Read noteonindirectinvestmentanddownstreaminvestment.pdf text version

Notes on Indirect Investment and Downstream Investment in Terms of Foreign Exchange Management Act, 1999

Foreign Direct Investment (FDI) in India is governed by the FDI Policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA), 1999. Reserve Bank has issued Notification No. FEMA 20 /2000-RB dated May 3, 2000 which contains the Regulations in this regard. This Notification has been amended from time to time. In terms of Press Note No. 9 of 1999 issued by DIPP certain guidelines were laid down for the downstream investment made by foreign owned Indian holding companies that required prior FIPB/Government approval. Recently, the Government has come out with a fresh set of guidelines/press notes on the subjects of indirect investment and downstream investment. Press Note No. 2 of 2009 was issued, wherein guidelines for calculation of total foreign investment were detailed.

Notes on Indirect Investment and Downstream Investment in Terms of Foreign Exchange Management Act, 1999 ­ Prepared by: CS. Prashant Kumar Jain ­ Based on Law as on 3rd May, 2010 http://www.rna-cs.com 1

There are different ways in which investment can be made in Indian Companies.

Direct Method

In this method, Investment is directly routed to the Indian Company from Foreign Company. Pictorial presentation is represented below:

Indirect Method

Foreign Company can also resort an indirect way to Invest in Indian Companies.

Notes on Indirect Investment and Downstream Investment in Terms of Foreign Exchange Management Act, 1999 ­ Prepared by: CS. Prashant Kumar Jain ­ Based on Law as on 3rd May, 2010 http://www.rna-cs.com 2

In the above method Indian Company (I Co1) is the shareholder in I Co2. In other words, Foreign Company owns shares in I Co2 through I Co1. In the Indirect Method herein above referred, total foreign investment is total of Foreign Direct Investment + Indirect Investment. Press Note 4 of 2009 (Press Note 4) seeks to clarify compliance with foreign investment norms compared with downstream investments. Although the language in the operating part of the press note is not very clear, the introductory paragraph suggests that it is restricted to downstream investments by an Ico1 if the Ico1 is owned or controlled by non-resident entities. It categorizes I Co2 into three baskets:

1. 2.

Operating companies: Sectoral caps and Conditions of FEMA have to be complied with. Operating-cum-investment companies: Sectoral caps and Conditions of FEMA have to be complied by I Co2 as well by the I Co3 (Domestic Company) in which the investment is proposed by the I Co2. Investment companies: If the I Co2 is an investment company (i.e. neither an operating company nor an operating-cum-investment company), FIPB approval is required regardless of the amount or extent of foreign investment. Further, the Domestic Company will have to comply with conditions and sectoral caps?

3.

If the ICo2 is an operating-cum-investing company, or an investment company, additional conditions are prescribed in relation to downstream investment by an I Co2 in Domestic Companies: Two conditions are procedural and require certain intimations of downstream investment within 30 days of investment and certain board resolutions to be submitted to FIPB/ SIA. Other conditions are substantive and require compliance with certain pricing guidelines. The key principle emerging from Press Note 2 is that as long as an Indian company is owned and controlled ultimately by resident Indians, foreign investment in the Indian company would be ignored in relation to downstream investments made by the Indian company.

Notes on Indirect Investment and Downstream Investment in Terms of Foreign Exchange Management Act, 1999 ­ Prepared by: CS. Prashant Kumar Jain ­ Based on Law as on 3rd May, 2010 http://www.rna-cs.com 3

"Two Tests" to be satisfied for deciding the applicability of Press Note 2 and 4 are as under:

1. 2.

Control and Ownership of the Indian Investing Company The pattern of ,,Downstream Investment in the Sector in which the Investment is being made for being able to.

First Test: Control and Ownership of the Indian Investing Companies. Definition of "owned" and "controlled" given in Press Note 2 and which have been reproduced herein below. "Owned" by resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, if more than 50% of the equity interest in it is beneficially owned by resident Indian citizens and Indian companies, which are owned and controlled ultimately by resident Indian citizens. "Controlled" by resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, if the resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors. Conversely, an Indian company may be taken as being "owned" by ,,non resident entities, if more than 50 percent of the equity interest in it is beneficially owned by non-residents "controlled" by ,,non resident entities, if non-residents have the power to appoint a majority of its directors. Thus in the instant case, CFPL is owned and controlled by resident Indian Citizens. Second Test: Downstream Investment Please note that Press Note 4 is applicable only to downstream investment by investing Indian companies owned or controlled by non-residents. In other words, if the investing Indian companies are not foreign owned or controlled, Press Note 4 does not apply

Notes on Indirect Investment and Downstream Investment in Terms of Foreign Exchange Management Act, 1999 ­ Prepared by: CS. Prashant Kumar Jain ­ Based on Law as on 3rd May, 2010 http://www.rna-cs.com 4

Information

4 pages

Find more like this

Report File (DMCA)

Our content is added by our users. We aim to remove reported files within 1 working day. Please use this link to notify us:

Report this file as copyright or inappropriate

594086


You might also be interested in

BETA
01Miningbook
Microsoft Word - DRHP 03012007 Part - 2 Final.doc
16.indd
Microsoft Word - DRHP main Sections _14.11.06.doc
Microsoft Word - Prospectus - Jan07 final.doc