Exchange Control - Foreign Investments in India
[Source: Master Circular No. / 6/2004-05 dated July 1, 2004 Issued by RBI]

Investments by persons who are not residents of India are permitted subject to regulations in the following areas

1. Foreign Investments in Indian companies.:
   In terms of Section 6(3)(b) of Foreign Exchange Management Act. 1999 Reserve Bank regulates transfer or issue of any security by a person resident outside India read with Notification No. FEMA 20/2000-RB dated May 3,2000.

2. Acquisition of Immovable property:
   In terms of Section 6(3)(i) of Foreign Exchange Management Act. 1999 Reserve Bank regulates acquisition or transfer of immovable property in India other than a lease not exceeding 5 years , by a person resident outside India read with Notification No. FEMA 21/ 2000-RB dated May 3,2000.

3. Investment in capital of partnership firms or proprietary concern. :
   In terms of Section 2(h) of Section 47 of Foreign Exchange Management Act. 1999, Reserve Bank regulates investments by a person resident outside India by a partnership firm or proprietary concern read with Notification No. FEMA 24/2000-RB dated May 3, 2000.

An Indian entity cannot issue any security to a person resident outside India or record in its books any transfer of security from or to such person except as provided in the Act or Rules or Regulations or with the specific permission of the Reserve Bank.

Investments into India is not permissible in the following cases

1. Business of chit fund, or

2. Nidhi Company , or

3. Agricultural or plantation activities or

4. Real estate business, or construction of farm houses

5. Trading in Transferable Development Rights (TDRs)

6. Retail Trading

7. Atomic Energy

8. Lottery Business

9. Gambling and Betting

10. Housing and Real Estate business

11. 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)

In other cases investments can be made either with the specific prior approval of the Government of India, the Secretariat for Industrial Assistance/Foreign Investment Promotion Board (SIA/FIPB) or under the Automatic route. The list of the activities requiring the approval of the Government is given in Annex-A (A) to Schedule 1 to FEMA Notification No 94 and details of the activities/sectors which are covered under the automatic route is given as Annexure-B to the said Schedule. The Automatic Route is not open for those non-resident investors who have/had a previous financial/technical/ trademark collaboration in an existing domestic company engaged in the same or allied activity. If the activity or manufacturing item of the issuer company requires an Industrial License under the provisions of the Industries (Development and Regulation) Act, 1951 or under the locational policy notified by Government of India under the Industrial Policy Resolution 1991 or the investment is sought in excess of the prescribed sectoral limits Automatic Route is not available and in such cases, specific approval of FIPB would be required.

A person resident outside India (other than a citizen of Pakistan, Sri Lanka or Bangladesh) or an incorporated entity outside India, (other than an entity in Bangladesh or Pakistan) has the general permission to purchase shares or convertible debentures or preference shares of an Indian company subject to certain terms and conditions.

The Indian companies also have general permission to issue partly convertible debentures/ partly convertible preference shares subject to certain conditions. Companies can issue NCDs only to NRIs/PIO by means of a public issue only. The coupon rate on partly convertible preference shares/partly convertible debentures should not exceed SBI’s prime lending rate plus 300 basis points.

Trading is permitted under automatic route with FDI upto 51 % provided the Indian company is primarily engaged in export activities, and the undertaking is an export house/trading house/super trading house/star trading house. Government also permits certain trading activities under FIPB route, as mentioned in Annexure `B' to Notification No. FEMA 94/2003-RB dated 18th June 2003.

A company which is a small scale industrial unit and which is not engaged in any activity or in manufacture of items included in Annexure A to Notification No.94, may issue shares or convertible debentures to a non-resident, to the extent of 24% of its paid-up capital. Such a company may issue shares in excess of 24% of its paid-up capital -

1. It has given up its small scale status,

2. It is not engaged or does not propose to engage in manufacture of items reserved for small scale sector, and

3. It complies with the ceilings specified in Annexure B to Notification No.94

An Export Oriented Unit or a unit in Free Trade Zone or in Export Processing Zone or in a Software Technology Park or in an Electronic Hardware Technology Park may issue shares or convertible debentures to a person resident outside India in excess of 24 % provided it conforms to the ceilings specified in Annexure B to Notification No. 94.

1. Issue of Rights/Bonus share:
   General permission is also available to Indian companies to issue Right/Bonus shares subject to certain conditions. As clarified in terms of AP DIR(SERIES) Circular No 14 dated 16th September 2003, entitlement of rights shares is not automatically available to investors who have been allotted such shares as OCBs. Such issuing companies would have to seek specific permission from RBI, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai for issue of shares on right basis to erstwhile OCBs. However, bonus shares can be issued to OCBs.

2. Acquisition of shares under Scheme of Amalgamation/Merger:
   Where a Scheme of merger or amalgamation of two or more Indian companies has been approved by a court in India, the transferee company may issue shares to the shareholders of the transferor company, resident outside India subject to ensuring that the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the percentage specified in the approval granted by the Central Government or the Reserve Bank. The transferor company or the transferee or new company should not be engaged in activities prohibited in terms of FDI policy viz agriculture, plantation or real estate business or trading in TDRs.

3. Issue of shares under Employees Stock Option Scheme:
   A company may issue shares under the Employees Stock Option Scheme, to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India, directly or through a Trust subject to the condition that the scheme has been drawn in terms of relevant regulations issued by the Securities Exchange Board of India; and face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5% of the paid-up capital of the issuing company.

4. Issue of shares by Indian companies under ADR/GDR :
   An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:

   • the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time

   • The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and

   • Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations.

   These instruments are issued by a Depository abroad and listed in the overseas stock exchanges like NASDAQ. The proceeds so raised have to be kept abroad till actually required in India. There are no end use restrictions except for a ban on deployment/ Investment of these funds in Real Estate and the Stock Market. There is no limit upto which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy.

   The ADR/GDR can be issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager of the issue. The Indian company will issue its rupee denominated shares in the name of the Overseas Depository and will keep in the custody of the domestic Custodian in India. On the basis of the ratio worked out and the rupee shares kept with the domestic Custodian, the Depository will issue ADRs/GDRs abroad

   A limited Two-way Fungibility scheme has been put in place by the Government of India for ADRs/GDRs. Under this scheme, a stock broker in India, registered with SEBI, can purchase the shares from the market for conversion into ADRs/GDR. Re-issuance of ADRs/GDR would be permitted to the extent of ADRs/GDRs which have been redeemed into underlying shares and sold in the domestic market.

   An Indian company can also sponsor an issue of ADR/GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs/GDRs can be issued abroad. The proceeds of the ADR/GDR issue is remitted back to India and distributed among the resident investors who had offered their rupee denominated shares for conversion. These proceeds can be kept in foreign currency accounts in India by the shareholders who have tendered such shares for conversion into ADR/GDR.

   The ADR/GDR/FCCB proceeds may be utilised in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public in view of their strategic importance. ADs have been permitted to allow Indian companies to prepay the existing FCCB subject to certain conditions.

Reporting of such Issues
The Indian company issuing shares shall furnish to the Reserve Bank, full details of such issue in the form specified in Annexure C to Notification No.FEMA 20/2000-RB dated May 3,2000 within 30 days from the date of closing of the issue .The company should also furnish a quarterly return in the form specified in Annexure D to Reserve Bank within 15 days of the close of the calendar quarter.