Foreign Direct Investment - Economics, UPSC, IAS. | Indian Economy (Prelims) by Shahid Ali PDF Download

Foreign Direct Investment

Foreign Direct Investment (FDI)
Foreign direct investment (FDI) is direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.
Foreign direct investment in India
Foreign investment was introduced in 1991 as Foreign Exchange Management Act (FEMA), driven by Minister Manmohan Singh. As Singh subsequently became a prime minister, this has been one of his top political problems, even in the current (2012) election. India disallowed overseas corporate bodies (OCB) to invest in India.

Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012. As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a drop of 43% from the first half of the last year.
2012 FDI reforms
On 14 September 2012, Government of India allowed FDI in aviation up to 49%, in the broadcast sector up to 74%, in multi-brand retail up to 51%, in single-brand retail up to 100%. The choice of allowing FDI in multi-brand retail up to 51% has been left to each state. But Government of India does not allow foreign e-commerce companies to pick-up 51% stake in multi-brand retail sector in business-to-consumer space citing regulatory issues, problems in checking inter-state transactions in e-commerce activities. In its supply chain sector, the government of India had already approved 100% FDI for developing cold chain.
Why Countries Seek FDI ?

1. Domestic capital is inadequate for purpose of economic growth;
2. Foreign capital is usually essential, at least as a temporary measure, during the period when the capital market is in the process of development;
3. Foreign capital usually brings it with other scarce productive factors like technical know how, business expertise and knowledge
   

What are the major benefits of FDI :

1. Improves forex position of the country;
2. Employment generation and increase in production ;
3. Help in capital formation by bringing fresh capital;
4. Helps in transfer of new technologies, management skills, intellectual property
5. Increases competition within the local market and this brings higher efficiencies
6. Helps in increasing exports;
7. Increases tax revenues

Why FDI is Opposed by Local People or Disadvantages of FDI:

1. Domestic companies fear that they may lose their ownership to overseas company
2. Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business;
3. Large giants of the world try to monopolise and take over the highly profitable sectors;
4. Such foreign companies invest more in machinery and intellectual property than in wages of the local people;
5. Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company;
   

Brief Latest Developments on FDI (all sectors including retail):-

2012 – October: In the second round of economic reforms, the government cleared amendments to raise the FDI cap

1. in the insurance sector from 26% to 49%;
2. in the pension sector it approved a 26 percent FDI;
   Now, Indian Parliament will have to give its approval for the final shape,"

2012 - September : The government approved the

1. Allowed 51% foreign investment in multi-brand retail,
2. Relaxed FDI norms for civil aviation and broadcasting sectors. – FDI cap in Broadcasting was raised to 74% from 49%;
3. Allowed foreign investment in power exchanges

2012 – December :

1. The Indian government removed the 51 percent cap on FDI into single-brand retail outlets and thus opened the market fully to foreign investors by permitting 100 percent foreign investment in this area.

Explain the forms in which business can be conducted by a foreign company in India

A foreign company planning to set up business operations in India may:

• Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.
• Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company

What is the procedure for receiving Foreign Direct Investment in an Indian company?

An Indian company may receive Foreign Direct Investment under the two routes as given under:

i. Automatic Route

FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

ii. Government Route

FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

What is Scope of FDI in India? Why World is looking towards India for Foreign Direct Investments :

India is the 3rd largest economy of the world in terms of purchasing power parity and thus looks attractive to the world for FDI. Even Government of India, has been trying hard to do away with the FDI caps for majority of the sectors, but there are still critical areas like retailing and insurance where there is lot of opposition from local Indians / Indian companies.

Some of the major economic sectors where India can attract investment are as follows:-

• Telecommunications
• Apparels
• Information Technology
• Pharma
• Auto parts
• Jewelry
• Chemicals

In last few years, certainly foreign investments have shown upward trends but the strict FDI policies have put hurdles in the growth in this sector. India is however set to become one of the major recipients of FDI in the Asia-Pacific region because of the economic reforms for increasing foreign investment and the deregulation of this important sector. India has technical expertise and skilled managers and a growing middle class market of more than 300 million and this represents an attractive market.

Background and Recent Developments for FDI in Retail Sector which has raised lot of controversies in political circles :

As part of the economic liberalization process set in place by the Industrial Policy of 1991, the Indian government has opened the retail sector to FDI slowly through a series of steps:

1995 : World Trade Organisation’s (WTO) General Agreement on Trade in Services, which includes both wholesale and retailing services, came into effect

1997 : FDI in cash and carry (wholesale) with 100% rights allowed under the government approval route;

2006 : FDI in cash and carry (wholesale) was brought under automatic approval route; Upto 51% investment in single brand retail outlet permitted, subject to Press Note 3 (2006 series)

2011 : 100% FDI in Single Brand Retail allowed’

2012 : On Sept. 13, Government approved the allowance of 51 percent foreign investment in multi-brand retail, [ It also relaxed FDI norms for civil aviation and broadcasting sectors]’

Name the sectors where FDI is  NOT  allowed in India, both under the Automatic

Route as well as under the Government Route?

FDI is prohibited under the Government Route as well as the Automatic Route in the

following sectors:

1. Atomic Energy
2. Lottery Business
3. Gambling and Betting
4. Business of Chit Fund
5. Nidhi Company
6. Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations)
7. Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in notification
8. Trading in Transferable Development Rights (TDRs).

Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.

For Knowledge Level III :

Name the authorities Dealing With Foreign Investment:

1.  Foreign Investment Promotion Board (popularly known as FIPB) : The Board is responsible for expeditious clearance of FDI proposals and review of the implementation of cleared proposals. It also undertake investment promotion activities and issue and review general and sectoral policy guidelines;
2. Secretariat for Industrial Assistance (SIA) : It acts as a gateway to industrial investment in India and assists the entrepreneurs and investors in setting up projects. SIA also liaison with other government bodies to ensure necessary clearances;
3. Foreign Investment Implementation Authority (FIIA) : The authority works for quick implementation of FDI approvals and resolution of operational difficultieis faced by foreign investors;
4. Investment Commission
5. Project Approval Board
6. Reserve Bank of India

What are the instruments for receiving Foreign Direct Investment in an Indian company?

Foreign investment is reckoned as FDI only if the investment is made in equity shares , fully and mandatorily convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront. Any foreign investment into an instrument issued by an Indian company which: gives an option to the investor to convert or not to convert it into equity or does not  involve upfront pricing of the instruments a date would be reckoned as ECB and would have to comply with the ECB guidelines.

The FDI policy provides that the price/ conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [the DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies].

What are the Total Inflows of FDI in India :

1. For the FY 2012-13 (for the month of July, 2012) was US$ 1.47 billion.
2. Amount of FDI equity inflows for the financial year 2012-13 (from April 2012 to July 2012) stood at US$ 5.90 billion.
3. Cumulative amount of FDI (from April 2000 to July 2012) into India stood at US$ 176.76 billion 

FDI Equity Inflows from 2000-2012

			Financial Year				%age growth over previous
S. No				Amount of FDI Inflows
								year (in terms of US $)
		(April – March)
				In Rs, crores		In US$ million
	1		2000-01	10733		2463		-
	2		2001-02	18654		4065		( + ) 65 %
	3		2002-03	12871		2705		( - ) 33 %
	4		2003-04	10064		2188		( - ) 19 %

5	2004-05	14653	3219	( + ) 47 %
6	2005-06	24584	5540	( + ) 72 %
7	2006-07	56390	12492	(+ )125 %
8	2007-08	98642	24575	( + ) 97 %
9	2008-09 ‘*’	142829	31396	( + ) 28 %
10	2009-10 #	123120	25834	( - ) 18 %
11	2010-11 #	88520	19427	( - ) 25 %

				2011-12	#
		12		(April	-		122307		26192		-
				January 2012)
		CUMULATIVE
		TOTAL  (from			April		723367		160096		-
		2000		to  January 2012)

(a)  including  amount  remitted  through  RBI‟s-NRI  Schemes  (2000-2002).

(ii) FEDAI (Foreign Exchange Dealers Association of India) conversion rate from rupees to US dollar applied, on the basis of monthly average rate provided by RBI(DEAP),    Mumbai.

       (iii) Variation in equity inflows reported in above Table II-A & II-B for 2006-07, 2007-08, 2008-09, 2009-10 & 2010-11 is due to difference in                    reporting of inflows by RBI in their  monthly   report   to   DIPP   &   monthly   RBI   bulletin.

       (IV) # Figures for the years 2009-10, 2010-11 & 2011-12 are provisional subject to reconciliation  with RBI.

        (V) „*‟ An additional amount of US$ 4,035 million pertaining to the year 2008-09, since reported by RBI, has been included in FDI data base from           February 2012.

Which country tops in inflow of FDI Since 2000-2010? Top 5 Countries for FDI :

		Inflow in %		Inflows in absolute
	Country			Terms (million US
		age terms
				dollars)
	Mauritius	42%		50164
	Singapore	9		11275
	USA	7		8914
	UK	5		6158
	Netherlands	4		4968

Majority of the foreign direct investment comes through Mauritius as it enjoys several tax advantages, which works well for the international investors.

What are the Limits for FDI in different Sectors :

** Note / Caution : The below is only broad categorization and may need fine tuning and updations, For example in Civil Aviation and Broadcasting there are subcategories with different %ag of FDI allowed. These needs to be checked for further and updated knowledge.

1. News About Civil Aviation and Broadcasting can be read from this link.
2. Second Link for the details can be checked by clicking here
3. 26% FDI is permitted in Defence

Newspaper and media ** Petroleum refining

Pension sector (allowed in October 2012 as per cabinet decision)

(B)49% FDI is permitted in :

Banking

Cable network**

DTH **

Infrastructure investment

Telecom

Insurance (Enhanced from 26% to 49% in October, 2012)

49% (FDI & FII) in power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations 2010 subject to an FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital is now permissible. [Permitted in September 2012]

(C ) 51% is Permitted in

Multi-Brand Retail (Since September 2012)

Petro-pipelines

(D) 74% FDI is permitted in

Atomic minerals

Science Magazines /Journals

Petro marketing

Coal and Lignite mines

Telecom

(E)100% FDI is permitted in

Single Brand Retail (Increased to 100% from 51% in December 2011).

Advertizement

Airports

Cold-storage

BPO/Call centres

E-commerce

Energy (except atomic)

export trading house

Films

Hotel, tourism

Metro train

Mines (gold, silver)

Petroleum exploration

Pharmaceuticals

Pollution control

Postal service

Roads, highways, ports.

Township

Wholesale trading

Q. 1. What are the forms in which business can be conducted by a foreign company in India?

Ans. A foreign company planning to set up business operations in India may:

• Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.
• Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

Q.2. What is the procedure for receiving Foreign Direct Investment in an Indian company?

Ans. An Indian company may receive Foreign Direct Investment under the two routes as given under:

i. Automatic Route

FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

ii. Government Route

FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-IL, Plain paper applications carrying all relevant details are also accepted. No fee is payable.

The Indian company having received FDI either under the Automatic route or the Government route is required to comply with provisions of the FDI policy including reporting the FDI to the Reserve Bank. as stated in Q 4.

Q.3. What are the instruments for receiving Foreign Direct Investment in an Indian company?

Ans. Foreign investment is reckoned as FDI only if the investment is made in equity shares , fully and mandatorily convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront. Any foreign investment into an instrument issued by an Indian company which:

• gives an option to the investor to convert or not to convert it into equity or
• does not involve upfront pricing of the instrument as a date would be reckoned as ECB and would have to comply with the ECB guidelines.

The FDI policy provides that the price/ conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [the DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies].

Q.4. What are the modes of payment allowed for receiving Foreign Direct Investment in an Indian company?

Ans. An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures by:

1. inward remittance through normal banking channels.
2. debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.
3. conversion of royalty / lump sum / technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.
4. conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
5. debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.

If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B) / Escrow account, the amount shall be refunded. Further, Reserve Bank may on an application made to it and for sufficient reasons permit an Indian Company to refund / allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.

Q.5. Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route?

Ans. FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

1. Atomic Energy
2. Lottery Business
3. Gambling and Betting
4. Business of Chit Fund
5. Nidhi Company
6. Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) (c.f. Notification No. FEMA 94/2003-RB dated June 18, 2003).
7. Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).
8. Trading in Transferable Development Rights (TDRs).
9. Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.

(Please also see the the website of Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India at www.dipp.gov.in for details regarding sectors and investment limits therein allowed ,under FDI)

Q.6. What is the procedure to be followed after investment is made under the Automatic Route or with Government approval?

Ans. A two-stage reporting procedure has to be followed :.

• On receipt of share application money:

Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India,under whose jurisdiction its Registered Office is located, the Advance Reporting Form, containing the following details :

• Name and address of the foreign investor/s;
• Date of receipt of funds and the Rupee equivalent;
• Name and address of the authorised dealer through whom the funds have been received;
• Details of the Government approval, if any; and
• KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.

The Indian company has to ensure that the shares are issued within 180 days from the date of inward remittance which otherwise would result in the contravention / violation of the FEMA regulations.

Upon issue of shares to non-resident investors:

Within 30 days from the date of issue of shares, a report in Form FC-GPR- PART A together with the following documents should be filed with the Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India.

• Certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that:
• The company has complied with the procedure for issue of shares as laid down under the FDI scheme as indicated in theNotification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.
• The investment is within the sectoral cap / statutory ceiling permissible under the Automatic Route of the Reserve Bank and it fulfills all the conditions laid down for investments under the Automatic Route,

OR 

• Shares have been issued in terms of SIA/FIPB approval No. --------------------- dated ----------

---------- (enclosing the FIPB approval copy)

• Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

Q.7. What are the guidelines for transfer of existing shares from non-residents to residents or residents to non-residents?

Ans. The term ‘transfer’ is defined under FEMA as including "sale, purchase, acquisition, mortgage, pledge, gift, loan or any other form of transfer of right, possession or lien” {Section 2 (ze) of FEMA, 1999}.

The following share transfers are allowed without the prior approval of the Reserve Bank of India

A. Transfer of shares from a Non Resident to Resident under the FDI scheme where the pricing guidelines under FEMA, 1999 are not met provided that :-

1. The original and resultant investment are in line with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation, etc.;
2. The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST, buy back); and
3. Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.

B. Transfer of shares from Resident to Non Resident:

i) where the transfer of shares requires the prior approval of the FIPB as per the extant FDI policy provided that :

1. the requisite approval of the FIPB has been obtained; and
2. the transfer of share adheres with the pricing guidelines and documentation requirements as specified by the Reserve Bank of India from time to time.
3. where SEBI (SAST) guidelines are attracted subject to the adherence with the pricing guidelines and documentation requirements as specified by Reserve Bank of India from time to time.
4. where the pricing guidelines under the Foreign Exchange Management Act (FEMA), 1999 are not met provided that:- 

The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation etc.; b) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST); and

Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.

iv) where the investee company is in the financial sector provided that :

a) NOCs are obtained from the respective financial sector regulators/ regulators of the investee company as well as transferor and transferee entities and such NOCs are filed along with the form FC-TRS with the AD bank; and

b). The FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation etc., are complied with.

Where non-residents (including NRIs) make investment in an Indian company in compliance with the provisions of the Companies Act, 1956, by way of subscription to Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme.

Transfer of shares/ fully and mandatorily convertible debentures by way of Gift:

A person resident outside India can freely transfer shares/ fully and mandatorily convertible debentures by way of gift to a person resident in India as under:

• Any person resident outside India, (not being a NRI or an erstwhile OCB), can transfer by way of gift the shares/ fully and mandatorily convertible debentures to any person resident outside India;
• a NRI may transfer by way of gift, the shares/convertible debentures held by him to another NRI only,

Any person resident outside India may transfer share/ fully and mandatorily convertible debentures to a person resident in India by way of gift.

Q.8. Can a person resident in India transfer security by way of gift to a person resident outside India?

Ans. A person resident in India who proposes to transfer security by way of gift to a person resident outside India [other than an erstwhile OCBs] shall make an application to the Central Office of the Foreign Exchange Department, Reserve Bank of India furnishing the following information, namely:

• Name and address of the transferor and the proposed transferee
• Relationship between the transferor and the proposed transferee
• Reasons for making the gift.
• In case of Government dated securities, treasury bills and bonds, a certificate issued by a Chartered Accountant on the market value of such securities.
• In case of units of domestic mutual funds and units of Money Market Mutual Funds, a certificate from the issuer on the Net Asset Value of such security.
• In case of shares/ fully and mandatorily convertible debentures, a certificate from a Chartered Account on the value of such securities according to the guidelines issued by the Securities & Exchange Board of India or the Discount Free Cash Flow Cash (DCF) method with regard to listed companies and unlisted companies, respectively.
• Certificate from the Indian company concerned certifying that the proposed transfer of shares/convertible debentures, by way of gift, from resident to the non-resident shall not breach the applicable sectoral cap/ FDI limit in the company and that the proposed number of shares/convertible debentures to be held by the non-resident transferee shall not exceed 5 per cent of the paid up capital of the company.

The transfer of security by way of gift may be permitted by the Reserve bank provided:

1. The donee is eligible to hold such security under Schedules 1, 4 and 5 to Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.
2. The gift does not exceed 5 per cent of the paid up capital of the Indian company/ each series of debentures/ each mutual fund scheme
3. The applicable sectoral cap/ foreign direct investment limit in the Indian company is not breached
4. The donor and the donee are relatives as defined in section 6 of the Companies Act, 1956.
5. The value of security to be transferred by the donor together with any security transferred to any person residing outside India as gift in the financial year does not exceed the rupee equivalent of USD 50000.
6. Such other conditions as considered necessary in public interest by the Reserve Bank.

Q.9. What if the transfer of shares from resident to non-resident does not fall under the above categories?

Ans.

Transfer of Shares by Resident which requires Government approval

The following instances of transfer of shares from residents to non-residents by way of sale or otherwise requires Government approval:

1. Transfer of shares of companies engaged in sector falling under the Government Route.
2. Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral cap applicable.

Prior permission of the Reserve Bank in certain cases for acquisition / transfer of security

i) Transfer of shares or convertible debentures from residents to non-residents by way of sale requires prior approval of Reserve Bank in case where the non-resident acquirer proposes deferment of payment of the amount of consideration. Further, in case approval is granted for the transaction, the same should be reported in Form FC-TRS to the AD Category – I bank, within 60 days from the date of receipt of the full and final amount of consideration.

(ii) A person resident in India, who intends to transfer any security, by way of gift to a person resident outside India, has to obtain prior approval from the Reserve Bank.

Any other case not covered by by General Permission.

Q 10. What are the reporting obligations in case of transfer of shares between resident and non-resident ?

Ans. The transaction should be reported by submission of form FC-TRS to the AD Category

– I bank, within 60 days from the date of receipt/remittance of the amount of consideration. The onus of submission of the form FC-TRS within the given timeframe would be on the resident in India, the transferor or transferee, as the case may be.

Q.11. What is the method of payment and remittance/credit of sale proceeds in case of transfer of shares between resident and non-resident?

Ans. The sale consideration in respect of the shares purchased by a person resident outside India shall be remitted to India through normal banking channels. In case the buyer is a Foreign Institutional Investor (FII), payment should be made by debit to its Special Non-Resident Rupee Account. In case the buyer is a NRI, the payment may be made by way of debit to his NRE/FCNR (B) accounts. However, if the shares are acquired on non-repatriation basis by NRI, the consideration shall be remitted to India through normal banking channel or paid out of funds held in NRE/FCNR (B)/NRO accounts.

The sale proceeds of shares (net of taxes) sold by a person resident outside India) may be remitted outside India. In case of FII the sale proceeds may be credited to its special Non-Resident Rupee Account. In case of NRI, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to his NRE/FCNR(B) accounts and if the shares sold were held on non repatriation basis, the sale proceeds may be credited to his NRO account subject to payment of taxes. The sale proceeds of shares (net of taxes) sold by an erstwhile OCB may be remitted outside India directly if the shares were held on repatriation basis and if the shares sold were held on non-repatriation basis, the sale proceeds may be credited to its NRO (Current) Account subject to payment of taxes, except in the case of erstwhile OCBs whose accounts have been blocked by Reserve Bank.

Q. 12. Are the investments and profits earned in India repatriable?

Ans. All foreign investments are freely repatriable (net of applicable taxes) except in cases where:

1. the foreign investment is in a sector like Construction and Development Projects and Defence wherein the foreign investment is subject to a lock-in-period; and
2. NRIs choose to invest specifically under non-repatriable schemes.

Further, dividends (net of applicable taxes) declared on foreign investments can be remitted freely through an Authorised Dealer bank.

Q.13. What are the guidelines on issue and valuation of shares in case of existing companies?

Ans.

A. The price of shares issued to persons resident outside India under the FDI Scheme shall not be less than :

1. the price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company is listed on any recognised stock exchange in India;
2. the fair valuation of shares done by a SEBI registered Category - I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company is not listed on any recognised stock exchange in India; and
3. the price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment.

B. The price of shares transferred from resident to a non-resident and vice versa should be determined as under:

i) Transfer of shares from a resident to a non-resident:

1. In case of listed shares, at a price which is not less than the price at which a preferential allotment of shares would be made under SEBI guidelines.
2. In case of unlisted shares at a price which is not less than the fair value as per the Discount Free Cash Flow (DCF) Method to be determined by a SEBI registered Category-I-Merchant Banker/Chartered Accountant.

ii) Transfer of shares from a non-resident to a resident - The price should not be more than the minimum price at which the transfer of shares would have been made from a resident to a non-resident.

In any case, the price per share arrived at as per the above method should be certified by a SEBI registered Category-I-Merchant Banker / Chartered Accountant.