12 March 2009 Foreign Investment Policy in India: Recent Guidelines

2 Glossary 1)Foreign Investment: FI 2)Foreign Company- F Co 3)Indian Company: I Co 4)Non resident Entity: NRE 5)Resident Indian Citizen(s): RIC 6)Investing Company- Invest Co 7)Operating Company- Op Co

3 Setting the context: Manner of Investing in an Indian Company (1/2) Foreign Company (F Co) Indian Company (I Co) 100% Overseas India Foreign Investment in an Indian Company - Direct Foreign Company is a shareholder in the Indian Company

4 Setting the context: Manner of Investing in an Indian Company (2/2) F Co I Co 1 Overseas India I Co 2 Indian Company (I Co 1 ) is the shareholder in I Co 2. In other words, F Co owns shares in I Co 2 through I Co 1 100% FI in an Indian Company - Indirect TOTAL FI= Direct FI + Indirect FI

5 Setting the context: Manner of computing Indirect FI in I Co 2 (1/2) Currently, different methods of computing Indirect FI have been prescribed for different sectors (in which I Co 2 operates) - Telecom/ Broadcasting: Proportionate method - Investing companies in Infrastructure/ Services sector: Management + Ownership Test - Insurance: Governed by regulations issued by Insurance Regulatory Authority of India (IRDA) For other sectors, no method has been prescribed. Accordingly, Indirect FI in those cases was not considered for computing Total FI

6 Setting the context: Manner of computing Indirect FI in I Co 2 (2/2) F Co I Co 1 Overseas India I Co2 in Telecom sector I Co 2 100% 60% F Co I Co 1 * Overseas India I Co2 in Infrastructure sector I Co 2 49% 100% *Management of I Co 1 is with Indians FI in I Co 2 is 60%FI in I Co 2 is NIL

7 Press Note 2 (2009 Series)

8 Overview Objective: To bring in clarity, uniformity, consistency and homogeneity in computation of FI in I Co Defines the framework for computing Indirect FI in I Co Shift from economic ownership to beneficial ownership and control Meaning: Amount or % of Investment in an Indian company is no longer the only the criterion for determining Indirect FI

9 Some Key aspects (1/4) Ownership: Majority Equity Interest (>50%) Control: Power to appoint majority of directors Resident Indian Citizen (RIC): Person resident in India* Non-resident Entity (NRE): Person resident outside India* * As per Foreign Exchange Management Act, 1999 read with Indian Citizenship Act, as applicable NRE I Co 1 X% Overseas India Foreign (Direct) Investment in I Co 1 = X% Direct Investment

10 Some Key aspects (2/4) Direct FI in I Co 2 = 39% Indirect FI in I Co 2 = Nil Total FI in I Co 2 = 39% NRE I Co 1 (Owned and Controlled by RIC I Co 2 (Owned and Controlled by RIC) 40% 39% 10% Overseas India Direct FI in I Co 2 = 51% Indirect FI in I Co 2 = 49% Total FI in I Co 2 = 100% NRE 49% 40% I Co 1 (Owned and Controlled by RIC) Overseas India I Co 2 (Owned or Controlled by NRE) 51%

11 Some Key aspects (3/4) Direct FI in I Co 2 = 40% Indirect FI in I Co 2 = 9% Total FI in I Co 2 = 40% NRE 9% 60% I Co 1 (Owned or Controlled by NRE) Overseas India I Co 2 (Owned and Controlled by RIC) 40% Direct FI in I Co 2 = 51% Indirect FI in I Co 2 = 20% Total FI in I Co 2 = 71% NRE 20% 60% I Co 1 (Owned or Controlled by NRE) Overseas India I Co 2 (Owned or Controlled by NRE) 51%

12 Some Key aspects (4/4) Indirect FI in I Co 2 is Mirror holding in I Co 1, i.e. 75% NRE 100% 75% I Co 2 I Co 1 (Owned or Controlled by NRE) Overseas India

13 Issue 1: Equal Ownership & Control between RIC and NRE 50% NRE I Co 1 Overseas India RIC I Co 2 50% X% Issue Determination of Ownership/ Control in I Co 1 (between NRE & RIC)

14 Issue 2: Mirror shareholding in case of Wholly Owned Subsidiaries Issue Indirect FI in I Co2 - NIL? NRE 100 % 75% 25% RIC I Co 1 (Owned and Controlled by RIC) I Co 2 Overseas India 100%

15 Issue 3: Near 100% subsidiaries Indirect FI in I Co 2 : 75% NRE 100% 75% I Co 2 I Co 1 (Owned or Controlled by NRE) Overseas India Indirect FI in I Co 2 : 99% NRE 99% 75% I Co 2 I Co 1 (Owned or Controlled by NRE) Overseas India

16 Issue 4: Downstream investment in Prohibited sectors 51% 49% Issue Total FI in I Co 2 : a) Direct: Nil b) Indirect : Nil Q. Whether Investment in I Co 2 (Prohibited sector) possible? NRE I Co 1 (Owned and controlled by RIC) I Co 2 (Owned and controlled by RIC- prohibited sector)

17 Issue 5: Economic ownership > Sectoral cap Applicable Sectoral Cap= 74% Issue Total FI in I Co 2 : a) Direct: 30% b) Indirect : 70% c) Total FI: 100% Q. Whether breach of sectoral limits permissible? NRE 70% 60% I Co 1 (Owned or Controlled by NRE) Overseas India I Co 2 (Owned or Controlled by NRE) 30%

18 Issue 6: Retrospective Vs Prospective Issue Conformity of past FI to the new guidelines Compliant earlier; not compliant now Not compliant earlier; compliant now All other cases

19 Press Note 3 (2009 Series)

20 Overview Presently, transfer of shares from RIC to NRE permitted under automatic route, subject to relevant sectoral guidelines. PN 3 lays down the Guidelines for transfer of ownership or control of I Co in sectors with caps from RIC to NRE Guidelines not applicable where 100 % FI is permitted under automatic route

21 Overview Mandatory to seek Government approval in specified situations:- -I Co, owned or controlled by NRE, being established with FI or; -Transfer of Ownership/ control in an I Co, from RIC to NRE under a scheme of amalgamation/ merger/ acquisition etc. Food for thought Need for approval in Sectors where Foreign Investments within caps has been allowed without any approval up till now?

22 Issue I Co 2 I Co 1 NRE Ownership and/or control transferred Amalgamation, Merger, Acquisition Government approval required Issue: Whether transfer possible without amalgamation/ merger/acquisition etc and need for approval in such cases?

23 Press Note 4 (2009 Series)

24 Overview - Further to PN 2 of 2009, Government of India has issued clarificatory guidelines on downstream investments made by Indian companies owned or controlled by NRE. - Downstream investments by I Cos owned or controlled by NRE would need to adhere to the same norms as Direct FI. Guidelines specified for the following companies: - Operating; - Operating and investing; - Investing; - Neither operating nor investing.

25 Some Key aspects (1/3) F Co Op Co Overseas India Only Operating companies Investment in Op Co would require compliance with the sectoral conditions and caps 1% to 100% (I)

26 F Co Op Co Overseas India FIPB* approval required F Co Op Co Co with No operations (NRE owned or controlled) Overseas India FIPB approval required -Compliance with sectoral conditions and caps required -Co with no operations - Compliance required when business commences/ downstream investment is made -Other applicable conditions for downstream Investment, e.g. Board resolution, notifying FIPB/ DIPP/ SIA Only Investing CompaniesCompanies having no operations Invest Co (NRE owned or controlled) Some Key aspects (2/3) 1% to 100% *FIPB- Foreign Investment Promotion Board (II) (III)

27 Some Key aspects(3/3) F Co Op Co Op + Invest Co (NRE owned or controlled) Overseas India Operating-cum-Investing companies Other compliance conditions apply 1% to 100% >51% Variants to the above situation have been illustrated in subsequent slides (IV)

28 I Co 1 - Operating cum Investing Co. – Situation I F Co I Co 1 (Automatic route) I Co 2 (Automatic route) No Approval required (as long as sectoral caps are met)

29 I Co 1 - Operating cum Investing Co– Situation II F Co I Co 1 (Approval route) I Co 2 (Automatic route) Foreign Investment received in I Co1 from F Co (1) For Own use Approval required (2) Partly for own, partly for Downstream Investment Approval required (3) Entirely for Downstream Investment ?

30 I Co 1 - Operating cum Investing Co– Situation III F Co I Co 1 (Automatic route) I Co 2 (Approval route) - No Approval required for Investing in I Co 1 - Approval required for downstream investment in I Co 2 Issue Need for approval if internal accruals of I Co 1 are used to make investment in I Co 2 ? Issue Where I Co 1 & I Co 2 both are under approval route, whether accruals from I Co 1 can be used for investment in I Co 2 without approval?

31 Other Issues (1/2) Whether approval is required when the operations would commence in due course? I Co incorporated with foreign investors as subscribers to Memorandum (Para 5) Can redeemable instruments be issued to the investing company? Para no. 6 (a) only refers that Equity, CCPS, CCD could be issued by downstream company Whether RBI valuation guidelines for Direct FI by NRE apply to downstream investment (as both companies are Indian)? SEBI / RBI guidelines to apply in case of Issue/ transfer/ pricing/ valuation of shares (Para 6 (c))

32 Other Issues (2/2) PN 4 not applicable to an Indian company holding investments for trading purposes How to determine whether Investments are for trading purposes? Investments held for Trading purposes

33 Thank You!