Policy On FDI

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The Department of Industrial Policy and Promotion (DIPP) has brought out a policy for consolidated foreign direct investment and it has been implemented from April 10, 2012. The fresh FDI policy has taken over from the consolidated FDI policy that had been effective during 2011 and the press notes that had been issued to this effect before April 9, 2012.

Changes in Foreign Direct Investment cap in different sectors

Government of India has announced new FDI proposals on 17th July 2013. According to the announcement, Foreign Direct Investment in sectors like Telecom and Defence has been relaxed. 100 percent Foregin Investment is allowed in Telecom and Defence on case by case basis.

The 100 percent FDI in defence is onlly for the state of the art technology coming to India and Ministry of Defence will decide what is the state of the Art.

Find below the sector wise FDI Cap.
1. Petroleum and Natural Gas and Refining49.00%Automatic
2. Commodity Exchanges49.00%Automatic
3. Power Exchanges49.00%Automatic
4. Stock Exchanges, Depositories, Corporation49.00%Automatic
5. Asset Reconstruction companiesUpto 49% 49% to 100%Automatic FIPB
6. Credit Information companies74.00%Automatic
7. Single Brand Retail tradingUpto 49% 49% to 100%Automatic FIPB
8. Basic and Cellular Services, etc.Upto 49% 49% to 100%Automatic  FIPB
9. Courier Services100.00%Automatic
10. Defence Production CCS may approve proposals on case to case basis beyond 26% which are likely to result in access to modern and state of the art technology in the country.

DIPP has stated in a press release that it does not feel it is necessary to make regular changes to the circular. This means that from now on the FDI policy will be reviewed only once a year instead of 2 times, as was done previously. As stated in the press release, it can be expected that the next combined FDI policy will come into effect on March 29, 2013.

The DIPP can however make changes to the existing policy in the interim by way of press notes.

Changes to Investment by FIIs in Commodity Exchanges

According to the previous FDI policy, 26 percent is the maximum permissible limit in case of FDI in the commodities exchanges through approval and for the FIIs it is 23 percent through the portfolio investment scheme (PIS).

The DIPP has taken into account the basic nature of FII investments and done away with the requirement of getting prior consent from the FIPB. But, the FDI investments will continue to happen through approval.

This new rule is in line with the FDI policies for infrastructure companies that are active in the securities markets like stock exchanges, clearing corporations, and depositories.

This move is expected to reduce the time needed for FIIs to invest in the commodities markets and generate liquidity. This decision can also help in free trading in securities available at commodities exchanges like the recently listed Multi Commodity Exchange.

Explanation of ‘financing and leasing’ for FDI in NBFCs

As of now, DIPP has permitted FDI in the non banking financial services in the 18 previously prescribed activities and this also covers leasing and financing. The new FDI regulation makes sure that the leasing and financing part includes the financial leases only and not the operational leases.

This decision makes it clear that the government had always intended to support financing and operational leases. It is expected that this could affect companies that are operating in the auto leasing industry.

Change in amount necessary for importing second hand machines

According to the previous FDI policy, any change of amount that needs to be paid for importing capital goods, equipment, and machinery including used machines into equity shares is permissible after approval. The consent in these instances is provided if certain regulatory conditions are complied with.

The new FDI rules have made exclusion to this amount. The policy has been changed with the precise purpose of safeguarding the interests of machinery and capital goods manufacturers who have been hit hard due imported second hand products that are mostly of an inferior quality.

Transfer of shares from Non Resident Indians to Non Residents

The new FDI policy has made it mandatory to seek prior consent of the RBI in case shares are transferred from a Non Resident Indian to a Non Resident (NR). This is as per the Transfer or Issue of Security by a Person Resident Outside India (TISPRO Regulations) section of the Foreign Exchange Management Act.

It is not clear as to why the ruling did not apply for shares being transferred from NRs to NRs. According to experts this would have been applicable if the regulation was imposed on sectors like real estate where the NRIs were provided special privileges.

This ruling can put the NRIs, who are investing through the FDI route, in significant disadvantage compared to the foreigners who transfer their shares to other NRs without the need for a previous approval.

Explanation of investment by FIIs

At present, the FIIs are allowed to invest in an Indian organization as per the Portfolio Investment Scheme, which restricts an individual FII to 10 percent and the puts the maximum limit for all FIIs to 24%. The total limit can be upped as per the applicable statutory ceiling or sectoral cap.

However, this can be done only if the general body of the concerned company takes a resolution followed by a special resolution to this effect. The new FDI policy has made it necessary to inform the RBI before taking such a decision.

Companies in India already have systems in place for informing different shareholders regarding such changes and now, experts assume, that this decision will add another dimension to it.

Investment by Foreign Venture Capital Investors (FVCIs)

From now on, FVCIs registered with SEBI will be permitted to invest in securities being traded at a well known stock exchange such as the following:

  • equity
  • IVCU debentures
  • equity linked instruments
  • VCF debentures
  • debt
  • units of VCF schemes
  • debt instruments
  • units of VCF funds

They can buy these through a third party or participate through private purchase or arrangement.

Investment by Qualified Foreign Investors (QFIs)

The union government has allowed QFIs to invest in equity shares and DPs of listed companies. They can also invest in equity shares of organizations that have been offered publicly according to regulations and guidelines laid down by the SEBI.

They can also perform the following transactions:

  • acquiring equity shares through right shares and bonus shares
  • acquiring equity shares through corporate procedures such as demergers or amalgamation
  • acquiring equity shares through stock consolidation or split

These transactions need to be done as per previously specified limits – for individual QFIs it is 5 percent and for all the QFIs the limit goes up to 10%. This percentage is calculated in respect of the respective company’s paid up capital.

Other Changes

The new FDI policy has brought about some provisions that had been previously approved. Some of them may be mentioned as below:

  • allowing investment by international VC and PE firms in secondary deals
  • liberalized policy for transferring convertible debentures and shares of financial services companies
  • 100 percent FDI in single brand retailing

Last Updated on 17/07/2013