Foreign Direct Investment - PowerPoint Presentation

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Foreign Direct Investment - PPT Presentation

Anup P Shah 21 st February 2015 Gujarat Chamber of Commerce amp Industry PRAVIN P SHAH amp CO 2 FDI Inflows over the years PRAVIN P SHAH amp CO 3 Sectors with Highest FDI 200014 ID: 133013

shah amp fdi pravin amp shah pravin fdi investment issue shares rbi capital tax fema foreign price pricing activities

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Slide1

Foreign Direct Investment

Anup P. Shah21st February 2015Gujarat Chamber of Commerce & IndustrySlide2

2FDI Inflows over the yearsSlide3

3Sectors with Highest FDI: 2000-14Slide4

ModesSlide5

5Entry Strategies into IndiaSlide6

6Total Foreign InvestmentSlide7

7Primary v SecondarySlide8

8Key RegulationsSlide9

Relevant FEMA Regulations

Which Prevails?FEMA Regulations or FDI Policy

What if FEMA Regulations are not in sync with FDI Policy?Does Govt. need to bring FEMA Regulations up to page with CFDIP?Manohar Lal Sharma v UOI– Writ Petition SC© PRAVIN P. SHAH & CO.

Which is Supreme? Slide11

AP Dir Circulars Operational Instructions by RBI to Authorised Persons & Banks

U/ss. 10(4) & 11(1) of FEMA, 1999Are they Legally Valid?Prof Krishnaraj Goswami v RBI (Bom)RBI has power & jurisdiction to issue such CircularsAP bound by these Directions

AP Dir CircularsSlide12

12Relevant RegulatorsSlide13

FDI in CompaniesSlide14

Foreign Direct InvestmentInvst. by NR in Capital of an Indian Company under Sch. 1 of FEMA Regulations

Fresh Issue / Private Placement / Rights Issue to NRMoney comes directly into Indian Co. However, now FDI via Stock Market also permissibleOnly for Foreign Promoters of Listed Cos.Co. can issue shs in lieu of dividend payable to Promoter

FDI Sch. 1Slide15

15Top 10 FDI Jurisdictions (2000-14)Slide16

Structuring of FDI

Treaty Shopping is ValidTo claim DTAA benefitsPO Box Office & Professional Directors with TRC?Substantial Presence?Singapore Substantial presence tests?

Mauritian FSC’s recent proposals

16Slide17

For Sale by Mauritius Co.

Can Treaty benefits be denied if only TRC Can Dept. apply LoB in absence of provision in DTAA?Does Vodafone Amdt. nullify Treaty Benefits? Capital Gains not taxable by virtue of Indo-Mauritius Treaty? Revisit the situation once GAAR comes into force

Limitation of Benefit ClauseSlide18

Structuring of FDI

FactorMauritius

Cyprus

Singapore

Net Rate on Interest Higher of Act, DTAA or Domestic Tax Rate

40%

10%

17%

Capital Gains Tax

NIL

LoB

in DTAA

Yes

Perception

FDI Share over 14 Years

36%

12%Slide19

Who Can Invest?

Entities for FDI

21Types of FDISlide22

22Instruments

Foreign Direct

Investment

Equity

Hybrid

Voting

Non-Voting

CCDs

CCPS

Warrants Slide23

Consideration must be for CashAll other cases – FIPB approval

Issue Price of FDI SharesListed Cos. Unlisted Cos. Must be issued within 180 days of fundsCompanies Act 2013: 2 months

Equity SharesSlide24

24Equity SharesValuation

Any Internationally accepted Pricing MethodNo Assured Returns

ALP Basis

No Method Specified

DCF / ECM / NAV / Price * Book Value / SOTP / PE / Comparable Cases / Liquidation Slide25

S.56(2)(vii)/(viia): IOS ~ Deemed Income

Applies to Issue of shares by Unlisted Companies Sudhir Menon HUF (Mum ITAT) Discount to FMV (Book Value) = Income of recipientApplies if Recipient is an Unlisted Co. / Ind.

Valuation of

Shs

- IT Slide26

Part of Sectoral Caps Only if CCPS

If RPS / OCPS – treated as ECBsMust be converted within a reasonable timeframePlain redemption / buyback possible? Max. Dividend Rate

DDT Payable

Preference SharesSlide27

Quasi-equity Instruments

Subject to ECB restrictions? Cap on Rate of Interest?All-in-cost ceilings like ECBs? Cap like CCPS?Tax Deduction benefits to Investee Co.Can be redeemed / bought back by Co.?

CCDsSlide28

FEMA

Issue Price or Conversion Formula to be specified upfront at time of issue Price @ Conversion Date > FMV @ Issue DateFMV = Any Internationally Accepted MethodCompanies ActIssue Price of Pref. Issue of CCPS / CCD for Unlisted Cos.

Takes away flexibility for earn-out formula given by FEMA

Valuation of CCDs/CCPSSlide29

Issue of NVR Shares possible?When Useful?

Companies Act 2013 RulesEven for Private Companies?Examples© PRAVIN P. SHAH & CO.

NVR SharesSlide30

Partly Paid-up Shares?

Auto Route25% Upfront & Balance within 12 mts (NA if Issue > 500 cr)Warrants? Auto Route25% Upfront & Balance within 18 mts (NA if Issue > 500

cr)Conversion Price not lower than FMV on date of Issue

FMV = Internationally Accepted Pricing Methodology

OthersSlide31

31FDI Prohibitted

- TabooSlide32

Controversial

ConditionalAgricultural – Emaar MGFTelecom – Bharti-Qatar Foundation

Defence – Mahindra / L&TBroadcasting / Media / FM– Jagran

Real Estate – Vatika

/ DLF Assets

Petroleum & Gas – RIL-BP

Financial Services – Warburg-Future

Private Security – GS Security

Multi-Brand Retail Trading –

Walmart

Single-Brand Retail – M &S

Power Exchanges – Indian Exchange

Mining – Vedanta /

Posco

Courier – Blue Dart

Aviation –

Etihad

-Jet

Industrial Parks / SEZ- Blackstone

Pharmaceuticals –

Mylan

/ Fresenius

Wholesale Trading - Metro

FDI Permitted Slide33

33Indirect / Downstream FDI

Direct FDI

Indirect FDISlide34

FDI via Indian Cos

Owned & Controlled by Resident Indians Citizens = Domestic Investment not counted as FDIOwned OR Controlled by NRs = Downstream treated as Indirect FDIOwnershipMore than 50% of Capital (

Eq /CCD/CCPS)

ControlRight to appoint a majority of Directors or to control management or policy decisions including by virtue of their Shareholding or Management Rights or SHA or Voting Agreements

Indirect FDISlide35

FDI% in Indco controlled by Residents

Indco’s Investment in SPVIndirect FDI in SPV40%

51%

Nil – Indco is O&C by Indians

75%

26%

- Indco is O or C by NRs so entire Downstream is Indirect FDI

60%

100%

60% -

Downstream in SPV is a mirror image of Indco

Indirect FDISlide36

Seller

BuyerRBIFIPBConditionsResident

Any NR



Invst. breaching the Caps

Sectors needing FIPB nod

Resident

Any NR





Following Sectors:

Defence

Air Transport

ARC

Bank

Broadcasting

Commodity Exchanges

Credit Info. Cos.

Insurance

Print Media

Telecom

Trf. of Securities to NRSlide37

Seller

BuyerRBIFIPBConditionsResident

Any NR



Not lower than SEBI Regs / Fair Valuation

Any method

Resident

NR under Open Offer



Takeover Code complied + CA’s Certificate

Resident

NR under SEBI Regs.



SEBI G/L complied + CA’s Certificate

Resident

NR for Fin. Services Sector



NOC from FSS Regulator

Not required

Trf. of Securities to NRSlide38

Seller

BuyerRBIFIPBConditionsNR (not NRI)

Any NR / NRI



Sale or Gift – No conditions

NRI



Sale or Gift – No conditions

NRI

NR (Not NRI)



Not Specified

Trf. of Securities to NRSlide39

Non-Repatriable FDI

Meaning:Only Dividend / Interest can be sent back abroadPrincipal + Gains cannot be repatriatedMust be credited to NRO A/c.NRI/PIO can buy shares on NR Basis:Without any limit Not Nidhi / Chit Fund / Plantations/ Farm Houses / Dealing in TDRs

39Slide40

Some Sensitive SectorsSlide41

41NBFC - Specified ActivitiesMerchant Banking

UnderwritingPortfolio Management Services

Investment Advisory ServicesFinancial Consultancy

Stock Broking

Asset Management

Money Changing Business

Venture Capital

Custodian Services

Factoring

Credit Rating Agencies

Leasing and Finance

Operating Leasing?

Housing Finance

Forex broking

Credit Card Business

Micro Credit

Rural Credit

18 Activities under 100% Automatic RouteSlide42

42NBFC - Specified Activities FDI in Commodity BrokingPermissible?

Is it an NBFC activity?

FDI by Banks in Com. Broking?

FDI in Wealth Management Services?Slide43

FDI in Investing Co. – Co. engaged in investing in Capital of Other Companies

Prior FIPB ApprovalIf it is a CIC then also comply with RBI Directions on CICInvesting Co. does not include Company buying shares for Trading / Portfolio InvestmentFDI in Co. without operations and which does not have any operations – FIPB approvalWhen it makes downstream investment – comply with sectoral caps© PRAVIN P. SHAH & CO.

FDI in Investing Co.Slide44

44 FDI in Investment Co.FDI for Portfolio Investment?Prohibited?

Tata Invst., Future Capital, Goldman

RBI Act – NBFC definition FIPB’s stance?

FEMA Regulations – 18 Activities

Dual Interpretation?

Slide45

45Capitalisation - Fund Based NBFCs3 Tiers for Fund based Activities

Up to 51% of Capital:

US $0.5 M upfront

More than 51% - 75% of Capital:

US$5M upfront

75%+ of Capital:

US $50M out of which US $7.5M. upfront immediately and balance US$42.5 M within 24 months

Capitalisation refers to Foreign Investment or Total Investment?Slide46

Activities classified as Non- fund based are

1. Investment Advisory Service 2. Financial Consultancy 3. Forex Broking 4. Money changing business 5. Credit rating agencies

US $ 0.5 M upfront for any amount of investmentQ. What about Stock Broking Activities?

Capitalisation :Non-Fund based NBFCsSlide47

FDI in Real Estate

General Prohibitions

Real Estate Business / Trading in TDRs

Construction of Farm House

‘Real Estate Business’: Meaning?

Assignment of Development Agreements?

Leasing

Buying & Leasing?

Constructing & Leasing?

100% Auto FDI in Construction & Development Projects

Subject to conditions Slide48

4848

RE: Conditions

Minimum Area

Serviced Housing Plots – No minimum area

Built-up area: Floor area of 20,000 sq.

mtrs

. or 2,15,280

s.ft

Combination Project – Any one of above 2 conditions

NA if ≥30% of Total Project Cost for Low Cost Affordable Hsg

What is Floor Area?

As per local laws

Certificate from Local Architect about Minimum Floor Area usage

Slide49

4949

RE: Conditions

Investment – Minimum Capitalisation

Whether WOS or JV–

US $5M

NA if ≥30% of Total project cost for Low Cost Affordable Hsg

To be brought within 6

mts

of commencement of Project

Date of Approval of building plan / layout by Authority (BMC)

Subsequent tranches ~ Later of:

Till 10 years from commencement; or

Before completion Slide50

RE: Conditions

Exit from Project:

After 3 years from date of Final Invst (must develop trunk infrastructure); OR Completion of Project

FDI Conditions Not Applicable to:

Investment by NRIs

SEZs / IT Parks

Educational Institutions

Old Age Homes

Hotels, Tourist resorts, Hospitals

Completed projects for O & M of Malls, Business CentresSlide51

Sector

FDI ConditionsAgriculture100% Auto Route only in: Floriculture / Horticulture / Vegetables cultivation

Devlp. of Seeds Animal

Husbandary, Pisciculture

Services related to Agro & Allied Activities

100% with FIPB in Tea Plantations

Pharma

100% permissible

FIPB

Approval for Greenfield

Auto Route for Brownfield & All FDI in Medical Devices

Some Other Sectors

51Slide52

FDI Exit OptionsSlide53

PRAVIN P. SHAH & CO., CAs

53Exit OptionsSlide54

Limits under Cos. Act

25% of Eq. + Free Reserves25% of Eq. Capital per FYCan use Free Reserves, Sh. PremiumAuto. Route of RBI:Pricing G/L Max. Price – Valn Int’l accepted Pricing method

CA’s Certificate on TDS / ITO’s NOCBuyback Tax payable by Unlisted Company

Tax @ 20% + SC + CessNo Tax / No Credit in hands of Investor

Negates benefit of DTAA – No benefit of coming through DTAA

Buyback by Co.Slide55

Reduction of shares held by FDI alone

Shares cancelled and consideration paidCourt process u/s. 100 of Companies ActSelective Reduction possible Auto Route of RBI subject to Pricing GuidelinesReduction @ Price not higher than DCF ValuationTax consequencesCo. liable to pay DDT up to Accumulated Profits

Excess of consideration over Cost & Dividend = LTCGNo tax on Cap Gains if Treaty benefits available to Investor

Reduction of CapitalSlide56

Automatic Route of RBI

Pricing Guidelines:Valuation: Int’l Accepted pricing method Tax on Sale of shares by FcoOn-market: Nil for LTCG and 15% for STCGOff-market: 10% without indexation for LTCG?Unlisted: 10% for LTCGMAT Payable?

Tax Benefit if through Tax HavensCA’s Certificate on TDS / ITO’s NOC

Buyout of PE by PromotersSlide57

FDI ComplianceSlide58

Reporting of FDI Inflows within 30 days to Regional Office, RBI

Advance Reporting Form + FIRCs + KYCRBI allots an UIN KYC on Foreign InvestorPassport / Social Security No. of Individual Investor Bank Name & Bank A/cPeriod of Banking relationship

FDI ComplianceSlide59

Reporting of Issuance of Shares within 30 days to Regional Office of RBI –

Form FC-GPREven if FVCI / FII invests under FDI SchemeSigned by MD / Dir / CSValuation Certificate from CA / AuditorCertificate from CS of Co. Online Filing on

eBiz Portal wef 19

th Feb www.ebiz.gov.in

Online Verification by AD and onward transmission to RBI’s RO

If OK – RBI allots UIN

Annual Return

of Foreign A &L by 15

July

FDI ComplianceSlide60

Thank You!!

anup@ppsco.inwww.ppsco.in