Master Circular No.-13/2010-11 - FEMA

[Rules and Regulations]

Master Circular on Foreign Investment in India
Master Circular No. 13/2010-11
Dated 1-7-2010

Foreign investment in India is governed by sub-section (3) of Section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time. The regulatory framework and instructions issued by the Reserve Bank have been compiled in this Master Circular. The list of underlying circulars/notifications is furnished in Appendix. In addition to the above, this Master Circular also covers the area of Investment in capital of partnership firms or proprietary concern which is regulated in terms of sub-section 2(h) of Section 47 of Foreign Exchange Management Act, 1999, read with Notification No. FEMA 24/2000-RB dated May 3, 2000.
2. This Master Circular is being issued with a sunset clause of one year. This circular will stand withdrawn on July 1, 2011 and be replaced by an updated Master Circular on the subject.

[Rules and Regulations]

Part - 1

Foreign Investments in India - Schematic Representation

Section - I: Foreign Direct Investment

1. Foreign Direct Investment in India

Foreign Direct Investment (FDI) in India is governed by the FDI Policy announced
by the Government of India and the provisions of the Foreign Exchange
Management Act (FEMA), 1999. Reserve Bank has issued Notification No. FEMA
20 /2000-RB dated May 3, 2000 which contains the Regulations in this regard.
This Notification has been amended from time to time.

[Rules and Regulations]

2. Entry routes for investments in India

(i) Foreign Direct Investment is freely permitted in almost all sectors. Under
the Foreign Direct Investments (FDI) Scheme, investments can be made by
non-residents in the shares / convertible debentures / preference shares

1

of an Indian company, through two routes - the Automatic Route and the
Government Route.The pricing of shares / convertible debentures /
preference shares should be decided / determined upfront at the time of
issue of the instruments. Under the Automatic Route, the foreign investor
or the Indian company does not require any approval from the Reserve
Bank or Government of India for the investment. Under the Government
Route, prior approval of the Government of India, Ministry of Finance,
Foreign Investment Promotion Board (FIPB) is required.
If the investor has existing venture or tie-up in India as on January 12,
2005, through investment / technical collaboration / trade mark agreement
in the same field in which the Indian company, whose shares are being
issued, is engaged, he has to obtain prior permission of Secretariat of
Industrial Assistance (SIA) / Foreign Investment Promotion Board (FIPB),
to acquire the shares. This restriction is, however, not applicable to:

a) the issue of shares for investments to be made by Venture Capital
Funds registered with the Securities and Exchange Board of India
(SEBI);
b) investments by multinational financial institutions;
c) where in the existing joint venture, investment by either of the parties
is less than 3 per cent;
d) where the existing joint venture / collaboration is defunct or sick
e) for issue of shares of an Indian company engaged in Information
Technology sector or in the mining sector, if the existing joint venture
or technology transfer / trade mark agreement of the person to
whom the shares are to be issued are also in the Information
Technology sector or in the mining sector for same area / mineral.
Entry route for non-resident investors in India as well as sector-specific
investment limits in India are given in Annex -1.
(ii) FDI Policy is formulated by the Government of India.The Ministry of
Commerce and Industry, Department of Industrial Policy and Promotion
has issued a “Consolidate FDI Policy Circular” dated March 31,2010
elaborating the policy and the process in respect of FDI in India, which is
available in public domain and can be downloaded from the website of
Ministry of Commerce and Industry, Department of Industrial Policy and
Promotion -

http://siadipp.nic.in/policy/fdi_circular/fdi_circular_1_2010.pdf
FEMA Regulations prescribe the mode of investments i.e. manner of
receipt of funds, issue of shares / convertible debentures and preference
shares and reporting of the investments to the Reserve Bank.


Note-

1

"Shares" mentioned in this Master Circular means equity shares, "preference shares" means fully and mandatorily
convertible preference shares and "convertible debentures" means fully and mandatorily convertible debentures [cf. A. P.
(DIR Series) Circular Nos. 73 & 74 dated June 8, 2007]

[Rules and Regulations]

3. Prohibition on investment in India

(i) Foreign investment in

any form is prohibited in a company or a partnership
firm or a proprietary concern or any entity, whether incorporated or not

(such as, Trusts) which is engaged or proposes to engage in the following
activities

2:
(a) Business of chit fund, or
(b) Nidhi company, or
(c) Agricultural or plantation activities, or
(d) Real estate business, or construction of farm houses, or
(e) Trading in Transferable Development Rights (TDRs).
(ii) It is clarified that “real estate business” does not include development of
townships, construction of residential / commercial premises, roads or
bridges, educational institutions, recreational facilities, city and regional
level infrastructure, townships. It is further clarified that partnership firms
/proprietorship concerns having investments as per FEMA regulations are
not allowed to engage in print media sector.
(iii) In addition to the above, investment in the form of FDI is also prohibited in
certain sectors such as (Annex-2)3:
(a) Retail Trading (except single brand product retailing)
(b) Atomic Energy
(c) Lottery Business including Government / private lottery , online
lotteries, etc.
(d) Gambling and Betting including casinos, etc
(e) Business of chit fund
(f) Nidhi company
(g) Trading in Transferable Development Rights(TDRs)
(h) Activities / sectors not opened to private sector investment
(i) Agriculture (excluding Floriculture, Horticulture, Development of
seeds, Animal Husbandry, Pisciculture and cultivation of vegetables,
mushrooms, etc. under controlled conditions and services related to

agro and allied sectors) and Plantations (other than Tea Plantations)
(j) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of
tobacco or of tobacco substitutes.
Note:
1. Besides foreign investment in any form, foreign technology
collaboration in any form including licensing for franchise,
trademark, brand name, management contract is also completely
prohibited for Lottery Business and Gambling and Betting
activities.
2. Foreign investment in Trusts other than investment by SEBI
registered FVCIs in domestic VCF is not permitted.


Notes-

2.

As per Notification no. FEMA 1/2000-RB dated May 3, 2000

3.

As per Notification no. FEMA 20/2000-RB dated May 3, 2000

[Rules and Regulations]

4. Eligibility for Investment in India

(i) A person

4 resident outside India (other than a citizen of Pakistan) or an
entity incorporated outside India, (other than an entity incorporated in
Pakistan) can invest in India, subject to the FDI Policy of the Government
of India. A person who is a citizen of Bangladesh or an entity incorporated

in Bangladesh can invest in India under the FDI Scheme, with the prior
approval of the FIPB.
(ii) Overseas Corporate Body (OCB) means a company, partnership firm,
society and other corporate body owned directly or indirectly to the extent
of at least sixty per cent by Non-Resident Indians and includes overseas
trust in which not less than sixty per cent beneficial interest is held by Non-
Resident Indians, directly or indirectly, but irrevocably. OCBs have been
de-recognised as a class of investors in India with effect from September
16, 2003. Erstwhile OCBs which are incorporated outside India and are not
under adverse notice of the Reserve Bank can make fresh investments
under the FDI Scheme as incorporated non-resident entities, with the prior
approval of the Government of India if the investment is through the
Government Route; and with the prior approval of the Reserve Bank if the
investment is through the Automatic Route.


Note-

4.

A "person" is defined under FEMA (Section 2 u) as:

(a)

an individual,

(b)

a Hindu undivided family,

(c)

a company,

(d)

a firm,

(e)

an association of persons or a body of individuals, whether incorporated or not,

(f)

every artificial juridical person, not falling within any of the preceding sub-clauses, and

(g)

any agency, office or branch owned or controlled by such person;

•

“person resident in India” means—[As per FEMA Sec 2( v)]
(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding
financial year but does not include—
(A) a person who has gone out of India or who stays outside India, in either case—
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside
India for an uncertain period;
(B) a person who has come to or stays in India, in either case, otherwise than—
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for
an uncertain period;
(ii) any person or body corporate registered or incorporated in India,
(iii) an office, branch or agency in India owned or controlled by a person resident outside India,
(iv) an office, branch or agency outside India owned or controlled by a person resident in India;

•

“person resident outside India” means a person who is not resident in India; [As per FEMA Sec 2(w)].

[Rules and Regulations]

5. Type of instruments

(i) Indian companies can issue equity shares, fully and mandatorily convertible
debentures and fully and mandatorily convertible preference shares subject
to pricing guidelines / valuation norms prescribed under FEMA Regulations.
(ii) Issue of other types of preference shares such as, non-convertible,
optionally convertible or partially convertible, have to be in accordance with
the guidelines applicable for External Commercial Borrowings (ECBs).
Since these instruments are denominated in rupees, the rupee interest rate
will be based on the swap equivalent of London Interbank Offered Rate
(LIBOR) plus the spread permissible for ECBs of the corresponding
maturity.
(iii) As far as debentures are concerned, only those which are fully and
mandatorily convertible into equity, within a specified time would be
reckoned as part of equity under the FDI Policy.

[Rules and Regulations]

6. Investments in Micro and Small Enterprise (MSE)

A company which is reckoned as Micro and Small Enterprise (MSE) (earlier Small
Scale Industrial Unit) in terms of the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006, including an Export Oriented Unit or a Unit in
Free Trade Zone or in Export Processing Zone or in a Software Technology Park
or in an Electronic Hardware Technology Park, and which is not engaged in any
activity/sector mentioned in Annex I may issue shares or convertible debentures
to a person resident outside India (other than a resident of Pakistan and to a
resident of Bangladesh under approval route), subject to the prescribed limits as
per FDI Policy, in accordance with the Entry Routes and the provision of Foreign
Direct Investment Policy, as notified by the Ministry of Commerce & Industry,
Government of India, from time to time.
Any Industrial undertaking, with or without FDI, which is not an MSE, having an
industrial license under the provisions of the Industries (Development &
Regulation) Act, 1951 for manufacturing items reserved for manufacture in the
MSE sector may issue shares to persons resident outside India (other than a
resident of Pakistan and to a resident of Bangladesh under approval route), to the
extent of 24 per cent of its paid-up capital. Issue of shares in excess of 24 per cent
of paid-up capital shall require prior approval of the Foreign Investment Promotion
Board of the Government of India and shall be in compliance with the terms and
conditions of such approval.

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7. Investments in Asset Reconstruction Companies (ARCs)

(i) Persons resident outside India [other than Foreign Institutional Investors
(FIIs)], can invest in the equity capital of Asset Reconstruction Companies
(ARCs) registered with the Reserve Bank only under the Government
Route. Automatic Route is not available for such investments. Such
investments have to be strictly in the nature of FDI. Investments by FIIs are
not permitted in the equity capital of ARCs and FDI is restricted to 49 per
cent of the paid-up capital of the ARC.

(ii) However, FIIs registered with the SEBI can invest in the Security Receipts
(SRs) issued by ARCs registered with the Reserve Bank. FIIs can invest up
to 49 per cent of each tranche of scheme of SRs, subject to the condition
that investment by a single FII in each tranche of SRs shall not exceed 10
per cent of the issue.

[Rules and Regulations]

8. Investment in infrastructure companies in the Securities Market

Foreign investment is permitted in infrastructure companies in Securities Markets,
namely, stock exchanges, depositories and clearing corporations, in compliance
with SEBI Regulations and subject to the following conditions :
(i) There is a composite ceiling of 49 per cent for Foreign Investment, with a
FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital;
(ii) FDI will be allowed with specific prior approval of FIPB; and
(iii) FII can invest only through purchases in the secondary market.

[Rules and Regulations]

9. Investment in Credit Information Companies

Foreign investment is permitted in Credit Information Companies in compliance
with the Credit Information Companies (Regulations) Act, 2005 and subject to the
following :
(i) The aggregate foreign investment in Credit Information Companies is
permitted only up to 49 per cent of the paid up capital.
(ii) Foreign investment up to 49 per cent is allowed only with the prior approval
of FIPB and regulatory clearance from the Reserve Bank.
(iii) Investment by SEBI Registered FIIs is permitted only through purchases in
the secondary market to an extent of 24 per cent which should be within
the overall limit of 49 per cent for foreign investment.
(iv) No FII can individually hold directly or indirectly more than 10 per cent of
the equity.