Other Laws

FEMA Update

Mayur Nayak, Natwar Thakrar & Pankaj Bhuta
Chartered Accountants

In this article, we have discussed recent important amendments to FEMA related to relaxation of provisions of Foreign Direct Investment in India:–

1. Foreign investment in Credit Information Companies

Presently, investment by a registered Foreign Institutional Investor (FII) under Schedule-2, “Portfolio Investment Scheme by FIIs” is allowed up to 49% in Credit Information Companies with prior approval of the Government and regulatory clearances from RBI. Presently, Credit Information Companies were categoried as NBFC Companies [Sl. No. 20, item xi – Press Note 4 (2006)].

With a view to liberalised Foreign Investment in Credit Information Companies (as defined under Credit Information Companies (Regulation) Act, 2005), Central Government vide Press Note No. 1 (2008) dated 12th March, 2008 has now deleted ‘Credit Reference Agencies’ from the list of NBFC activities in col. 20 of the Annex to Press Note 4 (2006) dated 10-2-2006.

The salient features of the new scheme are as follows:–

1. Foreign Investment is subject to the Credit Information Companies (Regulation) Act, 2005

2. Total Foreign Investment; i.e., Foreign Direct Investment (FDI) + investment by registered Foreign Institutional Investors (FII) under the Portfolio Investment Scheme incorporated as Schedule 2 under Regulation 5(2) of the FEMA Regulations, is allowed up to 49% with prior approval of the Government and regulatory clearance from RBI.

3. Investment by a registered FII under the Portfolio Investment Scheme would be permitted up to 24% only in the CICs listed at the Stock Exchanges, within the overall limit of 49% for foreign investment.

4. Such FII investment would be permitted subject to the condition that:–

1. No single entity should directly or indirectly hold more than 10% equity

2. Any acquisition in excess of 1% will have to be reported to RBI as a reporting requirement; and

3. FII investing in CICs shall not seek representation on the Board of Directors based upon shareholding.

5. “Credit information” as defined under Credit Information Companies (Regulation) Act, 2005 means any information relating to—

1. the amounts and the nature of loans or advances, amounts outstanding under credit cards and other credit facilities granted or to be granted, by a credit institution to any borrower;

2. the nature of security taken or proposed to be taken by a credit institution from any borrower for credit facilities granted or proposed to be granted to him;

3. the guarantee furnished or any other non-fund based facility granted or proposed to be granted by a credit institution for any of its borrowers;

4. the creditworthiness of any borrower of a credit institution;

5. any other matter which the Reserve Bank may, consider necessary for inclusion in the credit information to be collected and maintained by credit information companies, and, specify, by notification, in this behalf;

This is a beneficial relaxation by the Government to attract more FDI in ‘Credit Reference Agencies’ by separating them from NBFCs category.

(Press Note No. 1 (2008)) dt. 12-3-2008)

2. Guidelines for Foreign Investment in Commodity Exchanges

Commodity Exchanges, like Stock Exchanges, are infrastructure companies in the commodity futures market. With a view to infuse globally acceptable best practices, modern management skills and latest technology, Government has decided to allow foreign investment in Commodity Exchanges which are recognized under the Forward Contracts (Regulation) Act, 1952.

The salient features of the policy announcement are as follows:–

1. Foreign investment will be allowed through a composite ceiling; i.e., Foreign Direct Investment (FDI) under the FDI Scheme incorporated as Schedule 1 under regulation 5 (1) of the Foreign Exchange Management (Transfer or Issue of Security By a Person Resident Outside India) Regulations, 2000 (FEMA Regulations) + Investment by registered Foreign Institutional Investors (FII) under the Portfolio Investment Scheme Incorporated as Schedule 2 under Regulation 5(2) of the FEMA Regulations, is allowed up to 49%.

2. FDI will be allowed with specific prior approval of the Government.

3. Investment by registered FII under the Portfolio Investment Scheme will be limited to 23% and investment under the FDI Scheme will be limited to 26%

4. FII purchases shall be restricted to secondary market only.

5. No foreign investors/entity, including persons acting in concert, will hold more than 5% of the equity in these companies.

This is a welcome relaxation by the Government to increase FDI in Commodity Exchanges.

(Press Note No. 2 (2008)) dt. 12-3-2008)

3. Guidelines for Foreign Direct Investment (FDI) in Industrial Parks

Earlier, vide Press Note 2 (2000), FDI up to 100% was permitted under the automatic route in Industrial Parks. However, subsequently Press Note 2 (2005), was issued relating to FDI in construction development projects, townships etc. subject to the conditions for minimum capitalization, minimum areas requirements and lock-in of original investment. It was then not clear whether the investments under Industrial Parks would be subject to these guidelines and conditions.

Government of India has now clarified that investments in Industrial Parks would not be subject to the conditions prescribed under Press Note 2 (2005) and that FDI up to 100% is allowed under the automatic route both in setting up new industrial parks and in established industrial parks subject fulfilment of following conditions:

1. it would comprise of a minimum of 10 units and no single unit shall occupy more than 50% of the allocable area;

2. the minimum percentage of the area to be allocated for industrial activity shall not be less than 66% of the total allocable area.

This is a welcome clarification by the Government as many projects of industrial parks were held up due to subsequent introduction of Press Note No. 2 with stringent conditions and lack of clarity on its applicability to the existing projects of industrial parks. Further the definition of “Industrial Activity” is wide enough to cover consultancy and supply, data processing and data base activities.

(Press Note No. 3 (2008)) dt. 12-3-2008)

4. FDI policy for the Civil Aviation Sector

Current FDI Policy in Civil Aviation Sector notified under Press Note No. 4 (2006) covered investments in Airports and Air Transport Services. The Civil Aviation Sector, however is much wider and includes Airports, Scheduled and Non-Scheduled domestic passenger airlines, Helicopter services/Seaplane services, Ground Handling services, Maintenance and Repair organizations; Flying training institutes; and Technical training institutions.

The Government has now decided to amplify and lay down the policy for Foreign Direct Investment (FDI) for Civil Aviation sector and has also laid down definitions of the terms Airport, Aerodrome, Air transport service, Air transport undertaking, Aircraft component, Helicopter, Scheduled air transport service, Non-scheduled air transport services, Chartered and Cargo airlines, Seaplane and Ground handling.

The salient features of the new policy are as follows:–

1. Airports

The policy is the same as notified vide Press Note 4(2006), namely –

1. Investment in Green field projects – FDI up to 100% is allowed under the automatic route.

2. Existing projects FDI up to 100% is allowed with prior approval of the Government for FDI beyond 74%

2. Air Transport Services

1. Air Transport Services would include Domestic Scheduled Passenger Airlines; Non-Scheduled Airlines; Chartered Airlines; Cargo Airlines; Helicopter and seaplane services.

2. No foreign airlines would be allowed to participate directly or indirectly in the equity of an Air Transport Undertaking engaged in operating Scheduled, Non-Scheduled, and Chartered airlines.

3. Foreign airlines are allowed to participate in the equity of companies operating Cargo airlines, helicopter and seaplane services.

3. FDI ceiling in Air Transport Services

1. Scheduled Air Transport Services/Domestic Scheduled Passenger Airline
   FDI up to 49% and investment by Non-resident Indians (NRI) up to 100% allowed on the automatic route

2. Non-scheduled Air transport Service/Non Scheduled Airlines Chartered Airlines, and Cargo airlines
   FDI up to 74% and investment by Non-resident Indians (NRI)
   up to 100% allowed on the automatic route.

3. Helicopter services/Seaplane services requiring DGCA approval
   FDI up to 100% allowed on the automatic route.

4. FDI ceilings in other services under Civil Aviation sector

1. Ground Handling Services
   FDI up to 74% and investment by Non-resident Indians (NRIs) up to 100% allowed on the automatic route. This will be subject to sectoral regulations and security clearance.

2. Maintenance and Repair organizations; flying training institutes; and technical training institutions
   FDI up to 100% allowed on the automatic route.

This is a welcome step taken by Government towards development of Air Transport services. Foreign firms can set up wholly-owned subsidiaries for flying training institutes, technical training institutions, helicopter and seaplane services. Aircraft manufacturers can now set up fully owned Maintenance and Repairs Organisations (MROs). Cargo/Logistics companies will have relaxed limits of FDI in logistic sector.

(Press Note No. 4(2008) dt. 12-3-2008)

5. Rationalization of FDI policy for the petroleum & natural gas sector

Present policy for FDI in the Petroleum & Natural Gas Sector is governed by Press Note 1(2004) and Press Note 4(2006) and permits FDI up to 100% under the automatic route in exploration, petroleum product marketing, petroleum product pipelines, Natural gas/LNG pipelines and Petroleum refining in the private sector. FDI up to 26% is permitted with prior Government approval in petroleum refining by the Public Sector Undertakings (PSU). In the case of actual trading and marketing of petroleum products, FDI is allowed up to 100% with the condition that 26% foreign equity would be divested in favour of Indian Partner/public within 5 years.

On review of the extant policy for the sector, the Government of India has now decided as under:

1. To continue to allow FDI up to 100% under the automatic route in exploration, petroleum product marketing, petroleum product pipelines, natural gas/LNG pipelines and petroleum refining in the private sector.

2. To delete the condition of compulsory divestment of up to 26% equity within 5 years for actual trading and marketing of petroleum products; (Presently 100% FDI is allowed through automatic route with the condition of 26% compulsory divestment) and

3. To allow FDI up to 49% with prior approval of FIPB, in petroleum refining by PSUs without involving any divestment of dilution of domestic equity in the exiting PSUs

This is a beneficial relaxation given which is capable of attracting more FDI in petroleum refining PSUs and actual trading and marketing companies.

(Press Note No. 5 (2008)) dt. 12-3-2008)

6. FDI policy for mining of titanium bearing minerals and ore

India has large reserves of beach sand minerals in the coastal stretches around the country. Titanium bearing minerals viz., limenite, rutile and leucoxene, and zirconium bearing minerals including zircon are some of the beach sand minerals which have been classified as “prescribed substances” under the Atomic Energy Act, 1962.

Under the Industrial Policy Statement 1991 mining and production of minerals as “prescribed substances” and specified in the Scheduled to the Atomic Energy (Control of Production and Use) Order, 1953 were included in the list of industries reserved for the public sector. Vide Government of India Resolution No. 8/1(1)/97-PSU/1422 dated 6th October, 1998 issued by the Department of Atomic Energy laying down the policy for exploitation of beach sand minerals, private participation including Foreign Direct Investment (FDI), was permitted in mining and production of titanium ores (llmenite, rutile and Leucoxene) and Zirconium minerals (Zircon).

FDI up to 74% was permitted with prior approval of the Government in pure value addition projects without mining and mineral separation as well as integrated projects comprising both mining & mineral separation and value addition.

Vide Government of India Notification No. S.O. 61 (E) dated 18-1-2006, the Department of Atomic Energy re-notified the list of “prescribed substances” under the Atomic Energy Act, 1962. Titanium bearing ores and concentrates (llimenite, rutile and leucoxene) and Zirconium, its alloys and compounds and minerals/concentrates including Zircon, were removed from the list of “prescribed substances”.

On review of the extant policy Guidelines, the Government of India has now decided as under:

1. FDI up to 100% will be allowed with prior Government approval in mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities subject to sectoral regulations and the Mines and Minerals (Development and Regulation Act 1957).
    

2. FDI for separation of titanium bearing minerals and ores will be subject to the following additional conditions viz:

1. value addition facilities are set up within India along with transfer of technology;

2. disposal of tailings during the minerals separation shall be carried out in accordance with regulations framed by the Atomic Energy Regulatory Board such as Atomic Energy (Radiation Protection) Rules, 2004 and the Atomic Energy (Safe Disposal of Radioactive Wastes) Rules, 1987.

3. FDI will not be allowed in mining of “prescribed substances” listed in the Government of India Notification No. S.O 61(E) dated 18-1-2006 issued by the Department of Atomic Energy.

This is a beneficial relaxation available with prior Government approval which will increase activities of mining and mineral separation of titanium bearing minerals & ores.
(Press Note No. 6 (2008)) dt. 12-3-2008)

7. RBI has issued notification No. FEMA 174/2007-RB, Dt. 25-1-2008 allowing a shipping or airline company incorporated outside India or its agent in India, to open, hold and maintain a foreign Currency Account with an authorized dealer in India for meeting the local expenses in India of such airline or shipping company. (A.P. (DIR Series) Circular No. 48/2007-08-RB, Dt. 30-4-2007 was already issued for the same.)
    

8. Overseas Investments by Mutual Funds

With a view to providing greater opportunity for investment overseas, the aggregate ceiling for overseas investment by Mutual Funds registered with the Securities and Exchange Board of India (SEBI) has been enhanced from US $ 5 billion to US $ 7 billion with immediate effect. The existing facility to allow a limited number of qualified Indian Mutual Funds to invest cumulatively up to US $ 1 billion in overseas Exchange Traded Funds, as may be permitted by SEBI, shall continue. The investments would be subject to the terms and conditions and operational guidelines as issued by SEBI.

[A. P. (DIR Series) Circular No. 34 dated April 3, 2008]