India Relaxing framework
Vijaya Sampath and Sonali Kapoor of Lakshmikumaran & Sridharan look at the likely effects of the most recent changes to India’s framework policy on foreign investment
T
he Circular on Consolidated Foreign Direct Investment Policy (FDI Policy), generally issued or updated bi-annually in April and October by the Department of Industrial Policy and Promotion of the Ministry of Commerce and Industry, provides the framework for foreign investment in
India. The regulatory authority for all foreign exchange transactions in India is the Reserve Bank of India and, correspondingly, all changes in the FDI Policy are notified by the Reserve Bank in the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 under the Foreign Exchange Management Act, 1999. Any foreign investment in companies listed with any recognised stock exchange in India will also be subject to the applicable Securities and Exchange Board of India (Sebi) regulations and, in the case of certain sectors like telecommunications, approval of the relevant sectoral regulator is also necessary. India’s policy on FDI has been the subject of frequent changes towards further liberalisation in the light
of economic growth, the huge investments required in infrastructure, changing demographic profile and the growing middle class as well as international trade and reciprocal arrangements with other countries. Foreign investment is now permitted into India in almost all sectors, subject to certain conditions. There are two routes for entry of foreign funds into India: the automatic route which requires only notification when the investment is made, and the approval route where prior approval is needed from the government before an investment is made. Approvals are granted by the Foreign Investment Promotion Board (FIPB), which comprises members
from various ministries. The FIPB may refer applications for investment to relevant ministries and the Cabinet Committee on Economic Affairs (in certain cases) before clearing a proposal above a threshold limit. The majority of applications (barring exceptional and sensitive cases) that meet the norms are cleared within four to six weeks by the FIPB. Foreign direct investment, within the meaning of the FDI Policy, means purchase or acquisition, by a
person (which includes companies) resident outside India of equity shares, fully, compulsorily and manda- torily convertible debentures, and fully, compulsorily and mandatorily convertible preference shares. Foreign funds can also be raised by Indian companies in the form of ADRs and GDRs, issued in accor- dance with the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993. Warrants and partly-paid shares can be issued to persons resident out- side India only after approval through the government route. Other types of shares and debentures, such as non-convertible, optionally convertible or partially convertible, are considered as debt and need to comply with the External Commercial Borrowing guidelines issued by the Reserve Bank of India. Investments into India can be divided into four main categories. The first is the investment by non-res-
ident entities into capital of Indian companies, Indian partnership firms (by non-resident Indians and per- sons of Indian origin) and limited liability partnerships. The second category is investments by Sebi-listed foreign institutional investors (FIIs) under the portfolio investment scheme into capital of an Indian com- pany. Thirdly, Sebi-registered foreign venture capital investors can invest into the capital of an Indian ven- ture capital undertaking. The final type of investment can be made by qualified foreign investors in the equity shares of listed Indian companies through recognised stock exchange in India and equity shares of Indian companies offered to the public in India. Qualified foreign investors can also hold equity shares acquired by way of right, shares, bonus shares or equity shares on account of stock split/consolidation, or equity shares on account of amalgamation or de-merger.
Downstream investment, control and ownership While calculating the quantum of foreign investments in an Indian entity, both direct and indirect foreign investments, including downstream investments, are taken into account. Downstream (indirect) invest- ment by an Indian company which is owned and/or controlled by non-resident entities into another Indian company must comply with the sectoral caps and conditions imposed under the FDI Policy.
www.iflr.com IFLR|FOREIGN DIRECT INVESTMENT 007
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India’s policy on
FDI has been the subject of frequent changes
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