Nabin Ballodia July 9, 2011 Foreign Direct Investment in India

2 Agenda Entry Route Sectoral Caps Downstream Investment Swap of shares Shares for non-cash consideration Overview

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4 FDI Policy Objective of India’s FDI Policy to invite and encourage foreign investment in India Since 1991, the policy has been liberalized substantially to facilitate foreign investment The Department of Industrial Policy & Promotion (DIPP), the Foreign Investment Promotion Board (FIPB) and Secretariat of Industrial Assistance (SIA) regulate the FDI Policy The administrative and compliance aspects of FDI are monitored by the RBI Consolidated half yearly policy document - subsumes all Press notes etc

5 Entry Routes

6  Only for cases other than Automatic Route and those mentioned in sectoral policy  Applies to investment over 24% in SSI reserved items  Investments by citizens / entity incorporated in Bangladesh Government Route  Allowed for Most sectors  Limits : Sectoral caps/ stipulated sector specific guidelines  Inward remittances through proper banking channels  Pricing valuations prescribed  Post facto filing with 30 days of fund receipt  Filings within 30 days of share allotment  Includes Technical Collaboration/ Brand Name/ Royalty Automatic Route FDI Guidelines for Investing in India Foreign Investment Promotion Board (FIPB) No Prior Regulatory Approval but only Post Facto Filings to RBI, through AD  

7 Entry Routes  Existing Airports 100%  Asset Reconstruction Companies 49%  Titanium Minerals 100%  Broadcasting (a)  Courier 100%  Print Media (a) 26%  Single brand retailing 51%  Agriculture (b)  Atomic energy  Retail trading (except single brand up to 51%)  Lottery, betting and gambling  Chit fund, Nidhi company  Trading in Transferable Development Rights  Cigars & Cigarettes Negative List (Illustrative) Government Route (Illustrative)  NBFC (minimum capitalization norms)  IT / ITes  Financial services (a)  Telecom Sector (74% cap) (a)  Insurance (26 % cap) (a)  Real Estate (a)  Special Economic Zones  Infrastructure  Shipping  Manufacturing sector  Hotels and tourism Automatic Route (Illustrative) Note: (a) Sector specific guidelines (b) Subject to certain exceptions    FDI limits – Illustrative list

8 FDI Policy – Procedural Aspects Applications can be filed online/physically – mandatory preliminary application Intimation of receipt of share application money – within 30 days Allotment of shares within 180 days of receipt of funds Funds against which shares not allotted to be refunded For transfer of shares file Form FC-TRS within 60 days of receipt of consideration Downstream investment by Indian companies to be notified to SIA, DIPP and FIPB within 30 days of investment Onus on transferor/ transferee, resident in India

9 Sector Specific Caps

10 Snapshot of Certain Specific Sectors Sector / Activity% of FDI Cap / EquityRoute Real estate i.e. ( Development of Townships, Housing, Built-up infrastructure and Construction- development projects) 100%Automatic Trading (i)Cash & Carry Wholesale Trading / Wholesale Trading (ii)Single Brand Product Trading 100% 51% Automatic Government NBFC100%Automatic Defence26%Government

11 Real Estate For business of development of townships, housing, built-up infrastructure and construction- development projects Illustrative list Commercial premises, Hotels & resorts Hospitals, Educational institutions, Recreational facilities, City and regional level infrastructure FDI is not allowed in Real Estate business, construction of farm houses

12 Real Estate Real Estate Investment subject to the following conditions: ParameterCondition 1.AreaFor development of serviced housing plots Minimum 10 Hectare Construction development projectsMinimum 50,000sq.mtrs 2. CapitalizationWOSMinimum USD 10 Million JV with Indian partnerMinimum USD 5 Million 3. Repatriation of Original Investment Lock in of 3 years 4. Timeline for development50% of project, within 5 years of statutory clearances – restriction on undeveloped projects 5. Norms and standardTo conform as laid by respective local/state authorities 6. Responsibility for seeking approval On the investor / investee company Conditions (1) to (4) would not apply to Hotel & Tourism, Hospitals and SEZs as well as investment by NRIs

13 Trading- Cash & Carry Wholesale trading / Wholesale trading (WT) Sale of goods/merchandise to Retailers, Industrial users, Commercial users, Institutional users, Other professional business users, Other wholesalers and related subordinated service providers, Resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales, or B2B e-Commerce Type of customers to whom the sale is made Cash & Carry Wholesale trading/ Wholesale trading Sale to qualify for WT, it should primarily be for the purpose of trade, business or profession and not personal consumption Yardstick for Determination whether sale is WT   Size and volume of sales

14 Requisite licenses/registration under the relevant State / Central legislations Sales by the wholesaler (except to Government) to qualify as above if made to entities : Holding sales tax/ VAT /service tax/excise registrations; or Holding trade licenses under Shops and Establishment Act; or Holding license for undertaking retail trade (like tehbazari and similar license for hawkers); or Registered as a society or public trust for their self consumption Maintenance of full records indicating all the details of such sales on a day to day basis WT to group companies - limited to 25% of the total turnover of the wholesale venture WT as per normal business practice - including extending credit facilities Restriction on opening retail shops to sell to the consumer directly. Trading- Cash & Carry Wholesale trading / Wholesale trading (WT)

15 Trading- Single Brand product trading Conditions to be satisfied Products to be sold should be of a ‘Single Brand’ only Products should be sold under the same brand internationally Covers only products which are branded during manufacturing Application to indicate product/ product categories - any additions require a fresh approval

16 NBFC FDI in NBFC is allowed under the automatic route in only the following activities: x.Factoring xi.Credit Rating Agencies xii.Leasing & Finance xiii.Housing Finance xiv.Forex Broking xv.Credit Card Business* xvi.Money Changing Business xvii.Micro Credit xviii.Rural Credit i.Merchant Banking ii.Under Writing iii.Portfolio Management Services iv.Investment Advisory Services v.Financial Consultancy vi.Stock Broking vii.Asset Management viii.Venture Capital ix.Custodian Services * Credit Card business includes issuance, sales, marketing & design of various payment products such as credit cards, charge cards, debit cards, stored value cards, smart card, value added cards etc.

17 NBFC Investment would be subject to the following minimum capitalisation norms: 100% foreign NBFCs with minimum USD 50 million can set up step down subsidiaries for specific NBFC activities, No restriction on the number of operating subsidiaries/minimum capital. NBFCs with 75% or less FDI can also set up subsidiaries for undertaking other NBFC activities Subsidiaries should also comply with the min cap norms stated above Foreign Capital ShareMinimum Amount of Funds i.Upto 51%USD 0.5 Million, to be brought upfront ii.More than 51% but up to 75%USD 5 Million, to be brought upfront iii.More than 75%USD 50 Million, out of which USD 7.5 million to be brought upfront ; balance in 24 months.

18 NBFC – Non- Fund based activities Investment in Non-Fund based activities would be subject to the following - Such NBFC is not permitted to set up any subsidiary for any other activity, nor to participate in any equity of an NBFC holding/operating company Following activities classified as Non-Fund based activities: Investment Advisory Services Financial Consultancy Forex Broking Money Changing Business Credit Rating Agencies Foreign Capital ShareMinimum Amount of Funds Irrespective of shareUSD 0.5 Million to be brought upfront for all permitted non-fund based NBFCs irrespective of the level of foreign investment FDI in NBFC is subject to compliance with guidelines by RBI and other relevant regulators

19 Defence Applications to be considered by the DIPP, MoCI and MoD Applicant should be an Indian company/firm. Management of applicant in Indian hands [Board / Chief Executives Indian resident) Full particulars of the Directors / Chief Executives to be furnished along with the applications. Government to verify the background of foreign collaborators / domestic promoters including No minimum capitalization, however adequate Net Worth of foreign investor important Three-year lock-in period for transfer of equity from one NR to another Such transfer would be subject to prior approval of the FIPB

20 Indirect & Downstream Investment

21 Downstream Investment FDI in a company can be in two forms Direct : A non-resident investing directly in an Indian company, or Indirect : Investment by one Indian company into another, wherein the former has foreign investment in it. Indirect can also be a cascading investment i.e. through multi-layered structure For the purpose of FDI, Foreign Investment shall include all types of foreign investments i.e. FDI Investment by FIIs; NRIs; ADRs; GDRs; FCCB; Fully, compulsorily and mandatorily convertible preference shares and Fully, compulsorily and mandatorily convertible Debentures.

22 Downstream Investment FI in pure investing company – Approval route For other companies – Foreign investment subject to sectoral FDI policy conditions Reporting requirements within 30 days of investment with DIPP/ FIPB introduced Issue / transfer / pricing / valuation as per SEBI / RBI guidelines Indian company making downstream investment not permitted to leverage funds from domestic market

23 Calculation of Indirect FDI F Co. I Co 1 Overseas India I Co 1 Overseas India I Co 2 F Co. Direct FI Direct Foreign Investment Indirect Foreign Investment Indirect FI Total FI is sum of Direct FI and Indirect FI

24 Calculation of Indirect FDI RIC means: ‘Resident Indian Citizen’ as interpreted / in line with the definition of ‘person resident in India’ as per FEMA 1999, read in conjunction with the Indian Citizenship Act; and/or Indian Companies (Companies registered / incorporated in India) which are ultimately owned and controlled by ‘Resident Indian Citizens’ Non Resident Entity (NRE) means: A ‘person resident outside India’ as defined under FEMA 1999 ‘Owned’ by RIC means: If more than 50% of capital in Indian Company is beneficially owned by RIC/ICO owned and controlled by RIC Owned by NRE means: If more than 50% of capital in Indian Company is beneficially owned by non-residents ‘Controlled by’ means: Power to appoint majority of directors in the Indian Company

25 Calculation of Indirect FDI I Co 1 Overseas India I Co 2 NRE If ICO 2 & ICO 1 owned and controlled by RIC, investment by ICO 1 in ICO 2 is not indirect FDI 1 If ICO 1 is owned or controlled by NRE, investment by ICO 1 in ICO 2 is considered indirect FDI 2 FI to include all types of foreign investments For RIC own and control are cumulative conditions; for NRE these are non-cumulative The methodology to apply to every stage of investment at Indian company If ICO 1 holds 100% in ICO 2, NRE investment in ICO 1 is considered indirect FDI in ICO 2 3

26 Calculation of Indirect FDI Direct FI in I Co 2 = 39% Indirect FI in I Co 2 = Nil Total FI in I Co 2 = 39% Non Resident Entity (‘NRE’) I Co 1 (Owned and Controlled by RIC) I Co 2 (Owned and Controlled by RIC) Overseas India 40% 10% 39% Rule 1 Direct FI in I Co 2 = 39% Indirect FI in I Co 2 = 10% Total FI in I Co 2 = 49% NRE I Co 1 (Owned or Controlled by NRE) I Co 2 (Owned and Controlled by RIC) 51% 10% 39% Rule 2

27 Calculation of Indirect FDI Indirect FI in I Co 2 = 75% Non Resident Entity (‘NRE’) I Co 1 (Investing/ operating cum investing company) I Co 2 Overseas India 75% 100% RIC 25% Indirect FI in I Co 2 = NIL or 26%? Non Resident Entity (‘NRE’) I Co 1 (Investing/ operating cum investing company) I Co 2 Overseas India 26% 100% 74% What is indirect FDI in near 100% say 99% held companies? Rule 3

28 Investment by way of Swap of Shares

29 Swap of Shares F Co 1 I Co F Co 2 India Issue of shares Transfer of shares Outside India Existing Structure F Co 1 I Co F Co 2 Equity Resulting Structure Equity Mechanics To start with - F Co 1 holds shares in F Co 2, I Co not in structure I Co acquires the shares of F Co 2 from F Co 1 As a consideration, I Co issues its own shares to F Co 1

30 Swap of Shares Approval required from the FIPB for such transaction Irrespective of the amount, valuation of shares to done either by by a Category I Merchant Banker registered with SEBI, or An Investment Banker outside India registered with the appropriate authority of the host country Share valuation norms to be complied under both the legs: ODI and the FDI Overseas investment to comply with ODI guidelines and inward issue of shares to FDI policy

31 Issue of shares for Non-cash consideration

32 Shares for Non-cash consideration Shares to be issued to a non-resident against receipt of funds through normal banking channels If the funds not received through normal banking channels, prior approval of the Government required Exception to the above condition Shares are to be issued against ECB and/or Shares are to be issued against royalty payments (including lump-sum technical know-how fees) Issue of shares for non-cash consideration also extended under the approval route for following - Import of capital goods/ machinery/ equipment (including second-hand machinery), subject to conditions Pre-operative/ Pre-incorporation expenses (including payments of rent etc.), subject to conditions

33 Shares for Non-cash consideration For import of capital goods/ machinery/ equipment - Import as per the Export / Import Policy as notified by the DGFT and RBI Independent valuation by a third party entity from importing country with documents Application to indicate beneficial ownership and identity of importer / exporter All such conversions should be completed within 180 days from the date of shipment of goods. For pre-operative/ pre-incorporation expenses - Submission of FIRC for remittance of funds Verification / certification of the pre-incorporation/ pre-operative expenses by statutory auditor; Payments to be made directly by the foreign investor to the company.; and Capitalization be completed within the stipulated period of 180 days Special Resolution to be passed by the company for conversion Government approval subject to pricing guidelines of RBI and appropriate tax clearance

34 Shares for Non-cash consideration Pre- incorporation Incorporated but not operational(Pre- operational) Set-up or Commencement of business Indian Company not in existence– Payment cannot be made to the Indian Company Payments to be directly made to Indian Company’s bank account and FIRCs to explicit mention that funds remitted to meet “pre-operative” expenses Shares cannot be issued in lieu of payment made by Foreign Investor towards “Pre-incorporation” expenses Shares can be issued in lieu of foreign direct inward remittances made by Foreign Investor towards “Pre-operative” expenses Issue  Definition / meaning of pre-operative / pre-incorporation expenses not provided  Trigger point for time period of 180 days for issue of shares not clear  Past transactions may not get covered Bank Account opened subsequent to issue of PAN

Nabin Ballodia July 9, 2011 Thank You

36 Calculation of Indirect FDI Different methods of computing Indirect FI prescribed for different sectors. E.g. - Telecom : Proportionate method - Investing companies in Infrastructure sector : Management + Ownership Test F Co. I Co 1 Overseas India Telecom sector I Co 2 90% 60% FI in I Co 2 is 54% (90*60%) I Co 1 * Overseas India Infrastructure sector I Co 2 49% 100% FI in I Co 2 is NIL F Co. *Management of I Co1 with Indians Erstwhile Regulations