ICSI – Indore

FEMA – FDI RELATED ASPECTS

Harry Parikh

April 2018

2

WHY THE NEED ?

Why is it important to understand this regulation ?

▪ $ 209 BN of FDI in India from April 2014 to Dec 2017

▪ Out of which ~ 30 % FDI inflows worth USD 60.1 billion

in 2016-17

▪ Continuous liberalisation of the Indian economy

▪ India Inc is going for international funding

Why is FDI important for India Inc ?

▪ Access to cheaper capital

▪ Increase in employment

▪ Access to advanced technology and upgradation in

quality

Source : Economic times, Wikipedia

WHY DO WE NEED TO UNDWHY DO WE NEED TO UNDERSTAND FDI ?

3

WHAT WILL WE COVER TODAY ?

FDI

Sectors

Capital Instruments

Eligible entities

Sectoral Caps + FDI linked performance conditions

Acquisition and Transfer conditions

Other aspects

SECTORS

5

PROHIBITED - SECTORS

Lottery Business including

Government/ private lottery,

online lotteries

Gambling and betting

including casinosChit funds

Nidhi company Trading in TDRsReal Estate Business or

Construction of Farm Houses

Manufacturing of Cigars,

cheroots, cigarillos and

cigarettes, of tobacco or of

tobacco substitutes

Atomic energy and Railway

operations

NRIs and OCIs can

invest in Chit

funds on a non-

repatriation basis

Does not include

permitted real

estate

development and

earning rental or

maintenance

income

6

PROHIBITED - INVESTORS

FDI from Pakistan

▪ Requires prior Government Approval

▪ FDI not allowed in: defence, space, atomic energy and prohibited sectors

▪ FDI not allowed in Convertible Notes issued by Indian Startup company

▪ FDI in LLP not allowed

FDI from Bangladesh

▪ Requires prior Government Approval

▪ FDI not allowed in Convertible Notes issued by Indian Startup company

▪ FDI in LLP not allowed

7

SECTOR SNAPSHOT

100% Automatic route Party AutomaticGovernment approval for any

investment▪ Agriculture & Animal Husbandry▪ Exploration, marketing of oil and

natural gas fields, products,

pipelines;▪ LNG Regasification infrastructure▪ Manufacturing▪ Teleports, Direct to Home, Cable

Networks ▪ Civil Aviation▪ Scheduled Air Transport Service/

Domestic Scheduled Passenger

Airline (for NRIs and OCIs)▪ Regional Air Transport Service

(for NRIs and OCIs)

▪ Petroleum refining▪ Defence ▪ Terrestrial Broadcasting FM (FM

Radio)▪ Up-Linking of ‘News & Current

Affairs’ TV Channels▪ Scheduled Air Transport Service/

Domestic Scheduled Passenger

Airline ▪ Regional Air Transport Service▪ Telecom services (including

Telecom Infrastructure Providers

Category-l)▪ Multi Brand Retail Trading

▪ Mining and mineral separation of

titanium bearing minerals and

ores, its value addition and

integrated activities▪ Publishing/ printing of Scientific

and Technical Magazines/

specialty journals/periodicals▪ Publication of facsimile edition

of foreign newspapers▪ Satellites - Establishment and

operation

8

SECTOR SNAPSHOT

100% Automatic route Party Automatic

▪ Construction Development:

Townships, Housing, Built-up

infrastructure▪ Industrial Parks▪ Cash and Carry Wholesale

Trading/ Wholesale Trading

(including sourcing from MSEs)▪ Up-linking of Non-'News & Current

Affairs' TV Channels/ Downlinking

of TV Channels▪ Asset Reconstruction Companies▪ Credit Information Companies▪ Other Financial Services

▪ Pharmaceuticals (Brownfield)▪ Banking - Private sector ▪ Banking - Public Sector▪ Pension Sector▪ Private Security Agencies

+ANY OTHER SECTORS WHICH ARE

NOT PROHIBITED

CAPITAL INSTRUMENTS

10

CAPITAL INSTRUMENTS

Equity shares

▪ Fully paid up equity shares

▪ Partly paid up equity shares – 25% to be received upfront and subject to other conditions of calling the money in 12 months

Preference shares

▪ Fully, compulsorily and mandatorily convertible preference sharescovered

▪ Conversion lock in for minimum 1 year

Debentures

▪ Fully, compulsorily and mandatorily convertible debentures covered

▪ Conversion lock in for minimum 1 year

Warrants

▪ Issued on or after July 8, 2014

▪ 25% consideration to be received upfront and balance within 18 months

▪ Forfeit the balance amount on non payment

Equity shares

▪ Any other types of equity shares or share application money pending over 60 days

Preference shares

▪ Non-convertible/ optionally convertible/ partially convertible preference shares funds for which have been received on or after May 1, 2007 shall be treated as debt and shall conform to ECB guidelines

Debentures

▪ Non-convertible/ optionally convertible/ partially convertible debenture shall be treated as debt and shall conform to ECB guidelines

Warrants

▪ Not meeting above conditions

ELIGIBLE ENTITIES

12

ENTITIES ELIGIBLE FOR FDI

▪ Companies

• Unlisted companies

• Listed companies (with 10% minimum

investment)

▪ Limited Liability Partnerships (only for sectors

where no FDI linked conditions are specified)

▪ AIFs

▪ REITS

▪ INViTS

▪ FVCIs

▪ VCFs

▪ Proprietorships (except for NRI)

▪ Partnerships, other than LLPs (except for NRI)

▪ Society

13

DOWNSTREAM INVESTMENT

Downstream investment

India

Outside India

Person Resident outside India

Indian

company

FD

I

Subsidiary Subsidiary

100% 49%Indian company

14

▪ For downstream investment, funds to be brought from abroad and not use

funds borrowed in the domestic markets.

▪ Can be made through internal accruals.

▪ Comply with the entry route, sectoral caps, pricing guidelines and other

FDI linked performance conditions as applicable for foreign investment.

DOWNSTREAM INVESTMENT

Downstream investment

15

▪ Downstream investment by an LLP which is FOCC can invest in another

Indian company operating in sectors where foreign investment up to 100%

is permitted under automatic route and there are no FDI linked

performance conditions.

▪ Indirect foreign Investment is permitted in an LLP in sectors where

foreign investment is allowed 100% under automatic route and there are

no FDI linked performance conditions.

▪ For AIF / REIT / INViT, if the sponsors/ managers/ investment managers is

not FOCC, then no downstream investment rules apply

DOWNSTREAM INVESTMENT

Downstream investment

ACQUISITION AND TRANSFER

17

ACQUISITON AND TRANSFER CONDITIONSMode of funding for all FDI investment

+Inward remittance from abroad through

banking channels

Out of funds held in NRE/ FCNR(B)/ Escrow account

Issue of equity shares by an Indian

company against any funds payable by it

to the investor

Swap of capital instruments where the Indian investee company is engaged

in an automatic route sector

++▪ Does not cover ECB related dues

▪ Only fully paid up shares can be issued

▪ Permitted for pre-incorporation expenses /

Pre operative expenses

• ONLY FOR WOS

• Only upto 5% of Authorised capital or

USD 500,000 (whichever is less)

18

Pricing guidelines

ACQUISITON AND TRANSFER CONDITIONS

India

Outside India

Person Resident outside India

Person Resident in IndiaCapit

al in

stru

ments

FD

I

$$$

MINIMUM FAIR MARKET VALUE

$$$

19

ACQUISITON AND TRANSFER CONDITIONS

India

Outside India

Person Resident outside India

Person Resident in India

Capita

l instru

ments E

xit

To Invest

or

$$$

MAXIMUM FAIR MARKET VALUE

Pricing guidelines

$$$

20

ACQUISITON AND TRANSFER CONDITIONS

▪ Timing ?

▪ What is fully diluted basis ?

▪ Valuation to be given by CA or Merchant Banker or Cost Accountant

▪ In case of listed companies, as per SEBI rules

Pricing guidelines

21

ACQUISITON AND TRANSFER CONDITIONS

▪ No guaranteed / assured exit price at the time of making such investment/ agreement

▪ Exit at the price prevailing at the time of exit

▪ What about subscription shares ?

▪ What about swap of shares ?

Pricing guidelines

22

ACQUISITON AND TRANSFER CONDITIONS

▪ Valuation of interest in LLP

▪ Pricing in case of convertible instruments (Formula to be fixed upfront or mechanism to be fixed)

▪ In case of Investment on Non Repat basis?

▪ Transfer of Capital Instruments between two Persons Outside India

Pricing guidelines

23

ACQUISITON AND TRANSFER CONDITIONSRoutes for acquisition

▪ Offer in compliance in CO 2013

▪ Should not breach sectoral cap

▪ Original investment if as per FEMA

▪ Right and / or Bonus share have same repat conditions

▪ Rights issue price to be not less than price offered to Indian persons (in case of unlisted companies)

▪ Renunciation of rights is allowed, subject to same conditionalities applicable to original allottee

Rights / Bonus issues

24

ACQUISITON AND TRANSFER CONDITIONSRoutes for acquisition

▪ ESOPS scheme is in compliance with CO 2013

▪ Government approval required depending on sector

▪ Government approval required if PROI is resident of Bangladesh / Pakistan

ESOPs

25

ACQUISITON AND TRANSFER CONDITIONSRoutes for acquisition

▪ Acquisition on account of merger demerger of Indian companies - Sector of

amalgamated company to be checked

▪ Foreign merger / demerger

Other methods

26

ACQUISITON AND TRANSFER CONDITIONSRoutes for acquisition

▪ Investing in India using an intermediary company

▪ Can consideration be kept as deferred ?

▪ Investment on non repatriation basis

Other key points

27

TRANSFER OF CAPITAL INSTRUMENTS

Transferor Transferee By way of Remarks

PROI (not being NRI OCI

OCB)PROI Sale / gift

Includes transfer of capital instruments of an Indian

company pursuant to merger, demerger and amalgamation

of entities / companies incorporated outside India

NRI / OCI PROI Sale / gift Held by transferor on repatriation basis

NRI / OCI / FOCC NRI / OCI GiftHeld by Transferor and acquired by transferee on non-

repatriation basis

PROI PRII

Sale / gift /

Sale on Stock

Exchange in

India

If held by PROI on non-repatriation basis, then pricing

guidelines, documentation and reporting requirements

will not apply

Sale in stock exchange in the manner prescribed by SEBI

NRI / OCI / PRII / FOCC PROI Sale

Held by transferor on non-repatriation basis

If transferee is NRI / OCI / FOCC who acquires on non-

repatriation basis then entry routes, investment limits,

pricing guidelines etc will not apply

PROI PROI / PRII Sale / Gift

Capital Instruments having optionality clause

Complying pricing guidelines

Minimum Lock in Period = one year or according to FEMA

20(R)

FOCC = Company / Trust / Partnership Firm incorporated outside India and owned and controlled by NRI or OCI

FDI LINKED PERFORMANCE CONDTIONS

29

FDI LINKED CONDITIONSGENERAL

FDI linked performance conditions

What does this mean ?

Can a company be formed in India before meeting these conditions ?

What if the company is a dormant company?

When is Government approval required ?

What if the Indian company is engaged only in business of investing into other Companies ?

30

E-COMMERCE

What is E-Commerce?‘E-commerce’ is buying and selling of goods and services

including digital products over digital & electronic network.

‘Inventory based model of e -commerce’

means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.

‘Market place model of e-commerce’

means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

✓X

Not permit > 25 % sales value one vendor or their group companies

31

REAL ESTATE BUSINESS

▪ Dealing in land and immovable property

▪ Construction of Farm Houses

▪ Trading in TDRs

▪ Development of townships Construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships

▪ Rental income

▪ Operating and maintenance services ✓

X

32

CONSTRUCTION DEVELOPMENTTownships, Housing, Built-up infrastructure

Investor

Permitted to exit on completion of the project or after development of trunk infrastructure i.e.

roads, water supply, street lighting, drainage and sewerage.

Three year lock in (except transfer to another non resident)

Indian company Permitted to sell only developed plots

REPORTING REQUIREMENTS

34

REPORTING REQUIREMENTS

FDI Infusion

▪ Within 30 Days of receipt of money – File form ARF

▪ Allot Capital instruments within 60 days

▪ File form FC GPR within 30 days of allotment

▪ Onus of filing is on the Indian company

Transfer of shares

▪ File form FCTRS in 60 days of receipt of funds

▪ Onus is on Indian resident transferor / transferee

Indian company

▪ File FLA by 15 July

▪ Intimate RBI of downstream investment in 30 days of investment

35

FAQS

Is Services sectors covered under 100% automatic route ?

Can I change the terms of CCPS /

CCDS ?

How do I achieve valuation

difference between Income tax and

FEMA ?

Using LLPs for Construction and

Real estate business

Can foreign entity invest in a

unregistered partnership ?

Can anyone invest in Indian listed

company ?

Can FDI be done at discount ?

THANK YOU

HARRY PARIKHAssociate Partner Transaction Tax Tax & Regulatory ServicesBDO India LLP

harryparikh@bdo.in+91 98672 66712

Note: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information

contained therein without obtaining specific professional advice. Please contact BDO India LLP to discuss these matters in the context of your particular circumstances. BDO India LLP and each BDO member firm in India, their partners and/or directors, employees and agents do

not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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