Non-Banking Finance Companies (NBFC) sector of India under the consolidated FDI policy of India 2012.

FDI in Non-Banking Finance Companies (NBFC) is allowed up to 100% under the automatic route in only the following activities:

(i) Merchant Banking

(ii) Under Writing

(iii) Portfolio Management Services

(iv) Investment Advisory Services

(v) Financial Consultancy

(vi) Stock Broking

(vii) Asset Management

(viii) Venture Capital

(ix) Custodian Services

(x) Factoring

(xi) Credit Rating Agencies

(xii) Leasing & Finance

(xiii) Housing Finance

(xiv) Forex Broking

(xv) Credit Card Business

(xvi) Money Changing Business

(xvii) Micro Credit

(xviii) Rural Credit

The other conditions in this regard are:

(1) Investment would be subject to the following minimum capitalisation norms:

(i) US $0.5 million for foreign capital up to 51% to be brought upfront

(ii) US $ 5 million for foreign capital more than 51% and up to 75% to be brought upfront

(iii) US $ 50 million for foreign capital more than 75% out of which US$ 7.5 million to be brought upfront and the balance in 24 months.

(iv) 100% foreign owned NBFCs with a minimum capitalisation of US$ 50 million can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital. The minimum capitalization condition shall not apply to downstream subsidiaries.

(v) Joint Venture operating NBFCs that have 75% or less than 75% foreign investment can also set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capitalisation norm mentioned in (i), (ii) and (iii) above and (vi) below.

(vi) Non- Fund based activities : US $0.5 million to be brought upfront for all permitted non-fund based NBFCs irrespective of the level of foreign investment subject to the following condition:

It would not be permissible for such a company to set up any subsidiary for any other activity, nor it can participate in any equity of an NBFC holding/operating company.

The following activities would be classified as Non-Fund Based activities:

(a) Investment Advisory Services

(b) Financial Consultancy

(c) Forex Broking

(d) Money Changing Business

(e) Credit Rating Agencies

(vii) This will be subject to compliance with the guidelines of RBI.

(i) Credit Card business includes issuance, sales, marketing and design of various payment products such as credit cards, charge cards, debit cards, stored value cards, smart card, value added cards etc.

(ii) Leasing & Finance covers only financial leases and not operating leases.

(2) The NBFC will have to comply with the guidelines of the relevant regulator/ s, as applicable.

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FDI In Pharmaceuticals Sector Of India Under Consolidated FDI Policy Of India 2012

This is in continuance of our series on Consolidated FDI Policy of India 2012 by DIPP. In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the FDI in Pharmaceuticals sector of India under the consolidated FDI policy of India 2012.

FDI in Greenfield is allowed up to 100% through automatic route. FDI in Existing Companies is allowed up to 100% through government approval route.

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1. What are the forms in which business can be conducted by a foreign company in India?

A foreign company planning to set up business operations in India has the following options:

As an incorporated entity by incorporating a company under the Companies Act, 1956 through
Joint ventures; or
Wholly owned subsidiaries
As an office of a foreign entity 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 Office or other place of business) Regulations, 2000.

2. How does a foreign company invest in India? What are the regulations pertaining to issue of shares by Indian companies to foreign collaborators/investors?

Automatic Route

FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require prior approval of the government:

i) where provisions of Press Note 1 (2005 Series) issued by the Government of India are attracted.
ii) where more than 24% foreign equity is proposed to be inducted for manufacture of items reserved for the Small Scale sector.
iii) FDI in sectors/activities to the extent permitted under Automatic Route does not require any prior approval either by the government or the Reserve Bank of India [Get Quote].
iv) The investors are only required to notify the Regional Office concerned of the Reserve Bank of India within 30 days of receipt of inward remittances and file the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the non-resident investors.

Government Route

FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.

General permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve Bank of India for receiving inward remittance and issue of shares to the non-resident investors. The companies are required to notify the concerned regional office of the Reserve Bank of India of receipt of inward remittances within 30 days of such receipt and submit form FC-GPR within 30 days of issue of shares to the non-resident investors.

3. Which are the sectors where FDI is not allowed in India, under the Automatic Route as well as Government Route?

FDI is prohibited under Government as well as Automatic Route for the following sectors:

i) Retail Trading (except single brand product retailing)
ii) Atomic Energy
iii) Lottery Business
iv) Gambling and Betting
v) Business of Chit Fund
vi) Nidhi Company
vii) Agricultural or plantation activities (cf Notification No. FEMA 94/2003-RB dated June 18, 2003).
viii) Housing and real estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005 )
ix) Trading in Transferable Development Rights (TDRs).

4. What should be done after investment is made under the Automatic Route or with Government approval?

A two-stage reporting procedure has been introduced for this purpose.

On receipt of money for investment:
Within 30 days of receipt of money from the non-resident investor, the Indian company will report to the regional office of the Reserve Bank of India, under whose jurisdiction its registered office is located, containing details such as:
Name and address of the foreign investor/s
Date of receipt of funds and their rupee equivalent
Name and address of the authorised dealer through whom the funds have been received, and
Details of the Government approval, if any.
Upon issue of shares to non-resident investors:
Within 30 days from the date of issue of shares, a report in Form FC-GPR, PART A together with the following documents should be filed with the concerned regional office of the Reserve Bank of India.
Certificate from the company secretary of the company accepting investment from persons resident outside India certifying that;
The company has complied with the procedure for issue of shares as laid down under the FDI scheme as indicated in the notification no. FEMA 20/2000-RB dated 3rd May 2000 as amended from time to time
The proposal is within the sectoral policy / cap permissible under the automatic route of RBI and it fulfills all the conditions laid down for investments under the Automatic approval route namely

a) Non-resident entity/ies (other than individuals) to whom it has issued shares does / do not have any existing joint venture or technology transfer or trade mark agreement in India in the same field.

b) The company is not investing in an SSI unit & the investment limit of 24 % has been observed/ requisite approvals have been obtained.

c) Shares have been issued on rights basis and the shares are issued to non-residents at a price that is not lower than that at which shares are/were issued to residents.

d) Shares issued are bonus shares.

e) Shares have been issued under a scheme of merger and amalgamation of two or more Indian companies or reconstruction by way of demerger or otherwise of an Indian company, duly approved by a court in India.

Shares have been issued in terms of SIA/FIPB approval No. --------------------- dated --------------------
Certificate from statutory auditors or chartered accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

5. What are the guidelines for transfer of existing shares from non-residents to residents or residents to non-residents?

Transfer from Non-Resident to Resident:

The term 'transfer' is defined under FEMA as including "sale, purchase, acquisition, mortgage, pledge, gift, loan or any other form of transfer of right, possession or lien."

The FEMA Regulations give specific permission covering the following forms of transfer i.e. transfer by way of sale and gift. These permissions are discussed below:

A: Transfer by way of sale:

A person resident outside India can freely transfer share/convertible debenture by way of sale to a person resident in India as under:

Any person resident outside India (other than NRIs/OCBs) can transfer by way of sale the shares/convertible debentures to any person resident outside India; subject to the condition that the acquirer or transferee does not have any previous venture or tie up in India in the same field or sector.
A non-resident Indian (NRI) or an erstwhile Overseas Corporate Body may transfer by way of sale, the shares/convertible debentures held by him to another NRI only.
Any person resident outside India may sell share/convertible debenture acquired in accordance with FEMA Regulations, on a recognized Stock Exchange in India through a registered broker.

B: Transfer by way of Gift:

A person resident outside India can freely transfer share/convertible debenture by way of gift to a person resident in India as under:

Any person resident outside India, (not being a non-resident Indian or an erstwhile overseas corporate body), can transfer by way of gift the shares/convertible debentures to any person resident outside India; subject to the condition that the acquirer or transferee does not have any previous venture or tie up in India in the same field or sector.
A non-resident Indian (NRI) may transfer by way of gift, the shares/convertible debentures held by him to another NRI only.
Any person resident outside India may transfer share/convertible debenture to a person resident in India by way of gift.

Transfer from Resident to Non-Resident:

A: Transfer by way of sale - General Permission under Regulation 10 of Notification No. FEMA 20/2000-RB dated May 3, 2000.

A person resident in India may transfer to a person resident outside India any share/convertible debenture of an Indian company whose activities fall under the Automatic Route for FDI subject to the sectoral limits, by way of sale subject to complying with pricing guidelines, documentation and reporting requirements for such transfers, as may be specified by the Reserve Bank of India, from time to time.

This general permission is not available where:

Indian company whose shares or convertible debentures are proposed to be transferred is in financial service sector (financial services sector means service rendered by banking and non-banking companies regulated by the Reserve Bank, insurance companies regulated by Insurance Regulatory and Development Authority (IRDA) and other companies regulated by any other financial regulator, as the case may be).
The transfer falls within the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

B: Transfer by way of gift:

A person resident in India can transfer by way of gift shares to a person resident outside India in the following ways:

A person resident in India who proposes to transfer to a person resident outside India [other than erstwhile OCBs] any security, by way of gift, shall make an application to the central office of the foreign exchange department, Reserve Bank of India furnishing the following information, namely:

Name and address of the transferor and the proposed transferee
Relationship between the transferor and the proposed transferee
Reasons for making the gift. The gifts are permissible up to a limit of:

(i) 5% of the paid up capital of the company per donee, and

(ii) Amount does not exceed $25,000 per calendar year for each donor. The valuation of these shares shall be in accordance with pricing guidelines prescribed.

6. What if the transfer from resident to non-resident does not fall under the above facility?

In case the transfer does not fit into any of the above, either the transferor (resident) or the transferee (non-resident) can make an application for the Reserve Bank's permission for the transfer. The application has to be accompanied with the following documents:

A copy of FIPB approval (if required).
Consent letter from transferor and transferee clearly indicating the number of shares, name of the investee company and the price at which the transfer is proposed to be effected.
The present/post transfer shareholding pattern of the Indian investee company showing the equity participation by residents and non-residents category-wise.
Copies of the Reserve Bank of India's approvals/acknowledged copies of FC-GPR evidencing the existing holdings of the non-residents.
If the sellers/transferors are NRIs / OCBs, the copies of the Reserve Bank of India's approvals evidencing the shares held by them on repatriation / non-repatriation basis.
Open Offer document filed with SEBI if the acquisition of shares by non-resident is under SEBI Takeover Regulations.
Fair valuation certificate from chartered accountant indicating the value of shares as per the following guideline.
In the case of unlisted shares the fair value is worked out as per the erstwhile Controller of Capital Issue/s.
For listed shares, the price worked out is not less than the higher of average weekly high and low quotations for 6 months and average of daily high and low quotation or two weeks preceding 30 days prior to the date of making application to FIPB.

7. Are the investments and profits earned in India repatriable?

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.

8. What are the guidelines on issue and valuation of shares in case of existing companies?

Allotment of shares on preferential basis shall be as per the requirements of the Companies Act, 1956, which will require special resolution in case of a public limited company.
In case of listed companies, valuation shall be as per the Reserve Bank of India /SEBI guidelines as follows:
The issue price shall be either at:

i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date or

ii) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the two weeks preceding the relevant date.

In case of unlisted companies, valuation shall be done in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.

9. What are the regulations pertaining to issue of ADRs/GDRs by Indian companies?

Indian companies are allowed to raise capital in the international market through the issue of ADRs/GDRs. They can issue ADRs/GDRs without obtaining prior approval from RBI if it is eligible to issue ADRs/GDRs in terms of the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and subsequent guidelines issued by ministry of finance, government of India.
After the issue of ADRs/GDRs, the company has to file a return in the proforma given in Annexure 'C' to the RBI Notification No.FEMA.20/ 2000-RB dated May 3, 2000. The company is also required to file a quarterly return in a form specified in Annexure 'D' of the same regulations.
There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets.

10. What is meant by Sponsored ADR & Two-way fungibility Scheme of ADR/GDR?

Sponsored ADR/GDR: An Indian company may sponsor an issue of ADR/GDR with an overseas depository against shares held by its shareholders at a price to be determined by the Lead Manager. The Operative guidelines for the same have been issued vide A.P. (DIR Series) Circular No.52 dated November 23, 2002.
Two-way fungibility Scheme: Under the limited Two-way fungibility Scheme, a registered broker in India can purchase shares of an Indian company on behalf of a person resident outside India for the purpose of converting the shares so purchased into ADRs/GDRs. The operative guidelines for the same have been issued vide A.P. (DIR Series) Circular No.21 dated February 13, 2002. The Scheme provides for purchase and re-conversion of only as many shares into ADRs/GDRs which are equal to or less than the number of shares emerging on surrender of ADRs/GDRs which have been actually sold in the market. Thus, it is only a limited two-way fungibility wherein the headroom available for fresh purchase of shares from domestic market is restricted to the number of converted shares sold in the domestic market by non-resident investors. So long ADRs/GDRs are quoted at discounts to the value of shares in domestic market, an investor will gain by converting the ADRs/GDRs into underlying shares and selling them in the domestic market. In case of ADRs/GDRs being quoted at premium, there will be demand for reverse fungibility, i.e. purchase of shares in domestic market for re-conversion into ADRs/GDRs. The scheme is operationalised through the Custodians of securities and stockbrokers under SEBI.

11. Can Indian companies issue Foreign Currency Convertible Bonds (FCCBs)?

FCCBs can be issued by Indian companies in the overseas market in accordance with Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.
The FCCB issue needs to conform to External Commercial Borrowing Guidelines, issued by RBI vide Notification No. FEMA 3/2000-RB dated May 3, 2000 as amended from time to time.

12. Can I invest through Preference Shares? What are the regulations applicable in case of such investments?

Foreign investment through preference shares is treated as foreign direct investment. 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. If the preference shares are structured without such conversion option, they would fall outside the foreign direct equity cap.

13. Can shares be issued against Lumpsum Fee, Royalty and ECB?

Issue of equity shares against lump sum fee, royalty and external commercial borrowings (ECBs) in convertible foreign currency are permitted, subject to meeting all applicable tax liabilities and sector specific guidelines.

14. Other than issue of shares under Automatic /Government Route, what other general permissions are available under RBI Notification No.FEMA 20 dt.3-5-2000?

Issue of shares under ESOP by Indian companies to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India directly or through a Trust up to 5% of the paid up capital of the company.
Issue and acquisition of shares by non-residents after merger or de-merger or amalgamation of Indian companies.
Issue shares or preference shares or convertible debentures on rights basis by an Indian company to a person resident outside India.

15. Can I invest in unlisted shares issued by a company in India?

Yes. As per the regulations/guidelines issued by the Reserve Bank of India/Government of India, investment can be made in unlisted shares of Indian companies.

16. Can a foreigner set up a partnership/proprietorship concern in India?

No. Only NRIs/PIOs are allowed to set up partnership/proprietorship concerns in India. Even for NRIs/PIOs investment is allowed only on non-repatriation basis.

17. Can I invest in Rights shares issued by an Indian company at a discount?

There are no restrictions under FEMA for investment in Rights shares at a discount, provided the rights shares so issued are being offered at the same price to residents and non-residents.

II - Foreign Technical Collaboration

1. What are the payment parameters for foreign technology transfer under the Automatic Route of Reserve Bank of India? How should royalty be calculated?

Payment for foreign technology collaboration by Indian companies are allowed under the automatic route subject to the following limits:
Lump sum payments not exceeding US$ 2 million.
Royalty payable being limited to 5 per cent for domestic sales and 8 per cent for exports, without any restriction on the duration of the royalty payments.
The royalty limits are net of taxes and are calculated according to standard conditions.
The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc.
RBI has delegated the powers to ADs to make payment of royalty under such agreements. The requirement of registration of the agreement with the Regional Office of Reserve Bank of India has been done away with.

2. What should be done, if Automatic Route of Reserve Bank of India for technology transfer is not available?

Proposals, which do not satisfy the parameters prescribed for automatic route of RBI, require clearance from Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.

III -- Foreign Portfolio Investment

1. What are the regulations regarding Portfolio Investments by Foreign Institutional Investors (FIIs)?

Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000. FIIs include asset management companies, pension funds, mutual funds, and investment trusts as nominee companies, incorporated / institutional portfolio managers or their power of attorney holders, university funds, endowment foundations, charitable trusts and charitable societies.
SEBI acts as the nodal point in the registration of FIIs. The Reserve Bank of India has granted general permission to SEBI-registered FIIs to invest in India under the Portfolio Investment Scheme (PIS).
Investment by individual FIIs cannot exceed 10% of paid up capital. Investment by foreign registered as sub accounts of FII cannot exceed 5% of paid up capital. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian company. An Indian company can raise the 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 their general body.

2. What are the regulations regarding Portfolio Investments by NRIs/PIOs?

Non Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can 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 sale/purchase transactions are to be routed through the designated branch.
An NRI or a PIO can purchase shares up to 5% of the paid up capital of an Indian company. All NRIs/PIOs 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).
The sale proceeds of the repatriable investments can be credited to the NRE/NRO etc. accounts of the NRI/PIO whereas the sale proceeds of non-repatriable investment can be credited only to NRO accounts.
The sale of shares will be subject to payment of applicable taxes.

IV - Investment in Government Securities and Corporate debt

1. Can a Non-resident Indian invest in Government Securities/Treasury bills and Corporate debt?

Under the FEMA Regulations only NRIs and SEBI registered FIIs are permitted to purchase Government Securities/Treasury bills and Corporate debt. The details are as under;

A. A Non-resident Indian can purchase,

(1) i) Government dated securities (other than bearer securities) or treasury bills or

units of domestic mutual funds;

ii) bonds issued by a public sector undertaking(PSU) in India;

iii) shares in Public Sector Enterprises being disinvested by the Government of India.

(2) They can also invest, on non-repatriation basis, in dated Government securities (other than bearer securities), treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds in India, or National Plan/Savings Certificates on non-repatriation basis. The guidelines for these schemes are framed by the concerned Government agencies.

B. A SEBI registered Foreign Institutional Investor may purchase, on repatriation basis, dated Government securities/treasury bills, non-convertible debentures/bonds issued by an Indian company and units of domestic mutual funds either directly from the issuer of such securities or through a registered stock broker on a recognised stock exchange in India. The FIIs is required to ensure that;

i) the FII allocation of its total investment between equity and debt instruments (including dated Government Securities and Treasury Bills in the Indian capital market) should not exceed the ratio of 70:30.

ii) In case the FII is set-up as a 100% debt FII, it can invest the entire corpus in dated Government Securities including Treasury Bills, non-convertible debentures/bonds issued by an Indian company subject to limits, if any, stipulated by SEBI in this regard.

The Investment in Government Securities/Treasury bills and Corporate debt is subject to a ceiling decided in consultation with the Government of India. Investment limit for the FIIs as a group in Government securities currently is USD 3.2 Billion. The limit for investment in Corporate debt is USD 1.5 billion. At present, the FIIs can also invest in Innovative instruments such as Upper Tier-II capital upto a limit of USD 500 million.

V - Foreign Venture Capital Investment

1. What are the regulations for Foreign Venture Capital Investment?

A SEBI registered Foreign Venture Capital Investor with general permission from the Reserve Bank of India can invest in a Venture Capital Fund or an Indian Venture Capital Undertaking, in the manner and subject to the terms and conditions specified in Schedule 6 of RBI Notification No. FEMA 20/2000-RB dated May 3, 2000 as amended from time to time.

VI - Procedure for opening Branch/Project/Liaison Office

1. How can foreign companies open Liaison/Project/Branch office in India?

Foreign company can set up Liaison/Branch Offices in India after obtaining approval from Reserve Bank of India. Reserve Bank of India has given general permission to foreign companies to establish Project Offices in India subject to certain conditions.

2. What is the procedure to be followed for obtaining Reserve Bank's approval for opening Liaison Office/Representative Office?

A Liaison office can carry on only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office abroad. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers.
The companies desirous of opening a liaison office in India may make an application in form FNC-1 along with the documents mentioned therein to Foreign Investment Division, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai. This form is available at www.rbi.org.in
Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Regional Office in whose jurisdiction the office is set up. Liaison/Representative offices have to file an Activity Certificate on annual basis from a Chartered Accountant to the concerned Regional Office of the Reserve Bank of India , stating that the Liaison Office has undertaken only those activities permitted by Reserve Bank of India .

3. What is the procedure for setting up Project Office?

Foreign companies are granted projects in India by Indian entities. General Permission has been granted by Reserve Bank of India vide Notification No. FEMA 95/2003-RB dated July 2, 2003 to foreign companies to open Project Office/s in India provided they have secured from an Indian company, a contract to execute a project in India, and the project is funded directly by inward remittance from abroad; or
the project is funded by a bilateral or multilateral International Financing Agency; or
the project has been cleared by an appropriate authority; or
a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
However, if the above criteria are not met, or if the parent entity is established in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, such applications have to be forwarded to Central Office of the Foreign Exchange Department of the Reserve Bank at Mumbai for approval.

4. What is the procedure for setting up branch office?

Reserve Bank permits companies engaged in manufacturing and trading activities abroad to set up Branch Offices in India for the following purposes:
To represent the parent company/other foreign companies in various matters in India e.g. acting as buying/selling agents in India
To conduct research work in the area in which the parent company is engaged
To undertake export and import activities and trading on wholesale basis
To promote possible technical and financial collaborations between the Indian companies and overseas companies.
Rendering professional or consultancy services
Rendering services in Information technology and development of software in India
Rendering technical support to the products supplied by the parent/Group companies.
A branch office is not allowed to carry out manufacturing, processing activities directly/indirectly. A Branch Office is also not allowed to undertake Retail Trading activities of any nature in India. Branch Offices have to submit Activity Certificate from a Chartered Accountant on an annual basis to the Central Office of FED. For annual remittance of profit Branch Office may submit required documents to an authorised dealer.
Permission for setting up branch offices is granted by the Reserve Bank of India. Reserve Bank of India considers the track record of the Applicant Company, existing trade relations with India, the activity of the company proposing to set up office in India as well as the financial position of the company while scrutinising the application.

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Consolidated FDI Policy Of India 2012 By DIPP: Definitions

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