The Finance Bill 2007 got enacted on 11th May 2007 as president has given his assent to the bill.
From 11th May 2007 Service tax rate will be 12% + Education Cess is 2% on Service Tax (12%) +
1% Secondary and Higher Education Cess on Service Tax (12%) making the effective rate 12.36%.
This new rate is effective on all services provided on and after 11th May ,2007.
Tuesday, May 15, 2007
New Forms
As informed earlier, the Notification regarding the New Income Tax Forms and the Rule 12 substitution is issued dated 14th May, 2007.
The New Income Tax Forms along with the Notes as notified in PDF Formats are available for Download at Download section on our website www.meraconsultant.com
The respective Excel Prefilled Formats of the Income Tax Returns will be available after 31st May, 2007 for the members.
NOTIFICATION
In the Income-tax Rules, 1962,-
(a) for rule 12, the following rule shall be substituted, namely:-
`Return of income and return of fringe benefits
12.(1) The return of income required to be furnished under sub-section (1) or subsection (3) or sub-section (4A) or sub-section (4B) or sub-section (4C) or subsection (4D) of section 139 or clause (i) of sub-section (1) of section 142 or subsection (1) of section 148 or section 153A or the return of fringe benefits required to be furnished under sub-section (1) or sub-section (2) of section 115WD relating to the assessment year commencing on the 1st day of April, 2007 or any subsequent assessment year shall, -
(a) in the case of a person being an individual where the total income
includes income chargeable to income-tax under the head "salaries" or income in the nature of family pension as defined in the Explanation to clause (iia) of section 57 but does not include any other income except income by way of interest chargeable to income-tax under the head "income from other sources", be in Form No. ITR-1 and be verified in the manner indicated therein;
(b) in the case of a person being an individual [not being an individual to whom clause (a) applies] or a Hindu Undivided family where the total income does not include any income chargeable to income-tax under the head "Profits or gains of business or profession", be in Form No. ITR-2 and be verified in the manner indicated therein;
(c) in the case of a person being an individual or a Hindu Undivided family who is a partner in a firm and where income chargeable to income-tax under the head "Profits or gains of business or profession" does not include any income except the income by way of any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by him from such firm, be in Form No. ITR-3 and be verified in the manner indicated therein;
(d) in the case of a person being an individual or a Hindu Undivided family other than the individual or Hindu Undivided family referred to in clause (a) or clause (b) or clause (c) and deriving income from a proprietory business or profession, be in Form No. ITR-4 and be verified in the manner indicated therein;
(e) in the case of a person not being an individual or a Hindu Undivided family or a company or a person to which clause (g) applies, be in Form No. ITR-5 and be verified in the manner indicated therein;
(f) in the case of a company not being a company to which clause (g)
applies, be in Form No. ITR-6 and be verified in the manner indicated therein;
(g) In the case of a person including a company whether or not registered under section 25 of the Companies Act, 1956 (1 of 1956), required to file a return under sub-section (4A) or sub-section (4B) or sub-section (4C) or sub-section (4D) of section 139, be in Form No. ITR-7 and be verified in the manner indicated therein;
(h) in the case of a person who is not required to furnish the return of income but is required to furnish the return of fringe benefits, be in Form No. ITR-8 and be verified in the manner indicated therein.
(2) The return of income and return of fringe benefits required to be furnished in Form No.ITR-1 or Form No ITR-.2 or Form No. ITR-3 or Form No.ITR-4 or Form No.ITR-5 or Form No.ITR-6 or Form No.ITR-8 shall not be accompanied by a statement showing the computation of the tax payable on the basis of the return, or
proof of the tax, if any, claimed to have been deducted or collected at source or the advance tax or tax on self-assessment, if any, claimed to have been paid or any document or copy of any account or Form or report of audit required to be attached with the return of income or the return of fringe benefits under any of the provisions
of the Act.
(3) The return of income or return of fringe benefits referred to in sub-rule (1) may be furnished in any of the following manners, namely:-
(i) furnishing the return in a paper form;
(ii) furnishing the return electronically under digital signature;
(iii) transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR-V;
(iv) furnishing a bar-coded return in a paper form:
Provided that -
(a) a firm required to furnish the return in Form ITR-5 and to whom
provisions of section 44AB are applicable or a company required to
furnish the return in Form ITR-6 shall furnish the return in the manner specified in clause (ii) or clause (iii);
(b) a person required to furnish the return in Form ITR-7 shall furnish the return in the manner specified in clause (i).
(4) The Director-General of Income-tax (Systems) shall specify the procedures, formats and standards for ensuring secure capture and transmission of data and shall also be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to furnishing the returns in the manners specified in clauses (ii), (iii) and (iv) of sub-rule (3).
(5) Where a return of income or return of fringe benefits, relates to the assessment year commencing on the 1st day of April, 2006 or any earlier assessment year, it shall be furnished in the appropriate form as applicable in that assessment year.'
(b) in appendix-II, for Form No. 1, Form No. 2, Form No. 2D, Form No. 2F, Form No. 3, Form No. 3A and Form No.3B, the following forms shall be substituted,
The New Income Tax Forms along with the Notes as notified in PDF Formats are available for Download at Download section on our website www.meraconsultant.com
The respective Excel Prefilled Formats of the Income Tax Returns will be available after 31st May, 2007 for the members.
NOTIFICATION
In the Income-tax Rules, 1962,-
(a) for rule 12, the following rule shall be substituted, namely:-
`Return of income and return of fringe benefits
12.(1) The return of income required to be furnished under sub-section (1) or subsection (3) or sub-section (4A) or sub-section (4B) or sub-section (4C) or subsection (4D) of section 139 or clause (i) of sub-section (1) of section 142 or subsection (1) of section 148 or section 153A or the return of fringe benefits required to be furnished under sub-section (1) or sub-section (2) of section 115WD relating to the assessment year commencing on the 1st day of April, 2007 or any subsequent assessment year shall, -
(a) in the case of a person being an individual where the total income
includes income chargeable to income-tax under the head "salaries" or income in the nature of family pension as defined in the Explanation to clause (iia) of section 57 but does not include any other income except income by way of interest chargeable to income-tax under the head "income from other sources", be in Form No. ITR-1 and be verified in the manner indicated therein;
(b) in the case of a person being an individual [not being an individual to whom clause (a) applies] or a Hindu Undivided family where the total income does not include any income chargeable to income-tax under the head "Profits or gains of business or profession", be in Form No. ITR-2 and be verified in the manner indicated therein;
(c) in the case of a person being an individual or a Hindu Undivided family who is a partner in a firm and where income chargeable to income-tax under the head "Profits or gains of business or profession" does not include any income except the income by way of any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by him from such firm, be in Form No. ITR-3 and be verified in the manner indicated therein;
(d) in the case of a person being an individual or a Hindu Undivided family other than the individual or Hindu Undivided family referred to in clause (a) or clause (b) or clause (c) and deriving income from a proprietory business or profession, be in Form No. ITR-4 and be verified in the manner indicated therein;
(e) in the case of a person not being an individual or a Hindu Undivided family or a company or a person to which clause (g) applies, be in Form No. ITR-5 and be verified in the manner indicated therein;
(f) in the case of a company not being a company to which clause (g)
applies, be in Form No. ITR-6 and be verified in the manner indicated therein;
(g) In the case of a person including a company whether or not registered under section 25 of the Companies Act, 1956 (1 of 1956), required to file a return under sub-section (4A) or sub-section (4B) or sub-section (4C) or sub-section (4D) of section 139, be in Form No. ITR-7 and be verified in the manner indicated therein;
(h) in the case of a person who is not required to furnish the return of income but is required to furnish the return of fringe benefits, be in Form No. ITR-8 and be verified in the manner indicated therein.
(2) The return of income and return of fringe benefits required to be furnished in Form No.ITR-1 or Form No ITR-.2 or Form No. ITR-3 or Form No.ITR-4 or Form No.ITR-5 or Form No.ITR-6 or Form No.ITR-8 shall not be accompanied by a statement showing the computation of the tax payable on the basis of the return, or
proof of the tax, if any, claimed to have been deducted or collected at source or the advance tax or tax on self-assessment, if any, claimed to have been paid or any document or copy of any account or Form or report of audit required to be attached with the return of income or the return of fringe benefits under any of the provisions
of the Act.
(3) The return of income or return of fringe benefits referred to in sub-rule (1) may be furnished in any of the following manners, namely:-
(i) furnishing the return in a paper form;
(ii) furnishing the return electronically under digital signature;
(iii) transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR-V;
(iv) furnishing a bar-coded return in a paper form:
Provided that -
(a) a firm required to furnish the return in Form ITR-5 and to whom
provisions of section 44AB are applicable or a company required to
furnish the return in Form ITR-6 shall furnish the return in the manner specified in clause (ii) or clause (iii);
(b) a person required to furnish the return in Form ITR-7 shall furnish the return in the manner specified in clause (i).
(4) The Director-General of Income-tax (Systems) shall specify the procedures, formats and standards for ensuring secure capture and transmission of data and shall also be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to furnishing the returns in the manners specified in clauses (ii), (iii) and (iv) of sub-rule (3).
(5) Where a return of income or return of fringe benefits, relates to the assessment year commencing on the 1st day of April, 2006 or any earlier assessment year, it shall be furnished in the appropriate form as applicable in that assessment year.'
(b) in appendix-II, for Form No. 1, Form No. 2, Form No. 2D, Form No. 2F, Form No. 3, Form No. 3A and Form No.3B, the following forms shall be substituted,
Sunday, April 29, 2007
New Income Tax Return Forms
Press release notified the new Income Tax forms and notified that E-filing of Returns by Firms liable for Tax Audit u/s 44AB mandatory.
PRESS RELEASE
The Forms for Return of Income areassessment year specific. The CentralBoard of Direct Taxes have prepared following eight Return Forms for assessmentyear 2007-08 under a new series:-
(i) ITR-1 - return of income for Individuals having salary and interestincome and no other income.
(ii) ITR-2- return of income for Individuals andHUFs having income from any source except from business or profession.
(iii) ITR-3- return of income for Individuals andHUFs being partners in firms and not having proprietory business or profession.
(iv) ITR-4- return of income for Individuals andHUFs having proprietory business or profession.
(v) ITR-5- combined form for return of income andfringe benefits for Firms/AOP/BOI .
(vi) ITR-6- combined form for return of income andfringe benefits for Companies.
(vii) ITR-7- combined form for return of income andfringe benefits for Charitable / religious trusts, political parties and othernon- profit organizations.
(viii) ITR-8- stand alone form for return of fringebenefits for persons who are not liable to file return of income but are liableto file return of fringe benefits
2. All these Forms (except Form ITR-7)have been designed as annexure-less so as to make them amenable for electronicfiling.
3. Last year, electronic filing was madecompulsory for corporate tax-payers. E-filingof corporate returns has been a resounding success. Therefore, it is importantto carry forward this successful initiative. In the Budget Speech – 2007, the Finance Minister had announced thatelectronic filing of returns would be made mandatory for more categories oftaxpayers. Accordingly, for assessmentyear 2007-08, it would be mandatory for firms liable to tax audit under section44AB to file their returns electronically. Corporate taxpayers and such firms may either file their returnelectronicall y under digital signature or may transmit the data of the returnelectronicall y and thereafter submit a one page verification Form whichcontains a summary of the return transmitted electronically.
4. All other categories of taxpayers(other than charitable trusts, institutions, etc.) will have the option to filethe return in a paper form or electronically, as mentioned above, or in abar-coded return form.
5. Last year, the Government hadintroduced a cash flow statement for Individuals and HUFs. However, in responseto representations against the cash flow statement, the same has been withdrawn.Individua l and HUF taxpayers would now be required to furnish only informationwith regard to transactions which are reported through Annual InformationReturns (AIR).
6. The new forms will be available on theIncome Tax Department's website http://.incometaxin diaefiling. gov.in. Government proposes to take the views of the Institute of CharteredAccountant s of India on these forms. In the meanwhile taxpayers are advised tofamiliarize themselves with the new forms. The formal notification will be madeon 14.5.2007.
7. The Government would urge taxpayers touse the e-filing option, since it will help the Department to serve thembetter.
PRESS RELEASE
The Forms for Return of Income areassessment year specific. The CentralBoard of Direct Taxes have prepared following eight Return Forms for assessmentyear 2007-08 under a new series:-
(i) ITR-1 - return of income for Individuals having salary and interestincome and no other income.
(ii) ITR-2- return of income for Individuals andHUFs having income from any source except from business or profession.
(iii) ITR-3- return of income for Individuals andHUFs being partners in firms and not having proprietory business or profession.
(iv) ITR-4- return of income for Individuals andHUFs having proprietory business or profession.
(v) ITR-5- combined form for return of income andfringe benefits for Firms/AOP/BOI .
(vi) ITR-6- combined form for return of income andfringe benefits for Companies.
(vii) ITR-7- combined form for return of income andfringe benefits for Charitable / religious trusts, political parties and othernon- profit organizations.
(viii) ITR-8- stand alone form for return of fringebenefits for persons who are not liable to file return of income but are liableto file return of fringe benefits
2. All these Forms (except Form ITR-7)have been designed as annexure-less so as to make them amenable for electronicfiling.
3. Last year, electronic filing was madecompulsory for corporate tax-payers. E-filingof corporate returns has been a resounding success. Therefore, it is importantto carry forward this successful initiative. In the Budget Speech – 2007, the Finance Minister had announced thatelectronic filing of returns would be made mandatory for more categories oftaxpayers. Accordingly, for assessmentyear 2007-08, it would be mandatory for firms liable to tax audit under section44AB to file their returns electronically. Corporate taxpayers and such firms may either file their returnelectronicall y under digital signature or may transmit the data of the returnelectronicall y and thereafter submit a one page verification Form whichcontains a summary of the return transmitted electronically.
4. All other categories of taxpayers(other than charitable trusts, institutions, etc.) will have the option to filethe return in a paper form or electronically, as mentioned above, or in abar-coded return form.
5. Last year, the Government hadintroduced a cash flow statement for Individuals and HUFs. However, in responseto representations against the cash flow statement, the same has been withdrawn.Individua l and HUF taxpayers would now be required to furnish only informationwith regard to transactions which are reported through Annual InformationReturns (AIR).
6. The new forms will be available on theIncome Tax Department's website http://.incometaxin diaefiling. gov.in. Government proposes to take the views of the Institute of CharteredAccountant s of India on these forms. In the meanwhile taxpayers are advised tofamiliarize themselves with the new forms. The formal notification will be madeon 14.5.2007.
7. The Government would urge taxpayers touse the e-filing option, since it will help the Department to serve thembetter.
Tuesday, April 10, 2007
FAQ NBFC
The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-Banking Financial Companies by virtue of powers vested in Chapter III B of the Reserve Bank of India Act, 1934. The regulatory and supervisory objective, is to:
a) ensure healthy growth of the financial companies;
b) ensure that these companies function as a part of the financial system within the policy framework, in such a manner that their existence and functioning do not lead to systemic aberrations; and that
c) the quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with the developments that take place in this sector of the financial system.
It has been felt necessary to explain the rationale underlying the regulatory changes and provide clarification on certain operational matters for the benefit of the NBFCs, members of public, rating agencies, Chartered Accountants etc. To meet this need, the clarifications in the form of questions and answers, is being brought out by the Reserve Bank of India (Department of Non-Banking Supervision) with the hope that it will provide better understanding of the regulatory framework.
The information given in the FAQ is of general nature for the benefit of depositors/public and the clarifications given do not substitute the extant regulatory directions/instructions issued by the Bank to the NBFCs.
(Shekhar Bhatnagar)
General Manager In-Charge
February 5, 2007
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Frequently Asked Questions on NBFCs
QUES -1 What is a Non-Banking Financial Company (NBFC)?
ANS -1 A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company).
QUES 2. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ?
ANS 2. NBFCs are doing functions akin to that of banks, however there are a few differences:
(i) a NBFC cannot accept demand deposits;
(ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and
(iii) deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.
QUES-3. Is it necessary that every NBFC should be registered with RBI?
ANS 3. In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.
However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housing Bank.
QUES 4. What are the different types of NBFCs registered with RBI?
ANS 4. The NBFCs that are registered with RBI are:
(i) equipment leasing company;
(ii) hire-purchase company;
(iii) loan company;
(iv) investment company.
With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as
(i) Asset Finance Company (AFC)
(ii) Investment Company (IC)
(iii) Loan Company (LC)
AFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive / economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.
The above type of companies may be further classified into those accepting deposits or those not accepting deposits.
Besides the above class of NBFCs the Residuary Non-Banking Companies are also registered as NBFC with the Bank.
QUES 5. What are the requirements for registration with RBI?
ANS 5. A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999). The company is required to submit its application for registration in the prescribed format alongwith necessary documents for Bank’s consideration. The Bank issues Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.
QUES 6. Where one can find list of Registered NBFCs and instructions issued to NBFCs?
ANS 6. The list of registered NBFCs is available on the web site of Reserve Bank of India and can be viewed at www.rbi.org.in. The instructions issued to NBFCs from time to time are also hosted at the above site. Besides, instructions are also issued through Official Gazette notifications. Press Release is also issued to draw attention of the public/NBFCs.
QUES 7. Can all NBFCs accept deposits and what are the requirements for accepting Public Deposits?
ANS 7. All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorisation to accept Public Deposits can accept/hold public deposits. The NBFCs accepting public deposits should have minimum stipulated Net Owned Fund and comply with the Directions issued by the Bank.
QUES 8. Is there any ceiling on acceptance of Public Deposits? What is the rate of interest and period of deposit which NBFCs can accept?
ANS 8. Yes, there is ceiling on acceptance of Public Deposits. A NBFC maintaining required NOF/CRAR and complying with the prudential norms can accept public deposits as follows:
Category of NBFC
Ceiling on public deposits
AFCs maintaining CRAR of 15%
without credit rating
AFCs with CRAR of 12% and having
minimum investment grade credit rating
1.5 times of NOF or Rs 10 crore
whichever is less
4 times of NOF
LC/IC with CRAR of 15% and
having minimum investment
grade credit rating
1.5 times of NOF
Presently, the maximum rate of interest a NBFC can offer is 11%. The interest may be paid or compounded at rests not shorter than monthly rests.
The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
The RNBCs have different norms for acceptance of deposits which are explained elsewhere in this booklet.
QUES 9. What are the salient features of NBFCs regulations which the depositor may note at the times of investment?
ANS 9. Some of the important regulations relating to acceptance of deposits by NBFCs are as under:
i) The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
ii) NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
iii) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
iv) NBFCs (except certain AFCs) should have minimum investment grade credit rating.
v) The deposits with NBFCs are not insured.
vi) The repayment of deposits by NBFCs is not guaranteed by RBI.
vii) There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.
QUES 10. What is ‘deposit’ and ‘public deposit’? Is it defined anywhere?
ANS 10. The term ‘deposit’ is defined under Section 45 I(bb) of the RBI Act, 1934. ‘Deposit’ includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form but does not include:
amount raised by way of share capital, or contributed as capital by partners of a firm;
amount received from scheduled bank, co-operative bank, a banking company, State Financial Corporation, IDBI or any other institution specified by RBI;
amount received in ordinary course of business by way of security deposit, dealership deposit, earnest money, advance against orders for goods, properties or services;
amount received by a registered money lender other than a body corporate;
amount received by way of subscriptions in respect of a ‘Chit’.
Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998 defines a ‘ public deposit’ as a ‘deposit’ as defined under Section 45 I(bb) of the RBI Act, 1934 and further excludes the following:
amount received from the Central/State Government or any other source where repayment is guaranteed by Central/State Government or any amount received from local authority or foreign government or any foreign citizen/authority/person;
any amount received from financial institutions;
any amount received from other company as inter-corporate deposit;
amount received by way of subscriptions to shares, stock, bonds or debentures pending allotment or by way of calls in advance if such amount is not repayable to the members under the articles of association of the company;
amount received from shareholders by private company;
amount received from directors or relative of the director of a NBFC;
amount raised by issue of bonds or debentures secured by mortgage of any immovable property or other asset of the company subject to conditions;
the amount brought in by the promoters by way of unsecured loan;
amount received from a mutual fund;
any amount received as hybrid debt or subordinated debt;
any amount received by issuance of Commercial Paper.
Thus, the directions have sought to exclude from the definition of public deposit amount raised from certain set of informed lenders who can make independent decision.
QUES 11. Are Secured debentures treated as Public Deposit? If not who regulates them?
ANS 11. Debentures secured by the mortgage of any immovable property or other asset of the company if the amount raised does not exceed the market value of the said immovable property or other asset are excluded from the definition of ‘Public Deposit’ in terms of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998. Secured debentures are debt instruments and are regulated by Securities & Exchange Board of India.
QUES 12. Whether NBFCs can accept deposits from NRIs?
ANS 12. Effective from April 24, 2004, NBFCs cannot accept deposits from NRI except deposits by debit to NRO account of NRI provided such amount do not represent inward remittance or transfer from NRE/FCNR (B) account. However, the existing NRI deposits can be renewed.
QUES 13. Is nomination facility available to the Depositors of NBFCs?
ANS 13. Yes, nomination facility is available to the depositors of NBFCs. The Rules for nomination facility are provided for in section 45QB of the Reserve Bank of India Act, 1934. Non-Banking Financial Companies have been advised to adopt the Banking Companies (Nomination) Rules, 1985 made under Section 45ZA of the Banking Regulation Act, 1949. Accordingly, depositor/s of NBFCs are permitted to nominate, one person to whom, the NBFC can return the deposit in the event of the death of the depositor/s. NBFCs are advised to accept nominations made by the depositors in the form similar to one specified under the said rules, viz Form DA 1 for the purpose of nomination, and Form DA2 and DA3 for cancellation of nomination and variation of nomination respectively.
QUES14. What else should a depositor bear in mind while depositing money with NBFCs?
ANS 14. While making deposits with a NBFC, the following aspects should be borne in mind:
(i) Public deposits are unsecured.
(ii) A proper deposit receipt which should, besides the name of the depositor/s state the date of deposit, the amount in words and figures, rate of interest payable and the date of maturity should be insisted. The receipt shall be duly signed by an officer authorised by the company in that behalf.
(iii) The Reserve Bank of India does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.
QUES 15. It is said that rating of NBFCs is necessary before it accepts deposit? Is it true? Who rates them?
ANS 15. An unrated NBFC, except certain Asset Finance companies (AFC), cannot accept public deposits. An exception is made in case of unrated AFC companies with CRAR of 15% which can accept public deposit up to 1.5 times of the NOF or Rs 10 crore whichever is lower without having a credit rating. A NBFC may get itself rated by any of the four rating agencies namely, CRISIL, CARE, ICRA and FITCH Ratings India Pvt. Ltd.
QUES 16. What are the symbols of minimum investment grade rating of different companies?
ANS 16. The symbols of minimum investment grade rating of the Credit rating agencies are:
Name of rating agencies
Level of minimum investment
grade credit rating (MIGR)
CRISIL
FA- (FA MINUS)
ICRA
MA- (MA MINUS)
CARE
CARE BBB (FD)
FITCH Ratings India Pvt. Ltd.
tA-(ind)(FD)
It may be added that A- is not equivalent to A, AA- is not equivalent to AA and AAA- is not equivalent to AAA.
QUES 17. Can a NBFC which is yet to be rated accept public deposit?
ANS 17. No, a NBFC cannot accept deposit without rating except an EL/HP company complying with prudential norms and having CRAR of 15%, though not rated, may accept public deposit up to 1.5 times of NOF or Rs. 10 crore whichever is less.
QUES 18. When a company’s rating is downgraded, does it have to bring down its level of public deposits immediately or over a period of time?
ANS 18. If rating of a NBFC is downgraded to below minimum investment grade rating, it has to stop accepting public deposit, report the position within fifteen working days to the RBI and reduce within three years from the date of such downgrading of credit rating, the amount of excess public deposit to nil or to the appropriate extent permissible under paragraph 4(4) of Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998; however such NBFC can renew the matured public deposits subject to repayment stipulations specified above and compliance with other conditions for acceptance of deposits.
QUES 19. In case a NBFC defaults in repayment of deposit what course of action can be taken by depositors?
ANS 19. If a NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit to recover the deposits.
QUES 20. What is the role of Company Law Board in protecting the interest of depositors? How one can approach it?
ANS 20. Where a non-banking financial company fails to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board (CLB) either on its own motion or on an application from the depositor directs, by order, the non-banking financial company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order.
As explained above the depositor can approach CLB by mailing an application in prescribed form to the appropriate bench of the Company Law Board according to its territorial jurisdiction with the prescribed fee.
QUES 21. Can you give the addresses of the various benches of the Company Law Board (CLB) indicating their respective jurisdiction?
ANS 21. The details of addresses and territorial jurisdiction of the bench officers of CLB are as under:
Sr. No.
Addresses
Territorial Jurisdiction
1.
Bench Officer, Company Law Board,
Northern Region Bench,
Shastri Bhavan, ‘A’ Wing, 5th Floor,
Dr. Rajendra Prasad Road,
New Delhi 110 001.
Uttar Pradesh, Jammu & Kashmir,
Punjab, Himachal Pradesh,
Rajasthan, Haryana and Union
Territories of Chandigarh and Delhi
2.
Bench Officer, Company Law Board,
Southern Region Bench,
Shastri Bhavan, ‘A’ Wing, 5th Floor,
Block 8, No 26, Haddows Road,
Chennai 600 006.
Tamil Nadu, Andhra Pradesh,
Kerala, Karnataka, Union
Territories of Amindivi,
Minicoy and Lakshadweep Islands
and Pondicherry
3.
Bench Officer, Company Law Board,
Western Region Bench,
2nd Floor, N.T.C. House,
15, Narottam Morarjee Marg,
Ballard Estate,
Mumbai-400 038.
Maharashtra, Gujarat, Madhya
Pradesh, Goa and Union
Territories of Dadra & Nagar
Haveli, Daman and Diu.
4.
Bench Officer, Company Law Board,
Eastern Region Bench,
9, Old Post Office Street,
6th Floor,
Kolkata 700 001.
West Bengal, Orissa, Bihar,
Assam, Tripura, Manipur,
Nagaland, Meghalaya, Arunachal
Pradesh, Mizoram, Union
Territories of Andaman and
Nicobar Islands.
5.
Bench Officer, Company Law Board,
Principal Bench at New Delhi, Shastri
Bhavan, ‘A’ Wing, 5th Floor,
Dr. Rajendra Prasad Road,
New Delhi 110 001.
All Principal Bench matters all over
India.
QUES 22. We hear that in a number of cases official liquidators have been appointed on the defaulting NBFCs. What is their role and how one can approach them?
ANS 22. Official Liquidator is appointed by the court after giving the company reasonable opportunity of being heard in a winding up petition. The liquidator performs duties of winding up and such duties in reference thereto as the court may impose.
Where the court has appointed an official liquidator or provisional liquidator, he becomes custodian of the property of the company and runs the day-to-day affairs of the company. He has to draw up a statement of affairs of the company in prescribed form containing particulars of assets of the company, its debts and liabilities, names/residences/occupations of its creditors, the debts due to the company and such other information as may be prescribed. The scheme is drawn up by the liquidator and same is put up to the court for approval. The liquidator realizes the assets of the company and arranges to repay the creditors according to the scheme approved by the court. The liquidator generally inserts advertisement in the newspaper inviting claims from depositors/investors in compliance with court orders. Therefore, the investors/depositors should file the claims within due time as per such notices of the liquidator. The Reserve Bank also provides assistance to the depositors in furnishing addresses of the official liquidator.
QUES 23. Consumer Court play useful role in attending to depositors problems. Can one approach Consumer Forum, Civil Court, CLB simultaneously?
ANS 23. Yes, a depositor can approach any or all of the redressal authorities i.e consumer forum, court or CLB.
QUES 24. Is there an Ombudsman for hearing complaints against NBFCs?
ANS 24. No, there is no Ombudsman for hearing complaints against NBFCs.
QUES 25. What are various prudential regulations applicable to NBFCs?
ANS 25. The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998. The directions interalia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, constitution of audit committee, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares.
QUES 26. Please explain the terms ‘owned fund’ and ‘net owned fund’ in relation to NBFCs?
ANS 26. ‘Owned Fund’ means aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the company after deducting therefrom accumulated balance of loss, deferred revenue expenditure and other intangible assets.
The amount of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances made to and deposits with subsidiaries and companies in the same group is arrived at. The amount thus calculated, to the extent it exceeds 10% of the owned fund, is reduced from the amount of owned fund to arrive at ‘Net Owned Fund’.
QUES 27. What are the responsibilities of the NBFCs accepting/holding public deposits with regard to submission of Returns and other information to RBI?
ANS 27. The NBFCs accepting public deposits should furnish to RBI
i. Audited balance sheet of each financial year and an audited profit and loss account in respect of that year as passed in the general meeting together with a copy of the report of the Board of Directors and a copy of the report and the notes on accounts furnished by its Auditors;
ii. Statutory Annual Return on deposits - NBS 1;
iii. Certificate from the Auditors that the company is in a position to repay the deposits as and when the claims arise;
iv. Quarterly Return on liquid assets;
v. Half-yearly Return on prudential norms;
vii. Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and above or with assets of Rs. 100 crore and above irrespective of the size of deposits ;
viii. Monthly return on exposure to capital market by companies having public deposits of Rs. 50 crore and above; and
ix. A copy of the Credit Rating obtained once a year along with one of the Half-yearly Returns on prudential norms as at (v) above.
QUES 28. What are the documents or the compliance required to be submitted to the Reserve Bank of India by the NBFCs not accepting/holding public deposits?
ANS 28. The NBFCs having assets size of Rs. 100 crore and above but not accepting public deposits are required to submit a Monthly Return on important financial parameters of the company. All companies not accepting public deposits have to pass a board resolution to the effect that they have neither accepted public deposit nor would accept any public deposit during the year.
However, all the NBFCs (other than those exempted) are required to be registered with RBI and also make sure that they continue to be eligible to remain Registered. Further, all NBFCs (including non-deposit taking) should submit a certificate from their Statutory Auditors every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR under Section 45-IA of the RBI Act, 1934.
RBI has powers to cause Inspection of the books of any company and call for any other information about its business activities. For this purpose, the NBFC is required to furnish the information in respect of any change in the composition of its Board of Directors, address of the company and its Directors and the name/s and official designations of its principal officers and the name and office address of its Auditors. With effect from April 1, 2007 non-deposit taking NBFCs with assets size of Rs 100 crore and above have been advised to maintain minimum CRAR of 10% and shall also be subject to single/group exposure norms.
QUES 29. The NBFCs have been made liable to pay interest on the overdue matured deposits if the company has not been able to repay the matured public deposits on receipt of a claim from the depositor. Please elaborate the provisions.
ANS 29. As per Reserve Bank’s Directions, overdue interest is payable to the depositors in case the company has delayed the repayment of matured deposits, and such interest is payable from the date of receipt of such claim by the company or the date of maturity of the deposit whichever is later, till the date of actual payment. If the depositor has lodged his claim after the date of maturity, the company would be liable to pay interest for the period from the date of claim till the date of repayment. For the period between the date of maturity and the date of claim it is the discretion of the company to pay interest.
QUES 30. Can a company pre-pay its public deposits?
ANS 30. A NBFC accepts deposits under a mutual contract with its depositors. In case a depositor requests for pre-mature payment, Reserve Bank of India has prescribed Regulations for such an eventuality in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 wherein it is specified that NBFCs cannot grant any loan against a public deposit or make premature repayment of a public deposit within a period of three months (lock-in period) from the date of its acceptance, however in the event of death of a depositor, the company may, even within the lock - in period, repay the deposit at the request of the joint holders with survivor clause / nominee / legal heir only against submission of relevant proof, to the satisfaction of the company.
An NBFC subject to above provisions, if it is not a problem company, may permit after the lock–in period premature repayment of a public deposit at its sole discretion, at the rate of interest prescribed by the Bank.
A problem NBFC is prohibited from making premature repayment of any deposits or granting any loan against public deposits/deposits, as the case may be. The prohibition shall not, however, apply in the case of death of depositor or repayment of tiny deposits i.e. up to Rs. 10000/- subject to lock in period of 3 months in the latter case.
QUES 31. What is the liquid asset requirement for the deposit taking companies? Where these assets are kept? Does Depositors have any claims on them?
ANS 31. In terms of Section 45-IB of the RBI Act, 1934 the minimum level of liquid asset to be maintained by NBFCs is 15 per cent of public deposits outstanding as on the last working day of the second preceding quarter. Of the 15%, NBFCs are required to invest not less than ten percent in approved securities and the remaining 5% can be in unencumbered term deposits with any scheduled commercial bank. Thus, the liquid assets may consist of Government securities, Government guaranteed bonds and term deposits with any scheduled commercial bank.
The investment in Government securities should be in dematerialised form which can be maintained in Constituents’ Subsidiary General Ledger (CSGL) Account with a scheduled commercial bank (SCB) / Stock Holding Corporation of India Limited (SHICL). In case of Government guaranteed bonds the same may be kept in dematerialised form with SCB/SHCIL or in a dematerialised account with depositories [National Securities Depository Ltd. (NSDL)/Central Depository Services (India) Ltd. (CDSL)] through a depository participant registered with Securities & Exchange Board of India (SEBI). However in case there are Government bonds which are in physical form the same may be kept in safe custody of SCB/SHCIL.
NBFCs have been directed to maintain the mandated liquid asset securities in a dematerialised form with the entities stated above at a place where the registered office of the company is situated. However, if a NBFC intends to entrust the securities at a place other than the place at which its registered office is located, it may do so after obtaining in writing the permission of RBI. It may be noted that the liquid assets in approved securities will have to be maintained in dematerialised form only.
The liquid assets maintained as above are to be utilised for payment of claims of depositors. However, deposit being unsecured in nature depositors do not have direct claim on liquid assets.
QUES 32. Please tell us something about the companies which are NBFCs, but are exempted from registration?
ANS 32. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.
Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India, Insurance companies are regulated by Insurance Regulatory and Development Authority. Similarly, Chit Companies are regulated by the respective State Governments and Nidhi Companies are regulated by Ministry of Company Affairs, Government of India.
QUES 33. There are some entities (not companies) which carry on activities like that of NBFCs. Are they allowed to take deposit? Who regulates them?
ANS 33. Any person who is an individual or a firm or unincorporated association of individual cannot accept deposit except by way of loan from relatives, if his/its business wholly or partly includes business that of loan, investment, hire-purchase or leasing company or principal business is that of receiving of deposits under any scheme or arrangement or in any manner or lending in any manner.
QUES 34. What is a Residuary Non-Banking Company (RNBC)? In what way it is different from other NBFCs?
ANS 34. Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilisation of deposits and requirement of deployment of depositors' funds. However, Prudential Norms Directions are applicable to these companies also.
QUES 35. We understand that there is no ceiling on raising of deposits by RNBCs, then how safe is deposit with them?
ANS 35. It is true that there is no ceiling on raising of deposits by RNBCs but every RNBC has to ensure that the amounts deposited and investments made by the company are not less that the aggregate amount of liabilities to the depositors.
To secure the interest of depositor, such companies are required to invest in a portfolio comprising of highly liquid and secured instruments viz. Central/State Government securities, fixed deposit of scheduled commercial banks (SCB), Certificate of deposits of SCB/FIs, units of Mutual Funds, etc.
QUES 36. Can RNBC forfeit deposit if deposit installments are not paid regularly or discontinued?
ANS 36. No Residuary Non-Banking Company shall forfeit any amount deposited by depositor, or any interest, premium, bonus or other advantage accrued thereon.
QUES 37. Please tell us something on rate of interest payable by RNBCs on deposits and maturity period of deposits?
ANS 37. The amount payable by way of interest, premium, bonus or other advantage, by whatever name called by a residuary non-banking company in respect of deposits received shall not be less than the amount calculated at the rate of 5% (to be compounded annually) on the amount deposited in lump sum or at monthly or longer intervals; and at the rate of 3.5% (to be compounded annually) on the amount deposited under daily deposit scheme. Further, a RNBC can accept deposits for a minimum period of 12 months and maximum period of 84 months from the date of receipt of such deposit. They cannot accept deposits repayable on demand.
a) ensure healthy growth of the financial companies;
b) ensure that these companies function as a part of the financial system within the policy framework, in such a manner that their existence and functioning do not lead to systemic aberrations; and that
c) the quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with the developments that take place in this sector of the financial system.
It has been felt necessary to explain the rationale underlying the regulatory changes and provide clarification on certain operational matters for the benefit of the NBFCs, members of public, rating agencies, Chartered Accountants etc. To meet this need, the clarifications in the form of questions and answers, is being brought out by the Reserve Bank of India (Department of Non-Banking Supervision) with the hope that it will provide better understanding of the regulatory framework.
The information given in the FAQ is of general nature for the benefit of depositors/public and the clarifications given do not substitute the extant regulatory directions/instructions issued by the Bank to the NBFCs.
(Shekhar Bhatnagar)
General Manager In-Charge
February 5, 2007
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Frequently Asked Questions on NBFCs
QUES -1 What is a Non-Banking Financial Company (NBFC)?
ANS -1 A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company).
QUES 2. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ?
ANS 2. NBFCs are doing functions akin to that of banks, however there are a few differences:
(i) a NBFC cannot accept demand deposits;
(ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and
(iii) deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.
QUES-3. Is it necessary that every NBFC should be registered with RBI?
ANS 3. In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.
However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housing Bank.
QUES 4. What are the different types of NBFCs registered with RBI?
ANS 4. The NBFCs that are registered with RBI are:
(i) equipment leasing company;
(ii) hire-purchase company;
(iii) loan company;
(iv) investment company.
With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as
(i) Asset Finance Company (AFC)
(ii) Investment Company (IC)
(iii) Loan Company (LC)
AFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive / economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.
The above type of companies may be further classified into those accepting deposits or those not accepting deposits.
Besides the above class of NBFCs the Residuary Non-Banking Companies are also registered as NBFC with the Bank.
QUES 5. What are the requirements for registration with RBI?
ANS 5. A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999). The company is required to submit its application for registration in the prescribed format alongwith necessary documents for Bank’s consideration. The Bank issues Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.
QUES 6. Where one can find list of Registered NBFCs and instructions issued to NBFCs?
ANS 6. The list of registered NBFCs is available on the web site of Reserve Bank of India and can be viewed at www.rbi.org.in. The instructions issued to NBFCs from time to time are also hosted at the above site. Besides, instructions are also issued through Official Gazette notifications. Press Release is also issued to draw attention of the public/NBFCs.
QUES 7. Can all NBFCs accept deposits and what are the requirements for accepting Public Deposits?
ANS 7. All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorisation to accept Public Deposits can accept/hold public deposits. The NBFCs accepting public deposits should have minimum stipulated Net Owned Fund and comply with the Directions issued by the Bank.
QUES 8. Is there any ceiling on acceptance of Public Deposits? What is the rate of interest and period of deposit which NBFCs can accept?
ANS 8. Yes, there is ceiling on acceptance of Public Deposits. A NBFC maintaining required NOF/CRAR and complying with the prudential norms can accept public deposits as follows:
Category of NBFC
Ceiling on public deposits
AFCs maintaining CRAR of 15%
without credit rating
AFCs with CRAR of 12% and having
minimum investment grade credit rating
1.5 times of NOF or Rs 10 crore
whichever is less
4 times of NOF
LC/IC with CRAR of 15% and
having minimum investment
grade credit rating
1.5 times of NOF
Presently, the maximum rate of interest a NBFC can offer is 11%. The interest may be paid or compounded at rests not shorter than monthly rests.
The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
The RNBCs have different norms for acceptance of deposits which are explained elsewhere in this booklet.
QUES 9. What are the salient features of NBFCs regulations which the depositor may note at the times of investment?
ANS 9. Some of the important regulations relating to acceptance of deposits by NBFCs are as under:
i) The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
ii) NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
iii) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
iv) NBFCs (except certain AFCs) should have minimum investment grade credit rating.
v) The deposits with NBFCs are not insured.
vi) The repayment of deposits by NBFCs is not guaranteed by RBI.
vii) There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.
QUES 10. What is ‘deposit’ and ‘public deposit’? Is it defined anywhere?
ANS 10. The term ‘deposit’ is defined under Section 45 I(bb) of the RBI Act, 1934. ‘Deposit’ includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form but does not include:
amount raised by way of share capital, or contributed as capital by partners of a firm;
amount received from scheduled bank, co-operative bank, a banking company, State Financial Corporation, IDBI or any other institution specified by RBI;
amount received in ordinary course of business by way of security deposit, dealership deposit, earnest money, advance against orders for goods, properties or services;
amount received by a registered money lender other than a body corporate;
amount received by way of subscriptions in respect of a ‘Chit’.
Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998 defines a ‘ public deposit’ as a ‘deposit’ as defined under Section 45 I(bb) of the RBI Act, 1934 and further excludes the following:
amount received from the Central/State Government or any other source where repayment is guaranteed by Central/State Government or any amount received from local authority or foreign government or any foreign citizen/authority/person;
any amount received from financial institutions;
any amount received from other company as inter-corporate deposit;
amount received by way of subscriptions to shares, stock, bonds or debentures pending allotment or by way of calls in advance if such amount is not repayable to the members under the articles of association of the company;
amount received from shareholders by private company;
amount received from directors or relative of the director of a NBFC;
amount raised by issue of bonds or debentures secured by mortgage of any immovable property or other asset of the company subject to conditions;
the amount brought in by the promoters by way of unsecured loan;
amount received from a mutual fund;
any amount received as hybrid debt or subordinated debt;
any amount received by issuance of Commercial Paper.
Thus, the directions have sought to exclude from the definition of public deposit amount raised from certain set of informed lenders who can make independent decision.
QUES 11. Are Secured debentures treated as Public Deposit? If not who regulates them?
ANS 11. Debentures secured by the mortgage of any immovable property or other asset of the company if the amount raised does not exceed the market value of the said immovable property or other asset are excluded from the definition of ‘Public Deposit’ in terms of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998. Secured debentures are debt instruments and are regulated by Securities & Exchange Board of India.
QUES 12. Whether NBFCs can accept deposits from NRIs?
ANS 12. Effective from April 24, 2004, NBFCs cannot accept deposits from NRI except deposits by debit to NRO account of NRI provided such amount do not represent inward remittance or transfer from NRE/FCNR (B) account. However, the existing NRI deposits can be renewed.
QUES 13. Is nomination facility available to the Depositors of NBFCs?
ANS 13. Yes, nomination facility is available to the depositors of NBFCs. The Rules for nomination facility are provided for in section 45QB of the Reserve Bank of India Act, 1934. Non-Banking Financial Companies have been advised to adopt the Banking Companies (Nomination) Rules, 1985 made under Section 45ZA of the Banking Regulation Act, 1949. Accordingly, depositor/s of NBFCs are permitted to nominate, one person to whom, the NBFC can return the deposit in the event of the death of the depositor/s. NBFCs are advised to accept nominations made by the depositors in the form similar to one specified under the said rules, viz Form DA 1 for the purpose of nomination, and Form DA2 and DA3 for cancellation of nomination and variation of nomination respectively.
QUES14. What else should a depositor bear in mind while depositing money with NBFCs?
ANS 14. While making deposits with a NBFC, the following aspects should be borne in mind:
(i) Public deposits are unsecured.
(ii) A proper deposit receipt which should, besides the name of the depositor/s state the date of deposit, the amount in words and figures, rate of interest payable and the date of maturity should be insisted. The receipt shall be duly signed by an officer authorised by the company in that behalf.
(iii) The Reserve Bank of India does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.
QUES 15. It is said that rating of NBFCs is necessary before it accepts deposit? Is it true? Who rates them?
ANS 15. An unrated NBFC, except certain Asset Finance companies (AFC), cannot accept public deposits. An exception is made in case of unrated AFC companies with CRAR of 15% which can accept public deposit up to 1.5 times of the NOF or Rs 10 crore whichever is lower without having a credit rating. A NBFC may get itself rated by any of the four rating agencies namely, CRISIL, CARE, ICRA and FITCH Ratings India Pvt. Ltd.
QUES 16. What are the symbols of minimum investment grade rating of different companies?
ANS 16. The symbols of minimum investment grade rating of the Credit rating agencies are:
Name of rating agencies
Level of minimum investment
grade credit rating (MIGR)
CRISIL
FA- (FA MINUS)
ICRA
MA- (MA MINUS)
CARE
CARE BBB (FD)
FITCH Ratings India Pvt. Ltd.
tA-(ind)(FD)
It may be added that A- is not equivalent to A, AA- is not equivalent to AA and AAA- is not equivalent to AAA.
QUES 17. Can a NBFC which is yet to be rated accept public deposit?
ANS 17. No, a NBFC cannot accept deposit without rating except an EL/HP company complying with prudential norms and having CRAR of 15%, though not rated, may accept public deposit up to 1.5 times of NOF or Rs. 10 crore whichever is less.
QUES 18. When a company’s rating is downgraded, does it have to bring down its level of public deposits immediately or over a period of time?
ANS 18. If rating of a NBFC is downgraded to below minimum investment grade rating, it has to stop accepting public deposit, report the position within fifteen working days to the RBI and reduce within three years from the date of such downgrading of credit rating, the amount of excess public deposit to nil or to the appropriate extent permissible under paragraph 4(4) of Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998; however such NBFC can renew the matured public deposits subject to repayment stipulations specified above and compliance with other conditions for acceptance of deposits.
QUES 19. In case a NBFC defaults in repayment of deposit what course of action can be taken by depositors?
ANS 19. If a NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit to recover the deposits.
QUES 20. What is the role of Company Law Board in protecting the interest of depositors? How one can approach it?
ANS 20. Where a non-banking financial company fails to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board (CLB) either on its own motion or on an application from the depositor directs, by order, the non-banking financial company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order.
As explained above the depositor can approach CLB by mailing an application in prescribed form to the appropriate bench of the Company Law Board according to its territorial jurisdiction with the prescribed fee.
QUES 21. Can you give the addresses of the various benches of the Company Law Board (CLB) indicating their respective jurisdiction?
ANS 21. The details of addresses and territorial jurisdiction of the bench officers of CLB are as under:
Sr. No.
Addresses
Territorial Jurisdiction
1.
Bench Officer, Company Law Board,
Northern Region Bench,
Shastri Bhavan, ‘A’ Wing, 5th Floor,
Dr. Rajendra Prasad Road,
New Delhi 110 001.
Uttar Pradesh, Jammu & Kashmir,
Punjab, Himachal Pradesh,
Rajasthan, Haryana and Union
Territories of Chandigarh and Delhi
2.
Bench Officer, Company Law Board,
Southern Region Bench,
Shastri Bhavan, ‘A’ Wing, 5th Floor,
Block 8, No 26, Haddows Road,
Chennai 600 006.
Tamil Nadu, Andhra Pradesh,
Kerala, Karnataka, Union
Territories of Amindivi,
Minicoy and Lakshadweep Islands
and Pondicherry
3.
Bench Officer, Company Law Board,
Western Region Bench,
2nd Floor, N.T.C. House,
15, Narottam Morarjee Marg,
Ballard Estate,
Mumbai-400 038.
Maharashtra, Gujarat, Madhya
Pradesh, Goa and Union
Territories of Dadra & Nagar
Haveli, Daman and Diu.
4.
Bench Officer, Company Law Board,
Eastern Region Bench,
9, Old Post Office Street,
6th Floor,
Kolkata 700 001.
West Bengal, Orissa, Bihar,
Assam, Tripura, Manipur,
Nagaland, Meghalaya, Arunachal
Pradesh, Mizoram, Union
Territories of Andaman and
Nicobar Islands.
5.
Bench Officer, Company Law Board,
Principal Bench at New Delhi, Shastri
Bhavan, ‘A’ Wing, 5th Floor,
Dr. Rajendra Prasad Road,
New Delhi 110 001.
All Principal Bench matters all over
India.
QUES 22. We hear that in a number of cases official liquidators have been appointed on the defaulting NBFCs. What is their role and how one can approach them?
ANS 22. Official Liquidator is appointed by the court after giving the company reasonable opportunity of being heard in a winding up petition. The liquidator performs duties of winding up and such duties in reference thereto as the court may impose.
Where the court has appointed an official liquidator or provisional liquidator, he becomes custodian of the property of the company and runs the day-to-day affairs of the company. He has to draw up a statement of affairs of the company in prescribed form containing particulars of assets of the company, its debts and liabilities, names/residences/occupations of its creditors, the debts due to the company and such other information as may be prescribed. The scheme is drawn up by the liquidator and same is put up to the court for approval. The liquidator realizes the assets of the company and arranges to repay the creditors according to the scheme approved by the court. The liquidator generally inserts advertisement in the newspaper inviting claims from depositors/investors in compliance with court orders. Therefore, the investors/depositors should file the claims within due time as per such notices of the liquidator. The Reserve Bank also provides assistance to the depositors in furnishing addresses of the official liquidator.
QUES 23. Consumer Court play useful role in attending to depositors problems. Can one approach Consumer Forum, Civil Court, CLB simultaneously?
ANS 23. Yes, a depositor can approach any or all of the redressal authorities i.e consumer forum, court or CLB.
QUES 24. Is there an Ombudsman for hearing complaints against NBFCs?
ANS 24. No, there is no Ombudsman for hearing complaints against NBFCs.
QUES 25. What are various prudential regulations applicable to NBFCs?
ANS 25. The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998. The directions interalia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, constitution of audit committee, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares.
QUES 26. Please explain the terms ‘owned fund’ and ‘net owned fund’ in relation to NBFCs?
ANS 26. ‘Owned Fund’ means aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the company after deducting therefrom accumulated balance of loss, deferred revenue expenditure and other intangible assets.
The amount of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances made to and deposits with subsidiaries and companies in the same group is arrived at. The amount thus calculated, to the extent it exceeds 10% of the owned fund, is reduced from the amount of owned fund to arrive at ‘Net Owned Fund’.
QUES 27. What are the responsibilities of the NBFCs accepting/holding public deposits with regard to submission of Returns and other information to RBI?
ANS 27. The NBFCs accepting public deposits should furnish to RBI
i. Audited balance sheet of each financial year and an audited profit and loss account in respect of that year as passed in the general meeting together with a copy of the report of the Board of Directors and a copy of the report and the notes on accounts furnished by its Auditors;
ii. Statutory Annual Return on deposits - NBS 1;
iii. Certificate from the Auditors that the company is in a position to repay the deposits as and when the claims arise;
iv. Quarterly Return on liquid assets;
v. Half-yearly Return on prudential norms;
vii. Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and above or with assets of Rs. 100 crore and above irrespective of the size of deposits ;
viii. Monthly return on exposure to capital market by companies having public deposits of Rs. 50 crore and above; and
ix. A copy of the Credit Rating obtained once a year along with one of the Half-yearly Returns on prudential norms as at (v) above.
QUES 28. What are the documents or the compliance required to be submitted to the Reserve Bank of India by the NBFCs not accepting/holding public deposits?
ANS 28. The NBFCs having assets size of Rs. 100 crore and above but not accepting public deposits are required to submit a Monthly Return on important financial parameters of the company. All companies not accepting public deposits have to pass a board resolution to the effect that they have neither accepted public deposit nor would accept any public deposit during the year.
However, all the NBFCs (other than those exempted) are required to be registered with RBI and also make sure that they continue to be eligible to remain Registered. Further, all NBFCs (including non-deposit taking) should submit a certificate from their Statutory Auditors every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR under Section 45-IA of the RBI Act, 1934.
RBI has powers to cause Inspection of the books of any company and call for any other information about its business activities. For this purpose, the NBFC is required to furnish the information in respect of any change in the composition of its Board of Directors, address of the company and its Directors and the name/s and official designations of its principal officers and the name and office address of its Auditors. With effect from April 1, 2007 non-deposit taking NBFCs with assets size of Rs 100 crore and above have been advised to maintain minimum CRAR of 10% and shall also be subject to single/group exposure norms.
QUES 29. The NBFCs have been made liable to pay interest on the overdue matured deposits if the company has not been able to repay the matured public deposits on receipt of a claim from the depositor. Please elaborate the provisions.
ANS 29. As per Reserve Bank’s Directions, overdue interest is payable to the depositors in case the company has delayed the repayment of matured deposits, and such interest is payable from the date of receipt of such claim by the company or the date of maturity of the deposit whichever is later, till the date of actual payment. If the depositor has lodged his claim after the date of maturity, the company would be liable to pay interest for the period from the date of claim till the date of repayment. For the period between the date of maturity and the date of claim it is the discretion of the company to pay interest.
QUES 30. Can a company pre-pay its public deposits?
ANS 30. A NBFC accepts deposits under a mutual contract with its depositors. In case a depositor requests for pre-mature payment, Reserve Bank of India has prescribed Regulations for such an eventuality in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 wherein it is specified that NBFCs cannot grant any loan against a public deposit or make premature repayment of a public deposit within a period of three months (lock-in period) from the date of its acceptance, however in the event of death of a depositor, the company may, even within the lock - in period, repay the deposit at the request of the joint holders with survivor clause / nominee / legal heir only against submission of relevant proof, to the satisfaction of the company.
An NBFC subject to above provisions, if it is not a problem company, may permit after the lock–in period premature repayment of a public deposit at its sole discretion, at the rate of interest prescribed by the Bank.
A problem NBFC is prohibited from making premature repayment of any deposits or granting any loan against public deposits/deposits, as the case may be. The prohibition shall not, however, apply in the case of death of depositor or repayment of tiny deposits i.e. up to Rs. 10000/- subject to lock in period of 3 months in the latter case.
QUES 31. What is the liquid asset requirement for the deposit taking companies? Where these assets are kept? Does Depositors have any claims on them?
ANS 31. In terms of Section 45-IB of the RBI Act, 1934 the minimum level of liquid asset to be maintained by NBFCs is 15 per cent of public deposits outstanding as on the last working day of the second preceding quarter. Of the 15%, NBFCs are required to invest not less than ten percent in approved securities and the remaining 5% can be in unencumbered term deposits with any scheduled commercial bank. Thus, the liquid assets may consist of Government securities, Government guaranteed bonds and term deposits with any scheduled commercial bank.
The investment in Government securities should be in dematerialised form which can be maintained in Constituents’ Subsidiary General Ledger (CSGL) Account with a scheduled commercial bank (SCB) / Stock Holding Corporation of India Limited (SHICL). In case of Government guaranteed bonds the same may be kept in dematerialised form with SCB/SHCIL or in a dematerialised account with depositories [National Securities Depository Ltd. (NSDL)/Central Depository Services (India) Ltd. (CDSL)] through a depository participant registered with Securities & Exchange Board of India (SEBI). However in case there are Government bonds which are in physical form the same may be kept in safe custody of SCB/SHCIL.
NBFCs have been directed to maintain the mandated liquid asset securities in a dematerialised form with the entities stated above at a place where the registered office of the company is situated. However, if a NBFC intends to entrust the securities at a place other than the place at which its registered office is located, it may do so after obtaining in writing the permission of RBI. It may be noted that the liquid assets in approved securities will have to be maintained in dematerialised form only.
The liquid assets maintained as above are to be utilised for payment of claims of depositors. However, deposit being unsecured in nature depositors do not have direct claim on liquid assets.
QUES 32. Please tell us something about the companies which are NBFCs, but are exempted from registration?
ANS 32. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.
Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India, Insurance companies are regulated by Insurance Regulatory and Development Authority. Similarly, Chit Companies are regulated by the respective State Governments and Nidhi Companies are regulated by Ministry of Company Affairs, Government of India.
QUES 33. There are some entities (not companies) which carry on activities like that of NBFCs. Are they allowed to take deposit? Who regulates them?
ANS 33. Any person who is an individual or a firm or unincorporated association of individual cannot accept deposit except by way of loan from relatives, if his/its business wholly or partly includes business that of loan, investment, hire-purchase or leasing company or principal business is that of receiving of deposits under any scheme or arrangement or in any manner or lending in any manner.
QUES 34. What is a Residuary Non-Banking Company (RNBC)? In what way it is different from other NBFCs?
ANS 34. Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilisation of deposits and requirement of deployment of depositors' funds. However, Prudential Norms Directions are applicable to these companies also.
QUES 35. We understand that there is no ceiling on raising of deposits by RNBCs, then how safe is deposit with them?
ANS 35. It is true that there is no ceiling on raising of deposits by RNBCs but every RNBC has to ensure that the amounts deposited and investments made by the company are not less that the aggregate amount of liabilities to the depositors.
To secure the interest of depositor, such companies are required to invest in a portfolio comprising of highly liquid and secured instruments viz. Central/State Government securities, fixed deposit of scheduled commercial banks (SCB), Certificate of deposits of SCB/FIs, units of Mutual Funds, etc.
QUES 36. Can RNBC forfeit deposit if deposit installments are not paid regularly or discontinued?
ANS 36. No Residuary Non-Banking Company shall forfeit any amount deposited by depositor, or any interest, premium, bonus or other advantage accrued thereon.
QUES 37. Please tell us something on rate of interest payable by RNBCs on deposits and maturity period of deposits?
ANS 37. The amount payable by way of interest, premium, bonus or other advantage, by whatever name called by a residuary non-banking company in respect of deposits received shall not be less than the amount calculated at the rate of 5% (to be compounded annually) on the amount deposited in lump sum or at monthly or longer intervals; and at the rate of 3.5% (to be compounded annually) on the amount deposited under daily deposit scheme. Further, a RNBC can accept deposits for a minimum period of 12 months and maximum period of 84 months from the date of receipt of such deposit. They cannot accept deposits repayable on demand.
MERGERS & ACQUISITIONS (Pumping the Profit Lines)
Despite stock market jolts, the merger-and-acquisition frenzy continues unabated. Companies have to live up to hyperbolic expectations by boosting stock prices and keeping earnings high. But while the permutations seem infinite, deal-making is a legal exercise.
The rapid growth and capitalisation of infotech industry in India has seen the need for restructuring of commercial entities along more profitable lines. Mergers and acquisitions (M&A) is an important area of capital market activity within corporate structuring and has lately become one of the favoured routes for growth and consolidation.
The reasons to merge or acquire are varied, ranging from acquiring market share and restructuring corporate structure to meeting global competition. In recent years, India has seen a manifold growth in in M&A, largely encouraged by liberalisation measures, which have substantially relaxed restrictions on M&A transactions. There has been a marked shift in legislative policy towards facilitating commercial restructuring. We aim to provide a bird's-eye view of the substantive law and procedural requirements with regard to M&A in the Indian capital markets.
Merger Mania
Mergers can be classified into three categories: when two entities amalgamate and give birth to a new entity; when a relatively small and less profitable company merges with a big company; and when a relatively big and profitable company merges with a smaller company (sometimes even a loss-making company for that matter). Such a merger is known as a reserve merger.
As for the reason of merger, there can be many-diversification, growth, corporate control, synergy, cost advantages, market control or market share, breadth of product range, technological edge or control of research and development, globalisation, access to otherwise inaccessible source and markets, lower gestation period (such as in greenfield projects), managerial capability, or shareholder value, among others.
The usual form of consideration for a merger is exchange of shares of the acquiring firm with the shares of the target company. In acquisitions, the consideration may take the form of cash consideration or loan instruments such as debentures.
The regulatory regime governing M&A is complex and straddles several areas of law and accounting, not to mention business concerns. The restrictions on M&A transactions in India have been substantially relaxed with the liberalisation of the economy. Thus, the provisions concerning M&A under the Monopolies and Restrictive Trade Practice Act, 1969 (MRTP) and the restrictions under Foreign Exchange Regulation Act, 1973 (FERA) have been substantially removed.
In 1994, the law relating to acquisition of shares of quoted/listed companies was codified and the Securities and Exchange Board of India (SEBI) announced the Substantial Acquisition of Shares and Take Over Code (the 'code'). The code inter alia provides that if any one or more persons together acquire 10 per cent or more equity shares of a listed company, the acquirer shall make an offer to the remaining shareholders of the company to acquire their shares. The code also provides a detailed procedure to be followed and the price to be offered to the shareholders. The existing code is undergoing drastic changes and a new takeover code is expected to be notified soon.
MRTP Act, 1969: Certain Amendments in the MRTP Act were brought about in 1991. The government has removed restrictions on the size of assets; market shares and on the requirement of prior government approval for mergers that created entities that would violate prescribed limits. The Supreme Court, in a recent judgement, decided that "prior approval of the central government for sanctioning a scheme of amalgamation is not required in view of the deletion of the relevant provision of the MRTP Act and the MRTP Commission was justified in not passing an order restraining implementation of the scheme of amalgamation of two firms in the same field of consumer articles".
FERA, 1973: FERA is the primary Indian law which regulates dealings in foreign exchange. Although there are no provisions in the Act which deal directly with transactions relating to amalgamations, certain provisions of the Act become relevant when shares in Indian companies are allotted to non-residents, where the undertaking sought to be acquired is a company which is not incorporated under any law in India. Section 29 of FERA provides that no foreign company or foreign national can acquire any share of an Indian company except with prior approval of the Reserve Bank of India. The Act has been amended to facilitate transfer of shares between two non-residents and to allow Indian companies to set up subsidiaries and joint ventures abroad without the prior approval of the Reserve Bank of India.
Indian Companies Act, 1956: This has provisions specifically dealing with the amalgamation of a company or certain other entities with similar status. The most common form of merger involves an elaborate but time-bound procedure under sections 391 to 394 of the Act. An amalgamation is complete only after the court sanctions it and it takes effect after the order of the court is filed with the Registrar of Companies.
Acquisition by Purchase of Shares
Acquisition of shares means two categories: acquisition of shares of an unlisted or closely-held company; or acquisition of shares of a company listed or quoted on a stock exchange.
In the case of a closely-held (unlisted) company, the following provisions of the Companies Act have to be taken into account:
Under Sections 108A to 108I, the Central Government's approval is required before shares may be acquired beyond 10 per cent by an undertaking if it is the dominant undertaking as defined by the MRTP Act or will become the dominant undertaking after such an acquisition.
The term 'dominant undertaking' is defined in the MRTP Act as: "An undertaking which by itself or along with inter-connected undertakings produces, supplies, distributes or otherwise controls not less than one-fourth of the total goods that are produced, supplied or distributed in India or any substantial part thereof; an undertaking which provides or otherwise controls not less than one-fourth of any services that are rendered in India or any substantial part thereof."
Section 372 of the Companies Act limits the investment of one company in the shares of another and requires prior approval of the Central Government for any company to make an investment beyond 30 per cent of its paid-up share capital and free reserves. This is an important section for acquisition of shares since it limits inter-corporate investments, thereby restricting the ability of one company to acquire another in a hostile manner.
Section 395 facilitates the acquisition of 100 per cent of the shares of company and provides that if any scheme of acquisition is approved by shareholders holding 90 per cent or more shares, then the same may be imposed on the remaining shareholders of the company.
In the case of a listed company, the acquirer has to follow the procedure laid down under the Substantial Acquisition of Shares and Takeover Code and the Listing Agreement with stock exchanges. In particular, an acquirer must comply with clauses 40A and 40B of the listing Agreement which, among other things, require a purchaser acquiring shares of 20 per cent (or more), to make an offer to all the shareholders of the company to acquire their shares at a price at which the acquirer has already acquired or agreed to acquire shares of 10 per cent or more, or at a price which is the average of the high and low of the price quoted on the stock exchange during the preceding six months, whichever being higher.
SEBI's Shenanigans
It is expected that very soon the Securities and Exchange Borad of India, which rules on takeovers, is likely to have a substantial say in M&A, which, at present, is the sole preserve of the Companies Act and the courts.
The working group set up to draft a new Companies Bill has proposed the bringing of cases relating to company mergers and amalgamations within the ambit of the Company Law Board (CLB). This is a welcome proposal as it would not only reduce the number of pending cases but would also reduce costs of litigation as the process would be taken up by a single bench of the CLB.
The Indian Income Tax Act (ITA), 1961, contains elaborate provisions for corporate restructuring so that companies can focus better on core commercial activities. The comprehensive set of amendments to the Act aim at making such commercial re-organisations 'fully tax neutral'. The ITA refers to two types of mergers. The first type of merger as defined in Section 291B of the Act has to satisfy the following conditions:
All the property and liabilities of the amalgamating company or companies immediately before the amalgamation must become part of the amalgamated company by virtue of the amalgamation. Shareholders holding not less than nine-tenths in value of the shares in the amalgamating company or companies must become shareholders of the amalgamated company by virtue of the amalgamation procedure.
It is not as if the amalgamation, which does not satisfy the above conditions, will not be recognised or that its legal effects will be ignored. Rather, the intention is to give special treatment and grant certain relief to an amalgamation satisfying the conditions under Section 2(1B). To amalgamations not covered under Section 2(1B), the relief would not be available and the transaction would have to be analysed individually and its implication determined accordingly.
It is also relevant to point out that the above conditions are for compliance with the Income Tax Act and the same is not necessary for compliance with the Indian Companies Act.
Sick Industrial Companies (Special Provisions) Act, 1985 (SICA): The SICA is a special statute to remove bottlenecks contained in various laws in the way of revival and rehabilitation of sick companies as well as to provide a single-window clearance to provisions of all such laws with respect to the revival of a sick unit. The Act provides for the revival of sick companies through a scheme, which may provide for amalgamation of the company with another company. The Board for Industrial and Financial Reconstruction (BIFR), which is the operational authority, has substantial powers to sanction such schemes prepared by an operating agency provided such amalgamations effectively revive the company.
A Major Business
Mergers and acquisitions are a common phenomenon in a competitive and free economy and as India integrates into the world economy, there will be several opportunities for M&A deals both inside and outside India. In the context of the liberalised environment, M&As are emerging as a major business for the financial community. There are a host of factors propelling the Indian corporate sector to move towards the M&A arena, including existence of several domestic players seeking to consolidate their business by acquiring firms in their core areas and shedding their non-core businesses. This trend is further supported by the presence of several foreign firms, which are looking to buy their way into the Indian market by acquiring existing plants and capacities.
Rodney D. Ryder, Rajinder Narain & Co., Solicitors and Advocates, Supreme Court of India. E-mail: mc@del2.vsnl.net.in
The rapid growth and capitalisation of infotech industry in India has seen the need for restructuring of commercial entities along more profitable lines. Mergers and acquisitions (M&A) is an important area of capital market activity within corporate structuring and has lately become one of the favoured routes for growth and consolidation.
The reasons to merge or acquire are varied, ranging from acquiring market share and restructuring corporate structure to meeting global competition. In recent years, India has seen a manifold growth in in M&A, largely encouraged by liberalisation measures, which have substantially relaxed restrictions on M&A transactions. There has been a marked shift in legislative policy towards facilitating commercial restructuring. We aim to provide a bird's-eye view of the substantive law and procedural requirements with regard to M&A in the Indian capital markets.
Merger Mania
Mergers can be classified into three categories: when two entities amalgamate and give birth to a new entity; when a relatively small and less profitable company merges with a big company; and when a relatively big and profitable company merges with a smaller company (sometimes even a loss-making company for that matter). Such a merger is known as a reserve merger.
As for the reason of merger, there can be many-diversification, growth, corporate control, synergy, cost advantages, market control or market share, breadth of product range, technological edge or control of research and development, globalisation, access to otherwise inaccessible source and markets, lower gestation period (such as in greenfield projects), managerial capability, or shareholder value, among others.
The usual form of consideration for a merger is exchange of shares of the acquiring firm with the shares of the target company. In acquisitions, the consideration may take the form of cash consideration or loan instruments such as debentures.
The regulatory regime governing M&A is complex and straddles several areas of law and accounting, not to mention business concerns. The restrictions on M&A transactions in India have been substantially relaxed with the liberalisation of the economy. Thus, the provisions concerning M&A under the Monopolies and Restrictive Trade Practice Act, 1969 (MRTP) and the restrictions under Foreign Exchange Regulation Act, 1973 (FERA) have been substantially removed.
In 1994, the law relating to acquisition of shares of quoted/listed companies was codified and the Securities and Exchange Board of India (SEBI) announced the Substantial Acquisition of Shares and Take Over Code (the 'code'). The code inter alia provides that if any one or more persons together acquire 10 per cent or more equity shares of a listed company, the acquirer shall make an offer to the remaining shareholders of the company to acquire their shares. The code also provides a detailed procedure to be followed and the price to be offered to the shareholders. The existing code is undergoing drastic changes and a new takeover code is expected to be notified soon.
MRTP Act, 1969: Certain Amendments in the MRTP Act were brought about in 1991. The government has removed restrictions on the size of assets; market shares and on the requirement of prior government approval for mergers that created entities that would violate prescribed limits. The Supreme Court, in a recent judgement, decided that "prior approval of the central government for sanctioning a scheme of amalgamation is not required in view of the deletion of the relevant provision of the MRTP Act and the MRTP Commission was justified in not passing an order restraining implementation of the scheme of amalgamation of two firms in the same field of consumer articles".
FERA, 1973: FERA is the primary Indian law which regulates dealings in foreign exchange. Although there are no provisions in the Act which deal directly with transactions relating to amalgamations, certain provisions of the Act become relevant when shares in Indian companies are allotted to non-residents, where the undertaking sought to be acquired is a company which is not incorporated under any law in India. Section 29 of FERA provides that no foreign company or foreign national can acquire any share of an Indian company except with prior approval of the Reserve Bank of India. The Act has been amended to facilitate transfer of shares between two non-residents and to allow Indian companies to set up subsidiaries and joint ventures abroad without the prior approval of the Reserve Bank of India.
Indian Companies Act, 1956: This has provisions specifically dealing with the amalgamation of a company or certain other entities with similar status. The most common form of merger involves an elaborate but time-bound procedure under sections 391 to 394 of the Act. An amalgamation is complete only after the court sanctions it and it takes effect after the order of the court is filed with the Registrar of Companies.
Acquisition by Purchase of Shares
Acquisition of shares means two categories: acquisition of shares of an unlisted or closely-held company; or acquisition of shares of a company listed or quoted on a stock exchange.
In the case of a closely-held (unlisted) company, the following provisions of the Companies Act have to be taken into account:
Under Sections 108A to 108I, the Central Government's approval is required before shares may be acquired beyond 10 per cent by an undertaking if it is the dominant undertaking as defined by the MRTP Act or will become the dominant undertaking after such an acquisition.
The term 'dominant undertaking' is defined in the MRTP Act as: "An undertaking which by itself or along with inter-connected undertakings produces, supplies, distributes or otherwise controls not less than one-fourth of the total goods that are produced, supplied or distributed in India or any substantial part thereof; an undertaking which provides or otherwise controls not less than one-fourth of any services that are rendered in India or any substantial part thereof."
Section 372 of the Companies Act limits the investment of one company in the shares of another and requires prior approval of the Central Government for any company to make an investment beyond 30 per cent of its paid-up share capital and free reserves. This is an important section for acquisition of shares since it limits inter-corporate investments, thereby restricting the ability of one company to acquire another in a hostile manner.
Section 395 facilitates the acquisition of 100 per cent of the shares of company and provides that if any scheme of acquisition is approved by shareholders holding 90 per cent or more shares, then the same may be imposed on the remaining shareholders of the company.
In the case of a listed company, the acquirer has to follow the procedure laid down under the Substantial Acquisition of Shares and Takeover Code and the Listing Agreement with stock exchanges. In particular, an acquirer must comply with clauses 40A and 40B of the listing Agreement which, among other things, require a purchaser acquiring shares of 20 per cent (or more), to make an offer to all the shareholders of the company to acquire their shares at a price at which the acquirer has already acquired or agreed to acquire shares of 10 per cent or more, or at a price which is the average of the high and low of the price quoted on the stock exchange during the preceding six months, whichever being higher.
SEBI's Shenanigans
It is expected that very soon the Securities and Exchange Borad of India, which rules on takeovers, is likely to have a substantial say in M&A, which, at present, is the sole preserve of the Companies Act and the courts.
The working group set up to draft a new Companies Bill has proposed the bringing of cases relating to company mergers and amalgamations within the ambit of the Company Law Board (CLB). This is a welcome proposal as it would not only reduce the number of pending cases but would also reduce costs of litigation as the process would be taken up by a single bench of the CLB.
The Indian Income Tax Act (ITA), 1961, contains elaborate provisions for corporate restructuring so that companies can focus better on core commercial activities. The comprehensive set of amendments to the Act aim at making such commercial re-organisations 'fully tax neutral'. The ITA refers to two types of mergers. The first type of merger as defined in Section 291B of the Act has to satisfy the following conditions:
All the property and liabilities of the amalgamating company or companies immediately before the amalgamation must become part of the amalgamated company by virtue of the amalgamation. Shareholders holding not less than nine-tenths in value of the shares in the amalgamating company or companies must become shareholders of the amalgamated company by virtue of the amalgamation procedure.
It is not as if the amalgamation, which does not satisfy the above conditions, will not be recognised or that its legal effects will be ignored. Rather, the intention is to give special treatment and grant certain relief to an amalgamation satisfying the conditions under Section 2(1B). To amalgamations not covered under Section 2(1B), the relief would not be available and the transaction would have to be analysed individually and its implication determined accordingly.
It is also relevant to point out that the above conditions are for compliance with the Income Tax Act and the same is not necessary for compliance with the Indian Companies Act.
Sick Industrial Companies (Special Provisions) Act, 1985 (SICA): The SICA is a special statute to remove bottlenecks contained in various laws in the way of revival and rehabilitation of sick companies as well as to provide a single-window clearance to provisions of all such laws with respect to the revival of a sick unit. The Act provides for the revival of sick companies through a scheme, which may provide for amalgamation of the company with another company. The Board for Industrial and Financial Reconstruction (BIFR), which is the operational authority, has substantial powers to sanction such schemes prepared by an operating agency provided such amalgamations effectively revive the company.
A Major Business
Mergers and acquisitions are a common phenomenon in a competitive and free economy and as India integrates into the world economy, there will be several opportunities for M&A deals both inside and outside India. In the context of the liberalised environment, M&As are emerging as a major business for the financial community. There are a host of factors propelling the Indian corporate sector to move towards the M&A arena, including existence of several domestic players seeking to consolidate their business by acquiring firms in their core areas and shedding their non-core businesses. This trend is further supported by the presence of several foreign firms, which are looking to buy their way into the Indian market by acquiring existing plants and capacities.
Rodney D. Ryder, Rajinder Narain & Co., Solicitors and Advocates, Supreme Court of India. E-mail: mc@del2.vsnl.net.in
FAQs on Foreign Direct Investment (FDI)
Foreign Direct Investment
1. What are the forms in which business can be conducted by a foreign company in India?
• A foreign company planning to set up business operations in India has the following options :
• As an incorporated entity by incorporating a company under the Companies Act,1956 through
o Joint Ventures; or
o Wholly Owned Subsidiaries
• As an unincorporated entity through
o Liaison Office/Representative Office
o Project Office
o Branch Office
Such offices can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office of other place of business) Regulations, 2000.
2. How does a foreign company invest in India? What are the regulations pertaining to issue of shares by Indian companies to foreign collaborators/investors?
Automatic Route
• FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require prior approval of the Government :
o Activities/items that require an Industrial License;
o Proposals in which the foreign collaborator has an existing financial / technical collaboration in India in the ‘same’ field,
o Proposals for acquisition of shares in an existing Indian company in: Financial services sector and where Securities & Exchange Board of India (Substantial Acquisition of Shares and Takeovers ) Regulations, 1997 is attracted;
o All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.
• FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.
Government Route
• FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.
General permission of RBI under FEMA
• Indian companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.
3. Which are the sectors where FDI is not allowed in India, under the Automatic Route as well as Government Route?
FDI is prohibited under Government as well as Automatic Route for the following sectors:
i. Retail Trading
ii. Atomic Energy
iii. Lottery Business
iv. Gambling and Betting
v. Housing and Real Estate business
vi. Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea plantations)].
4. What should be done after investment is made under the Automatic Route or with Government approval?
• A two-stage reporting procedure has been introduced for this purpose.
• On receipt of money for investment:
o Within 30 days of receipt of money from the foreign investor, the Indian company will report to the Regional Office of RBI under whose jurisdiction its Registered Office is located, a report containing details such as:
o Name and address of the foreign investors
o Date of receipt of funds and their rupee equivalent
o Name and address of the authorised dealer through whom the funds have been received, and
o Details of the Government approval, if any;
• On issue of shares to foreign investor:
• Within 30 days from the date of issue of shares, a report in Form FC-GPR together with the following documents should be filed with the Regional Office of RBI:
• Certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that
o All the requirements of the Companies Act, 1956 have been complied with;
o Terms and conditions of the Government approval, if any, have been complied with;
o The company is eligible to issue shares under these Regulations; and
o The company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration;
• Certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.
5. What are the guidelines for transfer of existing shares from residents to non-residents or non-residents to residents?
Transfer from Non-Resident to Non-Resident:
A: Transfer by way of sale:
• A person resident outside India can freely transfer share/convertible debenture by way of sale to a person resident in India as under:
o Any person resident outside India, (not being a non-resident Indian or an overseas corporate body), can transfer by way of sale the shares/convertible debentures to any person resident outside India; subject to the condition that the acquirer or transferee does not have any previous venture or tie up in India in the same field or sector.
o A non-resident Indian (NRI) may transfer by way of sale, the shares/convertible debentures held by him to another NRI only
o Any person resident outside India may sell share/convertible debenture acquired in accordance with FEMA Regulations, on a recognized Stock Exchange in India through a registered broker.
o A non-resident Indian or Overseas Corporate Body can transfer by way of sale, shares only to a non-resident Indian.
B: Transfer by way of Gift:
• A person resident outside India can freely transfer share/convertible debenture by way of gift to a person resident in India as under:
o Any person resident outside India, (not being a non-resident Indian or an overseas corporate body), can transfer by way of gift the shares/convertible debentures to any person resident outside India; subject to the condition that the acquirer or transferee does not have any previous venture or tie up in India in the same field or sector.
o A non-resident Indian (NRI) may transfer by way of gift, the shares/convertible debentures held by him to another NRI only
o Any person resident outside India may transfer share/convertible debenture to a person resident in India by way of gift;
Transfer from Resident to Non-Resident:
A: Transfer by way of sale—General Permission under Regulation 10of Notification No. FEMA 20/2000-RB dated May 3, 2000.
• A person resident in India may transfer to a person resident outside India any share/convertible debenture of an Indian Company whose activities fall under the Automatic Route for FDI subject to the Sectoral Limits, shall transfer such shares/debentures by way of sale subject to the following:
• Indian Company whose shares or convertible debentures are proposed to be transferred shall not be engaged in rendering any financial service; (financial services means service rendered by banking and non-banking companies regulated by the Reserve Bank, insurance, companies regulated by Insurance Regulatory and Development Authority (IRDA) and other companies regulated by any other financial regulator as the case may be).
• The transfer shall not fall within the purview of the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997; and
• The concerned parties shall adhere to pricing guidelines, documentation and reporting requirements for such transfers as may be specified by Reserve Bank, from time to time.
B: Transfer by way of gift:
• A person resident in India can transfer shares to a person resident outside India in the following ways:
• A person resident in India who proposes to transfer to a person resident outside India [other than erstwhile OCBs] any security, by way of gift, shall make an application to the Central Office of Foreign Exchange Department, Reserve Bank furnishing the following information, namely :
• Name and address of the transferor and the proposed transferee
• Relationship between the transferor and the proposed transferee
• Reasons for making the gift;
6. What if the transfer from resident to non-resident does not fall under the above facility?
• In case the transfer does not fit into any of the above, either the transferor (resident) or the transferee (non-resident) can make an application for RBI’s permission for the transfer.
• A copy of FIPB approval.
• Consent letter from transferor and transferee clearly indicating the number of shares, name of Investee Company and the price at which the transfer is proposed to be effected.
• The present/post transfer shareholding pattern of the Indian investee company showing the equity participation by residents and non-residents category-wise.
• Copies of RBI approvals/acknowledged copies of FC-GPR evidencing the existing holdings of the non-residents.
• If the sellers/transferors are NRIs / OCBs, the copies of RBI approvals evidencing the shares held by them on repatriation / non-repatriation basis.
• Open Offer document filed with SEBI if the acquisition of shares by non-resident is under SEBI Takeover Regulations.
• Fair Valuation Certificate from Chartered Accountant indicating the value of shares as per the following guideline:
• In the case of unlisted shares the fair value is worked out as per the erstwhile Controller of Capital Issue/s.
• For listed shares, the price worked out is not less than the higher of average weekly high and low quotations for 6 months and average of daily high and low quotation or two weeks preceding 30 days prior to the date of making application to FIPB.
7. Are the investments and profits earned in India repatriable?
• All foreign investments are freely repatriable except for the cases where NRIs choose to invest specifically under non-repatriable schemes. Dividends declared on foreign investments can be remitted freely through an Authorised Dealer.
8. What are the guidelines on issue and valuation of shares in case of existing companies?
• Allotment of shares on preferential basis shall be as per the requirements of the Companies Act, 1956, which will require special resolution in case of a public limited company.
• In case of listed companies, valuation shall be as per the RBI/SEBI guidelines as follows:
The issue price shall be either at:
(a) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date or
(b) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the two weeks preceding the relevant date.
• In case of unlisted companies, valuation shall be done in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.
9. What are the regulations pertaining to issue of ADRs/GDRs by Indian companies?
• Indian companies are allowed to raise capital in the international market through the issue of ADRs/GDRs. They can issue ADRs/GDRs without obtaining prior approval from RBI if it is eligible to issue ADRs/GDRs in terms of the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and subsequent guidelines issued by Ministry of Finance, Government of India.
• After the issue of ADRs/GDRs, the company has to file a return in the proforma given in Annexure `C' to the RBI Notification No.FEMA.20/ 2000-RB dated May 3, 2000. The company is also required to file a quarterly return in a form specified in Annexure `D' of the same regulations.
• There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets.
10. What is meant by Sponsored ADR & Two-way fungibility Scheme of ADR/GDR?
• Sponsored ADR/GDR: An Indian company may sponsor an issue of ADR/GDR with an overseas depository against shares held by its shareholders at a price to be determined by the Lead Manager. The Operative guidelines for the same have been issued vide A.P.(DIR Series) circular No.52 dated November 23, 2002.
• Two-way fungibility Scheme: Under the limited two-way fungibility Scheme, a registered broker in India can purchase shares of an Indian company on behalf of a person resident outside India for the purpose of converting the shares so purchased into ADRs/GDRs. The operative guidelines for the same have been issued vide A.P.(DIR Series) Circular No.21 dated February 13, 2002.
• The Scheme provides for purchase and re-conversion of only as many shares into ADRs/GDRs which are equal to or less than the number of shares emerging on surrender of ADRs/GDRs which have been actually sold in the market. Thus, it is only a limited two-way fungibility wherein the headroom available for fresh purchase of shares from domestic market is restricted to the number of converted shares sold in the domestic market by non-resident investors. So long ADRs/GDRs are quoted at discounts to the value of shares in domestic market, an investor will gain by converting the ADRs/GDRs into underlying shares and selling them in the domestic market. In case of ADRs/GDRs being quoted at premium, there will be demand for reverse fungibility, i.e. purchase of shares in domestic market for re-conversion into ADRs/GDRs. The scheme is operationalised through the Custodians of securities and stockbrokers under SEBI.
11. Can Indian companies issue Foreign Currency Convertible Bonds (FCCBs)?
• FCCBs can be issued by Indian companies in the overseas market in accordance with Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.
• The FCCB issue needs to conform to External Commercial Borrowing guidelines, issued by RBI vide Notification No. FEMA 3/2000-RB dated May 3, 2000 as amended from time to time.
12. Can I invest through Preference Shares? What are the regulations applicable in case of such investments?
• Foreign investment through preference shares is treated as foreign direct investment. Proposals are processed either through the automatic route or FIPB as the case may be. Foreign investment in preference share is considered as part of share capital and fall outside the External Commercial Borrowing (ECB) guidelines/cap. Preference shares to be treated as foreign direct equity for purpose of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. If the preference shares are structured without such conversion option, they would fall outside the foreign direct equity cap.
13. Can shares be issued against Lumpsum Fee, Royalty and ECB?
• Issue of equity shares against lump sum fee, royalty and external commercial borrowings (ECBs) in convertible foreign currency are permitted subject to meeting all applicable tax liabilities and sector specific guidelines.
14. Other than issue of shares under Automatic Route/Government Route, what other general permissions are available under RBI Notification No.FEMA 20 dt.3-5-2000?
• Issue of shares under ESOP by Indian companies to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India directly or through a Trust up to 5% of the paid up capital of the company
• Issue and acquisition of shares by non-residents after merger or de-merger or amalgamation of Indian companies
• Issue shares or preference shares or convertible debentures on right basis by an Indian company to a person resident outside India.
15. Can I invest in unlisted shares issued by a company in India?
Yes. As per the regulations/guidelines issued by RBI/Government of India, investment can be made in unlisted shares of Indian companies.
16. Can a foreigner set up a partnership/proprietorship concern in India?
No. Only NRIs/PIOs are allowed to set up partnership/proprietorship concern in India. Even for NRIs/PIOs investment is allowed only on non-repatriation basis.
17. Can I invest in Right shares issued by an Indian company at a discount?
There are no restrictions from RBI for investment in Right shares at a discount, provided the rights shares so issued are being offered at the same price to residents and non-residents.
II - Foreign Technical Collaboration
1. What are the payment parameters for foreign technology transfer under the Automatic Route of RBI? How should royalty be calculated?
• Payment for foreign technology collaboration by Indian companies are allowed under the automatic route subject to the following limits :
• Lump sum payments not exceeding US$2 million;
• Royalty payable being limited to 5 per cent for domestic sales and 8 per cent for exports, without any restriction on the duration of the royalty payments.
• The royalty limits are net of taxes and are calculated according to standard conditions.
• The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc.
• RBI has delegated the powers to ADs to make payment of royalty under such agreements. The requirement of registration of the agreement with the Regional Office of RBI has been done away with.
2. What should be done, if Automatic Route of RBI for technology transfer is not available?
• Proposals which do not satisfy the parameters prescribed for automatic route of RBI, require clearance from Ministry of Commerce, Department of Industrial Policy and Promotion, Government of India.
III - Portfolio Investment
1. What are the regulations regarding Portfolio Investments by Foreign Institutional Investors (FIIs)?
• Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000. FIIs include Asset Management Companies, Pension Funds, Mutual Funds, Investment Trusts as Nominee Companies, Incorporated/ Institutional Portfolio Managers or their Power of Attorney holders, University Funds, Endowment Foundations, Charitable Trusts and Charitable Societies.
• SEBI acts as the nodal point in the registration of FIIS. RBI has granted General Permission to SEBI Registered FIIs invest in India under the Portfolio Investment Scheme.
• All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body.
2. What are the regulations for Foreign Venture Capital Investment?
• A Foreign Venture Capital Investor registered with SEBI may make investment in a Venture Capital Fund for an Indian Venture Capital Undertaking, in the manner and subject to the terms and conditions specified in Schedule 6 of RBI Notification No.FEMA 20/2000-RB dated 3-5-2000 as amended from time to time.
3. What are the regulations regarding Portfolio Investments by NRIs/PIOs
• Non Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply to a designated branch of a Bank which deals in Portfolio Investment. All sale/purchase transaction is to be routed through the designated branch.
• An NRI or a PIO can purchase shares up to 5% of the paid up capital of an Indian company. All NRIs/PIOs taken together cannot purchase more than 10% of the paid up value of the company. (This limit can be increased by the Indian company to 24% by passing a General Body resolution).
• The sale proceeds of the repatriable investments can be credited to the NRE/NRO etc. accounts of the NRI/PIO whereas the sale proceeds of non-repatriable investment can be credited only to NRO accounts.
• The sale of shares will be subject to payment of applicable taxes.
IV: Procedure for opening Branch/Project/Liaison Office
1. How can foreign companies open Liaison/Project/Branch office in India?
• Foreign company can set up Liaison/Branch Offices in India after obtaining approval from RBI. RBI has given general permission to foreign companies to establish Project Offices in India subject to certain conditions.
2. What is the procedure to be followed for obtaining Reserve Bank's approval for opening Liaison Office/Representative Office?
• A Liaison office can carry on only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office abroad. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers.
• The companies desirous of opening a liaison office in India may make an application in form FNC-1 along with the documents mentioned therein to Foreign Investment Division, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai. This form is available in www.rbi.org.in.
• Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Regional Office in whose jurisdiction the office is set up. Liaison/representative offices have to file an Activity Certificate on annual basis from a Chartered Accountant to the concerned Regional Office of the RBI, stating that the Liaison Office has undertaken only those activities permitted by RBI.
3. What is the procedure for setting up Project Office?
• Foreign companies are granted projects in India by Indian entities. General Permission has been granted by RBI vide Notification No. FEMA 95/2003-RB dated July 2, 2003 to foreign companies to open Project Office/s in India provided they have secured from an Indian company, a contract to execute a project in India, and
• the project is funded directly by inward remittance from abroad; or
• the project is funded by a bilateral or multilateral International Financing Agency; or
• the project has been cleared by an appropriate authority; or
• a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
• However, if the above criteria are not met, or if the parent entity is established in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, such applications have to be forwarded to Central Office of the Foreign Exchange Department of the Reserve Bank of India at Mumbai for approval.
4. What is the procedure for setting up Branch office?
• Reserve Bank permits companies engaged in manufacturing and trading activities abroad to set up Branch Offices in India for the following purposes:
• To represent the parent company/other foreign companies in various matters in India e.g. acting as buying/selling agents in India
• To conduct research work in the area in which the parent company is engaged
• To undertake export and import activities and trading on wholesale basis
• To promote possible technical and financial collaborations between the Indian companies and overseas companies.
• Rendering professional or consultancy services
• Rendering services in Information technology and development of software in India
• Rendering technical support to the products supplied by the parent/Group companies.
• A branch office is not allowed to carry out manufacturing, processing activities directly/indirectly. A Branch Office is also not allowed to undertake Retail Trading activities of any nature in India. Branch Offices have to submit Activity Certificate from a Chartered Accountant on an annual basis to the Central Office of FED. For annual remittance of profit Branch Office may submit required documents to an authorised dealer.
• Permission for setting up branch offices is granted by the Reserve Bank of India. RBI considers the track record of the Applicant Company, existing trade relations with India and financial position of the company while scrutinising the application.
1. What are the forms in which business can be conducted by a foreign company in India?
• A foreign company planning to set up business operations in India has the following options :
• As an incorporated entity by incorporating a company under the Companies Act,1956 through
o Joint Ventures; or
o Wholly Owned Subsidiaries
• As an unincorporated entity through
o Liaison Office/Representative Office
o Project Office
o Branch Office
Such offices can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office of other place of business) Regulations, 2000.
2. How does a foreign company invest in India? What are the regulations pertaining to issue of shares by Indian companies to foreign collaborators/investors?
Automatic Route
• FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require prior approval of the Government :
o Activities/items that require an Industrial License;
o Proposals in which the foreign collaborator has an existing financial / technical collaboration in India in the ‘same’ field,
o Proposals for acquisition of shares in an existing Indian company in: Financial services sector and where Securities & Exchange Board of India (Substantial Acquisition of Shares and Takeovers ) Regulations, 1997 is attracted;
o All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.
• FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.
Government Route
• FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.
General permission of RBI under FEMA
• Indian companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.
3. Which are the sectors where FDI is not allowed in India, under the Automatic Route as well as Government Route?
FDI is prohibited under Government as well as Automatic Route for the following sectors:
i. Retail Trading
ii. Atomic Energy
iii. Lottery Business
iv. Gambling and Betting
v. Housing and Real Estate business
vi. Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea plantations)].
4. What should be done after investment is made under the Automatic Route or with Government approval?
• A two-stage reporting procedure has been introduced for this purpose.
• On receipt of money for investment:
o Within 30 days of receipt of money from the foreign investor, the Indian company will report to the Regional Office of RBI under whose jurisdiction its Registered Office is located, a report containing details such as:
o Name and address of the foreign investors
o Date of receipt of funds and their rupee equivalent
o Name and address of the authorised dealer through whom the funds have been received, and
o Details of the Government approval, if any;
• On issue of shares to foreign investor:
• Within 30 days from the date of issue of shares, a report in Form FC-GPR together with the following documents should be filed with the Regional Office of RBI:
• Certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that
o All the requirements of the Companies Act, 1956 have been complied with;
o Terms and conditions of the Government approval, if any, have been complied with;
o The company is eligible to issue shares under these Regulations; and
o The company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration;
• Certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.
5. What are the guidelines for transfer of existing shares from residents to non-residents or non-residents to residents?
Transfer from Non-Resident to Non-Resident:
A: Transfer by way of sale:
• A person resident outside India can freely transfer share/convertible debenture by way of sale to a person resident in India as under:
o Any person resident outside India, (not being a non-resident Indian or an overseas corporate body), can transfer by way of sale the shares/convertible debentures to any person resident outside India; subject to the condition that the acquirer or transferee does not have any previous venture or tie up in India in the same field or sector.
o A non-resident Indian (NRI) may transfer by way of sale, the shares/convertible debentures held by him to another NRI only
o Any person resident outside India may sell share/convertible debenture acquired in accordance with FEMA Regulations, on a recognized Stock Exchange in India through a registered broker.
o A non-resident Indian or Overseas Corporate Body can transfer by way of sale, shares only to a non-resident Indian.
B: Transfer by way of Gift:
• A person resident outside India can freely transfer share/convertible debenture by way of gift to a person resident in India as under:
o Any person resident outside India, (not being a non-resident Indian or an overseas corporate body), can transfer by way of gift the shares/convertible debentures to any person resident outside India; subject to the condition that the acquirer or transferee does not have any previous venture or tie up in India in the same field or sector.
o A non-resident Indian (NRI) may transfer by way of gift, the shares/convertible debentures held by him to another NRI only
o Any person resident outside India may transfer share/convertible debenture to a person resident in India by way of gift;
Transfer from Resident to Non-Resident:
A: Transfer by way of sale—General Permission under Regulation 10of Notification No. FEMA 20/2000-RB dated May 3, 2000.
• A person resident in India may transfer to a person resident outside India any share/convertible debenture of an Indian Company whose activities fall under the Automatic Route for FDI subject to the Sectoral Limits, shall transfer such shares/debentures by way of sale subject to the following:
• Indian Company whose shares or convertible debentures are proposed to be transferred shall not be engaged in rendering any financial service; (financial services means service rendered by banking and non-banking companies regulated by the Reserve Bank, insurance, companies regulated by Insurance Regulatory and Development Authority (IRDA) and other companies regulated by any other financial regulator as the case may be).
• The transfer shall not fall within the purview of the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997; and
• The concerned parties shall adhere to pricing guidelines, documentation and reporting requirements for such transfers as may be specified by Reserve Bank, from time to time.
B: Transfer by way of gift:
• A person resident in India can transfer shares to a person resident outside India in the following ways:
• A person resident in India who proposes to transfer to a person resident outside India [other than erstwhile OCBs] any security, by way of gift, shall make an application to the Central Office of Foreign Exchange Department, Reserve Bank furnishing the following information, namely :
• Name and address of the transferor and the proposed transferee
• Relationship between the transferor and the proposed transferee
• Reasons for making the gift;
6. What if the transfer from resident to non-resident does not fall under the above facility?
• In case the transfer does not fit into any of the above, either the transferor (resident) or the transferee (non-resident) can make an application for RBI’s permission for the transfer.
• A copy of FIPB approval.
• Consent letter from transferor and transferee clearly indicating the number of shares, name of Investee Company and the price at which the transfer is proposed to be effected.
• The present/post transfer shareholding pattern of the Indian investee company showing the equity participation by residents and non-residents category-wise.
• Copies of RBI approvals/acknowledged copies of FC-GPR evidencing the existing holdings of the non-residents.
• If the sellers/transferors are NRIs / OCBs, the copies of RBI approvals evidencing the shares held by them on repatriation / non-repatriation basis.
• Open Offer document filed with SEBI if the acquisition of shares by non-resident is under SEBI Takeover Regulations.
• Fair Valuation Certificate from Chartered Accountant indicating the value of shares as per the following guideline:
• In the case of unlisted shares the fair value is worked out as per the erstwhile Controller of Capital Issue/s.
• For listed shares, the price worked out is not less than the higher of average weekly high and low quotations for 6 months and average of daily high and low quotation or two weeks preceding 30 days prior to the date of making application to FIPB.
7. Are the investments and profits earned in India repatriable?
• All foreign investments are freely repatriable except for the cases where NRIs choose to invest specifically under non-repatriable schemes. Dividends declared on foreign investments can be remitted freely through an Authorised Dealer.
8. What are the guidelines on issue and valuation of shares in case of existing companies?
• Allotment of shares on preferential basis shall be as per the requirements of the Companies Act, 1956, which will require special resolution in case of a public limited company.
• In case of listed companies, valuation shall be as per the RBI/SEBI guidelines as follows:
The issue price shall be either at:
(a) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date or
(b) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the two weeks preceding the relevant date.
• In case of unlisted companies, valuation shall be done in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.
9. What are the regulations pertaining to issue of ADRs/GDRs by Indian companies?
• Indian companies are allowed to raise capital in the international market through the issue of ADRs/GDRs. They can issue ADRs/GDRs without obtaining prior approval from RBI if it is eligible to issue ADRs/GDRs in terms of the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and subsequent guidelines issued by Ministry of Finance, Government of India.
• After the issue of ADRs/GDRs, the company has to file a return in the proforma given in Annexure `C' to the RBI Notification No.FEMA.20/ 2000-RB dated May 3, 2000. The company is also required to file a quarterly return in a form specified in Annexure `D' of the same regulations.
• There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets.
10. What is meant by Sponsored ADR & Two-way fungibility Scheme of ADR/GDR?
• Sponsored ADR/GDR: An Indian company may sponsor an issue of ADR/GDR with an overseas depository against shares held by its shareholders at a price to be determined by the Lead Manager. The Operative guidelines for the same have been issued vide A.P.(DIR Series) circular No.52 dated November 23, 2002.
• Two-way fungibility Scheme: Under the limited two-way fungibility Scheme, a registered broker in India can purchase shares of an Indian company on behalf of a person resident outside India for the purpose of converting the shares so purchased into ADRs/GDRs. The operative guidelines for the same have been issued vide A.P.(DIR Series) Circular No.21 dated February 13, 2002.
• The Scheme provides for purchase and re-conversion of only as many shares into ADRs/GDRs which are equal to or less than the number of shares emerging on surrender of ADRs/GDRs which have been actually sold in the market. Thus, it is only a limited two-way fungibility wherein the headroom available for fresh purchase of shares from domestic market is restricted to the number of converted shares sold in the domestic market by non-resident investors. So long ADRs/GDRs are quoted at discounts to the value of shares in domestic market, an investor will gain by converting the ADRs/GDRs into underlying shares and selling them in the domestic market. In case of ADRs/GDRs being quoted at premium, there will be demand for reverse fungibility, i.e. purchase of shares in domestic market for re-conversion into ADRs/GDRs. The scheme is operationalised through the Custodians of securities and stockbrokers under SEBI.
11. Can Indian companies issue Foreign Currency Convertible Bonds (FCCBs)?
• FCCBs can be issued by Indian companies in the overseas market in accordance with Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.
• The FCCB issue needs to conform to External Commercial Borrowing guidelines, issued by RBI vide Notification No. FEMA 3/2000-RB dated May 3, 2000 as amended from time to time.
12. Can I invest through Preference Shares? What are the regulations applicable in case of such investments?
• Foreign investment through preference shares is treated as foreign direct investment. Proposals are processed either through the automatic route or FIPB as the case may be. Foreign investment in preference share is considered as part of share capital and fall outside the External Commercial Borrowing (ECB) guidelines/cap. Preference shares to be treated as foreign direct equity for purpose of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. If the preference shares are structured without such conversion option, they would fall outside the foreign direct equity cap.
13. Can shares be issued against Lumpsum Fee, Royalty and ECB?
• Issue of equity shares against lump sum fee, royalty and external commercial borrowings (ECBs) in convertible foreign currency are permitted subject to meeting all applicable tax liabilities and sector specific guidelines.
14. Other than issue of shares under Automatic Route/Government Route, what other general permissions are available under RBI Notification No.FEMA 20 dt.3-5-2000?
• Issue of shares under ESOP by Indian companies to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India directly or through a Trust up to 5% of the paid up capital of the company
• Issue and acquisition of shares by non-residents after merger or de-merger or amalgamation of Indian companies
• Issue shares or preference shares or convertible debentures on right basis by an Indian company to a person resident outside India.
15. Can I invest in unlisted shares issued by a company in India?
Yes. As per the regulations/guidelines issued by RBI/Government of India, investment can be made in unlisted shares of Indian companies.
16. Can a foreigner set up a partnership/proprietorship concern in India?
No. Only NRIs/PIOs are allowed to set up partnership/proprietorship concern in India. Even for NRIs/PIOs investment is allowed only on non-repatriation basis.
17. Can I invest in Right shares issued by an Indian company at a discount?
There are no restrictions from RBI for investment in Right shares at a discount, provided the rights shares so issued are being offered at the same price to residents and non-residents.
II - Foreign Technical Collaboration
1. What are the payment parameters for foreign technology transfer under the Automatic Route of RBI? How should royalty be calculated?
• Payment for foreign technology collaboration by Indian companies are allowed under the automatic route subject to the following limits :
• Lump sum payments not exceeding US$2 million;
• Royalty payable being limited to 5 per cent for domestic sales and 8 per cent for exports, without any restriction on the duration of the royalty payments.
• The royalty limits are net of taxes and are calculated according to standard conditions.
• The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc.
• RBI has delegated the powers to ADs to make payment of royalty under such agreements. The requirement of registration of the agreement with the Regional Office of RBI has been done away with.
2. What should be done, if Automatic Route of RBI for technology transfer is not available?
• Proposals which do not satisfy the parameters prescribed for automatic route of RBI, require clearance from Ministry of Commerce, Department of Industrial Policy and Promotion, Government of India.
III - Portfolio Investment
1. What are the regulations regarding Portfolio Investments by Foreign Institutional Investors (FIIs)?
• Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000. FIIs include Asset Management Companies, Pension Funds, Mutual Funds, Investment Trusts as Nominee Companies, Incorporated/ Institutional Portfolio Managers or their Power of Attorney holders, University Funds, Endowment Foundations, Charitable Trusts and Charitable Societies.
• SEBI acts as the nodal point in the registration of FIIS. RBI has granted General Permission to SEBI Registered FIIs invest in India under the Portfolio Investment Scheme.
• All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body.
2. What are the regulations for Foreign Venture Capital Investment?
• A Foreign Venture Capital Investor registered with SEBI may make investment in a Venture Capital Fund for an Indian Venture Capital Undertaking, in the manner and subject to the terms and conditions specified in Schedule 6 of RBI Notification No.FEMA 20/2000-RB dated 3-5-2000 as amended from time to time.
3. What are the regulations regarding Portfolio Investments by NRIs/PIOs
• Non Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply to a designated branch of a Bank which deals in Portfolio Investment. All sale/purchase transaction is to be routed through the designated branch.
• An NRI or a PIO can purchase shares up to 5% of the paid up capital of an Indian company. All NRIs/PIOs taken together cannot purchase more than 10% of the paid up value of the company. (This limit can be increased by the Indian company to 24% by passing a General Body resolution).
• The sale proceeds of the repatriable investments can be credited to the NRE/NRO etc. accounts of the NRI/PIO whereas the sale proceeds of non-repatriable investment can be credited only to NRO accounts.
• The sale of shares will be subject to payment of applicable taxes.
IV: Procedure for opening Branch/Project/Liaison Office
1. How can foreign companies open Liaison/Project/Branch office in India?
• Foreign company can set up Liaison/Branch Offices in India after obtaining approval from RBI. RBI has given general permission to foreign companies to establish Project Offices in India subject to certain conditions.
2. What is the procedure to be followed for obtaining Reserve Bank's approval for opening Liaison Office/Representative Office?
• A Liaison office can carry on only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office abroad. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers.
• The companies desirous of opening a liaison office in India may make an application in form FNC-1 along with the documents mentioned therein to Foreign Investment Division, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai. This form is available in www.rbi.org.in.
• Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Regional Office in whose jurisdiction the office is set up. Liaison/representative offices have to file an Activity Certificate on annual basis from a Chartered Accountant to the concerned Regional Office of the RBI, stating that the Liaison Office has undertaken only those activities permitted by RBI.
3. What is the procedure for setting up Project Office?
• Foreign companies are granted projects in India by Indian entities. General Permission has been granted by RBI vide Notification No. FEMA 95/2003-RB dated July 2, 2003 to foreign companies to open Project Office/s in India provided they have secured from an Indian company, a contract to execute a project in India, and
• the project is funded directly by inward remittance from abroad; or
• the project is funded by a bilateral or multilateral International Financing Agency; or
• the project has been cleared by an appropriate authority; or
• a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
• However, if the above criteria are not met, or if the parent entity is established in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, such applications have to be forwarded to Central Office of the Foreign Exchange Department of the Reserve Bank of India at Mumbai for approval.
4. What is the procedure for setting up Branch office?
• Reserve Bank permits companies engaged in manufacturing and trading activities abroad to set up Branch Offices in India for the following purposes:
• To represent the parent company/other foreign companies in various matters in India e.g. acting as buying/selling agents in India
• To conduct research work in the area in which the parent company is engaged
• To undertake export and import activities and trading on wholesale basis
• To promote possible technical and financial collaborations between the Indian companies and overseas companies.
• Rendering professional or consultancy services
• Rendering services in Information technology and development of software in India
• Rendering technical support to the products supplied by the parent/Group companies.
• A branch office is not allowed to carry out manufacturing, processing activities directly/indirectly. A Branch Office is also not allowed to undertake Retail Trading activities of any nature in India. Branch Offices have to submit Activity Certificate from a Chartered Accountant on an annual basis to the Central Office of FED. For annual remittance of profit Branch Office may submit required documents to an authorised dealer.
• Permission for setting up branch offices is granted by the Reserve Bank of India. RBI considers the track record of the Applicant Company, existing trade relations with India and financial position of the company while scrutinising the application.
Investing in India
The first and second-generation reforms have created a conducive environment for foreign investments in India. Market oriented policies are boosting economic activity, all round development and GDP growth rate. Government procedures are constantly being simplified and paper work minimised. As the Indian economy gears for competition in the international market, overseas investors clearly see the potential for attractive returns from investments in India, which is also evident from the many FDI success stories already achieved.
Policy Framework
Industrial Policy
The Indian Government’s market liberalisation and economic policy reforms programme aims at rapid and substantial economic growth and integration of the country’s economy with the global economy. The industrial policy reforms have eliminated the industrial licensing requirements except for certain select sectors, removed restrictions on investment and expansion and facilitated easy access to foreign technology and direct investment.
The Industrial Policy Resolution of 1956 and the Statement on Industrial Policy of 1991 provide the basic framework for the Government’s overall industrial policy. The procedures for obtaining government approvals have been progressively simplified and quickened. Normal FDI proposals are cleared within a month. Areas earlier reserved for public sector have mostly been opened for private sector participation also.
Industrial Licensing
All industrial undertakings are exempt from obtaining an industrial license to manufacture, except for the following:
• Industries reserved for the Public Sector;
• Industries retained under compulsory licensing;
• Items of manufacture reserved for the small scale sector; and
• Any proposal attracting locational restriction.
Industrial undertakings exempt from obtaining an industrial license are required to file an Industrial Entrepreneur Memoranda (IEM) with the Secretariat of Industrial Assistance (SIA), Department of Industrial Policy and Promotion.
Foreign Investment Policy
Foreign investment is permitted in virtually every sector, except those of strategic concern such as defence (opened up recently to a limited extent) and rail transport. Foreign companies are permitted to set up 100 per cent subsidiaries in India. No prior approval from the exchange control authorities (RBI) is required, except for certain specified activities. The investment should be in accordance with the prescribed guidelines and the details of the investment should be filed with the authorities within the prescribed time limit. This procedure is applicable only for fresh investments directly in Indian companies and not for purchase of shares from the existing shareholders. This investment procedure is commonly known as the "automatic approval route".
Foreign Investment Promotion Board (FIPB) of the Government of India is constituted mainly to promote inflows of FDI into the country, as also to provide appropriate institutional arrangements, transparent procedures and guidelines for investment promotion and to consider and approve/recommend proposals for foreign investment.
Secretariat for Industrial Assistance (SIA) has been set up by the Government of India in the Department of Industrial Policy and Promotion in the Ministry of Commerce & Industry to provide a single window service for entrepreneurial assistance, investor facilitation, receiving and processing all applications which require Government approval, conveying Government decisions on applications filed, assisting entrepreneurs and investors in setting up projects (including liaison with other organisations and State Governments) and in monitoring implementation of projects. It also notifies all Government Policy decisions relating to investment and technology, and collects and publishes monthly production data for select industry groups. The SIA website (http://siadipp.nic.in) provides for chat time during fixed hours when all questions are answered. During other times, investors are encouraged to write e-mails and the Secretariat assures a reply within 24 hours.
In order to give further impetus to facilitation and monitoring of investment, as well as for better coordination of infrastructural requirements for industry, a new cell called the "Investment Promotion and Infrastructure Development Cell" has been created.
Regulation and procedures
Procedures for obtaining government approvals have been considerably simplified. Approval procedures have been laid out for undertakings that are
• exempt from industrial licensing requirements (including existing units undertaking substantial expansion);
• subject to compulsory industrial licensing; and
• small scale units exceeding the prescribed limit of investment in plant and machinery and continuing to manufacture small scale reserved item(s) or, in cases where exemption from industrial licensing granted for any item, is withdrawn.
Automatic approval route and FIPB route
• Foreign investment into India is governed by the Foreign Direct Investment (FDI) policy of the Government of India and the Foreign Exchange Management Act, 1999 (FEMA). With increasing liberalisation of the Indian economy, generally, there is no need to obtain prior approval of the Government of India for a fresh investment to be made into an Indian company (only procedural filings have to be made with the Reserve Bank of India (RBI), the Indian central bank). In certain cases, however, and also for investment in certain specified sectors, prior approval is required. Further, investment in certain specified sectors, is subject to foreign equity caps.
New ventures
All items/activities for FDI up to 100% by Non-Resident Indians (NRI)/Overseas Corporate Bodies (OCB) fall under the Automatic Route except those that expressly require a prior Government approval.
An investor may, if so prefered, choose to make an application to the FIPB and not avail of the automatic route.
Investment in Public Sector Units as also for units located in Export Oriented Units (EOU)/Export Processing Zones (EPZ)/Special Economic Zones (SEZ)/Electronic Hardware Technology Parks (EHTP)/ Software Technology Parks (STP) would also qualify for the Automatic Route. Investment under the Automatic Route is governed by the notified sectoral policy and equity caps and RBI ensures compliance of the same.
Any change in sectoral policy/sectoral equity cap is notified by the SIA in the Department of Industrial Policy & Promotion.
Existing Companies
Besides new companies, automatic route for FDI/NRI/OCB investment is also available to the existing companies to induct foreign equity. For existing companies with an expansion programme, the additional requirements are that:
• the increase in equity level must result from the expansion of the equity base of the existing company without acquisition of existing shares by NRI/OCB/foreign investors;
• the money to be remitted should be in the sector(s) under the automatic route.
Otherwise the proposal would need Government approval through the FIPB. For this, the proposal must be supported by a Board Resolution of the existing Indian company.
For existing companies without an expansion programme, the additional requirements for eligibility for automatic route are that:
• they are engaged in the industries under automatic route (including additional activities covered under the automatic route regardless of whether the original activities were undertaken with Government approval or by accessing the automatic route);
• the increase in equity level must be from expansion of the equity base; and
• the foreign equity must be in foreign currency.
Equity participation by international financial institutions in domestic companies is permitted through automatic route subject to Securities Exchange Board of India (SEBI) /RBI regulations and sector specific caps on FDI.
Indian companies are required to notify the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors. This facility is available to NRI/OCB investment also.
Government approval (FIPB route)
For the following categories, Government approval for FDI/NRI/OCB through the FIPB shall be necessary:
• All proposals requiring an Industrial License.
• All proposals in which the foreign collaborator has a previous venture/tie-up in India in the same or allied field. However, this condition is not applicable for proposals in the Information Technology industry.
• All proposals relating to acquisition of shares in an existing Indian company.
• All proposals falling outside notified sectoral policy/caps or under sectors for which FDI is not permitted and/or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route.
Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors. These Companies are required to notify the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors.
Foreign Investment in the Small Scale Sector
Small Scale Undertakings (SSUs) are defined as units having investments in fixed assets in plant and machinery of not more than INR 10 million. Under the small scale industrial policy, equity holding by other units including foreign equity in a small scale undertaking is permissible up to 24 per cent. However there is no bar on higher equity holding for foreign investment if the unit is willing to give up its small scale status. In case of foreign investment beyond 24 per cent in a small scale unit which manufactures small scale reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent must be obtained.
A SSU manufacturing small scale reserved item(s), on exceeding the small-scale investment ceiling in plant and machinery by virtue of natural growth, needs to apply for and obtain a Carry-on-Business (COB) License. No export obligation is fixed on the capacity for which the COB license is granted. However, if the unit expands its capacity for the small scale reserved item(s) further, it needs to apply for and obtain a separate industrial license.
Foreign Investment Policy for trading activities
Foreign investment for trading is permissible under the automatic route up to 51% foreign equity, and beyond this by the Government through FIPB. For approval through the automatic route, the requirement would be that it is primarily export activities and the undertaking concerned is an export house/trading house/ super trading house/star trading house registered under the provisions of the Export and Import policy in force. However, under the Government route, 100% FDI is permitted in case of trading activities carried out in certain specified sectors such as hi-tech medical and diagnostic items, items for social sector, exports, bulk imports, to name a few.
FDI upto 100% is also permitted for E-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world.
Other modes of Foreign Direct Investments
Global Depository Receipts (GDR)/American Deposit Receipts (ADR)/Foreign Currency Convertible Bonds (FCCB)
Indian companies are allowed to raise equity capital in the international market through the issue of GDRs/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking Government’s approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years.
There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. A company engaged in the manufacture of items covered under Automatic Route whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the prescribed percentage for automatic approval, or which is implementing a project not contained in project falling under Government Approval route, would need to obtain prior Government approval. Foreign investment through preference shares is also treated as foreign direct investment.
State Level Project Implementation
India has evolved a comprehensive organisational structure at the state level for industrial development. In most states the organisations present to assist and promote industries are:
• Investment Promotion Agencies (IPA)
• State Industrial Development Corporation (SIDC)
• Small Scale Industries Development Corporation (SSIDC)
• State Financial Corporation (SFC)
• District Industries Centre (DIC)
• Single Window Service and Escort Service
Several state governments have set up single window services (SWS) and investor escort services (ES). SWS aim at providing the investors a single point of contact to meet all regulatory requirements and get the required approvals. ES is targeted at large and medium sized projects and one individual is assigned from one of the state government agencies to the investor. ES seeks to help the investor in information collection, identification of project sites, arranging feasibility studies, clearance of the project by financial institutions, etc.
Investment Incentives
The state finances a part of the fixed capital cost of the project. Various states have designated areas as ‘A’, ‘B’ and ‘C’ according to their levels of development. The level of incentive provided by a state varies and is generally larger for investment in backward areas. Further, the terms and ceiling of the incentives vary across states, depending on the nature of industry that the state is trying to promote.
Power Tariff Incentives
Power tariff incentives are extended by state governments in different ways, such as exemption from the payment of electricity duty, freeze on the tariff charged for new units for a few years after commencement of production, assurance of uninterrupted electricity supply, concessional rates of billing subject to certain conditions and fiscal incentives for purchase and installation of captive power generation sets.
The actual incentives given vary across states and from industry to industry and are also dependent upon the area in which this unit is set up. Some states specify a list of industries, which do not qualify for some of these incentives.
Other Incentives
Some states extend other incentives to small-scale units or priority industries as defined in their industrial policy statements. Such incentives include concessional loans granted by State Financial Corporations, price preference on goods made by Small Scale Industries (SSIs) in purchases made by government and semi government organisations, exemption from the payment of octroi (entry tax) for a certain specified period, preferential allotment of land and sheds in industrial areas to SSIs and grant of interest free loans in lieu of deferred sales tax.
A few states have taken the initiative to streamline the investment approval process by introducing common application forms for various approvals. A ‘green channel facility’, has been introduced in some states, where applications required for clearances will be received and processed through various institutional offices on a time bound basis.
Policy framework
Most FDI activities permitted for foreign direct investment are placed on the automatic route. Under this the applicant company has only to notify the Reserve bank of India within 30 days of inward remittance of funds and again within 30 days of issuing shares to the non-resident investor. Some salient features of the FDI policy are:
• Original investment as also the returns on investment are fully repatriable
• Payment of fee and royalty to foreign technology provider is permitted including that by a wholly owned subsidiary to its off-shore parent company
• Payment of royalty and use of trade marks and brand name without transfer of technology is also permitted
• FDI is not permitted in the areas of agriculture and plantations other than the tea sector, real estate business other than development of integrated townships and settlements, retail trading, atomic energy, lottery business, gambling and betting sectors.
Foreign Investment Implementation Authority (FIIA)
The Government of India has set up the Foreign Investment implementation Authority (FIIA) to facilitate the process of translating FDI approvals into implementation. The agency provides services to foreign investors to help obtain necessary approvals, sort out operational problems and seek intervention of various government agencies to find solution to their problems.
The functions of the FIIA are as under:
• Expediting various approvals/permissions;
• Fostering partnership between investors and government agencies concerned;
• Resolve difference in perceptions;
• Enhance overall credibility;
• Review policy framework; and
• Liaise with the Ministry of External Affairs for keeping India’s diplomatic missions abroad informed about translation of FDI approvals into actual investment and implementation.
The FIIA acts as a single point interface between the investor and Government agencies including Administrative Ministries/State Governments/Regulatory Authorities/Tax Authorities/Company Law Board, etc.
Investment Promotion and Infrastructure Development (IP & ID) Cell
The functions of the Cell include: -
• Dissemination of information about investment climate in India;
• Investment facilitation;
• Developing and distributing multimedia presentation material and other publications;
• Organising Symposiums, Seminars, etc. on investment promotion;
• Liaison with State Governments regarding investment promotion;
• Documentation of single window systems followed by various States;
• Match-making service for investment promotion;
• Coordination of progress of infrastructure sectors approved for investment/technology transfer, power, telecom, ports, roads, etc.;
• Facilitating Industrial Model Town Projects, and Industrial Parks, etc.;
• Promotion of Private Investment including Foreign Investment in the infrastructure sector;
• Compilation of sectoral policies, strategies and guidelines of infrastructure sectors, both in India and abroad; and
• Facilitating preparation of a perspective plan on infrastructure requirements for industry.
Entry strategy into India
A business presence in India may be established by a foreign entity through:
Company
A company may be incorporated, inter alia, using the following modes:
• Incorporating an Indian company with 100% foreign equity, operating as a wholly owned subsidiary;
• Incorporating a Joint Venture Company (JVC) with an Indian partner and/or with the general public and operating as a listed company; or
• Incorporating a JVC with an Indian partner and operating as an unlisted company.
Branch Office
A branch would mean an establishment carrying on substantially the same activity as its Head Office. Foreign companies intending to open a Branch Office (BO) in India need to obtain prior permission of RBI which would encompass even approval to the scope of activities that are intended to be carried out in India. As per the guidelines laid down by the RBI, the BO in India is allowed to carry on only the following activities:
• Export / Import of goods;
• Rendering professional or consultancy services;
• Carrying out research work, in which the parent company is engaged;
• Promoting technical or financial collaboration between Indian companies and parent or overseas group company;
• Representing the parent company in India and acting as buying / selling agent in India;
• Rendering services in Information Technology and development of software in India;
• Rendering technical support to the products supplied by parent / group companies;
• Foreign airline / shipping company
Liaison Office
A Liaison Office (LO) is in the nature of a representative office set up primarily to explore and understand the business and investment climate. A LO is not permitted to undertake any commercial / trading / industrial activity, directly or indirectly, and is required to maintain itself out of inward remittances received from abroad through normal banking channels. The LO is permitted to undertake only the following activities:
• Representing in India the parent Company / group Company;
• Promoting export/ import from/ to India
• Promoting technical / financial collaborations between the parent / group companies and companies in India;
• Acting as a communication channel between the parent Company and Indian companies.
Any company intending to open a LO in India is required to obtain prior approval from the RBI, the apex foreign exchange management authority in India. Approval is usually granted for three years and can be renewed on expiry thereof.
Project Office
Foreign companies can establish Project Offices (POs) in India specifically for the purpose of execution of specific projects. A PO is similar to a branch office opened for the limited purpose of executing a particular contract. As POs are opened for undertaking a specific activity they cannot perform any other function or undertake any other activity. Generally, companies engaged in turnkey projects or installation projects set up POs. All expenses of POs must be met through inward foreign currency remittances if the rupee component of the contract, if any, is not sufficient to meet the said expenses. RBI approval is required to open a PO.
Important sectors where FDI up to 100 per cent is permitted
Automatic route
Most manufacturing activities
Non-banking financial services
Infrastructure such as roads and highways, ports and harbours, electricity generation transmission and distribution, mass rapid transit systems, LNG projects, etc.
Drugs and pharmaceuticals that do not attract compulsory licensing or involve use of recombinant DNA technology
Hotels and tourism
Food processing
Electronic hardware
Software Development
Film industry
Advertising
Hospitals
Oil refineries
Pollution control and management Exploration and mining of minerals other than diamonds and precious stones
Management consultancy
Venture capital funds/ companies
Setting up/ development of industrial park/ industrial model town/ SEZ
Government route
Airports (beyond 74%)
B2B e-commerce
Trading companies within notified policy
Drugs and pharmaceuticals not falling under the automatic route
Integrated township development
ISPs without gateways, electronic mail and voice mail beyond 49 per cent
Courier services other than distribution of letters
TV software production for Broadcasting
Sectors which attract ceiling on foreign ownership
Sector
Telecom
Coal and lignite
Mining
Private sector banking
Insurance
Domestic airlines
Petroleum
(other than refining)
Refining
Investing companies/
Services sector
Atomic minerals
Defence industry sector
Broadcasting
Setting up hardware
facilities such as uplinking,
HUB, etc.
Cable network
Direct-to-Home
Terrestrial Broadcasting FM
Small scale industries (SSI) sector
Satellites
Tea sector
Print Media
FDI cap (in per cent)
49
74
49
50
74
74
49
26
40
60
51
51
74
26
49
74
26
49
49
20
20 (portfolio investment)
24
74
100*
74**
26**
Activities
Basic, cellular, value-added services, global mobile personal communications by satellite I
Internet service providers with gateways, radio-paging, end-to-end bandwidth
Public sector undertakings
Other than public sector undertakings
For exploration and mining of coal or lignite for captive consumption
Exploration and mining of diamonds and precious stones
Private banking sector
Insurance sector (subject to obtaining license from IRDA)
No direct or indirect equity participation by foreign airlines
In un-incorporated joint venture
In incorporated joint venture
Petroleum products and pipeline sector
In infrastructure related marketing and marketing of petroleum products
For public sector undertakings
Investment through such vehicle is treated as resident equity
a. mining and mineral separation
b. value addition
c. integrated activities
For arms and ammunition and allied items of defence equipment, defence aircraft and warships
Private companies incorporated in India with permissible FII/ NRI/ OCB/ PIO equity within the limits to set uplinking hubs (teleports) for leasing or hiring out their facilities to broadcasters.
Footnote: As regards satellite broadcasting, all TV channels irrespective of the ownership or management control to uplink from India provided they undertake to comply with the broadcast (programme and advertising) code.
Foreign investment allowed up to 49 per cent (inclusive of both FDI and portfolio investment) of paid up share capital. Companies with minimum 51 per cent of paid up share capital held by Indian citizens are eligible under the Cable Television Network Rules (1994) to provide cable TV services.
Companies with a maximum of foreign equity including FDI/ NRI/ OCB/ FII of 49 per cent would be eligible to obtain DTH License. Within the foreign equity, the FDI component not to exceed 20 per cent
The licensee shall be a company registered in India under the Companies Act. All share holding should be held by Indians except for the limited portfolio investment by FII/ NRI/ PIO/ OCB subject to such ceiling as may be decided from time to time. Company shall have no direct investment by foreign entities, NRIs and OCBs. As of now the foreign investment is permissible to the extent of 20 per cent portfolio investment. No private operator is allowed in terrestrial TV transmission.
If FDI in an SSI unit exceeds 24 per cent of the paid up capital, the company looses its SSI status. Further, if the item/s of manufacture is/ are reserved for the SSI sector, the company has to obtain an industrial license and undertake a minimum export obligation of 50 per cent of annual production on such products.
Establishment and operation of satellites.
FDI permitted in tea sector, including tea plantations requiring prior government approval
*subject to compulsory divestment of 26 per cent equity of the company in favour of an Indian partner/ Indian public within a period of five years.
In Indian entities publishing scientific/ technical and speciality magazines/ periodicals/ Journals
In Indian entities publishing newspapers and periodicals
**subject to guidelines notified by ministry of information and broadcasting periodically.
Foreign technology agreements
The RBI through the automatic route, within the following prescribed monetary limits, permits foreign Technology Agreements in all industries:
• Royalty up to 5 per cent on domestic sale and 8 per cent on exports is allowed by wholly owned subsidiary to offshore parent company.
• Lump sum payment not exceeding US$ 2 million
• Royalty not exceeding 2 per cent on exports and 1 per cent on domestic sale for use of the trade marks/ brand names
All other proposals for foreign technology agreement, not meeting any or all of the parameters for automatic approval, and all cases of extension of existing foreign technical collaboration agreement, are considered for approval, on merits, by the Government. Application in respect of such proposals should be submitted in the prescribed form to the SIA Department of Industrial Policy & Promotion, Ministry of Industry.
Facilitating alliances
While a number of foreign companies have established operations in the country on their own, others have successfully teamed up with local companies and leveraged their presence in the country. Many organisations help foreign organisations forge alliances with local companies. These include the Confederation of Indian Industries (CII), Federation of Indian Chambers of Commerce and Industry (FICCI) and consulting firms that in addition assist in chalking out entry strategies, undertaking feasibility studies, etc.
Indian embassies and missions abroad closely assist foreign investors in their initiatives to participate in various projects in India. ‘Escort services’ are provided to the foreign investor for realisation of the project.
Further information can be obtained at www.bisnetindia.com and www.indianindustry.com
Also visit dipp.nic.in
Policy Framework
Industrial Policy
The Indian Government’s market liberalisation and economic policy reforms programme aims at rapid and substantial economic growth and integration of the country’s economy with the global economy. The industrial policy reforms have eliminated the industrial licensing requirements except for certain select sectors, removed restrictions on investment and expansion and facilitated easy access to foreign technology and direct investment.
The Industrial Policy Resolution of 1956 and the Statement on Industrial Policy of 1991 provide the basic framework for the Government’s overall industrial policy. The procedures for obtaining government approvals have been progressively simplified and quickened. Normal FDI proposals are cleared within a month. Areas earlier reserved for public sector have mostly been opened for private sector participation also.
Industrial Licensing
All industrial undertakings are exempt from obtaining an industrial license to manufacture, except for the following:
• Industries reserved for the Public Sector;
• Industries retained under compulsory licensing;
• Items of manufacture reserved for the small scale sector; and
• Any proposal attracting locational restriction.
Industrial undertakings exempt from obtaining an industrial license are required to file an Industrial Entrepreneur Memoranda (IEM) with the Secretariat of Industrial Assistance (SIA), Department of Industrial Policy and Promotion.
Foreign Investment Policy
Foreign investment is permitted in virtually every sector, except those of strategic concern such as defence (opened up recently to a limited extent) and rail transport. Foreign companies are permitted to set up 100 per cent subsidiaries in India. No prior approval from the exchange control authorities (RBI) is required, except for certain specified activities. The investment should be in accordance with the prescribed guidelines and the details of the investment should be filed with the authorities within the prescribed time limit. This procedure is applicable only for fresh investments directly in Indian companies and not for purchase of shares from the existing shareholders. This investment procedure is commonly known as the "automatic approval route".
Foreign Investment Promotion Board (FIPB) of the Government of India is constituted mainly to promote inflows of FDI into the country, as also to provide appropriate institutional arrangements, transparent procedures and guidelines for investment promotion and to consider and approve/recommend proposals for foreign investment.
Secretariat for Industrial Assistance (SIA) has been set up by the Government of India in the Department of Industrial Policy and Promotion in the Ministry of Commerce & Industry to provide a single window service for entrepreneurial assistance, investor facilitation, receiving and processing all applications which require Government approval, conveying Government decisions on applications filed, assisting entrepreneurs and investors in setting up projects (including liaison with other organisations and State Governments) and in monitoring implementation of projects. It also notifies all Government Policy decisions relating to investment and technology, and collects and publishes monthly production data for select industry groups. The SIA website (http://siadipp.nic.in) provides for chat time during fixed hours when all questions are answered. During other times, investors are encouraged to write e-mails and the Secretariat assures a reply within 24 hours.
In order to give further impetus to facilitation and monitoring of investment, as well as for better coordination of infrastructural requirements for industry, a new cell called the "Investment Promotion and Infrastructure Development Cell" has been created.
Regulation and procedures
Procedures for obtaining government approvals have been considerably simplified. Approval procedures have been laid out for undertakings that are
• exempt from industrial licensing requirements (including existing units undertaking substantial expansion);
• subject to compulsory industrial licensing; and
• small scale units exceeding the prescribed limit of investment in plant and machinery and continuing to manufacture small scale reserved item(s) or, in cases where exemption from industrial licensing granted for any item, is withdrawn.
Automatic approval route and FIPB route
• Foreign investment into India is governed by the Foreign Direct Investment (FDI) policy of the Government of India and the Foreign Exchange Management Act, 1999 (FEMA). With increasing liberalisation of the Indian economy, generally, there is no need to obtain prior approval of the Government of India for a fresh investment to be made into an Indian company (only procedural filings have to be made with the Reserve Bank of India (RBI), the Indian central bank). In certain cases, however, and also for investment in certain specified sectors, prior approval is required. Further, investment in certain specified sectors, is subject to foreign equity caps.
New ventures
All items/activities for FDI up to 100% by Non-Resident Indians (NRI)/Overseas Corporate Bodies (OCB) fall under the Automatic Route except those that expressly require a prior Government approval.
An investor may, if so prefered, choose to make an application to the FIPB and not avail of the automatic route.
Investment in Public Sector Units as also for units located in Export Oriented Units (EOU)/Export Processing Zones (EPZ)/Special Economic Zones (SEZ)/Electronic Hardware Technology Parks (EHTP)/ Software Technology Parks (STP) would also qualify for the Automatic Route. Investment under the Automatic Route is governed by the notified sectoral policy and equity caps and RBI ensures compliance of the same.
Any change in sectoral policy/sectoral equity cap is notified by the SIA in the Department of Industrial Policy & Promotion.
Existing Companies
Besides new companies, automatic route for FDI/NRI/OCB investment is also available to the existing companies to induct foreign equity. For existing companies with an expansion programme, the additional requirements are that:
• the increase in equity level must result from the expansion of the equity base of the existing company without acquisition of existing shares by NRI/OCB/foreign investors;
• the money to be remitted should be in the sector(s) under the automatic route.
Otherwise the proposal would need Government approval through the FIPB. For this, the proposal must be supported by a Board Resolution of the existing Indian company.
For existing companies without an expansion programme, the additional requirements for eligibility for automatic route are that:
• they are engaged in the industries under automatic route (including additional activities covered under the automatic route regardless of whether the original activities were undertaken with Government approval or by accessing the automatic route);
• the increase in equity level must be from expansion of the equity base; and
• the foreign equity must be in foreign currency.
Equity participation by international financial institutions in domestic companies is permitted through automatic route subject to Securities Exchange Board of India (SEBI) /RBI regulations and sector specific caps on FDI.
Indian companies are required to notify the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors. This facility is available to NRI/OCB investment also.
Government approval (FIPB route)
For the following categories, Government approval for FDI/NRI/OCB through the FIPB shall be necessary:
• All proposals requiring an Industrial License.
• All proposals in which the foreign collaborator has a previous venture/tie-up in India in the same or allied field. However, this condition is not applicable for proposals in the Information Technology industry.
• All proposals relating to acquisition of shares in an existing Indian company.
• All proposals falling outside notified sectoral policy/caps or under sectors for which FDI is not permitted and/or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route.
Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors. These Companies are required to notify the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors.
Foreign Investment in the Small Scale Sector
Small Scale Undertakings (SSUs) are defined as units having investments in fixed assets in plant and machinery of not more than INR 10 million. Under the small scale industrial policy, equity holding by other units including foreign equity in a small scale undertaking is permissible up to 24 per cent. However there is no bar on higher equity holding for foreign investment if the unit is willing to give up its small scale status. In case of foreign investment beyond 24 per cent in a small scale unit which manufactures small scale reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent must be obtained.
A SSU manufacturing small scale reserved item(s), on exceeding the small-scale investment ceiling in plant and machinery by virtue of natural growth, needs to apply for and obtain a Carry-on-Business (COB) License. No export obligation is fixed on the capacity for which the COB license is granted. However, if the unit expands its capacity for the small scale reserved item(s) further, it needs to apply for and obtain a separate industrial license.
Foreign Investment Policy for trading activities
Foreign investment for trading is permissible under the automatic route up to 51% foreign equity, and beyond this by the Government through FIPB. For approval through the automatic route, the requirement would be that it is primarily export activities and the undertaking concerned is an export house/trading house/ super trading house/star trading house registered under the provisions of the Export and Import policy in force. However, under the Government route, 100% FDI is permitted in case of trading activities carried out in certain specified sectors such as hi-tech medical and diagnostic items, items for social sector, exports, bulk imports, to name a few.
FDI upto 100% is also permitted for E-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world.
Other modes of Foreign Direct Investments
Global Depository Receipts (GDR)/American Deposit Receipts (ADR)/Foreign Currency Convertible Bonds (FCCB)
Indian companies are allowed to raise equity capital in the international market through the issue of GDRs/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking Government’s approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years.
There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. A company engaged in the manufacture of items covered under Automatic Route whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the prescribed percentage for automatic approval, or which is implementing a project not contained in project falling under Government Approval route, would need to obtain prior Government approval. Foreign investment through preference shares is also treated as foreign direct investment.
State Level Project Implementation
India has evolved a comprehensive organisational structure at the state level for industrial development. In most states the organisations present to assist and promote industries are:
• Investment Promotion Agencies (IPA)
• State Industrial Development Corporation (SIDC)
• Small Scale Industries Development Corporation (SSIDC)
• State Financial Corporation (SFC)
• District Industries Centre (DIC)
• Single Window Service and Escort Service
Several state governments have set up single window services (SWS) and investor escort services (ES). SWS aim at providing the investors a single point of contact to meet all regulatory requirements and get the required approvals. ES is targeted at large and medium sized projects and one individual is assigned from one of the state government agencies to the investor. ES seeks to help the investor in information collection, identification of project sites, arranging feasibility studies, clearance of the project by financial institutions, etc.
Investment Incentives
The state finances a part of the fixed capital cost of the project. Various states have designated areas as ‘A’, ‘B’ and ‘C’ according to their levels of development. The level of incentive provided by a state varies and is generally larger for investment in backward areas. Further, the terms and ceiling of the incentives vary across states, depending on the nature of industry that the state is trying to promote.
Power Tariff Incentives
Power tariff incentives are extended by state governments in different ways, such as exemption from the payment of electricity duty, freeze on the tariff charged for new units for a few years after commencement of production, assurance of uninterrupted electricity supply, concessional rates of billing subject to certain conditions and fiscal incentives for purchase and installation of captive power generation sets.
The actual incentives given vary across states and from industry to industry and are also dependent upon the area in which this unit is set up. Some states specify a list of industries, which do not qualify for some of these incentives.
Other Incentives
Some states extend other incentives to small-scale units or priority industries as defined in their industrial policy statements. Such incentives include concessional loans granted by State Financial Corporations, price preference on goods made by Small Scale Industries (SSIs) in purchases made by government and semi government organisations, exemption from the payment of octroi (entry tax) for a certain specified period, preferential allotment of land and sheds in industrial areas to SSIs and grant of interest free loans in lieu of deferred sales tax.
A few states have taken the initiative to streamline the investment approval process by introducing common application forms for various approvals. A ‘green channel facility’, has been introduced in some states, where applications required for clearances will be received and processed through various institutional offices on a time bound basis.
Policy framework
Most FDI activities permitted for foreign direct investment are placed on the automatic route. Under this the applicant company has only to notify the Reserve bank of India within 30 days of inward remittance of funds and again within 30 days of issuing shares to the non-resident investor. Some salient features of the FDI policy are:
• Original investment as also the returns on investment are fully repatriable
• Payment of fee and royalty to foreign technology provider is permitted including that by a wholly owned subsidiary to its off-shore parent company
• Payment of royalty and use of trade marks and brand name without transfer of technology is also permitted
• FDI is not permitted in the areas of agriculture and plantations other than the tea sector, real estate business other than development of integrated townships and settlements, retail trading, atomic energy, lottery business, gambling and betting sectors.
Foreign Investment Implementation Authority (FIIA)
The Government of India has set up the Foreign Investment implementation Authority (FIIA) to facilitate the process of translating FDI approvals into implementation. The agency provides services to foreign investors to help obtain necessary approvals, sort out operational problems and seek intervention of various government agencies to find solution to their problems.
The functions of the FIIA are as under:
• Expediting various approvals/permissions;
• Fostering partnership between investors and government agencies concerned;
• Resolve difference in perceptions;
• Enhance overall credibility;
• Review policy framework; and
• Liaise with the Ministry of External Affairs for keeping India’s diplomatic missions abroad informed about translation of FDI approvals into actual investment and implementation.
The FIIA acts as a single point interface between the investor and Government agencies including Administrative Ministries/State Governments/Regulatory Authorities/Tax Authorities/Company Law Board, etc.
Investment Promotion and Infrastructure Development (IP & ID) Cell
The functions of the Cell include: -
• Dissemination of information about investment climate in India;
• Investment facilitation;
• Developing and distributing multimedia presentation material and other publications;
• Organising Symposiums, Seminars, etc. on investment promotion;
• Liaison with State Governments regarding investment promotion;
• Documentation of single window systems followed by various States;
• Match-making service for investment promotion;
• Coordination of progress of infrastructure sectors approved for investment/technology transfer, power, telecom, ports, roads, etc.;
• Facilitating Industrial Model Town Projects, and Industrial Parks, etc.;
• Promotion of Private Investment including Foreign Investment in the infrastructure sector;
• Compilation of sectoral policies, strategies and guidelines of infrastructure sectors, both in India and abroad; and
• Facilitating preparation of a perspective plan on infrastructure requirements for industry.
Entry strategy into India
A business presence in India may be established by a foreign entity through:
Company
A company may be incorporated, inter alia, using the following modes:
• Incorporating an Indian company with 100% foreign equity, operating as a wholly owned subsidiary;
• Incorporating a Joint Venture Company (JVC) with an Indian partner and/or with the general public and operating as a listed company; or
• Incorporating a JVC with an Indian partner and operating as an unlisted company.
Branch Office
A branch would mean an establishment carrying on substantially the same activity as its Head Office. Foreign companies intending to open a Branch Office (BO) in India need to obtain prior permission of RBI which would encompass even approval to the scope of activities that are intended to be carried out in India. As per the guidelines laid down by the RBI, the BO in India is allowed to carry on only the following activities:
• Export / Import of goods;
• Rendering professional or consultancy services;
• Carrying out research work, in which the parent company is engaged;
• Promoting technical or financial collaboration between Indian companies and parent or overseas group company;
• Representing the parent company in India and acting as buying / selling agent in India;
• Rendering services in Information Technology and development of software in India;
• Rendering technical support to the products supplied by parent / group companies;
• Foreign airline / shipping company
Liaison Office
A Liaison Office (LO) is in the nature of a representative office set up primarily to explore and understand the business and investment climate. A LO is not permitted to undertake any commercial / trading / industrial activity, directly or indirectly, and is required to maintain itself out of inward remittances received from abroad through normal banking channels. The LO is permitted to undertake only the following activities:
• Representing in India the parent Company / group Company;
• Promoting export/ import from/ to India
• Promoting technical / financial collaborations between the parent / group companies and companies in India;
• Acting as a communication channel between the parent Company and Indian companies.
Any company intending to open a LO in India is required to obtain prior approval from the RBI, the apex foreign exchange management authority in India. Approval is usually granted for three years and can be renewed on expiry thereof.
Project Office
Foreign companies can establish Project Offices (POs) in India specifically for the purpose of execution of specific projects. A PO is similar to a branch office opened for the limited purpose of executing a particular contract. As POs are opened for undertaking a specific activity they cannot perform any other function or undertake any other activity. Generally, companies engaged in turnkey projects or installation projects set up POs. All expenses of POs must be met through inward foreign currency remittances if the rupee component of the contract, if any, is not sufficient to meet the said expenses. RBI approval is required to open a PO.
Important sectors where FDI up to 100 per cent is permitted
Automatic route
Most manufacturing activities
Non-banking financial services
Infrastructure such as roads and highways, ports and harbours, electricity generation transmission and distribution, mass rapid transit systems, LNG projects, etc.
Drugs and pharmaceuticals that do not attract compulsory licensing or involve use of recombinant DNA technology
Hotels and tourism
Food processing
Electronic hardware
Software Development
Film industry
Advertising
Hospitals
Oil refineries
Pollution control and management Exploration and mining of minerals other than diamonds and precious stones
Management consultancy
Venture capital funds/ companies
Setting up/ development of industrial park/ industrial model town/ SEZ
Government route
Airports (beyond 74%)
B2B e-commerce
Trading companies within notified policy
Drugs and pharmaceuticals not falling under the automatic route
Integrated township development
ISPs without gateways, electronic mail and voice mail beyond 49 per cent
Courier services other than distribution of letters
TV software production for Broadcasting
Sectors which attract ceiling on foreign ownership
Sector
Telecom
Coal and lignite
Mining
Private sector banking
Insurance
Domestic airlines
Petroleum
(other than refining)
Refining
Investing companies/
Services sector
Atomic minerals
Defence industry sector
Broadcasting
Setting up hardware
facilities such as uplinking,
HUB, etc.
Cable network
Direct-to-Home
Terrestrial Broadcasting FM
Small scale industries (SSI) sector
Satellites
Tea sector
Print Media
FDI cap (in per cent)
49
74
49
50
74
74
49
26
40
60
51
51
74
26
49
74
26
49
49
20
20 (portfolio investment)
24
74
100*
74**
26**
Activities
Basic, cellular, value-added services, global mobile personal communications by satellite I
Internet service providers with gateways, radio-paging, end-to-end bandwidth
Public sector undertakings
Other than public sector undertakings
For exploration and mining of coal or lignite for captive consumption
Exploration and mining of diamonds and precious stones
Private banking sector
Insurance sector (subject to obtaining license from IRDA)
No direct or indirect equity participation by foreign airlines
In un-incorporated joint venture
In incorporated joint venture
Petroleum products and pipeline sector
In infrastructure related marketing and marketing of petroleum products
For public sector undertakings
Investment through such vehicle is treated as resident equity
a. mining and mineral separation
b. value addition
c. integrated activities
For arms and ammunition and allied items of defence equipment, defence aircraft and warships
Private companies incorporated in India with permissible FII/ NRI/ OCB/ PIO equity within the limits to set uplinking hubs (teleports) for leasing or hiring out their facilities to broadcasters.
Footnote: As regards satellite broadcasting, all TV channels irrespective of the ownership or management control to uplink from India provided they undertake to comply with the broadcast (programme and advertising) code.
Foreign investment allowed up to 49 per cent (inclusive of both FDI and portfolio investment) of paid up share capital. Companies with minimum 51 per cent of paid up share capital held by Indian citizens are eligible under the Cable Television Network Rules (1994) to provide cable TV services.
Companies with a maximum of foreign equity including FDI/ NRI/ OCB/ FII of 49 per cent would be eligible to obtain DTH License. Within the foreign equity, the FDI component not to exceed 20 per cent
The licensee shall be a company registered in India under the Companies Act. All share holding should be held by Indians except for the limited portfolio investment by FII/ NRI/ PIO/ OCB subject to such ceiling as may be decided from time to time. Company shall have no direct investment by foreign entities, NRIs and OCBs. As of now the foreign investment is permissible to the extent of 20 per cent portfolio investment. No private operator is allowed in terrestrial TV transmission.
If FDI in an SSI unit exceeds 24 per cent of the paid up capital, the company looses its SSI status. Further, if the item/s of manufacture is/ are reserved for the SSI sector, the company has to obtain an industrial license and undertake a minimum export obligation of 50 per cent of annual production on such products.
Establishment and operation of satellites.
FDI permitted in tea sector, including tea plantations requiring prior government approval
*subject to compulsory divestment of 26 per cent equity of the company in favour of an Indian partner/ Indian public within a period of five years.
In Indian entities publishing scientific/ technical and speciality magazines/ periodicals/ Journals
In Indian entities publishing newspapers and periodicals
**subject to guidelines notified by ministry of information and broadcasting periodically.
Foreign technology agreements
The RBI through the automatic route, within the following prescribed monetary limits, permits foreign Technology Agreements in all industries:
• Royalty up to 5 per cent on domestic sale and 8 per cent on exports is allowed by wholly owned subsidiary to offshore parent company.
• Lump sum payment not exceeding US$ 2 million
• Royalty not exceeding 2 per cent on exports and 1 per cent on domestic sale for use of the trade marks/ brand names
All other proposals for foreign technology agreement, not meeting any or all of the parameters for automatic approval, and all cases of extension of existing foreign technical collaboration agreement, are considered for approval, on merits, by the Government. Application in respect of such proposals should be submitted in the prescribed form to the SIA Department of Industrial Policy & Promotion, Ministry of Industry.
Facilitating alliances
While a number of foreign companies have established operations in the country on their own, others have successfully teamed up with local companies and leveraged their presence in the country. Many organisations help foreign organisations forge alliances with local companies. These include the Confederation of Indian Industries (CII), Federation of Indian Chambers of Commerce and Industry (FICCI) and consulting firms that in addition assist in chalking out entry strategies, undertaking feasibility studies, etc.
Indian embassies and missions abroad closely assist foreign investors in their initiatives to participate in various projects in India. ‘Escort services’ are provided to the foreign investor for realisation of the project.
Further information can be obtained at www.bisnetindia.com and www.indianindustry.com
Also visit dipp.nic.in
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