The Consolidated Foreign Direct Investment (FDI) Policy was released by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India on 12 May 2015 (New Policy) and came into force with immediate effect. The New Policy supersedes the Consolidated FDI Policy (Circular 1 of 2014) (Old Policy) issued by the DIPP on 17 April 2014.

As was the case with the Old Policy, the New Policy mainly serves to (i) consolidate various press releases issued by the DIPP in the intervening period between the Old Policy and the New Policy; and (ii) provide clarifications to align the New Policy with existing laws and regulations. In particular, Press Note 4 of 2015, dated 24 April 2015, regarding policy on foreign investment in the pension sector has not been consolidated in the New Policy and should be read together with the New Policy.

The following is a brief analysis of the clarifications and changes effected in the New Policy:

  1. Transfer of shares from non-resident to non-resident: It has been clarified that approval of the Foreign Investment Promotion Board (FIPB) will be required only in case of transfer of shares from one non-resident investor to another non-resident investor in sectors under the Government route (i.e., pharmaceuticals).
  2. Cabinet Committee on Economic Affairs (CCEA) approval: Earlier, proposals with total foreign equity inflow of more than INR 1,200 crore were required to be placed for consideration of CCEA. The New Policy has increased the threshold to INR 2,000 crore. The CCEA had earlier proposed this limit to be increased to INR 3,000 crore. We can expect another press release/circular amending this to INR 3,000 crore.
  3. Filing of FC-TRS: The New Policy provides that in cases where the non-resident investor, including a non-resident Indian acquires shares on the stock exchanges under the FDI scheme, the responsibility of filing form FC-TRS with the AD Category-I bank would be on the investee company (and not on the transferor or transferee). There is a lack of clarity on the intent of this provision and how this requirement is sought to be operationalised. Given that the company may not be privy to such transactions, it needs to be understood how an investee company would achieve this requirement. It may be of interest to note that the RBI vide its circular dated 6 September 2013 had permitted non-residents who hold a controlling stake to acquire additional shares on the stock exchange.
  4. Issue of equity shares against any fund payable by the investee company: The New Policy clarifies that equity shares issued against any fund payable by the investee company, remittance of which does not require prior permission of the Government of India or the RBI, is permitted, provided the equity shares are issued in accordance with the extant FDI policy.
  5. Acquisition of shares under a scheme of amalgamation: It has been clarified that FIPB approval will not be required in cases of mergers or acquisitions taking place in companies engaged in automatic route sectors.
  6. ESOPs: It has been provided that FIPB approval will not be required for issue of employees’ stock options by companies engaged in automatic route sectors.
  7. Additional foreign investment: It has been clarified that FIPB approval will not be required in respect of additional foreign investment into an entity within an approved foreign equity percentage or in a wholly owned subsidiary.
  8. Confusion on Warrants/Partly Paid Shares: Pursuant to the RBI circular dated 14 July 2014, an Indian company whose activity/sector falls under the automatic route was not required to procure prior approval of the FIPB/Government for issue of partly-paid shares/warrants. However, the recent FDI Policy does not harmonize the same and states that warrants and partly paid shares can be issued to non-residents only after approval through the Government route.

The New Policy has not introduced any significant change or reform but has clarified several issues that otherwise needed clarity. We expect a series of reforms and clarifications through press notes to continue in the days to come.