The Department of Industrial Policy and Promotion (“DIPP”) has reeased the half yearly consolidated FDI Policy, viz. Circular 2 of 2011 (“New FDI Policy”) that is effective from 1 October 2011 in suppression of previous policy. There are the following major changes:
Exit options not to be considered as FDI but as ECB – The new FDI Policy has restricted the exit rights that can be made available to foreign investors. Now on, equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, would qualify as eligible ‘equity’ instruments for FDI only if they are without any ‘in-built’ options. Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the extant External Commercial Borrowings (ECB) guidelines. This is likely to affect the appetite of foreign private equity players as their ability to enforce exit options on Indian promoters like a IRR/put & call options may be irreconcilably impaired.
Exemption from restrictions for construction-development activities in the education sector and in old-age homes - Conditionality’s relating to FDI into construction development activities would not be applicable to projects in the education sector and in respect of old age homes. The removal of conditions relating to FDI in construction development projects i.e. minimum built area, minimum capitalization and the lock-in period of three years from the date of completion of minimum capitalization, would provide the impetus to the educational infrastructure in the country and augment the increasing demand for old –age homes.
Clarification on timelines for conversion of imported capital goods/machinery to equity instruments and payment of pre-operative/pre-incorporation expenses – In the FDI policy, viz. Circular 1 of 2011, issue of equity capital by conversion, was permitted under the Governmentroute, in the following cases also: import of capital goods/ machinery/ equipment (including second-hand machinery), pre-operative/ pre-incorporation expenses (including payments of rent etc.) The prescribed time limit of 180 days for making an application for conversion into equity is applicable from the date of shipment of capital goods/machinery and date of incorporation respectively. Further, payments for pre-operative/incorporation expenses can now be made directly by the foreign investor to the company or through a bank account, opened by the foreign investor, as provided under the FEMA regulations.
Pledge of shares - Under the FDI Policy, the following pledges have been allowed, subject to specified conditions i.e. Promoter of a company registered in India (borrowing company), which has raised external commercial borrowings, may pledge the shares of the borrowing company or that of its associate resident companies for the purpose of securing the ECB raised by the borrowing company, Non-resident holding shares of an Indian company, can pledge these shares in favour of the AD bank in India to secure credit facilities being extended to the resident investee company for bonafide business purpose, Non-resident holding shares of an Indian company, can pledge these shares in favour of an overseas bank to secure the credit facilities being extended to the non-resident investor / non- resident promoter of the Indian company or its overseas group company.
Single brand product trading – FDI is permitted in single brand retailing (FDI is not allowed in multi-brand retail) under approval route. A new condition has been added that the foreign investor should be the ‘owner’ of the brand, under which application FDI in single brand retailing is being made.
Expansion of definition of industrial activity under industrial parks – Applied R&D on bio-technology, pharmaceutical sciences/life sciences’ has been included in the definition of Industrial Activity.
FM Radio- FDI limit in terrestrial broadcasting / FM radio has been increased to 26% under the New FDI Policy, from the erstwhile cap of 20%.
Inclusion of ‘apiculture’ under controlled conditions, under the agricultural activities permitted for FDI – FDI has been allowed up to 100% under the automatic route in apiculture under controlled conditions. In the last circular, FDI was permitted in ‘seed development’.
Sectoral Classification for better organization of the Circular – The sectoral section of the policy has been re-arranged, to provide for grouping of services under ‘financial services’, ‘other services’ and ‘information services’. The Circular has also been re-organized, with a view to grouping of similar subjects under common chapters.
