J.

Sagar Associates
advocates and solicitors

Legal Update
April 10, 2012

Consolidated FDI Policy Circular 1 of 2012

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India vide Circular 1 of 2012 dated April 10, 2012 has released the new Foreign Direct Investment Policy (New FDI Policy). The New FDI Policy has introduced certain new provisions as well as consolidated the press notes and notifications that have been issued by the DIPP and the Reserve Bank of India (RBI) since Circular 2 of 2011 was issued by the DIPP. In terms of the Press Release issued by the DIPP along with the New FDI Policy, going forward the foreign direct investment policy will be issued by the DIPP on an annual basis (and not on half yearly basis as was done till now) and therefore the next FDI Policy will be released towards the end of March, 2013. Set out below are the highlights of the New FDI Policy: (a) FDI in Commodity Exchanges Foreign direct investment in commodity exchanges has been liberalized wherein prior government approval will only be required for the foreign direct investment component of the entire investment in a commodity exchange. Therefore, prior government approval will not be required for investments made by Foreign Institutional Investors (FIIs) in a commodity exchange under the Portfolio Investment Scheme (PIS). Previously, prior government approval was required for the foreign direct investment component as well as the investment by FIIs in a commodity exchange under the PIS. There has not been any change in the thresholds of investment in a commodity exchange i.e. the investment by FIIs under the PIS Scheme is 23% and foreign direct investment is 26%. The aforementioned amendment aligns the policy for foreign investment in commodity exchanges, with that of other infrastructure companies in the securities markets, such as stock exchanges, depositories and clearing corporations.

(b) Issue of Shares Machinery

against

Import

of

The DIPP has clarified that equity shares will not be issued against import of second hand machinery by an Indian company. This clarification comes in view of the representations received by the government that the Indian capital goods sector, including the machine tools industry, construction machinery and textile machinery, has been suffering because of import of cheaper second hand machinery, which is often sub-standard. Prior to this New FDI Policy, an Indian company could issue shares against the import of machinery (including second hand machinery) after satisfying the stipulated conditions and obtaining prior government approval. It is worth noting that earlier RBI had vide A.P. (DIR Series) Circular No.74 dated June 30, 2011 (amended subsequently by A.P. (DIR Series) Circular No.55 dated December 9, 2011) had permitted issue of shares against import of machinery (including second hand machinery). With the New FDI Policy, while DIPP has clarified that shares cannot be issued against import of second hand machinery, however the said RBI circular continues to provide that shares can be issued against import of second hand machinery. (c) Investment by FIIs In addition to an Indian company being authorised by its Board of Directors, followed by a special resolution of its shareholders for allowing the increase in the aggregate limit of investment under the PIS by FIIs from 24% to the sectoral cap/statutory ceiling, an Indian company would now need to intimate RBI prior to FIIs increasing their aggregate investment from the stipulated 24% to the sectoral cap/statutory ceiling. That said, the investment by an individual FII in an Indian company continues to be limited to 10% of the entire capital of the Indian company. (d) Investment by Foreign Venture Capital Investors The RBI pursuant to A.P. (DIR Series) Circular No. 93 dated March 19, 2012 had inter-alia permitted Foreign Venture Capital Investors (FVCIs) registered with the Securities and Exchange Board of India
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JSA Legal Update April 10, 2012

J. Sagar Associates
advocates and solicitors

Legal Update
April 10, 2012

(SEBI) to invest in eligible securities (equity, equity linked instruments, debentures of Indian Venture Capital Undertakings (IVCU) or Venture Capital Fund (VCF), units of schemes/funds set up by a VCF) by way of private arrangement / purchase from a third party, subject to the satisfaction of the conditions set out in Schedule 6 of Foreign Exchange Management (Transfer or Issue of Security by a Person resident outside India) Regulations, 2000. The New FDI Policy encompasses the aforementioned provision. (e) Non Banking Finance Companies Clarification on Leasing The New FDI Policy has clarified that the activity of leasing and finance (one of eighteen Non Banking Finance Company activities where FDI is permitted) covers only financial leases and not operating leases. (f) Investments Investors by Qualified Financial (g)

company is in the financial sector provided that: (i) No-objection Certificates (NOCs) are obtained from the respective financial regulators of the investee company as well as the transferor and transferee entities and such NOCs are filed with the AD Bank along with Form FCTRS; and (ii) The FDI Policy and FEMA Regulations in terms of sectoral cap, conditionalities (such as minimum capitalisation, etc.), reporting requirements, documentation etc, are complied with. The New FDI Policy encompasses the aforementioned provisions. Transfer of Shares RBI Approval not required The New FDI Policy also encompasses the provisions of Circular No. 43 dated November 4, 2011 issued by RBI which set out the instances of transfer of shares that would not require prior RBI Approval subject to the satisfaction of the conditions stipulated therein. (h) FDI in Single Brand Retail Increased to 100% In terms of Press Note 1 (2012) issued on January 10, 2012, the policy regarding single brand retail had been liberalized, and now 100% FDI is permitted under the government route, subject to the specifications specified in the said Press Note. The New FDI Policy has been duly amended to incorporate the aforementioned liberalization. (i) FDI in the Pharmaceutical Sector The DIPP vide Press Note No. 3 (2011 Series) dated November 8, 2011 had permitted FDI, up to 100% for Brownfield investments (i.e. investments in existing companies), in the pharmaceutical sector, under the government route. The provisions of the said Press Note have been included in the New FDI Policy as well.

The RBI vide A.P. (DIR Series) Circular No. 66 dated January 13, 2012 had permitted Qualified Financial Investors (QFIs) to invest in the equity shares of listed Indian companies as well as in the equity shares of Indian Companies which are offered to the public in India in terms of the relevant and applicable SEBI guidelines / regulations. QFIs have also been permitted to acquire equity shares by way of rights shares, bonus shares or equity share on account of a stock split / consolidation or equity shares on accounts of an amalgamation, demerger or such other corporation, so long as the prescribed investment limits are not breached. The provisions of the said circular have been included in the New FDI Policy as well. (g) Financial Services Sector General Permission for Transfer of Shares and Convertible Debentures The RBI vide A.P. (DIR Series) Circular No. 43 dated November 4, 2011 had liberalized the provisions relating to transfer of shares and companies engaged in the financial services sector. Briefly, prior RBI approval will not be required where the investee

JSA Legal Update April 10, 2012 2

J. Sagar Associates
advocates and solicitors

Legal Update
April 10, 2012

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