New circular clarifies FDI guidelines

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On 1 October, the Department of Industrial Policy and Promotion issued a new circular on foreign direct investment (FDI) policy. Circular 2 of 2010 clarifies the following points:

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  1. The manufacturing of “cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes”, in which FDI had been prohibited earlier this year, has now been formally included in the list of sectors/activities in which FDI is prohibited.
  2. Non-banking financial companies (NBFCs) that are 100% foreign-owned with a minimum capitalization of US$50 million can set up subsidiaries for specific NBFC activities, without raising additional capital for minimum capitalization. This point was clarified following uncertainty about whether such downstream subsidiaries were independently required to meet minimum capitalization conditions.
  3. Downstream investments through internal accruals are now permissible, providing that Indian companies “owned and/or controlled by non-resident entities” adhere to guidelines for these investments. FDI policy states that operating and investing companies would have to bring in funds from overseas rather than leveraging funds from the domestic market for downstream investments.
  4. The circular has clarified that the term “original investment” means the entire amount brought in as FDI. In addition, the circular indicates that the lock-in-period of three years will begin from the date of receipt of each instalment or tranche of FDI, or from the time that minimum capitalization is met, whichever is later.
  5. In response to stakeholder demands for the simplification of guidelines for cash-and-carry wholesale trading, the condition stipulating that “wholesale trading made to group companies should be for internal use only”, has been removed.
  6. The circular states that minimum capitalization includes the share premium received along with the face value of the shares only when it is received by the company after the shares have been issued to non-resident investors. This is relevant in sectors such as NBFCs and construction development, where minimum capitalization requirements have been stipulated. This point clarifies the circumstances under which a share premium can be counted towards minimum capitalization.
  7. The note below the definition of “capital” has been amended to allow FDI in partly paid shares and warrants through the government route. Currently, capital is defined as “equity shares, fully, compulsorily and mandatorily convertible preference shares, fully compulsorily and mandatorily convertible debentures”. The inclusion of partly paid shares and warrants through the government route is intended to bring in consistency with existing rules.
  8. The circular introduces changes in the paragraphs relating to the issue price of shares and adds a paragraph on share-swaps, which are now being considered under the government approval route. Prior to this, share swaps were not explicitly mentioned under FDI policy.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.