FOREIGN DIRECT INVESTMENT IN INDIA
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India, the largest democracy in the world, with its consistent growth/performance and abundant skilled manpower provides enormous opportunities for investment, both domestic and foreign. India is the fourth largest economy in terms of Purchase Power Parity and the tenth most industrialized country in the world. Major initiatives such as industrial decontrol, simplification of investment procedures, enactment of competition law, liberalisation of trade policy, full commitment to safeguarding intellectual property rights, financial sector reforms, liberalisation of exchange regulations etc., have been taken, which provide a liberal, attractive, and investor friendly investment climate.Main features of policy on Foreign Direct Investment are dealt with.
Objective
In this article I have attempted to analyse different aspects and nature of India’s policy on Foreign Direct Investment, various routes through which they can be chanelised in India.
Foreign Direct Investment (FDI) is now recognized as an important driver of growth in the country. Government is , therefore, making all efforts to attract and facilitate FDI and investment from Non Resident (NRIs) including Overseas Corporate Bodies (OCBs), that are predominantly owned by them, to complement and supplement domestic investment. To make the investment in India attractive, investment and returns on them are freely repatriable, except where the approval is subject to specific conditions such as lock -in period on original investment, dividend cap, foreign exchange neutrality, etc. as per the notified sectoral policy.
Foreign direct investment is freely allowed in all sectors including the services sector, excepta few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. FDI for virtually all items/activities can be brought in through the Automatic Route under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through Government approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB).
Foreign Direct Investment: Policy
Automatic Route
(a) New Venture
All items/activities for FDI/NRI/OCB investment up to 100% fall under the Automatic Route except those covered later here. Whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route, he or she may do so. Investment in Public Sector Units as also for EOU/EPZ/SEZ/EHTP/STP units would also qualify for the Automatic Route. Investment under the Automatic Route shall continue to be governed by the notified sectoral policy and equity caps and RBI will ensure compliance of the same. The National Industrial Classification (NIC) 1987 shall remain applicable for description of activities and classification for all matters relating to FDI/NRI/OCB investment:
(b) Existing Companies
Besides now companies, automatic route for FDI/NRI/OCB investment is also available to the existing companies to induct foreign equity. For existing companies with an expansion programme, the additional requirement are that (I) the increase in equity level must result from the expansion of the equity base of the existing company without acquisition of existing shares by NRI/OCB/foreign investors, (ii) the money to be remitted should be in the sector(s) under the automatic route. Otherwise the proposal would need Government approval through the FIPB. For this, the proposal must be supported by a Board Resolution of the existing Indian company. For existing companies without an expansion programme, the additional requirements for eligibility for automatic route are (I) that they are engaged in the industries under automatic route, (ii) the increase in equity level must be from expansion of the equity base and (iii) the foreign equity must be in foreign currency. The earlier SEBI requirement, applicable to public limited companies, that shares allotted on preferential basis shall not be transferable in any manner for a period of 5 years from the date of their allotment has now been modified to the extent that not more than 20 per cent of the entire contribution brought in by promoter cumulatively in public or preferential issue shall be locked in. The automatic route for FDI and/or technology collaboration would not be available to those who have or had any previous joint venture or technology transfer/trade mark agreement in the same or allied field in India. Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc. in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and sector specific caps on FDI. In a major drive to simplify procedures for foreign direct investment under the "automatic route", RBI has given permission to Indian Companies to accept investment under this route without obtaining prior approval from RBI. Investors are required to notify the Regional Office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors. This facility is available to NRI/OCB investment also.
Government Approval
For the following categories, Government approval for FDI/NRI/OCB through the FIPB shall be necessary:-
1. All proposals that require an Industrial Licence which includes (i) the item requiring an Industrial Licence under the Industries (Development and Regulation) Act, 1951; (ii) foreign investment being more than 24% in the equity capital of units manufacturing items reserved for small scale industries; and (iii) all items which require an Industrial Licence in terms of the locational policy notified by Government under the New Industrial Policy of 1991.
2. All proposals in which the foreign collaborator has a previous venture/tie-up in India.. However, this shall not apply to investment made by multilateral financial institutions such as ADB,IFC,CDC,DEG, etc. as also investment made in IT sector.
3. All proposals relating to acquisition of shares in an existing Indian company in favour of a foreign/NRI/OCB investor.
4. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.
Whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route, he or she may do so.
Areas/Sectors/Activities hitherto not open to FDI/NRI/OCB investment shall continue to be so unless otherwise decided and notofied by Government. Henceforth any change in sectoral policy/sectoral equity cap shall be notified by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect of proposals approved by the Government. Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors. Such companies are, however, required to notify the Regional Office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and to file the required document with the concerned Regional Offices of the RBI within 30 days after issue of shares to the foreign investors.
Issue and Valuation of Shares in Existing Companies
Allotment of shares on preferential basis shall be as per the requirements of the Companies Act, 1956, which will require special resolution in case of a public limited company.
In case of listed companies, valuation shall be as per the RBI/SEBI guidelines as follows:
The issue price shall be either at:
a) The average of the weekly high and low of the closing prices of the related shares quoted on the Stock Exchange during the six months preceding the relevant date or
b) The average of the weekly high and low of the closing prices of the related shares quoted on the Stock Exchange during the two weeks preceding the relevant date.
The stock exchange referred to is the one at which the highest trading volume in respect of the share of the company has been recorded during the preceding six months prior to the relevant date. The relevant date is the date thirty days prior to the date on which the meeting of the General Body of the shareholder is convened. In all other cases a company may issue shares as per the RBI regulation in accordance with the guidelines issued by the erstwhile Controller of Capital Issues. Other relevant guidelines of Securities and Exchange Board of India (SEBI)/(RBI) including the SEBI (Substancial Acquistion of Shares and Takeover) Regulations, 1997, wherever applicable, would need to be followed.
Foreign Investment in the Small Scale Sector
Under the small scale policy, equity holding by other units including foreign equity in a small scale undertaking is permissible up to 24 per cent. However there is no bar on higher equity holding for foreign investment if the unit is willing to give up its small scale status. In case of foreign investment beyond 24 per cent in a small scale unit which manufactures small scale reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent would need to be obtained.
Foreign Investment Policy for Trading Activities
Foreign investment for trading can be approved through the automatic route up to 51% foreign equity, and beyond this by the Government through FIPB. For approval through the automatic route, the requirement would be that it is primarily export activities and the undertaking concerned is an export house/trading house/ super trading house/star trading house registered under the provisions of the Export and Import policy in force. Both in the case of automatic and Government approvals, the valuation and pricing of shares would be governed by the provisions stated above. Closely held companies would also be governed, mutatis mutandis, by the same guidelines.
Other Modes of Foreign Direct Investment
Global Depository Receipts (GDR)/American Deposit Receipts (ADR)/Foreign Currency Convertible Bonds (FCCB): Foreign Investment through GDRs/ADRs, Foreign Currency Convertible Bonds (FCCBs) are treated as Foreign Direct Investment. Indian companies are allowed to raise equity capital in the international market through the issue of GDR/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition can be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. A company engaged in the manufacture of items covered under Automatic Route is likely to exceed the percentage limits under the Automatic Route, whose direct foreign investment after a proposed GDR/ADR/FCCBs issue is likely to exceed 50 per cent/51 per cent/74 per cent as the case may be, or which is implementing a project not contained in project falling under Government Approval route, would need to obtain prior Government clearance through FIPB before seeking final approval from the Ministry of Finance. There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements; in addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring.
Preference Shares
Foreign investment through preference shares is treated as foreign direct investment. Proposals are processed either through the automatic route or FIPB as the case may be. The following guidelines apply to issue of such shares:-
(i) Foreign investment in preference share are considered as part of share capital and fall outside the External Commercial Borrowing (ECB) guidelines/cap
(ii) Preference shares to be treated as foreign direct equity for purpose of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. If the preference shares are structured without such conversion option, they would fall outside the foreign direct equity cap.
(iii) Duration for conversion shall be as per the maximum limit prescribed under the Companies Act or what has been agreed to in the share holders agreement whichever is less.
(iv) The dividend rate would not exceed the limit prescribed by the Ministry of Finance.
(v) Issue of Preference Shares should conform to guidelines prescribed by the SEBI and RBI and other statutory requirements.
Procedure for Automatic Route
The proposals for approval under the automatic route are to be made to the Reserve Bank of India in the FC(RBI) form. In a major drive to simplify procedures for foreign direct investment under the "automatic route", RBI has given permission to Indian Companies to accept investment under this route without obtaining prior approval from Reserve Bank of India. However, investors will have to file the required documents with the concerned Regional Office of the RBI within 30 days after issue of shares to foreign investors. This facility is available to NRI/OCB investment also.
Procedure for Government Approval
FIPB
(a) All other proposals for foreign investment, including NRI/OCB investment and foreign investment in EOU/EPZ/STP/EHTP units, which do not fulfill any or all of the parameters prescribed for automatic approval, are considered for approval on merits by the Government. All such proposals are considered for approval by the Foreign Investment Promotion Board (FIPB). The FIPB also grants composite approvals involving foreign technical collaborations and setting up of Export Oriented Units involving foreign investment/foreign technical collaboration.
(b) Applications to FIPB for approval of foreign investment should be submitted in prescribed form. Plain paper applications carrying all relevant details are also accepted. No fee is payable. The following information should form part of the proposal submitted to FIPB:
1. Whether the applicant has had or has any previous financial/technical collaboration or trade mark agreement in India in the same or allied field for which approval has been sought?; and
2. If so, details thereof and the justification for proposing the new venture/technical collaboration (including trade marks).
The decisions of the Government in all cases are conveyed by the SIA normally within 30 days. RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect of proposals approved by the Government. Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors. Such companies are, however, required to file the required document with the concerned Regional Offices of the RBI within 30 days after issue of shares to the foreign investors. Similarly, for inward remittance and issue of shares to NRI/OCB up to 100 per cent equity also, prior permission of RBI is not required. These companies have to file the required documents with the concerned Regional Offices of RBI within 30 days after the issue of shares to NRIs/OCBs.
Literature Review
It has been observed that liberalization of the economic policy and changes in the structure of the economy has not translated fully into attracting greater investments due to a variety of reasons. Existing procedures of project formulation, appraisal & approval particularly for government projects, inadequacies in the existing management system and inadequate skills in project formulation, appraisal and management are some of the major reasons behind delays in the investment approvals and implementation of projects.
Various studies have shown that complexities in the approvals required for primary resources like land, power, etc., multiplicity of approvals, disproportionate level of details sought with applications are among the
major difficulties in the implementation of projects. Many approvals also do not seem to serve any public interest. Recent studies have shown that, while
handling of approvals at Central level has registered a marked improvement, state level handling of approvals and reducing ground level hassles have emerged as important issues.
Conclusion
Foreign companies can make investments or operate their business in a number of ways such as Liaison/ Representative Office, Branch Office, Project Office, 100% wholly owned Subsidiary, and Joint Venture Company. The requisite approval can be granted by Reserve Bank of India (RBI) or Foreign Investment Promotion Board (FIPB). Any company set up with FDI has to be incorporated under the Indian Companies Act with the Registrar of Companies, Ministry of Company Affairs and all Indian operations would be conducted through this company.
Under the New Industrial Policy, all industrial undertakings are exempt from licensing except for industries requiring compulsory industrial license. The project should not be located within 25 kilometers of a city with a population of more than one million as per 1991 Population Census.
The Government has substantially liberalized the procedures for obtaining an Industrial License. The application in form IL-FC should be filed with the SIA. Approvals are normally granted within 4-6 weeks.
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About the Author
ANAND KUMAR, STUDENT V TH YEAR SYMBIOSIS LAW SCHOOL, PUNE, MAHARASHTRA.
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