Saturday, March 14, 2009

GOVT. AMENDS FDI NORMS

Department of Industrial Policy and Promotion (DIPP) have brought out four press notes significantly amending the existing FDI norms.

Press Note 1 (2009), allows Foreign Investment in the following two sectors-

  • Facsimile of foreign newspaper

FDI up to 100% is permitted with prior approval of the Government in publication of facsimile edition of foreign newspaper provided the FDI is by the owner of the original foreign newspaper whose facsimile edition is proposed to be published in India. Only companies registered under the provisions of the Companies Act 1956 can undertake the publication of such facsimile edition.

  • Indian edition of foreign magazine
Foreign Investment upto 26% is permitted with prior approval of the Government in publication of Indian editions of foreign magazines. Foreign Investment for this purpose includes FDI and investment by NRIs/PIOs/ FII.

Foreign Investment Computation
Press Note 2 (2009 series), issues the new guidelines for calculation of Total Foreign Investment in
India.
 
  • Total Foreign Investment means Direct as well as Indirect Foreign Investment.
  • Counting of Direct Foreign Investment
All investment directly by a non resident entity into the Indian company would be counted towards foreign investment.

  • Counting of Indirect Foreign direct Investment
Foreign Investment through the investing Indian Company would not be considered for the purpose of Indirect Foreign Investment in case of investing Indian Company is owned and controlled by the resident Indian Citizens and/or Indian Companies which are owned and controlled by resident Indian Citizens. If the Investing Company is owned or controlled by Non-Resident Entities then all such investment would be considered for the purpose of Indirect Foreign Investment except where Investee Company is 100% subsidiary of investing company, indirect foreign investment will be limited to proportionate foreign investment in investing company.

Additional conditions for approval by Government of India include disclosure of information 
about ownership and control details in the Indian investing Company and any shareholder or interse
agreement having effect on the appointment of Board of Directors, exercise of voting rights, creation of disproportionate voting rights, any incidental matter thereof.

Transfer of Ownership - Mandatory Govt. approval where sectoral cap is there

Press Note 3 (2009 series) provides guidelines for transfer of ownership or control of Indian
Companies in sector with caps from Resident Indian Citizens to Non-Resident entities. It is to be noted that this guideline will not be applicable for sectors where 100% foreign investment is permitted under automatic route. In sector with caps, Government/FIPB approval will be required in the following cases-

  • An Indian Company is being established with foreign investment and is owned or controlled by a Non-resident entity.
  • The control or ownership of an existing Indian company, which is currently owned or controlled by resident Indian citizens and Indian companies which are owned or controlled by resident Indian citizen, is preferred to transferred to a non-resident entity as a consequence of transfer of shares by way of amalgamation, merger, acquisition.
Downstream Investment

Press Note 4 (2009 series) clarifies the Guidelines for downstream investment by investing Indian
companies owned or controlled by Non Resident Indians
Policy of Downstream Investment applies to:

  • Operating Companies: Foreign Investment in Operating Companies must comply with the Sectoral conditions and caps with regard to the sectors in which these companies are operating.
  • Operating cum Investing companies: Foreign Investment in such companies as well as the Indian Company in which downstream investment is made by such companies must comply the Sectoral caps and conditions of the sector in which they are operating.
  • Investing companies: Foreign Investment in investing companies will require prior approval of Government/FIPB regardless of the amount or extent of foreign investment. Indian Company in which downstream investment is made by such  investing companies: Foreign Investment in 
  • investing companies will require prior approval of Government/FIPB regardless of the amount or extent of foreign investment. Indian Company in which downstream investment is made by such
Downstream Investment shall be subject to following conditions:
  • Company making investment must within 30 days notify SIA, DIPP and FIPB of such investment;
  • Resolution by the Board of Directors supported by the Shareholders Agreement, if any for the induction of foreign equity;
  • Issue/transfer pricing/ valuation shall comply with the SEBI/RBI Guidelines;
  • Investing companies need to bring the requisite funds from abroad rather than using leverage funds from domestic market. This does not restrict the downstream operating companies to raise debt in the domestic market.
New Definitions

  • Resident Indian citizen means a person resident in India AND a citizen of India.
  • Non-resident entity is a person resident outside India.
  • Investing Company means an Indian company making equity/preference/CCD investment into another Indian Company.
  • Owned by resident Indian citizen and Indian companies, which are owned and controlled by resident Indian citizen means that more that 50% of the equity interest is beneficially owned by resident Indian citizen and Indian companies, which are owned and controlled by resident Indian citizen
  • Controlled by resident Indian citizen and Indian companies, which are owned and controlled by resident Indian citizen means that resident Indian citizen and Indian companies, which are owned and controlled by resident Indian citizen have the power to appoint majority of its directors.

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