CONSOLIDATED FOREIGN DIRECT INVESTMENT POLICY -2013 -AN OVERVIEW

CONSOLIDATED FOREIGN DIRECT INVESTMENT POLICY -2013

-AN OVERVIEW

By K P C Rao., LLB.,  FCMA., FCS

Practicing Company Secretary

kpcrao.india@gmail.com

INTRODUCTION

India’s conscious shift in the early 1990s from an inward-looking development strategy to a globalized market-based approach resulted in significant changes in its foreign investment policy. Till the 1990s, the policy was heavily restrictive with majority foreign equity permitted only in a handful export-oriented, high technology industries. Outward-oriented reforms radically changed such perceptions with foreign investment policy becoming progressively liberal following steady withdrawal of external capital controls and simplification of procedures.

India’s present policy framework for inward FDI was introduced by the Industrial Policy Statement of July 24, 1991. The framework has subsequently evolved and enlarged in line with reforms and structural developments in the economy. The present policy allows foreign investors to invest in resident entities through either the automatic route or the government-administered route. Most sectors and activities qualify for the automatic route. This route allows investors to bring in funds without obtaining prior permission from the Government, RBI, or any other regulatory agency.

Certain investment intentions do not qualify under automatic route and require prior permission from the government. There are also sectors/activities where despite being eligible for automatic route, foreign investment is subject to other caveats. Though almost all of manufacturing is fully open to foreign investment, limitations on extent of foreign ownership (measured by proportion of equity capital belonging to non-resident entities) prevail in several services. Most of India’s agriculture is closed to foreign investment except[1] some segments, while it is prohibited in atomic energy, lottery business, gambling & betting and retail trading (except single-brand retailing).

The present policy permits foreign investors to collaborate with local partners as well as establish wholly owned subsidiaries (WOSs). Both joint ventures and WOSs can be incorporated as resident enterprises under the Indian Companies Act (1956). India does not restrict repatriation of investments, dividends and profits. Non-resident investors can dispose equity shares without prior government permission. They are also allowed to purchase immovable property in India after acquiring permission for doing business as incorporated/unincorporated entities.

A major policy revamp occurred in February 2000. The automatic route was significantly expanded to make FDI in all items/activities eligible for the route except a well-defined ‘negative list’. The latter included industries requiring licenses under the Industries (Development and Regulation) Act of 1951 and in terms of locational policy requirements of the Industrial Policy of 1991, proposals involving FDI higher than 24 percent of equity in small-scale enterprises, instances where foreign collaborator had previous venture/tie-up in India, cases relating to acquisition of shares in resident Indian companies in favour of foreign/NRI/OCB investors and all proposals falling outside notified sectoral policy/caps relating to the automatic route, or in sectors where FDI was not permitted. The ‘negative list’ proposals were to be examined by FIPB.

Liberalization of FDI policies has been a part of reforms aiming to remove controls on industrial output. A key reform in this regard has been reduction of the scope of the public sector. India’s industrialization during the first four decades of its planned development was led by the public sector. Public enterprises dominated the basic and heavy segments of manufacturing (e.g. steel, cement and coal). While consumer goods and intermediates had sizeable presence of small and medium private enterprises, key services (e.g. electricity, telecommunication, road transport, aviation, shipping, banking, insurance) were monopolized by state agencies. Effective entry of foreign investors in the Indian economy was inconceivable till the scope of the public sector was reduced and private enterprise allowed to fill up the vacuum. The Industrial Policy of 1991 limited public sector monopoly to only eight activities while freeing up the rest. Subsequently state monopoly has been cramped to only sectors of strategic importance such as atomic energy. Private initiative and foreign investment has been allowed in most of the erstwhile domain of the public sector including ‘sensitive’ segments such as defense, insurance, petroleum & natural gas.

In a significant move, 100 percent foreign ownership under automatic route was allowed in electricity generation, transmission, and distribution in June 1998. However, the projects were capped at a maximum of `15 billion. Within less than a year in January 1999, projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours were permitted 100 percent FDI under automatic route subject to same limitations on size. Permission of full foreign ownership underlined the urgency of inviting funds in India’s infrastructure. Since then, almost all manufacturing activities and several services have been allowed to access 100 percent FDI under automatic route.

The gradual ease of entry enabled to foreign investors through the automatic route marks another key reform in India’s foreign investment policy. The automatic route is a simpler route than the government-administered (FIPB) process. Since the latter involves acquiring prior permission before the investor can bring in funds, there are more procedures involved entailing greater transaction costs. For almost a decade, however, the scope of the automatic route remained relatively restricted.

THE CONSOLIDATED FDI POLICY-2012

The consolidated FDI policy document is a single reference point for investors and regulators. The first such consolidation was released the Department of Industrial Policy and Promotion (DIPP) in March, 2010 after which it has been updated every six months. This ‘Circular 1 of 2012’-is the fifth edition of the consolidated policy document and applicable with effect from 10 April 2012.  DIPP has also clarified that in the light of   significant rationalisation of FDI norms, the FDI policy would henceforth be reviewed on yearly basis.

Prohibited Sectors

FDI is prohibited in:

a)     Retail Trading (except single brand product retailing)

b)     Lottery Business including Government /private lottery, online lotteries, etc.

c)     Gambling and Betting including casinos etc.

d)     Chit funds

e)     Nidhi company

f)      Trading in Transferable Development Rights (TDRs)

g)     Real Estate Business or Construction of Farm Houses

h)     Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes

i)       Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

Permitted Sectors

In certain sectors/activities, FDI up to the limit indicated against each sector/activity is allowed, subject to applicable laws/ regulations; security and other conditionalities. (See the Table given below) In sectors/activities FDI is permitted upto 100% on the automatic route, subject to applicable laws/ regulations; security and other conditionalities.

Wherever there is a requirement of minimum capitalization, it shall include share premium received along with the face value of the share, only when it is received by the company upon issue of the shares to the non-resident investor. Amount paid by the transferee during post-issue transfer of shares beyond the issue price of the share, cannot be taken into account while calculating minimum capitalization requirement.

The highlights the key changes introduced in the Department of Industrial Policy and Promotion (DIPP) Circular are:

Key amendments/Clarification

1)      Import of capital goods/ machinery/ equipment

At present, conversion to equity is permitted for import of capital goods/ machinery/ equipment (including second-hand machinery). It has been represented before Government that the Indian capital goods sector, including the machine tools industry, construction machinery and textile machinery, has been suffering because of import of cheaper second hand machinery, which is often sub-standard. With a view to incentivising machinery embodying state-of-the-art technology, compliant with international standards, in terms of being green, clean and energy efficient, secondhand machinery has now been excluded from the purview of this provision.

2)      Non-Banking Finance Companies (NBFC) – clarification

The Circular clarifies that the activity of leasing  and finance covered within the ambit of 18  permissible NBFC activities eligible for FDI  under automatic route covers only ‘Financial  leases’ and not ‘Operating Leases’. This provision intends to clarify the coverage of the term ‘leasing and finance’, insofar as the NBFC sector is concerned.

3)      FDI in Commodity Exchanges

At present, foreign investment, within a composite (FDI & FII) cap of 49%, under the Government approval route-i.e. through the Foreign Investment Promotion Board (FIPB)-is permitted in commodity exchanges. Within this overall limit of 49%, investment by Registered FIIs, under the Portfolio Investment Scheme (PIS) is limited to 23% and investment under the FDI Scheme is limited to 26%. It has now been decided to liberalise the policy and to mandate the requirement of Government approval only for FDI component of the investment. Such investment by FIIs, in commodity exchanges, will, therefore, no longer require Government approval. This change aligns the policy for foreign investment in commodity exchanges, with that of other infrastructure companies in the securities markets, such as stock exchanges, depositories and clearing corporations.

4)      Clarification on investment by FIIs

The existing exchange control regulations permits a FII to invest in the capital of an Indian Company under the PIS with overall ceiling of 10 percent of the Capital for individual FII and aggregate ceiling of 24 percent for FII investment. This aggregate   ceiling may further be increased upto sectoral cap/ statutory ceiling, as applicable to the Indian Company by passing a Board Resolution followed by Special Resolution at its Annual General Meeting. It has now been clarified that this would also be subject to prior intimation to Reserve Bank of India (RBI).  

5)     Investment by Foreign Venture Capital Investors (FVCIs)

Government has permitted FVCIs to invest in the eligible securities (equity, equity linked instruments, debt, debt instruments, debentures of an IVCU or VCF, units of schemes / funds set up by a VCF) by way of private arrangement / purchase from a third party also, subject to stipulated terms and conditions. SEBI registered FVCIs have also been permitted to invest in securities on a recognized stock exchange subject to the provisions of the SEBI (FVCI) Regulations, 2000. These provisions have now been reflected under the FDI policy as well.

6)      Investment by ‘Qualified Financial Investors (QFIs)’

Government has permitted QFIs to invest (DPs), in equity shares of listed Indian companies as well as in equity shares of Indian companies which are offered to public in India in terms of the relevant and applicable SEBI guidelines/regulations. QFls have also been permitted to acquire equity shares by way of right shares, bonus shares or equity shares, on account of stock split/consolidation or equity shares on account of amalgamation, demerger or such corporate actions, subject to the prescribed investment limits. These provisions have now been reflected under the FDI policy as well.

7)      General permission for transfer of shares and convertible debentures

The liberalised policy on transfer of shares/ convertible debentures of companies engaged in the financial services sector has now been reflected under FDI policy.

8)      Changes in FDI policy in single-brand retail trading and pharmaceuticals sector

The policy regarding Single Brand retail trading has been liberalized and now FDI, up to 100%, is permitted, under the Government route, subject to specified conditions, as per Press Note 1(2012) issued on 10.1.2012. Accordingly, the revised provisions have been incorporated in the Circular. The provisions of Press Note 3 of 2011, dated 8.11.2011, have also been incorporated in the Circular.

9)     Liberalised policy on transfer of shares

Liberalised policy on transfer of shares between Non-resident and Resident in case of nonadherence to pricing norms, transfer requiring prior Government Approval and companies engaged in  financial services sector.

CHANGES IN THE REVISED FDI POLICY OF 2013

The Department of Industrial Policy and Promotion, Government of India (“DIPP”), has released 6th issue of Consolidated FDI Policy (Circular 1 of 2013) effective from 5th April 2013 (“FDI Policy 2013”). The FDI Policy 2013 supersedes, inter alia, the erstwhile version of the Consolidated FDI Policy (Circular 1 of 2012) dated 9th April 2012 (“Erstwhile FDI Policy”) and other press notes issued since then. The key changes in the policy 2013 are:

Investment from Pakistan

It has been specified in the FDI Policy 2013 that a citizen of Pakistan or an entity incorporated in Pakistan can invest subject to Government Approval, in sectors/activities other than defence, space and atomic energy sectors/activities prohibited for foreign investment.

FDI against import of capital goods/machinery/equipments

Under the FDI Policy 2013, the erstwhile requirement for an independent valuation of the capital goods/machinery/equipment (including second-hand machinery) by a third party entity, (preferably by an independent valuer from the country of import  along with production of copies of documents/certificates issued by the customs authorities towards assessment of the fair-value of such imports) has been removed.

Downstream investment by Banking Companies in certain case

A note has been inserted in  the FDI Policy 2013, wherein it has been prescribed that downstream investments by a banking company incorporated in India, which is owned and/or controlled by non-residents/non-resident entity(ies), under corporate debt restructuring or other loan restructuring mechanism or in trading books or for acquisition of shares due to default in loans, shall not be counted towards indirect foreign investment. It has been prescribed further that the strategic downstream investments, however, shall be counted towards indirect foreign investment. 

Foreign Investment in Multi Brand Retail Trading

After prolonged discussions and debate, foreign investment in multi brand retail trading, was permitted by DIPP vide issuance of the Press Note No. 5 (2012 Series) dated 20th September 2012.  Accordingly, the list of ‘Prohibited Sectors’ under para 6.1 of the FDI Policy 2013 has been modified to omit the words “Retail Trading (except single brand product retailing)”. Further, the FDI Policy 2013 has been amended to give include detailed framework dealing with foreign investments in multi brand retail trading.

Foreign Investment in teleports, Direct to Home and Mobile TV

The DIPP increased foreign investment limits in teleports and Direct to Home from 49% to 74% (wherein any investment beyond 49% to 74% would be subject to government route). Further, the said press note also permitted foreign investment in Mobile TVs up to 74% (wherein any investment beyond 49% to 74% would be subject to government route). Accordingly, a new para has been inserted (in modified form) in the FDI Policy 2013 to capture above policy amendments.

Foreign Investment in Air Transport Services

The investment by foreign airlines in scheduled and non-scheduled air transport services was permitted by DIPP in the year 2012 and such investment is subject to Government Approval. Accordingly, the relavant para of the FDI Policy 2013 has been amended to include foregoing policy announcements.

Single brand product retail trading

With effect from 20th September 2012, amendments were announced in the erstwhile policy governing foreign investments in ‘Single brand product retail trading’. Accordingly, it was announced that only one non-resident entities, whether owner of the brand or otherwise, be permitted to undertake single brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner for undertaking single brand product retail trading in respect of the specific brand for which approval is being sought. Further, it was also announced that the onus for ensuring compliance with the foregoing condition shall rest with the Indian entity carrying out single brand product retail trading in India and the investing entity shall provide evidence to this effect at the time of seeking approval, including a copy of the licensing/franchise/sub-licence agreement, specifically indicating compliance with the said conditions. It was also prescribed that in respect of proposals involving Foreign Direct Investment (“FDI”) beyond 51%, sourcing of 30% of the value of goods purchased, will be done from India, preferably from micro, small and medium enterprises (MSMEs), village and cottage industries, artisans and craftsmen, in all sectors and the quantum of domestic sourcing will be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company will be required to maintain. The said procurement requirement would have to be met, in the first instance, as an average of five years' total value of the goods purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis. For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, incorporated in India, which is the recipient of FDI for the purpose of carrying out single-brand product retail trading. Accordingly, the relavant para of the FDI Policy 2013 has been amended to include the above policy changes related to investment in single brand product retail trading.

Foreign Investment in Asset Reconstruction Companies

Few changes have been included to include policy announcements by Ministry of Finance in December 2012. It has been mentioned that Foreign Institutional Investors (“FIIs”) have been permitted to invest in Asset Reconstruction Companies upto 10% of the total paid-up capital. Further, FIIs limits for investing in Security Receipts have been enhanced to 74% of each tranche of scheme of such Security Receipts. It is also prescribed that such investments should be within the FII limit on corporate bonds prescribed from time to time, and sectoral caps under extant FDI regulations should also be complied with.

Downstream Investments by foreign owned Non Banking Finance Companies

The DIPP in the year 2012, announced policy revisions to permit Non Banking Finance Companies (“NBFCs”) (i) having foreign investment above 75% and below 100% and (ii) with a minimum capitalisation of US$ 50 million, to set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital. The foregoing revisions have been included in the FDI Policy 2013.

Foreign Investment in Power Exchanges

Till 20th September 2012, there was no clarity as regards the foreign investment in power exchanges and hence, the investee companies/investors used to seek clarifications on the matter. Considering the same, on 20th September 2012, the DIPP vide its Press Note No. 8 (2012 Series) announced a framework governing foreign investments in power exchanges. By virtue of the same, foreign investment upto 49% was permitted in power exchanges (inclusive of limits of 26% and 23% on FDI and FII investments respectively) to put power exchanges at par with commodity exchanges. Further, it was specified that the FII investments shall be restricted to secondary markets only and no non-resident investor (including persons acting in concert) shall hold more than 5% of the equity in power exchanges. A new para has been added in the FDI Policy 2013 to reflect above policy announcements.

Further, specific provisions dealing with conversion of companies with FDI into LLPs have also been included in the FDI Policy 2013.

CONCLUSION

While India has an overall market-friendly and liberal policy towards foreign investment, foreign capital still does not enjoy equally porous access in all parts of the economy. Fairly unhindered access to manufacturing is accompanied by conspicuous lack of access in certain services and agriculture. India’s future foreign investment policy faces the critical challenge of increasing access of foreign capital to these segments for enhancing inward FDI.

The existing pattern of inward FDI into India does point to the possibility of substantive increase in investment following further liberalization. FDI inflows in India have been concentrating mostly in services. Financial and non-financial services, computer software, telecommunications, housing and construction have been the top drawers of FDI during April 2000 – March 2009. The services orientation of inward FDI vindicates arguments for greater liberalization of foreign investment policies in services. Despite being relatively more restricted than manufacturing, India’s services are drawing significant FDI due to undisputed virtues of large domestic market and skilled human resources. Manufacturing is unable to do so in spite of more liberal entry rules primarily on account of persistence of high transaction costs arising from poor infrastructure, inflexible labour policies in the formal sector and opaque land markets.

Structural changes within the economy also point to a larger role of foreign investment in some sectors. Insurance is a key area in this respect. Rising life expectancy and greater healthcare costs have increased demand for a variety of life and non-life, equity market linked insurance products. Global insurance majors with a diverse product portfolio can make a major difference in this regard. India’s aviation industry, particularly the low-cost segment, can benefit from foreign funds and managerial expertise at a time when it is struggling to recover from financial difficulties. India’s agriculture, on the other hand, is in dire need of investments for enhancing productivity and improving infrastructure, particularly in storage, conservation and transmission of farm produce. Foreign investment again can play a critically important role in augmenting capacities.

India has been able to provide an enabling environment to foreign investors in several respects. Deep reforms in capital markets aided by an efficient regulatory architecture have facilitated portfolio investments. Transfer and acquisition of shares are taking place according to investor-friendly guidelines. Foreign exchange regulations have been aligned to global standards courtesy FEMA. But these facilitations need to be matched by a more open foreign investment policy for increasing FDI inflows to a level higher than their current share of only 3 percent of India’s GDP. A more open policy calls for committed political consensus on foreign investment. Such an accord has proved elusive so far. However, given that India’s reforms have been irreversible notwithstanding political discord, hopes of further reforms in foreign investment are not entirely farfetched.

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CONSOLIDATED FDI POLICY

(EFFECTIVE FROM APRIL 5, 2013)

Government of India Ministry of Commerce & Industry Department of Industrial Policy & Promotion (FC Section)

CIRCULAR 1 OF 2013

SUBJECT:    CONSOLIDATED FDI POLICY.

The “Consolidated FDI Policy” is attached.

2. This circular will take effect from April 5, 2013.

(Anjali Prasad) Joint Secretary to the Government of India

D/o IPP F. No. 5(1)/2013-FC.I Dated the  05.04.2013

INDEX

DESCRIPTION	PAGE NUMBER
CHAPTER-1  INTENT AND OBJECTIVE	5
1.1 Intent And Objective	5
CHAPTER-2  DEFINITIONS	7
2.1 Definitions	7
CHAPTER-3  GENERAL CONDITIONS ON FDI	13
3.1  Who can invest in India?	13
3.2. Entities into which FDI can be made	15
3.3  Types of Instruments	17
3.4  Issue/Transfer of Shares	20
3.5  Specific conditions in certain cases	26
3.6  Entry routes for Investment	29
3.7  Caps on Investments	30
3.8  Entry conditions on investment	30
3.9  Other conditions on Investment besides entry conditions	31
3.10 Foreign Investment into/Downstream Investment by Indian Companies	31
CHAPTER-4  CALCULATION OF FOREIGN INVESTMENT	33
4.1   Total Foreign Investment i.e. Direct and Indirect Foreign Investment in Indian Companies	33
CHAPTER-5  FOREIGN INVESTMENT PROMOTION BOARD (FIPB)	37
5.1  Constitution of FIPB	37
5.2  Levels of approval for cases under Government Route	37
5.3  Cases which do not require fresh Approval	37
5.4  Online filing of applications for FIPB/Government‟s approval	38
CHAPTER-6  SECTOR SPECIFIC CONDITIONS ON FDI	39
6.1 PROHIBITED SECTORS	39
6.2 PERMITTED SECTORS	39
AGRICULTURE	40
6.2.1 Agriculture & Animal Husbandry	40
6.2.2 Tea plantation	41
MINING AND PETROLEUM & NATURAL GAS	42
6.2.3 Mining	42
6.2.4 Petroleum & Natural Gas	44
MANUFACTURING	45
6.2.5 Manufacture of items reserved for production in Micro and Small Enterprises (MSEs)	45
6.2.6 Defence	45

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SERVICES SECTOR	48
6.2.7   Broadcasting	48
6.2.8   Print Media	53
6.2.9   Civil Aviation	54
6.2.10 Courier Services	57
6.2.11 Construction Development: Townships, Housing, Built-up infrastructure	58
6.2.12 Industrial Parks new and existing	59
6.2.13 Satellites – Establishment and operation	61
6.2.14 Private Security Agencies	61
6.2.15 Telecom Sector	61
6.2.16 Trading	66
FINANCIAL SERVICES	71
6.2.17. FINANCIAL SERVICES	71
6.2.17.1 Asset Reconstruction Companies	71
6.2.17.2 Banking –Private sector	72
6.2.17.3 Banking- Public Sector	75
6.2.17.4 Commodity Exchanges	75
6.2.17.5 Credit Information Companies (CIC)	76
6.2.17.6 Infrastructure Company in the Securities Market	77
6.2.17.7 Insurance	77
6.2.17.8 Non-Banking Finance Companies (NBFC)	77
OTHERS
6.2.18 Pharmaceuticals	79
6.2.19 Power Exchanges	79
CHAPTER-7 REMITTANCE, REPORTING AND VIOLATION	81
7.1 Remittance and Repatriation	81
7.2 Reporting of FDI	82
7.3 Adherence to Guidelines/Orders and Consequences of Violation Penalties Adjudication and Appeals Compounding Proceedings	84
ANNEXURES
Annex-1 Form FC-GPR	87
Annex-2 Terms and conditions for transfer of capital instruments from resident to non-resident and vice-versa	94
Annex-3 Documents to be submitted by a person resident in India for transfer of shares to a person resident outside India by way of gift	98
Annex-4 Definition of "relative" as given in Section 6 of Companies Act, 1956	99
Annex-5 Report by the Indian company receiving amount of consideration for issue of shares / convertible debentures under the FDI scheme	100
Annex-6 Know Your Customer (KYC) Form in respect of the non-resident investor	102

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Annex-7 Form Annual Return on Foreign Liabilities and Assets	103
Annex-8 Form FC-TRS	111
Annex-9 Form DR	117
Annex-10 Form DR - Quarterly	119

 CHAPTER 1: INTENT AND OBJECTIVE

1.1       INTENT AND OBJECTIVE

1.1.1    It is the intent and objective of the Government of India to attract and promote foreign direct investment in order to supplement domestic capital, technology and skills, for accelerated economic growth.  Foreign Direct Investment, as distinguished from portfolio investment, has the connotation of establishing a „lasting interest‟ in an enterprise that is resident in an economy other than that of the investor.

1.1.2    The Government has put in place a policy framework on Foreign Direct Investment, which is transparent, predictable and easily comprehensible.  This framework is embodied in the Circular on Consolidated FDI Policy, which may be updated every year, to capture and keep pace with the regulatory  changes,  effected  in  the  interregnum.  The  Department  of  Industrial  Policy  and Promotion  (DIPP),  Ministry  of  Commerce  &  Industry,  Government  of  India  makes  policy pronouncements on FDI through Press Notes/ Press Releases which are notified by the Reserve Bank of India as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No.FEMA 20/2000-RB dated May 3,  2000).            These notifications  take effect  from  the date of issue of Press  Notes/ Press Releases,   unless  specified  otherwise  therein.  In  case  of  any  conflict,  the  relevant  FEMA Notification will prevail.  The procedural instructions are issued by the Reserve Bank of India vide A.P. Dir. (series) Circulars.   The regulatory framework, over a period of time, thus, consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.

1.1.3    The     present     consolidation     subsumes     and    supersedes     all     Press     Notes/Press Releases/Clarifications/ Circulars issued by DIPP, which were in force as on April 4, 2013 and reflects the FDI  Policy as on April 5 2013.                     This Circular accordingly will take effect from April  5,  2013.  Reference  to  any  statute  or  legislation  made  in  this  Circular  shall  include modifications, amendments or re-enactments thereof.

1.1.4    Notwithstanding         the          rescission           of          earlier          Press          Notes/Press

Releases/Clarifications/Circulars, anything done or any action taken or purported to have been done or taken  under the rescinded Press Notes/Press Releases/Clarifications/Circulars prior to

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April  5,  2013,  shall,  in  so  far  as  it  is  not  inconsistent  with  those  Press  Notes/Press

Releases/Clarifications/Circulars, be deemed to have been done or taken under the corresponding provisions of this circular and shall be valid and effective.

 CHAPTER 2: DEFINITIONS

2.1       DEFINITIONS

2.1.1	„AD Category-I Bank‟ means a bank( Scheduled Commercial, State or Urban Cooperative) which is authorized under Section 10(1) of FEMA to undertake all current and  capital account transactions according to the directions issued by the RBI from time to time.
2.1.2	„Authorized Bank‟ means a bank including a co-operative bank (other than an authorized dealer) authorized by the Reserve Bank to maintain an account of a person resident outside India
2.1.3	„Authorized Dealer‟ means a person authorized as an authorized dealer under sub-section (1) of section 10 of FEMA.
2.1.4	„Authorized Person‟ means  an  authorized  dealer,  money  changer,  offshore banking unit or any other person for the time being authorized under Sub- section (a) of  Section 10 of FEMA to deal in foreign exchange or foreign securities.
2.1.5	„Capital‟ means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures. Note : Warrants  and partly paid shares can be issued to person/ (s) resident outside India only after approval through the Government route1.
2.1.6	„Capital account transaction‟ means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets  or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6 of FEMA.
2.1.7	A company is considered as “Controlled” by resident Indian citizens if the resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors in that company .
2.1.8	„Depository Receipt‟ (DR) means a negotiable security issued outside India by a Depository bank, on behalf of an Indian company, which represent the local Rupee  denominated  equity  shares  of  the  company  held  as  deposit  by  a Custodian  bank  in  India.  DRs  are  traded  on  Stock  Exchanges  in  the  US,

1  Review of FDI policy to include warrants and partly-paid shares is under consideration of the Government.

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	Singapore,  Luxembourg,  etc. DRs listed and  traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded anywhere/elsewhere are known as Global Depository Receipts (GDRs).
2.1.9	„Erstwhile Overseas Corporate Body‟  (OCB) means a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least  sixty percent by non-resident Indian and includes overseas trust in which not less than sixty  percent beneficial interest is held by non-resident Indian directly or indirectly but irrevocably and which was in existence on the date of commencement of the Foreign Exchange Management (Withdrawal of General Permission to Overseas Corporate Bodies (OCBs) ) Regulations, 2003 (the Regulations) and immediately prior to such commencement was eligible to undertake transactions pursuant to the general permission granted under the Regulations.
2.1.10	„Foreign Currency Convertible  Bond‟ (FCCB)  means  a bond  issued  by an Indian company expressed in foreign currency, the principal and interest of which is payable in foreign currency.  FCCBs are issued in accordance with the Foreign Currency Convertible Bonds and ordinary shares (through depository receipt mechanism) Scheme 1993  and subscribed by a non-resident entity in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part.
2.1.11	„FDI‟ means investment by non-resident entity/person resident outside India in the capital  of  an  Indian  company  under  Schedule  1  of  Foreign  Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations    2000                 (Original        notification             is                                   available athttp://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=174.          Subsequent amendment                 notifications                 are                 available                 at http://rbi.org.in/Scripts/BS_FemaNotifications.aspx)
2.1.12	„FEMA‟ means the Foreign Exchange Management Act 1999 (42 of 1999) (http://finmin.nic.in/law/index.asp).
2.1.13	„FIPB‟  means  the  Foreign  Investment  Promotion  Board  constituted  by  the Government of India.
2.1.14	„Foreign Institutional Investor‟(FII) means an entity established or incorporated outside  India  which  proposes  to  make  investment  in  India  and  which  is registered as  a  FII in accordance with the Securities and Exchange Board of

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	India (SEBI) (Foreign Institutional Investor) Regulations 1995.
2.1.15	„Foreign Venture Capital Investor‟ (FVCI) means an investor incorporated and established outside India, which is registered under the Securities and Exchange Board   of   India   (Foreign   Venture   Capital   Investor)   Regulations,   2000 {SEBI(FVCI) Regulations} and proposes to make investment in accordance with these Regulations
2.1.16	„Government route‟ means that investment in the capital of resident entities by non-resident entities can be made only with the prior approval of Government (FIPB,   Department  of  Economic  Affairs  (DEA),  Ministry  of  Finance  or Department of Industrial Policy & Promotion, as the case may be).
2.1.17	„Holding Company‟  would have the same meaning as defined in Companies Act 1956.
2.1.18	„Indian   Company‟   means   a   company   incorporated   in   India   under   the Companies Act, 1956.
2.1.19	„Indian Venture Capital Undertaking‟ (IVCU) means an Indian company:─ (i) whose shares are not listed in a recognised stock exchange in India; (ii) which  is  engaged  in  the  business  of  providing  services,  production  or manufacture of articles or things, but does not include such activities or sectors which are specified in the negative list by the SEBI, with approval of Central Government, by notification in the Official Gazette in this behalf.
2.1.20	„Investing  Company‟  means an Indian Company holding only investments in other Indian company/ (ies), directly or indirectly, other than for trading of such holdings/securities.
2.1.21	„Investment on repatriable basis‟ means investment, the sale proceeds of which, net of taxes, are eligible to be repatriated  out  of India and the expression „investment on non-repatriable basis‟ shall be construed accordingly.
2.1.22	„Joint Venture‟ (JV) means an Indian entity incorporated in accordance with the laws and regulations in India in whose capital a non-resident entity makes an investment.
2.1.23	"Limited  Liability Partnership" means  a  Limited  Liability Partnership  firm, formed and registered under the Limited Liability Partnership Act, 2008.
2.1.24	„Non resident entity‟ means a „person resident outside India‟ as defined under FEMA.
2.1.25	„Non Resident Indian‟ (NRI) means an individual resident outside India who is

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	a citizen of India or is a person of Indian origin.
2.1.26	A company is considered as 'Owned‟ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or Indian  companies,  which  are  ultimately  owned  and  controlled  by  resident Indian citizens;
2.1.27	„Person‟ includes (i) an individual (ii) a Hindu undivided family, (iii) a company (iv) a firm (v)  an   association   of   persons   or   a   body  of   individuals   whether incorporated or not, (vi)  every  artificial  juridical  person,  not  falling  within  any  of  the preceding sub-clauses, and (vii) any agency, office, or branch owned or controlled by such person.
2.1.28	„Person of Indian Origin‟ (PIO) means a citizen of any country other than Bangladesh or Pakistan, if (i) he at any time held Indian Passport (ii) he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or (iii) the person is a spouse of an Indian citizen or a person referred to in sub- clause (i) or (ii).
2.1.29	„Person resident in India‟ means - (i) a person residing in India for more than one hundred and eighty-two days during  the course of the preceding financial year but does not include – (A) A person who has gone out of India or who stays outside India, in either case- (a) for or on taking up employment outside India, or (b) for  carrying  on  outside  India  a  business  or  vocation  outside India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

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	(B) A person who has come to or stays in India, in either case, otherwise than- (a) for or on taking up employment in India; or (b) for carrying on in India a business or vocation in India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period; (ii) any person or body corporate registered or incorporated in India, (iii) an office, branch or agency in India owned or controlled by a person resident outside India, (iv)an office, branch or agency outside India owned or controlled by a person resident in India.
2.1.30	„Person resident outside India‟ means a person who is not a Person resident in India.
2.1.31	„Portfolio Investment Scheme‟ means the Portfolio Investment Scheme referred to in Schedules 2 & 3 of FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000.
2.1.32	„A Qualified Foreign Investor (QFI)‟ means a non-resident investor (other than SEBI  registered  FII  and  SEBI  registered  FVCI)  who  meets  the  KYC requirements  of SEBI for the purpose of making investments in accordance with the regulations/orders/circulars of  RBI/SEBI.
2.1.33	„RBI‟ means the Reserve Bank of India established under the Reserve Bank of India Act, 1934.
2.1.34	„Resident Entity‟ means  „Person resident in India‟ excluding an individual.
2.1.35	„Resident Indian Citizen‟ shall be interpreted in line with the definition of „person resident in India‟ as per FEMA, 1999, read in conjunction with the Indian Citizenship Act, 1955.
2.1.36	„SEBI‟ means the Securities and Exchange Board of India established under the Securities and Exchange Board of India Act, 1992.
2.1.37	„SEZ‟ means a Special Economic Zone as defined in Special Economic Zone Act, 2005.
2.1.38	„SIA‟   means  Secretariat  of  Industrial  Assistance  in  DIPP,  Ministry  of Commerce & Industry, Government of India.
2.1.39	„Transferable Development Rights‟ (TDR) means certificates issued in respect of category of land acquired for public purposes either by the Central or State

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	Government  in  consideration  of  surrender  of  land  by  the  owner  without monetary compensation, which are transferable in part or whole.
2.1.40	„Venture Capital Fund‟ (VCF) means a Fund established in the form of a Trust, a company including a body corporate and  registered under Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996, which (i) has a dedicated pool of capital; (ii) raised in the manner specified under the Regulations; and (iii) invests in accordance with the Regulations.