1. What do you mean by Foreign direct investment? JUNE 2010 Ans: Foreign direct investment in its c!

assic de"inition is de"ined as a company from one country making a physical investment into building a factory in another country. Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organi ational technologies and management skills, and as such can provide a strong impetus to economic development.

Foreign Direct Investment, or FDI, is a measure of foreign ownership of domestic productive assets such as factories, land and organizations. Foreign direct investments have become the major economic driver of globalization, accounting for over had of all cross-border investments.

2. #istinguish bet$een the %Financia! co!!aboration& and %technica! co!!aboration Ans$er 2: Financia! 'o!!aboration v. (echnica! 'o!!aboration Financia! co!!aboration involves Foreign Direct Investments in the form of !"uity, F##$s, etc., and in (echnica! co!!aboration in involves payment of royalty, technical know%how fee etc. $oth forms of investment may take place under automatic route where post facto approval of &$I is obtained when the investment ' payments are within the limits. (hen it exceeds the specified limits, it re"uires prior approval of central government.
Foreign #irect )nvestment *Financia! 'o!!aboration+

Foreign Direct Investments (FDI) can be made under the following two routes ). *utomatic &oute and +. ,overnment &oute'*pproval &oute. -nder the *utomatic &oute, the foreign investor or the Indian company does not re"uire any approval from the &eserve $ank or Foreign Investment .romotion $oard for the investment. -nder the ,overnment &oute, prior approval Foreign Investment .romotion $oard (FI.$) is re"uired.

Foreign #irect )nvestment in )ndia is a!!o$ed under automatic route e,ce-t under the "o!!o$ing circumstances.
(i) .roposals that re"uire an industrial licence (ii) #ases where foreign investment is more than +/0in the e"uity capital of units manufacturing items reserved for 11Is. (iii) .roposals in which the foreign collaborator has a previous venture'tie%up in India. (iv) .roposals relating to ac"uisition of shares in an existing Indian #ompany in favour of Foreign'2&I'3#$ investor. (v) .roposals falling outside notified sectoral caps (vi) 1ectors where FDI is not permitted. (vii) Investor chooses not to avail automatic route.

(echnica! co!!aboration *Foreign (echno!ogy Agreements+ For promoting technological capability and competitiveness of the Indian Industry, ac"uisition of foreign technology is encouraged through foreign collaboration agreements. Induction of know%how through such collaborations is permitted either through automatic route or with prior government approval. *a+ Under FE.A /egu!ations .ayment of foreign technology collaboration by Indian #ompanies are allowed under automatic route sub4ect to the following limits ). the lump sum payments not exceeding -15 + million +. &oyalty payable is being limited to 60 for domestic sales and 70 for exports, without restriction on duration of royalty payments. 8he royalty limits are net of taxes and are calculated according to standard conditions.

9. .ayment of royalty upto +0 for exports and )0 for domestic sales is allowed under automatic route for use of trademarks and brand name of the foreign collaborator without technology transfer. *b+ Under 'om-etition Act 2002 *i+ 0icencing agreements 8he provisions relating to anti%competitive agreements under the #ompetition *ct, +::+ does not restrict the right of any person, to restrain any infringement of intellectual property rights or to impose such reasonable conditions as may be necessary for the purposes of protecting any of his rights which have been or may be conferred upon him under the following legislations relating to intellectual property right; ; the #opyright *ct, )<6=> ; the .atents *ct, )<=:> ; the 8rade and ?erchandise ?arks *ct, )<67 or the 8rade ?arks *ct, )<<<> ; the ,eographical Indications of ,oods (&egistration and .rotection) *ct, )<<<> ; the Designs *ct, +:::> ; the 1emi%conductor Integrated #ircuits @ayout%Design *ct, +:::.
8hese, Intellectual property legislations confer exclusive rights on holders of patents, copyright, design rights, registered trademarks and other related rights protected by law. * holder of intellectual property rights is authorised to prevent any unauthori ed used of its intellectual property and to exploit such property, in particular by licensing it to third parties. 8hus, the technology transfer agreements which involves licensing of technology are outside the purview of 1ection 9 prohibition. It is presumed that such agreements usually improve economic efficiency and are pro%competitive as they can reduce duplication of research and development, strengthen the incentive for the initial research and development, spur incremental innovation, facilitate diffusion and generate product market competition. Aowever, licensing agreements may also be used for anti%competitive purposes, e.g. where two competitors use a licensing agreement to share out markets between themselves or where an important licence holder excludes competing technologies from the market. *ii+ Joint 1enture Agreements It has been clarified that any agreement entered into by way of 4oint ventures shall not be prohibited by 1ection 9()) of #ompetition *ct, +::+ if such agreements increase efficiency in production, supply, distribution, storage, ac"uisition or control of goods or provisions of services.

2. What is the E!igibi!ity "or Foreign #irect )nvestment? AN3: !ligibility for Foreign Direct Investment * person resident outside India (other than a citi en of .akistan or $angladesh) or an entity incorporated outside India, (other than an entity incorporated in .akistan or $angladesh) can invest in India, sub4ect to the FDI .olicy of the ,overnment of India. !rstwhile 3#$s, who have converted themselves into companies incorporated outside India can make fresh investments in India under

the FDI 1cheme provided they are not under the adverse notice of &eserve $ank ' 1!$I

4. What are the instruments used "or Foreign #irect )nvestment? AN3: 8ype of Instruments available for Foreign Direct Investment !"uity shares ' convertible debentures and preference shares are eligible under Foreign Direct Investment. 3ther instruments such as preference shares (non%convertible, optionally convertible or partially convertible) are considered as debt and guidelines applicable for !xternal #ommercial $orrowing (!#$) will apply to such issues. *s far as Debentures are concerned, only those which are fully and mandatorily convertible into e"uity, within a specified time would be reckoned as part of e"uity under the FDI .olicy. 5. 'an )ndian com-anies issue Foreign 'urrency 'onvertib!e 5onds *F''5s+? Ans. F##$s can be issued by Indian companies in the overseas market in accordance with the 1cheme for Issue of Foreign #urrency #onvertible $onds and 3rdinary 1hares (8hrough Depository &eceipt ?echanism) 1cheme, )<<9. 8he F##$ being a debt security, the issue needs to conform to the !xternal #ommercial $orrowing guidelines, issued by &$I vide 2otification 2o. F!?* 9'+:::%&$ dated ?ay 9, +:::, as amended from time to time. 6. 'an a "oreign investor invest in 6re"erence 3hares? What are the regu!ations a--!icab!e in case o" such investments? Ans. Bes. Foreign investment through preference shares is treated as foreign direct investment. Aowever, the preference shares should be fully and mandatorily convertible into e"uity shares within a specified time to be reckoned as part of share capital under FDI. Investment in other forms of preference shares re"uires to comply with the !#$ norms. 7. 'an a com-any issue debentures as -art o" F#) ?

Ans. Bes. Debentures which are fully and mandatorily convertible into e"uity within a specified time would be reckoned as part of e"uity under the FDI .olicy.

8. What are the "orms in $hich business can be conducted by a "oreign com-any in )ndia? Ans. * foreign company planning to set up business operations in India mayC

Incorporate a company under the #ompanies *ct, )<6D, as a Eoint Fenture or a (holly 3wned 1ubsidiary. 1et up a @iaison 3ffice ' &epresentative 3ffice or a .ro4ect 3ffice or a $ranch 3ffice of the foreign company which can undertake activities permitted under the Foreign !xchange ?anagement (!stablishment in India of $ranch 3ffice or 3ther .lace of $usiness) &egulations, +:::.

9. What is the -rocedure "or receiving Foreign #irect )nvestment in an )ndian com-any? Ans. *n Indian company may receive Foreign Direct Investment under the two routes as given under C
i. Automatic Route FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes for Investment' issued by the overnment of India from time to time, are attracted! FDI in sectors /activities to the extent permitted under the automatic route does not re"uire any prior approval either of the overnment or the #eserve $an% of India! ii. Government Route FDI in activities not covered under the automatic route re"uires prior approval of the overnment which are considered by the Foreign Investment Promotion $oard &FIP$', Department of (conomic )ffairs, *inistry of Finance! )pplication can be made in Form F+,I-, which can be downloaded from http://www.dipp.gov.in! Plain paper applications carrying all relevant details are also accepted! .o fee is payable!

Indian companies having foreign investment approval through FI ! route do not re"uire any further clearance from the Reserve !an# of India for receiving inward remittance and for the issue of shares to the non$resident investors. /he Indian company having received FDI either under the Automatic route or the Government route is re"uired to report in the )dvance #eporting Form, the details of the receipt of the amount of consideration for issue of e"uity instrument vi0! shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares through an )D +ategory 1I $an%, together with copy/ ies of the FI#+ evidencing the receipt of inward remittances along with the 2now 3our +ustomer &23+' report on the non,resident investors from the overseas ban% remitting the amount, to the #egional 4ffice concerned of the #eserve $an% of India within 50 days from the date of receipt of inward remittances! Further, the Indian company is re"uired to issue the e"uity instrument within 160 days, from the date of receipt of inward remittance or debit to .#(/F+.# &$' account in case of .#I/ PI4! )fter issue of shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares, the Indian company has to file the re"uired documents along with Form F+, P# with the #egional 4ffice concerned of the #eserve $an% of India within 50 days of issue of shares to the non,resident investors!

10. %hich are the sectors where F&I is not allowed in India' (oth under the Automatic
Route as well as under the Government Route) Ans. FDI is prohibited under the following sectors7 overnment #oute as well as the )utomatic #oute in the

i' #etail /rading &except single brand product retailing' ii' )tomic (nergy iii' -ottery $usiness iv' ambling and $etting

v' $usiness of +hit Fund vi' .idhi +ompany vii' )gricultural &excluding Floriculture, 8orticulture, Development of seeds, )nimal 8usbandry, Pisciculture and cultivation of vegetables, mushrooms, etc! under controlled conditions and services related to agro and allied sectors' and Plantations activities &other than /ea Plantations' &cf! .otification .o! F(*) 9:/;005,#$ dated <une 16, ;005'! viii' 8ousing and #eal (state business &except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in .otification .o! F(*) 15=/;00>,#$ dated <uly 19, ;00>'! ix' /rading in /ransferable Development #ights &/D#s'! x ' *anufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes!

11. %hat is the procedure to (e followed after investment is made under the Automatic
Route or with Government approval) Ans. ) two,stage reporting procedure has to be followed 7! ? *n receipt of share application money : @ithin 50 days of receipt of share application money/amount of consideration from the non, resident investor, the Indian company is re"uired to report to the #egional 4ffice concerned of the #eserve $an% of India, under whose Aurisdiction its #egistered 4ffice is located, the )dvance #eporting Form, containing the following details 7 .ame and address of the foreign investor/sB Date of receipt of funds and the #upee e"uivalentB .ame and address of the authorised dealer through whom the funds have been receivedB Details of the overnment approval, if anyB and 23+ report on the non,resident investor from the overseas ban% remitting the amount of consideration!

? +pon issue of shares to non$resident investors : (ithin 9: days from the date of issue of shares, a report in Form F#%,.&% .*&8 * together with the following documents should be filed with the &egional 3ffice concerned of the &eserve $ank of India. #ertificate from the #ompany 1ecretary of the company investment from persons resident outside India certifying thatC accepting

8he company has complied with the procedure for issue of shares as laid down under the FDI scheme as indicated in the 2otification 2o. F!?* +:'+:::%&$ dated 9rd ?ay +:::, as amended from time to time! 8he investment is within the sectoral cap ' statutory ceiling permissible under the *utomatic &oute of the &eserve $ank and it fulfills all the conditions laid down for investments under the *utomatic &oute, namely% a) 2on%resident entity'ies % (other than individuals), to whom it has issued shares have existing 4oint venture or technology transfer or trade mark agreement in India in the same field and #onditions stipulated at .aragraph /.+ of the #onsolidated FDI policy #ircular of ,overnment of India have been complied with. 7/ 2on%resident entity' ies % (other than individuals), to whom it has issued shares do not have any existing 4oint venture or technology transfer or trade mark agreement in India in the same field. Note G For the purpose of the HsameH field, / digit 2I# )<7= code would be relevant. b) 8he company is not an Industrial -ndertaking manufacturing items reserved for small sector.

7/ 8he company is an Industrial -ndertaking manufacturing items reserved for the small sector and the investment limit of +/ per cent of paid%up capital has been observed' re"uisite approvals have been obtained. c) 1hares issued on rights basis to non%residents are in conformity with &egulation D of the &$I 2otification 2o F!?* +:'+:::%&$ dated 9rd ?ay +:::, as amended from time to time. 7/ 1hares issued are bonus shares. 7/ 1hares have been issued under a scheme of merger and amalgamation of two or more Indian companies or reconstruction by way of de%merger or otherwise of an Indian company, duly approved by a court in India. 7/ 1hares are issued under !13. and the conditions regarding this issue have been satisfied. I 1hares have been issued in terms of 1I*'FI.$ approval 2o. %%%%%%%%%%%%%%%%%%%%% dated %%% I #ertificate from 1tatutory *uditors' 1!$I registered #ategory % I ?erchant $anker ' #hartered *ccountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

12. As a Practising Company Secretary, you have been assigned to work out preliminary considerations for setting up a !oint venture. State the preliminary considerations to be taken care of in this regard. "# marks$ *nsC Answer5(b)
Preliminaryconsiderations

; 1election C 1election of an appropriate co%venturer can have long lasting implications for the operation and success of the venture as the ability of the co%managing parties to co%exist and make unanimous decisions is essential to the success of a 4oint venture. ; 1etting out the ob4ectives and expectations C 1etting out the ob4ectives and expectations of the venture is pre%re"uisite. It is essential that the nature, scope and duration of the 4oint venture be identified. ; !mploy competent professionals C #ompetent professional like #1, @egal experts experienced in drafting 4oint venture and strategic alliance agreements should be retained as consultants, to structure the deal with proper legal advice.

; 2egotiation C It is appropriate that negotiations be conducted at the level of more senior management. ; *ttitude C 2egotiations for alliances should not be entered into with an adverse approach to the opposing party. ; ?3- C 8he next step is to prepare memorandum of understanding, setting out the ob4ectives of the 4oint venture prior to finalising the 4oint venture agreement. 8he ?3- may set out the key features of the proposed 4oint venture arrangements and can represent a broad outline of the definitive agreement.

; Due Diligence C *fter the parties have agreed on the basic terms of the 4oint venture arrangement a fixed period of time is often set in which to conduct a detailed and comprehensive review of all information pertinent to the proposed business venture prior to the execution of the 4oint venture agreement. 8his process is referred to as Jdue diligenceK.

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12. What are the "unctions o" 0iaison 7""ice;/e-resentative 7""ice 6ro<ect 7""ice and 5ranch 7""ice ? AN3: Foreign 'om-anies can set u- their o-erations in )ndia through = 0iaison 7""ice;/e-resentative 7""ice = 6ro<ect 7""ice = 5ranch 7""ice 0iaison o""ice acts as a channe! o" communication bet$een the -rinci-a! -!ace o" business or head office and Indian activities. @iaison office can not undertake any commercial activity directly or

indirectly and can not, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export'import from'to India and also facilitate technical' financial collaboration between parent company and companies in India. *pproval for establishing a liaison office in India is granted by &eserve $ank of India (&$I). Foreign #ompanies planning to execute specific pro4ects in India can set up temporary pro4ect'site offices in India. &$I has now granted general permission to foreign entities to establish 6ro<ect 7""ices sub4ect to specified conditions. 1uch offices can not undertake or carry on any activity other than the activity relating and incidental to execution of the pro4ect. .ro4ect 3ffices may remit outside India the surplus of the pro4ect on its completion, general permission for which has been granted by the &$I Foreign companies engaged in manufacturing and trading activities abroad are allowed to set u- 5ranch 7""ices in India for the following purposesC !xport'Import of goods &endering professional or consultancy services #arrying out research work, in which the parent company is engaged. .romoting technical or financial collaborations between Indian companies and parent or overseas group company. &epresenting the parent company in India and acting as buying'selling agents in India. &endering services in Information 8echnology and development of software in India. &endering technical support to the products supplied by the parent' group companies. It may be noted that retail trading activities of any nature is not allowed for a branch office in India. * branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. $ranch 3ffices established with the approval of &$I, may remit outside India profit of the branch, net of applicable Indian taxes and sub4ect to &$I guidelines, permission for setting up branch offices is granted by the &eserve $ank of India (&$I). No a--rova! sha!! be necessary "rom /5) "or a com-any to estab!ish a branch; unit in 3E>s to underta?e manu"acturing and service activities sub<ect to s-eci"ied conditions. 3uch 5ranch 7""ices $ou!d be iso!ated and restricted to the 3-ecia! Economic >one *3E>+ a!one and no business activity;transaction $i!! be a!!o$ed outside the 3E>s in )ndia 10

$hich inc!ude branches;subsidiaries o" its -arent o""ice in )ndia. *pplication for setting up @iaison 3ffice' .ro4ect 3ffice' $ranch 3ffice may be submitted in "orm FN' 1, along with the following documentsC ; !nglish version of the #ertificate'&egistration or ?emorandum and *rticles of *ssociation attested by Indian !mbassy'2otary .ublic in the country of &egistration. ; @atest *udited $alance 1heet of the applicant entity.

FA,,... /ow can foreign companies open 0iaison /!ranch office in India) Ans. A. @ith effect from February 1, ;010, foreign companies/entities desirous of setting up of -iaison 4ffice / $ranch 4ffice &-4/$4' are re"uired to submit their application in Form F.+ along with the documents mentioned therein to Foreign Investment Division, Foreign (xchange Department, #eserve $an% of India, +entral 4ffice, *umbai through an )uthorised Dealer ban%! /his form is available at www!rbi!org!in !. /he applications from such entities in Form F.+ will be considered by the #eserve $an% under two routes7 Reserve !an# Route , @here principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment &FDI' is permissible under the automatic route! Government Route , @here principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route! )pplications from entities falling under this category and those from .on , overnment 4rganisations / .on , Profit 4rganisations / overnment $odies / Departments are considered by the #eserve $an% in consultation with the *inistry of Finance, overnment of India!

1. /he following additional criteria are also considered by the #eserve $an% while sanctioning -iaison/$ranch 4ffices of foreign entities 7 ? 2rac# Record For $ranch 4ffice C a profit ma%ing trac% record during the immediately preceding five financial years in the home country!

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For -iaison 4ffice C a profit ma%ing trac% record during the immediately preceding three financial years in the home country!

3 4et %orth Dtotal of paid,up capital and free reserves, less intangible assets as per the latest )udited $alance Eheet or )ccount Etatement certified by a +ertified Public )ccountant or any #egistered )ccounts Practitioner by whatever nameF! For $ranch 4ffice C not less than GED 100,000 or its e"uivalent! For -iaison 4ffice C not less than GED >0,000 or its e"uivalent!

&. Permission to set up such offices is initially granted for a period of 5 years and this may be extended from time to time by the )uthorised Dealer in whose Aurisdiction the office is set up! /he $ranch / -iaison offices established with the #eserve $an%Hs approval will be allotted a +ni"ue Identification 4um(er &GI.' & www!rbi!org!in/scripts/Fema!aspx '! /he $4s / -4s shall also obtain Permanent )ccount .umber &P).' from the Income /ax )uthorities on setting up the offices in India! E. -iaison/$ranch offices have to file an )nnual )ctivity +ertificate &))+s' from the )uditors, as at end of *arch 51, along with the audited $alance Eheet on or before Eeptember 50 of that year, stating that the -iaison 4ffice has underta%en only those activities permitted by #eserve $an% of India! In case the annual accounts of the -4/ $4 are finali0ed with reference to a date other than *arch 51, the ))+ along with the audited $alance Eheet may be submitted within six months from the due date of the $alance Eheet! ,.5. %hat are the permitted activities of 0iaison *ffice/ Representative *ffice) Ans. ) -iaison 4ffice &also %nown as #epresentative 4ffice' can underta%e only liaison activities, i!e! it can act as a channel of communication between 8ead 4ffice abroad and parties in India! It is not allowed to underta%e any business activity in India and cannot earn any income in India! (xpenses of such offices are to be met entirely through inward remittances of foreign exchange from the 8ead 4ffice outside India! /he role of such offices is, therefore, limited to collecting information about possible mar%et opportunities and providing information about the company and its products to the prospective Indian customers! ) -iaison 4ffice can underta%e the following activities in India 7 i! ii! iii! #epresenting in India the parent company / group companies! Promoting export / import from / to India! Promoting technical/financial collaborations companies and companies in India! between parent/group

iv!

)cting as a communication channel between the parent company and Indian companies!

Foreign investment in India is governed by Foreign Direct Investment .olicy and sub%section (9) of section D of the Foreign !xchange ?anagement *ct, )<<< read with 2otification 2o. F!?* +:'+:::%&$ dated ?ay 9, +:::, containing Foreign !xchange ?anagement (8ransfer or issue of security by a person resident outside India) &egulations, +::: which has been amended from time to time. 12

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Foreign investment in India is freely permitted in almost all sectors except for specified prohibited sectors. Foreign Direct Investments (FDI) can be made under *utomatic &oute and ,overnment &oute'*pproval &oute. Eoint Fenture in India can be either by setting up a new company or in an existing company.
-tate whether the following statement is 62rue7 or 6False7 4ne of the %ey attractions of Aoint ventures is their non,flexibility! ? /rue ? False 1orrect answer: False 1hoose the correct answer Eetting up of wholly owned subsidiaries &@4E' and <oint Ientures abroad is aJJJJJJJJ! a! Direct Investment b! Indirect Investment c! Foreign Investment d! .one of the above 1orrect answer: a

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