Tag Archives: FDI policy

Cabinet to consider relaxing FDI norms to attract Overseas Investment

Foreign Direct Investment (FDI) is major driver of growth and development of the economy of the country. With this intent, the Government of India has time and again come up with investor friendly reforms under FDI regulations to have more liberalized reforms across various sectors.

To boost up FDI, the Union Cabinet headed by Prime Minister Narendra Modi on 28 August 2019, has approved the proposal for reviewing of the FDI policy on various sectors. They have considered relaxing foreign direct investment (FDI) norms in several sectors, including coal mining, manufacturing, single-brand retail and digital media, to attract overseas players.

The key highlights of the proposed changes are as follows:

Coal Mining

The present FDI policy allows 100% FDI under automatic route for captive coal mining only. The captive coal mining deals with coal & lignite mining for captive consumption by power projects, iron & steel and cement units and other eligible activities. Along with the captive coal mining, 100% FDI under automatic route is also allowed for setting up coal processing plants like washeries. However, the companies are prohibited to sell washed coal or sized coal from its coal processing plants in the open market and supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing.

This proposal aims at allowing 100% FDI under automatic route for “Associated Processing Infrastructure”. Associated Processing Infrastructure includes coal washery, crushing, coal handling, and separation (magnetic and non-magnetic). This proposal has opened 100% FDI for selling coal subject to provisions of Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957.

In crux

  • 100% FDI under automatic route is allowed for Associated Processing Infrastructure.
  • 100% FDI under automatic route is allowed for sale of coals.

Contract Manufacturing

Contract manufacturing in international markets is used in situations when one company arranges for another company in a different country to manufacture its products. This concept is not captured in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 and therefore there is no clear laws and rules regulating FDI in contract manufacturing in India. Therefore, the Government through this proposal has allowed to include contract manufacturing under the manufacturing sector and has allowed 100% FDI under automatic route. Manufacturing activities may be conducted either by the investee entity or through contract manufacturing in India under a legally tenable contract, whether on Principal to Principal or Principal to Agent basis.

In crux

  • Contract manufacturing included as an activity under the manufacturing sector.
  • 100% FDI under automatic route is allowed for contract manufacturing.

Single Brand Retail Trade (SBRT)

The present FDI policy provides that 30% of the value of goods has to be procured from India if SBRT entity has FDI more than 51% and the same can be met as an average during the first 5 years, and thereafter annually towards its India operations. As regards local sourcing requirement, the Government has decided to count procurements made from India by the SBRT entity for that single brand as local sourcing, irrespective of whether the goods procured are sold in India or exported. Also, the Government would relax the cap of 5 years by removing it. The approvals allow ‘sourcing of goods from India for global operations’ can be done directly by the entity undertaking SBRT or its group companies (resident or non-resident}, or indirectly by them through a third party under a legally tenable agreement.

The present policy limits the global sourcing by stating that only that part of the global sourcing shall be counted towards local sourcing requirement which is over and above the previous year’s value. The Government is trying to relax this restriction by considering sourcing from India for global operations shall be considered towards local sourcing requirement.

The present FDI policy states that if any SBRT wants to trade through e-commerce, they would be required to operate through brick and mortar stores before trading through e-commerce. The Government by approving this proposal is relaxing the said condition by allowing SBRT to operate through e-commerce subject to the opening of brick and mortar stores within 2 years of starting to trade online.

In crux

  • Goods procured are sold in India or exported to be considered as local sourcing.
  • The 5 years cap removed.
  • No incremental value for calculating local sourcing requirement.
  • SBRT can trade through e-commerce prior to having a brick and mortar store.

Digital Media

The present FDI policy is silent on the fast-growing digital media segment. In the print media sector, 26 percent FDI is allowed through government approval route. Similarly, 49 percent FDI is permitted in broadcasting content services through government approval route. With this proposal, it has been decided by the Government to permit 26% FDI under government route for uploading/ streaming of News & Current Affairs through Digital Media, on the lines of print media.

In crux

  • Introduction of the concept of digital media
  • 26% FDI under governmental route is allowed for uploading/ streaming of News & Current Affairs through Digital Media.

The proposed change reflects that the Government is keen on promoting FDI in various sectors. These amendments are meant to liberalize and simplify the FDI policy to provide ease of doing business in the country. These changes will lead to benefits of increased investments, employment and growth.

Source:  https://pib.gov.in/PressReleseDetail.aspx?PRID=1583294

FDI in LLP

Foreign Director Investment allowed in Limited Liability Partnerships (LLPs), subject to some conditions. Everything that you need to know is listed herein:

Who is eligible to invest in LLP?

A person resident outside India (PROI) or an entity incorporated outside India

Who can’t invest in LLP?

  • Citizen/entity of Pakistan and Bangladesh or
  • SEBI registered Foreign Institutional Investor (FII) or
  • SEBI registered Foreign Venture Capital Investor (FVCI) or
  • SEBI registered Qualified Foreign Investor (QFI) or
  • SEBI registered Foreign Portfolio Investor

What are the eligibility conditions for LLP to accept FDI?

  • All LLPs operating in sector/activities where 100% FDI is allowed under Automatic Route are eligible.
  • All the LLPS engaged in the followings sectors are not allowed to accept FDI:

a) Sectors eligible to accept 100% FDI under automatic route but are subject to FDI-linked performance related conditions

b) Sectors eligible to accept less than 100% FDI under automatic route

c) Sectors eligible to accept FDI under Government Approval route

d) Agricultural/plantation activity & print media

e) Prohibited sectors/activities

What is eligible investment?

  • Amount contributed in the capital of LLP would be an eligible investment.

Note: Investment by way of ‘profit share’ will fall under the category of reinvestment of earnings.

What is the entry route?

  • Any kind (direct or indirect) of FDI in LLP will require prior Government/FIPB approval

Pricing of investment/Transfer?

  • FDI in an LLP shall be at a price more than or equal to the fair price as worked out with any valuation norm which is internationally accepted. A valuation certificate has to be issued by a Chartered Accountant or by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government.
  • Transfer of capital contribution/profit share from resident to non-resident– To  be at a consideration equal to or more than the fair price of capital contribution/profit share of an LLP
  • Transfer of capital contribution/profit share from non- resident to a resident- To be at a consideration which is less than or equal to the fair price of the capital contribution/profit share of an LLP.

What is the mode of payment?

Consideration can only be in cash through either:-

  • Normal banking channels; or
  • Debit to NRE/FCNR(B) account of the person concerned, maintained with an AD Category – I bank.

Reporting of FDI by LLPs?

  • LLPs shall submit Form FOREIGN DIRECT INVESTMENT-LLP(I), together with a copy of FIRC, Valuation Certificate and KYC report to concerned Regional Office of RBI through an AD Category – I bank within 30 days from the date of receipt of the inward remittance.
  • AD Bank should get the KYC report of the foreign investor from the overseas bank.
  • Disinvestment / transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) shall be reported within 60 days from the date of receipt of funds in Form FOREIGN DIRECT INVESTMENT-LLP(II).

Downstream Investment in LLP?

  • An Indian company, having foreign investment can make downstream investment in LLP only if both are operating in sectors where 100% FDI is allowed under the automatic route, having no FDI-linked performance related conditions.
  • LLP with FDI can’t make any downstream investments in any entity in India.

Other Conditions to be complied by LLP ?

  • Note that an LLP having body corporate as Designated Partner, can accept FDI only if that body corporate is a Company registered under Companies Act. Also, Nominee of that Company should satisfy the residential status as per FEMA, 1999.
  • Designated partners will be responsible for all the aforementioned compliances and also liable for all penalties imposed on the LLP for their contravention.
  • Company with FDI can convert into LLP  only if all the aforementioned conditions (except mode of payment) are met and with the prior approval of FIPB/Government.
  • LLPs are not permitted to avail External Commercial Borrowings (ECBs).

Please click here to see the complete notification.

Author: Geetika Chandel, Associate at NovoJuris.

Disclaimer:  There are many details that the Act prescribes, please speak with your attorney for advice. This is not a legal opinion and should not be construed as one.

 

ESOP to employees outside India – Part V of the Series

We’re probably making the startup founder an expert on ESOPs :).  Startups who work with us understand our obsession of making them a success.

In this post, we’ll discuss about legal aspects of ESOP to employees of the Indian company based outside of India and ESOP to employees of a foreign company based in India.

A private and unlisted Indian company can issue ESOP to employees, who are resident outside India, by being compliant not only to Companies Act but also the FDI Policy (Foreign Direct Investment).  The Indian company has to report to the Reserve Bank of India (RBI) with details of the issue of shares after the Exercise.

Also, there are no restrictions on the operationalization of the Plan, i.e. the shares can be issued directly by the company or through a Trust.

Care to be taken that the adjustments on bonus shares, rights shares, transfer of shares has compliances attached to it.

For a Listed company, the ESOP Plan has to be drawn in line with SEBI’s regulations and a limit of 5% of the total paid up capital.

ESOP to employees of a foreign company based in India

Automatic permission has been given for an Indian citizen (individual) to acquire shares under ‘cashless’ ESOP issued by a company outside of India.  I.e. no remittance from India is permitted.

To purchase equity shares offered by a foreign company under ESOP, an employee/ director of Indian subsidiary, the same can be done upto 51% through automatic permission route. Again, there are no restrictions on the operationalization of the Plan, through Trust or directly from the company or through a special purpose vehicle. There is also a need to ensure that the ESOP offered by the foreign company is on a uniform basis globally.

Remittance made by the Indian company for purchase of shares under ESOP has to be intimated to RBI.

Further, if an employee transfers the shares acquired then he has to repatriate the sale proceeds within 90 days to India.

The foreign company is also allowed to repurchase the shares issued under ESOP, but comes with compliance requirements.

Disclaimer: This is not a legal opinion and should not be construed as one. Please speak with your attorney for any advice.