ADiscussion on

FDI(Foreign Direct Investment)

Week end discussion on 18-07-2011

byCA.N.S.Sivakumar,B.Com.,F.C.A.,Grad.C.W.A

NSS & Associates

Chartered Accountants

Chennai

Meaning of FDI

• 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

•Started in 1990

• Presently, only few industries where FDI is prohibited

• Investment ceiling in permitted sectors are being gradually removed or phased out

•Investment in permitted sector are permitted to 100% except some restriction, which are known as automatic route.

•Those Industries, which are prohibited or to invest beyond the ceiling, needs to be permitted by Govt or its agencies, which are known as

Foreign Direct Investment Policy

Foreign Direct Investment

Restricted Industries

FDI Not allowed

Approved Industries

Under Automatic Route

Under Approval Route

Limited to Sectoral Cap.

Capital receipt should be reported to RBI

Allotment (within six months) of shares should be reported through Form FC-GPR with Auditor Certificate for basis of pricing and Company Secretary Certificate on Compliance aspects

For Certain Industries, only with Approval upto Sectoral Cap.

When exceeds sectoral cap or for restricted Industries.

Must apply for Foreign Investment Promotion Board.(FIPB)

Restricted Industries

Sectoral Cap – Restricted Industries

FDI is prohibited in the following IndustriesRetail Trading (except single brand product retailing) Lottery Business including Government /private lottery, online lotteries, etc. Gambling and Betting including casinos etc. Chit funds Nidhi company Trading in Transferable Development Rights (TDRs) Real Estate Business or Construction of Farm Houses Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

Entities for Investments

Proprietorship Concern or Partnership Firm

On Non-repatriation Basis• Investment through NRE/FCNR/NRO account(Foreign currency account)• Is not engaged in any agricultural/plantation or real estate or print media

sector• Is not eligible for repatriation

On Repatriation basis• Application should be made to RBI before starting, which will be decided

after consultation with GOI

Companies On repatriation basis• Can invest in any Industry subject to Sectoral Cap.•Should report to RBI on receipt of money with a copy of Foreign Inward Remittance Certificate•Should file Form FC-GPR.Shares should be allotted within 6 months or to be reported.

Venture Capital Fund Subject to Sector Cap

Trust and other entities FDI is not permitted

LLP •FDI in LLP is allowed through Approval Rough only in those sector for which 100% is permitted under Automatic Route.•FDI in LLP is not allowed in any agricultural/plantation or real estate or print media sector.•Indian Companies having FDI is allowed to Invest in LLP only in those sector for which 100% is allowed under Automatic Route(Hence, no approval is needed)•LLP with FDI will not be eligible for any downstream investments.•Investment in LLP by FII or FVCI are not allowed.•One Indian Partner should be “person of Indian Origin” as defined in FEMA

Some Important Terms

• FDI – Foreign Direct Investment

• Sectoral Cap – the Industry and the limit upto which FDI is permitted.Say,

– in software Sector, 100% is allowed.– In single brand retail, 51%is allowed– In Telecom, 74% is allowed

• Repatriation Basis – means taking back the money invested in India

Who Can Invest?

• 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.

Who Can Invest?

FII – Foreign Institutional Investors

• Can do through Portfolio Investment Scheme• Can purchase up to 10% of the capital of the company• Holding of all FII in any company is restricted to 24%• This limit (24%) can be increased to sectoral cap

through a Board resoultion and Special resolution in General Body meeting.

• Any issues by Indian Company to FII has to be reported through Form FC-GPR

FVCI - Foreign Venture Capital Investor

•Can contribute to 100% of Indian Venture Capital Fund•Investments are within the limit of the Sectoral Cap.

Sectoral Cap – Few examples

Agriculture & Animal Husbandry

•Agriculture -100% Automatic•Agriculture - Tea Plantation – 100% Govt. Approval

Mining •Mining – 100% Automatic •Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities – 100% Govt .Approval

Petroleum and Natural Gas •Petroleum and Natural Gas - 100% Automatic•Petroleum refining by the Public Sector Undertakings (PSU), without any disinvestment or dilution of domestic equity in the existing PSUs -49%- Government Approval-

Defence - •DEFENCE – 26% with subject to Industrial License

Print Broadcasting

FM radia – 26% with Govt. Approval

Cable TV – 49% with Govt. Approval

DTH - 49% with Govt. Approval

HITS - upto 74% with GOvtapproval – 49% under automatic

Sectoral Cap – Few examples

Print Media •26%wih Govt.Approval for New papers and periodicals with news and current affairs and for Publication of Indian Editions of Foreign News papers with news and current affairs•100% with Govt approval – for Publishing Scientific Magazines and to publish Facimile edition of foreign news papers

Trading •Cash & Carry Wholesale Trading/ Wholesale Trading (including sourcing from MSEs) – 100 % under automatic route•Ecommerce activities – 100% Automatic•Test Marketing – 100% with Govt.approval•Single Brand Product Retail Trading – 51% with Govt. Approval (like Nike, Adidos etc)• Retail Trading is a prohibited Activity for FDI

CIVIL Aviation Airports

Greenfield Projects Airports – 100% under Automatic Route

Existing Projects – 100% allowed - But,74% under automatic route and Govt.route beyond 74%

Air Transport Services

Scheduled Transport Service – 49% under Automatic (100% for NRI)

Non-Scheduled Service – 74% (100% for NRI) – 49% under Automatic and beyond 49% to 74% under Govt. Route

Helicopter, seaplane service(with the approval of DGCA) -100% under Automatic

Sectoral Cap

Manufacture of items reserved for production in Micro and Small Enterprises (MSEs

• FDI in MSEs will be subject to the sectoral caps, entry routes and other relevant sectoral regulations.

• Any industrial 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.

Note the following

•In the above 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 above(Please see the detailed list. The above given are only examples), FDI is permitted upto 100% on the automatic route, subject to applicable laws/ regulations; security and other conditionalities.

Thank You