Sipcot

To
All Authorised Dealers in Foreign Exchange

Dear Sirs,
Foreign investment under the Automatic Route of Reserve Bank -Further Liberalisation

1. Attention of authorised dealers is drawn to paragraph 10B.2 of Exchange Control Manual (ECM), regarding foreign investment under the 'Automatic Route of Reserve Bank'.

2. Government of India have since substantially expanded foreign investment under the 'Automatic Route of Reserve Bank' to include all items/activities, except certain items, for investment under Foreign Direct Investment (FDI) and Non-Resident Indian (NRI)/Overseas Corporate Body (OCB) investment. The said liberalisations have been announced through Ministry of Commerce &Industry's Press Note No.2 (2000 Series) dated 11th February 2000 (copy enclosed).

3. In line with these liberalisations, Reserve Bank has granted general permission under FERA,1973 for issue of shares to non-residents (which includes FDI and NRI/OCB investments) vide Notification No. FERA. 215/2000-RB dated 22nd March 2000 (copy enclosed). Accordingly, eligible Indian companies can issue shares to non-residents and submit the prescribed documents to the Regional Office of the Reserve Bank, as hitherto.

4. In this connection, it may be observed that, in terms of Press Note dated 11th February 2000 Government have superseded earlier Annexure III items which were linked to eligibility under the "Automatic Route of Reserve Bank". In that context, present Notification of Reserve Bank dated 22nd March 2000 has also been issued, in supersession of certain earlier Notifications, to give effect to the liberalisation in line with Government's Press Note dated 11th February 2000.

5. With regard to Reserve Bank's present Notification dated 22nd March 2000 granting general permission for issue of shares under FERA, 1973 it is clarified as under :

(a) All items/activities not covered by List A & B (mentioned in the Notification) will be eligible for foreign investment (FDI and NRI/OCB) under the 'Automatic Route of Reserve Bank', upto even 100% of capital subject to compliance of the conditions of the Notification.

(b) Automatic Route of Reserve Bank will not be available in respect of items in List A. All such investment proposals would come under SIA/FIPB route.

(c) Automatic Route of Reserve Bank will be available only upto the cap indicated in List B. [Proposals beyond the cap would come under SIA/FIPB route].

(d) Investment by non-residents (FDI and NRI/OCB) in EOUs/EPZ/EHTP/ STP units have now been made eligible under the 'Automatic Route of Reserve Bank' in terms of paragraph 2 of Press Note No.2 (2000 Series) dated 11th February 2000.

(e) The Automatic Route of Reserve Bank, hereafter, will be available only where non-resident investment does not exceed Rs.600 crores (FDI and NRI/OCB investments put together).

(f) The general permission granted by Reserve Bank as per the Notification dated 22nd March 2000 is available only when the Indian company is issuing shares to non-resident investors. Needless to mention where shares are to be acquired from the existing shareholders, such proposals will require clearance from SIA/FIPB and thereafter application will have to be made in Form FNC-7 to the Chief General Manager, Exchange Control Department (Foreign Investment Division), Reserve Bank of India, Central Office, Mumbai-400001.

(g) In terms of item (ii) of opening paragraph of Government's Press Note No.2 (2000 Series) dated 11th February 2000, all proposals in which the foreign collaborator has any previous venture/tie up in India (through investment or technical collaboration or trade mark agreement) in the same or allied field, are not eligible to be covered under the 'Automatic Route of Reserve Bank' (as per Government Press Note No.18 dated 14th December 1998). However, only foreign companies/entities have been made ineligible vide paragraph 2(b) of Notification dated 22nd March 2000.

(h) It is the responsibility of the investee Indian companies to ensure that investment (i.e. FDI and NRI/OCB investment) is eligible under the 'Automatic Route of Reserve Bank' as provided for in the Notification dated 22nd March 2000. Where there is a doubt or where it is clear that the proposal will not come under the 'Automatic Route of Reserve Bank', such cases will require clearance from SIA/FIPB.

(i) A new form, Form FC-GPR has now been prescribed (instead of earlier FC-RBI) for reporting shares issued in terms of the present Notification dated 22nd March 2000.

6. Authorised dealers may bring the contents of this circular to the notice of their constituents concerned.

7. Consequential amendments to the Exchange Control Manual will be issued in due course.

8. The directions contained in this circular have been issued under Section 73(3) of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and any contravention or non-observance thereof is subject to the penalties prescribed under the Act.

Yours faithfully,

B. MAHESHWARAN
Chief General Manager

Government of India
Ministry of Commerce & Industry
Department of Industrial Policy & Promotion
SIA (FC Division)

2. The general permission granted herein shall not apply to or in respect of -

(a) a person who is a citizen of, or a company incorporated in Pakistan, Bangladesh or Sri Lanka

(b) investment proposal in which the foreign company/entity has any previous venture/tie up in India (through investment or technical collaboration or trade mark agreement) in the same or allied field

(c) a company

(i) being an SSI unit seeking investment more than 24% of capital, or

(ii) being unit manufacturing items which require an Industrial licence under the Industries (Development and Regulation) Act,1951 or which require an Industrial Licence in terms of the locational policy notified by Government under the New Industrial Policy of 1991, or

(iii) having a proposal exceeding Rs.600/- Crores.

3. The general permission granted herein to issue shares is subject to the following conditions, namely:

(i) where the issuer company is a Trading Company, non-resident investment therein shall not exceed 51% of its capital and in respect of activities/area specified in the annexed List B, the cap for non-resident shareholding indicated thereat shall be observed;

(ii) In the case of issue of shares by an existing company,

(a) Board Resolution has been passed in connection with preferential allotment of shares, if any, to foreign investor, indicating the issue price;

(b) Special Resolution has been passed under Section 81(1A) of the Companies Act, 1956, wherever applicable, in connection with preferential allotment, indicating the issue price;

(c) In the case of a listed company, the price for the issue is worked out according to SEBI guidelines and is duly certified by the Company's Statutory Auditors; and in the case of any other company, calculation of fair value of shares (as per erstwhile CCI guidelines) is made by an independent Chartered Accountant; and the issue price shall not be less than that calculated price.

(iii) Approval, wherever necessary, from any authority, statutory or otherwise, required for the project or for issue of shares is obtained by the company;

(iv) payment for the shares to be issued to the foreign investor has been received by remittance from abroad through normal banking channels and/or from the NRE/FCNR accounts of eligible holders;

(v) In the case of issue of convertible preference shares, the valuation procedure shall conform to the guidelines issued by the Reserve Bank or SEBI, as the case may be, besides observing the equity cap prescribed ( after conversion).

(vi) the rate of dividend payable in respect of preference shares shall not exceed SBI Prime Lending Rate (prevailing on the date of the Board meeting in which issue of shares is recommended) plus 300 basis points;

(vii) remittance of dividend in respect of 22 comsumer goods industries specified in the Ministry of Industry Press Note No.12 dated 26.6.1992, shall be subject to the condition of balancing of dividend over a period of seven years to be reckoned in the case of an existing company, from the date of issue of shares, and in any other cases, from the date of commencement of production;

(viii) the issuer company files with the Regional Office of Reserve Bank, not later than 30 days from the date of receipt of remittance, a report containing the following:

(a) Name of the foreign investor;

(b) Country of residence or incorporation of the foreign investor;

(c) Date of receipt of remittance and its rupee equivalent;

(d) Name and address of the authorised dealer in India through whom the remittance is received.

(ix) the issuer company files with the Regional Office of Reserve Bank, not later than 30 days from the date of issue of shares, the following:

(a) A declaration as per annexed Form "FC-GPR"

(b) Original Foreign Inward Remittance Certificate (FIRC) evidencing receipt of funds from abroad or as the case may be, from the eligible NRE/FCNR accounts of the investor;

(c) Memorandum and Articles of Association of the issuer company;

(d) Particulars of shares issued, date of issue, number of shares and the issue price duly countersigned by a Chartered Accountant

(e) Certified copy each of Board Resolution, Special Resolution, Statutory Auditor's Certificate, or the Chartered Accountant's calculation, referred to in para 3(ii) above.

(f) Such other particulars and documents as may be required or specified by the Reserve Bank from time to time.

4. This notification supersedes the following notifications :

(i) No. F.E.R.A. 180/98-RB dated 13.01.1998
(ii) No. F.E.R.A. 184/98-RB dated 14.07.1998
(iii) No. F.E.R.A. 187/98-RB dated 03.10.1998
(iv) No. F.E.R.A. 190/98-RB dated 02.12.1998
(v) No. F.E.R.A. 197/99-RB dated 30.03.1999

(P.R. Gopala Rao)
Executive Director

Encl: List A& B, Form FC-GPR

LIST A

1. Banking

2. NBFC's activities in Financial Services Sector

3. Civil Aviation

4. Petroleum including exploration/refinery/marketing

5. Housing & Real Estate Development sector for foreign investment, other than NRIs/OCBs.

6. Venture Capital Fund & Venture Capital Company

7. Investing companies in Infrasturcture & Service Sector

8. Atomic Energy & related projects

9. Defence and strategic industries

10. Agriculture (including plantation)

11. Print Media

12. Broadcasting

13. Postal services

LIST B

1.Telecommunications

i)In basic, Cellular Mobile, paging and Value Added Services, and Global Mobile Personal Communications by Satellite, FDI is limited to 49% subject to grant of licence from Department of Telecommunications and adherence by the companies (who are investing and the companies in which investment is being made) to the licence conditions for foreign equity cap and lock in period for transfer and adition of equity and other licence provisions

ii)No equity cap is applicable to manufacturing activities

2.Housing and Real Estate

No foreign investment is permitted in this sector. NRIs/OCBs are allowed to invest. The scheme specificto NRIs and OCBs covers the following:

a)Development of serviced plots and construction of residential premises

b)Investment in real estate covering construction of residential and commercial premises including business centres and offices

c)Development of townships

d)City and regional level urban infrastructure facilities, including both roads and bridges.

e)Investment in manufacture of building materials

f)Investment in participatory ventures in (a) to (e) above

g)Investment in housing finance institutions

3.Coal and Lignite

upto 49% in PSU and

upto 50% in other cases as per the following terms and conditions prescribed by Govt.
i)Private Indian companies setting up or operating power projects as well as coal or lignite mines for captive consumption.

ii)for setting up coal processing plants subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing.

iii)for exploration or mining of coal or lignite for captive consumption.

4.Drugs & Pharmaceuticals

upto 74% in case of bulk drugs, their intermediaries and formulations (except those produced by the use of recombinant DNA technology)

5.Hotel & Tourism upto 51%

The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry includes travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment amusement, sports, and health units for tourists and Convention/Seminar units and organisations.

6.Mining

upto 74% for exploration and mining of diamonds and precious stones

upto 100% for exploration and mining of gold and silver and minerals other than diamonds and precious stones, metallurgy and processing

7.Advertising and films

upto 74% in advertising sector

upto 100% in film industry (i.e. film financing, production, distribution, exhibition, marketing and associated activities relating to film industry) subject to the following:

I)Companies with an established track record in films, TV, music, finance and insurance

II)The company should have a minimum paid up capital of US $ 10 million if it is the single largest equity shareholder and atleast US $ 5 million in other cases

III)Minimum level of foreign equity investment would be US $ 2.5 million for the single largest equity shareholder and US$ 1 million in other cases

IV)Debt equity ratio of not more than 1:1 i.e., domestic borrowings shall not exceed equity

V)Provisions of dividend balancing would apply.

Explanation :

(a) a person (not being a citizen of Pakistan or Bangladesh or Sri Lanka) shall be deemed to be of "Indian Origin", if

(i) he, at any time, held an Indian passport; or

(ii) he or either of his parents or his grandparents was citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955)

(b) "Overseas Corporate Body (OCB)" mean any overseas company, partnership firm, society and other corporate body predominantly owned directly or indirectly to the extent of at least 60% by non-residents of Indian nationality or origin(NRIs)