Investing in India- Regulatory overview
This briefing note sets out a summary of the law relating to foreign investments in India and the key issues that one must consider while investing in India.
FOREIGN INVESTMENT REGULATIONS
Non-residents can invest in Indian securities either through the foreign direct investment (FDI) route, the portfolio investment scheme (PIS) route, or the foreign venture capital investment route .
India has one of the most transparent and liberal FDI regimes amongst the emerging and developing economies.
The acquisition of securities of an Indian company, either by way of subscription and/or purchase, by a person resident outside India is regulated primarily through the Foreign Exchange Management Act, 1999 (FEMA) read with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.
FDI is permitted in all sectors except the following sectors / activities:
(a) lottery business including Government/ private lottery, online lotteries (the restriction includes foreign technology collaborations in any form (such as franchise or trademark or brand name licensing));
(b) gambling and betting, including casinos;
(c) chit funds (except for investment made by Non-Resident Indians (NRIs) and Overseas Citizens of India (OCI) on a non-repatriation basis);
(d) Nidhi companies;
(e) trading in transferable development rights;
(f) real estate business or construction of farm houses;
(g) manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes; and
(h) activities / sectors not open to private sector investment (such as atomic energy and Railway operations).
Apart from the above sector / activity specific restrictions, any investment either by a citizen of Bangladesh or Pakistan or by an entity incorporated in Bangladesh or Pakistan requires prior Government approval.
There are two routes for FDI – the 'automatic route' and the 'government / approval route'.
Most sectors now provide for foreign investment under the automatic route . Any investment under this route does not require any Government approval specifically for the foreign investment. However, sector specific approvals may still be required.
Government / Approval route
Prior Government approval is required in the following:
(a) for investment in sectors which fall within the approval route (such as, terrestrial broadcasting FM (FM Radio), print media, satellites establishment and operation and private security agencies); or
(b) where the investment sought to be made is in excess of the sectoral cap specified under the automatic route or where as a result of the investment the aggregate of foreign investment limit permitted under the automatic route will be exceeded ;
(c) where the investment does not comply with the requirements/ conditions for investment under the automatic route; and/or
(d) where shares/ permitted instruments are being acquired or purchased by a non-resident for non-cash consideration, except in the following cases:
(i) an Indian subsidiary which is wholly owned by a non-resident entity and which operates in a sector in which hundred (100) per cent FDI is permitted without any conditions can issue shares (up to a maximum of five (5) per cent of its authorised capital or USD five hundred thousand (USD 500,000), whichever is less) to the overseas parent company subsidiary against the pre-incorporation expenses,
(ii) an Indian company engaged in a sector in which FDI is permitted under the automatic route can issue shares against swap of capital instriments, import of capital goods / machinery / equipment (excluding second hand machinery), and
(iii) an Indian company may issue shares to a person resident outside India against any funds payable by the Indian company to the person resident outside India and the remittance of which is permitted under FEMA and any rules or regulations framed under FEMA .
Indian companies are allowed to issue 4 types of instruments to foreign investors:
(a) equity shares (including partly paid shares and warrants);
(b) fully, compulsorily and mandatorily convertible debentures;
(c) fully, compulsorily and mandatorily convertible preference shares; and
(d) share warrants.
In addition to the above, Indian startup companies are permitted to issue convertible notes , subject to compliance with certain conditions.
Any instrument which is non-convertible, optionally convertible or partially convertible is considered as foreign debt and not treated as FDI. Accordingly all restrictions applicable to raising of foreign debt, under India’s external commercial borrowing regulations, apply to such instruments.
The FDI policy regulates the price at which foreign investors can:
(a) can acquire permitted capital instruments of an Indian company, either by way of subscription or by way of purchase from resident sellers; and/ or
(b) sell the permitted capital instruments of an Indian company to resident purchasers.
The pricing guidelines provide for:
(a) a ceiling in case of acquisition of permitted capital instruments (either by way of subscription or by way of purchase from resident shareholders) by a non-resident investor, and
(b) a floor price in case of sale of permitted capital instruments to a resident purchaser.
Further, in the case of convertible capital instruments, the price/ conversion formula is also required to be determined upfront at the time of issue of the instruments, and the conversion price cannot be less than the price arrived at the time of issuance of the instrument.
Reporting and filing requirements
Any acquisition of shares by a person resident outside India from a person resident in India and any transfer of shares by a person resident outside India to a person resident in India, irrespective of the route under which this takes places, requires certain filings (in the nature of intimations) to be made to the Reserve Bank of India (RBI). The filings are made electronically at the e-Biz platform (http://www.ebiz.gov.in).
The reporting requirements are as follows:
(a) In case of issuance of permitted capital instruments by an Indian company to a person resident outside India – In such as case the Indian company is required to be file, through an authorised dealer bank with the RBI, the form FC-GPR, within thirty (30) days from the date of issuance of the permitted capital instruments. Further, the Indian company would also need to file an advance remittance form (ARF) within thirty (30) days from the date of receipt of the remittance. Along with the ARF, the following documents need to be submitted – the foreign inward remittance certificate (which evidences receipt of the remittance) and the know your customer report on the non-resident investor from the overseas bank which has remitted the subscription amount.
(b) In case of transfer of permitted capital instruments between a person resident outside India and a person resident in India – Transfer of permitted capital instruments between:
(i) a person resident outside India (holding permitted capital instruments on a repatriable basis) and a person resident outside India (holding permitted capital instuments on a non-repatriable basis); and
(ii) a person resident outside India (holding permitted capital instruments on a repatriable basis) and a person resident in India, is required to be reported by way of form FC-TRS.
The form is to be filed, electronically on the e-biz portal, with the RBI through an authorised dealer bank. This form is to be filed within sixty (60) days from the date of transfer of the capital instrument or receipt / remittance of the sale consideration, whichever is earlier.
The PIS route permits the following category of non-resident investors to acquire listed shares directly through the Indian stock markets:
(a) NRI ;
(b) Overseas Citizens of India (OCI) ; and
(c) Foreign Portfolio Investors (FPIs).
Conditions for investments
(a) Investments by NRIs and / or by OCIs:
(i) The purchase and sale must be done through a designated AD Bank branch.
(ii) The total holding of an individual NRI / OCI should not exceed five (5) per cent of the total paid up equity shares (on fully diluted basis) of the relevant Indian company or of the total value of the series of debentures/ preference shares/ warrants issued by the Indian company, as the case may be.
(iii) The aggregate consolidated holdings of all NRIs / OCIs should not exceed ten (10) per cent of total paid up equity shares (on fully diluted basis) of the relevant Indian company or of the paid up value of each series of debentures/ preference shares/ warrants. This ten (10) per cent limit can be raised to twenty four (24) per cent by way of a special resolution passed by the shareholders of the relevant Indian company.
(iv) The consideration should be received as inward remittance through banking channels or out of funds held in a Non Resident External (NRE) Account.
(b) Investments by FPIs:
(i) Total holding of each FPI or an investor group should be less than ten (10) per cent of the total paid up equity capital (on a fully diluted basis) of the relevant Indian company or the paid up value of each series of debentures / preference shares / warrants issued by the relevant Indian company, as the case may be.
(ii) The aggregate consolidated holding of all FPIs in an Indian company should not exceed the aggregate limit of twenty four (24) per cent of paid-up equity capital (on a fully diluted basis) or paid up value of each series of debentures / preference shares / warrants, as the case may be.
(iii) an FPI can invest in certain securities only, which include:
(A) shares, debentures and warrants of company which are listed or to be listed on a recognised stock exchange in India,
(B) units of schemes floated by domestic mutual funds (whether or not listed on a recognised stock exchange) or by collective investment schemes,
(C) derivatives traded on a recognised stock exchange,
(D) treasury bills and dated Government securities,
(E) commercial papers issued by an Indian company,
(F) Rupee denominated credit enhanced bonds,
(G) Security receipts issued by asset reconstruction companies, and (H) Perputual debt instruments and debt capital instruments as specified by the RBI from time to time.
CERTAIN KEY ISSUES
Repatriation of capital
Foreign capital invested in India is generally allowed to be repatriated along with capital appreciation, if any, after the payment of taxes due on them, provided the investment was made on a repatriation basis.
Repatriation of dividends and profits
Profits and dividends earned in India are repatriable after the payment of taxes due on them. No permission of RBI is necessary for effecting remittance, subject to compliance with certain specified conditions.
Foreign owned or controlled company
Under the FDI laws an Indian company which is owned and/or controlled by non-residents is treated as a foreign owned/controlled company. Any investment by such an Indian company is treated as downstream investment and has to comply with various conditions, depending on sectoral caps, entry routes, such as compliance with pricing guidelines and other FDI linked performance conditions.
Merger control and competition law
Under the Competition Act, 2002, prior approval of the Competition Commission of India is required in case an acquisition results in:
(a) the acquirer and the enterprise (whose control, shares, voting rights or assets have been acquired or are being acquired) jointly having:
(i) within India, either: (A) assets valued at more than INR twenty billion (INR 20,000,000,000), or (B) a turnover of more than INR sixty billion (INR 60,000,000,000), or
(ii) in aggregate within India and/or outside India, either (A) assets valued at more than USD one billion (USD 1,000,000,000), including at least INR ten billion (INR 10,000,000,000) in India, or
(B) turnover of more than USD three billion (USD 3,000,000,000), including at least INR thirty billion (INR 30,000,000,000) in India, or (b) the group, to which the enterprise (whose control, shares, assets or voting rights have been acquired or are being acquired) would belong to after the acquisition, jointly having or likely to jointly have:
(i) within India, either (A) assets valued at more than INR eighty billion (INR 80,000,000,000), or (B) turnover of more than INR two hundred forty billion (INR 240,000,000,000), or
(ii) in aggregate within India and/or outside India, either (A) assets valued at more than USD four billion (USD 4,000,000,000), including at least INR ten billion (INR 10,000,000,000) in India, or (B) turnover of more than USD twelve billion (USD 12,000,000,000), including at least INR thirty billion (INR 30,000,000,000) in India.
The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code) is triggered upon acquisition of listed securities in excess of the thresholds specified under the Takeover Code. The Takeover Code imposes an obligation to make disclosure and/or a public offer, depending on the percentage of the shares being acquired.
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