|
femaonline created by nribanks.com | ||
|
Foreign
Exchange Management Act Aug 21, 2003 Procedure in
connection with Foreign Investment in India Section I -
Foreign Direct Investment Section I - Foreign Direct Investment Q. What is Automatic Route for Foreign Direct Investment in India? Ans. Foreign investment in India has a long history. Foreign Exchange Regulation Act (FERA) of 1973 put severe restrictions on foreign investment in India. Within the overall statutory framework provided by FERA 1973, foreign investment was guided by the Industrial Policy of Government of India and most of foreign investment was done in India with the prior approval of Government of India. The New Industrial Policy of 1991 introduced an innovation by way of an Automatic Route not requiring approval from Government of India. It was limited to 35 industries and was subject to an investment ceiling of 51% and still required approval from RBI. Over the past one decade, the scope of Automatic Route has been expanded and the requirement of RBI's approval has also been waived. The present Automatic Route allows Indian companies engaged in all industries except for certain select industries/sectors to issue shares to foreign investors up to 100% of their paid up capital in Indian companies. These selected sectors are listed in Annexure `A' of Schedule I of Reserve Bank Notification No.FEMA.20/2000-RB dated 3rd May 2000. Any investment in a company that is engaged in an activity in the sectors listed in Annexure A needs specific approval of Government of India. There are also some areas where though Automatic Route is available, foreign investors cannot invest beyond a certain percentage of the paid up capital of the Indian companies or where investment is subject to some other conditions. These areas have been listed in Annexure `B' of the notification mentioned above. Q. What are the circumstances when the Automatic Route is not available? Ans. Foreign investors have to, however, keep in mind that they may invest freely under the Automatic Route described above but where such investment does not conform to policies of Government of India, a specific approval from Government must be sought. For example, there are Government guidelines on location of industrial units, or there are certain items like explosives or liquor that need an industrial licence. If the Indian company does not conform to the locational guidelines or needs an Industrial licence then it cannot issue shares under the Automatic Route. Automatic Route is also not available to those foreign investors who already have a financial or technical collaboration in the same or allied field or where more than 24% foreign investment is made in a company which is engaged in manufacture of an item reserved for small scale industry. Finally, Sri Lankan nationals and investors from Pakistan & Bangladesh need to apply to Government of India for investing in Indian companies. Q. Who decides whether the Automatic Route is available? Ans. The Company Secretary of the company issuing shares has to go through the Reserve Bank's Notifications and instructions of the Department of Industrial Policy & Promotion of Ministry of Commerce and Industry and satisfy himself/herself that the company is eligible to issue shares under the Automatic Route. If she is doubtful about the availability of the Automatic Route, an application may be made to the Secretariat for Industrial Assistance (SIA), Ministry of Commerce & Industry, Government of India, Udyog Bhavan, New Delhi. Reserve Bank's notifications are available on the Web site www.fema.rbi.org.in and Government guidelines are available on SIA web site www.sia.nic.in. Q. What is the alternative if the Automatic Route is not available? Ans. If for any of the reasons mentioned above, the Indian company cannot issue shares to foreign investors under the Automatic Route, an application may be made to Secretariat for Industrial Assistance (SIA), Ministry of Commerce & Industry, Government of India, Udyog Bhavan, New Delhi. This application can be made on plain paper by either the investee company or by the foreign investor. It will, however, be necessary to provide to the Government full details of the proposal. No RBI approval is needed after the approval of the Government. Q. What should be done after investment is made under the Automatic Route or SIA/FIPB approval? Ans. The Indian company has to follow a two-stage reporting procedure. In the first stage, the company should make a report on plain paper to the concerned Regional Office of RBI within 30 days of receipt of funds. The report should include the name & address of foreign investor, date of receipt of funds and the amount (in rupees), name and address of the bank through whom funds are received and details of the Government approval, if any.In the second stage, the Indian company has to file a report in Form FC-GPR together with two certificates, one from Company Secretary certifying adherence to regulations etc. and the other from a Chartered Accountant indicating the manner of arriving at the issue price of shares. Q. At what price can a company issue shares to non-residents Ans.
Q. Is Automatic Route available for purchase of existing shares by the foreign investor?
Ans. It is important to note that the Automatic Route is only for issue of fresh shares by the Indian company. Transfer of existing shares from residents to non-residents needs approval from Government of India followed by an approval from Reserve Bank of India.
Q. What should be done after SIA/FIPB permission for transfer of existing shares from residents to non-residents has been obtained?
Ans. Either the transferor (resident) or the transferee (non-resident) can make an application for RBI’s permission for the transfer. The application accompanied with the following documents should be submitted to concerned Regional Office of RBI under whose jurisdiction the registered office of the Indian investee company is situated: -
RBI issues an `in-principle' approval for the transfer. After obtaining the `in principle' approval the applicant has to apply for final permission together with original Foreign Inward Remittance Certificate and an undertaking to the effect that the shares acquired by them shall not be disposed of/transferred in favour of residents except in terms of the extant provisions of FEMA, 1999.
Q. Can the surplus funds/refund of remittance received from a person resident outside India for purchase of shares under the Automatic route or with specific Government approval or purchase of shares offered on right basis be repatriated?
Ans. YES, the surplus funds/refund of remittance received from a person resident outside India for purchase of shares under the Automatic route or with specific Government approval or purchase of shares offered on right basis can be repatriated through authorized dealers who have been delegated powers by way of (A.P.DIR Series) circular No.45 dated November 12, 2002.
Q. Other than issue of shares under Automatic Route/Government Route, what other general permissions are available under RBI Notification No.FEMA 20 dt.3-5-2000?
Ans. The following general permissions have been granted subject to the conditions mentioned in the Notification:
Q. What should be done if a company is doubtful of applicability of Automatic Route?
Ans. It is the responsibility of the investee companies to ensure that investment is eligible under the `Automatic Route' as provided for in the Notification No.FEMA 20 dated 3-5-2000. In case of doubt regarding whether the proposal will come under the `Automatic Route' or not, the investee company may approach Secretariat of Industrial Assistance (SIA), Ministry of Commerce & Industry, Government of India, Udyog Bhavan, New Delhi.
Q. What procedure should an Indian company follow to issue ADRs/GDRs?
Ans. An Indian company can issue ADRs/GDRs without obtaining prior approval from RBI if it is eligible to issue ADRs/GDRs in terms of the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and subsequent guidelines issued by Ministry of Finance, Government of India. The issue is subject to filing of a return in the proforma appearing in Annexure `C' to the RBI Notification No.FEMA.20/2000-RB dated May 3, 2000. The company is also required to file a quarterly return in a form specified in Annexure `D' of the same regulations.
Q. What is limited two-way fungibility Scheme?
Ans. Under the limited two-way fungibility Scheme, a registered broker in India may purchase shares of an Indian company on behalf of a person resident outside India for the purpose of converting the shares so purchased into ADRs/GDRs in terms of Notification No.FEMA 20 dated 3rd May 2000 as amended by Notification No.FEMA 41 dated 2nd March 2001. The operative guidelines for the same have been issued vide A.P.(DIR Series) Circular No.21 dated February 13, 2002.
The Scheme provides for purchase and re-conversion of only as many shares into ADRs/GDRs which are equal to or less than the number of shares emerging on surrender of ADRs/GDRs which have been actually sold in the market. Thus, it is only a limited two-way fungibility wherein the headroom available for fresh purchase of shares from domestic market is restricted to the number of converted shares sold in the domestic market by non-resident investors. So long ADRs/GDRs are quoted at discounts to the value of shares in domestic market, an investor will gain by converting the ADRs/GDRs into underlying shares and selling them in the domestic market. In case of ADRs/GDRs being quoted at premium, there will be demand for reverse fungibility, i.e. purchase of shares in domestic market for re-conversion into ADRs/GDRs. The scheme is operationalised through the Custodians of securities and stockbrokers under SEBI.
Q. Can an Indian company sponsor an issue of ADR/GDR with an overseas depository against shares held by its shareholders?
Ans. YES. In terms of FEMA Notification No.41 dated 2nd March 2001, an Indian company may sponsor an issue of ADR/GDR with an overseas depository against shares held by its shareholders at a price to be determined by the Lead Manager. The Operative guidelines for the same have been issued vide A.P.(DIR Series) circular No.52 dated November 23, 2002.
Q. Can the surplus funds received for purchase of shares or on account of cancellation of trade, under Two-way fungibility of ADRs/GDRs be repatriated?
Ans.YES. The surplus funds received for purchase of shares or on account of cancellation of trade under Two-way fungibility of ADRs/GDRs can be repatriated through authorized dealers who have been delegated powers vide A.P.(DIR Series) circular No.45 dated November 12, 2002.
Q. Can the ADR/GDR proceeds be used for acquisition of shares in the disinvestments process?
Ans.YES. In terms of Govt. of India Press Note dated 8th July 2002 and A.P.(DIR Series) circular No.52 dated November 23, 2002, the ADR/GDR proceeds could be used in the first stage acquisition of shares in the disinvestments process and also in the mandatory second stage offer to the public, in view of their strategic importance.
Q. Can Preference shares be issued under the Automatic Route ?
Ans. Yes. However, the rate of dividend offered should not exceed SBI Prime Lending Rate plus 300 basis points.
Q. Are all foreign investments repatriable? Whether the dividend thereon be freely repatriated?
Ans. Yes. All foreign investments are on repatriation basis except for the cases where NRIs/OCBs choose to invest specifically under non-repatriable schemes. Dividends declared on foreign investments can be remitted freely through an Authorised Dealer (AD).
Q. Is RBI permission necessary for foreigner/NRI/OCB to subscribe to Memorandum and Articles of Association?
Ans. Indian companies are permitted to issue shares to non-resident investors in terms of the Automatic Route as indicated in the Schedule I to the Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations 2000. It is clarified that non-resident investors can subscribe to the Memorandum & Articles of Association of those companies which are eligible to issue shares under the Automatic Route in terms of the Regulations mentioned above. In respect of companies not covered by the Automatic Route, foreign investors can subscribe to the Memorandum & Articles of Association after necessary approval for investment is obtained from SIA/FIPB.
Q. What is the procedure for disinvestment of capital invested?
Ans. Non residents can sell shares on Stock Exchange without prior approval of RBI. They can approach a bank for repatriation of the sale proceeds if they hold the shares on repatriation basis and if they have necessary NOC/Tax Clearance Certificate issued by Income Tax authorities. For sale of shares through private arrangements, Regional Offices of RBI grant permission for disinvestment of foreign equity in Indian company in terms of guidelines indicated in Regulation 10.B of Notification No.FEMA.20/2000 RB dated 3rd May 2000. The sale price of shares on disinvestment is determined strictly in accordance with the guidelines prescribed under Regulation 10B(2) of the above Notification.
Section II - Foreign Technical Collaboration
Q. What are the provisions for remittance in foreign exchange on account of Foreign Technology Transfer?
Ans. In terms of the provisions of Section 5 of FEMA, a person resident in India may draw foreign exchange from an Authorised Dealer for all current account transactions, except certain prohibited/restricted categories. Government of India Notification No. GSR 381(E) dated 3rd May 2000 lays down the prohibition/restrictions mentioned above.
In terms of the above-mentioned notification, an Authorised Dealer may permit an Indian company to effect remittance of technical know-how fees/royalties on account of a technical collaboration agreement entered into with a person resident outside India if (a) the payment is made out of RFC/EEFC account of the remitter OR (b) the agreement is registered with the Reserve Bank.
Q. What are the parameters for foreign technology transfer under the Automatic Route of RBI?
In case the lumpsum payment does not exceed US$ 2 million and payment of royalty does not exceed 5% on domestic sale and 8% on export sale, RBI may register the agreement and grant approval for remittance under the Automatic Route, if certain criteria as explained below are met.
Q. Where Automatic Route of RBI for technology transfer is not available?
Ans. Proposals which do not satisfy the parameters prescribed for automatic approval by RBI, require clearance from Government of India.
If the terms of any technical collaboration agreement are beyond the above mentioned parameters, the Reserve Bank will register the agreement after the company submits copy of specific permission from Government of India.
Further, in terms of the policy laid down by the Government, no Automatic Approval shall be granted by the RBI for Technology Transfer proposals for any item reserved for Small Scale Sector or for any item, which requires Industrial Licence. Similarly if the foreign collaborator had a previous financial/technical collaboration with a company in India, in the same or allied activity, Automatic Route is not available.
Any application requiring Government approval may be lodged in Form FC/IL (SIA) or on plain paper containing complete information regarding the proposals. Applications may be addressed to SIA (Secretariat for Industrial Assistance), Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Udyog Bhavan, New Delhi 110 011.
Q. Is RBI approval required for foreign technical collaboration under the Automatic Route? If so, what is the procedure?
Ans. YES. The procedure for getting foreign technical collaboration approvals under the said Automatic Route, together with allied information is given below:
A. General Approval will be given for payment in connection with foreign technology for manufacture of products as also foreign technology required for services sector. The payment parameters will be a lump sum payment up to US$ 2 million and/or 5% royalty on domestic sales and 8% on exports. The prescribed lump sum/royalty rates may be subject to or net of taxes and will be calculated according to standard conditions/procedures. B. Hotel & Tourism Related Industries The term "Tourism Related Industries" will include the following:
For technology transfer in respect of Hotel & Tourism related industries, the parameters are:
C. Procedure for granting approval All applications for permission under the Automatic Route of RBI should be submitted on plain paper in five copies furnishing the following details, to the concerned Regional Office of Exchange Control Department, Reserve Bank of India.
I/We hereby certify that a) The applicant is eligible for Automatic Approval from RBI in accordance with guidelines issued by Government. The foreign collaborator does not have any previous JV or technical collaboration or trade-mark agreement in India in the same or allied field.* b) No approval for technology transfer was obtained earlier (either from Government or from RBI under Automatic Route) in respect of products/activities for which remittance for technology transfer is sought in this application c) All information furnished in the application is true and correct to the best of applicant’s knowledge and belief. N.B. * This condition will not be applicable in case the Indian company is in the IT Sector.
D. Documentation Applications for "Technology Transfer" need not be accompanied by any documents. On approval, the applicant will be advised to file necessary documents viz. a certified copy of the collaboration agreement and a certified copy of the Memorandum & Articles of Association of the company or copy of Partnership Deed in the case of a partnership firm or an affidavit from the Proprietor of a Proprietary firm indicating the details regarding constitution of the firm, with Authorised Dealer (AD)/concerned Regional Office (RO) of RBI. In this connection, further enquiries pertaining to mode of remittance, payment of R&D Cess etc. should be made to the concerned Authorised Dealer / Regional Office of RBI. E. Standard conditions attached to Approvals for Technology Agreement 1.(a) The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc. The payment of royalty will be restricted to the licensed capacity plus 25% in excess thereof for such items requiring industrial licence or on such capacity as specified in the approval letter. This restriction will not apply to items not requiring industrial licence. In case of production in excess of this quantum, approval of Government would have to be obtained regarding the terms of payment of royalty in respect of such excess production. (b) No minimum guaranteed royalty would be allowed.
2. The lump sum shall be paid in three instalments as indicated below, unless otherwise stipulated in the approval letter:-
The lump sum can be paid in more than three instalments, subject to completion of activities as specified above.
3. All remittances to the foreign collaborator shall be made as per the exchange rates prevailing on the date of remittance.
4. The applications for remittances may be made to the Authorised Dealer in Form A2 with the under noted documents:
5. The agreement shall be subject to Indian Laws.
6. A copy of the foreign technology transfer agreement signed by both the parties may be furnished to the following authorities:
(a) Administrative Ministry/Department (b) Department of Scientific and Industrial Research, Technology Bhavan, New Delhi 110 016. (c) Concerned Regional Office of Exchange Control Department, RBI. (d) Authorised Dealer designated to service the agreement
8. All payments made under the foreign investment and technology transfer including Rupee payments (if any) to be made in connection with engagement/deputation of foreign technical personnel such as passage fare, living expenses etc. of foreign technicians, would be liable for the levy of cess under the Research and Development Cess Act, 1986 and the Indian company while making such payments should pay the cess prescribed under the Act.
Q. Is payment of royalty to parent companies and payment of royalty for use of trademarks and brand name without technology transfer covered under the Automatic Route of RBI?
Ans. YES.
Section III - Portfolio Investment
Q. What are the regulations regarding Portfolio Investments by Foreign Institutional Investors ( FIIs)?
Ans. Investment by FIIs is regulated under SEBI (FII) Regulations , 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3,2000. For details please see Schedule 2 of the above mentioned notification.
All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company.
Explanation: Presence of Sectoral Cap/ Statutory ceiling means that foreign investment from all sources cannot exceed a specified level. A Company to which no sectoral cap/statutory ceiling is applicable can raise the limit of permissible FII investment to 100% of the paid up capital. A Company to which a 49% sectoral cap is applicable can raise the limit of permissible FII investment to 49% and if there is an existing foreign direct investment of 15%, possible FII investment can only be up to 34%.
When the total holdings of FIIs reaches within 2% of the applicable limit, Reserve Bank issues a notice to all concerned that any further purchases of the shares of the said Company requires prior approval of RBI.
High Net worth Individuals /foreign Corporates can invest through SEBI Registered FIIs subject to an sub-limit of 5% each within the aggregated limit of 24%. FIIs can trade in Exchange Traded Derivative Contracts. Q. What are the regulations regarding Portfolio Investments by NRIs/PIOs Ans.
For further details please see Schedule 3 of RBI Notification No.FEMA.20/2000-RB dated 3-5-2000.
Section IV - Other Investments
Q. Under what regulations can NRIs/OCBs make investments in shares and Convertible Debentures of Indian company on non-repatriation basis ?
Ans. NRIs/OCBs can make investments up to 100% of paid up capital of the companies in all sectors on non-repatriation basis except Agriculture/Plantation, Real Estate Business, Chit Funds & Nidhi companies and companies engaged in Print Media sector. For further details please see Schedule 4 of RBI Notification No.FEMA.20/2000-RB dated 3-5-2000.
Q. In what securities other than shares/convertible debentures can NRIs/OCBs make investment in India?
Ans. NRIs/OCBs/FIIs can purchase, without limit, on repatriation basis Government dated securities, Treasury Bills, Units of Mutual Funds, PSU Bonds etc. In addition, they can also purchase on non-repatriation basis units of Money Market Mutual Funds and National Plan/Savings Certificates. Further information in this matter is available in Schedule 5 to RBI Notification No.FEMA 20/2000-RB dated 3-5-2000.
Q. What are the regulations for Foreign Venture Capital Investment?
Ans. A Foreign Venture Capital Investor registered with SEBI may make investment in a Venture Capital Fund for an Indian Venture Capital Undertaking, in the manner and subject to the terms and conditions specified in Schedule 6 of RBI Notification No.FEMA 20/2000-RB dated 3-5-2000.
Section V : Procedure for opening Branch/Project/Liaison Office
Q. How can foreign companies open Liaison/Project/Branch office in India?
Foreign company can set up Liaison, Project and Branch Offices in India after obtaining approval from RBI.
Q. What is the procedure to be followed for obtaining Reserve Bank's approval for opening Liaison Office/Representative Office?
A Liaison office can carry on only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office abroad. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers.
The opening and operation of such offices is regulated by the Foreign Exchange Management Act -1999 (FEMA). Approval from the Reserve Bank of India (RBI) is required for opening such offices. The companies desirous of opening a liaison office in India may make an application in form FNC-1 along with the documents mentioned therein to Foreign Investment Division-I, Exchange Control Department, Reserve Bank of India, Central Office, Fort, Mumbai 400 001. This form is available on our website www.fema.rbi.org.in.
Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Regional Office in whose jurisdiction the office is set up. Liaison/representative offices also have to file an annual activity certificate etc. from a Chartered Accountant to the concerned Regional Office of the RBI.
Q. What is the procedure for setting up Project Office?
Ans. Foreign companies planning to execute specific projects in India can set up project/site offices in India. Specific approval from the RBI is required for setting up a project office. An application is required to be made in Form FNC-1. Such approval is generally accorded in respect of projects approved by appropriate authorities or where the projects are financed by Indian bank/Financial Institution or a multilateral/bilateral international financial institution.
For permission/assistance please contact: Concerned Regional Office of Reserve Bank of India under whose jurisdiction the office will be situated.
Q. What is the procedure for setting up Branch office?
Ans. Reserve Bank permits companies engaged in manufacturing and trading activities abroad to set up Branch Offices in India for the following purposes:
A branch office is not allowed to carry out manufacturing, processing activities directly/indirectly. Branch office will have to submit activity certificate from a Chartered Accountant on an annual basis to Reserve Bank of India. For annual remittance of profit Branch Office may submit required documents to an authorised dealer.
Permission for setting up branch offices is granted by the Reserve Bank of India. RBI considers the track record of the Applicant Company, existing trade relations with India and financial position of the company while scrutinising the application.
An application in Form FNC-1 is to be made to RBI.
For permission/assistance please contact:
Reserve Bank of India, |