14 November, 2015
Introduction of Composite Caps for Simplification of Foreign Direct Investment policy
The Ministry of Commerce and Industry, Department of Industrial Policy and Promotion (‘DIPP’) has by way of Press Note No. 8 (2015 series) dated July 30, 2015, made certain changes to ensure simplicity and uniformity in order to attract foreign investments into India. The following amendments and clarifications have been made to the Consolidated Foreign Direct Investment Policy, 2015 (‘FDI Policy’):
- Sub-paragraph (vi) of Paragraph 3.6.2 of the FDI Policy, which deals with guide- lines for establishment of Indian companies/transfer of ownership/control of In- dian companies, from resident Indian citizens to non-resident entities, in sectors with caps, has been amended to clarify that foreign investments will include all types of foreign investments, whether direct or indirect, regardless of whether the investments have been made under Schedules 1 (FDI), 2 (FII), 2A (FPI), 3 (NRI), 6 (FVCI), 8 (QFIs), 9 (LLPs) and 10 (DRs) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (‘FEMA Regulations’).
- It has been clarified that, Foreign Currency Convertible Bonds and Depository Receipts being in the nature of debt, will not be treated as foreign investments, whether direct or indirect. However, any equity holding by a person resident out- side India resulting from conversion of any debt instrument under any agreement will be treated as foreign investment under the composite cap.
- If the foreign investment results in a transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities and is in a sector that is: (a) under the Government approval route, it will be subject to Government approval; or (b) under the automatic route, but subject to conditions, then it will be subject to the compliance of such conditions. Sectors under 100% automatic route that are not subject to conditions remain unaffected. Further, portfolio in- vestment up to an aggregate foreign investment level of 49% or the prescribed sectoral cap, whichever is lower, will not be subject to either Government approval or compliance of sectoral conditions, if such investment does not result in transfer of ownership and/or transfer of control of Indian entities from resident Indians to non-resident entities.
- Total foreign investment in an entity cannot exceed the prescribed sectoral cap and the onus of compliance of such provisions will be on the investee company.
- No sub-limits prescribed for portfolio investment and other kinds of foreign investments will apply to commodity exchanges, credit information companies, infrastructure companies in securities market and power exchanges.
- In the defence sector, portfolio investment by FPIs/FIIs/NRIs/QPIs and investment by FVCIs together will not exceed 24% of the total equity of the investee or joint venture company. Portfolio investment will be under the automatic route.
- With respect to the private banking sector, where the sectoral cap is 74%, FII/FPI/ QFI investment limits continue to be restricted to a maximum of 49% of the total paid up capital.
Issue of Shares under Employee Stock Options Scheme and/or Sweat Equity Shares to Persons Resident Outside India
In terms of the FEMA Regulations, an Indian company is permitted to issue shares under ESOP Scheme, by whatever name called, to its employees or employees of its joint venture or wholly owned overseas subsidiary/subsidiaries who are resident outside India.
Reserve Bank of India (‘RBI’) has, by the way of a circular dated July 16, 2015, authorised an Indian company to issue ESOPs and/or sweat equity shares to its employees/directors or as well as employees/direc- tors of its holding company, its joint venture or its wholly owned overseas subsidiary(ies) who are resident outside India provided the following conditions are satisfied:
- The relevant scheme has been established under the Securities Exchange Board of India Act, 1992 or the Companies (Share Capital and Debenture) Rules, 2014;
- The issuance of ESOPs/sweat equity shares to non-resident employees/directors is in compliance with the relevant sectoral caps applicable to the company;
- Prior approval of the Foreign Investment Promotion Board is obtained in cases where the issue of ESOPs is by a company that has received foreign investment under the approval route or where the concerned employee/director is a citizen of Bangladesh or Pakistan.
Additionally, the issuing company is required to furnish to the regional office of RBI under whose jurisdiction the registered office of the company operates, a return as per the Form-ESOP within 30 days from the date of issue of the ESOP/sweat equity shares.
Foreign Investment in India by Foreign Portfolio Investors (‘FPI’)
RBI has, by way of a circular dated July 16, 2015, clarified that the restriction on all future investments by an FPI within the limit for investment in corporate bonds with minimum residual maturity of three years will not be applicable to investments by FPIs in security receipts issued by asset reconstruction companies. However, investment in security receipts is required to be within the overall limit prescribed for corporate debt from time to time.
Reporting of Transactions under FDI Scheme on the e-Biz Platform
With a view to promoting the ease of reporting of transactions under FDI, RBI, under the aegis of the e-Biz project of the Government of India, has enabled online filing of the Foreign Currency Transfer of Shares returns for reporting transfer of shares, convertible debentures, partly paid shares and warrants from a person resident in India to a person resident outside India or vice versa. This online reporting system has come into operation on the e-Biz plat- form from August 24, 2015. The new online reporting system enables authorized dealer banks to download the completed forms, verify the contents and if necessary, request for additional in- formation from the customer and then upload the same for RBI to process and allot the Unique Identification Number. The manual system of reporting will continue till further notice.
Clarification on FDI Policy on Facility Sharing Arrangements Between Group Companies
By way of a circular dated September 15, 2015, DIPP has clarified that facility sharing agree- ments between group companies through leasing/subleasing arrangements for the larger inter- est of business will not be treated as ‘real estate business’ within the provisions of the Consoli- dated FDI Policy, provided such arrangements are at an arm’s length price in accordance with the relevant provisions of Income Tax Act 1961, and the annual lease rent earned by the lessor company does not exceed 5% of its total revenue.
Review of the Existing FDI policy on Partly Paid Shares and Warrants
DIPP has by way of Press Note No. 9 (2015 series) dated September 15, 2015, decided to allow partly paid-up shares and warrants as eligible capital instruments for the purposes of the FDI Policy. Accordingly, the definition of ‘capital’ under the FDI Policy has been amended to include warrants and partly paid-up shares.A new paragraph after paragraph 3.3.3 of the FDI Policy has been inserted, which clarifies that an Indian company may issue warrants and partly paid-up shares to a person resident outside India, subject to terms and conditions as may be stipulated by RBI in this behalf, from time to time. The Press Note has aligned the FDI Policy with the RBI circular dated July 14, 2014 in this regard.
Foreign Exchange Management (Regularization of assets held abroad by a person resident in India) Regulations, 2015.
By way of a circular dated September 25, 2015, RBI has notified the Foreign Exchange Man- agement (Regularization of assets held abroad by a person resident in India) Regulations, 2015 (‘FEMA Regularization of Offshore Assets Regulations’). These regulations will come into force from the date of their publication in the Official Gazette. Some key provisions include:
i. Except as otherwise provided in the regulations or with the general or special per- mission of RBI, no person resident in India is entitled to hold an asset located out- side India for which a declaration has been made under Section 59 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘Black Money Act’);
ii. No proceedings will lie under Foreign Exchange Management Act, 1999 (‘FEMA’) against a person resident in India who has made a declaration under Section 59 of the Black Money Act, in respect of any undisclosed asset located outside India and has paid the tax and penalty in accordance with the provisions of the said Act;
iii. Where the declarant intends to continue to hold the asset so declared, he must apply to RBI within 180 days from the date of declaration, for permission under FEMA, if such permission is necessary as on the date of application;
iv. Where the declarant does not intend to hold the asset or permission to hold such asset is refused by RBI, the declarant will dispose of the said asset within 180 days from the date of making such declaration or the date of receipt of such refusal from RBI, or within such extended period as may be permitted by RBI and bring back the proceeds to India immediately.
All India Footwear Manufacturers & Retailers Association & Ors. v. Union of India & Ors.
On July 31, 2015, the All India Footwear Manufacturers & Retailers Association, along with certain other footwear retailers, filed a writ petition before the Delhi High Court2 against the Union of India and several other government agencies, inter alia alleging that the respondent authorities have failed to take any action against the various e-commerce companies current- ly operating in India and doing business through the World Wide Web as “online stores”, in complete violation of the existing foreign exchange regulations in India. The existing foreign exchange regulations in India prohibit foreign direct investment in any form in retail ‘e-com- merce’ activities, while foreign investment of up to 100% in a company undertaking business to business (B2B) e-commerce sales is permitted under the automatic route. However, according to the petitioners, the e-commerce companies in India have created complex and convoluted business structures by creating a façade of a “market place” and are thus evading the law by accepting foreign direct investment despite foreign investment in retail e-commerce activities being prohibited. The petitioners’ contention is that such companies are, in fact, the actual sell- ers of goods on their platforms/ websites since they control the goods being offered for sale and sold on their platforms/ websites and the entire process leading up to the sale, including showcasing the goods online, offering discounts, collecting payments, delivering the goods, ac- cepting returns, offering guarantee on the goods sold and refunding monies to the customers for goods returned.
The primary grievance of the petitioners is that while there is a complete prohibition on the petitioners, who operate brick and mortar retail stores, from accepting any kind of foreign direct investment, such e-commerce companies, who are also retailers albeit in the garb of ‘market place’ have been permitted to accept foreign direct investments, thus creating a non-level playing field whereby the petitioners are being discriminated against by the respondents. The petitioners have also alleged in their writ petition that the monies invested in the e-commerce companies by foreign investors are used by the e-commerce companies to offer deep discounts on the goods sold on their platforms, which is not feasible for the brick and mortar stores to offer. Consequently, the business of the petitioners have been deeply and adversely affected as customers are increasingly making their purchases from the “online stores” rather than from the physical stores.
The petitioners have offered various other arguments in support of their contention that the e-commerce companies are nothing but ‘online retailers’ and their platforms/ websites ‘on- line stores’. In light of these arguments the petitioners have inter alia sought for direction (i) seeking investigation by the respondents into the affairs of the e-commerce companies who have invited foreign direct investments; (ii) seeking action by the respondents against such e- commerce companies; and (iii) restraining and prohibiting the respondents from allowing for- eign direct investment in India in companies involved in e-commerce.
When the writ petition came up for hearing on September 23, 2015, the Delhi High Court, after hearing the arguments of the counsels, directed the Union Government to provide its views on the issue relating to foreign investment in e-commerce. The High Court has, in its or- der, stated that prima facie, it appears that the Union Government / State Governments cannot, on the one hand, for the purpose of tax, treat such sales (by e-commerce companies) as retail and on the other hand, for the purposes of investment, not treat the same as retail sale. The out- come of the writ petition would be interesting and may have far reaching ramifications for an industry where billions of dollars of foreign investment is at stake.
2 Writ Petition No. 7479 of 2015
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
