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A Little More FDI Liberalization
The Reserve Bank of India (RBI) issued two notifications today (June 30, 2011) making India's foreign direct investment (FDI) rules just a little easier for some foreign investors and Indian companies.
The first notification should be welcomed by foreign investors who require prior government approval for their FDI into India. In cases where such approval is required, Indian companies can now (once the government approval for FDI has been obtained) issue shares to a foreign investor not just against cash, but also against capital imports from and pre-operating expenses paid for by the foreign investor. To take advantage of this liberalization the parties will need to establish an independent value for the capital imports or pre-operating expenses and comply with the anti-abuse provisions set out in the notification.
The second notification brings relief to Indian companies that are looking to prematurely buyback their foreign currency convertible bonds (FCCBs). The old rules on premature FCCB buybacks were due to lapse today, but the RBI has now extended the sunset provision to March 31, 2012. While doing so, it has also reduced the minimum discount to book value under which the buybacks can be undertaken by the Indian companies (down to 8% if the buyback is from foreign currency funds held and to between 10% and 20% if the buyback is from internal accruals).
India's Outbound Investment Rules Eased
The Reserve Bank of India (RBI) has further liberalized India's outbound investment rules. It's now become easier for an Indian company to sell its shares in a foreign joint venture or wholly owned subsidiary.
Previously, such sales were only permitted in a limited number of cases. Even then, the permitted sales were subject to various conditions, including the somewhat unrealistic requirement that the sale could not result in any write-off.
Under the new rules, it is now possible for an Indian company to sell its shares in a foreign venture at a loss to the original investment.
Even if the sale results in a loss, no prior RBI approval is required in three cases: (i) if the foreign venture is listed on an overseas exchange, (ii) if the Indian company is listed and has a net worth of at least Rs. 1,000 million, or (iii) if the Indian entity's original investment was less than US$10 million.
If the sale does not result in a loss to the original investment, no prior RBI approval is needed to effect the sale.
However, in both instances, a few basic compliance requirements still need to be met when making the sale without RBI approval. These requirements relate to ensuring that: (i) the shares are sold at a fair value, (ii) there are no dues owed to the Indian entity, (iii) the foreign entity has been operating for at least a year, and (iv) the Indian entity isn't being investigated by Indian authorities. As before, the sales have to be subsequently reported to the RBI.
In the few cases where an Indian entity still won't be able to meet the new requirements, it will only be able to sell its shares in a foreign venture with the RBI's prior approval.
India–Singapore DTAA Amendment
India and Singapore signed a protocol today amending the exchange of information provision in their double tax avoidance agreement (DTAA). The protocol is based on the new OECD model provisions on exchange of information in tax treaties.
It requires exchange of information on request in all tax matters and doesn't allow information to be withheld solely because it is held by a bank, financial institution or person acting in a fiduciary capacity. While the information received has to be treated as secret in the same manner as information obtained under the domestic law of the receiving country, it can be disclosed to authorities and courts concerned with tax enforcement. The protocol will not enter into force until it is ratified by both countries.
Sectoral Caps in India's FDI Policy
The Department of Industrial Policy and Promotion (DIPP) in the Government's Commerce Ministry issued a discussion paper inviting public comment on its current policy of capping foreign direct investment (FDI) in various sectors.
The purpose of the discussion paper is to help further rationalise India's FDI policy, specifically on issues related to ownership and control. Any rationalization would be welcome, given the 30% drop in annual FDI inflows India experienced in 2010, while other BRIC economies continued to see increased FDI inflows during the same year.
India's Outbound FDI Data
The Reserve Bank of India (RBI) has now started publishing data on India’s outbound foreign direct investment (FDI). The data published on financial commitments made by Indian companies to their foreign subsidiaries over the last four years reveal two interesting trends.
The first relates to the strong growth in debt-based financial commitments. Indian companies have been advancing more loans to their foreign subsidiaries over the last four years. Suprisingly, this lending increased after February 2010, even as the cost of funds in India were headed north.
The second trend relates to the 350% plus year-on-year spike in guarantee based commitments made by Indian companies in the last fiscal year (2010-11). Consistent with the Pareto principle, this spike was attributable to a handful of large international projects (mainly in the telecom sector, but also in oil and gas, manufacturing and other capital intensive sectors).
Dematerializing Promoter Securities
The Securities and Exchange Board of India (SEBI) is pushing promoters of listed companies to completely dematerialize their holdings.
In a June 17, 2011 circular sent to all stock exchanges, SEBI has required the exchanges to ensure that a company's securities can only be traded on their 'normal segment' if the company's promoters and promoter group have fully dematerialized their shareholding by September 30, 2011, and reported this to the concerned exchanges. If a company does not meet this criterion, its securities will have to be traded in the 'trade for trade segment' of the exchanges.
India's scientific research output
India's scientific research output has been improving in the last few years. The Indian Government's Press Information Bureau published a background note that showed India's global rank moved from 13th (in 1996) to 9th (in 2010), based on the number of scientific papers published.
Patent application filings have been increasing too—from less than 25,000 filing five years ago to over 34,000 filings last year. While filings by Indian residents represent just over a fifth of total annual filings, even those numbers are showing an upward trend.