All proposals involving foreign direct investment and technology transfer require approvals. Two routes are available for foreign investors for obtaining such approvals.
One route covers automatic approval cases, where foreign equity upto 51% is allowed in 35 specified industries and upto 50% in the Mining Sector, provided certain parameters are met:
The second route covers all other cases where the parameters for automatic approval are not met, for example, where foreign equity does not cover the foreign exchange requirement for import of capital goods, or where it is beyond 51%, or where it involves activities/items other than in the list of 35 specified industries. Applications may be made either to the FIPB or to the Secretariat for Industrial Approvals (SIA) or Indian Embassies and Consulates abroad.
It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the full equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.
Following the new economic policies, the Government has set up a special Board known as the Foreign Investment Promotion Board.
The FIPB is a specially empowered Board in the Office of the Prime Minister set up specifically for the purpose of speeding up the approval process for proposals relating to foreign investment in India.
The FIPB is headed by the Principal Secretary to the Prime Minister and has as its members, the Finance Secretary, the Commerce Secretary and the Secretary for Indusrial Development. Secretaries of the other Ministries concerned with specific investment proposals are also invited as appropriate. No special application form is needed for applying to FIPB. Proposals can be sent directly to the Prime Minister's Office or through any of India's diplomatic Missions abroad.
The FIPB has the flexibility to examine all proposals in totality, free from predetermined parameters or procedures. Its approach is liberal for all sectors and all types of proposals. So far, it has been rare for the FIPB to reject a proposal. A large number of the proposals cleared till date have involved 100% equity participation by foreign investors.
FIPB's clearance of foreign investment proposals is based on the investment proposed, the technology to be inducted, the export potential or the import substitution factors, the foreign exchange balance sheet and the employment potential. The totality of the package proposed is examined and approved on merits.
The FIPB has accorded approval to the investments of a large number of corporations such as McDonalds, General Electric, Coca-Cola and Fujitsu in the recent past. It normally processes applications within 6 weeks.
Companies wishing to increase foreign equity up to 51% (either as part of an expansion programme or without an expansion programme) can obtain automatic approval from the RBI subject to certain conditions:
All other proposals for inducting or raising foreign equity in existing company will be subject to prior approval of the Government and may be addressed to the Secretariat of Industrial Approvals (SIA).
All proposals for raising foreign equity or inducting new foreign equity in existing companies through preferential share allocation to the foreign investor would need to be approved by the shareholders of the company through a special resolution of the Companies Act.
Every preferential allotment of shares by companies viz allotment of shares other than allotment on rights basis to select investors, is permitted at the market value of the shares. The guidelines issued by SEBI in August 1994, require the issue price to be determined at the higher of following:
Further, in terms of the SEBI guidelines, the resulting instrument of such preferential allotments are subject to a five year lock in period during which they are non-transferable.
While submitting applications for raising foreign equity under automatic route to RBI, the companies would need to work out the price according to the above guidelines and enclose them, duly certified by a Chartered Accountant. The SEBI guidelines require such certificates of the statutory auditors of the company to be placed before the meeting of shareholders convened to consider the proposed issue.
RBI accords automatic approval to foreign technology agreements in all industries within prescribed monetary limits:
The prescribed rates are net of Indian taxes.
In case of foreign technology agreements for Hotel and Tourism related industry, automatic approval of the RBI is available subject to the following parameters:
All other proposals for foreign technology agreements not meeting the parameters for automatic approval, are considered on merit by SIA, which normally clears such proposals within 4 to 6 weeks.
In order to encourage exports, the Government of India offers special incentives to investors to set up units to manufacture goods for exports. Such units may be set up in Export Processing Zones (EPZs) or may be 100% Export Oriented Units (EOUs) outside EPZs. 100% foreign equity is also welcome in EOUs and EPZs.
Recently, with a view to augmenting infrastructural facilities for export production, Government has permitted the setting up of EPZs in the private/joint sectors including those by NRIs and foreign companies. Applications for setting up an EPZ may be made to the Development Commissioner of the EPZ in whose jursdiction, the proposed Zone is to be located. Further details may be obtained from the SIA and the Development Commissioners of the EPZs.
A foreign investor has also the option of acquiring a company already existing in India. Such acquisition could take place through the issue of fresh capital and/or transfer of shares of an existing Indian company to the foreign investor with the effect of transferring control. Shares of an Indian company could be acquired from another foreign investor, subject to RBI approval.
NRIs, OCBs (overseas firms in which NRI holdings is 60% or more) and FIIs are allowed to acquire shares of listed companies by trading in the stock exchanges. Overall limits on such acquisitions are, however, prescribed by the RBI (currently 5% of paid up capital for each FII, subject to an overall limit of 24% for all such investors, including NRI's).
The Foreign Exchange regulation Act (FERA) makes it necessary that RBI permission be taken prior to acquisition of shares in an Indian company by a foreign investor. Similar permission is required in case of transfer of shares from a foreign national to a person resident in India. Either the transferer or the transferee can apply for permission.
If a foreign investor has already acquired an Indian company then such an Indian company is not restricted from acquiring shares in other Indian companies.
In addition to the permissions required by the foreign investor, the existing Indian company is required to satisfy provisions of the Indian Companies Act and the listing agreement with the Indian Stock Exchange if it is listed on a stock exchange in India. With the coming into force of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994, effective November 9, 1994, its provisions would require compliance in regard to acquisition of an Indian company listed on a stock exchange.
Mergers and amalgamations are permitted between two or more Indian companies (under the provisions of the Companies Act). Other mergers involving a sick company can take place as per the order of the Board for Industrial & Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985. However, where any of the companies involved in the merger have substantial foreign equity, RBI permission is required.
Foreign companies may invest in trading companies engaged primarily in export activity. Such trading companies are treated at par with domestic trading companies in accordance with the Trade Policy.
New companies being set up are required to register themselves with the Director General of Foreign Trade and acquire certification under the prevailing Exim policy. This certification is given based on the amount of net foreign exchange earned in preceding years.
RBI accords automatic approvals for foreign equity upto 51 per cent for setting up trading companies engaged primarily in export activity. All other proposals which do not meet the criteria for automatic approval, subject to specified industries can be addressed to the FIPB.
Foreign companies engaged in manufacturing and trading activities abroad may open branch offices with the necessary permission of RBI. These branch offices may be opened for the purpose of:
The approvals for these branch offices are normally for limited periods, which are decided by RBI on a case-by-case basis.
The project office is the ideal method for companies to establish a business presence in India for a limited period of time. It is essentially a branch office set up with the limited purpose of executing a specific project. Foreign companies engaged in the business of turnkey construction projects or installations normally set up a project office for their operations in India.
A foreign company can open a liaison office in India to look after its Indian operations and promote its business interests. Companies engaged in the sale or manufacture of defence, telecommunication items and shipping (without owning ships) are permitted to open liaison offices without prior approval of the Government. Liaison offices are not allowed to carry on any business or earn any income in India and all expenses are to be borne by remittances from abroad. The approvals for these liaison offices are normally for a period of 3 years; this period can be further extended.
Foreign companies normally use liaison offices to oversee the company's existing business interests, to spread awareness of the company's products and to explore further opportunities for business and investment.
Centre for Monitoring Indian Economy, Bombay
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Last updated: May 1995.