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FOREIGN CAPITAL
Major Sources are
Foreign Direct Investment (FDI)
Direct Investment by Residents in Joint
Venture/wholly owned subsidiaries
External Commercial Borrowings (ECB)
Euro Issues (FCCB/GDR/ADR)
Foreign Currency Exchangable Bonds
Foreign Institutional Investor Investment
(FIIIs)
Off-shore funds
Overseas Venture Capital Investments
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Foreign Direct Investment

Channelised in the form of direct contribution to the equity capital of
the Co. and is akin to domestic equity invested by corporate
shareholders. The driving force is return on capital. Domestic
companies benefit from financial & technical participation.

The Govt. Policy relates to

i) Industrial Policy/Licencing Liberalisation and facilitation for
easy access to foreign technology.

ii) Investment by NRI/OCBs NRIs/PIOs/OCBs (owing at least
60% share) are eligible to bring
investment through the automatic
route of RBI NRIs/OBCs are
allowed to invest in housing & real estate
developments (in which FDI is not
permitted). They can hold 100% equity in
civil aviation in which otherwise only upto
40% of Foreign Capital is permitted.
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iii) Foreign Technology Agreements Foreign Technology collaborations are
permitted either through the automatic
route under delegated powers exercised
by the RBI, or by the Government.
However, cases involving industrial
licenses/small scale reserved item do
not qualify for automatic approval and
require government approval. Automatic
route for technology collaboration is also
not available to those who have, or had,
any technology transfer/trademark
agreement in the same or allied field in
India.

iv) 100% EOU/EPZ/SEZ & electronic 1. 100 % Export Oriented Units (EOUs)
and units in the Export Processing
hardware Technology park schemes
Zones (EPZs)/Special Economic
Zones(SEZs) enjoy a package of
incentives and facilities,which include
duty free imports of all types of capital
goods, raw materials and consumables,
in addition to tax holiday against
export.
2. 100% FDI is permitted under the
automatic route for setting up of
industrial park industrial model
town/special economic zone in the
country.

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The Development Commissioners (DCs) of
EPZs/FTZs/SEZs accord automatic approval to projects where

a) The activity proposed does not attract compulsory licensing
or fall in the services sector, except IT enabled services;
b) 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 & import policy in force;
d) The unit is amenable to bonding by customs authoritites;
e) The units has projected the minimum export turnover
specified in the Handbook of Procedures for Export & Import.
All proposals for FDI/NRI/OCB investments in EOU/EPZ
UNITS qualify for approval through the automatic route
subject to sectoral norms. Proposals not covered under the
automatic route would be considered and approved by the
FIPB.

In order to provide an 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.


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AUTOMATIC ROUTE

The automatic route covers both new ventures & existing Cos.

New Ventures
I) All items/activities for FDI/NRI/OCB investment upto 100% except proposals
requiring
- Industrial license
- foreign collaborators has previous tie-up/venture
- relating acquisition of shares in existing Co.
- falling outside sector policy/caps e.g. defence/railway etc.

II) Investments in Public Sector Units as also in EOU/EPZ/STP/SEZ qualify for
automatic route.

Existing Companies
For existing companies with an expansion programme, the additional
requirements are that:
1. The increase in equity level must result from the expansion of the equity
base of the existing company without the acquisition of existing shares by
NRI/OCB/Foreign Investors.
2. The money to be remitted should be in foreign currency.
3. Proposed expansion programme should be in the sector(s) under automatic
route.
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Govt. Approval
Govt. approval is required for all proposals
1. That require Industrial license.

2. In which the collaborators has previous ventures/tie-up

3. Relates to acquisition of shares in an existing Companies

4. Falling outside the notified Sectoralpolicy/Caps or under
Sectors into which FDI is not permitted.

Proposals which do not fulfill the Criteria for automatic
approval are approved by the FIPB. To facilitate FDI
investment in India, FIPB/FIIA/FIPC/SiA have been set
up.
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Direct Investment by Residents in JV/WOS

An Indian party is permitted to invest in JVs and WOSs abroad within the framework of
Government/RBI policy. A JV means a foreign concern formed in the host country in which the
Indian Party makes a direct investment. Direct investment means investment in the equity capital
with a view to acquiring a long-term interest in the concern including representation on its Board
and so on. A WOS means a foreign concern formed in the host country where entire equity capital
is owned by an Indian Party. Indian parties are prohibited from making investment in a foreign
entity engaged in real estate/banking business without the RBIs prior approval. There are two
routes for approval for JVs/WOS abroad; automatic route and approval route.

The automatic route facility is not available for investment in Pakistan and such investments
in Nepal and Bhutan can be made only in Indian rupees. An Indian party can invest in overseas
JV/WOS without RBIs prior approval upto 400 per cent of its networth. The main elements of the
automatic approval framework are
1. Investment in entities overseas engaged in oil sector
2. Methods of funding
3. Capitalisation of exports
4. Investment in financial services sector
5. Investment in equities of companies registered overseas/rated debt
instruments.

In all other cases of direct investment abroad, RBIs prior approval is necessary. The main
elements of the framework include the following:
1. Investment in energy and natural resources sector
2. Overseas investment by proprietorship concerns
3. Overseas investment by registered trust/society
4. Post investment changes
5. Obligations
6. Transfer by way of sale of shares
7. Pledge of shares
8. Hedging of overseas direct investment
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External Commercial Borrowings (ECB)
ECB refers to commercial loans (Bank Loan, Buyers credit, Suppliers Credit,
securatised instrument e.g. floating rate notes and fixed interest bonds) availed from non-
resident lenders. The policy for ECB is also applicable to FCCB. These can be accessed
through two routes; automatic & approval

Eligibility/Borrowers :
1. Corporates other than financial intermediatories and NGOs engaged in micro-finance.
2. Investment in infrastructure.

Lender:
Internationally recognised sources such as international Bank/Capital markets, multilateral
financial institutions, export credit agencies, suppliers of equipments, foreign collaborators
and foreign equity-holders.

Maturity : 3-7 years

Amounts : Min. US $ 20 Mio. MAX US $ 500 Mio.

Costs : The ceiling on all costs
Over 6 months LIBOR 300 basic points for maturity period 3.5 years
Over 6 months LIBOR 350 basic points for maturity period over 5 years
Over 6 months LIBOR 500 basic points for maturity period of 7 years

Uses : Cannot be used for lending, investment in Capital Market, acquiring new Co., real
estate, repayment of Loans. Can be used for investment in industrial & infrastructural
sectors, overseas direct investment on JV/WOS and acquisition of shares in disinvestments
process of PSU

Parking : Until actual requirements, ECB proceeds can be parked outside India in liquid assets.

Notes : 1. Refinancing of existing ECBs by fresh ECB at lower cost is permitted.
2. Prepayments upto US $ 200 Mio is permitted.

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EURO issues (FCCB/GDR/ADR)
As a part of globalising the Indian economy after 1991, Indian corporates are
permitted to float their securities in, and raise funds from, the Euro markets. The two
long-term primary instruments of Euro issues are Foreign Currency Bonds (FCCBs)
and Global Depository Receipts/Certificates (GDRs)/American Depository
receipts/Certificates (ADRs).

A GDR/ADR means any instrument in the form of a depository
receipt/certificate, by whatever name called, created by the Overseas Depository
Bank (ODB) outside India and issued to non-resident investors against the issue of
ordinary shares or FCCBs of the issuing company. A bank authorised by the issuing
company to issue GDRs/ADRs against the issue of FCCBs/ordinary shares of the
issuing company is known as an ODB.

Eligibility Criteria
1. To obtain prior permission of Dept. of Eco. Affairs, MUF, GOI.
2. Issuing Co. to sponsor an issue of GDR/ADR with overseas Depository against
shares held by its share holders, at a price determined by Lead Managers with
respect to disinvestment of their holdings by share-holders of Indian Companies that
are
a) Listed in India
b) Not Listed in India but listed overseas
c) Unlisted but ready to simultaneously list on Indian S/E
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3. The issuing Co. should have consistent good track record for three years.

Overseas Depository Bank (ODB)
A Bank authorised by the issuing Co. to issue GDR/SDR against its
FCCB/ordinary shares is known as ODB.
ODB who are eligible to invest in the India through portfolio route and
entities prohibited by SEBI to buy/sell/deal in securities are not eligible to
FCCB/shares through GDRs/ADRs.

Procedure:
The FCCBs (bonds) should be denominated in any convertible foreign
currency and shares of the issuing company should be denominated in
Indian rupees. The shares/bonds should be delivered to a domestic
custodian Bank (DCB) who would instruct the OBD to issue GDR/ADR
certificates/receipts to non-resident investors against the shares/bonds
held. A GDR/ADR may be issued in a negotiable form and may be listed on
any international stock exchange for trading outside India. A non-resident
holder of GDRs/ADRs may transfer them or may ask the ODB to redeem
them. The redeemed GDRs/ADRs and underlying shares sold may be re-
issued.


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The issuing company would finalise the issue structure with the lead
manager of the issue. The aspects to be considered would include
public/private placement, number of GDRs/ADRs issued, issue price,
interest on FCCBs, conversion price/coupon rate/pricing of the conversion
options of the FCCBs. The pricing for listed companies as well as the
conversion price of FCCBs should not be less than the higher of the
average of the weekly high and low of the closing prices of the related
shares quoted on the stock exchange(s) during (1) 2 weeks or (2) 6
months preceding the relevant date. The RBI regulations would be the
basis in case of unlisted companies.

Indian companies can also access the GDR/ADR market through the
automatic route in the following cases:
1. through a registered stock exchange
2. through private placement if lead managed by an overseas
investment banker.
3. linked to employee stock options of software /IT Companies
4. arising out of business recognisation/merger/demerger. All the
mandatory approval for overseas investments requirements under
the FDI Policy approval under the Companies Act approval and so
on should be obtained by the company prior to the GDR/ADR
issue.


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An Indian company can issue FCEB expressed in foreign currency; the principle
and interest in respect of which is payable in foreign currency and subscribed by a
person who is resident outside India in foreign currency & exchangeable into equity
shares of another company (i.e. offered company) in any manner, either
wholly/partly or on the basis of any equity related warrants attached to a debt
instrument.

The proceeds of the FCEB may be invested by the issuing company in the
promoter group companies which would use the proceeds in accordance with the
end-uses prescribed under the ECBs policy. They may also be invested overseas by
way of direct investment including in JVs/WOS.

The interest and the issue expenses should be within the all-in-cost ceiling
specified by the RBI under the ECBs policy.

The exchange price of the offered listed equity shares should not be less than
the higher of the average of the weekly high & low of the closing prices quoted on
the stock exchange during
1. six months
2. two weeks preceding the relevant date. The minimum maturity of the FCEB
should be five years for redemption purposes.

Interest payments on the FCCBs until the exchange option is exercised would
be subject to deduction of tax at source. Tax on dividends on the exchanged portion
of the FCEB would be in accordance with Section 115-AC(1) of the Income Tax Act.
The exchange of the FCCB into shares would not give rise to any capital gains tax.
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A company incorporates outside India can issue IDRs, that is, a depository receipt created
by a domestic depository against its underlying equity shares. The main elements of the framework
of their issue are : eligibility, procedure, registration, issue of prospectus, listing,
transfer/redemption, continuous disclosure and penalty.

To be eligible, the foreign company should have
1. pre-issued capital, US$ 100 millions; average turnover during 3 preceding
financial years, US$ 500 million: making profits/declaring 10% dividend in the preceding 5
years and debt equity ratio, 2:1: fulfill eligibility criteria laid by SEBI.

Procedure for issue: SEBIs prior approval 90 days before the opening of the issue; necessary
approval from regulatory authorities in the country of incorporation;
appointment of DCB/domestic depository/SEBI registered merchant banker,
filling of due diligence/prospectus/letters of offer; and in principle listing
permission.

Other conditions include: redemption of underlying shares after 1 year; ceiling of 15% of capital of
free reserves of the issuer.

Registration document: instrument constituting the constitution of the issuer, enactments under
which incorporated/copy of certificate of incorporation; copies of agreements
with OCBs/DD.

Contents of prospectus: general information; capital structure; terms of issue; company
management and project; report; other information.

Listing : on recognised stock exchange(s) having nation-wide trading terminals in India.

Continuous disclosure : about utilisation of fund and variations from projections.

Penalty for violation : fine upto twice the amount of the IDR and Rs. 5000 per day for continuing
default.
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FIIs Investment

The FII investment is primarily routed through the capital market. A FII means
an institution established/incorporated outside India that proposes to make
investment in securities in India. A domestic asset management company/portfolio
manager who managers funds raised/collected brought from outside India for
investment in India on behalf of a sub-account is deemed to be a FII. A sub account
means any person outside India on whose behalf investments are proposed to be
made by a FII and who is registered as a sub-account with the SEBI.
To buy/sell/otherwise deal in securities, a FII must be registered with SEBI.
The major elements of the registration framework are:
1. eligibility criteria
2. Payment of fee
3. code of conduct
4. conditions for registration
5. registration of sub-accounts
Any FII can invest in securities in India the primary and secondary markets
including shares, debentures, warrants of listed/unlisted/to the listed companies;
units of mutual funds; dated Government securities; and commercial papers and so
on. A FII/sub-account can also lend securities through an approved intermediary. At
least 70% of the aggregate investments of a FII/sub-account should be in equity
related instruments.
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Ar regards secondary market transactions the FIIs can transact business only
by taking/giving delivery of securities. No transaction on a stock exchange can be
carried forward. All transaction should be settled only through dematerialised
securities. The securities should be registered in the name of the FII/sub-account.

The obligations and responsibilities of the FIIs include the appointment of
domestic custodian/designated bank, investment advice in publicly accessible media,
maintainance /preservation of books /records /documents and appointment of
compliance officer. Any FII/global custodian acting on behalf of a FII has to appoint a
domestic custodian to act as custodian of securities for the FII. It has also to appoint
a designated bank branch for opening foreign currency denominated accounts and
special non-resident rupee accounts. Any FII/any of his employees should not render
any investment advice about any security in the publicly accessible media without a
disclosure of his interest including long-short position in the security. Every FII
should maintain & preserve for 5 years accounts relating to all remittances to India,
bank statement of accounts, contract notes relating to purchase/sales of securities
and communication from/to the domestic custodian regarding investments. A
compliance with SEBI Act/rules regulations/notifications/guidelines/instructions
issued by Government/SEBI.

The registration of a FII can be suspended for a specified period, cancelled
after due enquiry for
1. failure to comply with any condition subject to which certificate was granted
2. contravention of any of SEBI Act/regulations. The penalty of
suspension/cancellation can also be imposed be SEBI in specified situations.
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