Introduction
Pursuant to notifications of RBI of June 7, 2013 and June 21, 2013, the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 have been amended to incorporate 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. The key aspects of the guidelines have been summarized below:
Key Definitions:
i. 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;
ii. 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;
iii. ‘Direct foreign investment‘ shall mean investment received by an Indian Company from nonresident entities
iv. ‘Downstream investment‘ means indirect foreign investment, by one Indian company into another Indian company, by way of subscription or acquisition;
v. ‘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-cuminvesting/ investing company;
vi. ‘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;
vii. ‘Total foreign investment‘ in an Indian Company would be the sum total of direct and indirect foreign investment.
Guidelines for calculation of total foreign investment, i.e. direct and indirect foreign investment in an Indian company:
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.
a) Direct Foreign Investment (investment received by an Indian Company from non-resident entities): All investments made directly by non- resident entities into the Indian company would be counted towards ‘Direct foreign investment’.
b) 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-cuminvesting/investing companies will be limited to the foreign investment in the operating-cuminvesting/ 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 strictlyfor those cases where the entire capital of the downstream subsidiary is owned by the holding company.
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.
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
In sectors/activities with caps, including, inter-alia, defense 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.
Downstream investment by an Indian company which is not owned and/or controlled by resident entity/ies
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;
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 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.
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, RBI.
About Bulwark Solicitors
Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.