FEMA STUDY CIRCLE CHANGES IN FDI POLICY 2017 CA RAJESH L. SHAH · General Conditions on FDI (Chapter 3) Contents Old Provisions New Provisions 3.7.2 establishment of BO/LO/PO - For

FEMA STUDY CIRCLE

CHANGES IN FDI POLICY 2017

CA RAJESH L. SHAH

FDI Policy 2017 Issued on 28/08/2017

Effective from 28/08/2017

Previous year issued and effective on 07/06/2016

DIPP, Ministry of Commerce & Industry, Govt. of Indiamakes policy pronouncements on FDI – Notification 20

In case of conflict, relevant FEMA notification will prevail.

Present consolidation subsumes and supersedes all PressNotes/Press Releases/Clarifications/Circulars issued byDIPP which is in force as on 28/08/17.

This policy will remain in force until superseded in totalityor in part thereof

09/10/2017 2CA Rajesh L. Shah

CHAPTER 2 - DEFINITIONS


Definitions (Chapter 2)Contents Old Provisions New Provisions

2.1.7 –Competent Authority

- Competent Authority Meansthe concerned AdministrativeMinistry/ Departmentempowered to grantgovernment approval forforeign investment under theextant FDI Policy and FEMARegulation .

2.1.9 –Convertible Note

- Convertible Note means aninstrument issued by a startupcompany evidencing receipt ofmoney initially as debt, which isrepayable at the option of theholder, or which is convertibleinto such number of equityshares of such startup company,


Definitions (Chapter 2)Contents Old Provisions New Provisions

2.1.15 – FDIlinked performance conditions

- FDI linked performanceconditions means the sectorspecific conditions for companiesreceiving foreign investment.

2.1.48 – Venture Capital Fund

Venture Capital Fund (VCF)means an Alternative InvestmentFund which invests primarily inunlisted securities of start-ups,emerging or early-stage venturecapital undertakings mainlyinvolved in new products, newservices, technology orintellectual property right basedactivities or a new businessmodel and shall include an angelfund as defined under ChapterIII-A of SEBI (AIF) Regulations,2012

Venture Capital Fund (VCF)means a Fund registered as aventure capital fund under SEBI(Venture Capital Funds)Regulations, 1996.

As per sec. 2(m) of SEBI (VentureCapital Funds) Regulationsventure capital fund means a

fund established in the form of atrust or a company including abody corporate and registeredunder these regulation which—(i) has a dedicated pool of capital;(ii) raised in a manner specified inthe regulations;09/10/2017 5CA Rajesh L. Shah

CHAPTER 3 – GENERAL CONDITIONS ON FDI


General Conditions on FDI (Chapter 3)

Contents Old Provisions New Provisions

3.2.4 (iii) –Conversion of LLP having FDI into a company

Conversion of a company having FDI into LLP

-

-

Conversion of an LLP havingforeign investment &-operating in sectors/activitieswhere 100% FDI is allowedthrough the automatic route and- there are no FDI-linkedperformance conditions, into acompany is permitted underautomatic route.

-Similarly, conversion of acompany having foreigninvestment and- operating in sectors/activitieswhere 100% FDI is allowedthrough the automatic route &- there are no FDI-linkedperformance conditions, into anLLP is permitted underautomatic route


General Conditions on FDI (Chapter 3)Contents Old Provisions New Provisions

3.2.6 – Start up Companies as eligible investee entities (Noti No: 377/2016-RB dt. 10/01/17)

- Start companies can issue convertible notessubject to following conditions:- PROI (other than individual who arecitizen of Pakistan or Bangladesh or entityregistered in Pakistan/ Bangladesh) canpurchase convertible notes up to Rs. 25lakhs or more in a single tranche.- Where Govt. permission is required forFDI, issue of convertible note will requireGovt. permission.- consideration to be paid either by inwardremittance / debit to NRE/FCNR (B)/Escrow account.- Escrow a/c to be closed immediately afterthe requirements are completed or within 6months whichever is earlier.- NRIs may acquire convertible notes on NRbasis09/10/2017 8CA Rajesh L. Shah


3.2.6 – Start up Companies as eligible investee entities (Noti No: 377/2016-RB dt. 10/01/17)

-PROI may acquire/transfer/saleconvertible notes to PROI/PRII asper pricing guidelines.- Where Govt. approval is obtained,transfer/sale will also require Govt.approval- Furnish reports as prescribed byRBI.



3.7.2 – establishment of BO/LO/PO

- For establishment of branchoffice, liaison office or projectoffice or any other place ofbusiness in India if the principalbusiness of the applicant isDefence, Telecom, PrivateSecurity or Information andBroadcasting, approval ofReserve Bank of India is notrequired in cases whereGovernment approval orlicense/permission by theconcerned Ministry/Regulatorhas already been granted.


General Conditions on FDI (Chapter 3)


Foreign Investment into/downstream investment by eligible Indian entities (Para 3.8) (Page 17)

Para 3.8.4.2 -Conditions

Such an entity is tonotify SIA, DIPP andFIPB of its downstreaminvestment in the formavailable athttp://www.fipbindia.comwithin 30 days of suchinvestment,- even if capitalinstruments have not beenallotted along with themodality of investment innew/existing ventures(with/without expansionprogramme);

Such an entity is to notifyRBI and ForeignInvestment FacilitationPortal of its downstreaminvestment in the formavailable at www.fifp.gov.inwithin 30 days of suchinvestment,- even if capital instrumentshave not been allotted alongwith the modality ofinvestment in new/existingventures (with/withoutexpansion programme)


http://www.fipbindia.com/


Para 3.8.3.1 Foreign investment into anIndian company, engagedonly in the activity ofinvesting in the capital ofother Indian company/ies/LLP, will require priorGovernment/FIPB approval,regardless of the amount orextent of foreign investment.Foreign investment into Non-Banking Finance Companies(NBFCs), carrying onactivities approved for FDI,will be subject to theconditions specified inparagraph 5.2.26 of thisCircular.

Foreign investment into anIndian company, engaged onlyin the activity of investing inthe capital of other Indiancompany/ies/ LLP, will requireprior Government approval,regardless of the amount orextent of foreign investment.


CHAPTER 4 – PROCEDURE FOR GOVERNMENT APPROVAL


Procedure for Government approval

(Chapter 4)Contents Old Provisions New Provisions

Chapter 4 Chapter has been replaceddue to abolition of FIPB.Issue of SOP by DIPP forprocessing of FDI proposals– Page 19


CHAPTER 5 – SECTOR SPECIFIC CONDITIONS ON FDI


Sector specific conditions on FDI (Chapter 5)Contents Old Provisions New Provisions

Agriculture & Animal Husbandry (Para 5.2.1)

Para 5.2.1.1 – other conditions

Conditions (ii), (iii)& (iv) deleted

The term under controlled conditions incase of Animal Husbandry, Pisciculture &aquaculture, apiculture deleted.

Now under controlled conditions isrequired for Agriculture & not for AnimalHusbandary

Apiculture deleted from (a) and addedunder (c)

Manufacturing (Para 5.2.5)

Para 5.2.5.2 - Notwithstanding the FDI policyprovisions on trading sector, 100% FDIunder Government approval route isallowed for retail trading, includingthrough e-commerce, in respect of foodproducts manufactured and/or producedin India.



Defence (Para 5.2.6) (Page 26)

FDI Cap -Automatic up to 49%-Government route oncase to case basis- Government route whereit is likely to result inaccess to modern andstate-of-art technology inthe country.

-Automatic up to 49%-Government route beyond49%- Government route whereverit is likely to result in accessto modern technology or forother reasons to be recorded.

Activity - Added - Manufacturing ofsmall arms and ammunitionunder the Arms Act, 1959


Sector specific conditions on FDI (Chapter 5)


Broadcasting Carriage Services (Para 5.2.7.1) (Page 27)

FDI Cap Automatic – up to 49%Government route – beyond 49%

Automatic – 100%

Conditions - Government approval required -Infusion of fresh foreigninvestment beyond 49% in acompany not seeking license/permission from sectoralMinistry, resulting in change inthe ownership pattern or transferof stake by existing investor tonew foreign investor.




Civil Aviation – Airports (Para 5.2.9.1) (Page 29)

FDI Cap – Existing Projects

Automatic – up to 74%Government route –beyond 74%

Automatic 100%

Private Security Agencies (Para 5.2.13) (Page 35)

FDI Cap Government route – 49% Automatic – 49%Government Route – beyond 49% and up to 74%



Civil Aviation – Air Transport Services (Para 5.2.9.2) (Page 30)

-Scheduled AirTransport Service/DomesticScheduledPassenger Airline

-Regional AirTransport Service

Automatic – up to 49%

Automatic – 100% for NRIs

Automatic – up to 49%

Automatic – up to 100% for NRIs

Government route – beyond 49%

-Definitions Non-Scheduled air transportservice means any servicewhich is not a scheduled airtransport service and willinclude Cargo airlines

Cargo airlines would meansuch airlines which meet theconditions as given in the CivilAviation Requirements issuedby the Ministry of CivilAviation

Non-Scheduled air transportservice means any service which isnot a scheduled air transportservice




Cash & Carry Wholesale Trading/Wholesale Trading (including sourcing from MSEs (Para 5.2.15.1) (Page 36)

Guidelines for Cash & Carry WholesaleTrading/Wholesale Trading (WT) (Para 5.2.15.1.2) (f)

A wholesale/cash & carrytrader can undertake singlebrand retail trading,subject to the conditionsmentioned in para 5.2.15.3.An entity undertakingwholesale/cash and carry aswell as retail business will bemandated to maintainseparate books of accounts forthese two arms of thebusiness and duly audited bythe statutory auditors.Conditions of the FDI policyfor wholesale/cash and carrybusiness and for retailbusiness have to be separatelycomplied with by therespective business arms.

A wholesale/cash & carry tradercan undertake retail trading,subject to the conditions asapplicable. An entityundertaking wholesale/cash andcarry as well as retail business willbe mandated to maintain separatebooks of accounts for these twoarms of the business and dulyaudited by the statutory auditors.Conditions of the FDI policy forwholesale/cash and carrybusiness and for retail businesshave to be separately compliedwith by the respective businessarms.



E-Commerce activities (Para 5.2.15.2) (Page 37)

Other Conditions (Para5.2.15.2.4)

(v) An e-commerce entitywill not permit more than25% of the sales affectedthrough its marketplacefrom one vendor or theirgroup companies.

An e-commerce entitywill not permit more than25% of the sales value onfinancial year basisaffected through itsmarketplace from onevendor or their groupcompanies.




Single Brand Product Retail Trading (Para 5.2.15.3)

Notes (ii) An Indianmanufacturer ispermitted to sell its ownbranded products in anymanner i.e. wholesale,retail including throughe-commerce platforms

deleted

(iii) Indian manufacturerwould be the investeecompany, which is theowner of the Indian brandand which manufactures inIndia in terms of value, atleast 70% of its products inhouse and sources at most30% from Indianmanufacturers

deleted




Single Brand Product Retail Trading (Para 5.2.15.3)

Conditions (v) Government may relaxsourcing norms for entitiesundertaking single brand retailtrading of products havingstate-of-art and cutting edgetechnology & where localsourcing is not possible

- (iii) Sourcing norms will- Not applicable up tothree years fromcommencement of thebusiness i.e. opening ofthe first store for entitiesundertaking single brandretail trading of productshaving state-of-art andcutting-edge technologyand where local sourcing isnot possible.- Thereafter, provisions ofPara 5.2.15.3 (2) (e) will beapplicable.




Infrastructure Company in the Securities Market (Para 5.2.21)(Page 45)

Other conditions (Para 5.2.21.2)

(i) FII/FPI can invest onlythrough purchases in thesecondary market(ii) No non-residentinvestor/entity, includingpersons acting in concert,will hold more than 5% ofthe equity in commodityexchanges.(iii) Foreign investmentin commodity exchangeswill be subject to theguidelines of the CentralGovernment/SEBI fromtime to time.

(i) Foreign investment, includinginvestment by FPIs, will be subjectto the Securities Contracts(Regulations) (Stock Exchanges andClearing Corporations) Regulations2012, and Securities and ExchangeBoard of India (Depositories andParticipants) Regulations, 1996 asamended from time to time, andother Guidelines/Regulations issuedby the Central Government, SEBIand the Reserve Bank of India fromtime to time.

(ii) Words and expressions used hereinand not defined in these regulations butdefined in the Companies Act, 2013 (18 of2013) or the Securities Contracts(Regulation) Act, 1956 (42 of 1956) or theSecurities and Exchange Board of IndiaAct, 1992 (15 of 1992) or the DepositoriesAct, 1996 (22 of 1996) or in the concernedRegulations issued by SEBI shall have thesame meanings respectively assigned tothem in those Acts/ Regulations.09/10/2017 25CA Rajesh L. Shah



Pension Sector (Para 5.2.23) (Page 48)

Conditions (iii) Wherever such .foreign equityinvestment involves control or ownership bythe foreign investor or, transfer of control orownership of an existing pension fund fromresident Indian citizens and/or Indiancompanies owned and controlled byresident Indian citizens to such foreigninvesting entities as a consequence of theinvestment, including through transfer ofshares and or fresh issue of shares to Non-Resident entities through acquisition,amalgamation, merger etc., it would requireGovernment approval in consultation withthe Department of Financial Services,PFRDA and other entities concerned andthe onus of compliance to these conditionswill be on investee Indian pension fundcompany. The meaning of ownership andcontrol would be as per the Foreign DirectInvestment policy.

(iii) An Indian pensionfund shall ensure that itsownership and controlremains at all times in thehands of resident Indianentities as determined bythe Government ofIndia/PFRDA as per therules/regulation issued bythem from time to time.



White Label ATM Operations (Para 5.2.25) (Page 49)

Other conditions (ii) In case the entity isalso engaged in any other18 NBFC activities, thenthe foreign investment inthe company setting upWLA, shall also have tocomply with theminimum capitalizationnorms for foreigninvestments in NBFCactivities as provided inPara 5.2.26.2..

(ii) In case the entity isalso engaged in anyOther Financial Servicesas laid down at Para5.2.26 below, then theforeign investment in thecompany setting upWLA, shall also have tocomply with theminimum capitalizationnorms, if any, for foreigninvestments in suchOther Financial Services .



Other Financial Services (Para 5.2.26)(Page 50) Earlier known as NBFC Scope widened Automatic 100% - Financial services activities regulated by

financial sector regulators viz., RBI, SEBI, IRDA, PFRDA, NHB orany other financial sector regulator as may be notified by theGovt. of India

Conditions: FDI in Other Financial Services activities shall be subject to

conditionalities including minimum capitalization norms asspecified by the concerned Regulator/Govt. agency.

If any financial services is not regulated by any regulators / onlypart of financial services is regulated/ doubt regarding who is theregulator FDI permitted under Govt. approval route subject to conditions

including minimum capitalization requirement as decided by the Govt.

Activity regulated by any Act, FDI limits restricted to the limitsspecified under that Act.

Downstream investments permitted subject to the sectoral caps.09/10/2017 28CA Rajesh L. Shah



Pharmaceuticals (Para 5.2.27)(Page 50)

FDI Cap Brownfield – Government– 100%

Automatic – up to 74%Government route – beyond74%

Other conditions (i) Non-compete clausewould not be allowedexcept in specialcircumstances with theapproval of FIPB.

(iv) -

(i) Non-compete clause wouldnot be allowed in automatic orgovernment approval except inspecial circumstances with theapproval of Government.

(iv) FDI in brownfieldpharmaceuticals, under bothautomatic and governmentapproval routes, is furthersubject to compliance offollowing conditions:


Sector specific conditions on FDI (Chapter 5) Brownfield Pharmaceuticals conditions

(a) Production level of essential medicines drugs and orconsumables to be maintained over the next 5 years at an absolute quantity level

Benchmark for this level would be decided with reference tothe level of production of essential medicines drugs and/orconsumables in the 3 FY. Highest level of production in any of these 3 years would be taken as

level

(b) R&D Exp. being maintained in the value terms for 5 yearsat an absolute quantitative level at the time of induction ofFDI. Benchmark for this level would highest level of R&D Exp. which has

been incurred in any of 3 FY immediately preceding the year ofinduction of FDI

(c) information relating to transfer of technology andinduction of FDI should be informed to Ministry of Health &Family Welfare (MHFW)

(d) MHFW will monitor the compliance of conditions.09/10/2017 30CA Rajesh L. Shah

ANNEXURE 3 – PROVISIONS RELATING TO ISSUE/TRANSFER OF SHARES


Annexure 3 – Provisions relating to issue/ transfer of Shares


Para 4(v) –Transfer of shares on deferred payment basis

- -Notification No: 368/2016-RB dt. 24/10/2016In case of transfer of shares between a residentbuyer and a non-resident seller or vice-versa,-Not more than 25% of total consideration canbe deferred.- deferrement will not be for more than 18months- escrow arrangement can be made by both theparties for amt. not more than 25% of totalconsideration.- escrow arrangement should not be for morethan 18 months.- if total consideration is paid by buyer to seller,seller may furnish an indemnity for an amt.

-Not more than 25% of the totalconsideration- period not exceeding 18 months for thedate of payment of the full consideration.

-Applicable pricing guidelines to be compliedwith.09/10/2017 32CA Rajesh L. Shah



Para (ii) – Shares against lump sum technical know-how fee, royalty

(ii) General permission is alsoavailable for issue ofshares/preference sharesagainst lump sum technicalknow-how fee, royalty due forpayment, subject to entryroute, sectoral cap andpricing guidelines (as per theprovision of para 2 above)andcompliance with applicabletax laws. Further, issue ofequity shares against anyother funds payable by theinvestee company, remittanceof which does not requireprior permission of theGovernment of India orReserve Bank of India underFEMA, 1999 or any rules/regulations framed ordirections issued thereunderis permitted, provided that:

(ii) General permission is alsoavailable for issue ofshares/preference shares againstlump sum technical know-how fee,royalty due for payment, subject toentry route, sectoral cap and pricingguidelines (as per the provision ofpara 2 above)and compliance withapplicable tax laws. Further, issue ofequity shares against any other fundspayable by the investee company,remittance of which does not requireprior permission of the Governmentof India or Reserve Bank of Indiaunder FEMA, 1999 or any rules/regulations framed or directionsissued thereunder, or has beenpermitted by the Reserve Bank underthe Act or the rules and regulationsframed or directions issuedthereunder is permitted, providedthat:09/10/2017 33CA Rajesh L. Shah



Para 6(iii) – Conversion of ECB/lump sum Fee/Royalty etc. into Equity

Pre-incorporation/ pre-operative exp.(Noti. No: 373/2016-RB dt. 24/10/2016)

- -A wholly owned subsidiary set up in Indiaby a non-resident entity, operating in asector where 100 percent foreigninvestment is allowed in the automaticroute and there are no FDI linkedconditionalities, may issue equity sharesor preference shares or convertibledebentures or warrants to the said non-resident entity against pre-incorporation/pre-operative expenses incurred by thesaid non-resident entity up to a limit offive percent of its capital or USD 500,000whichever is less, subject to the conditionslaid down below.1. Within 30 days from the date of issue file

FC-GPR2. Valuation should be as per Para 5 of

Schedule 13. Certificate from CA that the amt. of pre-

incorporation/ pre-operative exp. havebeen utilised for the purpose for which itwas received


CHAPTER 4 – PROCEDURE FOR GOVERNMENT APPROVAL


Procedure for Govt. approval (Chapter 4) Respective ministries will grant approval for FDI under Govt. route

FDI presently under automatic route – previously required Govt. approval

Concerned ministry/ department would grant post-facto approval for FDI

In case of doubt about the ministry

DIPP would identify the concerned department where application will beprocessed

Proposal for foreign investment

Examine by competent authorities

Standard operation procedure (SOP) laid down by DIPP.

FDI > 5000 cr.

Competent authority shall place before Cabinet Committee on Economic Affairs(CCEA)

CCEA will also consider proposals – referred by respective ministry.

Competent authority

Rejects FDI proposals

Stipulate additional conditions (other than laid down in FDI policy)

Concurrence from DIPP shall be compulsory taken by competent authority

Monitoring of compliance conditions & past cases

To be carried out by respective ministry/ departments09/10/2017 36CA Rajesh L. Shah

Procedure for Govt. approval (Chapter 4)

Companies will not require fresh approval for bringingadditional FDI into the same entity in the following cases Activities which had earlier required prior approval of Govt. –

now under automatic route

Activities which had sectoral cap – Govt. approval obtained –now sectoral cap increased / removed Such additional investment does not exceed sectoral cap.

Additional FDI in the same entity – prior approval of Govt.obtained as per PN1 of 2005 Not required for any other reason/purpose

addl. FDI up to Rs. 5000 cr. In same entity Within an approved foreign equity percentage / or into a wholly

owned subsidiary

Guidelines for e-filing of applications/ amendmentapplications and instructions to applicants are available atForeign Investment Facilitation Portal (www.fifp.gov.in)


CA Rajesh L. Shah9892132520 / [email protected]


Documents

FEMA STUDY CIRCLE CHANGES IN FDI POLICY 2017 CA RAJESH L. SHAH · General Conditions on FDI (Chapter 3) Contents Old Provisions New Provisions 3.7.2 establishment of BO/LO/PO - For