A.P. (DIR Series) (2003-2004) Circular No. 38, dated 3-12-2003
u Recent liberalisation measures relating to Foreign Direct Investment -
FEMA No.94/2000-RB
u Summary of Regulatory Provisions
covering Foreign Investments in India
Attention of Authorised Dealers is invited to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 notified by the Reserve Bank of India vide Notification No. FEMA 20/2000-RB dated May 3, 2000 as amended from time to time.
2. The Reserve Bank has issued
FEMA Notification No. FEMA 94/2003-RB dated June 18, 2003 (Second Amendment)
covering certain modifications and measures for liberalisation, in consultation
with the Government in the area of Foreign Direct Investment. A copy of the
Notification is enclosed.
3. A gist of the current
regulatory provisions (as amended from time to time) relating to foreign
investment is given in the Annexure for guidance.
4. Authorised Dealers may bring
the contents of this circular to the notice of their constituents concerned.
5. The directions contained in
this circular have been issued under sections 10(4) and 11(1) of the Foreign
Exchange Management Act, 1999 (42 of 1999).
Annexure
Foreign Investments in India
1. Statutory Provisions
Foreign
Investments in India are governed by the provisions of Section 6 of the Foreign
Exchange Management Act (FEMA), 1999 and are subject to the Regulations issued
by the Reserve Bank of India under FEMA, 1999. The Regulations have been
notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000. An Indian
entity cannot issue any security to a person resident outside India or shall
not record in its books any transfer of security from or to such person save as
otherwise provided in the Act or the Rules or Regulations framed thereunder or
with the specific permission of the Reserve Bank.
2. Foreign Direct Investment Policy
2.1 Foreign Investments in India are not permissible in the
following cases :
(i) In
the business of chit fund, or
(ii) Nidhi
Company, or
(iii) In agricultural or plantation activities, or
(iv) In
real estate business, or construction of farm houses, or
(v) In
trading in Transferable Development Rights (TDRs).
2.2 In addition, the Government
has also notified the following activities where Foreign Direct Investment is
not permissible :
1. Retail
Trading
2. Atomic
Energy
3. Lottery
Business
4. Gambling
and Betting
5. Housing
and Real Estate business
6. Agriculture (excluding
Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture
and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and
services related to Agro and allied sectors) and Plantations (Other than Tea
plantations).
2.3 In other cases, investments
can be made either with the specific prior approval of the Government i.e. the
Secretariat for Industrial Assistance/Foreign Investment Promotion Board
(SIA/FIPB) or under the Automatic Route. A list of the Activities requiring the
approval of the Government is given in Annexure-A to Schedule 1 to FEMA
Notification No 20 while details of the Industries which are covered under the
Automatic Route are given as Annexure-B to the said Schedule. The Automatic
Route is not open to those foreign investors who have/had a previous
financial/technical/trademark collaboration in an existing domestic company
engaged in the same or allied activity. Also, if the activity of the issuer
company requires an Industrial Licence under the provisions of the Industries
(Development and Regulation) Act, 1951 or under locational policy notified by
Government of India under the Industrial Policy, 1991, Automatic Route is not
available.
2.4 Eligibility for Investment in India
A person
resident outside India (other than a citizen of Pakistan, Bangladesh, Sri
Lanka) or an incorporated entity outside India (other than an entity in
Bangladesh or Pakistan) has general permission to purchase shares or
convertible debentures or preference shares of an Indian company subject to
certain terms and conditions.
2.5 Nature of Investments
2.5-1 The Indian companies have
also got the general permission to issue partly convertible debentures/partly
convertible preference shares provided the terms of issue are in accordance
with the Schedule for convertible portion and in accordance with Regulation 5
of Notification No. FEMA 4/2000-RB dated May 3, 2000 for the non-convertible
portion. Companies can issue NCDs only to NRIs and that too by means of a
public Issue. The coupon rate on partly convertible preference shares/partly
convertible debentures should not exceed State Bank of India’s prime lending
rate plus 300 basis points.
2.5-2 Trading is permitted under
Automatic Route with FDI upto 51% provided it is primarily towards export
activities, and the undertaking is an export house/trading house/super trading
house/star trading house. The Government also permits certain trading
activities under FIPB route.
2.5-3 A company which is a small
scale industrial unit and not engaged in any activity or in manufacture of
items included in Annexure A to Notification No. 20 may issue shares or
convertible debentures to a non-resident, to the extent of 24% of its paid-up
capital if,
(a) It
has given up its small scale status;
(b) It is not engaged or does not propose to
engage in manufacture of items reserved for small scale sector; and
(c) It
complies with the ceilings specified in Annexure B to Notification No. 20.
3. Issue of Shares
3.1 Issue of Rights/Bonus Shares
General
permission is also available to Indian companies to issue Bonus/Rights Shares.
The rights shares or debentures purchased by the person resident outside India
shall be subject to the same conditions including restrictions in regard to
repatriability as are applicable to the original shares against which rights
shares or debentures are issued. Further, the existing non-resident share
holders may apply for issue of additional shares and the investee company may
allot the same subject to the condition that the overall issue of shares to
non-residents in the total paid-up capital does not exceed the sectoral cap. In
other words, non-residents may subscribe for additional shares over and above
shares offered on rights basis by the company and renounce the shares offered
either in full or part thereof in favour of a person named by them. Residents
may subscribe for additional shares over and above the shares offered on rights
basis by the company and also renounce the shares offered either in full or
part thereof in favour of a person named by them. However, as clarified in
terms of A.P. DIR. Circular No. 14 dated September 16, 2003, this facility
would not be available to investors who have been allotted such shares as OCBs.
3.2 Acquisition of shares under a Scheme of
Amalgamation/Merger
Where a Scheme
of merger or amalgamation of two or more Indian companies has been approved by
a court in India, the transferee company may issue shares to the shareholders
of the transferor company, resident outside India subject to ensuring that the
percentage of shareholding of persons resident outside India, in the transferee
or new company does not exceed the percentage specified in the approval granted
by the Central Government or the Reserve Bank. In case the percentage is likely
to exceed the percentage specified in the approval or the Regulations, the
transferor company or the transferee or new company may, after obtaining an approval
from the Central Government, apply to the Reserve Bank for its approval under
these Regulations. Further, the transferor company or the transferee or new
company shall not engage in agriculture, plantation or real estate business or
trading in TDRs.
3.3 Issue of shares under the Employees Stock
Option Scheme (ESOPS)
A company may
issue shares under the ESOPS to its employees or employees of its joint venture
or wholly-owned subsidiary abroad who are resident outside India, directly or
through a Trust subject to the conditions that the scheme has been drawn in
terms of regulations issued under the Securities Exchange Board of India Act,
1992, and face value of the shares to be allotted under the scheme to the
non-resident employees does not exceed 5% of the paid-up capital of the issuing
company. The Trust and the issuing company should ensure that value of shares
held by persons resident outside India under the scheme does not exceed the
limit specified in clause (b) of sub-regulation (1) thereof.
3.4 Issue of shares by Indian companies under
ADR/GDR
3.4-1 An Indian company may issue
its rupee denominated shares to a person resident outside India being a
depository for the purpose of issuing Global Depository Receipts (GDRs) and/or
American Depository Receipts (ADRs). The company issuing these shares should
ensure that it has:
(a) approval from the Ministry of Finance,
Government of India to issue such ADRs and/or GDRs or is eligible to issue
ADRs/GDRs in terms of the relevant scheme in force or notification issued by
the Ministry of Finance, and
(b) is not otherwise ineligible to issue
shares to persons resident outside India in terms of these Regulations, and
(c) the ADRs/GDRs are issued in accordance
with the provisions of the Foreign Currency Convertible Bonds and Ordinary
Shares (through Depository Receipt Mechanism) Scheme, 1993 and guidelines
issued by the Central Government.
3.4-2 A registered broker may
purchase shares of an Indian company on behalf of a person resident outside
India for purpose of converting the shares into ADRs/GDRs subject to compliance
with provisions of the Foreign Currency Convertible Bonds and Ordinary Shares
(through Depository Receipt Mechanism) Scheme, 1993. The operative guidelines
for the limited two way fungibility under the issue “Issue of Foreign Currency
Convertible bonds and Ordinary shares (through Depositary Receipt Mechanism)
Scheme, 1993 has been issued vide A.P. (DIR Series) Circular No. 21 dated
February 13, 2002.
An Indian
company may sponsor issue of ADRs/GDRs with an overseas depository against
shares held by its shareholders at a price to be determined by the Lead
Manager.
3.4-3 Utilising the proceeds -
Retention of proceeds abroad - Pending repatriation or utilisation of the
foreign exchange resources raised, the Indian company may invest the foreign
currency funds in deposits with or in Certificate of Deposits or other
instruments of banks which have been rated not less than A+1 by Standard and
Poor or P1 by Moody’s for short-term obligations or in deposits with branch
outside India of an Authorised Dealer in India and in treasury bills and other
monetary instruments with a maturity of one year or less.
3.4-4 In order to encourage Indian
companies to list ADRs/GDRs on the overseas exchanges, through the schemes of
sponsored ADRs/GDRs, resident shareholders of Indian companies have been
permitted to offer their shares for conversion to ADRs/GDRs and to receive the
sale proceeds in foreign currency with FIPB approval.
3.4-5 The ADR/GDR/FCCB proceeds
may be utilised in the first stage acquisition of shares in the disinvestment
process and also in the mandatory second stage offer to the public in view of
their strategic importance.
ADs have been
permitted to allow Indian companies to prepay the existing FCCB subject to
certain conditions.
3.5 Reporting of such Issues
The Indian
company issuing shares shall furnish to the Reserve Bank full details of such
issue in the form specified in Annexure C to Notification No.FEMA 20/2000-RB
dated 3rd May, 2000 within 30 days from the date of closing of the issue. The
company should also furnish a quarterly return in the form specified in
Annexure D to the Reserve Bank within 15 days of the close of the calendar
quarter.
3.6 General Permissions to the Indian
companies
Indian companies
receiving subscription from non-residents for issue of shares have also got the
general permission for the following:—
(a) Refund of funds received towards
allotment of shares under Regulation 5(1) of the Reserve Bank’s Notification
No. FEMA 20/2000-RB dated 3rd May, 2000;
(b) Remittance
of surplus funds received for purchase of shares offered on rights basis;
(c) Remittance on account of surplus funds
received for purchase of shares or on account of cancellation of trade, under
two-way fungibility of ADRs/GDRs.
4.1 Transfer of Shares and convertible
debentures
General permission has been granted to non-residents/NRIs for transfer
of shares and convertible debentures of an Indian company as under :—
u A person resident outside India (other
than NRI and OCB) may transfer by way of sale or gift the shares or convertible
debentures to any person resident outside India (including NRIs/OCBs) provided
transferee has obtained prior permission of Central Government to acquire the
shares if he has previous venture or tie-up in India through investment in
shares or convertible debentures or a technical collaboration or a trade mark
agreement or investment in the same field or allied field in which the Indian
company whose shares are being transferred, is engaged.
u NRI or OCB may transfer by way of sale
or gift the shares or convertible debentures held by him or it to another
non-resident Indian.
u The person resident outside India may
transfer any security to a person resident in India by way of gift.
4.2 Prior permission of RBI in certain cases
for transfer of Security
A person
resident in India who proposes to transfer any share or convertible debenture
of an Indian company by way of sale or gift to a person resident outside India
will have to obtain prior approval of Secretariat for Industrial Assistance,
Government of India, followed by permission from the RBI. The above two-stage
approval is applicable even when the transfer is made on non-repatriation basis.
A person resident outside India holding shares/convertible debentures of an
Indian company may transfer by way of sale to a person resident in India by
obtaining prior permission from RBI in form TS 1.
4.3 Issue Price
Prices of shares
issued to persons resident outside India under Schedule I, shall not be less
than the price worked out in accordance with the SEBI guidelines, where the
issuing company is listed on any recognised stock exchange in India, and fair
valuation of shares is done by a Chartered Accountant as per the guidelines
issued by the erstwhile Controller of Capital Issues, in all other cases.
4.4 Reporting by Indian companies
An Indian
company issuing shares or convertible debentures in accordance with these
Regulations shall submit to the Reserve Bank the details of advance remittance,
not later than 30 days from the date of receipt of the amount of consideration,
giving details regarding :—
u Name and address of the foreign
investors
u Date of receipt of funds and their
rupee equivalent
u Name and address of the Authorised
Dealer through whom the funds have been received, and
u Details of the Government approval, if
any.
5. Report in Form FC-GPR
After the Issue
of shares, the company should file a report in Form FC-GPR not later than 30
days from the date of issue of shares. The report should contain the following
details:
u A certificate from the Company
Secretary of the company accepting investment from persons resident outside
India certifying that;
u All the requirements of the Companies
Act, 1956 have been complied with;
u Terms and conditions of the Government
approval, if any, have been complied with;
u The company is eligible to issue shares
under these Regulations; and
u The company has all original
certificates issued by Authorised Dealers in India evidencing receipt of amount
of consideration;
u A certificate from Statutory Auditors
or a Chartered Accountant indicating the manner of arriving at the price of the
shares issued to the persons resident outside India.
6. Permission for retaining
share subscription money received from persons resident outside India in a
foreign currency account.
The Reserve Bank
may permit an Indian company issuing shares to persons resident outside India
under this Schedule to retain the subscription amount in a foreign currency
account, subject to such terms and conditions as it may stipulate.
7. Portfolio Investment Scheme (PIS)
7.1 Foreign Institutional
Investors registered with SEBI and Non-resident Indians are eligible to
purchase shares and convertible debentures under the PIS. The concerned
companies should apply to the RBI for permission through a designated bank
which is granted along with permission for opening foreign currency account
and/or a Rupee account with a designated branch of an Authorised Dealer.
7.2 Investment by Foreign Institutional
Investors (FIIs)(Schedule 2)
In the case of
FIIs, the total holding of each FII/SEBI approved Sub A/C shall not exceed 10%
of the total paid-up equity capital or 10% of the paid-up value of each series
of convertible debentures issued by an Indian company and the total holdings of
all FIIs/sub-accounts of FIIs put together shall not exceed 24% of the paid-up
equity capital or paid-up value of each series of convertible debentures. This
limit of 24% can be increased to the sectoral cap/statutory limit as applicable
to the Indian company concerned by passing of a resolution by its Board of
Directors, followed by passing of a special resolution to that effect by its
General Body.
The FIIs are
also permitted to trade in all exchange traded derivative contracts subject to
certain limits. ADs can also offer forward cover to FIIs to the extent of total
inward remittance net of liquidated investments. FIIs are not permitted to
invest in Print Media Sector without prior approval of Government of India,
Foreign Investment Promotion Board and Ministry of Information and
Broadcasting.
Registered FIIs
have been permitted to purchase shares/convertible debentures of an Indian
company through offer/private placement. This is subject to applicable ceiling
as indicated in Schedule 2 to Notification No. FEMA 20/2000-RB dated 3rd May,
2000. It is clarified that a FII may invest in a particular issue of an Indian
company either under Schedule 1 or Schedule 2. It cannot, however, avail of
both the routes simultaneously for a particular issue. The ADs have to ensure
that the FIIs which are purchasing the shares by debit to the special rupee
accounts report these details separately in the LEC (FII) returns. The company
which has issued the shares to the FIIs under Schedule 1 (FDI) (for which the
payment has been received directly into company’s account) and under Schedule 2
(for which the payment has been received from FIIs’ account maintained with
Authorised Dealer in India) should report these figures separately under item
4(b) of the FC-GPR return so that the details could be suitably reconciled for
statistical/monitoring purposes.
The FII shall
restrict allocation of its total investment between equities and debt including
dated Government Securities and Treasury Bills in the Indian Capital Market in
the ratio of 70:30. The FII can form a 100% Debt Fund and get registered with
SEBI for investment in debt investments (Schedule 5).
7.3 Investments by NRIs
In the case of
NRIs it is to be ensured that the paid-up value of shares/convertible
debentures purchased by an NRI both on repatriation and non-repatriation basis
does not exceed 5% of the paid-up capital/paid-up value of each series of
debentures. The aggregate paid-up value of shares/convertible debentures
purchased by all NRIs should not exceed 10% of the paid-up capital of the
company/paid-up value of series of debentures of the company provided that the
NRI shall not purchase shares or convertible debentures of an Indian company
which is engaged in Print Media. The aggregate ceiling of 10% can be raised to
24%, if the General Body of the Indian company concerned passes a special
resolution to that effect. The NRI investor takes delivery of the shares
purchased and gives delivery of shares sold. Payment for purchase of shares
and/or debentures is made by inward remittance in foreign exchange through
normal banking channels or out of funds held in NRE/FCNR account maintained in India
if the shares are purchased on repatriation basis and by inward remittance or
out of funds held in NRE/FCNR/NRO account of the NRI concerned, maintained in
India where shares/debentures are purchased on non-repatriation basis. The link
office of the designated branch of an AD shall furnish to the Chief General
Manager, Reserve Bank of India, Exchange Control Department, Central Office,
Mumbai a report on a daily basis on PIS transactions undertaken by it, such
report to be furnished on-line or on a floppy or in a hard copy in a format
supplied by RBI.
NRIs have also
the general permission to purchase on repatriation basis Government dated
securities, Treasury bills, units of domestic Mutual funds bonds issued by
public sector undertakings and shares in public sector enterprise being
divested by the Government of India (Schedule 5).
With effect from
29th November, 2001, OCBs are not permitted to invest under the PIS in India.
Further, the OCBs that have already made investments under the PIS, may
continue to hold such shares/convertible debentures till such time these are
sold on the stock exchange.
8. Purchase of other securities
Foreign
Institutional Investor can buy with repatriation benefits dated
securities/treasury bills, non-convertible debentures/bonds issued by Indian
companies and units of domestic mutual funds either directly from the issuer of
such securities or through a registered stock broker on a recognised stock
exchange in India.
A non-resident
Indian (NRI) can invest on non-repatriation basis in the shares or convertible
debentures of Indian companies which are not engaged in Chit Fund or Nidhi
Company or in agricultural/plantation activities or real estate business or
construction of farm houses or dealing in Transferable Development rights and
Print Media. There is no limit on NRI purchasing shares/convertible debentures
issued by an Indian company whether by public issue or private placement.
Amount of consideration for such purchase shall be paid by inward remittance
through normal Banking channels from abroad or out of funds held in
NRE/FCNR/NRO account maintained with the AD. In the case of NRIs resident in
Nepal and Bhutan the amount of consideration for such purchase shall be paid
only by way of inward remittance in foreign exchange through normal Banking
channels. The sale proceeds shall be credited to NRO account. The amount
invested under the scheme and the capital appreciation thereon shall not be
allowed to be repatriated abroad.
9. Investments in other securities on
non-repatriation basis
NRI can also,
without any limit, purchase on non-repatriation basis dated Government
securities, treasury bills, units of domestic mutual funds, units of Money
Market Mutual Funds or National Plan/Savings certificates.
10. Investments by Venture Capital Funds
(Schedule 6)
A SEBI
registered Foreign Venture Capital Investor (FVCI) with general permission from
RBI under FEMA regulations can invest in Indian Venture Capital Undertaking
(IVCU) or in a Venture Capital Fund (VCF) or in a Scheme floated by such VCFs.
They can purchase equity/equity linked instruments/debt instruments, debentures
of an IVCU or of a VCF through initial public offer or private placement or in
units of schemes/funds set up by a VCF. The Reserve Bank, on application, may
permit a FVCI to open a foreign currency account or rupee account with a
designated branch of an Authorised Dealer. The purchase/sale of shares,
debentures, units can be at a price that is mutually acceptable to the buyer
and the seller/issuer. ADs are also authorised to offer forward cover to FVCIs
to the extent of total inward remittance net of liquidated investments.
Annexure A
(A) List of activities for which automatic route of RBI for
investment from person resident outside India is not available
1. Domestic Airlines
2. Petroleum
Sector (except for private sector oil refining)
3. Investing companies in Infrastructure
and Services Sector
4. Defence
and Strategic Industries
5. Atomic Minerals
6. Print
Media
7. Broadcasting
8. Postal
Services
9. Courier
Services
10. Establishment
and Operation of Satellite
11. Development
of Integrated Township
12. Tea
Sector
(B)
List of activities or items for
which FDI is prohibited.
1. Retail
Trading
2. Atomic
Energy
3. Lottery
Business
4. Gambling
and Betting
5. Housing
and Real Estate business
6. Agriculture (excluding Floriculture,
Horticulture, Development of seeds, Animal Husbandry, Pisiculture and
Cultivation of vegetables, mushrooms etc. under controlled conditions and
services related to agro and allied sectors) and Plantations (Other than Tea
plantations)