By TIOL News Service

NEW DELHI, APRIL 10, 2013: THE Department of Industrial Policy & Promotion (“ DIPP ”), Ministry of Commerce and Industry, Government of India (“ GoI ”) has released Consolidated Foreign Direct Investment Policy, 2013 (“ FDI Policy, 2013 ”), This is the sixth edition of consolidated foreign direct investment policy and will be effective from April 05, 2013. The FDI Policy, 2013, incorporates the changes made in the foreign investment policy over past one year. The changes include investments in sectors like single and multi-brand retail, power exchanges, asset reconstruction companies (ARCs), broadcasting, civil aviation, and non-banking financial companies.

Salient features of changes in the Consolidated FDI Policy, 2013, are as under:

The aforementioned changes have been discussed in detail below.

Investment by citizen/ entity of Pakistan:

The Government of India had vide Press Note 3 (2012 series) dated August 1, 2012, issued by DIPP, GoI (“Press Note 3”) reviewed the FDI policy and decided to permit a citizen of Pakistan or an entity incorporated in Pakistan to make investments in India, under the Government route, in sectors/activities other than defence, space and atomic energy. The changes made via Press Note 3 have been incorporated under the FDI Policy, 2013 by way of a note under para 3.1.1 of the FDI Policy, 2013, which is reproduced below for reference:

“ a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space and atomic energy and sectors/ activities prohibited for foreign investment ”

Issue price of shares

A new para has been inserted in para 3.4.2 of FDI Policy, 2013, dealing with issue price of shares to person resident outside India. The newly incorporated para provides that where non-residents (including NRIs) are making investments in an Indian company in compliance with the provisions of the Companies Act, 1956, by way of subscription to its Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme.

Conversion of ECB/ Lumpsum Fee/ Royalty etc into Equity

There has been change in the conditions in relation to issue of equity shares against import of capital goods/ machinery/ equipment (excluding second-hand machinery). One of the conditions requiring ‘independent valuation of the capital goods/machinery/equipments (including second-hand machinery) by a third party entity, preferably by an independent valuer from the country of import' as provided under para 3.4.6 of the Consolidated Foreign Direct Investment Policy, 2012 (“FDI Policy, 2012”) has been removed from the FDI Policy, 2013.

Downstream investments

The Government of India had vide Press Note 2 (2012 series) dated July 31, 2012, issued by DIPP, GoI (“ Press Note 2 ”) reviewed the policy relating to calculation of downstream investments by a banking company incorporated in India, which is owned and/or controlled by non-residents/ a non-resident entity/non-resident entities by insertion of a note in para 3.10.4.1 of the FDI Policy, 2012. The change made via Press Note 2 has been incorporated in FDI Policy, 2013. The new insertion is reproduced below for reference:

“ 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. ”

Sector Specific Conditions on FDI

•  Broadcasting services 

The foreign investment limits, in companies engaged in providing broadcasting carriage services, was revised vide Press Note 7 (2012 series) dated September 20, 2012, issued by DIPP, GoI (“ Press Note 7 ”). The changes made via Press Note 7 have been incorporated in the FDI Policy, 2013.

•  Civil Aviation 

The Government of India had vide Press Note 6 (2012 series) dated September 20, 2012, issued by DIPP, GoI (“ Press Note 6 ”) reviewed foreign direct investment limits in the civil aviation sector and decided to permit foreign airlines also to invest, in the capital of Indian companies, operating scheduled and nonscheduled air transport services, up to the limit of 49% of their paid-up capital. The changes made via Press Note 6 have been incorporated in the FDI Policy, 2013.

•  Single Brand product retail trading 

The Government of India had vide Press Note 4 (2012 series) dated September 20, 2012, issued by DIPP, GoI (“ Press Note 4 ”) reviewed existing policy for foreign direct investment in single brand product retail trading sector. The changes made via Press Note 4 have been incorporated in the FDI Policy, 2013

•  Multi Brand retail trading 

The Government of India had vide Press Note 5 (2012 series) dated September 20, 2012, issued by DIPP, GoI (“ Press Note 5 ”) reviewed existing policy for foreign direct investment in multi brand retail trading sector and decided to permit FDI,

up to 51%, under the Government route, in Multi-Brand Retail Trading, subject to specified conditions. The changes made via Press Note 5 have been incorporated in the FDI Policy, 2013..

•  Asset Reconstruction Companies 

The Ministry of Finance, Government of India, had reviewed the ceiling for FDI in ARCs vide a press release dated December 21, 2012 and had increased the same from 49% to 74 % subject to the condition that no sponsor may hold more than 50% of the shareholding in an ARC either by way of FDI or by routing through an FII. Further, it was also provided that:

•  the foreign investment in ARCs would need to comply with the FDI policy in terms of entry route conditionality and sectoral caps;

•  that the foreign investment limit of 74% in ARC would be a combined limit of FDI and FII; and

•  the total shareholding of an individual FII shall not exceed 10% of the total paid-up capital.

Hence, the prohibition on investment by FII in ARCs was removed.

The above stated changes in relation to investment in FDI in ARCs have been incorporated in the FDI policy, 2013. This move is aimed at inviting foreign expertise in this segment.

•  Non- Banking Finance Companies (NBFCs)

The Government of India had vide Press Note 9 (2012 series) dated October 03, 2012, issued by DIPP, GoI (“ Press Note 9 ”) reviewed the existing policy for foreign direct investment in NBFC's and provided that NBFC's (i) having foreign investment more than 75% and up to 100%, and (ii) with a minimum capitalisation of US$ 50 million, can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital. The changes made via Press Note 9 have been incorporated in the FDI Policy, 2013.

•  Power Exchanges

The Government of India had vide Press Note 8 (2012 series) dated September 20, 2012, issued by DIPP, GoI (“ Press Note 8 ”) reviewed the existing policy for foreign direct investment in power sector thereby permitting foreign investment, up to 49%, in Power Exchanges, registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010, subject to the specified conditions. The changes made via Press Note 8 have been incorporated in the FDI Policy, 2013.