On May 12, 2015, the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (the “DIPP”) issued the consolidated foreign direct investment policy circular of 2015 (the “FDI Policy 2015”).
The circular on consolidated foreign direct investment policy is updated by the DIPP every year and captures all the foreign direct investment policy changes made by the Indian government in the previous year by way of press notes or press releases. The FDI Policy 2015 (effective from May 12, 2015) subsumes and supersedes all press notes, press releases, clarifications and circulars issued by the DIPP and in force on May 11, 2015 other than press note 4 of 2015 dealing with foreign investment in the pensions sector issued by the DIPP on April 24, 2015.
Increase in the pecuniary limit for consideration of foreign investment proposals by the Foreign Investment Promotion Board
Under the previous foreign direct investment policy issued on April 17, 2014, the Foreign Investment Promotion Board (the “FIPB”) would consider all proposals resulting in foreign equity inflows up to INR12 billion (US$187.5 million) and the Cabinet Committee on Economic Affairs (“CCEA”) would consider all proposals in excess of INR12 billion (US$187.5 million). Under the FDI Policy 2015, the pecuniary limit of the FIPB to consider foreign investment proposals has been increased to INR20 billion (US$312.5 million). Therefore, only those proposals resulting in foreign equity inflows above INR20 billion (US$312.5 million) will now be considered by the CCEA. This will result in a speedier approval process for large-scale projects.
Filing of Form FC-TRS in case of purchase of shares on a stock exchange
The FDI Policy 2015 provides that in case of purchase of shares of an Indian company by a non-resident on an Indian stock exchange, the Form FC-TRS will have to be submitted by the investee company to the authorized dealer bank. Previously, in case of purchase of shares by a non-resident of an Indian company on an Indian stock exchange, the Form FC-TRS was required to be submitted by the transferor or transferee resident in India. Now, in such transactions, the onus of reporting the share purchase transaction has been placed on the investee company, thereby reducing the burden on the resident transferor.
FIPB approval needed for offshore transfers, etc.
As per the FDI Policy 2015, prior approval of the FIPB has to be obtained in case of transfer of shares of an Indian company engaged in a sector coming under the government approval route (i.e., a sector in which foreign investment requires the prior approval of the FIPB) from a non-resident to another non-resident. Previously, a transfer of shares from a non-resident to another non-resident in any sector was permitted freely and without such a requirement. Now, foreign investors in sectors like defense, insurance, retail trading, etc. will have to get FIPB approval in respect of any transfer of their Indian joint venture company’s shares to another non-resident, even to an affiliate. The rationale for this change is to ensure that India’s foreign investment policy is not circumvented through offshore transfers and other arrangements.
Further, the FDI Policy 2015 provides that: (a) an issue of shares by a transferee Indian company engaged in a sector coming under the automatic route (i.e., a sector in which foreign investment can be made without the approval of the FIPB) pursuant to a scheme of merger or amalgamation to a non-resident; and (b) an issue of employee stock options by an Indian company engaged in a sector coming under the automatic route, will not require prior FIPB approval. Impliedly, prior approval of the FIPB will now have to be obtained in case any of the foregoing transactions are undertaken by an Indian company engaged in a sector coming under the government route.
The changes brought about by the FDI Policy 2015 reflect the intention of the Indian government to tighten the rules for foreign investment in sectors under the government route. This is mainly to ensure that as the foreign ownership caps are raised, there is no circumvention of the rules to the detriment of the Indian government and economy.
As per Press Note 4 of 2015 up to 49% foreign investment is permitted in pension funds in India; however, prior approval of the FIPB has to be obtained for foreign investment exceeding 26%.