The Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India, has issued, as expected, its Circular 1 of 2011 dated 31st of March, 2011. This is the third edition of the Consolidated Foreign Direct Investment (FDI) policy effective from 1 April 2011 and will 2011 supersedes the previous Circular 2 of 2010. Following are main changes introduced by the revised FDI policy:
1. NO PRIOR APPROVAL REQUIRED FOR PREVIOUS JOINT VENTURE/ COLLABORATIONS:
The revised FDI policy has done away with the prior approval requirement (from Government, FIPB) for venture/ technology transfer/ trademark agreement by Non-residents who had existing joint ventures / technology transfer/ technical collaboration in the same field as on 12 January 2005.
Even in case where the agreement/ MOU has been entered before April 1, 2011, and the investment is undertaken post April 1, 2011, it could be argued that no FIPB approval would be required as the actual investment is flowing post the effective date.
Further, the requirement for incorporating a ‘conflict of interest’ clause in the Joint Venture Agreement has been done away with for ventures/ technical collaboration post 12 January 2005,
2. PRICING OF CONVERTIBLE INSTRUMENTS:
The earlier FDI policy required that the conversion price of equity convertible instruments (debentures, preference shares) to be determined upfront at the time of issue of such convertible instruments. With an intention as to provide better valuation based on performance, but as per the revised FDI Policy permits the flexibility to determine the conversion price of such instruments at the time of actual conversion using a conversion formula for such convertible instruments subject to FEMA/SEBI guidelines on pricing.
The change would enable upside benefits on improved performance of businesses to accrue to Indian promoters of these companies.
3. ISSUE OF SHARES PERMITTED AGAINST SPECIFIED NON-CASH CONSIDERATIONS UNDER APPROVAL ROUTE:
In addition issue of equity shares for ECB/lump-sum fee/Royalty into equity under the Approval Route, the revised FDI policy now permits issue of equity / equity convertible instruments under the Government / Approval route in the following categories:
§ Import of capital goods/ machinery/ equipment (including second-hand machinery) subject of the approval of the FIPB based on fulfillment of herein mentioned conditions :
1. Such import in accordance with the Export/ Import Policy issued by Government of India and as defined by Director General of Foreign Trade /FEMA provisions relating to imports
2. Independent valuation of the capital goods/machinery/equipments (including second-hand machinery) by a third party entity, to be done by an independent valuer from the country of import plus production of copies of documents/ certificates issued by the customs authorities towards assessment of the fair value of such imports.
3. Due disclosure of the beneficial ownership and identity of the Importer Company as well as overseas entity.
4. Conversion period within 180 days from date of shipment of goods.
§ Pre-operative/ Pre-incorporation expenses (including payments of rent etc.) subject of the approval of the FIPB based on fulfillment of herein mentioned conditions:
1. Foreign Inward Remittance Certificate, required to be submitted, in relation to remittance of funds by the overseas promoters for the expenditure incurred.
2. The Statutory Auditor will Verify and certify the pre-incorporation/pre-operative expenses.
3. Payments made directly by the foreign investor to the company will be eligible for issuance of equity shares. Accordingly, but any payments made through third parties will not be eligible for issuance of equity shares.
4. Equity shares should be issued within the stipulated period of 180 days
Provided such issue is in compliance with specified conditions including special resolution of the company and pricing guidelines.
But it does not address the issuance of shares in lieu of other forms of non cash consideration such as services rendered and import of raw materials/trade payables.
4. Guidelines relating to Down-Stream investments:
The revised FDI policy now there are only two categories of Companies namely – ‘companies owned or controlled by foreign investors’ and ‘companies owned and controlled by Indian residents’.
The earlier categorization of companies as ‘investing companies’, ‘operating companies’ and ‘investing-cum-operating companies’ find no mention.
5. Agriculture Sector Specific policy for FDI:
In the Agriculture Sector, the revised FDI policy now permits Development and production of Seeds and planting material without the stipulation of having to do so under controlled conditions.
5. Other Major changes:
Issuance of warrants:
Circular 1 of 2011 has clarified that FIPB approval would be required only for issuance of warrants and
partly paid shares, since these are not part of capital. The Government has clarified that the policy for issuance of warrants is under review. Thus, further changes can be expected.
Investment into a Venture Capital Fund ("VCF")
A Foreign Venture Capital Investor registered with the Securities and Exchange Board of India ("SEBI") can invest in a SEBI registered domestic VCF subject to Reserve Bank of India regulations and FDI Policy. In case the entity undertaking VCF activity is a Trust registered under the Indian Trust Act, 1882, the investment is subject to obtaining an approval from the FIPB. But any other form of investment into a trust is not permitted under the existing regulations. However, in case VCF is set up as a company, then a person resident outside India (including an individual NRI) can invest in such a VCF subject to pricing guidelines, reporting requirements, minimum capitalization norms, etc.
Trading of items sourced from Micro and Small Enterprises ("MSE")
Wholesale trading of items sourced from MSE’s has been placed under 100 % automatic route and now no approval from FIPB is required.
CONCLUDING REMARKS:
The revised FDI policy is a bold and effective effort from the point of foreign investor. Further it will forward the process of liberalization further and would assist in fast inflow of FDI into the Country. However, other changes were also expected such as permit foreign investment into Limited Liability Partnerships (the new policy provides that the Government is reviewing its policy to allow FDI in LLPs), liberalization of the policy on investment into real estate, as well as clarifications required on certain provisions of the current policy regarding lock-in on original investment, and several other subjects on which draft discussion papers were released earlier for public comments. It is important that these areas are also taken up the Government for liberalization so as to make India as one of the most favorable FDI destinations in the world.
