fdi policy + industry specific issues · 2017. 10. 17. · fdi policy + industry specific issues...

FDI Policy + Industry Specific Issues

– Real Estate / NBFC/ Trading / Media

- Anup P. Shah

20th April, 2011

© PRAVIN P. SHAH & CO. 2

Scope

FDI & Instruments

FDI in Real Estate

FDI in NBFCs

FDI in Trading

FDI in Media & Entertainment


FDI & Instruments


Relevant Regulations

Consolidated FDI Policy – DIPP, Ministry of Commerce

FEMA Regulations –

Mode of Investments

+ Reporting

AP Dir Circulars –

RBI‟s changes

from time to time


Relevant Regulators

FIPB –

Cases

requiring

Govt.

Approval

RBI –

Nodal

Regulatory

Authority

DIPP –

Formulates

FDI Policy

Part of

Finance

Ministry

Part of

Commerce

Ministry


Key Types of Foreign Invst.

Foreign Investment

Primary - FDI Secondary

Direct Downstream Portfolio Off-Market

FIIs

NRIs / PIOs

Repatriable

Non-repatriable

Invst by

PROI in

Capital of

an Indian

Co.

Purchase

by PROI

of Shs. Of

Indian Co.


FDI Prohibited

FDI in following Sectors is Banned:

Chit Fund / Nidhi

Agricultural / Plantation (except certain areas)

Real Estate business / Trading in TDRs

Lottery / Gambling/ Betting / Casinos

Atomic Energy

Manufacturing of Tobacco & related products

Sectors not yet opened to Private Sectors


Types of FDI

Foreign Direct Investment

Automatic Approval

No PermissionMoF/FIPB – Inflows

up to Rs.1200 cr.

CCEA – Inflows

above Rs. 1200 cr.


Instruments

Foreign Direct Investment

EquityHybrid

Voting Non-Voting CCDs CCPS

Warrants


Equity Shares

Consideration must be for Cash

All other cases – FIPB approval

Issue Price of FDI Shares

Listed Cos.

Unlisted Cos.

Must be issued within 180 days of funds


Equity Shares

DCF Valuation

No Guidelines specified

Discretion to Valuer in selection of:

No. of Years‟ Forecast

Discount Rate / WACC

Growth Rate

Method of Calculation of Terminal Value / Perpetuity

Q. Cos. where DCF is difficult?


Issue for CoC – ECBs / Know-how

R.8, Sch. 1 : Consideration must be received in

Cash for Auto Route FDI

If not received in Cash – FIPB Approval

Exceptions - ECB / lump sum Technical know-how

Fees / Royalty can be converted into Shares

Co. must be eligible for FDI under Auto Route or

FIPB/SIA route

Post-conversion Foreign Equity, within Sectoral Caps


Issue for CoC – ECBs / Know-how

Pricing : As per FEMA Guidelines

ECBs may be with General / Specific Permission

Whether ECBs due for repayment or not

Deemed ECBs (Import payables) not covered

Also secured / Unsecured Loans from NR

collaborator

Comply with applicable tax laws


Issue for CoC – Capital Goods

Import of Capital Goods / Machinery / Equipment

FIPB Permission reqd.

Import as per EXIM Policy

Independent Valn. ~ from Country of import

Customs Assessment of FMV

Must show Beneficial Ownership & Identity of

Importer & Exporter

Share Issue within 180 days of shipment

Special Resolution of Co. reqd.

DCF Valn. for Issue Price


Issue for CoC – Pre-Operative

Pre-op. Exp / Pre-Inc. Exp / Rent

FIPB Permission reqd.

Submit FIRC for remittance of funds by

overseas Promoters for Expenses

Certificate by Auditor about Exp. incurred

Payment by Foreign Party directly to Third

Party – not allowed

Must be routed through Co.

Share Issue within 180 days of Payment

Special Resolution of Co.

DCF Valn. for Issue Price


Issue for CoC – Other Instances

Type of CoC Issue Allowed /

Not Allowed

Sweat Equity Shares

For Technology Trf.

Conversion of RPS into Equity

Shares since no funds to redeem


Issue for CoC – Other Instances

Type of CoC Issue Allowed /

Not Allowed

Against Franchisee Rights

Against Trade payables

Against Import of white goods

Against Amount Payable under

an Arbitration Award

Export Advances


CCDs

Quasi-equity Instruments

Subject to ECB restrictions?

Cap on Rate of Interest?

All-in-cost ceilings like ECBs?

Tax Deduction benefits to Investee Co.

Can be redeemed / bought back by Co.?

Time limit for conversion into Equity?


CCDs

Circular 1/2011

Issue Price or Conversion Formula to be specified

upfront at time of issue

Price @ Conversion Date > FMV @ Issue Date

FMV = DCF OR Preferential issue Pricing under ICDR

Earlier Issue Price was required

Flexibility in Earn-out Formula Deals

Beneficial for PE / VCF Deals

Co. gets higher Value if performance good


CCDs

FIPB has granted time for extending

conversion of Convertible Instruments into

Shares

Milestone-linked conversion of CCDs


NVR Shares

Issue of NVR Shares possible?

When Useful?

If Public Company?

Examples


Preference Shares

Part of Sectoral Caps Only if CCPS

If RPS / OCPS – treated as ECBs

Must be converted within a reasonable

timeframe

Plain redemption / buyback possible?

Max. Dividend Rate


Others

Issue of Warrants?

Issue of Partly Paid-up Shares

Cir.1/2010

Cir 2/2010


Other Types of Foreign Invst.

Type of Invst. Approval Conditions

Issue on Merger of

Indian Cos.

Issue on Demerger of

Indian Cos.

Share Swap – ODI by

Issue of Shares

ESOP to NR

Employees

Rights / Bonus Issue

Cross-Border Merger


FDI in Real Estate

© PRAVIN P. SHAH & CO. 26© PRAVIN P. SHAH & CO. 26

FDI in Real Estate

General Prohibitions

Real Estate Business

Construction of Farm House

Trading in Transferable Development Rights (TDRs)

„Real Estate Business‟:

Buying and selling of immovable properties

Assignment of Development Agreements?


FDI in Real Estate – Guidelines

100% FDI allowed under Automatic Route subject to

conditions in Construction & Development Projects

Projects Permitted

Housing

Commercial Premises

Resorts

Educational Institutions

Recreational Facilities

City & Regional Level Infrastructure

Townships


Conditions

Minimum Area

Serviced Housing Plots – 10 hectares/25 acres

Built-up area: 50,000 sq. mtrs. or 5,38,200 s.ft.

Combination Project – Any one of above 2

conditions

What is „built-up area‟?

What is included and what is excluded in it?


Conditions

Investment – Minimum Capitalisation

In case of WOS – US $10M

In case of JV – US $ 5M

FDI in a JV in 99:1 between Foreign & Indian

Partner – What should be the min. capital?

Securities Premium included in Min. Cap?

Whether Preference Shares included?


Conditions

Funds to be brought within 6 months of

commencement of business

What is Commencement of Business?

Would it be date when Co. buys land as its SIT

Would it be date of approval by Local Authority?


Conditions

Original Investment locked-in for 3 years

Entire Invst. or only what is brought in initially?

If Invst. in Tranches?

Is Invst. In excess of Min. Cap. also locked-in?

50% project must be developed in 5 years

from date of obtaining all statutory clearances

“all statutory clearances” very wide in coverage


Conditions

Lock-in of Initial Investment

Can Foreign Investor sell to another NR within 3

years?

No outflow /remittance from Co.

Is lock-in on Investor or on Investment?


Conditions

Investor cannot sell „Undeveloped Plots‟

„Undeveloped Plots‟ means road, water supply, street

lighting, drainage, sewerage, etc. not made available

Developer to provide infrastructure and obtain CC

before disposing serviced housing plots

All Conditions should be mandatorily fulfilled

Earlier Exit ?


FDI in Real Estate – Issues

Whether Agricultural Land can be acquired for

developing serviced housing plots?

If FDI & non-FDI compliant projects, can Co. get

FDI?

FIPB planning to monitor end-use of funds on a

Qtly basis


FDI in Real Estate – Issues

Whether Service Provider to Developer needs to

comply with conditions of P.Note?

Developer has sold Units in an IT Park

Buyback of same units from Cos. and Leased

back to very same entities

Is it a Real Estate Business?

Permissible?


Exit Options

Sale of Equity / CCPS / CCDs by NR:

Automatic Route

Pricing Guidelines

Form FC-TRS + Documentation

If Project stalled mid-way due to some

reason, what is the Exit Route for Foreign

Investor?


Exit Options

Buyback of Shares

Automatic Route

Companies Act restrictions

25% of Networth

25% of Paid-up Equity Capital / FY

Can CCDs and CCPS be bought back without

conversion?

VL of SPV


Put Option to Investors

FDI by way of Issue of CCPS / CCDs

Put Option to Foreign Investor to sell CCDs to

Promoters

Can Put Option be given to sell back shares @

fixed price?

What if FEMA Pricing Guidelines adhered to?

RBI‟s Stance:


Investment by NRIs and PIOs

Prohibited Investments

Investment in Agricultural Property,

Plantations & Farm Houses

Trading in Real Estate and TDRs

Conditions of Press Note No. 2/2005?

Can invest in smaller size projects also


Investment by NRIs and PIOs

Specified Categories of Invst.:

Devlp. of serviced plots & built-up res. Premises

Const. of Res.& Comm‟l Premises / Offices

Townships

Urban Infrastructure facilities ~roads, bridges

Mfg. of Building Materials

Invst. in Participatory ventures in above

Invst in Hsg Finance Inst.


FDI in Infrastructure &

Other Real Estate-based Projects


FDI in Hotels & Hospitals

100% FDI under the Automatic Route in Hotels &

Tourism Industry

Hotels includes:

Restaurants

Beach Resorts

Other Tourist Complexes

Convention centres, seminar units

100% FDI under Auto. Route also allowed in Hospitals

Conditions of Press Note No. 2/2005

Mixed Use Projects


FDI in Industrial Parks

100% FDI allowed under the Automatic Route

FDI in Setting up of IPs and also in Established IPs

STPs, IT Parks, Bio-tech parks, etc

Conditions of Press Note No. 2/2005?

Conditions for FDI

Minimum 10 Units and No Single Unit occupying more than 50%

of the allocable area

Minimum 66% of the total allocable area for Industrial Activity


FDI in Industrial Parks

Must have Infrastructure Facilities:

Must have Common Facilities:

Must be for Industrial Activities:

Tax Benefits under Industrial Park Scheme, 2008

Difference between IPS 2008 and Circular 1/2011

Which is more liberal


FDI in SEZs

100% FDI allowed under the Automatic Route in

Development of :

SEZs

Free Trade Warehousing Zones

Conditions of P/N 2/2005 Applicable?

Conditions of SEZ Act should be fulfilled

What about Transfer of Shares of an SEZ Developer?

Recent Stand of BoA


FDI in NBFCs


Specified Activities

FDI Prohibited in:

Chit Fund

Nidhi Company

100% FDI permissible in 18 specified

Activities under Automatic Route

Minimum capitalisation norms ?



• Merchant Banking

• Underwriting

• Portfolio Management

Services

• Investment Advisory

Services

• Financial Consultancy

• Stock Broking

• Asset Management

• Money Changing Business

• Venture Capital

• Custodian Services

• Factoring

• Credit Rating Agencies

• Leasing and Finance

• Housing Finance

• Forex broking

• Credit Card Business

• Micro Credit

• Rural Credit

18 Activities under 100% Automatic Route



FDI in Commodity Broking

Permissible?

Is it an NBFC activity?

FDI by Banks in Com. Broking?



FDI in Investing Companies

Requires FIPB Approval

Irrespective of Ownership & Control of Investment

Co.

If Investing Co. is a CIC

Comply with CIC Regulations of RBI

FDI in Shell Co.

Prior FIPB Approval

Comply with sectoral caps for Downstream Invst



FDI in Investment Companies?

Prohibited?

Different from Investing Cos.

Investing Co.:

Definition – Other than for Trading of Such Shares

What if not for Trading?

RBI Act – NBFC definition

FEMA Regulations – 18 Activities

Dual stance?



FIPB has several times disallowed FDI in Invst

Cos.

Does not fall within 18 activities

Several FDI Proposals rejected:



Nomura Financial‟s Case

FDI for proprietary trading by a NBFC

Distinct from FDI for Investment Activities?


Other Financial Cos.

Activity FDI Cap Remarks

Infrastructure Cos. In

Securities Mkt.:

St. Ex. (BSE)

Depositories (CDSL)

Clearing Corp.

(NSECCL)

Composite Cap 49%

• FDI 26%

• FII 23%

• FDI by Approval Route

only

• SEBI Regs. for St Ex

• Single For. Investor

can hold only 5%

• FII through secondary

markets

Credit Information

Cos. (CIBIL)

Composite Cap 49%

• FDI 25%

• FII 24%


only + RBI clearance


markets


Other Financial Cos.

Activity FDI Cap Remarks

Commodity Exch.

(MCX / NCDEX)

Composite Cap 49%

• FDI 26%

• FII 23%


only + FMC clearance


markets

ARCs (ARCIL) 49% FDI Cap • FDI by Approval Route

only

• FII investment

prohibited


Capitalisation Norms

NBFC

Fund- Based

Activities

Non- fund

based activities


Capitalisation Norms-Fund Based

3 Tiers for Fund based Activities

Up to 51% of Capital: US $0.5 M upfront

More than 51% - 75% of Capital: US$5Mupfront

More than 75% of Capital: US $50M out ofwhich US $7.5M. upfront immediately andbalance US$42.5 M within 24 months


Capitalisation Norms:Non-Fund Based

Activities classified as Non- fund based are

1. Investment Advisory Service

2. Financial Consultancy

3. Forex Broking

4. Money changing business

5. Credit rating agencies


Capitalisation Norms:Non-Fund Based

US $ 0.5 M upfront for any amount of investment

Prohibition on:

Setting up Subsidiary for Activity other than in which

Holding Company is engaged

Participation in any equity of NBFC holding /

Operating Company



Requests to FIPB for relaxation of Cap

Norms:

Turned down in a host of cases

Waiver of norms tantamounts to dilution of

Press Notes

Despite recession, requests for dilution of

capitalisation norms have been rejected



What constitutes Capital

Only Equity

CCPS / CCDs?

Share Premium?


62

Downstream Invst. by NBFCs

Fund- based

activities

Joint Venture-

NBFC

• 100% FDI

• Min. Cap. US $ 50M

• No Min. Cap. for

Subsidiaries

• 75% or less FDI

• Min Cap. for Holdco

& Sub. both

Type of NBFC

which would be

Holdco

• Sub in same

activity as Holdco

Non- fund based


Subsidiaries

Can an NBFC with 100% FDI set up aSubsidiary?

Yes. Holding Co. must be an NBFC with 100% FDI with

minimum capitalisation of US$ 50 M.

Subsidiaries must be for Specific NBFC activities

No restriction of number of operating subsidiaries

No additional Capital is required to be brought in.

NBFC in Non- fund based activities can not set up

subsidiary for any other activity.


Subsidiaries

Can other NBFC set up Subsidiaries?

Yes. The NBFC must have FDI equal to 75% or less

than 75% of its capital.

Subsidiaries should also comply with the Min. Cap.

Norms applicable to Holdco. if they are in Fund Based

Activities

NBFC in Non- fund based activities can not set up

subsidiary for any other activity.


Contrary Provisions

Circular 1/2010 & FEMA Regulations

FEMA Regs. & Para 5 of Cir.

Para 4.6.4 of Cir. (Press Note 4)

Current Position?


FDI in Trading


67

FDI in Trading - Guidelines

Automatic Route Prohibited

• Wholesale trading

• Cash & Carry WT

• Trading for Exports

• E- commerce

Multi Brand Retailing

FDI in Trading

• Single Brand Retailing

• Trading Companies

engaged in specified

activities

Approval Route


68

Cash & Carry Wholesale Trading

Definition

Sale of goods to:

Retailers

Industrial/ commercial/ institutional / other

professional business users.

Other wholesalers

Related subordinated service providers

Sales not for personal Consumption


69


Definition

Includes:

Resale

Processing and Sale

Bulk imports with Export Warehouses

B2B E-Commerce

Type of Customer relevant

Size / volume of sales immaterial


70


Guidelines for WT

Requisite license / registration/ permits should

be in place for undertaking WT

Sale should be to valid business customers

which fulfill at least one of the foll.:

Entities holding VAT / Excise registration

Entities holding Trade Licenses

Entities holding Permits/ licenses for retail trade

Institutions having registration as a society/ public

trust


71


Guidelines for WT

Full records of daily WT sales should be kept

WT is permitted within the same group of

Companies but only up to 25% of total turnover

of WT venture

Wholesale Trader cannot open a retail shop to

sell directly to consumers

REMOVED:


72


Issues

What is meant by “same group”

How does one compute total turnover?


73


Issues

No distinction between Strategic Investors &

PEs

Vishal Retail



Existing Model of several Cos.

Indian JV company with stakes by Foreign &

Indian retailer

Role of JV Co.

Front-end retailing?



Walmart Bharti

JV

• Cash & Carry WT

• SCM / Systems

50%

Retail Co.

100%

Retail

ConsumersSale Sale

Example of Current Structures



Difference in 2006 & 2010 Guidelines:

2006 FIPB Route

Sale to Group Cos. / outsiders

Balance allowed for WT

2010 Auto Route

Not more than 25% allowed for WT among same

Group Cos.

Balance 75% must be for WT



Difference in 2006 & 2010 Guidelines:

2006 FIPB Route

Master Supplier Entity

Group Cos. would then sell on Retail Basis

2010 Auto Route

Not more than 25% allowed for WT among same

Group Cos.

Difficult to set up Retail Front-end Cos.


78

Single Brand Retail Trading

51% FDI under Approval route:

Product should be of single brand

Branding must be globally also

Products must be branded during

manufacturing only

Can cover multiple product categories


79

Retail Trading

Application to SIA DIPP

Must demonstrate that application attracts

invst. In production and marketing

Enhances competitiveness of Indian Cos. By

accessing Global designs

FIPB doesn‟t allow PEs to invest

Only wants Brand Owners to invest in JVs

Insists that Brand Owners must operate retail

stores in at least couple of other countries


80

Retail Trading

Restriction on No. of JVs by same

Partner?

Can Indian Partner have multiple JVs with

different Foreign Retail Partners?

Can one Foreign Partner have different JVs

with different Indian partners for separate

product lines?


81

Retail Trading

Different lines of same JV possible?

But different JVs for different products not alld.?

Can NRI Franchisee Partner invest in JV?

Approved by FIPB in past?


FDI in Media & Entertainment


83

FDI in M & E Sectors

Advertising

& Films

100%

Automatic

Route

FDI in M & E

Hardware /

Uplinking /

Teleports

Print MediaBroadcasting

Sectorwise

Conditions

Sectorwise

Conditions

News - 26%

Scientific – 100%

Facsimile – 100%


84

FDI in Broadcasting Sectors

Terrestial

/ FM

20% FDI+PIS

Approval

MIB Cond.

Broadcasting

CableHeadEnd

In The SkyDTH

49% FDI+PIS

Approval

MIB Cond.

20%FDI +

29%PIS

Approval

MIB Cond.

49% Auto +

up to 74% FIPB

MIB Cond.


85

FDI in Hardware Facilities

Uplinking

Hubs /

teleports

49% FDI+

FII

Approval

Hardware

Uplinking

Non-newsUplinking

News

100%

Approval

26% FDI + FII

Approval

PIS not from

a PAC


FDI in Print Media

Type of Media % FDI Conditions

Newspapers dealing with

News & Current Affairs

26% FDI

+ FII

Approval Route

Earlier all Invst Banned

Indian editions of Foreign

Magazines on News

26% FDI

+ FII

Approval Route

MIB Conditions

Scientific & technical Mag. 100% Approval Route

MIB Conditions

Facsimile Edition of Foreign

Newspapers

100% Approval Route

MIB Conditions

Thank You!!

[email protected]

fdi policy + industry specific issues · 2017. 10. 17. · fdi policy + industry specific issues...

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