Friday, October 7, 2011

Some Important Amendments in Foreign Direct Investment Scheme by RBI under FEMA

     Some Important Amendments in Foreign Direct Investment Scheme by RBI under FEMA.

Opening of non-interest bearing account by non-resident.

Authorized dealerpermitted to opening and maintaining non-interest bearing Escrow accounts inIndian Rupees in India under automatic route, on behalf of non-residents,towards payment of share purchase consideration and/or for keeping securitiesto facilitate FDI transactions, subject to the terms and conditions as specifiedby RBI.

       FDI  with built in option like selling to third parties or buy-back will not be considered as FDI

As we aware  as per existingFDI Policy, only issuance of equity shares, fully, compulsorily and mandatorilyconvertible debentures and fully, compulsorily and mandatorily convertiblepreference shares will be considered for FDI.

 Typically any foreign / domestic investmentwill have an exit option for the investor. Normally after 3 to 5 years from the date of investment, the investor exit from the Company either through IPO / buyback by the promoters / selling to third party.

 Now, vide Master Circular No.2 of 2011 DIPPsays that any of above said instruments with  in-built options of any type (i.e exit by wayof buy back or selling to third party) will not be considered as FDI and itwill treated as ECB and subject to compliance with ECB Policy.

 FDIin single brand retail

 As per existing provisions, FDI in singlebrand retail is allowed upto 51% subject to the approval from FIPB and otherconditions as imposed under FDI Policy.

 Vide this Master Circular No.2 of 2011 DIPP has imposed an additional condition that “theforeign investor should be the owner of brand”. Hence, only foreign investorwho owns brand can enter into single brand retail segment in India.

Inclusion of ‘basic and applied R&D onbio-technology pharmaceutical sciences/life sciences’, as an ‘industrial activity’, under the category of industrial parks.

As per existing Policy, 100% FDI ispermitted under the automatic route in existing and new industrial parks. Underthe existing regime, industrial parks cover specified sectors. In order to encourage development ofinfrastructure for R & D, Research and Development inbio-technology, pharmaceutical and life sciences included under the category ofindustrial park.

 Exemption of construction-developmentactivities in the education sector and in old-age homes, from the generalconditions as imposed under FDI Policy.

 As per exiting policy, 100% FDI is permitted  in construction development underthe automatic route subject to conditions like minimum build up area, minimumcapital requirement, lock-in period, etc.
 Vide Master 2 of 2011 DIPP clarified that theconditions imposed for construction development activities shall not be applicablefor construction in the education sector like construction of schools, college,university, etc and in respect of old-age homes. Hence, the constructiondevelopment companies can utilize this effectively to get more FDI without any conditionality.

Introduction of provisionson ‘pledging of shares’ and opening of non-interest bearing escrow accounts, subjectto specified conditions.

The promoters of an Indian can pledge shared held n that Company or that of its associate resident companies for the purpose of securing the ECBraised by the Company subject to NOC from authorized dealer bank and otherconditions as stipulated in FDI Policy.

 Increasing FDI Limit inTerrestrial Broadcasting/ FM radio.

 The foreign investmentlimit for FM radio has been enhanced to 26% from the earlier 20%. This changeensures conformity of the foreign investment limit in this sector with othersimilar activities in the Information & Broadcasting sector.

 Liberalisation ofconversion of imported capital goods/machinery andpre-operative/pre-incorporation expenses to equity instruments.

 Conversion of importedcapital goods/machinery and pre-operative/pre-incorporation expenses to equityinstruments had been permitted in the last Circular on FDI policy, effective 1April, 2011. It was stipulated that such conversions must be made within aperiod of 180 days of the date of shipment of capital goods/machinery orretention of advance against equity and that payments made through thirdparties would not be allowed. This conveyed the sense that the onus of  conversion is on the investor with no allowance for the FIPB process involved.This has been clarified through the present amendment, under which the timelimit for making applications for such conversions will be 180 days.

Further,payments for pre-operative/incorporation expenses can now be made directly bythe foreign investor to the company or through a bank account, opened by theforeign investor, as provided under the FEMA regulations.

REF ; FDI Circular 02 / 2011 - Consolidated FDI Policy