RBI/2013-14/117
A.P. (DIR Series) Circular No. 01
July 04, 2013
To
All Category – I Authorised Dealer banks
Madam/Sir,
Foreign Investment in India – Guidelines for calculation of total foreign
investment in Indian companies, transfer of ownership and control of Indian
companies and downstream investment by Indian companies
Attention of Authorised Dealer Category – I (AD Category-I) banks is invited to
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident
outside India) Regulations, 2000 notified by the Reserve Bank vide
Notification
No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.
2. The Department of Industrial Policy and Promotion (DIPP), Ministry of
Commerce & Industry, Government of India had, vide Press Notes 2 and 3 (2009
series) dated February 13, 2009, issued guidelines for calculation of total
foreign investment, i.e., direct and indirect foreign investment in Indian
companies and for establishment of Indian companies/ transfer of ownership or
control of Indian companies from resident Indian citizens to non-resident
entities, in sectors with caps. Further, DIPP, vide their Press Note 2 (2012
series) dated July 31, 2012, had made certain other changes. The Consolidated
FDI Policy Circular 1 of 2013 dated April 5, 2013, available at www.dipp.gov.in
comprehensively incorporates the contents of the Press Notes.
3. (i) The regulatory framework comprises:
(A) definitions;
(B) concept of direct and indirect foreign investment;
(C) method of calculation of total foreign investment;
(D) guidelines for establishment of Indian companies and transfer of ownership
or control of Indian companies, from resident Indian citizens and Indian
companies to non-resident entities, in sectors with caps;
(E) downstream investment by an Indian company which is not owned and/or
controlled by resident entity/ies.
These guidelines, summarised in the Annex, shall come into force from the
date(s) mentioned in the
Notification No. FEMA. 278/2013-RB dated June 07, 2013
and notified vide G.S.R.393(E) dated June 21, 2013.
(ii) Any foreign investment already made in accordance with the guidelines in
existence prior to February 13, 2009 would not require any modification to
conform to these guidelines. All other investments, after the said date, would
come under the ambit of these new guidelines.
(iii) As regards investments made between February 13, 2009 and the date of
publication of the FEMA notification, Indian companies shall be required to
intimate, within 90 days from the date of this circular, through an AD Category
I bank to the concerned Regional Office of the Reserve Bank, in whose
jurisdiction the Registered Office of the company is located, detailed position
where the issue/transfer of shares or downstream investment is not in conformity
with the regulatory framework now being prescribed. Reserve Bank shall consider
treating such cases as compliant with these guidelines within a period of six
months or such extended time as considered appropriate by RBI in consultation
with Government of India.
4. AD Category - I banks may bring the contents of the circular to the notice of
their customers/constituents concerned.
5. As stated above, Reserve Bank has since amended the Regulations and notified
vide
Notification No. FEMA.278/2013-RB dated June 07, 2013 and notified vide
G.S.R.393(E) dated June 21, 2013.
6. The directions contained in this circular have been issued under sections
10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and
are without prejudice to permissions / approvals, if any, required under any
other law.
Yours faithfully,
(Rudra Narayan Kar)
Chief General Manager-In-Charge
Annex
Guidelines for calculation of total foreign investment in Indian companies,
transfer of ownership and control of Indian companies and downstream investment
by Indian companies
A. Definitions
1 (i) Ownership and Control
a) Company ‘Owned by resident Indian citizens’ shall be an Indian company if
more than 50% of the capital in it is beneficially owned by resident Indian
citizens and/or Indian companies, which are ultimately owned and controlled by
resident Indian citizens; Company shall be considered ‘Controlled' by resident
Indian citizens if the residents Indian citizens and Indian companies, which are
owned and controlled by resident Indian citizens, have the power to appoint a
majority of its directors in that company;
b) Company ‘Owned by non-residents’ means an Indian company where more than 50%
of the capital in it is beneficially owned by non-residents; Company ‘Controlled
by ‘non-residents ’ means an Indian company where non-residents have the power
to appoint a majority of its directors in that company;
(ii) Direct foreign investment’ shall mean investment received by an Indian
Company from non-resident entities regardless of whether the said investments
have been made under Schedule 1, 2, 3, 6 and 8 of the
Notification No. FEMA.
20/2000-RB dated May 3, 2000, as amended from time to time;
(iii) ‘Downstream investment’ means indirect foreign investment, by one Indian
company into another Indian company, by way of subscription or acquisition;
(iv) 'Holding Company’ would have the same meaning as defined in Companies Act
1956;
(v) ‘Indian Company' means a company incorporated in India under the Companies Act, 1956;
(vi) ‘Indirect foreign investment’ means entire investment in other Indian
companies by an Indian company (IC), having foreign investment in it provided IC
is not ‘owned and controlled’ by resident Indian citizens and/or Indian
Companies which are owned and controlled by resident Indian citizens or where
the IC is owned or controlled by non-residents. However, as an exception, the
indirect foreign investment in the 100% owned subsidiaries of
operating-cum-investing/investing companies will be limited to the foreign
investment in the operating-cum-investing/ investing company.
(vii) ‘Investing Company’ means an Indian Company holding only investments in
other Indian company/ies directly or indirectly, other than for trading of such
holdings/securities;
(viii) ‘Non-Resident Entity’ means ‘person resident outside India’ (as defined
at Section 2(w) of FEMA, 1999);
(ix) ‘Resident Entity’ means ‘person resident in India’ (as defined at Section
2(v) of FEMA, 1999), excluding an individual;
(x) ‘Resident Indian citizen’ shall be interpreted in line with the definition
of person resident in India as per FEMA, 1999, read in conjunction with the
Indian Citizenship Act, 1955.
(xi) ‘Total foreign investment’ in an Indian Company would be the sum total of
direct and indirect foreign investment.
B. Direct and indirect foreign investment in Indian companies – meaning
2. Investment in Indian companies can be made by both non-resident as well as
resident Indian entities. Any non-resident investment in an Indian company is
direct foreign investment. Investment by resident Indian entities could again
comprise both resident and non-resident investments. Thus, such an Indian
company would have indirect foreign investment if the Indian investing company
has foreign investment in it. The indirect investment can also be a cascading
investment, i.e. through multi-layered structure.
C. Guidelines for calculation of total foreign investment, i.e., direct and
indirect foreign investment in an Indian company.
3.(i) Counting of Direct foreign investment: All investments made directly by
non-resident entities into the Indian company would be counted towards 'Direct
foreign investment'.
(ii) Counting of indirect foreign Investment: The entire indirect foreign
investment by the investing company into the other Indian Company would be
considered for the purpose of computation of indirect foreign investment.
However, as an exception, the indirect foreign investment in the 100% owned
subsidiaries of operating-cum-investing/investing companies will be limited to
the foreign investment in the operating-cum-investing/ investing company. This
exception has been made since the downstream investment of a 100% owned
subsidiary of the holding company is akin to investment made by the holding
company and the downstream investment should be a mirror image of the holding
company. This exception, however, is strictly for those cases where the entire
capital of the downstream subsidiary is owned by the holding company.
(iii) The methodology for calculation of total foreign investment would apply at
every stage of investment in Indian companies and thus in each and every Indian
company.
(iv) Additional requirements
(A) The full details about the foreign investment including ownership details
etc. in Indian company /ies and information about the control of the company /ies
would be furnished by the Company /ies to the Government of India at the time of
seeking approval.
(B) In any sector/activity, where Government approval is required for foreign
investment and in cases where there are any inter-se agreements between/amongst
share-holders which have an effect on the appointment of the Board of Directors
or on the exercise of voting rights or of creating voting rights
disproportionate to shareholding or any incidental matter thereof, such
agreements will have to be informed to the approving authority. The approving
authority will consider such inter-se agreements for determining ownership and
control when considering the case for approval of foreign investment.
(C) In all sectors attracting sectoral caps, the balance equity i.e. beyond the
sectoral foreign investment cap, would specifically be beneficially owned
by/held with/in the hands of resident Indian citizens and Indian companies,
owned and controlled by resident Indian citizens.
(D) In the I& B and Defence sectors where the sectoral cap is less than 49%, the
company would need to be “owned and controlled” by resident Indian citizens and
Indian companies, which are owned and controlled by resident Indian citizens.
(a) For this purpose, the equity held by the largest Indian shareholder would
have to be at least 51% of the total equity, excluding the equity held by Public
Sector Banks and Public Financial Institutions, as defined in Section 4A of the
Companies Act, 1956. The term “largest Indian shareholder", used in this clause,
will include any or a combination of the following:
(aa) In the case of an individual shareholder,
(aai) The individual shareholder,
(aaii) A relative of the shareholder within the meaning of Section 6 of the
Companies Act, 1956.
(aaiii) A company/ group of companies in which the individual shareholder/HUF to
which he belongs has management and controlling interest.
(ab) In the case of an Indian company,
(abi) The Indian company
(abii) A group of Indian companies under the same management and ownership
control.
(b) For the purpose of this Clause, “Indian company” shall be a company which
must have a resident Indian or a relative as defined under Section 6 of the
Companies Act, 1956/ HUF, either singly or in combination holding at least 51%
of the shares.
(c) Provided that, in case of a combination of all or any of the entities
mentioned in sub-clauses (aa) and (ab) above, each of the parties shall have
entered into a legally binding agreement to act as a single unit in managing the
matters of the applicant company.
(E) If a declaration is made by persons as per section 187C of the Indian
Companies Act about a beneficial interest being held by a non resident entity,
then even though the investment may be made by a resident Indian citizen, the
same shall be counted as foreign investment.
4. The above mentioned policy and methodology would be applicable for
determining the total foreign investment in all sectors, except in sectors where
it is specified in a statute or a rule there under. The above methodology of
determining direct and indirect foreign investment therefore does not apply to
the insurance sector which will continue to be governed by the relevant
Regulation.
D. Guidelines for establishment of Indian companies/ transfer of ownership or
control of Indian companies, from resident Indian citizens and Indian companies
to non-resident entities, in sectors with caps.
5. In sectors/activities with caps, including, inter-alia, defence production,
air transport services, ground handling services, asset reconstruction
companies, private sector banking, broadcasting, commodity exchanges, credit
information companies, insurance, print media, telecommunications and
satellites, Government approval/FIPB approval would be required in all cases
where:
(i) An Indian company is being established with foreign investment and is not
owned by a resident entity or
(ii) An Indian company is being established with foreign investment and is not
controlled by a resident entity or
(iii) The control of an existing Indian company, currently owned or controlled
by resident Indian citizens and Indian companies, which are owned or controlled
by resident Indian citizens, will be/is being transferred/passed on to a
non-resident entity as a consequence of transfer of shares and/or fresh issue of
shares to non-resident entities through amalgamation, merger/demerger,
acquisition, etc. or
(iv) The ownership of an existing Indian company, currently owned or controlled
by resident Indian citizens and Indian companies, which are owned or controlled
by resident Indian citizens, will be/is being transferred/passed on to a
non-resident entity as a consequence of transfer of shares and/or fresh issue of
shares to non-resident entities through amalgamation, merger/demerger,
acquisition, etc. or
(v) It is clarified that these guidelines will not apply to sectors/activities
where there are no foreign investment caps, that is, where100% foreign
investment is permitted under the automatic route.
(vi) For the purpose of computation of indirect foreign investment, foreign
investment shall include all types of direct foreign investments in the Indian
company making downstream investment. For this purpose portfolio investments
either by FIIs, NRIs or QFIs holding as on March 31 of the previous year would
be taken into account. e.g. for monitoring foreign investment for the financial
year 2011-12, investment as on March 31, 2011 would be taken into account.
Besides, investments in the form of Foreign Direct Investment, Foreign Venture
Capital investment, investments in ADRs/GDRs, Foreign Currency Convertible Bonds
(FCCB) will also be taken in account. Thus, regardless of the investments having
been made under Schedule 1, 2, 3, 6 and 8 of the
Notification No. FEMA.
20/2000-RB dated May 3, 2000, as amended from time to time will be taken into
account.
E. Downstream investment by an Indian company which is not owned and/or
controlled by resident entity/ies.
6. (i) Downstream investment by an Indian company, which is not owned and/ or
controlled by resident entity/ies, into another Indian company, would be in
accordance/compliance with the relevant sectoral conditions on entry route,
conditionalities and caps, with regard to the sectors in which the latter Indian
company is operating.
Note: with effect from 31st day of July 2012 Downstream investment/s made by a
banking company, as defined in clause (c) of Section 5 of the Banking Regulation
Act, 1949, incorporated in India, which is owned and/or controlled by
non-residents/ a non-resident entity/non-resident entities, under Corporate Debt
Restructuring (CDR), or other loan restructuring mechanism, or in trading books,
or for acquisition of shares due to defaults in loans, shall not count towards
indirect foreign investment. However, their 'strategic downstream investment'
shall count towards indirect foreign investment. For this purpose, 'strategic
downstream investments' would mean investment by these banking companies in
their subsidiaries, joint ventures and associates.
(ii) Downstream investments by Indian companies will be subject to the following conditions:
(a) Such a company has to notify Secretariat for Industrial Assistance, DIPP and
FIPB of its downstream investment in the form available at
http://www.fipbindia.com within 30 days of such investment, even if capital
instruments have not been allotted along with the modality of investment in
new/existing ventures (with/without expansion programme);
(b) downstream investment by way of induction of foreign equity in an existing
Indian Company to be duly supported by a resolution of its Board of Directors as
also a Shareholders’ Agreement, if any;
(c) issue/transfer/pricing/valuation of shares shall continue to be in
accordance with extant SEBI/RBI guidelines;
(d) For the purpose of downstream investment, the Indian companies making the
downstream investments would have to bring in requisite funds from abroad and
not use funds borrowed in the domestic market. This would, however, not preclude
downstream operating companies, from raising debt in the domestic market.
Downstream investments through internal accruals are permissible by an Indian
company engaged only in activity of investing in the capital of another Indian
company/ies, subject to the provisions above and as also elaborated below:
- Foreign investment into an Indian company, engaged only in the activity of
investing in the capital of other Indian company /ies, will require prior
Government/FIPB approval, regardless of the amount or extent of foreign
investment. Foreign investment into Non-Banking Finance Companies (NBFCs),
carrying on activities approved for FDI, will be subject to the conditions
specified in Annex-B of Schedule 1 of
FEMA Notification No. 20 dated May 3, 2000
as amended from time to time;
- Those companies, which are Core Investment Companies (CICs), will have to
additionally follow RBI‟s Regulatory Framework for CICs.
- For infusion of foreign investment into an Indian company which does not have
any operations and also does not have any downstream investments,
Government/FIPB approval would be required, regardless of the amount or extent
of foreign investment. Further, as and when such a company commences business(s)
or makes downstream investment, it will have to comply with the relevant
sectoral conditions on entry route, conditionalities and caps.
Note: Foreign investment into other Indian companies would be in accordance/
compliance with the relevant sectoral conditions on entry route,
conditionalities and caps.
(e) The FDI recipient Indian company at the first level which is responsible for
ensuring compliance with the FDI conditionalities like no indirect foreign
investment in prohibited sector, entry route, sectoral cap/conditionalities,
etc. for the downstream investment made by in the subsidiary companies at second
level and so on and so forth would obtain a certificate to this effect from its
statutory auditor on an annual basis as regards status of compliance with the
instructions on downstream investment and compliance with FEMA provisions. The
fact that statutory auditor has certified that the company is in compliance with
the regulations as regards downstream investment and other FEMA prescriptions
will be duly mentioned in the Director’s report in the Annual Report of the
Indian company. In case statutory auditor has given a qualified report, the same
shall be immediately brought to the notice of the Reserve Bank of India, Foreign
Exchange Department (FED), Regional Office (RO) of the Reserve Bank in whose
jurisdiction the Registered Office of the company is located and shall also
obtain acknowledgement from the RO of having intimated it of the qualified
auditor report. RO shall file the action taken report to the Chief General
Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, Central
Office, Central Office Building, Shahid Bhagat Singh Road, Mumbai 400001.