On 10 April the Department of Industrial Policy and Promotion (DIPP) released a revised version of the consolidated foreign direct investment (FDI) policy through circular 1 of 2012. The new FDI policy subsumes the previous version of the FDI policy and press notes issued before 9 April. The key changes are as follows:
FDI and investments by foreign institutional investors (FIIs) in commodity exchanges were earlier subject to government approval and were subject to a combined cap of 49%. Within this cap, FIIs could invest 23% and FDI investment was capped at 26% under the portfolio investment scheme (PIS). Under the new FDI policy, government approval is still required for FDI in commodity exchanges, however, the policy has been liberalized to the extent that FIIs can invest using the PIS under the automatic route without obtaining government approval.
Leasing under NBFCs
The FDI policy lists “leasing and finance” as an activity in which foreign investment in a non-banking finance company (NBFC) is allowed under the automatic route. The new policy clarifies that leasing and finance includes only financial leases and not operating leases.
Portfolio investment scheme
An FII raising the aggregate investment limit in a company from 24% to the sectoral cap through a special resolution is now required to inform the RBI of this. FIIs are also expected to produce a certificate from the company secretary stating that they have complied with the Foreign Exchange Management Act regulations and the FDI policy.
Foreign venture capital investments
In circular 93 on 19 March, the RBI announced that foreign venture capital investors (FVCIs) could invest in equity, equity-linked instruments, debt, debt instruments, debentures of an initial venture capital undertaking or venture capital fund (VCF), and units of schemes or funds set up by a VCF by way of a private arrangement or purchase from a third party. The circular also clarified that FVCIs can invest on the floor of the stock exchange, subject to the provisions of the Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000. This change has been incorporated into the new FDI policy.
Transfer of shares and debentures
Under regulation 10(A)(c) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, the transfer of shares from a resident to a non-resident required Reserve Bank of India (RBI) approval if it did not conform with the pricing guidelines of the RBI; if it fell under the government approval route, or within the purview of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997; or if the activities of the Indian company whose shares were being transferred fell under the financial services sector. Similarly, transfers of shares from non-residents to residents which did not conform to the pricing guidelines required prior RBI approval.
Companies no longer require RBI approval for the transfer of shares from residents to non-residents and vice versa in certain cases, including the transfer of shares of companies engaged in financial services. This relaxation has been incorporated into the new FDI policy.
Conversion into equity for imports
Under the previous FDI policy, the conversion into equity shares of amounts payable for imports of capital goods, machinery and equipment (including second-hand machinery) was allowed under the approval route, subject to compliance with certain conditions. Under the new FDI policy, amounts payable for the import of second-hand machinery cannot be converted into equity shares.
FDI in pharmaceuticals
Government approval is now required for FDI in existing pharmaceutical companies. In the past, such investments were possible under the automatic route.
Qualified foreign investor regime
Acknowledging the new class of investors introduced by the Securities and Exchange Board of India (SEBI) and the RBI, the new FDI policy has incorporated the provisions of the circulars issued by SEBI and RBI, permitting qualified foreign investors to invest in equity shares of listed Indian companies.
The new FDI policy reiterates the position under DIPP’s press note 1 (2012 series) that permitted up to 100% FDI in single-brand retail. However, if the investment exceeds 51%, at least 30% of the value of products sold would have to be sourced from small industries, village and cottage industries, artisans and craftsmen in India.
The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at firstname.lastname@example.org. Readers should not act on the basis of this information without seeking professional legal advice.