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Foreign Investments in Indian companies
In terms of Section 6(3)(b) of Foreign Exchange Management Act. 1999 Reserve Bank regulates transfer or issue of any security by a person resident outside India read with Notification No. FEMA 20/2000-RB dated May 3, 2000.
Foreign Investments in India
Foreign Investments in India attract provisions of Section 6 of Foreign Exchange Management Act (FEMA) 1999 and is subject to the Regulations issued by Reserve Bank of India under FEMA, 1999. The Regulations have been notified vide Notification No.FEMA 20/2000-RB dated May 3,2000, and amended from time to time vide various Notifications listed in Appendix. An Indian entity cannot issue any security to a person resident outside India or record in its books any transfer of security from or to such person except as provided in the Act or Rules or Regulations or with the specific permission of the Reserve Bank.
2. Prohibition on investment into India
No person resident outside India can make investment in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not which is engaged or proposes to engage in the following activities
(i) Business of chit fund, or
(ii) Nidhi Company, or
(iii) Agricultural or plantation activities or
(iv) Real estate business, or construction of farm houses
(v) Trading in Transferable Development Rights (TDRs).
It is clarified that Real Estate Business does not include development in townships, construction of residential/commercial premises, roads or bridges.
In addition to the above activities, the FDI is also prohibited in certain activities, a list of which is given in Annex-1 (Item B).
3. Permitted Investments in India
In other cases investments can be made either with the specific prior approval of the Government of India, the Secretariat for Industrial Assistance/Foreign Investment Promotion Board (SIA/FIPB) or under the Automatic route (Annex-1). The list of the activities requiring the approval of the Government is given in Annexure-A (A) to Schedule 1 to FEMA Notification No 94 and details of the activities/sectors which are covered under the automatic route is given as Annexure-B to the said Schedule. The Automatic Route is not open in the following cases and as such require specific approval of FIPB i.e. (i) where the non-resident investors who have/had a previous financial/technical/ trademark collaboration in an existing domestic company engaged in the same or allied activity, (ii) if the activity or manufacturing item of the issuer company requires an Industrial License under the provisions of the Industries (Development and Regulation) Act, 1951 or under the locational policy notified by Government of India under the Industrial Policy Resolution, 1991 and (iii) the investment is sought in excess of the prescribed sectoral limits Automatic Route.
While the nature of investment activities have been prescribed in the FEMA Regulations, the scope of these activities especially regarding the investments by nonresidents under the Government approval route have been detailed in the Government Manual on Investing in India, Foreign Direct Investment, Policy & Procedures. This is a document which is available in the public domain and can be downloaded from the website of DIPP, Ministry of Commerce and Industry.
4. Eligibility for Investing in India
A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an incorporated entity outside India, (other than an entity incorporated in Bangladesh or Pakistan) has the general permission to purchase shares or convertible debentures or preference shares of an Indian company subject to certain terms and conditions
5. Nature of Investments
5.1 The Indian companies have general permission to issue equity / preference /convertible preference shares and convertible debentures subject to certain conditions.
5.2 Investment in a trading company incorporated in India is permitted under automatic route with FDI up to 51 % provided the Indian company is primarily engaged in export activities, and the undertaking is an export house/trading house/super trading house/star trading house. Government also permits certain trading activities under FIPB route, as mentioned in Annexure `B' to Notification No. FEMA 94/2003-RB dated 18th June 2003. (Annex-2 Item No.9)
5.3 A company which is a small scale industrial unit and which is not engaged in any activity or in manufacture of items included in Annexure A (A) to Notification No.94, may issue shares or convertible debentures to a non-resident, to the extent of 24% of its paid-up capital. Such a company may issue shares in excess of 24% of its paid-up capital if
a) It has given up its small scale status,
c) It complies with the ceilings specified in Annexure B to Notification No.94.
5.4 An Export Oriented Unit or a unit in Free Trade Zone or in Export Processing Zone or in a Software Technology Park or in an Electronic Hardware Technology Park may issue shares or convertible debentures to a person resident outside India in excess of 24 % provided it conforms to the ceilings specified in Annexure B to Notification No. 94 as annexed at Annex-2.
6. General Permissions granted under the Regulations
6.1 Issue of Rights/Bonus shares
General permission is also available to Indian companies to issue Right/Bonus shares to existing non-resident share-holders, subject to adherence to sectoral cap and consequential offer on right basis is made at a price not lower than that at which offer is made to resident shareholder. As clarified in terms of AP (DIR Series) Circular No 14 dated 16th September 2003, entitlement of rights shares is not automatically available to investors who have been allotted such shares as OCBs. Such issuing companies would have to seek specific permission from RBI, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai for issue of shares on right basis to erstwhile OCBs. However, bonus shares can be issued to OCBs.
6.2 Acquisition of shares under Scheme of Amalgamation/merger Where a Scheme of merger or amalgamation of two or more Indian companies has been approved by a court in India, the transferee company may issue shares to the shareholders of the transferor company, resident outside India subject to ensuring that the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the percentage specified in the approval granted by the Central Government or the Reserve Bank. The transferor company or the transferee or new company should not be engaged in activities prohibited in terms of FDI policy viz agriculture, plantation or real estate business or trading in TDRs, etc.
6.3 Issue of shares under Employees Stock Option Scheme A company may issue shares under the Employees Stock Option Scheme, to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India, other than citizens of Pakistan, directly or through a Trust subject to the condition that the scheme has been drawn in terms of relevant regulations issued by the Securities Exchange Board of India; and face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5% of the paid-up capital of the issuing company. The issuing company is required to report the details and submit certificate stipulated to Reserve Bank, within 30 days from the date of issue of shares.
7.1 Advance Reporting
An Indian company issuing shares or convertible
debentures under bonus, rights, amalgamation and stock option in accordance
with these Regulations should submit to Reserve Bank the details of advance
remittance, not later than 30 days from the date of receipt of the amount
of consideration, giving details regarding
· Date of receipt of funds and their rupee equivalent
· Name and address of the authorised dealer through whom the funds have been received, and
· Details of the Government approval, if
After the issue of shares the company should file a report in Form FC-GPR not later than 30 days from the date of issue of shares with the Regional Office of RBI where the registered office of the company is situated.
8. Issue of shares by Indian companies under ADR/GDR
8.1 An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:
· The ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government there under from time to time
· The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and
· Is not otherwise ineligible to issue shares
to persons resident outside India in terms of these Regulations.
8.2 The ADR/GDR can be issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager of the issue. The Indian company will issue its rupee denominated shares in the name of the Overseas Depository and will keep in the custody of the domestic Custodian in India. On the basis of the ratio worked out and the rupee shares kept with the domestic Custodian, the Depository will issue ADRs/GDRs abroad.
8.3 A limited Two-way Fungibility scheme has been put in place by the Government of India for ADRs/GDRs. Under this scheme, a stock broker in India, registered with SEBI, can purchase the shares from the market for conversion into ADRs/GDR. Re-issuance of ADRs/GDR would be permitted to the extent of ADsRs/GDRs which have been redeemed into underlying shares and sold in the domestic market.
8.4 An Indian company can also sponsor an issue of ADR/GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs/GDRs can be issued abroad. The proceeds of the ADR/GDR issue is remitted back to India and distributed among the resident investors who had offered their rupee denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the shareholders who have tendered such shares for conversion into ADR/GDR.
8.5 The ADR/GDR/FCCB proceeds may be utilized in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public in view of their strategic importance.
ADs have been permitted to allow Indian companies to prepay the existing FCCB subject to certain conditions.
8.6 Reporting of such Issues
The Indian company issuing shares shall furnish to the Reserve Bank, full details of such issue in the form specified in Annexure C to Notification No.FEMA 20/2000-RB dated May 3, 2000 within 30 days from the date of closing of the issue. The company should also furnish a quarterly return in the form specified in Annexure D to Reserve Bank within 15 days of the close of the calendar quarter.
9. Issue Price
Price of shares issued to persons resident outside India under Schedule-I (i.e. under the FDI Scheme), would be worked out on the basis of SEBI guidelines in case of listed shares. In other cases valuation of shares would be done by a Chartered Accountant in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.
10. Permission for retaining share subscription money received from persons resident outside India in a foreign currency account
Reserve Bank may, permit an Indian company issuing shares to persons resident outside India under Schedule I to FEMA Notification No. 20 (i.e. under the FDI scheme), to retain the subscription amount in a foreign currency account, subject to such terms and conditions as it may stipulate.
11. Portfolio Investment Scheme.
11.1 Foreign Institutional Investors registered with SEBI and Non-resident Indians are eligible to purchase the shares and convertible debentures under the Portfolio Investment Scheme. The FII should apply to the designated AD, who may then grant permission to FII for opening a foreign currency account and/or a Non Resident Rupee Account.
NRIs should apply to the concerned designated branch of the AD authorised by RBI to administer the Portfolio Investment Scheme (PIS) for permission to open a NRE/NRO account under the Scheme.
11.2 Investment by Foreign Institutional Investors
11.2.1 In the case of FIIs, the total holding of each FII/SEBI approved sub account shall not exceed 10% of the total paid up capital or 10% of the paid up value of each series of convertible debentures issued by an Indian company and the total holdings of all FIIs/sub-accounts of FIIs put together shall not exceed 24% of the paid up capital or paid-up value of each series of convertible debentures. This limit of 24% can be increased to the sectoral cap/statutory limit as applicable to the Indian company concerned by passing a resolution by its Board of Directors followed by passing of a special resolution to that effect by its General Body. FIIs are not permitted to invest in Print Media Sector through FDI or PIS routes. Such investment by FII requires prior approval of Government of India, Foreign Investment Promotion Board and Ministry of Information & Broadcasting. FIIs should also take delivery of the shares purchased and give delivery of shares sold.
11.2.2 The FIIs are also permitted to trade in all exchange traded derivative contracts subject to position limits as prescribed by SEBI and advised by RBI to the custodian banks. ADs can also offer forward cover to FIIs to the extent of total inward remittance net of liquidated investments.
11.2.3 Registered FIIs have been permitted to purchase shares/convertible debentures of an Indian company through offer / private placement. This is subject to applicable ceiling as indicated in Schedule 2 to Notification No. FEMA 20/2000-RB dated May 3, 2000. It is clarified that a FII may invest in a particular issue of an Indian company either under Schedule 1 (i.e. FDI Scheme) or Schedule 2 (i.e. Portfolio Investment Scheme). The ADs may ensure that the FIIs who are purchasing the shares by debit to the special rupee accounts report these details separately in the LEC (FII) returns. The company who has issued the shares to the FIIs under Schedule 1 (FDI) (for which the payment has been received directly into company’s account) and under Schedule 2 (for which the payment has been received from FIIs account maintained with Authorized Dealer in India) should report these figures separately under item 4(b) of the FC-GPR return so that the details could be suitably reconciled for statistical / monitoring purposes.
11.3 The FII shall restrict allocation of its total investment between equities and debt including dated Government Securities and Treasury Bills in the Indian Capital Market in the ratio of 70:30. The FII can also form a 100% Debt Fund and get registered with SEBI for investment in debt investments. Investment in debt securities by FIIs are subject to limits, if any, stipulated by SEBI in this regard.
11.4. Investments by NRIs
11.4.1 In the case of NRIs under PIS it is to be ensured that the paid-up value of shares/ convertible debentures purchased by an NRI on repatriation and non-repatriation basis under PIS route should not exceed 5% of the paid up capital/ paid up value of each series of debentures. The aggregate paid-up value of shares/ convertible debentures purchased by all NRIs should not exceed 10% of the paid-up capital of the company/paid-up value of series of debentures of the company. The aggregate ceiling of 10% can be raised to 24%, if the General Body of the Indian company concerned passes a special resolution to that effect. The NRI investor should take delivery of the shares purchased and give delivery of shares sold. Payment for purchase of shares and/or debentures is made by inward remittance in foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India if the shares are purchased on repatriation basis and by inward remittance or out of funds held in NRE/FCNR/NRO account of the NRI concerned, maintained in India where shares/debentures are purchased on non-repatriation basis. Under PIS, NRIs are not permitted to invest in Print Media Sector.
11.4.2 The link office of the designated branch of an AD shall furnish to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Central Office, Mumbai a report on a daily basis on PIS transactions undertaken by it, such report should be furnished on-line or on a floppy in a format supplied by RBI.
11.4.3 Shares purchased by NRIs on the stock exchange under PIS cannot be transferred by way of sale under private arrangement of gift to a person resident India or outside India without prior approval of RBI.
11.4.4 NRI may invest in Exchange Trade Derivative Contracts approved by SEBI from time to time out of INR funds held in India on non-repatriation basis subject to the limits prescribed by SEBI.
12. Investments by Overseas Corporate Bodies (OCBs)
12.1 With effect from November 29, 2001, OCBs are not permitted to invest under the PIS in India. Further, the OCBs that have already made investments under the Portfolio Investment Scheme may continue to hold such shares/convertible debentures till such time these are sold on the stock exchange.
12.2 OCBs have been derecognised as a class of investor entity in India with effect from September 16, 2003. However, requests from such entities which are incorporated and not under the adverse notice of RBI/SEBI will be considered for undertaking fresh investments under FDI scheme with prior approval of Government if the investment is under Government route and with the prior approval of RBI if the investment is under automatic route.
13. Transfer of Shares and convertible debentures -Non-resident to Resident/Resident to Non-Resident- General Permission
13.1 General permission has been granted to non-residents/NRIs for transfer of shares and convertible debentures of an Indian company as under: -
· A person resident outside India (Other than NRI and OCB) may transfer by way of sale or gift the shares or convertible debentures to any person resident outside India (including NRIs); provided transferee has obtained prior permission of SIA/FIPB to acquire the shares if he has previous venture or tie-up in India through investment in shares or convertible debentures or a technical collaboration or a trade mark agreement or investment in the same field or allied field in which the Indian company whose shares are being transferred, is engaged. The restriction is not applicable to the transfer of shares to International Financial Institutions (i.e. ADB, IFC, CDC, DEG) and transfer of shares to Indian company engaged in Information Technology Sector.
· NRIs and erstwhile OCBs may transfer by way of sale or gift the shares or convertible debentures held by him or it to another Non-resident Indian; provided transferee has obtained prior permission of Central Government to acquire the shares if he has previous venture or tie-up in India through investment in shares or convertible debentures or a technical collaboration or a trade mark agreement or investment in the same field or allied field in which the Indian company whose shares are being transferred, is engaged. The restriction is not applicable to the transfer of shares to International Financial Institutions (i.e. ADB, IFC, CDC, DEG) and transfer of shares to Indian company engaged in Information Technology Sector.
· The person resident outside India may transfer any security to a person resident in India by way of gift.
· A person resident outside India may sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a registered broker.
· A person resident in India may transfer shares / convertible debentures (including transfer of subscriber's shares), by way of sale, of an Indian company in sectors other than financial service sector (i.e. Banks, NBFC and Insurance) to a person resident outside India, subject to the compliance with the guidelines indicated in Annex to A.P. (Dir Series) Circular No.16 dated October 4, 2004 (Annex-3).
· General permission is also available for transfer of shares / convertible debentures, by way of sale under private arrangement by a person resident outside India to a person resident in India, subject to certain conditions, subject to the guidelines indicated in the Annex to A.P. (Dir Series) Circular No.16 dated October 4, 2004 (Annex-3). 13.2 Prior permission of RBI in certain cases for transfer of shares/convertible debentures
· A person resident in India, who proposes to transfer to a person resident outside India any security, by way of gift, is required to obtain prior approval from Reserve Bank.
· A person resident in India who proposes to transfer any share or convertible debenture of an Indian company engaged in financial sector (i.e. Banks, NBFCs and Insurance), and which attract the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, etc., by way of sale to a person resident outside India will have to obtain prior approval of FIPB, Ministry of Finance & Company Affairs, Government of India followed by permission from RBI. The above two stage approval are applicable even when the transfer is made on no repatriation basis.
14. Purchase of other securities (Schedules 4 and 5)
14.1 There is no limit on NRI purchasing shares/ convertible debentures issued by an Indian company on non-repatriation basis whether by public issue or private placement. Amount of consideration for such purchase shall be paid by inward remittance through normal banking channels from abroad or out of funds held in NRE/FCNR/NRO account maintained with the AD.
NRI can also, without any limit, purchase on non-repatriation basis dated Government securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds.
As notified by Government NRIs are not permitted to make Investments in Small Savings Schemes including PPF.
14.2 Foreign Institutional Investors can buy dated Government securities/ treasury bills, non-convertible debentures /bonds issued by Indian companies and units of domestic mutual funds either directly from the issuer of such securities or through a registered stock broker on a recognized stock exchange in India.
14.3 A Multilateral Development Bank which is specifically permitted by Government of India to float rupee bonds in India may purchase Government dated securities.
14.4 NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in shares and convertible debentures of Indian companies under FDI Scheme on repatriation basis subject to the condition that the amount of consideration for such purchase on repatriation basis shall be paid only by way of inward remittance in free foreign exchange through normal banking channels or by debit to their NRE/ FCNR(B) accounts of NRIs.
In case of investment on non-repatriation basis, the sale proceeds shall be credited to NRO account. The amount invested under the scheme and the capital appreciation thereon shall not be allowed to be repatriated abroad.
15. Investments by Venture Capital Funds
A SEBI registered Foreign Venture Capital Investor (FVCI) with general permission from RBI under FEMA Regulations can invest in Indian Venture Capital Undertaking (IVCU) or in a Venture Capital Fund( VCF) or in a Scheme floated by such VCFs subject to the condition that the VCF should also be registered with SEBI. They can purchase equity/equity linked instruments/ debt/debt instruments, debentures of an IVCU or of a VCF through initial public offer or private placement or in units of schemes/ funds set up by a VCF. RBI, on application, may permit a FVCI to open a foreign currency account or rupee account with a designated branch of an authorised dealer.
The purchase/ sale of shares, debentures, units can be at a price that is mutually acceptable to the buyer and the seller /issuer. ADs are also authorised to offer forward cover to FVCIs to the extent of total inward remittance net of investments liquidated.
16. Conversion of ECB / Lump sum Fee/Royalty into Equity
16.1 General permission has been granted for conversion of ECB into equity, subject to certain conditions and reporting requirements. It is also clarified that the conversion facility is available for ECBs availed either with general permission or specific permission of Reserve Bank. This would also be applicable to ECBs irrespective of whether due for payment or not, as well as secured / unsecured loans availed from non-resident collaborators. However, import payables, deemed, as ECBs would not be eligible for conversion.
16.2 General permission is also available for issue of shares against lump-sum technical know-how fee, royalty, under automatic route or SIA/FIPB route, subject to pricing guidelines of Reserve Bank / SEBI and compliance with applicable tax laws.
17. Remittance of sale proceeds
Remittance of sale proceeds of an Indian Security held by a person resident outside India is permissible subject to conditions stipulated in relevant Schedules to the Notification No.FEMA.20/2000-RB dated May 3, 2000, as amended from time to time. An authorised dealer can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate has been produced.
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