Foreign Direct Investment (FDI) is permitted as under the following forms of investments.
1. Through financial collaborations.
2. Through joint ventures and technical collaboration
3. Through capital markets via Euro issue
4. Through private placements or preferential allotments.
Approval :There are two routes of approval by way of which a foreign investment can be made in India. One is the automatic route as monitored by the Reserve Bank and the other is when FIPB approval is sought.
1. Automatic Route: New Ventures: All foreign investments except the following fall under the automatic route:• All proposals that require an Industrial License which includesi. items requiring an Industrial License under the Industries (Development and Regulation) Act, 1951. ii. foreign investment being more than 24% in the equity capital of units manufacturing items reserved for small scale industries. iii. all items which require an Industrial License in terms of the locational policy notified by Government under the New Industrial Policy of 1991 • All proposals in which the foreign collaborator has a previous venture/tie-up in India.• All proposals relating to acquisition of shares in an existing Indian company for the purposes of taking over another company.• All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route. Investment in Public Sector Units as also for Export Oriented Units / Export Processing Zone Units / Electronic Hardware Technology Park Units / Software Technology Park Units would also qualify for the Automatic Route.
Existing Companies: In addition to Automatic Approval for new companies, such approval can be granted also for existing companies proposing to induct foreign equity. For existing companies with an expansion programme, the additional requirements are: -
Approval :There are two routes of approval by way of which a foreign investment can be made in India. One is the automatic route as monitored by the Reserve Bank and the other is when FIPB approval is sought.
1. Automatic Route: New Ventures: All foreign investments except the following fall under the automatic route:• All proposals that require an Industrial License which includesi. items requiring an Industrial License under the Industries (Development and Regulation) Act, 1951. ii. foreign investment being more than 24% in the equity capital of units manufacturing items reserved for small scale industries. iii. all items which require an Industrial License in terms of the locational policy notified by Government under the New Industrial Policy of 1991 • All proposals in which the foreign collaborator has a previous venture/tie-up in India.• All proposals relating to acquisition of shares in an existing Indian company for the purposes of taking over another company.• All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route. Investment in Public Sector Units as also for Export Oriented Units / Export Processing Zone Units / Electronic Hardware Technology Park Units / Software Technology Park Units would also qualify for the Automatic Route.
Existing Companies: In addition to Automatic Approval for new companies, such approval can be granted also for existing companies proposing to induct foreign equity. For existing companies with an expansion programme, the additional requirements are: -
1. the increase in equity level must result from the expansion of the equity base of the existing company
2. the money to be remitted should be in foreign currency
3. the proposed expansion programme should be predominantly in the sector(s) under Automatic Route.Otherwise, the proposal would need Government approval through the FIPB. For this a Board Resolution of the existing Indian company as well as a consent letter from the Indian partner and the foreign collaborator must support the proposal.For existing companies without an expansion programme, the additional requirements for eligibility for automatic approval are: -1. that they are predominantly engaged in the industries under Automatic Route2. the increase in equity level must be from expansion of the equity base3. the foreign equity must be in foreign currency.Not more than 20 per cent of the entire contribution brought in by promoter cumulatively in public or preferential issue shall be locked in.The RBI has given permission to Indian Companies to accept investment under this route without obtaining prior approval from RBI. Investors are required to notify the Regional Office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors.
2. Approval Route:
For the following categories, Government approval for FDI through the FIPB shall be necessary: i. All proposals that require an Industrial Licence which includes (i) the item requiring an Industrial Licence under the Industries (Development and Regulation) Act, 1951; (ii) foreign investment being more than 24% in the equity capital of units manufacturing items reserved for small scale industries; and (iii) all items which require an Industrial Licence in terms of the locational policy notified by Government under the New Industrial Policy of 1991.
ii. All proposals in which the foreign collaborator has a previous venture/tie up in India. The modalities prescribed in Press Note No. 18 dated 14.12.98 of 1998 series, shall apply in such cases.
iii. All proposals relating to acquisition of shares in an existing Indian company for the purposes of taking over another company.
iv. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route.
For greater transparency in the approval process, Government have announced guidelines for consideration of FDI proposals by the FIPB.
Processing of non-automatic approval cases: FIPB approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.
Other FDI Issues:
Issue and Valuation of Shares in case of existing companies On receipt of the approval (either through the automatic route, or by Government) an existing company needs to propose allotment of preferential allocation of the required amount of equity to the foreign investor by a special resolution. The company can make the issue at market prices of the shares either at (a) 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 (b) the average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. The stock exchange referred to is the one at which the highest trading volume in respect of the share of the company has been recorded during the preceding six months prior to the relevant date. The relevant date is the date thirty days prior to the date on which the meeting of the General Body of the shareholders is convened. Other relevant guidelines of Securities and Exchange Board of India (SEBI)/RBI, including SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 wherever applicable, would need to be followed.
Repatriation of Dividends - Dividend Balancing 100% repatriation of dividends is permissible in case of foreign investments in India. However, in the case of 22 specified industries in the consumer goods sector , (whether approved through the automatic route or by Government), the outflow on account of dividend payments would need to be balanced by an equivalent amount of export earnings over 7 years with effect from the date of commercial production. Balancing is not required beyond this period. For existing companies with on going activities, the date of allotment of shares for raising the level of foreign equity to the approved level would be the applicable date. In cases where dividend balancing was not applicable earlier and became applicable subsequently, it would be applicable to the extent of incremental foreign equity. This would also apply in the case of secondary market acquisition/preferential allotment/transfer of shares to the extent of foreign equity infused provided the activity attracts the condition of dividend balancing as per the existing policy. The entrepreneurs are free to export the item(s) for which FDI approval has been granted, as well as export any of the items falling under Automatic Route for such balancing. This condition of dividend balancing does not apply to investments by approved international organizations, such as International Finance Corporation (IFC), the Deutche Entwicklungs Gescelschaft (DEG), the Commonwealth Development Corporation (CDC), the Asian Development Bank (ADB), etc.
Repatriation of Winding-up Proceeds100% repatriation of the winding up proceeds is permissible under the concerned foreign exchange management regulations.
Foreign Investment in the Small Scale Sector Under the small-scale policy, equity holding by other units including foreign equity in a small-scale undertaking is permissible up to 24 per cent. However there is no bar on higher equity holding for foreign investment if the unit is willing to give up its small-scale status. In case of foreign investment beyond 24 per cent in a small-scale unit, which manufactures small scale, reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent would need to be obtained.
Foreign Investment Policy for Trading ActivitiesForeign investment for trading can be approved through the automatic route up to 51% foreign equity, and beyond by the Government through FIPB. For approval through the automatic route, the requirement would be that (i) the undertaking concerned should be an export house, trading house, super trading house or a star trading house registered under the provisions of the Export and Import policy in force. However, under the Government routei. 100% FDI is permitted in case of trading companies for the following activities:• Exports; • Bulk imports with export/expanded warehouse sales; • Cash and carry wholesale trading; • other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and for third party use or onward transfer/distribution/sales.II. The following kinds of trading are also permitted, subject to provisions of EXIM Policy: a. Companies for providing after sales services (that is not trading per se)b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India.c. Trading of hi-tech items/items requiring specialised after sales service.d. Trading of items for social sectore. Trading of hi-tech, medical and diagnostic items.f. Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name.g. Domestic sourcing of products for export.h. 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 facilities commences simultaneously with test marketing.
Foreign Investment Policy for 100% Export Oriented Units/Export Processing Zones: 100 per cent Export Oriented Units (EOUs) and units in the Export Processing Zones (EPZs), enjoy a package of incentives and facilities, which include duty free imports of all types of capital goods, raw material, and consumables in addition to tax holidays against export. Automatic Route: The Development Commissioners (DCs) of Export Processing Zones (EPZs) /Free Trade Zones (FTZS) accord automatic approval to projects where (a) items do not attract compulsory licensing; (b) where the location is in conformity with the prescribed parameters; (c) the units undertake to achieve exports and value addition norms as prescribed in the Export and Import Policy in force; (d) the CIF value of imported capital goods is financed through foreign equity,or foreign exchange required for import of plant and equipment (net of taxes) is within Rs. 100 Million, and in the case of import of second-hand capital goods if an Import Licence is not required;(e) Where the foreign technology agreement if any, envisages a lump sum payment not exceeding US $ 2.00 Million and royalty payment up to 8% on exports and 5% on DTA sales (net of taxes) over a period of 5 years from the date of commencement of commercial production. (f) where the exports are to general currency/hard currency areas; (g) where the unit is amenable to bonding by customs authorities; and(h) the unit has projected the minimum export turnover, as specified. Conversion of existing Domestic Tariff Area (DTA) units into EOU is also permitted under automatic route, if the DTA unit satisfies the parameters mentioned above and there is no outstanding export obligation under any other Export Oriented scheme of the Government of India.
Approval Route: All proposals which do not meet any or all of the parameters for automatic approval need to be considered and approved by the Government.
Foreign Investment Policy for Electronic Hardware Technology Park and Software Technology Park Schemes In order to provide impetus to the electronics industry, to enhance its export potential and to develop an efficient electronic component industry, Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) schemes offer a package of incentives and facilities like duty free imports on the lines of the EOU Scheme, deemed exports benefits and tax holidays. Automatic Route: The Directors of STPs in respect of STP proposals; and the Designated Officers in respect of EHTP proposals accord automatic approval if -(a) the items do not attract compulsory licensing; (b) the location is in conformity with the prescribed parameters; (c) the export obligation laid down in the respective EHTP scheme or STP scheme is fulfilled; (d) the CIF value of the imported capital goods required for the project does not exceed Rs. 100 million; (e) foreign technology proposals envisaged, if any, do not involve lump sum know how fee exceeding US$ 2 million, 8 per cent royalty on export and 5 per cent royalty on domestic sales (all net of taxes) over a period of 5 years from the date of commencement of commercial production; (f) the exports are to general currency/hard currency area; (g) the unit is amenable to bonding by the Customs, and all the manufacturing operations are carried out in the same premises and the proposal does not envisage sending out of the bonded area any raw material or intermediate products for any other manufacturing or processing activity.
2. Approval Route:
For the following categories, Government approval for FDI through the FIPB shall be necessary: i. All proposals that require an Industrial Licence which includes (i) the item requiring an Industrial Licence under the Industries (Development and Regulation) Act, 1951; (ii) foreign investment being more than 24% in the equity capital of units manufacturing items reserved for small scale industries; and (iii) all items which require an Industrial Licence in terms of the locational policy notified by Government under the New Industrial Policy of 1991.
ii. All proposals in which the foreign collaborator has a previous venture/tie up in India. The modalities prescribed in Press Note No. 18 dated 14.12.98 of 1998 series, shall apply in such cases.
iii. All proposals relating to acquisition of shares in an existing Indian company for the purposes of taking over another company.
iv. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route.
For greater transparency in the approval process, Government have announced guidelines for consideration of FDI proposals by the FIPB.
Processing of non-automatic approval cases: FIPB approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.
Other FDI Issues:
Issue and Valuation of Shares in case of existing companies On receipt of the approval (either through the automatic route, or by Government) an existing company needs to propose allotment of preferential allocation of the required amount of equity to the foreign investor by a special resolution. The company can make the issue at market prices of the shares either at (a) 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 (b) the average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. The stock exchange referred to is the one at which the highest trading volume in respect of the share of the company has been recorded during the preceding six months prior to the relevant date. The relevant date is the date thirty days prior to the date on which the meeting of the General Body of the shareholders is convened. Other relevant guidelines of Securities and Exchange Board of India (SEBI)/RBI, including SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 wherever applicable, would need to be followed.
Repatriation of Dividends - Dividend Balancing 100% repatriation of dividends is permissible in case of foreign investments in India. However, in the case of 22 specified industries in the consumer goods sector , (whether approved through the automatic route or by Government), the outflow on account of dividend payments would need to be balanced by an equivalent amount of export earnings over 7 years with effect from the date of commercial production. Balancing is not required beyond this period. For existing companies with on going activities, the date of allotment of shares for raising the level of foreign equity to the approved level would be the applicable date. In cases where dividend balancing was not applicable earlier and became applicable subsequently, it would be applicable to the extent of incremental foreign equity. This would also apply in the case of secondary market acquisition/preferential allotment/transfer of shares to the extent of foreign equity infused provided the activity attracts the condition of dividend balancing as per the existing policy. The entrepreneurs are free to export the item(s) for which FDI approval has been granted, as well as export any of the items falling under Automatic Route for such balancing. This condition of dividend balancing does not apply to investments by approved international organizations, such as International Finance Corporation (IFC), the Deutche Entwicklungs Gescelschaft (DEG), the Commonwealth Development Corporation (CDC), the Asian Development Bank (ADB), etc.
Repatriation of Winding-up Proceeds100% repatriation of the winding up proceeds is permissible under the concerned foreign exchange management regulations.
Foreign Investment in the Small Scale Sector Under the small-scale policy, equity holding by other units including foreign equity in a small-scale undertaking is permissible up to 24 per cent. However there is no bar on higher equity holding for foreign investment if the unit is willing to give up its small-scale status. In case of foreign investment beyond 24 per cent in a small-scale unit, which manufactures small scale, reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent would need to be obtained.
Foreign Investment Policy for Trading ActivitiesForeign investment for trading can be approved through the automatic route up to 51% foreign equity, and beyond by the Government through FIPB. For approval through the automatic route, the requirement would be that (i) the undertaking concerned should be an export house, trading house, super trading house or a star trading house registered under the provisions of the Export and Import policy in force. However, under the Government routei. 100% FDI is permitted in case of trading companies for the following activities:• Exports; • Bulk imports with export/expanded warehouse sales; • Cash and carry wholesale trading; • other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and for third party use or onward transfer/distribution/sales.II. The following kinds of trading are also permitted, subject to provisions of EXIM Policy: a. Companies for providing after sales services (that is not trading per se)b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India.c. Trading of hi-tech items/items requiring specialised after sales service.d. Trading of items for social sectore. Trading of hi-tech, medical and diagnostic items.f. Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name.g. Domestic sourcing of products for export.h. 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 facilities commences simultaneously with test marketing.
Foreign Investment Policy for 100% Export Oriented Units/Export Processing Zones: 100 per cent Export Oriented Units (EOUs) and units in the Export Processing Zones (EPZs), enjoy a package of incentives and facilities, which include duty free imports of all types of capital goods, raw material, and consumables in addition to tax holidays against export. Automatic Route: The Development Commissioners (DCs) of Export Processing Zones (EPZs) /Free Trade Zones (FTZS) accord automatic approval to projects where (a) items do not attract compulsory licensing; (b) where the location is in conformity with the prescribed parameters; (c) the units undertake to achieve exports and value addition norms as prescribed in the Export and Import Policy in force; (d) the CIF value of imported capital goods is financed through foreign equity,or foreign exchange required for import of plant and equipment (net of taxes) is within Rs. 100 Million, and in the case of import of second-hand capital goods if an Import Licence is not required;(e) Where the foreign technology agreement if any, envisages a lump sum payment not exceeding US $ 2.00 Million and royalty payment up to 8% on exports and 5% on DTA sales (net of taxes) over a period of 5 years from the date of commencement of commercial production. (f) where the exports are to general currency/hard currency areas; (g) where the unit is amenable to bonding by customs authorities; and(h) the unit has projected the minimum export turnover, as specified. Conversion of existing Domestic Tariff Area (DTA) units into EOU is also permitted under automatic route, if the DTA unit satisfies the parameters mentioned above and there is no outstanding export obligation under any other Export Oriented scheme of the Government of India.
Approval Route: All proposals which do not meet any or all of the parameters for automatic approval need to be considered and approved by the Government.
Foreign Investment Policy for Electronic Hardware Technology Park and Software Technology Park Schemes In order to provide impetus to the electronics industry, to enhance its export potential and to develop an efficient electronic component industry, Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) schemes offer a package of incentives and facilities like duty free imports on the lines of the EOU Scheme, deemed exports benefits and tax holidays. Automatic Route: The Directors of STPs in respect of STP proposals; and the Designated Officers in respect of EHTP proposals accord automatic approval if -(a) the items do not attract compulsory licensing; (b) the location is in conformity with the prescribed parameters; (c) the export obligation laid down in the respective EHTP scheme or STP scheme is fulfilled; (d) the CIF value of the imported capital goods required for the project does not exceed Rs. 100 million; (e) foreign technology proposals envisaged, if any, do not involve lump sum know how fee exceeding US$ 2 million, 8 per cent royalty on export and 5 per cent royalty on domestic sales (all net of taxes) over a period of 5 years from the date of commencement of commercial production; (f) the exports are to general currency/hard currency area; (g) the unit is amenable to bonding by the Customs, and all the manufacturing operations are carried out in the same premises and the proposal does not envisage sending out of the bonded area any raw material or intermediate products for any other manufacturing or processing activity.
Approval Route: All proposals which do not meet any or all of the parameters for automatic approval need to be considered and approved by the Government.
1. Reserve Bank of India is the central bank of the country and is the principal regulator of the entire banking system of the country including management of the foreign exchange.
2. Government of India has laid down this policy whereby it has prescribed the extent of FDI in terms of percentage, a foreign investor can have in a particular sector/set of industry.
3. This Board operates under the auspices of the Ministry of Industry. The Foreign Investment Promotion Board (FIPB), chaired by the Secretary, Department of Industrial Policy and Promotion (Ministry of Commerce and Industry) with the Union Finance Secretary, Commerce Secretary, and other key Secretaries of the Government as its members. It meets twice a month and consider all those FDI case which are outside the ambit of Reserve Bank of India.
4. Cases involving industrial licenses/small scale reserved items do not qualify for automatic approval and would require consideration and approval by the Government. Automatic route for technology collaboration would also not be available to those who have, or had any previous technology transfer/trade-mark agreement in the same or allied field in India.
5. An industrial undertaking is defined as a small-scale unit if the investment in fixed assets in plant and machinery does not exceed Rs 20 million. The Small Scale units can get registered with the Directorate of Industries/District Industries Centre in the State Government concerned. Such units can manufacture any item including those notified as exclusively reserved for manufacture in the small scale sector. Small scale units are also free from locational restrictions cited in paragraph 1.3 above. However, a small scale unit is not permitted more than 24 per cent equity in its paid up capital from any industrial undertaking either foreign or domestic.
6. Industrial undertakings are free to select the location of a project. In the case of cities with population of more than a million (as per the 1991 census), however, the proposed location should be at least 25 KM away from the Standard Urban Area limits of that city unless, it is to be located in an area designated as an "industrial area" before the 25th July, 1991. Electronics, Computer software and Printing (and any other industry which may be notified by the Government in future as "non polluting industry") are exempt from such locational restriction. Relaxation in the aforesaid locational restriction is possible if an industrial license is obtained as per the notified procedure. The location of industrial units is further regulated by the local zoning and land use regulations as also the environmental regulations. Hence, even if the requirement of the locational policy as stated above is fulfilled, if the local zoning and land use regulations of a State Government, or the regulations of the Ministry of Environment do not permit setting up of an industry at a location, the entrepreneur would be required to abide by that decision.
1. Reserve Bank of India is the central bank of the country and is the principal regulator of the entire banking system of the country including management of the foreign exchange.
2. Government of India has laid down this policy whereby it has prescribed the extent of FDI in terms of percentage, a foreign investor can have in a particular sector/set of industry.
3. This Board operates under the auspices of the Ministry of Industry. The Foreign Investment Promotion Board (FIPB), chaired by the Secretary, Department of Industrial Policy and Promotion (Ministry of Commerce and Industry) with the Union Finance Secretary, Commerce Secretary, and other key Secretaries of the Government as its members. It meets twice a month and consider all those FDI case which are outside the ambit of Reserve Bank of India.
4. Cases involving industrial licenses/small scale reserved items do not qualify for automatic approval and would require consideration and approval by the Government. Automatic route for technology collaboration would also not be available to those who have, or had any previous technology transfer/trade-mark agreement in the same or allied field in India.
5. An industrial undertaking is defined as a small-scale unit if the investment in fixed assets in plant and machinery does not exceed Rs 20 million. The Small Scale units can get registered with the Directorate of Industries/District Industries Centre in the State Government concerned. Such units can manufacture any item including those notified as exclusively reserved for manufacture in the small scale sector. Small scale units are also free from locational restrictions cited in paragraph 1.3 above. However, a small scale unit is not permitted more than 24 per cent equity in its paid up capital from any industrial undertaking either foreign or domestic.
6. Industrial undertakings are free to select the location of a project. In the case of cities with population of more than a million (as per the 1991 census), however, the proposed location should be at least 25 KM away from the Standard Urban Area limits of that city unless, it is to be located in an area designated as an "industrial area" before the 25th July, 1991. Electronics, Computer software and Printing (and any other industry which may be notified by the Government in future as "non polluting industry") are exempt from such locational restriction. Relaxation in the aforesaid locational restriction is possible if an industrial license is obtained as per the notified procedure. The location of industrial units is further regulated by the local zoning and land use regulations as also the environmental regulations. Hence, even if the requirement of the locational policy as stated above is fulfilled, if the local zoning and land use regulations of a State Government, or the regulations of the Ministry of Environment do not permit setting up of an industry at a location, the entrepreneur would be required to abide by that decision.
3 comments:
nice Mr srinivas..its really nice to learn abt alot though ur blog abt the finance....its very much helpful for the finance guys and MBA's...keep it
I HAVE SEEN A LOT OF BLOGS REGORDING FINANCE. But this is the blog which is having the current topics regording finance. kep it up. Mr srinivas Mudumba.
All the best for your next posts.
hi sheenu....
very nice yo are doing. it will be good if you writes FDI's demerits also.nice job.
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