Recently in the beginning of 2009, the government of India further relaxed the norms for foreign direct investment (FDI) in various sectors. As per new norms, various sectors such as commodity exchanges, credit information and aircraft maintenance are opened for overseas investors while hiking the ceiling for investment in public sector oil refineries.

Revised FDI policy would now permit 100 per cent foreign investment in maintenance, repair and overhauling (MRO) facilities for aircraft as also aviation training units.

100% Foreign investment will henceforth be permitted in mining of titanium bearing minerals and up to 49 per cent in credit information companies. However, for investment in credit information companies, the permission of the Reserve Bank of India (RBI) will be necessary.

The new FDI policy has also done away with the norms of 26 per cent compulsory equity divestment in fuel and gas trading ventures. Hitherto, 100 per cent FDI was allowed on the automatic approval route, subject to the condition that 26 per cent equity in such ventures is disinvested within five years in favour of an Indian partner.

FDI in public sector refineries has also been raised to 49 per cent from its existing cap of 26 per cent.

In order to strengthen the industrial sector, the Cabinet also decided to exempt foreign investors from certain regulatory norms such as minimum capitalization and the three-year lock-in period. Alongside, for construction development projects, investments by registered foreign institutional investors (FIIs) under the portfolio investment scheme are also to be treated as distinct from FDI. In effect, the investments by FIIs would now be outside the purview of certain restrictive norms applicable to FDI. However, the government is to provide a detailed clarification in this regard later.

Scope for higher FDI
49 per cent FDI ceiling for commodity exchanges has further been divided.
While the investment ceiling for FDI has been pegged at up to 26 per cent that for FIIs has been fixed at 23 per cent, subject to the condition that no single investor would be permitted to hold a stake of more than five per cent.

For in credit information services (CICs) companies, FIIs would be allowed to invest up to 24 per cent in firms listed on the stock exchanges and this would have to be within the 49 per cent ceiling. Apart from this, ‘Credit Reference Agencies’ are to be deleted from the list of non-banking finance companies (NBFCs) activities permitted for FDI up to 100 per cent under the automatic route.

Regarding the civil aviation sector, the existing FDI cap at 49 per cent on the automatic route and 100 per cent for NRIs is to continue with no direct or indirect participation by foreign airlines and it has been reclassified as ‘Domestic Scheduled Passenger Airline’ sector. For non-scheduled airlines, chartered and cargo airlines, the FDI cap is at 74 per cent on the automatic route and 100 per cent for NRIs. The same norms are to apply for ground handling services. Subject to sectoral regulations and security clearance.

Considered as one of the most favourite investment destinations, the FDI inflow into is expected to touch $ 30 billion this fiscal year (2009-2010)

• 0 comments »

Indian Investment Centre

• Being a service organization of the Government of India, the Indian Investment Centre was set up to promote foreign private investment in India. It furnishes valuable advises to foreign investors for setting up industrial projects in India by providing information regarding investment opportunities in India, the Government’s industrial policy (including that relating to foreign investment and technology transfer), licensing procedures, taxation laws and facilities and incentives available. Indian investment centers also aids the foreign investors in finding partners in India.

• Indian investment center is also the nodal agency for investment in India by NRIs and OCBs in which NRI holding is not less than 60 per cent. It provides NRIs and OCBs hand holding services.

• It also assist to establish joint ventures and technical collaborations in India and abroad and third country ventures between Indian and foreign entrepreneurs. It also advices and aids the Indian entrepreneurs for locating suitable foreign firms for collaboration.

• The most vital thing that Indian investment center does is to assist both the Indian and the foreign investors to meet the procedural requirements of project approvals and in overcoming bottlenecks, if any, in the process of implementation of the project.

• The center has rich library containing books and reference materials coverings a wide range of subjects like industry, management, taxation, etc. For ready reference, a cross-section of journals, periodicals and magazines is also available.

• The publications of the center provide authentic and the vital information on various aspects of Government policies, procedures and regulations as also facilities, incentives and opportunities available to entrepreneurs in various industrial fields, both in India and abroad. It also publish magazines, journals and books detailing industrial policy, facilities and incentives for Non Resident Indians and technological development.

• The Indian investment center also furnishes information on current economic developments in India through its Monthly News Letter. Through this it provides information on industrial licences and letters of intent issued, and foreign collaborations approved, by the Government of India/Reserve Bank of India.

• 0 comments »

Investment in Companies
NRIs, PIOs and OCBs can purchase share or convertible debentures (without any limit) on non-repatriation basis, of an Indian company issued by public issue or private placement or right issue. Howver there is an exception to this policy which says that the debentures or shares purchased should not belong to the following companies:

• Companies engaged in agricultural and plantation activities
• Companies in real estate business
• Companies engaged in the construction of farm houses
• Companies dealing in Transfer of Development Rights
• Nidhi companies and chit funds
  

Investment in Firms and Proprietary Concerns
Both NRIs and PIOs can invest by way of contribution to the capital of a firm or proprietary concern in India provided:

The amount can be invested through two mediums:

• By inward remittance through normal banking channels
• Out of permissible accounts maintained with an authorized dealer/bank.

However amount should not be invested in a firm or proprietary engaged in agricultural and plantation activity or real estate business. Investment in Firms and Proprietary Concerns shall not be eligible for repatriation.

Purchase and sale of securities other than shares or convertible debentures of an Indian company by NRIs and OCBs

A Non Resident Indian (NRIs) or an Overseas Corporate Body (OCB) may, without limit, purchase on non-repatriation basis:

• Units of Money Market Mutual Funds
• Non Convertible Debentures
• Commercial Papers (OCBs are not permitted)
• Make deposits with Companies
  

On a repatriation basis NRIs and OCBs can purchase

• Without limit, Government dated securities (other than bearer securities) or treasury bills domestic mutual funds units
• Public sector undertaking (PSU) Bonds in India.
  

• 1 comments »

Modified Guidelines for Foreigh Institutional Investors (Taxation Aspect)

No.F.5(13)/SE/91-FIU
Department of Economic Affairs
(Investment Division )
New Delhi, dated the 24th March, 1994

Press Note

Modified Guidelines for Foreigh Institutional Investors (Taxation Aspect)

The following modifications of FII guidelines dated 14.9.92 in general, and paragraph 9 (f) and paragraph 18 of those guidelines in particular, are issued by way of clarification in the light of the enactment of section 115 AD of the Income-Tax Act through the Finance Act, 1993:

The taxation of income of foreign Institutional Investors from securities or capital gains arising from their transfer, for the present, shall be as under:

i. The income received in respect of securities (other than units of offshore Funds covered by section 115 AD of the Income-Tax Act) is to be taxed at the rate of 20%.

ii. Income by way of long-term capita gains arising from the transfer of the said securities is to be taxed at the rate of 10%.

iii. Income by way of short-term capital gains arising from the transfer of the said securities is to be taxed at the rate of 30%.

iv. The rates of income-tax as aforesaid will apply on the gross income specified above without allowing for any deduction under sections 28 to 44C, 57 and Chapter VI-A of the Income Tax Act.

The expression " securities " referred to above shall have the meaning assigned to it in clause (h) of section 2 of the securities Contract (Regulation) Act, 1956. These include

i. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated or other body corporate;

ii. Government securities; and

iii. Rights or interests in securities.

On account, of the concessional rate of income –tax on the capital gains, the provisions currently available to non-residents for protection from fluctuation of rupee value against foreign currency for computing capital gains arising from the transfer of shares in, or debentures of, an Indian company, will not apply to the Foreign Institutional Investors covered under section 115 AD of the Income-Tax Act. Further, the benefit of cost inflation indexation will also not be available to FIIs while computing long-term capital gains arising to them on transfer of securities.

Shares in a company shall have to be held for more than 12 months in order to qualify as a long-term capital asset. Other securities shall have to be held for more than 36 months in order to qualify as a long-term capital asset.

2. The expression "Foreign Institutional Investors" has been defined in section 115AD of the Income-Tax Act to mean such investors as the Central Government may, by notification in the official Gazette, specify in this behalf. The FIIs as are registered with Securities and Exchanges Board of India will be automatically notified by the Central Government for the purposes of section 115AD.

3. Income of Foreign Institutional Investors from securities shall be subject to deduction of tax at source. However, no deduction of tax shall be made from any income by way of capital gains arising from the transfer of securities. In order that the tax on capital gains arising to FIIs can be realized, each FII, while applying for initial registration with Securities and Exchange Board of India, will have to specify an agent, including a person who is treated as an agent under section 163 of the Income-Tax Act for the said purposes.

• 1 comments »

Guidelines for Overseas Venture Capital Investments in India

Ministry of Finance
Department of Economic Affairs
Investment Division
New Delhi, Dated the 20th September, 1995
Press Note

1. In recognition of the growing importance of Venture capital as one of the sources of finance for Indian industry, particularly for the smaller unlisted companies, the Government has announced a policy governing the establishment of domestic Venture Capital Funds/Companies. An amendment has also been carried out in the SEBI Act empowering the Securities and Exchange Board of India (SEBI) to register and regulate Venture capital Funds (VCFs) and Venture Capital Companies (VCCs), through specific regulations.

2. With a view to augment the availability of Venture capital the Government has decided to allow overseas venture capital investments in India subject to suitable guidelines as outlined below:

• Offshore investors may invest in approved domestic Venture capital Funds/ Companies set up under the new policy after obtaining FIPB approval for the investment. There is no limit to the extent of foreign contribution to a domestic venture capital company/ Fund. An offshore venture capital company may contribute 100% of the capital of a domestic venture capital fund, and may also set up a domestic asset management company to manage the Fund.
  
• Establishment of an asset management company with foreign investment to manage such funds would require FIPB approval and would be subject to the existing norms for foreign investment in non-bank financial services companies.
  
• Once the initial FIPB approval has been obtained , the subsequent investment by the domestic venture capital company/ fund in Indian companies will not require FIPB approval. Such investments will be limited only by the general restrictions applicable to venture capital companies viz.-
  
• A minimum lock-in period of three years will apply to all such investments.
  
• VCFs and VCCs shall invest only in unlisted companies and their investment shall be limited to 40% of the paid up capital of the company. The ceiling will be subject to relevant equity investment limits that may be in force from time to time in relation to areas reserved for the Small Scale Sector.
  
• Investment in any single company by a VCF/VCC shall not exceed 5% of the paid –up corpus of the domestic VCF/VCC.
  
• The tax exemptions available to domestic VCFs and VCCs under Section 10(23F) of the Income tax Act, 1961, will also be extended to domestic VCFs and VCCs which attract overseas venture capital investments provided these VCFs/VCCs conform to the guidelines applicable for domestic VCFs/VCCs. However, if the VCFs/VCC is willing to forego the tax exemptions available under Section 10(23F) of the Income Tax Act, it would be within its rights to invest in any sector.
  Income paid to offshore investors from Indian VCFs/VCCs will be subject to tax as per the normal rates applicable to foreign investors.
  

3. Offshore investors may also invest directly in the equity of unlisted Indian companies without going through the route of a domestic VCF/VCC. However, in such cases each investment will be treated as a separate act of foreign investment and will require separate approval as required under the general policy for foreign investment proposals.

4. These guidelines will become operative with immediate effect.

Withdrawal of the Guidelines Issued by Way of Press Note Dated the 20th September, 1995.

Ministry of Finance
Department of Economic Affairs
(Investment Division)
New Delhi, dated the 29th September, 2000

PRESS NOTE
1.Government had issued Guidelines by way of a Press Note dated 20th September, 1995 setting out the norms and procedures governing overseas investment in Venture Capital Fund/Venture Capital Company. Such venture capital Investment by non-resident investors was also subject to :

• FDI related norms and provisions under the Industrial policy 1991 including NBFC guidelines;
• Tax related matters under the provision of Section 10(23F) of the IT Act and the rules there under;
• SEBI (Venture Capital Funds) Regulations 1996
  

2.) The need for harmonisation of policy and regulations governing Venture Capital Funds/Venture Capital Companies including investment by overseas investors has been engaging the attention of the Government. After consideration of all the issues Government has decided that SEBI will be the single point nodal agency for registration and regulation of both domestic and overseas venture capital funds. Accordingly SEBI has issued new guidelines on September 15, 2000 in accordance with the above policy decision.

3. In view of above, Government has decided to withdraw its guidelines dated 20th September, 1995 with effect from the date SEBI's new guidelines become effective.

( G. S. Dutt )
Joint Secretary (FT & Inv.)
Tel : 3014905

• 1 comments »

Government is aware of the concerns of the NRIs and therefore it came up with the investment plan beneficial to them. NRI can invest with full repatriation in certain cases.
NRIs can invest through two routes:

• Automatic route
• Government Route
  

Automatic Route
1.) FDI both by foreign investors and NRIs (non resident Indians), up to 100% (subject to sectoral equity caps/statutory ceilings) is allowed with repatriation benefits without any prior approval except in the following cases:-

• Where industrial licensing is necessary. It is imperative for the investors to have industrial license:

A.) To manufacture items reserved for the public sector

B.) Industries which require compulsory licensing

C) Where the proposal attracts locational restrictions.

• Where the concerned activities are related to civil aviation, housing and real estate development, etc
• In case investor is seeking investment in excess of specified sectoral caps
• When foreign investors seek to invest more than 24% of the equity in small scale sector or in items reserved for manufacturing in small scale unitss
• Where the investing entity has previous tie-up(s) in India.
• When there is an issue of acquiring shares of an existing share holder in an Indian company.
  

2.) Any trading company operating in India and engaged in exports and registered as Export House/Trading House/Star Trading House/Super Star Trading House with the Ministry of Commerce and Industry, may issue shares/convertible debentures up to 51% under the automatic route. If the company is set up recently, for export purpose it can issue shares only after registration as an Export House/Trading House/Star Trading House/Super Star Trading House is obtained, before remittance of dividends to the foreign investor.

3.) Special Schemes
For investment in following sectors by NRIs and the foreign investors, no government permission is required. The scheme include following sectors:

• Export Oriented Units
• Free Trade Zone/Export Processing Zones
• Software Technology Parks
• Electronic Hardware Technology Parks
• Special Economic Zones
  

4.) Existing companies with expansion programmes
The companies which are existing and undergoing expansion programmes, can issue shares under the automatic route. However this expansion must result from the expansion of equity base without acquisition of existing shares and the proposed expansion programme is in sector(s) under the automatic route.

5.) Existing companies without expansion programmes
Companies with no expansion programme can issue shares under the automatic approval scheme if their activities fall under the automatic approval route and increase in equity level is from expansion of the equity base.

The NRI/OCB can invest through either of the two modes- through inward remittance through normal banking channels or from the NRE/FCNR (B) account of the investor.

The Indian company is required to give a report not later than 30 days from the date of receipt of the investment and another report in form FC-GPR, within 30 days of issue of shares to the Reserve Bank of India.

Government Approval
Government approval is necessary if the company is ineligible for automatic approval. In such case company need to seek approval from the Secretariat for Industrial Assistance/Foreign Investment Promotion Board of the Government of India.

ADR/GDR/FCCB Route
With the approval of the Ministry of Finance, any Indian company can issue American Depository Receipts/Global Depository Receipts/Foreign Currency Convertible Bonds.

Housing and Real Estate
NRIs/OCBs, can invest in real state 100% with repatriation benefits. The investors can avail the benefits in the following areas:

• Service plots Development and construction of residential premises
• Real estate Investment which also includes constructing residential and commercial premises including business centers and offices
• Developing townships
• Development of urban infrastructure facilities in cities and regional level including both roads and bridges
• Investing in manufacture of building materials
• Investment in participatory ventures in all the above
• Housing Finance Institutions Investment
• Subject to prescribed guidelines, Government has recently allowed FDI in the development of integrated town ships
  

Civil Aviation
Government has allowed the NRIs/OCBs to invest up to 100% in the civil aviation sector. However for such investment, prior permission of the government is required.

• 6 comments »

Laws related to investment and Business

In India businesses are regulated by the certain set of rules and regulations. Some of the important laws pertaining to business are as follows:

Arbitration and Reconciliation Act, 1996 act relating to alternative in redressal of disputes amongst parties.

Central Excise Act, 1944Act governing duty levied on manufacture.

Companies Act, 1956Act governing all corporate bodies.

Competition Act, 2002Act to ensure free and fair competition in the market.

Consumer Protection Act, 1986Act relating to the protection of consumers from unscrupulous traders/manufacturers.

Customs Act, 1962Act dealing with import regulations.

Customs Tariff (Amendment) Act, 2003Act that has put in place a uniform commodity classification code based on globally adopted system of nomenclature for use in all trade-related transactions.

Electricity Act, 2003Act that regulates generation, transmission, distribution, trading and use of electricity and generally for taking measures conducive to the development of the electricity industry, promotion of investment and competition, protection of the interests of consumers and the assured supply of electricity to all areas.

Environment Protection Act, 1986Act providing the framework for seeking environmental clearances.

Factories Act, 1948Act regulating labour in factories.

Foreign Exchange Management Act, 1999Act regulating foreign exchange transactions including foreign investment.

Income Tax Act, 1961Act governing direct taxes on income of all persons, both corporate and non-corporate as well as residents and non-residents.

Industrial Disputes Act and Workmen Compensation ActLabour laws dealing with disputes.

Industries (Development & Regulation) Act, 1951Act governing all industries.

Information Technology Act, 1999Act governing e-commerce transactions.

Money Laundering ActAct preventing money laundering and providing for confiscation of property derived from, or involved in, money laundering.

Patent (Amendments) Act, 2004 The Act amends the Patent Act, 1970 to extend the product patent protection to all fields of technology, including drugs, foods and chemicals.

Sales Tax Act, 1948Act governing the levy of tax on sales.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002Act seeking to put in place securitisation and asset foreclosure laws creating a legal framework for the establishment of Asset Reconstruction Companies.

The Special Economic Zones Act, 2005 Provides a long-term, stable policy framework and establishes a single-window clearance mechanism for the establishment, development and management of SEZs and units operating in such zones. An SEZ is a specifically delineated duty-free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs.

The major fiscal and economic incentives for SEZ units include 15-year income-tax exemption from the date of commencement of operations, exemption of excise tax, sales tax and other levies on purchases from Domestic Tariff Areas and access to cheaper global capital through Offshore Banking Units.The Act allows 100% FDI through automatic approval route in most sectors

• 0 comments »

What is Venture Capital?
Venture capital (VC) is a fund invested or available for investment in funding invested, in enterprises that are too risky for the standard capital markets or bank loans. The investment contains within itself the probability of both profit and loss. Though the investment involves risk, but the venture capitalist don’t like to use this term as they don’t want to see both term that is risk and capital together. Managerial and technical expertise can also be included in venture capital. The major source of venture capital is wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This capital is important for new companies who want s to innovate and make break through in technology for production but has no capital.

Indian Scenario
The policy regarding Venture capital fund is regulated and controlled by RBI in India in regard to foreign exchange management act. Venture capitalist is required to be registered with SEBI (securities exchange board of India). The registered venture capital fund investor can invest into Venture Capital Fund or Indian venture capital undertakings, with the general permission of the RBI and according to the rules and regulations as specified by RBI notifications from time to time.

Government Policies and Regulations
Realizing the importance of venture capital investment, as an important source of finance for Indian industry, particularly for the smaller unlisted companies, the Government has announced a policy governing the establishment of domestic Venture Capital Funds/Companies. To streamline and simplify the procedure, government has also affected an amendment in the SEBI Act which empowers the SEBI (Securities and Exchange Board of India) to register and regulate Venture Capital Funds (VCFs) and Venture Capital Companies (VCCs) through specific regulations.

Major guidelines for Venture capital fund are as follows:

• Foreign companies can invest in domestic entire Capital Funds/Companies set up under the new policy after obtaining FIPB approval for the investment. The foreign companies can invest 100% of the capital of domestic venture capital fund, and is also allowed to establish domestic asset Management Company to manage the Fund.
• Foreign investment for establishing an asset management company would require FIPB approval and would be subject to the existing norms for foreign investment in non-bank financial services companies
• Once the company has obtained FIPB approval it does not require taking FIPB approval again if it is making subsequent investment in Indian companies. Such investments will be limited only by the general restriction applicable to venture capital companies viz.-
  
  1> For all such investments, a minimum lock-in period of three years will apply.
  2> VCFs and VCCs are allowed to invest only in unlisted companies and their investment shall not exceed the limit of 40% of the paid up capital of the company. The ceiling will be subject to relevant equity investment limits that may be in force from time to time in relation to areas reserved for the Small Scale Sector. Investment in any single company by a VCF/VCC shall not exceed 20% of the paid-up corpus of the domestic VCF/VCC.
  
• The tax exemption provided to domestic VCFs and VCCs under Section 10(23F) of the Income Tax Act, 1961, will also be applicable to those domestic VCFs and VCCs that attract overseas venture capital investments. However these VCFs/VCCs must conform to the guidelines applicable for domestic VCFs/VCCs. If VCF/VCC does not want to avail the tax exemptions benefit available under Section 10(23F) of the Income Tax Act, it would be within its rights to invest in any sector.
• Income generated by the foreign investors from Indian VCFs/VCCs will be subject to tax as per the normal rates applicable to foreign investors.
• Offshore investors can by pass the route of VCF/VCC and can invest directly in the equity of unlisted Indian companies. In this case every investment would be considered as a separate act of foreign investment that will require separate approval as required under the general policy for foreign investment proposals.

• 1 comments »

FDI versus Portfolio Investment

FDI figures show India narrowing the gap with china whose direct investment levels are flattening out.Foreign direct investment in India has surpassed portfolio investment by almost $5.6bn in 2006-07, marking a significant change from past trends.

Incoming FDI was recorded at $21.19bn in 2006-07, while portfolio investments stood at $15.62bn, according to a Reserve Bank of India report on the international investment position (IIP) of India. The report compiles the annual IIP of India as of the end of March 2007 and is the official statement of the stock of external financial assets and liabilities of the country.
The ratio of net IIP of India to GDP (at current price) has improved from -6.59% as of end-March 2006 to -5.28% as of end-March 2007.

But the increase in FDI compared with portfolio investment was the most noteworthy finding in the report. India has lagged behind competitor China in attracting greenfield investment projects, with portfolio flows accounting for a much larger share of India’s inward investment than as with China. However, India shows some signs of narrowing the gap somewhat with a steady rise in direct investment as China’s levels off.

During 2003-04 and 2004-05, portfolio investments in India were much higher than FDI inflows. According to the IIP report, FDI inflow during 2003-04 was $6.32bn as against portfolio investment of $12.01bn. Likewise, in 2004-05, FDI inflows were lower at $6.64bn as compared with portfolio investment of $8.94bn.

The cumulative portfolio investment of $80.25bn at the end of March 2007 was higher than the FDI inflows which totaled $72.33bn, the report said.The net IIP of India has improved by about $2.68bn to -$45.33bn as of end-March 2007 from a level of -$48.01bn as of end-March 2006, said the bank.

Among external financial assets, reserve assets registered an increase of about $47.56bn as of end-March 2007 over end-March 2006, followed by direct investment abroad, which had witnessed an increase of about $11bn during the same period. The report further pointed out that the total reserve assets of the country at the end of March 2007 exceeded the entire external debt (about $155bn) by $44.15bn.

• 0 comments »

Global Depository Receipt (GDR)

Global Depository Receipt (GDR) is a sort of bank certificate that is issued in more than one country for shares in foreign companies. It can be circulated worldwide in the capital markets. GDR's are issued by banks. Th bank purchases shares of foreign companies and deposit it on the accounts. Thus facilitation of the trade of share is the main objective of GDR, especially those from emerging markets. The values of the related share and the prices of GDR's are often close.

Indian companies can raise equity capital in the international market by issuing the Global Depository Receipt (GDRs). GDRs are designated in dollars and there are no ceilings on investment. The requirement for issuing of GDR is that the company applying should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. For infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads this condition would be however relaxed.
Use of GDRsGDR has many advantages. The government may use the proceed of the GDR to finance capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.

• 0 comments »

Global Depository Receipt (GDR) is a sort of bank certificate that is issued in more than one country for shares in foreign companies. It can be circulated worldwide in the capital markets. GDR's are issued by banks. Th bank purchases shares of foreign companies and deposit it on the accounts. Thus facilitation of the trade of share is the main objective of GDR, especially those from emerging markets. The values of the related share and the prices of GDR's are often close.

Indian companies can raise equity capital in the international market by issuing the Global Depository Receipt (GDRs). GDRs are designated in dollars and there are no ceilings on investment. The requirement for issuing of GDR is that the company applying should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. For infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads this condition would be however relaxed.
Use of GDRsGDR has many advantages. The government may use the proceed of the GDR to finance capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.

• 0 comments »

Bilateral Investment Promotion & Protection Agreement (BIPAs)

The Government of India started Economic reforms in 1991. Government of India liberalized the investment policy and entered into an Bilateral Investment Promotion & Protection Agreement (BIPAs) with various countries for promoting in order to promote and protect on reciprocal basis investment of the investors. Indian government has till date has entered into negotiation with 63 countries out of which 50 BIPAs have already come into force and the rest of the agreements are in the process of being enforced. Moreover, agreements have also been finalized and/ or being negotiated with various other countries.

Features of BIPA Agreement
The important features of BIPA are

• National Treatment for foreign investment
• MFN treatment for foreign investors and investment
• Free repatriation/ transfer of returns on investment
• Recourse to domestic disputes resolution and international arbitration for investor-State and
• State-State disputes
• Nationalization / expropriation only in public interest on a non-discriminatory basis and against compensation etc.
  

• 0 comments »

Foreign Currency Convertible Bonds (FCCB)

Foreign currency convertible bond (FCCB) is a convertible bond issued by a country in a currency different than the its own currency. This is the powerful instrument by which the country raises the money in the form of a foreign currency. The bond acts like both a debt and equity instrument. Like bonds it makes regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.

Foreign Currency Convertible Bond Policy in India
Ministry of Finance government of India defines FCCB. According to it:
"Foreign Currency Convertible Bonds" means bonds issued in accordance with this scheme and subscribed by a non- resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments; "

What is the criteria for issuing FCCBs?
● Any company who wish to raise the foreign funds by issuing FCCB, require prior permission of the Department of Economic Affairs, Ministry of Finance, Government of India.
● The company issuing the FCCB should have the consistent track record for a minimum period of three years
● The Foreign Currency Convertible Bonds shall be denominated in any freely convertible foreign currency and the ordinary shares of an issuing company shall be denominated in Indian rupees
● The issuing company should deliver the ordinary shares or bonds to a Domestic Custodian Bank as per regulation. The custodian bank on the other hand instructs the Overseas Depositary Bank to issue Global Depositary Receipt or Certificate to non-resident investors against the shares or bonds held by the Domestic Custodian Bank.

The provisions of any law with regard to the issue of capital by an Indian company will also be applicable the issue of Foreign Currency Convertible Bonds or the ordinary shares of an issuing company. The company issuing FCCB, shall obtain the necessary permission or exemption from the appropriate authority under the relevant law relating to issue of capital.

Limits of foreign investment in the issuing company
The Ordinary shares and Foreign Currency Convertible Bonds (FCCB) that are issued against the Global Depository Receipts are treated as Foreign Direct Investment (FDI). However total foreign investment made either directly or indirectly shall not exceed 51% of the issued and subscribed capital of the issuing company.

Taxation on Foreign Currency Convertible Bonds
● Until the conversion option is exercised, all the interest payments on the bonds, is subject to deduction of tax at source at the rate of ten per cent
● Tax exercised on dividend on the converted portion of the bond is subject to deduction of tax at source at the rate of ten per cent
● If Foreign Currency Convertible Bonds ( FCCB ) is converted into shares it will not give rise to any capital gains liable to income- tax in India.
● If Foreign Currency Convertible Bonds (FCCB) is transferred by a non-resident investor to another non-resident investor it shall not give rise to any capital gains liable to tax in India.

News Update
In May 2007, at least 10 companies converted FCCBs into equity at a price decided when the bonds were issued to respective investors. The list includes NIIT, Bharti Airtel, Sun Pharma, Glenmark Pharma, Amtek India, Jain Irrigation Systems and Maharashtra Seamless. FCCB holders have witnessed a significant rise in value of their investments in these companies on the back of a sharp rise in share prices since allotment of the bonds.

Source: The Economic Times

• 3 comments »

As per Indian company law, there are two types of shares that can be issued by the companies- equity shares and preference shares. Preference shares are those that which entail a preferential right to dividend, and to the proceeds of liquidation at winding up. Shares other than this are equity shares regardless of whether they have differential rights as to voting, dividend etc.

Preference shares cannot be issued on the perpetual basis as per company law. Company law prohibit perpetual preference shares. These shares have to be redeemed within an outer time limit of 20 years from their issue. Preference shares can also be converted into equity shares. Issuers issue preference shares with an element of optional or mandatory conversion into equity shares either partially or fully.

Company that issues preference share also agree to pay dividend on preference shares either at a specific rate or in terms of a pre-agreed formula.

Dividend along with the mandatory redemption requirement makes preference shares look like bonds - after all, bonds have an agreed tenure, and an interest element. However, it is pertinent to note that dividend, unlike interest, may be paid only from profits.

Redemption of preference shares is made from profits or balances in the securities premium account or a fresh issue of shares. Bonds carry obligation to redeem. Infact this redemption is an integral contractual obligation and one need not make profits or have securities premium balances to redeem debt.

In order to mobilize foreign investment by issuing preference preference shares, the Government of India (GOI) had initially permitted issuance of equity shares, preference shares, convertible preference shares by Indian companies to persons resident outside India in respect of financial projects / industries.

On 8th June 2007, The Reserve Bank of India modified the rules and regulations valid for foreign investment in preference shares. As per the revised guidelines, foreign investment from the issue of fully convertible preference shares would be considered as a portion of the share capital that would be inclusive in calculating the sectoral caps on foreign equity.

Influx of foreign investment from the issue of non-convertible, optionally convertible or partially convertible preference shares, would be regarded as debt and will demand to be in accordance with the guidelines/caps relating to External Commercial Borrowings (ECB).

Foreign investment in non-convertible, optionally convertible, partially convertible preference shares as on and upto 30th April 2007 would remain outside the sectoral cap until it achieves their current maturity.

Those preference shares that can be converted mandatorily into equity, would be treated as part of the share capital. These shares would be eligible to be issued to persons resident outside India under the Foreign Direct Investment scheme.

Funds for foreign investments from the issue of non-convertible, optionally convertible or partially convertible preference shares that would be obtained after1st May 2007, would be regarded as debt and would be demanded to be in accordance with ECB guidelines / caps. All standard norms that are relevant to ECBs will be implemented to such preference shares.

As per the above modifications, investments in optionally convertible/ partially convertible or redeemable preference shares passed by Indian companies on or upto April 30, 2007, would go on until its current maturity.

The government received many representation with respect to above guidelines. There were many entities who claimed that this guidelines has effected their business plans as they were at an advanced stage of issuing preference shares. Due to this representation government has decided that where verifiable and effective steps had been taken prior to April 30, 2007 in relation to issuance of such shares, exemption could be granted from the purview of the revised guidelines.

• 0 comments »

Portfolio Investment Scheme (PIS) for NRI

According to the FEMA regulation NRIs can make portfolio investment under certain conditions. However OCBs are not allowed to make fresh investments in India under the (PIS) Portfolio Investment Scheme.
Portfolio investment is covered by general permission subject to following condition/provisions.

(i) Investment is allowed both on repatriation as well as non-repatriation basis.

(ii) Under this scheme buying and selling of shares (Preference and Equity) and/or convertible debentures are included

(iii) Purchase and sale of share is allowed via registered broker of a recognized stock exchange.

(iv) NRI must designate one branch and all buying and selling must be routed through that designated bank branch only.

(v) Speculative transactions is prohibited. Transactions of sales and purchase must be delivery based

(vi) Investment mode should be carried out in any of the following ways:

(a) For investment on Repatriation basis

• Inward remittances is allowed through normal banking channels
  






• Investment can be made Out of FCNR/NRE account.
  

(b) For investment on non-repatriation basis

• Inward remittances is allowed through normal banking channels
  






• Investment can be made Out of FCNR/NRE account
  






• Investment can be made out of NRO account
  

(vii) Ceiling on Investment

(a) For every (Per NRI)

• NRI is allowed to invest 5% of the paid-up value of shares of an Indian Company on both repatriation and non-repatriation basis.
  






• He is also allowed to invest upto 5% of the value of each issue of convertible debenture of an Indian Company on both repatriation and non-repatriation basis.
  

(b) For Per investee Company
Total holding by all NRIs put together on both repatriable as well as non-repatriable basis should not exceed:

• 10% of paid-up value of shares of an Indian Company.
  






• 10% of paid-up value each series of convertible debenture.
  






• This ceiling of 10% could be enhance upto 24%, if the General Body of concerned
  






• Indian Company passes a special resolution to that effect.
  

(viii) Repatriation of Sale/Maturity Proceeds
The income from the Investment held on repatriation basis can be credited to NRE/FCNR/NRO account after payment of applicable taxes.
If investment is made on non-repatriation basis then credit of sale/maturity proceeds is permitted in NRO account.

(ix) If the holding of NRIs become less than 60% in existing OCB(i.e. prior to Sep 16, 2003), the existing OCBs must inform the same to the designated bank branch immediately

(x) NRIs can enter into forward contracts to hedge their investment made in India.

(xi) Subject to the limits prescribed by SEBI, NRI is permitted to invest in exchange traded derivatives contracts approved by SEBI from time to time out of his Rupee funds held in India on Non-Repatriable basis.

(xii) NRIs can also invest without limit on repatriable basis in Government dated securities, treasury bills, units of domestic mutual funds, bonds issued by PSUs, shares in public sector enterprises which are being disinvested by Government.

(Xiii) They can also invest without limit on non-repatriable basis in Government dated securities, treasury bills, units of Domestic mutual funds, units of Money market mutual funds. However, NRIs are not permitted to make Investments in Small Savings Schemes including PPF.

• 0 comments »

Updated Guidelines for Investment by NRIs (Non Resident India) (Sept 2001)

Investment Division
F.No.14/11/96-NRI
Government of India
Ministry of Finance
Department of Economic Affairs
(Investment Division)
New Delhi, dated the 20th September, 2001 (Updated)

PRESS NOTE
Subject: Enhancement in the limits on investments by Foreign Institutional Investors (FIIs).

1. Foreign Institutional Investors registered with SEBI are permitted to invest subject to an aggregate investment limit of 24% of the issued and paid up capital of an Indian company. In terms of the RBI Notification No.41/2001-RB dated 02 March, 2001 and Press Note dated 08th March, 2001, the Indian companies were permitted to enhance the normal aggregate portfolio investment limit from 24% to 49% under specified special procedure.

2. It has since been decided to increase the portfolio investment ceiling applicable to Foreign Institutional Investors (FIIs). Pursuant to the above decision, Indian companies would henceforth be permitted to raise the aggregate ceiling for FII portfolio investments through the secondary market from the normal level of 24%, upto the applicable Sectoral Cap levels, of the issued and paid up capital of the company subject to compliance with the special procedure viz.:

a) Approval by the Board of Directors of the Company to the enhanced limit beyond 24%; and

b) A Special Resolution passed by the General Body of the Company approving the enhanced limit beyond 24%.

3. All other requirements governing FII portfolio investments would continue to be operative as before.

4. In terms of RBI Notification No. FEMA 45/2001-RB dated 20th September 2001; the above provision has been made effective from 20th September, 2001.

(G. S. Dutt)
Joint Secretary (FT & Inv.)
Tel: 3014905

Guidelines for Investment by NRIs (March 2001)

Government of India
Ministry of Finance
Department of Economic Affairs
(Investment Division)
New Delhi, dated the 8th March, 2001

PRESS NOTE

Subject: Enhancement in the limits on investments by Foreign Institutional Investors (FIIs)

1. Foreign Institutional Investors registered with SEBI are permitted to invest subject to an aggregate investment limit of 24% of the issued and paid up capital of an Indian company. In terms of the Press Note dated 1st March, 2000, the Indian companies were permitted to enhance the normal aggregate portfolio investment limit from 24% to 40% under specified special procedure.

2. In his Budget Speech 2001-2002, the Finance Minister had announced an increase in the portfolio investment ceiling applicable to Foreign Institutional Investors (FIIs). Pursuant to the announcement, Indian companies would henceforth be permitted to raise the aggregate ceiling for FII portfolio investments from the normal level of 24% to 49% of the issued and paid up capital of an Indian company subject to compliance with the special procedure viz.:

1. Approval by the Board of Directors of the Company to the enhanced limit upto 49%; and

2. A Special Resolution passed by the General Body of the Company approving the enhanced limit up to 49%.

3. Aggregate portfolio investment limits applicable to FIIs would continue to be independent of the portfolio investment limits for NRIs/PIOs/OCBs as announced in the Press Note issued on 22nd June, 1998. All other requirements governing FII portfolio investments would continue to be operative as before.

4. In terms of RBI Notification No. FEMA 41/2001-RB dated March 2, 2001; the above provision has been made effective from 2nd March, 2001.

(G. S. Dutt)
Joint Secretary (FT & Inv.)
Tel: 3014905

Guidelines for Investment by NRIs (2000)

Government of India
Ministry of Finance
Department of Economic Affairs
(Investment Division)
New Delhi, dated the 1st March, 2000

PRESS NOTE

Subject: Enhancement in the limits on investments by Foreign Institutional Investors (FIIs).

1. Foreign Institutional Investors registered with SEBI are permitted to invest subject to an aggregate investment limit of 24% of the issued and paid up capital of an Indian company. In terms of the Press Note dated 4th April, 1997, the Indian companies were permitted to enhance the normal aggregate portfolio investment limit from 24% to 30% under specified special procedure. Aggregate investment limits applicable to FIIs had also been segregated through a Press Note issued on 22nd June, 1998 from the portfolio investment limits for NRIs/PIOs/OCBs.

2. In his Budget Speech 2000-2001, the Finance Minister had announced an increase in the portfolio investment ceiling applicable to Foreign Institutional Investors(FIIs). Pursuant to the announcement, Indian companies would henceforth be permitted to raise the aggregate ceiling for FII portfolio investments from the normal level of 24% to 40% of the issued and paid up capital of an Indian company subject to:
Approval by the Board of Directors of the Company to the enhanced limit upto 40%; and
A Special Resolution passed by the General Body of the Company approving the enhanced limit upto 40%.

3. All other conditions applicable to FII portfolio investment would continue to be operative as before.

( G. S. Dutt )
Joint Secretary (FT & Inv.)
Tel : 3014905

• 0 comments »

Modified Guidelines for Foreigh Institutional Investors (Taxation Aspect)
No.F.5(13)/SE/91-FIU
Department of Economic Affairs
(Investment Division )
New Delhi, dated the 24th March, 1994



Press Note
Modified Guidelines for Foreigh Institutional Investors (Taxation Aspect)
The following modifications of FII guidelines dated 14.9.92 in general, and paragraph 9 (f) and paragraph 18 of those guidelines in particular, are issued by way of clarification in the light of the enactment of section 115 AD of the Income-Tax Act through the Finance Act, 1993:



The taxation of income of foreign Institutional Investors from securities or capital gains arising from their transfer, for the present, shall be as under:

i. The income received in respect of securities (other than units of offshore Funds covered by section 115 AD of the Income-Tax Act) is to be taxed at the rate of 20%.

ii. Income by way of long-term capita gains arising from the transfer of the said securities is to be taxed at the rate of 10%.

iii. Income by way of short-term capital gains arising from the transfer of the said securities is to be taxed at the rate of 30%.

iv. The rates of income-tax as aforesaid will apply on the gross income specified above without allowing for any deduction under sections 28 to 44C, 57 and Chapter VI-A of the Income Tax Act.

The expression " securities " referred to above shall have the meaning assigned to it in clause (h) of section 2 of the securities Contract (Regulation) Act, 1956. These include

i. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated or other body corporate;

ii. Government securities; and

iii. Rights or interests in securities.

1. On account, of the concessional rate of income –tax on the capital gains, the provisions currently available to non-residents for protection from fluctuation of rupee value against foreign currency for computing capital gains arising from the transfer of shares in, or debentures of, an Indian company, will not apply to the Foreign Institutional Investors covered under section 115 AD of the Income-Tax Act. Further, the benefit of cost inflation indexation will also not be available to FIIs while computing long-term capital gains arising to them on transfer of securities.



Shares in a company shall have to be held for more than 12 months in order to qualify as a long-term capital asset. Other securities shall have to be held for more than 36 months in order to qualify as a long-term capital asset.



2. The expression "Foreign Institutional Investors" has been defined in section 115AD of the Income-Tax Act to mean such investors as the Central Government may, by notification in the official Gazette, specify in this behalf. The FIIs as are registered with Securities and Exchanges Board of India will be automatically notified by the Central Government for the purposes of section 115AD.



3. Income of Foreign Institutional Investors from securities shall be subject to deduction of tax at source. However, no deduction of tax shall be made from any income by way of capital gains arising from the transfer of securities. In order that the tax on capital gains arising to FIIs can be realized, each FII, while applying for initial registration with Securities and Exchange Board of India, will have to specify an agent, including a person who is treated as an agent under section 163 of the Income-Tax Act for the said purposes.

• 0 comments »

Portfolio Investment Scheme
FII is an institution that allows the investors ton invest in Indian securities traded in both primary and secondary capital markets secondary market. The comprehensive list of FII includes , Incorporated/Institutional Portfolio managers or their power attorney holders, University Funds,



Asset Management Companies, Pension Funds, Investment Trust as nominee companies, Endowment Foundations, Charitable Trusts Charitable Societies and Mutual Funds.

Foreign Institutional Investors (FIIs) can invest in India in the securities traded in both primary and secondary capital markets. The securities consist of shares, debentures, warrants, and units of mutual funds, government securities and derivative instruments.



Regulation of Portfolio Investment / FIIs
There are two main bodies regulating portfolio investment in India- SEBI (Securities and Exchange Board of India) and RBI (Reserve Bank of India). Every FII is required to register himself with Securities and Exchange Board of India (SEBI) and shall comply with the Exchange Control Regulations of RBI. SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA regulates the FIIs. Under the regulation of FEMA, RBI approval is also required in order to purchase or sell securities on Stock Exchanges and open foreign currency and Indian Rupee accounts with a designated bank branch. The permission from RBI is not requited so long as the FIIs purchase and sell on recognized stock exchange. All non-stock exchange sales/purchases require RBI permission.



Policy on FII Investment/ Portfolio Investment
The policy regulating FII, (Foreign Institutional Investors) NRI,( Non-Resident Indians) and PIO (Persons of Indian Origin) investment are as follows:

• (FIIs), (NRIs), and (PIOs) can invest in Indian capital market- both primary and secondary capital markets through the portfolio investment scheme (PIS). Through this scheme, foreign institution investors and Non resident Indians (NRIs) can acquire shares/debentures of Indian companies through the stock exchanges in India.
• FIIs can invest only up to 24 per cent of the paid up capital of the Indian company whereas for NRIs and PIOs this ceiling is kept up to 10 per cent. However for investment in public sector banks, including the State Bank of India the limit is 20 per cent of the paid up capital.
• The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, if it is approved by the board and the general body of the company through a special resolution. Similarly the ceiling limit for NRIs and PIOs can be raised to 24% from 10% if it is approved by the general body of the company passing a resolution to that effect.
• The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs.
  

The equity shares and convertible debentures of the companies within the prescribed ceilings are available for purchase under PIS subject to:

1. the total purchase of equity and debentures by all NRIs/PIOs both, on repatriation and non-repatriation basis, should be within an overall ceiling limit of (a) 24 per cent of the company's total paid up equity capital and (b) 24 per cent of the total paid up value of each series of convertible debenture; and




2. the investment made on repatriation basis by any single NRI/PIO in the equity shares and convertible debentures not exceeding five per cent of the paid up equity capital of the company or five per cent of the total paid up value of each series of convertible debentures issued by the company.

• The FIIs can divide their investment between equity and debt instruments in the ratio of 70:30.
• FII can also pronounced itself as a cent percent(100 percent) debt FII in which case it can make its entire investment in debt instruments.
• The FIIs are allowed to both purchase and sell securities on stock exchanges. These FIIs canalso invest in listed and unlisted securities outside Stock Exchanges where the price has been approved by RBI.
• Individual FII or Sub account is not allowed to purchase more than 10% of the paid up capital of an Indian company.
• Acquiring more than 24% of the paid up capital of an Indian Company, by all FIIs and their sub-accounts taken together is prohibited.

• 1 comments »

Portfolio Investment or FII Investment

The major constituents of Portfolio investment (FII investment) in India are:

Fund flows and resource mobilization by Indian companies through American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). These inflows are indicative of robustness of Indian capital market and overall macroeconomic conditions.

Indian Scenario
After the economic reforms of 1991, FII investment or portfolio investment started to gain momentum in India. Within the 15 years of span FII investment multiplied by leaps and bounds. The pace of investment started to gear up in 1993 and in 2004-05 it shot up rapidly. In 2005-06, the inflow of foreign investment was US$68.1 billion whereas the outflow of this investment was US$55.6 billion. Thus India recorded net portfolio inflow of US$12.5 billion. The flows through GDRs/ ADRs and others, reached the level of US$2.6 billion in 2005-06.

Whereas FDI increased in 2006-07, the net portfolio investment declined from US$5.4 billion in April-September 2005 to US$1.6 billion in April-September 2006. This is due to the fact that while thee portfolio investment increased by US$21.2 billion (from US$27.5billion to US$48.7 billion), outflows increased even more by US$25.0 billion (from US$22.1 billion to US$47.1 billion), during the reference period. Thus the decline of FII investment was more than the increased FDI thereby resulting in a decline in foreign investment inflows between the first half of the previous year and current year.

As FII is one of the major instruments for attracting foreign investment in India, government is trying hard to persuade foreign investors to invest in India. With GDP growing over 8%, foreign investors too are making India as a preferred destination for investment. Government’s policy regarding investment policy is meant to make procedure simpler to attract FIIs. Some of the steps taken by the Government are mentioned below:

• 0 comments »

Investment Limits and Routes for Various sectors

Government has allowed foreign direct investment (FDI) in India through two routes- Government route (FIPB route) and Automatic approval route of RBI. Foreign investment in most of the cases is hundred percent (100%). Whereas in some of the cases foreign participation is allowed up to 74%, 49% and 26%.
The following list will give you an insight about the foreign investment limits and their route of approval.

The chart below shows the sectorial caps and route of FDI for Infrastructure, Service and Manufacturing, Knowledge based & and resource based sectoe respectively

Click on the image to see the enlarge view

New FDI Norms 2009-2010

• 0 comments »