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Investment by Foreign Companies under Technical/Financial Collaborations
Approvals for Technical Collaboration Agreements
The Reserve Bank considers under the Automatic Route, applications from Indian companies for foreign technical collaborations, for lumsome payment of technical know-how fee up to US $ 2 million and/or royalty up to 5% on domestic sales and 8% on exports over a period of 7 years from the date of commencement of commercial production or 10 years from the date of agreement, whichever is earlier.
Applications for foreign technical collaborations under the Automatic Route should be made to the concerned regional office of Reserve Bank in form FT (RBI). Proposals which do not conform to the above parameters would require the approval of Secretariat for Industrial Assistance (SIA), Ministry of Industry, Government of India, New Delhi. The extension of foreign technical collaboration agreements (including those approved by Reserve Bank) would also need the approval of SIA, Government of India.
In cases where the collaboration is approved by Reserve Bank/Government of India, a letter of approval will be issued indicating the terms and conditions of the approval. A copy of the letter of approval will also be issued by Reserve Bank to the designated branch of an authorized dealer (as mentioned in the application) through whom remittances of technical know-how fee and/or royalty are to be made by the Indian company. A registration number will be granted by Reserve Bank when an approval is granted for foreign technical collaboration under the Automatic Route. Also in cases where the approval for collaboration is granted by the Government, the Indian company should obtain a registration number for the collaboration agreement from the concerned regional office of Reserve Bank before remittances under the agreement are made. The Indian company which has obtained approval for the foreign collaboration agreement from the Reserve Bank/Government should file a copy of the agreement with the designated branch of the authorized dealer through whom remittances falling due under the collaboration agreement would be made. The Indian company should also submit a Return in form TCD to the concerned office of Reserve Bank in the first fortnight of January each year showing payments made under the collaboration during the preceding calendar year duly countersigned by the designated branch of an authorized dealer.
Indian companies which had executed collaboration agreements under the old procedure and the agreements are subsisting should switch over to the revised procedure for making payments under the agreement. Application for the purpose should be made to the concerned office of the Reserve Bank together with a Return in Form TCD showing details of all payments made under the collaboration till the 31st December of the previous year. Reserve Bank will grant a registration number and approval to the concerned authorized dealer to effect future remittances.
Investment in Shares by Foreign Investors
As per the Foreign Investment guidelines issued by the Government of India, Ministry of Industry, foreign investment (equity/preference shares) upto certain specified limits would be permitted by Reserve Bank under Automatic Route as under:-
Foreign investment (equity/preference) upto 50% in respect of Mining activities referred to in Part 'A' of Annexure III to Ministry of Industry's Press Note No.14 (1997 Series) dated 8th October 1997;
Foreign investment (equity/preference) upto 51% in (i) industries/items included in part 'B' of Annexure III to Ministry of Industry's Press Note No.14 (1997 series) dated 8th October 1997 and (ii) a trading company primarily engaged in export activity;
Foreign investment (equity/preference) upto 74% in industries/items included in part 'C' of Annexure III to Ministry of Industry's Press Note No.14 (1997 series) dated 8th October 1997
Foreign Investment upto 100% in industries/items included in Part 'D' of Annexure III, to Ministry of Industry's Press Note No.14(1997 Series) as amended from time to time provided the foreign investment in a project does not exceed Rs.1500 crores.
Existing Indian companies are also permitted to raise foreign investment (equity/preference) to the level permissible as indicated above under the Automatic Route in case the company is engaged in the manufacture of item/s included in the Annexure III industries or the proposed expansion of capital is for undertaking an activity covered under the said Annexure. Raising of foreign investment (equity/preference) upto 51% in an existing trading company will be permitted if the company has already been registered as Export/Trading/Star Trading House.
Reserve Bank, vide its Notifications No.F.E.R.A.180/98-RB dated 13th January 1998 as amended by Notification No.F.E.R.A.188/98-RB dated 11th November 1998 has granted general permission to Indian companies for issue and export of equity/preference shares to foreign investors in respect of eligible investments under the Automatic Route. As a result of the general permission, Indian companies seeking foreign investment (equity/preference) under the Automatic Route of Reserve Bank and satisfying the conditions laid down in the said Notifications will not require prior clearance of Reserve Bank. Such Indian companies may issue shares to foreign investors and file a declaration in form FC(RBI) together with the required documents with the concerned Regional Office of Reserve Bank under whose jurisdiction their registered office is situated, within 30 days from the date of issue of shares to foreign investors/collaborators. Accordingly, non-residents who have been issued shares under the general permission granted by this Notification would not need specific approval from Reserve Bank. Issue of preference shares to Non-Resident Indians/Overseas Corporate Bodies is also permitted under 100% Scheme.
Applications for foreign investment which do not satisfy the parameters prescribed for Automatic Approval by Reserve Bank or for 100% Export Oriented Units located outside the Export Processing Zones are required to be made to the Secretariat for Industrial Assistance (SIA)/Foreign Investment Promotion Board (FIPB), as the case may be. If the unit is located in any of the Export Processing Zones, applications should be made to the Development Commissioner of the Export Processing Zone concerned.
The Reserve Bank vide Notification No.F.E.R.A.182/98-RB dated 10th February 1998 has granted general permission to Indian companies for issue and export of shares/securities to foreign investors/collaborators in respect of such investments approved by SIA/FIPB. As a result of the general permission, Indian companies seeking foreign investments based on the approvals granted by SIA/FIPB and satisfying the conditions laid down in the notification will not require any prior clearance of Reserve Bank. Such Indian companies may issue shares to foreign investors/collaborators and file a declaration in form ISD together with the required documents, with the concerned Regional Office of Reserve Bank under whose jurisdiction their Registered Office is situated, within 30 days from the date of issue of shares/securities to foreign investors/collaborators.
In the case of composite approvals granted by SIA/FIPB for foreign financial as also technical collaborations, while issue of shares/securities will be governed by the general permission, in respect of technical collaboration, the procedure prescribed for that purpose must be followed.
Retention of share subscriptions in foreign currency accounts in India/abroad for financing import of capital goods, etc. requires prior approval of Reserve Bank. Reserve Bank may also permit receipt of interest-free loans as advance share subscription from the collaborators to be adjusted against share capital contribution later, for meeting expenses in India of the Indian company.
Indian companies intending to raise foreign equity through preferential allotment of shares to non-residents are required to comply with the guidelines issued by Government of India, Reserve Bank of India, SEBI and other regulatory authorities from time to time.
Issue of Rights/Bonus Shares to Non-residents Companies in India wishing to issue rights/bonus shares to their non-resident shareholders requires Reserve Bank's permission. Application in form ISD should be made to the concerned office of Reserve Bank by such companies, giving a list of the non-resident shareholders to whom the shares are to be issued and the number of shares to be issued, citing a reference to the permission granted by Reserve Bank for issue/holding of original shares to/by non-residents.
Investment by foreign institutional investors
Foreign Institutional Investors (FIIs) including pension funds, mutual funds, investment trusts, university funds, endowments, foundations or charitable trusts or charitable societies, etc. are permitted to invest in all securities i.e. equity shares/debentures/PCDs/FCDs/Rights renunciations/warrants of Indian companies listed as well as unlisted, dated Government securities, Treasury Bills and units of domestic mutual fund schemes in the primary and secondary markets.
Investments by FIIs will be subject to a ceiling of 24% of the total paid up equity capital of the company. The ceiling would apply to all holdings taken together including conversions out of the fully and partly convertible debentures issued by the company. The holding of a single FII or the concerned FII group in any company would also be subject to a ceiling of 10% of total paid-up equity capital. Indian companies, however, would be permitted to raise the ceiling limit of 24% to 30% provided it has been approved by the Board of Directors of the company and a Special Resolution is passed to that effect by the General Body. The ceiling of 24% or 30%, as the case may be, applicable for investment by FIIs will not include investments made by NRIs/OCBs under the Portfolio Investment Scheme. It will also not include direct foreign investment by a foreign collaborator and investment by FIIs through Off-shore Funds, Global Depository Receipts and Euro-Convertible Bonds.
FIIs are required to register themselves with Securities and Exchange Board of India (SEBI) before they invest in the Indian capital market. Application for registration should be made by FIIs to SEBI in the prescribed form in duplicate. One copy of the application will be forwarded by SEBI to Reserve Bank. Reserve Bank will grant permission under FERA 1973 to the bank branch designated by the applicant FII to buy/sell equity shares/debentures/warrants/dated Government securities/Treasury Bills/units of domestic mutual funds. Reserve Bank's permission will be initially valid for five years and will be operative only after obtaining registration from SEBI. This permission can be renewed for a further period of five years on request. Reserve Bank's permission would enable the FIIs to buy/sell the securities and remit the income/dividend/sale proceeds after payment of applicable taxes through the designated bank branch. Reserve Bank's permission will also cover investment in shares/debentures of Indian companies in primary market i.e. new issues provided the company has reserved certain quota out of its public issue in favour of FIIs. The designated bank branch is required to submit to Reserve Bank a statement in form LEC(FII) on daily basis in respect of purchases/sales of shares/debentures made for the purpose of monitoring by Reserve Bank the overall ceiling of 24% or 30%.
In order to facilitate making of investments in India and repatriation of income/sale proceeds of such investments, Reserve Bank will permit the designated bank to open a foreign currency denominated account and a special Non-resident Rupee account in the name of FII. The designated bank branch will also be permitted
to transfer funds from foreign currency account to rupee account and vice versa,
to make investments out of the balance in the rupee account,
to credit sale proceeds of shares and other investments as also dividend/interest earned on the investments to the rupee account
to transfer the repatriable proceeds (net of taxes) from the rupee account to the foreign currency account. Remittance of Royalties/Technical Fees
The Reserve Bank has granted general permission to Indian companies for making payment of technical fee/royalty through an authorized dealer designated for the purpose under the technical collaboration arrangement approved by the Government of India/Reserve Bank, vide its Notification No. FERA.92/91-RB dated 13th September 1991. Indian companies who have obtained approval from Government of India/Reserve Bank for technical collaborations may, therefore, approach the designated authorized dealer for remittance of technical fee/royalty. The application should be supported by a certificate from the company's auditors, in form TCK, and other documents specified in the form. It will be in order for authorized dealers to allow remittances strictly in accordance with the terms and conditions prescribed by Reserve Bank/Government while approving the collaboration provided a registration number for the collaboration has been allotted by Reserve Bank.
Authorized dealers should maintain a proper record of the collaboration agreements and the remittances allowed thereunder should be preserved for a period of five years from the date of expiry of the agreement.
Remittance of Dividend Indian companies intending to remit dividend to their non-resident shareholders should make an application to an authorized dealer in Form RCD 1, supported by the particulars of non-resident shareholding in form RCD 2 and other documents prescribed in the form. Authorized dealers may allow the remittance of dividend in accordance with the procedure mentioned hereunder :-
Authorized dealers should verify the particulars with reference to the documents submitted in support of the non-resident shareholding and satisfy themselves that necessary permission of the Reserve Bank has been obtained by the non-resident shareholders for purchase/holding of the shares and/or the company has permission for issue of shares to the non-residents and that the terms of the permission do not prohibit remittance of dividend.
Authorized dealers should also verify that the certificate given in Part 'B' of the form RCD 1 has been properly completed by the company's auditors and specifically confirm on form A2 that they have verified the Reserve Bank's approval for purchase/holding/issue of the shares held by the non-resident beneficiary and it does not prohibit the remittance of dividend.
Authorized dealers should separately forward one copy of the application in form RCD 1 (without its enclosures) to the office of Reserve Bank within whose jurisdiction the Head/Registered Office of the company is situated, after completing the certificate in Part C thereof.
The Indian company/authorized dealers should ensure that the reference number, date, etc. of Reserve Bank's permission and the repatriable/non-repatriable nature of the shares/debentures/bonds held by the concerned non-residents are incorporated on the counterfoil of the dividend warrants.
As Indian companies are required to remit dividend to all their non-resident shareholders through the normal banking channels, it is not necessary for them to prepare individual dividend warrants for despatch to such non-resident shareholders. However, dividends due to non-resident shareholders who are not eligible for having the amounts remitted to them abroad or those who wish to have the dividend paid in India for credit to their non-resident accounts, may be paid by issuing individual dividend warrants to their mandatee bankers in India for credit to their Ordinary Non-resident Rupee (NRO) accounts. In cases where dividend is to be credited to NRO accounts of the non-resident investors, there is no need to follow the above procedure.
In case of interim dividend, application may be made by the company in India to the authorized dealer by letter (in duplicate) enclosing only the form RCD 2 and a copy of the Board Resolution approving the payment of interim dividend. Authorized dealers may allow the remittance of interim dividend subject to the above procedure.
As regards non-resident investment in consumer goods industries, the Government/Reserve Bank would stipulate that the dividend outflow should be balanced with inflow on account of export earnings. The balancing is required to be done for a period of 7 years from the date of commencement of commercial production. Reserve Bank's permission is also necessary for carrying on agricultural/plantation activities by companies having more than 40 % foreign company stake. Before allowing remittance of dividend in such cases, authorized dealers should verify that items 'C' and 'D' of Part 'B' in the auditor's certificate in form RCD 1 have been properly completed by the company's auditors. However, this requirement of dividend balancing has been removed with effect from January 2000.
Investment in companies engaged in export trading activity is permitted by Reserve Bank provided the company registers itself as an Export/Trading/Star Trading House. Authorized dealers should, therefore, before allowing the remittance of dividend by such companies ensure that the company has attained the status of an Export/Trading/Star Trading House.
In the case of investments by Foreign Institutional Investors (FIIs), Reserve Bank authorizes the designated branch of an authorized dealer to credit the net amount of dividend on the shares purchased to the special non-resident rupee account. It will, therefore, be in order for companies to pay the dividend amounts to the designated branches of FIIs by way of dividend warrant together with a statement, under the signature of an authorized official, showing the number of shares held by the non-resident shareholder, face value, rate of dividend declared, year/period to which it relates, gross dividend, tax deducted at source, net dividend, and the particulars of Reserve Bank's approval for issue/purchase of shares.
Remittance of Interest Applications for remittance of interest on bonds or debentures issued to non-residents, should be made by the Indian companies concerned to authorized dealers giving the following particulars :-
Name and address of the non-resident bond or debenture holder
Nationality or place of incorporation
Number and face value of the bond/debenture
Number & date of Reserve Bank approval for issue of bond/debenture along with a certified copy
Amount of gross interest
Tax deducted at source
Net remittable amount
On receipt of the application, authorized dealers may allow the remittance of the net amount of interest i.e. after payment of tax at applicable rate after verifying that the necessary permission of Reserve Bank for issue of the bond/debenture to the non-resident holder was obtained and that it does not prohibit the remittance of interest. Interest due to non-residents who are not eligible for having it remitted abroad can, however, be credited only to their Ordinary Non-resident Rupee (NRO) accounts. The Indian company/authorized dealers should ensure that the reference number, date etc. of Reserve Bank's permission and the repatriable/non-repatriable nature of the bonds/debentures held by the concerned non-residents are incorporated on the counterfoil of interest warrants.
While granting permission for purchase of bonds/debentures with repatriation rights on behalf of the Foreign Institutional Investors, Reserve Bank authorizes the designated bank branches to credit interest to the special non-resident rupee account of the investor. The Indian companies concerned may, therefore, send the interest warrants to designated bank branch concerned giving the necessary particulars as indicated above.