Consolidated FDI Policy

April 2011 www.deloitte.com/in

Background

Foreign Direct Investment (FDI) Regulatory Framework Ministry of Commerce and Industry (Department of Industrial Policy and Promotion), Government of India (GOI) had released Consolidated FDI Policy vide Circular 1 of 2010 dated 31 March 2010 which was effective from 1 April 2010. The policy document had consolidated all prior policies / regulations on FDI issued by the Department of Industrial Policy and Promotion (DIPP) and the Reserve Bank of India (RBI). Further, it has been indicated that the policy would be in effect up to 30 September 2010 and subject to review every six months to reflect all changes in the regulations during the intervening six months. Accordingly the DIPP had released the revised Consolidated FDI Policy vide Circular 2 of 2010 dated 30 September 2010 which was effective from 1 October 2010 and lapsed on 31 March 2011. DIPP has now released the revised Consolidated FDI Policy vide Circular 1 of 2011 dated 31 March 2011 which is effective from 1 April 2011.

It has been indicated that the Circular consolidates all prior policies / regulations on FDI issued within the intervening period and reflect the current policy framework on FDI. The circular is not intended to make changes in the existing regulations. Further all earlier Press Notes / Press Releases / Clarifications on FDI issued by the DIPP stand rescinded. It has been clarified that anything done or any action taken under the rescinded Press Notes / Press Releases / Clarifications prior to 31 March 2011 shall be effective and valid subject to the condition that it was not inconsistent with those Press Notes / Press Releases / Clarifications. The legal structure of the circular is built on notifications issued by Reserve Bank of India (RBI) under Foreign Exchange Management Act, 1999 (FEMA). Hence, any corresponding change made by RBI from time to time would have to be complied with and in case of need / scope of interpretation, the relevant FEMA notification will prevail.

Consolidated FDI Policy vide Circular 1 of 2011 dated 31 March 2011 which is effective from 1 April 2011.

Consolidated FDI Policy

Key Points under Circular 1 of 2011

Pricing of convertible instruments It has been provided that the price/ conversion formula of convertible capital instruments issued by Indian companies is required to be decided upfront at the time of issue of the said instrument. Further, the price at the time of conversion should not in any case be lower than the fair market value worked out at the time of the issuance of such instruments, in accordance with extant FEMA regulations (the DCF method of valuation for unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for listed companies). Consequently the absolute price mechanism has been done away with and parties would be able to set a formula for conversion in future. Downstream investments The distinctions in the prior policy between operating companies, operating-cum-investing companies and only investing companies have been eliminated. Companies have now been classified into only two categories, viz companies owned or controlled by non-resident entity/ies and companies owned and controlled by Indian residents. The new policy clarifies that prior FIPB approval would be required for investments by foreign investors into companies incorporated in India and whose only activity is investing in the capital of other Indian companies (i.e. holding companies) regardless of the amount or extent of foreign investment. Further infusion of funds into an Indian company which does not have operations or downstream investments would also require prior FIPB approval, regardless of the amount or extent of foreign investment. However there is no change in the policy framework as far as the downstream investments by companies which are owned and/or controlled by non-resident entities is concerned. Prior approval in case of existing joint ventures/ technical collaborations in the same field Under the prior FDI policy, where a foreign investor had already in place in India a joint venture or technology transfer or trade mark with an Indian counterpart, it could not enter into a new joint venture, make an investment or enter into a technology collaboration or trade mark agreement or enter into a technology transfer agreement without the prior approval of the FIPB. As such there was a need felt to

Price/ conversion formula of convertible capital instruments issued by Indian companies is required to be decided upfront
attract fresh investment and technology inflows and also reduce the levels of State intervention. Accordingly under the new policy, foreign investors would not be required to obtain FIPB approval before investing in the business in the same field as an existing joint venture or technology transfer or trademark agreement entered into before 1 June 2005. However, this does not affect the requirement of obtaining FIPB approval in sectors subject to sectoral caps. Investment in Non-Banking Financial Companies (NBFC) It has been clarified that foreign investment into NBFCs carrying on activities approved for FDI would need to comply with the conditions specified for such NBFCs. Further companies which are classified as Core Investment Companies( CICs) would also need to additionally follow RBIs regulatory framework for CICs Issue of shares for non-cash consideration The prior FDI policy allowed issue of shares by Indian companies only against cash consideration, apart from conversion of ECBs and payment obligations towards lump sum fee or royalty for technical collaboration. All other issue of shares for consideration other than cash required approval of the FIPB. Now under the new policy, issue of shares for consideration

other than cash has been expressly permitted for the following categories after taking prior approval of the FIPB and subject to the conditions as stipulated: import of capital goods/ machinery/ equipment (including second-hand machinery),subject to compliance with the following conditions: i. Any import of capital goods/machinery etc., made by a resident in India, has to be in accordance with the Export/ Import Policy issued by GOI as defined by DGFT/FEMA provisions relating to imports. ii. An independent valuation has to be carried out for the capital goods / machinery / equipments (including second-hand machinery) by a third party entity, preferably by an independent valuer from the country of import along with production of copies of documents / certificates issued by the customs authorities towards assessment of the fair-value of such imports. iii. The application has to clearly indicate the beneficial ownership and identity of the Importer Company as well as overseas entity. iv. All such conversions of import payables for capital goods into FDI should be done within 180 days from the date of shipment of goods. pre-operative/ pre-incorporation expenses (including payments of rent etc.), subject to compliance with the following conditions:

i. Submission of FIRC for remittance of funds by the overseas promoters for the expenditure incurred. ii. Verification and certification of the preincorporation/pre-operative expenses by the statutory auditor. Sectoral Specific changes: Following modifications have been provided in respect of the following sectors/sub-sectors Agriculture The restriction in respect of controlled conditions is not applicable in respect of the activity of development and production of seeds and planting material. Civil Aviation Non-scheduled airlines, chartered airlines and cargo airlines have been removed from the definition of Non- scheduled Air Transport Services Trading Wholesale Trading of items sourced from Medium & Small enterprises (MSEs) is now considered as 100% under the automatic route. Trading for exports has been removed from the schedule.

Consolidated FDI Policy

Conclusion

This periodical updation/ review of the foreign investment policy is a welcome initiative on the part of the Ministry of Commerce and Industry and provide a mechanism to the government to consider the policy on investments into India in various sectors and also address issues/concerns of investors which may act as a deterrent on an ongoing basis. While the clarification/ policy changes on pricing of convertible instruments, downstream investments and prior approval of existing joint ventures is welcomed, it maybe relevant to consider the discussion papers and comments received

thereon in respect of FDI in LLPs, defence sector and multi-brand retail and translating into a policy announcement. A Brief Comparative of sectoral caps after considering the policy changes has been given in the Annexure for the readers ready reference. These need to be read with any stipulations/ combinations provided under the policy/sector rules/ regulations and the schedule.

Annexure

Industry Sectors A. Agriculture B. Industry 1. Mining 2. Manufacture 3. Power C. Service Sector 4. Civil Aviation Sector 5. Asset Reconstruction Companies 6. Banking Private Sector 7. Banking Public Sector 8. Broadcasting 9. Commodity Exchanges 10. Development of Townships, Housing, Built-up Infrastructure and construction development projects 11. Courier services for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898. 12. Credit Information Companies(CIC) 13. Industrial Parks both setting up and in established Industrial Parks 14. Insurance 15. Infrastructure companies in securities markets namely, Stock Exchanges, Depositories and Clearing Corporations 16. Non-Banking Finance Companies 17. Petroleum and Natural Gas Sector 18. Print Media 19. Security Agencies in Private Sector 20. Satellites Establishment and operation 21. Telecommunications 22. Trading

Consolidated FDI Policy

Industry A. Agriculture & animal husbandry i. Floriculture, Horticulture and cultivation of vegetables, mushrooms, under controlled conditions; ii. Animal Husbandry (including breeding of dogs), Pisciculture, aqua-culture under controlled conditions; iii. Development and production of Seeds and planting material; iv. Services related to agro and allied sectors. Note: Besides the above FDI is not allowed in any other activity. v. Tea Sector, including tea plantations Compulsory divestment of 26% equity of the company has to be done in favour of an Indian partner / Indian public within a period of 5 years. Note: Besides the above FDI is not allowed in any other plantation / sector activity. B. Industry 1. ining M i. Mining and Exploration of metal and non-metal ores including diamond, gold, silver and precious ores but excluding titanium bearing minerals and its ores subject to the Mines and Minerals (Development and Regulation) Act, 1957 ii. Coal and Lignite mining for captive consumption by power projects, and iron and steel, cement units and other eligible activities permitted under the Coal Mines (Nationalisation) Act, 1973 iii. For setting up coal processing plants like washeries subject to the conditions iv. Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities subject to sectoral regulations and the Mines and Minerals (Development and Regulation) Act, 1957 Note: FDI will not be allowed in mining of prescribed substances listed in Government of India notification No. S.O. 61(E) dated 18 January 2006 issued by the Department of Atomic Energy. 2. anufacturing M

Cap from 1 April 2011 100% (Automatic)

100% (FIPB)

100% (Automatic)

100% (Automatic) 100% (Automatic) 100% (FIPB)

i. Manufacture of items reserved for production in Micro and Small Enterprises (MSEs). Such an undertaking FIPB beyond 24% would be required to obtain Industrial License under the Industries (Development & Regulation) Act 1951, for such manufacture. ii. Defence Industry subject to Industrial license under the Industries (Development & Regulation) Act, 1951 ii. Cigars and Cigarettes Manufacture 26% (FIPB) (Prohibited for the activity of manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco and tobacco substitutes)

3. Power i. Generation and transmission of electric energy produced in hydroelectric, coal/lignite based thermal, oil based 100% (Automatic) thermal and gas based thermal power plants; ii. Non-Conventional Energy Generation and Distribution; iii. Distribution of electric energy to households, industrial, commercial and other users; and iv. Power Trading Note: All the above would be subject to the provisions of the Electricity Act 2003. Note: (i) to (iii) above do not include generation, transmission and distribution of electricity produced in atomic power plant / atomic energy since private investment in this sector / activity is prohibited and is reserved for public sector.

Industry C. Service sector 4. ivil Aviation Sector 1 2 C i. Airports a. Greenfield projects b. xisting projects E

Cap from 1 April 2011

100% (Automatic) 100% (Automatic up to 74%) (FIPB - beyond 74%) 100% (Automatic) 100% (Automatic up to 74%) (FIPB - beyond 74%) 49% (Automatic) For NRI 100% (Automatic) 74% (Automatic up to 49%) (FIPB beyond 49% up to 74%) For NRI 100% (Automatic) 100% (Automatic) 74% (Automatic up to 49%) (FIPB beyond 49% up to 74%) For NRI 100% (Automatic) 100% (Automatic) 49% (FIPB) 74% (including investment by FII) (Automatic up to 49%) (FIPB beyond 49% up to 74%) 20% (FIPB) (FDI + Portfolio investment)

ii. Air Transport Services 3 a. Greenfield projects b. xisting projects E

ii. Air Transport Services a. Scheduled Air Transport Services/Domestic Scheduled Passenger Airline b. on-scheduled Air Transport Service N

c. Helicopter Services / Seaplane services requiring DGCA approval iii. Other Services a. Ground Handling Services subject to sectoral regulations and security clearance

b. aintenance and Repair organizations; flying training institutes; and technical training institutions M 5. sset Reconstruction Companies (ARCs) A 6. anking Private Sector B

7. anking Public Sector B

1 For the purpose of Civil Aviation Sector, the terms Airport, Aerodrome, Air Transport Service, Air Transport Undertaking, Aircraft Component, Helicopter, Scheduled Air Transport Service, Non-Scheduled Air Transport Service, Chartered, Cargo, Seaplane, and Ground Handling have been defined. 2 The policy for FDI in the Civil Aviation Sector would be subject to the Aircraft Rules, 1934 as amended from time to time, Civil Aviation Requirements, and Aeronautical Information Circulars as notified by the Ministry of Civil Aviation. 3 Airport Transport Services includes Domestic Scheduled Passenger Airlines; Non-Schedules Airlines; Chartered Airlines; Cargo Airlines; Helicopter and Seaplane Services. 4 HITS Broadcasting Services refers to the multichannel downlinking and distribution of television programme in C-Band or Ku Band wherein all the pay channels are downlinked at a central facility (Hub/teleport) and again uplinked to a satellite after encryption of channel.

Consolidated FDI Policy

Industry 8. roadcasting B i. FM Radio ii. Cable network iii. Direct-To-Home

Cap from 1 April 2011 20% (FIPB) (FDI +NRI +PIO) 49% (FIPB) (FDI+NRI + PIO ) 49% (FIPB) (FDI+ NRI +PIO) (FDI component not to exceed 20%) 74% (Automatic up to 49%) (FIPB beyond 49% up to 74%) (Direct and Indirect foreign investment including FDI and Portfolio) 49% (FIPB) (FDI+FII) 100% (FIPB) 26% (FIPB) (FDI+FII) 49% (FIPB) (FDI+FII) Investment by FII in PIS Scheme will be limited to FII 23% and in FDI Scheme shall be limited to 26%

iv. Headend-In-The-Sky (HITS) Broadcasting Service 4

v. Setting up hardware facilities such as up-linking, HUB, etc. vi. Up-linking a Non-news & Current Affairs TV Channel vii. Up-linking a News & Current Affairs TV Channel 9. ommodity Exchanges C

10. Development of Townships, Housing, Built-up Infrastructure and construction development project subject to 100% (Automatic) conditions like minimum area to be developed, minimum capitalization, etc. 6 Note: FDI is not allowed in Real Estate Business 11. Courier services for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898 12. Credit Information Companies(CIC) 100% (FIPB) 49% (FIPB) (FDI+FII) (FII investment not to exceed 24%) 100% (Automatic) 26% (Automatic) 49% (FIPB) (FDI+FII) FDI 26% FII 23%

13. Industrial Parks7 both setting up and already established Industrial Parks 14. Insurance is subject to licensing with Insurance Regulatory & Development Authority. 15. Infrastructure companies in securities markets namely, Stock Exchanges, Depositories and Clearing Corporations Note: FII can invest only through purchases in the secondary market

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Industry 16. Non-Banking Finance Companies i. Merchant Banking ii. Underwriting iii. Portfolio Management Services iv. Investment Advisory Services v. Financial Consultancy vi. Stock Broking vii. Asset management viii. Venture Capital ix. Custodian Services x. Factoring xi. Credit Rating Agencies xii. Leasing & Finance xiii. Housing Finance xiv. Forex Broking xv. Credit Card Business xvi. Money Changing Business xvii. Micro Credit xviii. Rural Credit Note: Investment would be subject to the compliance with the minimum capitalization Norms as prescribed 17. Petroleum and Natural Gas Sector i. Petroleum Refinery of Public Sector Undertaking (PSU) without any disinvestment or dilution of domestic equity in the existing PSUs.

Cap from 1 April 2011 100% (Automatic)

49% (FIPB)

ii. Exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products, 100% actual trading and marketing of petroleum products, petroleum product pipelines, natural gas/LNG pipelines, (Automatic) market study and formulation and Petroleum refining in the private sector subject to the existing sectoral policy and regulatory framework in the oil marketing sector and the policy of the Government on private participation in exploration of oil and the discovered fields of national oil companies 18. Print Media i. Publishing of newspaper and periodicals dealing with news and current affairs ii. Publication of Indian editions of foreign magazines dealing with news and current affairs iii. Publishing / Printing of scientific magazines / specialty journals / periodicals iv. Publication of facsimile edition of foreign newspapers 19. Security Agencies in Private Sector 20. Satellites Establishment and operation 26% (FIPB) (FDI+FII+NRI+ PIO) 26% (FIPB) (FDI+FII+NRI+ PIO) 100% (FIPB) 100% (FIPB) 49% (FIPB) 74% (FIPB)

5 The FDI will be subject to the condition that the portfolio investment from FII/ NRI shall not be persons acting in concert with FDI investors, as defined in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. 6 It would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure. 7 For the purpose of industrial parks, the terms Industrial Park, Infrastructure, Common Facilities, Allocable Area, and Industrial Activity have been defined. 8 Magazine, for the purpose of these guidelines, will be defined as a periodical publication, brought out on non-daily basis, containing public news or comments on public news.

Consolidated FDI Policy

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Industry 21. Telecommunications i. Basic and cellular, Unified Access Services, National/ International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added telecom services

Cap from 1 April 2011 74% (Automatic up to 49% and (FIPB beyond 49% up to 74%) (Including FDI, FII, NRI, FCCBs, ADRs, GDRs, convertible preference shares, and proportionate foreign equity in Indian promoters / Investing Company) Indian shareholding shall not be less than 26% 74% (Automatic up to 49%) (FIPB beyond 49% up to 74%) 74% (Automatic up to 49%) (FIPB beyond 49% up to 74%) 100% (Automatic up to 49%) (FIPB beyond 49%)) 100% (Automatic up to 49%) (FIPB beyond 49% 100% (Automatic) 100% (Automatic) 100% (FIPB)

ii. ISP with gateways, radiopaging, end-to-end bandwidth.

iii. ISP without gateways

iv. Infrastructure provider providing dark fibre, right of way, duct space, tower (Category I)

v. Electronic mail and voice mail

22. Trading i. Wholesale / Cash & Carrying Trading as defined (including sourcing from MSEs) ii. E-commerce Activities
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iii. Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of 2 years, and investment in setting up manufacturing facility commences simultaneously with test iv. Single Brand Product retailing In sectors / Activities not listed above, FDI is permitted up to 100% on the automatic route subject to applicable laws / sectoral rules / regulations.

51% (FIPB)

9 E-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in B2B e-commerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.

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Consolidated FDI Policy

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