Foreign Direct Investment Overview and recent developments

1. Foreign Direct InvestmentOverview and recent developments Nabin Ballodia & Sujay Paul 24 April 2010

2. Agenda Overview Recent Developments Procedural Aspects Sector Specific Guidelines Questions

3. Overview

4. India Transformed !! …Yesterday • Slow rate of growth • Bureaucratic • Protected and slow • Small consumer markets • Weak infrastructure …Today • Strong macro economic fundamentals • Encouraging foreign investment • Outsourcing destination • Growing consumerism • Impetus on infrastructure development India -- the largest Democracy - one of the fastest growing economies in the World!

5. India is Relatively Stable and Growing …! "If there is one place on the face of this Earth where all the dreams of living men have found a home when man began the dream of existence, it is India". Romain Rolland, French philosopher

6. Forms of business presence in India Forms of Business presence in India Foreign investor Government approval required. Typically, not forthcoming Generally requires approval (except for Project Office) Generally permitted except for certain sectors where government approval is required Unincorporated entities Incorporated entities Partnerships Liaison office Joint venture Unlimited partnership Project office Wholly owned subsidiary LLP Branch office A preferred form of business presence may be chosen based on operating flexibility, tax efficiencies, regulatory compliances and efficiency in capital raising

7. Foreign Direct Investment Policy… • Foreign Direct Investment (‘FDI’) – cross border investment with an objective to establish ‘lasting interest’ • Objective - to encourage FDI to promote industrial & socio-economic development; supplement domestic capital/ technology • Foreign investment in India is regulated by Government of India’s FDI policy. The FDI guidelines administered by the Ministry of Commerce and Industry. • Department of Industrial Policy & Promotion (‘DIPP’), Foreign Investment Promotion Board (‘FIPB’) and Secretariat of Industrial Assistance (‘SIA’) regulate the FDI Policy • Administrative and compliance aspects of FDI monitored by RBI • Since 1991, policy has been liberalized substantially to facilitate foreign investment

8. Foreign Direct Investment Snapshot 56% Figures in Million US$ 184% * April 2009 – January 2010 • Mauritius, Singapore and Cyprus are the favorite jurisdictions for investment into India • Foreign investment (‘FI’) from Mauritius constituting 43%* of India’s total FI *as per information in the Press

9. The Roadmap so far… Sectoral caps raised; Conditions relaxed; Up to 100% under ‘Automatic Route’ in all sectors except a small negative list Up to 74/51/50% in 111 Sectors under ‘Automatic Route’ 100% in some sectors Up to 51% under ‘Automatic Route’ for 35 Priority Sectors Allowed selectively up to 40% Post 2000 Pre 1991 1991 1997 2000

10. …Foreign Direct Investment Policy… FDI Guidelines for Investing in Indian Wholly Owned Subsidiary / Joint Venture Automatic Route Government Route No Prior Regulatory Approval but only Post Facto Filings to RBI, through AD Foreign Investment Promotion Board (FIPB) • Allowed for Most sectors • Limits : Sectoral caps/ stipulated sector specific guidelines • Inward remittances through proper banking channels • Pricing valuationsprescribed • Post facto filing with 30 days of fund receipt • Filings within 30 days of share allotment • Includes Technical Collaboration/ Brand Name/ Royalty • Only for cases other than Automatic Route and those mentioned in sectoral policy • Applies to cases with existing venture/ tie up in ‘same filed’ • Applies to investment over 24% in SSI reserved items  

11. …Foreign Direct Investment Policy FDI limits – Illustrative list Automatic Route (Illustrative) Prior Approval (Illustrative) Negative List (Illustrative) • NBFC (minimum capitalization norms) • IT / ITes • Financial services(a) • Telecom Sector (74% cap)(a) • Insurance (26 % cap)(a) • Real Estate(a) • Special Economic Zones • Infrastructure • Shipping • Manufacturing sector • Hotels and tourism • Existing Airports 100% • Asset Reconstruction Companies 49% • Titanium Minerals 100% • Broadcasting (a) • Cigars & Cigarettes 100% • Courier 100% • Print Media(a) 26% • Single brand retailing 51% • Agriculture (b) • Atomic energy • Retail trading (except single brand up to 51%) • Lottery, betting and gambling • Chit fund, Nidhi company • Trading in Transferable Development Rights    Note: (a) Sector specific guidelines (b) Subject to certain exceptions

12. Recent Developments

13. Setting the context… • Contribution of FDI in India’s economic development is an acknowledged fact • From inception policy subject to extensive amendments from time to time through Press Notes, circulars and clarifications • Press Note 2,3 and 4 of 2009 issued to provide clarity on indirect FDI and downstream investment • FM stressed the need for a consolidated FDI policy in Budget 2010-11 • Draft consolidated policy issued in late 2009 for public comments • Consolidated FDI policy issued effective from 1 April, 2010

14. Consolidated FDI Policy – salient features • Consolidated document of all foreign investment policies /regulations under FEMA, Press Notes, Press Releases and Clarifications issued by DIPP • Underlying rationale to promote FDI through a policy framework that is transparent, predictable, simple and clear and which reduces regulatory burden • As an investor friendly measure, a new Circular is proposed to be issued every six months • Press Notes/Press Releases/Clarifications on FDI in force as of 31 March 2010 will stand rescinded. Savings for actions taken under earlier press notes • Use of chapters, headings and definitions • Two kinds of foreign investment – (i) FDI and (ii) Foreign Portfolio Investment (FPI) • FDI – strategic long term relationship and establish a lasting interest • FPI – no intention to influence the management of the investee entity

15. FDI Policy – Principles • Capital defined as Equity, Compulsorily Fully Convertible Preference Shares and Compulsorily Fully Convertible Debentures • Warrants, partly paid up shares other hybrid instruments not permitted for FDI • Investment in other instruments such as: • Non Convertible Preference Shares/ Debenture (‘NCP’) • Optionally Convertible Preference Shares/ Debentures (‘OCP’) • Partially Convertible Preference Shares/ Debentures (‘PCP’) treated as External Commercial Borrowings (‘ECB’) - subject to ECB guidelines • Existing NCP/ OCP/ PCP on cut off date outside sectoral cap till current maturity

16. FDI Policy – Principles …contd. • FDI permitted in: • Indian companies including micro & small enterprise • Partnership firm/ proprietorship concern – only by NRI/PIOs • Trust only in the form of VCFs • Not permitted in LLPs or any other entities – under consideration • Investment by FIIs permitted upto 10% for individual FII and 24% in aggregate • Pricing of capital instruments (including conversion price for convertible instruments) is now required to be decided upfront at the time of issue of instruments • Investment by FVCI in DVCF set up as trust would now require specific Government approval; FVCI can directly invest subject to FDI policy

17. Existing Venture/ Tie-up cases • In case intending foreign investor had existing venture/ collaboration as on January 12, 2005 in ‘same’ field – FIPB approval subject to NoC • Same field as per 4 digit National Industrial Classification (NIC) 1987 code • Restriction not applicable under following circumstances – • Investment by VC Fund registered with SEBI • existing joint venture has less than 3% investment by either party • existing joint venture is defunct/sick • existing venture in specified sectors including mining, IT enabled services

18. All payments covered under Automatic route, subject to limits Royalty/ Foreign Technology Agreement Earlier Brand name/ trade mark royalty Foreign Technology Agreements • Payment of royalty upto 1% of domestic sales and 2% of exports permitted (without technology transfer) • Where royalty for brand name/ trademark and technology, then overall limits of 5% of domestic sales and 8% of exports • Lumpsum payments not to exceed USD 2 mn (per technology) • Royalty upto 5% of domestic sales and 8% of exports Now The Government has liberalized the aforesaid limits by permitting, under the automatic route, and without any restrictions: • All payments for royalty • Lump sum fee for transfer of technology • Payments for use of trademark/ brand name

19. Calculation of Indirect FDI… Direct Foreign Investment Indirect Foreign Investment Foreign Co. Foreign Co. Overseas Overseas Direct FI India India I Co1 I Co1 Indirect FI I Co2

20. Calculation of Indirect FDI… Earlier Different methods of computing Indirect FI prescribed for different sectors. E.g. • Telecom/ Broadcasting: Proportionate method • Investing companies in Infrastructure/ Services sector: Management + Ownership Test Telecom sector Infrastructure sector Foreign Co. Foreign Co. Overseas Overseas 90% 49% India India I Co1 I Co1* 60% 100% *Management of I Co1 with Indians I Co2 I Co2 FI in I Co2 is 54% (90*60%) FI in I Co2 is NIL

21. …Calculation of Indirect FDI* RIC means: • ‘Resident Indian Citizen’ as interpreted / in line with the definition of ‘person resident in India’ as per FEMA 1999, read in conjunction with the Indian Citizenship Act; and/or • Indian Companies (Companies registered / incorporated in India) which are ultimately owned and controlled by ‘Resident Indian Citizens’ Non Resident Entity (NRE) means: • A ‘person resident outside India’ as defined under FEMA 1999 ‘Owned’ by RIC means: • If more than 50% of equity interest in Indian Company is beneficially owned by RIC ‘Controlled’ by RIC means: • If RIC has power to appoint majority of directors in the Indian Company Owned by NRE means: • If more than 50% of equity interest in Indian Company is beneficially owned by non-residents Controlled by NRE means: • If non-residents have power to appoint majority of directors in the Indian Company

22. …Calculation of Indirect FDI* Now • Total FI is sum of Direct FI and Indirect FI • FI to include all types of foreign investments • For RIC own and control are cumulative conditions; for NRE these are non-cumulative • The methodology to apply to every stage of investment at Indian company Non Resident Entity (‘NRE’) NRE Overseas Overseas 51% 40% India India I Co1 (Owned or Controlled by NRE) I Co1 (Owned and Controlled by RIC) 51% 39% 49% 10% I Co2 (Owned and Controlled by NRE) I Co2 (Owned and Controlled by RIC) Direct FI in I Co2 = 51% Indirect FI in I Co2 = 49% Total FI in I Co2 = 100% Direct FI in I Co2 = 39% Indirect FI in I Co2 = Nil Total FI in I Co2 = 39%

23. …Calculation of Indirect FDI* Non Resident Entity (‘NRE’) Non Resident Entity (‘NRE’) Overseas Overseas 75% 26% India India I Co1 (Investing/ operating cum investing company) I Co1 (Investing/ operating cum investing company) 25% 74% RIC 100% 100% I Co2 I Co2 Indirect FI in I Co2 = 75% Indirect FI in I Co2 = NIL or 26%? What is indirect FDI in near 100% say 99% held companies?

24. Downstream Investment… Foreign Co. ICo1 could be • An investing company; or • An investing-cum-operating company ICo2 is an operating company Overseas India I Co1 Downstream Investment I Co2

25. Downstream investment • Guiding principle – downstream investment by Indian companies owned or controlled by NRE subject to same guidelines as direct investment • For operating companies – Foreign investment subject to sectoral FDI policy conditions • For operating-cum-investing companies - Foreign investment subject to sectoral FDI policy conditions • For investing companies – Foreign investment in investing companies under approval route; downstream investment subject to sectoral FDI policy • Reporting requirements within 30 days of investment with DIPP/ FIPB introduced • Investing and Investing-cum-operating companies not permitted to leverage funds from domestic market for downstream investment

26. Transfer of securities – basic rules

27. Procedural Aspects

28. FDI Policy – Procedural Aspects • Intimation of receipt of share application money – within 30 days • Purpose of inward remittance clearly stated on FIRC • Allotment of shares within 180 days of receipt of funds • Funds against which shares not allotted to be refunded • Reporting in Form FC GPR within 30 days of allotment • In case of Approval route, application to FIPB along with supporting documents • All applications to be placed before FIPB within 15 days • FIPB empowered to prioritise applications based on sector, export potential etc. • Violations of regulations attract penal provisions under FEMA

29. Sector Specific Guidelines

30. Sector Specific Guidelines Prohibited sectors • FDI not allowed in the following: • Retail trading (except single brand) • Atomic Energy • Lottery business • Gambling & Betting • Chit fund and Nidhi company • Trading in Transferable Development Rights • Real Estate business or construction of Farm Houses • Sectors not opened for private sector investments • Prohibition extended to foreign technology collaboration including licensing for franchisee, trademark, brand name or management contract for lottery, betting and gambling business

31. Sector Specific Guidelines Telecommunication • FDI allowed in the following (illustrative): • Basic and cellular • Unified Access Services • National/ International Long Distance • Global Mobile Personal Communications Services (GMPCS) • Other value added telecom services • FDI in ISPs without gateways now capped at 74% in line with DoT guidelines of 2007 • Subject to guidelines issued DOT • FDI Limits:

32. Sector Specific Guidelines Trading • No change in existing sectoral caps • Cash & Carry wholesale trading/ Wholesale trading (WT) specifically defined to mean sale to Retailers, Industrial, Commercial, Institutional or other professional business users and other wholesalers and related subordinated service providers • Some of the other key attributes of WT: • Implies sales for trade, business and profession as opposed to sales for personal consumption • Benchmark is the type of customers and not size and volume of sales • WT include Resale, Sale after processing, Bulk imports with export and B2B e-Commerce • WT permitted among group companies subject to max 25% of total turnover of the wholesale venture and only for internal use • Can be as per normal business practice including on credit • WT trader cannot open retail shops to sell to consumer directly

33. Sector Specific Guidelines Trading • Purchasing entity to fulfill one of the following: • Entity should hold sales tax/ VAT /service tax / excise duty registration; or • Entity should hold trade licenses reflecting that the entity is itself engaged in business involving commercial activity; or • Entity should hold permits/license etc. for undertaking retail trade from Government /Local Self Government Bodies; or • Entity should be an Institution having certificate of incorporation or registration as a society or registration as public trust for their self consumption • Obligation on Indian company to maintain day-to-day records with respect to satisfaction of above conditions. • FDI in e-commerce permitted only in B2B trade and not in retail trade

34. Sector Specific Guidelines Private sector banks/ Civil Aviation • No change in existing conditions • FDI permitted under automatic route upto 49% and thereafter upto 74% under Approval Route Banks Civil Aviation • No change in existing conditions • FDI in Non-scheduled air transport services/ non-schedule airlines, Chartered and Cargo airlines permitted under automatic route upto 49% and thereafter upto 74% under Approval Route

35. Sector Specific Guidelines Broadcasting • In the Broadcasting sector, all FDI are under the Approval route • For reckoning the FDI limits, FII investment also to be considered • Subject to guidelines issued by I&B ministry • FDI permitted in broadcasting sector: * FDI component not to exceed 20% ** May be raised to 49% as per recent press reports

36. Sector Specific Guidelines Print Media • FDI is permitted under Approval route based on nature of publication • Investment subject to sectoral policy issued by Ministry of Information and Broadcasting • FDI limits on publications: * May be raised to 49% as per recent press reports