Updated instructions and clarification relating to FDI Policy - FEMA - PRESS RELEASE

Updated instructions and clarification relating to FDI Policy 1. Circular 2 of 2010 , updating all instructions and clarifications relating to FDI Policy, as on September 30, 2010, is being released today. This is as per the commitment made that this circular would be revised every six months, when Circular 1 of 2010 was released. 2. The substantive issues addressed/clarified in Circular 2 include the following: (i) Incorporation of Press Note 2 of 2010 relating to the prohibition on manufacture of cigarettes etc {Para 5.1}: The manufacturing of 'cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes', in which FDI had been prohibited earlier this year, has now been formally included in the list of sectors/activities in which FDI is prohibited. (ii) Clarification on the coverage of "controlled conditions" for FDI in Agriculture, Animal Husbandry etc {Para 5.2.1.1(vi)}: The term is relevant because FDI is permitted only under 'controlled conditions' under specified sub-sectors within the "Agriculture and Animal Husbandry" sector. A number of queries had been received from stakeholders with regard to the coverage of this term. The coverage/scope of the term 'controlled conditions' has now been separately defined in respect of 'animal husbandry', 'development of seeds', 'pisciculture and aquaculture' and 'floriculture/horticulture/cultivation of vegetables and mushrooms'. It is expected that this would lead to adequate clarity on FDI in this sector. (iii)Clarification on the concept of value-addition in case of mining and mineral separation of Titanium bearing minerals {Para 5.2.3.3.2(ii)}: This is relevant because FDI for separation of Titanium bearing minerals and ores is subject to the setting up of value-addition facilities in India. It has been clarified that the objective of the policy is to ensure that raw material available in the country is utilized for setting up downstream industries and the technology available internationally is available for setting up such industries within the country. Thus, if with the technology transfer, the objective of the FDI policy can be achieved, the conditions stipulated in regard of setting up value addition facilities shall be deemed to be fulfilled. (iv) Clarification that 100% foreign owned NBFCs, with a minimum capitalization of $ 50 million, can set up subsidiaries for specific NBFC activities, without bringing additional capital towards minimum capitalization {Para 5.2.18.2(iv)}: The need for this clarification had arisen as requests had been received for clarifying whether such downstream subsidiaries were independently required to meet conditions relating to minimum capitalization. (v) Introduction of specific provision for downstream investment through internal accruals {Para 4.6.6(iv)}: It has now been explicitly clarified that downstream investments through internal accruals are permissible, subject to following of guidelines for downstream investments by Indian companies which are "owned and/or controlled by non-resident entities". This clarity was necessary as the FDI policy states that for the purpose of downstream investment, the operating-cum-investing/investing companies would have to bring in requisite funds from abroad and not leverage funds from the domestic market for such investments. While this would not preclude companies from making downstream investments through 'internal accruals', it had been noticed that, in certain cases, some companies had started accessing the Government approval route for downstream investments through internal accruals. (vi) Clarification of the terms 'original investment' and 'lock-in period' in case of minimum capitalization of construction development projects {Para 5.2.13.2(3)}: It has been clarified that the term "Original investment" means the entire amount brought in as FDI. It has further been clarified that the lock-in-period of three years will be applied from the date of receipt of each installment/tranche of FDI or from the date of completion of minimum capitalization, whichever is later. This was necessary as a number of queries had been received in regard to the coverage of these terms. (vii) Removal of the condition that 'wholesale trading made to Group companies should be for internal use only' in the guidelines for Cash Carry Wholesale Trading {Para 5.2.24.1.2(d)}: This change has been made in response to requests for simplification of the guidelines received from stakeholders. (viii) Clarification that Minimum Capitalization includes share premium received along with face value of the shares only when it is received by the company upon issue of the shares to the non-resident investors {Para 5.2.25.2 - Note below}: This is relevant in sectors such as NBFC and construction development where "minimum capitalization" requirements have been stipulated. This clarification is expected to bring in requisite clarity on the issues of inclusion of share premium within minimum capitalization and on the circumstances under which such share premium can be counted towards minimum capitalization. (ix) Amendment of Note below the definition of 'Capital' to allow for FDI in partly-paid shares and warrants through the Government route {Para 2.1.5}: At present, capital is defined as "equity shares, fully, compulsorily and mandatorily convertible preference shares, fully compulsorily and mandatorily convertible debentures". This clarification, allowing for FDI in partly-paid shares and warrants, through the Government route, is intended to bring in consistency with extant practice. (x) Changes in the paragraphs relating to issue price of shares and addition of a paragraph on share-swaps, consistent with extant instructions {Paras 3.4.2 and 3.5.6}: The latter has been included as a number of cases of share swaps are now being considered under the Government approval route. Prior to this, the issue of share swaps had not been explicitly mentioned under the FDI policy. This is expected to bring in clarity on the aspect of share swaps requiring approval of Government. 3. After the issue of Circular 1 of 2010 , the Department has released five discussion papers on various aspects of FDI policy. Appropriate reference has been made to these discussion papers in this Circular.