2014

Indo-Japan Trade & Investment

Bulletin July Issue

Japan Desk, Corporate Professionals

Indo-Japan Trade & Investment Highlights

Daido Steel to buy stake in India’s Sunflag

Foreign companies manufacturing in India can sell directly to online customers

Indians to 'guide' Nissan in car making

India may soon sign first bilateral advance-pricing pact with Japan

India’s Tide Water Oil Co signs JV with JX Nippon Oil & Energy Corp

Panasonic to launch e-stores in India

Mitsubishi bets big investment on India

Japan’s Dentsu Aegis buys controlling stake in India’s Milestone Brandcom

Japan's SBS Holdings Buys India’s Transpole Logistics

Japan may finance Mumbai Trans-Harbour link

JBIC invests $10.5M in Takshasila Hospitals

Knowledge Centre

Transfer of shares under FEMA Regulations

INDEX

Daido Steel to buy stake in India’s Sunflag

Japan based Daido Steel Co. will buy 10 percent stake in Sunflag Iron & Steel Co. for around Rs

55.86 crore ($9 million approx..) through a preferential allotment to strengthen its presence in

India. The two firms signed a share subscription agreement whereby the Japanese firm will be

allotted 18 million shares at Rs 31 each. The investment is a part of expansion plan of the Indian

operations of Daido after taking into consideration that India’s automobile market is growing at a

fast pace. The two companies also entered into a technical assistance partnership in November

2010. Daido has been providing advice and support to Sunflag on capital investment. Now, Daido

plans to buy the shares in Sunflag via third-party allotment. Daido expects that the Indian specialty

steel market will see significant growth amid increasing domestic demand for automobiles and

motorcycles and is also likely to grow as an export base.

Foreign companies manufacturing in India can sell directly to online customers

Foreign companies manufacturing in India will be allowed to engage in e-commerce retail sale

even if they source products from third-party producers in the country. This comes as good news

to brands such as Samsung, LG, Panasonic and Lenovo as they may now sell directly online to

customers in India. But foreign companies that arrived in India as retailers will not be allowed to

do so. Foreign direct investment (FDI) in the manufacturing sector in India was in the automatic

approval list and now, foreign companies manufacturing in India would be allowed to sell their

products through retail, including e-commerce platforms, without any additional clearance from

the government. Sony has been exploring the possibility of setting up a manufacturing plant in

India. It is expected that now, it could get expedited with the budget announcement proposal.

Further, for electronics firms that have already invested a few thousand crores of rupees in India

Panasonic, the development is a welcome one. Panasonic India Managing Director Manish Sharma

Indo-Japan Trade & Investment Highlights

welcomed this development and said that they can now showcase their products which are

manufactured in India, such as laptops and desktops, with full details.

Indians to 'guide' Nissan in car making

Japanese auto giant, Nissan, has revamped its strategies for India to make a renewed pitch. It is

developing three new vehicles for global markets and the centre of all these development processes

is not an American, European or Chinese consumer but an Indian one. Till now, the company has

had small presence in the Indian market, with a market share of only 1.5 per cent. Nissan has

invested more than Rs 15,000 crore ($2.5 billion) in India along with Renault, Nissan aims to take

on Maruti Suzuki, Hyundai, Mahindra & Mahindra. According to data from the Society of Indian

Automobile Manufacturers Nissan clocked 3 % growth in sales at 38,220 units last year. The

company is looking at doubling volumes in India.

India may soon sign first bilateral advance-pricing pact with Japan

Indian tax authorities are soon expected to sign their first bilateral advance-pricing agreements

(APAs) with Japanese trading companies. These agreements are aimed at avoiding conflicts with

multinational companies over sharing of taxes between India and the countries where these firms

are based. Tax officers often dispute pricing of transactions between related parties. Bilateral APAs

give certainty that the price declared using the agreed approach won't be frowned upon in either

of the countries concerned. An official from finance ministry said that the Japanese delegation

came to India in April and an Indian delegation will go to Japan next month and the first bilateral

APA might be signed soon. Bilateral APAs are likely to be signed in sectors like information

technology, consumer electronics, telecommunications and manufacturing. General trading

companies of Japan, called Sogo Shosha, are eager on finalizing the agreements as soon as possible

so that their investments in India have tax certainty.

India’s Tide Water Oil Co signs JV with JX Nippon Oil & Energy Corp

Tide Water Oil Co, a lubricant manufacturing company of India and a member of the Andrew

Yule Group, recently entered into an agreement with Japan's JX Nippon Oil & Energy Corp to

form a joint venture company in India by the name of JX Nippon TWO Lubricants India. JX

Nippon Oil & Energy Corp is Japan's largest oil company with interests in refining, manufacturing

and selling petroleum products, and in the energy sector. Tide Water Oil is one of the leading

players in the Indian lubricant industry. It manufactures and markets Veedol brand of lubricants.

Both companies are proposed to have equal stake in the Joint Venture entity. The joint venture

will sell, market, distribute and manufacture the 'Eneos' brand of lubricants in India, Nepal,

Bangladesh and Bhutan. It will also be responsible for the Genuine Oil requirements of the

Japanese and Korean equipment manufacturers in the automotive and industrial segments.

In 1993, Tide Water Oil had entered into a technical collaboration with Mitsubishi Oil Co to market

its lubricants in India. This partnership continued with Nippon Oil Corp when it merged with and

absorbed Mitsubishi Oil in the year 1999.

Panasonic to launch e-stores in India

Japanese major Panasonic Corp. plans to start selling its products directly to its Indian consumers

through “E-Store” after the Indian government in the Union budget 2014 announced its plan to

allow the foreign manufacturers to take up the online route. Taking into consideration the

increasing trend of online shopping in India, Panasonic will launch ‘Panasonic’s e-store’, where

the company will showcase its range of products. The e-store will showcase on the portal its

products such as kitchen and home appliances, washing machines and air conditioners

manufactured in India. Several factors such as large customer base, increasing penetration of

Internet connectivity and growing popularity of online shopping across cities have led to the

growth of online retailing in India. It is expected to help the company expand its reach, speed and

certainty of delivery to consumers and also with new demand insights that can be mined and used

for enhancing sales.

Mitsubishi bets big investment on India

Japan’s Mitsubishi Corporation is seeking Indian expertise and has major investment plans for

India. Mitsubishi president and CEO, Ken Kobayashi is keen to discuss with the Indian Prime

Minister, Narendra Modi and his key cabinet ministers. Apart from a joint venture with TCS,

Mitsubishi is looking for an Indian partner to launch light commercial vehicles in India. In

addition, Mitsubishi is also looking to import shale gas-based liquefied natural gas into India,

which a segment is having a lot of demand attributing to the low production levels in India. Further,

Kobayashi also plans to discuss possible investments in the Delhi-Mumbai and Chennai-Bangalore

industrial corridors. At present, the company has a tie up to sell its vehicles in India in partnership

with Hindustan Motors.

Japan’s Dentsu Aegis buys controlling stake in India’s Milestone Brandcom

Japan’s Dentsu Aegis Network acquired majority stake in India’s Milestone Brandcom, which is

one of the biggest out-of-home agencies in India. Dentsu Aegis Network is on the edge of

becoming a leading player in the Out-of-Home (OOH) market in India after the acquisition of

Milestone Brandcom, along with Posterscope. Milestone Brandcom is one of the fastest growing

outdoor media agencies in India and is also the largest OOH company on the bases of billings.

Nabendu Bhattacharyya will continue as CEO and Managing Director of Milestone Brandcom.

CEO of Dentsu Aegis Network Asia Pacific, Nick Waters welcoming Nabendu and the team to

the company, said that the acquisition is a significant step for the company to build a high quality

and scaled group in India.

Japan's SBS Holdings Buys India’s Transpole Logistics

Tokyo based SBS Group is acquiring majority stake in Delhi (India) based logistic services

provider Transpole Private Limited for USD 73.5 million. The acquisition would enable SBS to

get access to Transpole’s resources and channels in India, China, Hong Kong, Korea, Malaysia

and South East Asia. The Japanese company would be acquiring 66% shares in Transpole. The

company would be acquiring shares of Everstone, Fidelity and part of the holding of founding

members of the company providing an exit to existing PE investors of the Indian company. Fidelity

had invested INR 600 million in the year 2011 and Everstone had invested INR 2,200 million in

the year 2013. As a part of the acquisition, the entire preferred stock of the Indian company would

be converted to common stock which would give SBS Holdings a 66% holding in the company

along with common stock acquired from the founders.

Japan may finance Mumbai Trans-Harbour link

The Japanese International Cooperation Agency (JICA) may provide up to 80 percent loan to the

Maharahstra government's Mumbai Trans Harbour Link (MTHL) project. Mumbai Metropolitan

Region Development Authority (MMRDA) is implementing the mega-infrastructure project and

an expert team from the Japan International Cooperation Agency visited Mumbai for discussing

various issues. MMRDA Metropolitan Commissioner U.P.S. Madan said that the Japanese

International Cooperation Agency team has given favourable indications over financing the MTHL

and out of the total estimated cost of Rs.11,000 crore ($1.8 billion), they are expected to lend

almost 80 percent, or Rs.8,800 crore to the project. A preliminary survey has also been carried out

by Japanese International Cooperation Agency of the end points of the 22 km long MTHL. JICA

will now work out several aspects of the project in detail and provide MMRDA with inputs to

enhance constructability and shorten the construction period of the project.

JBIC invests $10.5M in Takshasila Hospitals

Japanese government controlled financial institution, Japan Bank for International Cooperation

(JBIC) has invested Rs 63 crore ($10.5 million) in India-based Takshasila Hospitals Operating Pvt

Ltd. Takshasila Hospitals is a joint venture between Japanese hospital chain operator Secom

besides Toyota Tsusho Corporation and Kirloskar Group. Takshasila Hospitals runs a Bangalore-

based multi-super specialty hospital under the banner of Sakra World Hospital. JBIC has invested

through compulsorily convertible preference shares issued by Takshasila Hospitals. In the recent

past, Hospitals chains have been attracting private equity firms with various deals.

FEMA: Transfer of Shares under FEMA Regulations

In terms of Section 2 (ze) of Foreign Exchange Management Act, 1999 (FEMA) "Transfer"

includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of

right, title, possession or lien. Transfer of shares by a person resident in India to person resident

outside India, as well as the transfer of shares by a person resident outside India to a person resident

in India is a capital account transaction. In terms of Section 6(3) of the Foreign Exchange

Management Act, 1999, the Reserve Bank of India (RBI) has the power to make regulations to

prohibit, restrict or regulate the transfer of shares.

Position in the Past:

Prior to the enactment of FEMA, the transfer of shares of an Indian company by a non-resident

person to another non-resident person did not require confirmation from RBI. However, the

transfer of shares of an Indian company by a non-resident person to a resident person required

confirmation from the RBI. The transfer of shares of an Indian company by a person resident in

India to a person resident outside India required the permission of the Government of India

followed by the approval of RBI.

Developments over time:

The above provisions of transfer of shares from non-resident to non-resident, from non-resident to

resident and from resident to non-resident continued up to 29.09.2004, when the Ministry of

Finance simplified foreign investment procedures. As per the Press Release dated 29.05.2004

issued by Ministry of Finance, permission of Government of India was not required for transfer of

shares from a resident to a non-resident. In other words, from 29.09.2004, only RBI approval was

required for transfer of shares by resident to non-resident. After this simplification, RBI approval

was still required in two cases of transfer of shares: (i) for transfer of shares by a non-resident to a

Knowledge Center

resident, and (ii) for transfer of shares by resident to non-resident. This means that for any transfer

of shares between a resident and a non-resident, only RBI approval was required.

Within a few days of the above Press Release of Ministry of Finance simplifying the investment

procedures, RBI came out with an A.P. (DIR Series) Circular No. 16 dated 04.10.2004, further

simplifying the procedure of transfer of shares. In terms of the above Circular, RBI granted general

permission for transfer of shares/convertible debentures by way of sale under private arrangement,

both from residents to non-residents, as well as from non-residents to residents, subject to pricing,

documentation, payment/receipt and remittance in respect of the shares/convertible debentures and

reporting requirements. This general permission, however, was not granted for transfer of

shares from resident to non-resident in financial service sector (i.e. banks, NBFCs and

insurance).

After the simplification of procedure in 2004, prior permission of RBI was required for transfer of

shares by way of gift from a resident to a non-resident. Further, in case of transfer of shares of an

Indian company engaged in financial sector (i.e. banks, NBFCs and insurance), and transactions

which attract the provisions of SEBI (Substantial Acquisition of Shares and Takeovers)

Regulations, 1997, etc., by way of sale from a resident to a non-resident, the transferor was

required to obtain prior approval of FIPB, Ministry of Finance & Company Affairs, Government

of India followed by permission from RBI. The above two stage approvals were applicable even

when the transfer was made on non-repatriation basis.

Present Position:

Present guidelines governing transfer of shares as contained in the Foreign Exchange Management

(Transfer or Issue of Securities by a Person Resident Outside India) Regulations, 2000 are as

follows:

1. A non-resident (other than NRI and erstwhile OCB) may transfer shares to any other non-

resident (including NRIs but excluding erstwhile OCBs), by way of sale or gift.

2. NRIs may transfer the shares to another NRI, by way of sale or gift.

3. A non-resident can transfer any security to a person resident in India by way of gift.

4. A non-resident can sell the shares on a recognized Stock Exchange in India through a stock

broker or a merchant banker registered with SEBI.

5. A non-resident can sell shares by private arrangement to a resident. Price for transfer of

existing shares by non-resident to resident shall not be more than the minimum price at

which the transfer of shares can be made from a resident to a non-resident.

6. A resident can sell shares (including transfer of subscriber‘s shares), of an Indian company

under private arrangement to a non-resident.

7. The general permission for sale of shares by resident to non-resident and by non-resident

to resident under private placement also covers transfer by a resident to a non-resident of

shares/convertible debentures of an Indian company, engaged in an activity earlier covered

under the Government Route but now falling under Automatic Route, as well as transfer

of shares by a non-resident to an Indian company under buyback and/or capital reduction

scheme of the company.

8. The Form FC-TRS has to be submitted to the AD Category-I Bank, within 60 days from

the date of receipt of the amount of consideration. The onus of submission of the Form FC-

TRS within the given timeframe would be on the transferor/transferee, resident in India.

The sale consideration of the shares purchased by a non-resident, remitted into India through

normal banking channels, shall be subjected to a Know Your Customer (KYC) check, and the

KYC report has to be submitted by the customer to the AD Category-I bank carrying out the

transaction along with the Form FC-TRS.

The following cases require prior approval of RBI

(i) Transfer of shares from resident to non-residents by way of sale where:

Transfer is at a price which falls outside the pricing guidelines specified by the Reserve

Bank from time to time.

Transfer of shares where the non-resident acquirer proposes deferment of payment of the

amount of consideration. Further, in case approval is granted for a transaction, the same

should be reported in Form FC-TRS, to an AD Category-I bank for necessary due

diligence, within 60 days from the date of receipt of the full and final amount of

consideration.

(ii) Transfer of shares by way of gift by a resident to a non-resident

Reserve Bank considers the following factors while processing such applications:

The proposed transferee (donee) is eligible to hold such capital instruments under

Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time,

The gift does not exceed 5 per cent of the paid-up capital of the Indian company/each series

of debentures/each mutual fund scheme.

The applicable sectoral cap limit in the Indian company is not breached.

The transferor (donor) and the proposed transferee (donee) are Relatives as defined under

Companies Act, 1956.

Please note that major provisions of Companies Act, 1956 has been repealed and replaced

by Companies Act, 2013 and the meaning and definition of Relative has been provided

under Section 2(77) of Companies Act, 2013 read with Rule 4 of Companies (Specification

of definitions details) Rules, 2014, which are in force as on date.

The value of shares to be transferred together with any shares already transferred by the

transferor, as gift, to any person residing outside India does not exceed the rupee equivalent

of USD 50,000 per financial year.

such other conditions as stipulated by Reserve Bank in public interest from time to time.

(iii) Transfer of shares from NRI to non-resident.

(iv) Transfer of shares from or by erstwhile OCBs would require prior approval of the Reserve

Bank of India.

In the following cases, approval of RBI is not required:

A. For transfer of shares by way of sale under private placement from a Non-Resident to Resident

under the FDI scheme where the pricing guidelines under FEMA, 1999 are not met provided that:-

i. The original and resultant investment comply with the extant FDI policy and FEMA regulations

in terms of sectoral caps, conditionality (such as minimum capitalization, etc.), reporting

requirements, documentation, etc.;

ii. The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI

regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/

substantial acquisition / SEBI SAST, buy back); and

iii. Chartered Accountants Certificate to the effect that compliance with the relevant SEBI

regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD

bank.

B. Transfer of shares from Resident to Non Resident:

i) where the transfer of shares requires the prior approval of the FIPB as per the extant FDI policy

provided that :

the requisite approval of the FIPB has been obtained; and

the transfer of share adheres with the pricing guidelines and documentation requirements

as specified by the Reserve Bank of India from time to time.

ii) where the transfer of shares attract SEBI (SAST) guidelines subject to the adherence with the

pricing guidelines and documentation requirements as specified by Reserve Bank of India from

time to time.

iii) where the transfer of shares does not meet the pricing guidelines under the FEMA, 1999

provided that:

The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in

terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting

requirements, documentation etc.;

The pricing for the transaction is compliant with the specific/explicit, extant and relevant

SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit,

open offer/ substantial acquisition / SEBI SAST); and

Chartered Accountants Certificate to the effect that compliance with the relevant SEBI

regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with

the AD bank.

iv) where the investee company is in the financial sector provided that:

NOCs are obtained from the respective financial sector regulators/ regulators of the

investee company as well as transferor and transferee entities and such NOCs are filed

along with the form FC-TRS with the AD bank; and the FDI policy and FEMA regulations

in terms of sectoral caps, conditionalities (such as minimum capitalization, pricing, etc.),

reporting requirements, documentation etc., are complied with.

Shares purchased by NRIs and FIIs on the stock exchange under PIS cannot be transferred by way

of sale under private arrangement or by way of gift to a person resident in India or outside India

without prior approval of the Reserve Bank. However, NRIs can transfer shares acquired under

PIS to their Relatives as defined under Companies Act, 1956 or to a charitable trust duly registered

under the laws of India without obtaining prior approval of the Reserve Bank.

Please note that major provisions of Companies Act, 1956 have been repealed and replaced by

Companies Act, 2013 and the meaning and definition of Relative has been provided under Section

2(77) of Companies Act, 2013 read with Rule 4 of Companies (Specification of definitions details)

Rules, 2014, which are in force as on date.

All parties involved in the transaction would have the responsibility to ensure that the relevant

regulations under FEMA are complied with and settlement of transactions will be subject to

payment of applicable taxes, if any.

DISCLAIMER:

The document has been prepared and produced only for the information purpose only and is not to be construed as an advertisement, solicitation,

invitation, personal communication or inducement of any kind by the firm, the author or any of its partner or associates. The entire content of this

document has been developed on the basis of relevant statutory provisions and as per the information available at the time of the preparation.

Though the author has made utmost efforts to provide authentic information, however, the material contained in this document does not

constitute/substitute professional advice that may be required before acting on any matter. The author and the firm expressly disclaim all and any

liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be

done by any such person in reliance upon the contents of this document.

CONTACT US

PANKAJ SINGLA

Japan Desk, Corporate Professionals

NEW DELHI

D-28, South Extension Part - I, New Delhi

– 110049

Tel: +91-11-40622200

Dir: +91-11-40622293

Fax: +91-11-40622201

Mob:+91-99715-08320

Email: pankaj@indiacp.com

MUMBAI

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Goregaon (East), Mumbai -400065

Tel: +91 9820079664

Fax: +91 9810037390

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Tel: +44 (0) 2030063240

Fax: +44 (0) 2030063241