FDI

Foreign Direct Investment (FDI)

Q. 1. What are the forms in which business can be conducted by a foreign company in India?
Ans.
A foreign company planning to set up business operations in India may:

  • Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.
  • Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

Q.2. What is the procedure for receiving Foreign Direct Investment in an Indian company?
Ans.
An Indian company may receive Foreign Direct Investment under the two routes as given under :

  • Automatic Route
    FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
  • Government Route
    FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.
    The Indian company having received FDI either under the Automatic route or the Government route is required to comply with provisions of the FDI policy including reporting the FDI to the Reserve Bank. as stated in Q 4.

Q.3. What are the instruments for receiving Foreign Direct Investment in an Indian company?
Ans. Foreign investment is reckoned as FDI only if the investment is made in equity shares , fully and mandatorily convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront. Any foreign investment into an instrument issued by an Indian company which :

  • Gives an option to the investor to convert or not to convert it into equity or
  • Does not involve upfront pricing of the instrument as a date would be reckoned as ECB and would have to comply with the ECB guidelines.

The FDI policy provides that the price/ conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [the DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies].

Q.4.What are the modes of payment allowed for receiving Foreign Direct Investment in an Indian company?
Ans. An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures by:

  • Inward remittance through normal banking channels.
  • Debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.
  • Conversion of royalty / lump sum / technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.
  • Conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
  • Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category. I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.

If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B) / Escrow account, the amount shall be refunded. Further, Reserve Bank may on an application made to it and for sufficient reasons permit an Indian Company to refund / allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.

Q.5.Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route?
Ans. FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

  • Atomic Energy.
  • Lottery Business.
  • Gambling and Betting.
  • Business of Chit Fund.
  • Nidhi Company.
  • Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations).
  • Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges).
  • Trading in Transferable Development Rights (TDRs).
  • Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.

6.2.11 Construction Development : Townships, Housing, Built-up Infrastructure

Sector/Activity 6.2.11.1 % of Equity/ FDI Cap Entry Route
Construction-development projects (which would include development of townships, construction of residential/commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure, townships). 100% Automatic

6.2.11.2. Investment will be subject to the following conditions:

A) Minimum area to be developed under each project would be as under:
  • In case of development of serviced plots, no minimum land area requirement.
  • In case of construction-development projects, a minimum floor area of 20,000 sq. meter.
(B) Investee company will be required to bring minimum FDI of US$ 5 million within six months of commencement of the project. The commencement of the project will be the date of approval of the building plan/lay out plan by the relevant statutory authority. Subsequent tranches of FDI can be brought till the period of ten years from the commencement of the project or before the completion of project, whichever expires earlier.
(C) (i) The investor will be permitted to exit on completion of the project or after development of trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage.
(ii)The Government may, in view of facts and circumstances of a case, permit repatriation of FDI or transfer of stake by one non-resident investor to another non-resident investor, before the completion of project. These proposals will be considered by FIPB on case to case basis inter-alia with specific reference to Note (i).

(D) The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/Municipal/Local Body concerned.
(E) The Indian investee company will be permitted to sell only developed plots. For the purposes of this policy developed plots will mean plots where trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage, have been made available.
(F) The Indian investee company shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/bye-laws/regulations of the State Government/Municipal/Local Body concerned.
(G) The State Government/Municipal/Local Body concerned, which approves the building/development plans, will monitor compliance of the above conditions by the developer.

Note :

(i) It is clarified that FDI is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in transferable development rights (TDRs).
Real estate business will have the same meaning as provided in FEMA Notification No. 1/2000-RB dated May 03, 2000 read with RBI Master Circular i.e. dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.
(ii) The conditions at (A) to (C) above, will not apply to Hotels &Tourist Resorts, Hospitals, Special Economic Zones (SEZs), Educational Institutions, Old Age Homes and investment by NRIs.
(iii) The conditions at (A) and (B) above, will also not apply to investee/joint venture companies which commit at least 30 percent of the total project cost for low cost affordable housing.
(iv) An Indian company, which is the recipient of FDI, shall procure a certificate from an architect empanelled by any Authority, authorized to sanction building plan to the effect that the minimum floor area requirement has been fulfilled.
(v)Floor area will be defined as per the local laws/regulations of the respective State governments/Union territories.
(vi) Completion of the project will be determined as per the local bye-laws/rules and other regulations of State Governments.
(vii) Project using at least 40% of the FAR/FSI for dwelling unit of floor area of not more than 140 square meter will be considered as Affordable Housing Project for the purpose of FDI policy in Construction Development Sector. Out of the total FAR/FSI reserved for Affordable Housing, at least one-fourth should be for houses of floor area of not more than 60 square meter.
(viii) It is clarified that 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres.

6.2.12 Industrial Park

Sector/Activity 6.2.11.1 % of Equity/ FDI Cap Entry Route
New and Existing. 100% Automatic

6.2.12.1
(i)Industrial Park is a project in which quality infrastructure in the form of plots of developed land or built up space or a combination with common facilities, is developed and made available to all the allottee units for the purposes of industrial activity.
(ii) Infrastructure refers to facilities required for functioning of units located in the Industrial Park and includes roads (including approach roads), railway line/sidings including electrified railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning.
(iii) Common Facilities refer to the facilities available for all the units located in the industrial park, and include facilities of power, roads (including approach roads), railway line/sidings including electrified railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment, common testing, telecom services, air conditioning, common facility buildings, industrial canteens, convention/conference halls, parking, travel desks, security service, first aid center, ambulance and other safety services, training facilities and such other facilities meant for common use of the units located in the Industrial Park
(iv) Allocable area in the Industrial Park means -

  • In the case of plots of developed land- the net site area available for allocation to the units, excluding the area for common facilities.
  • In the case of built up space- the floor area and built up space utilized for providing common facilities.
  • In the case of a combination of developed land and built-up space- the net site and floor area available for allocation to the units excluding the site area and built up space utilized for providing common facilities.
(v)Industrial Activity means manufacturing; electricity; gas and water supply; post and telecommunications; software publishing, consultancy and supply; data processing, database activities and distribution of electronic content; other computer related activities; basic and applied R&D on bio-technology, pharmaceutical sciences/life sciences, natural sciences and engineering; business 60 and management consultancy activities; and architectural, engineering and other technical activities.

6.2.12.2
FDI in Industrial Parks would not be subject to the conditionalities applicable for construction development projects etc. spelt out in para 6.2.11 above, provided the Industrial Parks meet with the under-mentioned conditions:
(i)It would comprise of a minimum of 10 units and no single unit shall occupy more than 50% of the allocable area.
(ii)The minimum percentage of the area to be allocated for industrial activity shall not be less than 66% of the total allocable area.