Foreign Investment Shroff
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Transcript of Foreign Investment Shroff
Privileged & Confidential
Amarchand & Mangaldas & Suresh A. Shroff & Co.Amarchand Towers, 216, Okhla Industrial Estate, Phase-III, New Delhi -
Tel: (91-11) 2492-0500 Fax:(91-11) 2692-4900Email: [email protected]
FOREIGN INVESTMENT IN INDIAThe Impact of Press Notes 2, 3 and 4 of 2009
August 26, 2009
By Shardul Shroff
Privileged & Confidential 2
Outline
Foreign Investment Policy: A Historical Overview
Foreign Investment: Facts and Figures
Legal Framework Governing Foreign Investment
Press Note 2 of 2009 – 13th Feb 2009
Press Note 3 of 2009 – 13th Feb 2009
Press Note 4 of 2009 – 25th Feb 2009
Privileged & Confidential
FOREIGN INVESTMENT POLICY A HISTORICAL OVERVIEW
Privileged & Confidential 4
A Historical Overview: Pre-2000
Pre-1991- “Careful regulation” of foreign capital and enterprise –
FERA- Hardly any foreign inflows, mostly reliance on foreign
debt 1991-92
- Balance of payments crisis led to IMF-induced liberalization
- Automatic route (Annexure III) – FI <= 51% permitted in various sectors
- Portfolio investment by FIIs allowed
Privileged & Confidential 5
A Historical Overview: Pre-2000
1996-97- FIPB set up - facilitation of expeditious approvals through
nodal agency- Automatic route expanded with increase in sectoral caps
1999- FEMA - Fundamental shift in philosophy and
liberalization
Privileged & Confidential 6
A Historical Overview: Post-2000
Sectoral classification- Prohibited List- Approval Route – with / without sectoral caps- Automatic Route - with / without sectoral caps (most
sectors)• Shift from ‘Positive List’ to ‘Negative List’
FDI sectoral caps exclusive of FII investment- Per recommendations of Expert Committees (2004 &
2005) Some Grey Areas
- “Opco Holdco” issue- FIPB approval for issue of warrants- FII v. FDI- FVCI regime
Privileged & Confidential
FOREIGN INVESTMENT:FACTS AND FIGURES
Privileged & Confidential 8
Foreign Investment: Facts and Figures
+Source: IMF Statistics 2008 *Source: DIPP Factsheet on FDI (May 2009)
Goldman Sachs BRIC Report 2007: “…if India can fulfill its growth potential, it can become a motor for the world economy.”- 2nd fastest growing economy in the world
4th largest economy in the world in terms of PPP+
Foreign Investment from August 1991 to May 2009 = USD 110 Billion*
Privileged & Confidential 9
Facts and Figures:FDI inflow (1970 – 2009)
0
20
40
60
80
100
120
'70-'80 '81-'90 '91-'00 '01-'09
FDI
(In
USD
Bn)
Source: RBI Bulletins
Privileged & Confidential 10
Facts and Figures:FDI Inflow - India v. China
0
10
20
30
40
50
60
70
80
90
100
'90-'91
'91-'92
'92-'93
'93-'94
'94-'95
'95-'96
'96-'97
'97-'98
'98-'99
'99-'00
'00-'01
'01-'02
'02-'03
'03-'04
'04-'05
'05-'06
'06-'07
'07-'08
India
China
(FD
I in
US
D B
n)
Source: RBI Bulletins, US-China Business Council Statistics
Privileged & Confidential 11
Facts and Figures:Inflows - FDI v. FII
0
5
10
15
20
25
30
35
'95-'96
'96-'97
'97-'98
'98-'99
'99-'00
'00-'01
'01-'02
'02-'03
'03-'04
'04-'05
'05-'06
'06-'07
'07-'08
FDI
FII
(In
USD
Bn)
Source: RBI Bulletins
Privileged & Confidential 12
Facts and Figures:Sectoral Distribution of FDI in 2008
Services
Computer Software andHardware Telecom
Construction
Housing and Real Estate
Automobiles
Power
Metallurgical Industries
Petroleum and NaturalGasChemicals
Source: DIPP Factsheet on FDI (May 2009)
Privileged & Confidential
LEGAL FRAMEWORK GOVERNING FOREIGN INVESTMENT
Privileged & Confidential 14
Legal Framework: Sources of Law
Multiple entry routes for foreign investment into India- FDI / FII / FVCI
FDI framework is governed by- FEMA 1999 - rules and regulations thereunder, primarily
FEMA 20- FDI Policy and Press Notes- Primarily regulated by FIPB and RBI- FDI in certain financial services activities regulated by
SEBI / RBI FII
- SEBI FII Regulations, 1995 & FEMA 20 FVCI
- SEBI FVCI Regulations, 1996 & FEMA 20 Sector specific regulators: IRDA, TRAI, DoT
Privileged & Confidential 15
Legal Framework: Government Agencies
Ministry of Finance Minister: Mr. Pranab Mukerjee
Ministry of Commerce and Industry Minister: Mr. Anand Sharma
Government of India
FIPB Unit: approves FDI proposals, encourages FDI, reviews FDI policy and offers suggestions to the DIPP Director: Mr. Prabodh Saxena
DIPP: Promotes and formulates FDI policiesSecretary: Ajay Shankar Joint Secretary: Mr. Gopal Krishna
FIIA: facilitates implementation of FDI approvals, addresses concerns of investors
FIPC: attracts FDI into the country
Department of Economic AffairsJoint Secretary: Dr. Anup K. Pujari
Privileged & Confidential 16
Legal Framework: Routes
FDI FII FVCI
• No special registration
• Investment limits per sector specific rules
• Entry/Exit price regulated
• Entry on market not permitted
• Pre IPO-lock in
• Most commonly used entry route
• SEBI & RBI Registration
• Aggregate investment up to 24% or FDI sectoral caps (with shareholder approval)
• Maximum of 10% per FII or 5% per sub account per target
• Entry - direct or on market
• Exit on market• Pre IPO – lock in• Registration 4-6 weeks
• SEBI & RBI Registration• Recent RBI limitation to
10 sectors • Can invest whole corpus
in DVCF• Pricing flexibility• Takeover Code
exemption• No Pre-IPO lock in if
held for 6 months• Registration 6-8 weeks or
longer
Privileged & Confidential 17
Legal Framework: FDI Entry Norms
Automatic Route- No Cap or Conditions (Eg: Manufacturing)- No Cap but with Conditions or Soft Caps
• Eg: minimum capitalizations norms for NBFCs, Real Estate- With Cap (no express see through) (Eg. Scheduled Air
Transport Services)- With Cap (see through under specific statute / rules) (Eg:
Insurance) Approval Route
- No Cap (Eg: Tea, Courier)- With Cap (no express see through) (Eg: Single-brand
Retail)- With Cap (see through under specific rules) (Eg:
Broadcasting)
Privileged & Confidential 18
Legal Framework: FDI Entry Norms
Automatic cum Approval Route- Eg: Telecom automatic upto 49%, approval to go up to
74% Prohibited Sectors (Eg: Multi-brand Retail)
Privileged & Confidential
PRESS NOTE 2 OF 2009
Privileged & Confidential 20
Press Note 2: Holding Structure
Son
Father
Grandfather
Overseas
India
Direct
Indirect
The New Vocabulary
Privileged & Confidential 21
Press Note 2: Key Concepts
New norms for computation of foreign investment Direct foreign investment
- All investment directly by a non-resident entity Indirect foreign investment
- ‘Father’ owned and controlled by resident Indians - NO see through
- ‘Father’ owned or controlled by non-residents – FULL see through
» Case 1: Majority foreign shareholding and / or foreign control» Case 2: 50:50 ownership / joint control
• Exception WOS (100% subsidiaries)- Review of inter-se agreements
“Grandfathering” of existing investments
Privileged & Confidential 22
Press Note 2: Some Issues
Definition of ownership?- Beneficial ownership - 187 C declaration / pledged shares
- Convertible instruments*
- Widely held companies without promoters?
Effect / rationale for exclusion of public sector banks and financial institutions for I&B and Defense sector (numerator, denominator or both?)
* DIPP officials have indicated that convertible instrument would be counted only upon conversion
Privileged & Confidential 23
No. Rule of foreign investment in Son
FIPB approval Change
1. No sectoral cap NoYes (PN 4)
2. Sectoral cap (under automatic route)
No(filing may be required) Yes (PN 4) ?
3. With prior Government approval
Yes(if inter-se agreement) Yes
4. Banned (eg. Retail, non-compliant Real Estate)
??? Yes ???
Press Note 2: Snapshot Indian Owned & Controlled
Indian “Father”
Privileged & Confidential 24
No. Rule of foreign investment in Son
FIPB approval Change
1. No sectoral cap No No 2. Sectoral cap (under
automatic route)No
(if within caps & no change of control)
Yes (full see-through)
3. With prior government approval
Yes(plus filing inter-se
agreement)
Yes (full see-through, no
prorating)
4. Banned (eg. Retail, non-compliant Real Estate)
Not permitted No
Press Note 2: SnapshotForeign Owned or Controlled
Foreign “Father”
Privileged & Confidential 25
Press Note 2: Illustrations
Son
Father
Indian Foreign
49%
Case I – Indian Owned & Controlled
74%
Foreign Investment = 0
51% withcontrol
Son
Father
Indian Foreign
Foreign Investment = 74%
74%
49%
Case II – Foreign Owned Father
51% (without control)
Privileged & Confidential 26
Press Note 2: Illustrations
Son
Father
Indian Foreign
Foreign Investment = 74%
74%
49% (with control)
51%
Case IV – Foreign Controlled FatherCase III – Indian Foreign 50:50 JV
Son
Father
50%
Indian Foreign
Foreign Investment = 74%
74%
50%
Privileged & Confidential 27
Press Note 2: Illustrations
Son
Father
Indian Foreign
51%
Case VI – WOS by a Foreign Father
100%
Foreign Investment = 51%
49% (with or without control)
Son
Father
Indian Foreign
Foreign Investment = 74%
74%
49%
Case V – Foreign Owned & Controlled
51% (with control)
Privileged & Confidential 28
Press Note 2: Illustrations: Insurance
Pre & Post PN 2 Pre & Post PN 2
Insurance JV
JV PartnerOther Foreign Co.
Indian Co.
Indian promoter
10%26%
74%
90%
• Foreign Investment = 26% (Automatic Route)• Other Foreign Co. investment ignored.• Based on FIPB ratified market practice
Insurance JV
JV Partner
Indian promoter
10%17%
83%
90%
• Foreign Investment = 17% + 10% of 83% = 25.3% (Automatic Route)
Indian Co.
Nothing’s Changed
Privileged & Confidential 29
Press Note 2: Illustrations: Defense
Son
Father
Indian Group Foreign
26% (without control)
51% (with control)
49%
51%
Foreign Investment = 26%(FIPB Approval)
After PN 2 Additional conditions for I&B and Defense
51% single Indian shareholder / group
Excludes public sector banks and public financial institutions
Binding agreement to exercise control collectively
Privileged & Confidential 30
Press Note 2: Illustrations: Telecom
Son
Father
Indian
Son
Father
Foreign
49% 49%
74%
Foreign Investment = 49% of 74% = 36.26%
Indian Foreign
Foreign Investment = 0%
74%
51% (with
control)
51%
Before After
Indian Father
Privileged & Confidential 31
Press Note 2: Illustrations: Telecom
Son
Father
Indian
Son
Father
Foreign
51%51%
74%
Foreign Investment = 51% of 74% = 37.74%
Indian Foreign
Foreign Investment = 74%
74%
49%49%
Before After
Foreign Father
Privileged & Confidential 32
PRESS NOTE 3 OF 2009
Privileged & Confidential 33
Press Note 3: Key Concepts
Applies to Sectors where FDI upto 100% not permitted under automatic route
FIPB / Government approval required when: - Indian company established with foreign ownership or
control
- Ownership or control of Indian company acquired by non-resident
• Consequent upon Transfer of shares
Foreign investment includes all types
Privileged & Confidential 34
Press Note 3: Key Concepts
Sectors directly impacted - Scheduled air transport, ground handling service, banking
– private
- Insurance, telecom, non-scheduled air transport (to the extent foreign shareholders acquire control through shareholder arrangements)
Impact on open offers under the SEBI Takeover Regulations
Privileged & Confidential 35
PRESS NOTE 4 OF 2009
Privileged & Confidential 36
Press Note 4: Key Concepts
“Guiding principle” is that foreign investment by foreign Father would be governed by same norms as applicable to direct foreign investment- You can only do indirectly what you can do directly
“Operating’ & ‘Investing” Companies defined “Operating cum Investing” company – amalgam of 2
- No threshold of operations or investment prescribed
Sectoral caps and other requirements apply both at the level of “foreign Father” and Son
Privileged & Confidential 37
Press Note 4: Key Concepts
Current FIPB issue in relation to prior approval for foreign investment in operating cum investing companies has ended prospectively, but no “grandfathering” – compounding issue seems to continue for existing structures (para 7 PN 2)
Foreign Investment irrespective of amount or extent in “Investing Companies” (Indian or foreign Father) requires prior FIPB approval- This requirement cannot be got around by using shell
companies for downstream investment on the basis that they will commence operations in future (paras 4.2.2, 4.2.3 & 5)
Post facto notification requirements prescribed (para 6)
Privileged & Confidential 38
Press Note 4: Key Concepts
SEBI / RBI pricing norms for issue and transfer apply to downstream investment in Son
Bar against leverage by foreign Father if it is an Investing Company – continuation of policy
Old Press Note 9 (1999) and para 11 of Press Note 3 (1997) is DELETED!!
VERDICT – GREAT NEWS!!
Privileged & Confidential 39
THANK YOU
© Amarchand & Mangaldas & Suresh A. Shroff & Co.
August 26, 2009