FOREIGN DIRECT INVESTMENT

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Summary

India has already marked its presence as one of the fastest growing economies of the world. It has been ranked among the top 10 attractive destinations for inbound investments. Since 1991, the regulatory environment in terms of foreign investment has been consistently eased to make it investor-friendly.

The measures taken by the Government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors and simplifying other conditions of the FDI policy. FDI policy reforms are meant to provide ease of doing business and accelerate the pace of foreign investment in the country.

RECENT POLICY MEASURES
  • 49% FDI under automatic route permitted in Insurance and Pension sectors
  • Foreign investment up to 49% in defence sector permitted under automatic route. The foreign investment in access of 49% has been allowed on case to case basis with Government approval in cases resulting in access to modern technology in the country or for other reasons to be recorded
  • FDI limit of 100% (49% under automatic route, beyond 49% government route) for defence sector made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959
  • FDI up to 100% under automatic route permitted in Teleports, Direct to Home, Cable Networks, Mobile TV, Headend-in- the Sky Broadcasting Service
  • FDI up to 100% under automatic route permitted in Up-linking of Non-‘News & Current Affairs’ TV Channels, Down-linking of TV Channels
  • In case of single brand retail trading of ‘state-of-art’ and ‘cutting-edge technology’ products, sourcing norms can be relaxed up to three years and sourcing regime can be relaxed for another 5 years subject to Government approval
  • Foreign equity cap of activities of Non-Scheduled Air Transport Service, Ground Handling Services increased from 74% to 100% under the automatic route
  • 100% FDI under automatic route permitted in Brownfield Airport projects
  • FDI limit for Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service raised to 100%, with FDI upto 49% permitted under automatic route and FDI beyond 49% through Government approval
  • Foreign airlines would continue to be allowed to invest in capital of Indian companies operating scheduled and nonscheduled airtransport services up to the limit of 49% of their paid up capital
  • In order to provide clarity to the e-commerce sector, the Government has issued guidelines for foreign investment in the sector. 100% FDI under automatic route permitted in the marketplace model of e-commerce
  • 100% FDI under Government route for retail trading, including through e-commerce, has been permitted in respect of food products manufactured and/or produced in India
  • 100% FDI allowed in Asset Reconstruction Companies under the automatic route
  • 74% FDI under automatic route permitted in brownfield pharmaceuticals. FDI beyond 74% will be allowed through government approval route
  • FDI limit for Private Security Agencies raised to 74% (49% under automatic route, beyond 49% and upto 74% under government route)
  • For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, approval of Reserve Bank of India would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted
  • Requirement of ‘controlled conditions’ for FDI in Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture and Apiculture has been waived off
TYPES OF INVESTORS
  1. Individual:
    • FVCI (Foreign Venture Capital Investors)
    • Pension/Provident Fund
    • Financial Institutions
  2. Company:
    • Foreign Trust
    • Sovereign Wealth Funds
    • NRIs (Non Resident Indians)/ PIOs (Persons of Indian Origin)
  3. Foreign Institutional Investors:
    • Private Equity Funds
    • Partnership / Proprietorship Firm
    • Others
GLOSSARY OF DEFINITIONS

Automatic Route:

  • Under this route no Central Government permission is required.

Government Route:

  • Under this route applications are considered by the Foreign Investment Promotion Board (FIPB). Approval from Cabinet Committee on Security is required for more than 49% FDI in defence. The proposals involving investments of more than USD 769.23 million are considered by Cabinet committee on economic affairs.
  • The Indian company receiving FDI either under the automatic route or the government route is required to comply with provisions of the FDI policy including reporting the FDI and issue of shares to the Reserve Bank of India. The details can be seen from Q.6 of Section I of the following link- Quarter 6 of Section I.
SECTORS REQUIRING CENTRAL GOVERNMENT APPROVAL (Relevant Para of Consolidated FDI Policy, June 2016)
  • Mining and mineral separation of titanium bearing minerals and ores – Upto 100% (5.2.3.3*)
  • Defence – Beyond 49% & upto 100% (5.2.6)
  • Publishing/printing of scientific and technical magazines/specialty journals/ periodicals – Upto 100% (5.2.8.3)
  • Publication of facsimile edition of foreign newspapers – Upto 100% (5.2.8.4)
  • Print Media - Publishing of newspaper and periodicals dealing with news and current affairs – Upto 26% (5.2.8.1)
  • Print Media - Publication of Indian editions of foreign magazines dealing with news and current affairs – Upto 26% (5.2.8.2)
  • Air Transport Service - Scheduled, and Regional Air Transport Service – Beyond 49% & Upto 100% (5.2.9.2(1))
  • Satellites – establishment and operation – Upto 100% (5.2.12)
  • Telecom Services – Beyond 49% & Upto 100% (5.2.14)
  • Trading – Single Brand Retail Trading (SBRT) – Beyond 49% & Upto 100% (5.2.15.3)
  • Pharma – Brownfield – Beyond 74% & Upto 100% (5.2.27.2)
  • Banking – Private Sector – Beyond 49% & Upto 74% (5.2.18)
  • Banking – Public Sector – Upto 20% (5.2.19)
  • Private Security Agencies – Beyond 49% & Upto 74% (5.2.13)
  • Broadcasting Content Service
    1. FM Radio – Upto 49% (5.2.7.2.1)
    2. Uplinking of ‘News & Current Affairs’ TV Channels – Upto 49% (5.2.7.2.2)
  • Trading - Multi Brand Retail Trading (MBRT) – Upto 51% (5.2.15.4)
* Relevant Para of Consolidated FDI Policy, June 2016
SECTORS UNDER AUTOMATIC ROUTE (Relevant Para of Consolidated FDI Policy, June 2016)
  • Agriculture – 100% (5.2.1*)
  • Plantation Sector – 100% (5.2.2)
  • Mining of metal and non-metal ores – 100% (5.2.3.1)
  • Mining – Coal & Lignite – 100% (5.2.3.2)
  • Food Product Retail Trading – 100% (5.2.5)
  • Broadcasting Carriage Services (Teleports, DTH, Cable Networks, Mobile TV, HITS) – 100% (5.2.7.1)
  • Broadcasting Content Service - Up-linking of Non-‘News & Current Affairs’ TV Channels/ Down-linking of TV Channels – 100% (5.2.7.2.3)
  • Airports – Greenfield – 100% (5.2.9.1 (a))
  • Airports – Brownfield – 100% (5.2.9.1 (b))
  • Air Transport Service – Non-Scheduled – 100% (5.2.9.2 (2))
  • Air Transport Service – Helicopter Services/ Seaplane Services – 100% (5.2.9.2 (3))
  • Ground Handling Services – 100% (5.2.9.3 (1))
  • Maintenance and Repair organizations; flying training institutes; and technical training institutions – 100% (5.2.9.3 (2))
  • Construction Development – 100% (5.2.10)
  • Industrial Parks – new and existing – 100% (5.2.11)
  • Trading – Wholesale – 100% (5.2.15.1)
  • Trading – B2B E-commerce – 100% (5.2.15.2)
  • Duty Free Shops – 100% (5.2.15.5)
  • Railway Infrastructure** – 100% (5.2.16)
  • Asset Reconstruction Companies – 100% (5.2.17)
  • Credit Information Companies – 100% (5.2.20)
  • White Label ATM Operations – 100% (5.2.25)
  • Non-Banking Finance Companies – 100% (5.2.26)
  • Pharma – Greenfield – 100% (5.2.27.1)
  • Petroleum & Natural Gas - Exploration activities of oil and natural gas fields – 100% (5.2.4.1)
  • Petroleum refining by PSUs – 49% (5.2.4.2)
  • Infrastructure Company in the Securities Market – 49% (5.2.21)
  • Commodity Exchanges – 49% (5.2.21)
  • Insurance – 49% (5.2.22)
  • Pension – 49% (5.2.23)
  • Power Exchanges – 49% (5.2.24)
* Relevant Para of Consolidated FDI Policy, June 2016
** Proposals involving FDI beyond 49% in sensitive areas from security point of view, to be brought by the Ministry of Railways before the Cabinet Committee on Security (CCS) for consideration on a case to case basis.
ENTRY STRUCTURES

Incorporating a company in India:

  • It can be a private or public limited company. Both wholly owned & joint ventures are allowed. Private limited company requires minimum of 2 shareholders.

Limited liability partnerships:

  • Allowed under the Government route in sectors which has 100% FDI allowed under the automatic route and without any conditions.

Sole proprietorship/partnership firm:

  • Under RBI approval. RBI decides the application in consultation with Government of India.

Extension of foreign entity:

  • Liaison office, Branch office (BO) or Project Office (PO). These offices can undertake only the activities specified by the RBI. Approvals are granted under the Government and RBI route. Automatic route is available to BO/PO meeting certain conditions.

Other structures:

  • Foreign investment or contributions in other structures like not for profit companies etc. are also subject to provisions of Foreign Contribution Regulation Act (FCRA).
STEPS INVOLVED IN INVESTMENT
  • Identification of structure
  • Central Government approval if required
  • Setting up or incorporating the structure
  • Inflow of funds via eligible instruments and following pricing guidelines
  • Meeting reporting requirements of RBI and respective Act
  • Registrations/obtaining key documents like PAN etc.
  • Project approval at State/UT level
  • Finding ideal space for business activity based on various parameters like incentives, cost, availability of man power etc.
  • Manufacturing projects are required to file Industrial Entrepreneur’s Memorandum (IEM), some of the industries may also require industrial license.
  • Construction/renovation of unit.
  • Hiring of manpower.
  • Obtaining licenses if any.
  • Other state & central level registrations.
  • Meeting annual requirements of a structure, paying taxes etc.
REPATRIATION

Repatriation of Dividend:

  • Dividends are freely repatriable without any restrictions (net after tax deduction at source or Dividend Distribution Tax.

Repatriation of Capital:

  • Authorized Dealer(AD) Category-I bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate from the Income Tax Department has been produced.
  • Investments are subject to lock-in period of 3 years in case of construction development sector.

Repatriation of Interest:

  • Interest on fully, mandatorily & compulsorily convertible debentures is also freely repatriable without any restrictions (net of applicable taxes).
ASPECTS OF TAXATION

Direct Taxes:

  • The investor is required to pay tax on net income earned in India. The rates of taxes differ among structures.

Company:

  • The company incorporated in India is required to pay 30% tax+surcharge+education cess on net income earned. It is also required to deduct tax on profits distributed @15.5%+surcharge+education cess.

Branch office/ Project office/ Liaison office or permanent establishment:

  • The fixed place of business in India is treated as a permanent establishment and is required to pay tax @40%+surcharge+education cess. There is no tax on profits distributed.

Limited Liability Partnerships (LLPs):

  • LLPs are required to pay tax @30%+surcharge+education cess. There is no tax on profits distributed.

Minimum Alternate Tax (MAT):

  • 18.5%+SC+EC- Indian tax law requires MAT to be paid by corporations in cases where the tax payable according to the regular tax provisions is less than 18.5% of their book profits. However MAT credit (MAT-actual tax) can be carried forward in next 10 years for set-off against regular tax payable during the subsequent years subject to certain conditions.
Please Note: Please note transactions between associated enterprises needs to follow transfer pricing regulations.
INCENTIVES

Central Government Incentives:

  • Investment allowance (additional depreciation) at the rate of 15 percent to manufacturing companies that invest more than INR 1 billion in plant and machinery available till to 31.3.2015.
  • Incentives available to unit’s set-up in Special Economic Zones (SEZ), National Investment & Manufacturing Zones (NIMZ) etc. and Export Oriented Units (EOUs).
  • Exports incentives like duty drawback, duty exemption/remission schemes, focus products & market schemes etc.
  • Areas based incentives like unit set-up in north east region, Jammu & Kashmir, Himachal Pradesh, Uttarakhand.
  • Sector specific incentives like Modified Special Incentive Package Scheme(M-SIPS) in electronics.

State Government Incentives:

  • Each state government has its own incentive policy, which offers various types of incentives based on the amount of investments, project location, employment generation, etc. The incentives differ from state to state and are generally laid down in each state’s industrial policy.
  • The broad categories of state incentives include: stamp duty exemption for land acquisition, refund or exemption of value added tax, exemption from payment of electricity duty etc.
SPECIAL DISPENSATION

Envisaged for NRI investments in the following:

  • Construction development
  • Ground Handling & Air transport services
  • NRI investing on non repatriable basis
  • FDI from NEPAL & BHUTAN is allowed in Indian rupees
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