India’s Latest Foreign Direct Investment Rules

Francisco A. Laguna

Last month, India further relaxed its laws governing foreign direct investment in various sectors.  This article summarizes the more significant amendments to the FDI Policy.

Broadcast Carriage Services & Cable Networks

Foreign investment in Broadcast Carriage Services and Cable Networks is now permitted up to 100% under the automatic route.  Previously, FDI above 49% required Government approval. However, change of control of the Indian company will require prior approval from the Government unless the same is subject to approval by the relevant sectoral regulator.

Civil Aviation

100% FDI is now permitted in existing airports and air transport services. Government approval is required for FDI above 74% in existing airports and 49% in air transport services. There is some debate as to whether airlines operated by Indian companies which are majority foreign owned will be permitted to fly international routes, but this should be resolved in a short while.

Defense

Until now, Foreign direct investment in the defense industry has be permitted up to 49% under the automatic route and above 49% with Government approval if such higher investment was likely to result in access to technology within India. The Press Note clarifies that defense products include small arms and ammunition and confers discretion on the Government to consider any other reasons deemed relevant for granting approval for FDI above 49%. All other conditions continue as before.

Hong Kong Kinder Joy - Made in India.  By Okstartnow (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

Hong Kong Kinder Joy – Made in India. By Okstartnow (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)%5D, via Wikimedia Commons

Foods “Made in India”

With government approval, 100% FDI is now permitted for companies selling food products wholly manufactured or produced in India, including sales through e-commerce.  This should allow for in-store cafés or shops in food courts and will add to the overall retail experience for Indian consumers.  Note, however, that the 100% FDI is only for foods manufactured or produced in India.  Foreign investors are hopeful that this liberalization will soon be applied to other food products.

Pharmaceuticals

While foreign investment in brownfield projects has been permitted up to 74% under the automatic route (it was earlier capped at 49% for the automatic route), the following new conditions are applicable to any investment in brownfield projects. These projects involve the purchase or lease by a company or government entity of existing production facilities to launch a new production activity.

  • Maintenance of production level of items falling within the National List of Essential Medicines for 5 years post investment at an absolute quantifiable level (bench marked to the highest production in the 3 financial years preceding the FDI);
  • Maintenance of R&D expenditure for 5 years post investment at an absolute quantifiable level (bench marked to the highest production in the 3 financial years preceding the FDI); and
  • Complete information on technology transfer, if any, must be provided to the relevant Ministry.

Private Security Agencies

The cap on FDI has been increased to 74%; FDI between 49% & 74% requires Government approval.

By Nazrila - Originally from en.wikipedia; description page is/was here, Public Domain, https://commons.wikimedia.org/w/index.php?curid=5843058

By Nazrila – Originally from en.wikipedia; description page is/was here, Public Domain, https://commons.wikimedia.org/w/index.php?curid=5843058

Technology Products

The new rules allow the Government discretion to relax sourcing norms for single-brand retailers that sell products using “state-of-art” or “cutting-edge” technology, in cases where local sourcing is not possible (Technology Products). The Department of Industrial Policy and Promotion (DIPP) issued Press Note 5 of 2016 Series on 24 June 2016 that states that sourcing norms will not apply for 3 years as of the commencement of business for such Technology Products. The Government’s approach of relaxing the norms, rather than providing a waiver, promotes its “Make in India” program.  It will be interesting to track whether FDI increases as a consequence of this provision, and, specifically, whether Apple and other tech companies will make FDIs in the country as a result.

All of the reforms discussed in this post are important and underline the incremental policy change which has long been hoped for. There is also a fair case to be made for the proposition that the FDI Policy is now fairly liberal and that the Government is open to considering proposals for FDI even more favorably where investment is coupled with capacity development and manufacturing.

TransLegal represents companies doing business in India in the biotechnology, foods and industrial sectors.  Call us with your questions related to doing business in India and how these new FDI rules may affect your business.

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India Legislative Updates — Reorganization of the Judiciary

Francisco A. Laguna

Today, we continue our India Update, focusing on the recent reorganization of the judiciary.  The reforms included in The Commercial Courts Commercial Division & Commercial Appellate Division of High Courts Act, 2015 (Act) form part of India’s efforts to ease doing business in the country, build confidence and attract foreign direct investment.

Jurisdiction in Arbitration Proceedings

All matters currently pending under Part I of the Arbitration & Conciliation Act, 1996 (Arbitration Act) will be transferred to the Commercial Courts or Divisions.

Golden Temple, Amritsar, by Rakshakdua – Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=21132680

International commercial arbitrations, defined as controversies involving at least one non-Indian party with proceedings in India, will be under the jurisdiction of the Commercial Divisions of the High Courts.  The one exception is applications for the designation of arbitrators, which are currently the responsibility of the Supreme Court.

This has created a conflict between the Act, which prescribes that arbitration proceedings would be heard by the Commercial Appellate Divisions, and the Arbitration Act, including the fact that the Commercial Divisions of the Mumbai High Court do not include arbitration proceedings within their jurisdiction.  This is expected to be modified in the near future.

Appellate Jurisdiction

Decisions issued by the Commercial Courts and Divisions are no longer subject to appellate review by the High Courts.  These appeals will be heard, exclusively, by the Commercial Appellate Division of the High Court that heard the case in first instance.  Appeals must be filed within 60 days of the date of the order, and more importantly from the foreign investor perspective, must be decided within a period of 6 months.  The time it takes for appeals to be heard and resolved has been a major criticism of foreign companies doing business in India.

Procedure & Timelines

To address concerns of the time required to litigate in the Indian courts, the Code of Civil Procedure has been revised to include the following provisions, some taken directly from procedures followed by US courts:

  • Parties may move for summary judgment solely on the written pleadings.
  • Every pleading must be attested by an affidavit; otherwise, it cannot be relied upon.

In addition, the following deadlines have been incorporated into the Code:

  • Written statements must be filed within 120 days of the date of service of process.
  • Document Inspection must be completed within 30 days of filing of the written statement.
  • Initial case management hearing will be within 4 weeks from admission or denial of documents by all parties.
  • Written arguments must be submitted within 4 weeks of commencement of oral arguments. The court has the discretion to permit revised written arguments to be filed within 1 week of oral arguments.
  • Oral arguments must be concluded within 6 months from the first case management hearing.
  • The Commercial Court or Division must issue its ruling within 90 days of the conclusion of oral arguments.

These deadlines, if indeed followed and enforced, will greatly streamline court proceedings.

Pending Disputes

The Act clearly stipulates that pending commercial disputes with the required Specified Value, including those pending under the Arbitration Act, will be transferred to the Commercial Courts or Divisions.  Not surprisingly, however, the Delhi High Court has adopted another position, ruling that the civil courts will continue to retain jurisdiction of cases where hearings have concluded and judgment is reserved.

From the practical perspective, Commercial Courts have yet to be established. Only the Delhi and Bombay High Courts have Commercial Divisions and Commercial Appellate Divisions. Moreover, the establishment of new divisions or courts does not resolve the fact that the judiciary is over-burdened.

Contact TransLegal with your questions concerning court and arbitration proceedings in India.

India Legislative Updates — Reorganization of the Judiciary

Francisco A. Laguna

 Today, we continue our India update, focusing on the recent reorganization of the judiciary.

On 31 December 2015, President Pranab Mukherjee approved The Commercial Courts Commercial Division & Commercial Appellate Division of High Courts Act, 2015 (Act), which is effective as of 23 October 2015.  The Act is yet another step in India’s efforts to ease doing business in the country, build confidence and attract foreign direct investment.  It will certainly impact both ongoing and future litigation.

Classes of Courts under the Act

The Act establishes three classes of courts.

 

"High Court of Karnataka, Bangalore MMK" by Muhammad Mahdi Karim (www.micro2macro.net)Facebook Youtube/ Augustus Binu - Own work. Licensed under GFDL 1.2 via Wikimedia Commons

“High Court of Karnataka, Bangalore MMK” by Muhammad Mahdi Karim (www.micro2macro.net)Facebook Youtube/ Augustus Binu – Own work. Licensed under GFDL 1.2 via Wikimedia Commons

  • First, the existing High Courts of original jurisdiction (Mumbai, Kolkata, Chennai, Delhi and Karnataka) must set up a Commercial Division.
  • Second, every High Court will have to establish a Commercial Appellate Division.
  • Third, state governments in the remaining states must establish Commercial Courts at the district level.

Threshold Monetary Jurisdiction

The Commercial Courts and Divisions will have jurisdiction over all commercial disputes in excess of INR 1,00,00,000 (~ US$ 150,900) or such higher amount dictated by the Central Government (“Specified Value”).

Chennai:  Madras High Court Photo Credit: Milei.vencel via Wikimedia Commons

Chennai: Madras High Court
Photo Credit: Milei.vencel via Wikimedia Commons

Section 12 of the Act provides how to calculate the value of the claim.  Plaintiffs and counsel should pay careful attention to the valuation provisions in Section 12 to avoid possible allegations of lack of jurisdictions.

Subject Matter Jurisdiction

The Commercial Courts and Divisions will have subject matter jurisdiction over commercial disputes, defined as those arising out of, or related to:

  • ordinary transactions of merchants, bankers, financiers and traders such as those relating to mercantile documents, including enforcement and interpretation of such documents;
  • export or import of merchandise or services;
  • issues relating to admiralty and maritime law;
  • transactions relating to aircraft, aircraft engines, aircraft equipment and helicopters, including sales, leasing and financing thereof;
  • carriage of goods;
  • construction and infrastructure contracts, including tenders;
  • agreements relating to immovable property used exclusively in trade or commerce;
  • franchising agreements;
  • distribution and licensing agreements;
  • management and consultancy agreements;

 

"High Court - Oval Maidan" in Mumbai, by Anunandusg - Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons

“High Court – Oval Maidan” in Mumbai, by Anunandusg – Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons

  • joint venture agreements;
  • shareholders agreements;
  • subscription and investment agreements pertaining to the services industry including outsourcing services and financial services;
  • mercantile agency and mercantile usage;
  • partnership agreements;
  • technology development agreements;
  • intellectual property rights relating to registered and unregistered trademarks, copyright, patent, design, domain names, geographical indications and semiconductor integrated circuits;
  • agreements for sale of goods or provision of services;
  • exploitation of oil and gas reserves or other natural resources including electromagnetic spectrum;
  • insurance and re-insurance;
  • contracts of agency relating to any of the above; and
  • such other commercial disputes as may be notified by the Central Government. Further, a commercial dispute includes a counter-claim filed in a suit if it is a commercial dispute of Specified Value.

Clearly, many of topics now under the purview of the commercial courts are of specific interest to investors.

Next week, we will continue the discussion of jurisdiction over arbitration proceedings and other procedural matter.

TransLegal assists its clients understand and maneuver the often difficult rules and regulations that characterize the Indian legal and regulatory system.  Call us with any questions you may have about doing business in India.

 

India Legislative Updates: The Insurance Sector

Francisco A. Laguna

 This week, TransLegal continues its 2015 series on recent legislative changes in India.  In light of Prime Minister Narendra Modi’s recent visit to Pakistan on the occasion of PM Nawaz Sharif’s birthday, this series is even more appropriate.  Today, we focus on issues related to ownership and control of insurance companies.

"IRDAI" by Swapna J BcomD - Own work. Licensed under CC BY-SA 4.0 via Wikimedia Commons

“IRDAI” by Swapna J BcomD – Own work. Licensed under CC BY-SA 4.0 via Wikimedia Commons

In April 2015, TransLegal wrote about the reforms to India’s insurance sector, including the near doubling of permitted foreign direct investment (26% to 49%), provided the Indian insurance company continued to be Indian owned and controlled.  In October 2015, the Insurance Regulatory and Development Authority (IRDA) issued guidelines which explain the concept of “Indian owned and controlled” for insurance companies.

The Indian Insurance Companies (Foreign Investment) Rules, 2015 defined: (a) Indian Ownership of an Indian Insurance company as “…more than 50% of the equity capital in it beneficially owned by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens…” (b) Indian Control of an Indian Insurance Company as “…Control of such Indian Insurance Company by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens…”

Section 2(7A) of the Insurance Laws (Amendment) Act, 2015 clarifies that control included the right to appoint a majority of the directors or to control the management or policy decisions by virtue of shareholding, management rights, shareholders’ agreement or voting rights.

The key requirements for an insurance company to qualify as Indian owned and controlled are:

  • Parliament of India Photo Credit: Wikimedia Commons

    Parliament of India
    Photo Credit: Wikimedia Commons

    Constitution of the Board: A majority of the directors (excluding independent directors) of the Indian insurance company must be nominated by the Indian promoter(s) and / or the Indian investor(s). If the Chairman of the board has a casting vote, such chairman must be a appointed by either the Indian promoter(s) and / or investor(s).

  • Qualifying Quorum at Board Meetings:  Indian directors are required to establish a valid quorum to conduct business. A nominee director representing the foreign investor(s) may be required for a valid quorum at the initial meeting to protect minority shareholder rights. If there is no quorum, subsequent meetings may be conducted following the Companies Act, 2013, which suggests special quorum rights will not be applicable.
  • Appointment of Key Managerial Personnel (KMPs): KMPs, including the chief executive officer, must be appointed by the Indian Board or by the Indian promoter(s) and, or, investor(s). The foreign investor can nominate KMPs (other than the CEO) but their appointment must be approved by an Indian Board.
  • Significant Policies: Control over significant policies must be exercised by an Indian Board. No definition of significant policies has been provided and the affirmative voting rights available to foreign investor(s) will need to be carefully reviewed.

The Guidelines require insurance company compliance by 19 January 2016. An extension for a maximum period of another 3 months can be sought by filing an application with IRDA, which it may grant at its discretion. Further, compliance is to be ensured through self-certification, including filing with the IRDA an undertaking from the CEO, resolution of the Board confirming compliance, copies of the joint venture agreements and amendments thereto.

The Prime Minister, Shri Narendra Modi addressing the gathering at the Indian Community Reception Event, at Singapore Expo, Singapore on November 24, 2015.

The Prime Minister, Shri Narendra Modi addressing the gathering at the Indian Community Reception Event, at Singapore Expo, Singapore on November 24, 2015.

Application to Insurance Intermediaries

The IRDA Act, 1999 defines insurance intermediaries as insurance brokers, reinsurance brokers, insurance consultants, surveyors and loss assessors.  These intermediaries must comply with the Guidelines if more than 50% of their revenue is from insurance activities.

The Guidelines are one of the first issued by India specifically requiring Indian control. They do, however, leave the interpretation of the criteria to the IRDA’s Chairperson.  As such, it will be  interesting to see how compliance and enforcement are approached and determined.

India: Legislative Updates

Francisco A. Laguna

 This week, TransLegal begins a series on recent legislative changes in India.  In the following posts, we will analyze some of the more significant ones for foreign investors.  Today, we focus on changes to India’s External Commercial Borrowing rules.

Symbol for Rupee (INR) Photo Credit: Wikimedia Commons

Symbol for Rupee (INR)
Photo Credit: Wikimedia Commons

The Reserve Bank of India (RBI) has substantially revised the rules governing external commercial borrowing (ECB) to allow Indian businesses to borrow monies from certain foreign banks.  The new rules are found in the External Commercial Borrowings (ECB) Policy – Revised Framework, RBI A.P. (DIR Series), Circular No. 32, 30 November 2015.  They enter into force once published in the Official Gazette.

The new ECB rules classify ECBs into three categories, broaden the list of eligible lenders and reduce the restrictions on how ECB monies may be used.

Classification

ECB will now fall into three “tracks”, depending on the term of the loan and the currency of the loan:

Track I ECBs are defined short- to medium-term (3 – 5 years / 5 – 10 years), foreign currency-denominated loans, with an all-in-cost ceiling, over a 6-month LIBOR, of 300 basis points and 450 basis points, respectively.

Track II ECBs are also foreign currency-denominated with a minimum maturity of 10 years and an all-in-cost ceiling of 500 basis points.

Track III ECBs are rupee-denominated loans, with all-in-cost ceilings determined by then-existing market conditions.

Presidential Standard of India Photo credit: Wikimedia Commons

Presidential Standard of India
Photo credit: Wikimedia Commons

Eligible Lenders / Investors

Regardless of the track, eligible lenders now include long-term investors, such as regulated financial entities, insurance funds, pension funds and sovereign wealth funds. In addition, foreign branches and subsidiaries of Indian banks qualify as eligible lenders for Track I.

 

 

End Use

Track I ECBs may be applied, among things, to: import capital goods; purchase capital goods domestically; finance new projects, or expand or update existing projects; invest in foreign subsidiaries or joint ventures; acquire shares of public sector projects under the disinvestment rules; refinance existing trade credits used to import capital goods; refinance existing ECBs; finance general corporate expenditures; and pay for capital goods already shipped / imported but as yet unpaid.

Flag of India Photo Credit: Wikimedia Commons

Flag of India
Photo Credit: Wikimedia Commons

Except for ECBs from non-banking finance companies, long-term ECBs, whether foreign currency or rupee-denominated, can be used for any purpose except: real estate purchases or speculation; investing in capital markets or domestic equities; or to lend monies to third parties involved in such activities.

Track III ECBs from non-banking finance companies can be used exclusively for: making loans to entities in the infrastructure or construction section; making secured loans to domestic entities to acquire capital goods and equipment; and to acquire capital goods and equipment that will be leased or leased-to-purchase by domestic entities.

Eligible Borrowers

As indicated above, the new ECB rules were adopted to increase foreign capital flows into India and provide companies with increased funding sources, especially in the infrastructure sector.  However, the class of eligible borrowers has been narrowed. Previously, all corporates entities were to take out ECBs, subject to end-use restrictions.  The new rules limit eligible borrowers to companies in the manufacturing, software development, shipping, airlines or infrastructure sectors.

TransLegal assists companies navigate the complexities of the Indian legal and financial system.  Call us with your questions.  Next week, we’ll explore developments in Indian labor and employment laws.

India: Legislative Updates Proposed Reforms to Access to Capital Markets for Knowledge-based Technology Companies

Francisco A. Laguna 

This week, TransLegal continues our series on recent legislative changes in India, focusing on a proposal by the Securities & Exchange Board of India (“SEBI”) that could ultimately affect an Indian company’s ability to raise capital and provide possible exit strategies for early stage investors.

 

Numerous Indian start-ups have innovative business models that seek to create or expand business opportunities or increase efficiency for existing business activities, including software development and e-commerce companies. These companies tend to be run by professional management, have low asset bases, long gestation period and limited founding member equity participation.

 

SEBI refers to these companies as “Knowledge-based Technology Companies”. SEBI understands that the laws currently applicable to these start-ups, including those governing small and medium enterprises (“SME”) do not allow them to raise capital effectively. To address this issue, SEBI proposes to amend the listing rules to enable these Knowledge-based Technology Companies to raise capital from India’s public markets.

 

SEBI Proposal

 

Parliament of India Photo Credit: Wikimedia Commons

Parliament of India
Photo Credit: Wikimedia Commons

The SEBI proposal would introduce the following changes.

 

Knowledge-based Technology Companies would be permitted to raise capital on the Institutional Trading Platform (“ITP”) through initial public offerings, provided that no person or persons acting in concert hold over 25% of the share capital.

 

Investors would be limited to qualified institutional buyers (“QIBs”) and non-institutional investors (“NIIs”). Retail investors will not be permitted to purchase shares of Knowledge-based Technology Companies at the IPO stage. The definition of a QIB would be expanded to include NBFCs and family offices / trusts, provided they are registered as alternate investment funds ( AIFs), as well as any entity registered with the SEBI with a net worth of more than INR 500 Crores.

 

75 % of the IPO must be reserved for QIBs. Allotments would be on a discretionary basis, provided no QIB is allotted more than 5 % of the issue. Allotments for NIIs would be proportional and spill-over from the NII portion would be allowed.

 

Investment in this segment would be treated as unlisted for Category I and II AIFs to allow them to satisfy their investment limits in unlisted securities.

 

The minimum application size will be INR 10 lakhs and the offer must be subscribed by no less than 500 allottees.

The issuer would need to remain listed on this restricted segment of the exchange for at least 1 year after the IPO, at which point it can apply for listing on the national exchanges, provided they satisfy applicable listing criteria.

National Stock Exchange of India  Photo Credit: Wikimedia Commons

National Stock Exchange of India
Photo Credit: Wikimedia Commons

The entire pre-issue capital must be locked-in for 6 months, with no separate lock-ins for promoters.

The issuer will be required to file a draft IPO document with SEBI for comments. However, rules for Knowledge-based Technology Companies would be slightly more flexible, as described below.

The main purpose of the IPO can include general corporate purposes and the disclosures may be restricted to broad objectives.

IPO disclosures related to the determination of the issue price falls within the discretion of issuers; however, the offering may not include income or other financial projections.

The issuer has discretion to include disclosures related to group companies, litigations (other than criminal cases, regulatory and tax matters) and creditors (though complete details to be made available on the website) based on whether such disclosures are material for purposes of determining whether to invest in the company.

Eligible Companies

Given the range of business activities available to start-up Knowledge-based Technology Companies, the SEBI should promote a broad definition for eligible companies to allow as many entities to participate in this approach to raising capital.

Promoter Requirements

Presidential Standard of India  Photo Credit: Wikimedia Commons

Presidential Standard of India
Photo Credit: Wikimedia Commons

As indicated above, the founders of Knowledge-based Technology Companies typically end up as minority shareholders. Consequently, they need promoters. The SEBI recognizes this reality, and its proposal provides more flexible rules for post-issue lock-in requirements than those generally applicable to listed companies., The SEBI Proposal is silent on the criteria for determining promoters or whether the issuer will be permitted to list without a named promoter.

Although founders are often minority shareholders, most Indian start-ups have more than 1 founder. These founders tend to be unrelated parties, except for their joint operational control which results from the fact that each is a shareholder. If these founders are deemed to be”persons acting in concert”, their combined holdings would likely exceed 25%, which would disqualify the company from this participating in this avenue to raise capital. SEBI has yet to issue any proposed guidance on this issue.

SEBI’s final qualification criteria and related definitions will determine the program’s success. If this issue is not appropriately addressed, the program will have limited practical effects.

Minimum Subscribers

Considering that retail investors will not be permitted to invest in the IPOs of the Knowledge-based Technology Companies, it is unclear why SEBI has imposed a minimum 500 subscriber requirement. Since most QIBs are often unwilling to assume limited positions, most issuers may not be able to meet this threshold for practical reasons.

Importance for Private Equity

SEBI’s proposal would result in a change in access to India’s public capital markets, which is likely to have long-term effects on the country’s venture capital and private equity industry. SEBI’s proposed reforms would allow Knowledge-based Technology Companies and other Indian start-ups much necessary access to institutional and other qualified investors.

Call TransLegal with your questions concerning Indian laws and regulations and how they may impact your proposed FDI projects.

India: Legislative Updates Reforms to the Insurance Sector

Francisco A. Laguna

 This week, TransLegal continues our series on recent legislative changes in India, focusing on the recent reforms to the insurance sectors and how they affect foreign investors.

 In March 2015, the Indian Parliament reformed the insurance sector by approving the Insurance Laws (Amendment) Bill, 2015 (“Insurance Amendment Act”), which amended the Insurance Act, 1938, the General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority Act, 1999 (“IRDA Act”). Although published in late March, the Insurance Amendment Act entered into force as of 26 December 2014.

The Insurance Amendment Act increases permissible foreign direct investment (“FDI”) in Indian insurance companies – clearly a significant change. However, the Act implements other noteworthy changes, discussed below.

Increase in FDI Cap

 

Symbol for Rupee (INR) Photo Credit: Wikimedia Commons

Symbol for Rupee (INR)
Photo Credit: Wikimedia Commons

The Insurance Amendment Act nearly doubles allowable FDI in the insurance sector from 26 % to 49 %. The new cap became effective as of 26 December 2014. The cap is applicable to direct and indirect FDI and to foreign portfolio investments. Foreign portfolio investments include investments by foreign institutional investors, qualified financial investors, foreign portfolio investors and non-resident investors.

FDI up to 26 % in an Indian insurance company is permitted under the “automatic route”, i.e., no government approval is required. FDI exceeding 26 % and up to 49 % must be approved by the Foreign Investment Promotion Board.

The FDI cap also applies to “other insurance intermediaries”. The Insurance Amendment Act does not define the term; however, the IRDA Act provides that intermediaries include insurance brokers, reinsurance brokers, insurance consultants, surveyors and loss assessors.

If applicable, foreign investors, at any level, must obtain necessary licenses from the Insurance Regulatory Development Authority of India (“IRDA”) to conduct insurance activities.

It is expected that the increased FDI limits will result in investments of up to INR 60,000 crores (~ US$ 9.5 billion) over the next 5 years.

Insurance Companies must be Indian Owned and Controlled 

India Gate, Delhi Photo Credit: Wikimedia Commons

India Gate, Delhi
Photo Credit: Wikimedia Commons

Insurance companies that accept FDA at any level must be Indian owned and controlled. Control is determined by the right to appoint a majority of the company’s board of directors, or to control management or policy decisions, including application of rights derived from shareholder or management rights or shareholder or voting agreements.

This is an important change because the Insurance Act, prior to being amended, did not require Indian insurance companies to be owned and controlled by individuals resident in-country. As such, it was possible for offshore strategic partners in the insurance sector to have substantial control, including reserved matters or veto rights on operational and financial policy decisions of the joint venture. This provision of the Insurance Amendment Act may affect offshore partners that currently have substantial control.

Structuring Promoter Investments

Before being amended, the Insurance Act only allowed insurance companies to issue one class of equity stock, which greatly curtailed the sector’s ability to structure investments. The Insurance Amendment Act gives the IRDA the ability to designate other classes of shares that can be issued by insurance companies. The IRDA is expected to publish a list of permitted classes in the near future.

Health Insurance

The Insurance Amendment Act defines the “health insurance business” as a business which provides for sickness benefits or medical, surgical or hospital expense benefits, including coverage for in-patient and out-patient travel and personal injury / accidents. The Act recognizes the health insurance sector, for the first time, as a separate vertical business.

Promoting Reinsurance in India

 

Flag of India Photo Credit: Wikimedia Commons

Flag of India
Photo Credit: Wikimedia Commons

The Insurance Amendment Act defines reinsurance as the insuring of part of one insurer’s risk by another insurer who accepts the risk for a mutually acceptable premium. The minimum capital requirement for a reinsurance company has been fixed at INR 200 crores (~ US$ 61.3 million). The Insurance Amendment Act also permits foreign reinsurance companies to establish branches in India, provided the net worth of the foreign company is at least INR 5,000 crores (~ US$ 790 million).

Corporate Governance

 The Insurance Amendment Act appears to place a priority on the interests of individual policy holders. For instance, the period during which an insurance company can cancel a policy on any ground has been restricted to 3 years as of the issuance thereof. The Act also has enabling provisions that allow for the imposition of penalties on intermediaries and insurance companies for misconduct. Penalties range from INR 1 crore to INR 25 crores (~ US$ 160,000 – 4 million).

Call TransLegal with your questions concerning Indian laws and regulations and how they may impact your proposed FDI projects.

India: Legislative Updates

Francisco A. Laguna

 This week, TransLegal begins a series on recent legislative changes in India. In the following posts, we will analyze some of the more significant ones for foreign investors.

 Capital Markets

 The Securities Exchange Board of India (“SEBI”) has revised insider trading regulations. The new rules, contained in the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, enter into force 16 May 2015. One major change introduced by the new rules is that people not in the brokerage sector cannot obtain from an insider, directly or indirectly, any unpublished, price-sensitive information related to a company listed, or proposed to be listed, on an exchange. Insiders are defined as people who have been associated for the prior 6 months with a company that is listed, or proposed to be listed, on an exchange, and who are is in possession of the company’s unpublished, price-sensitive information.

Citizenship Law

The Parliament issued the Citizenship (Amendment) Bill, 2015, which purports to grant the same rights and privileges to persons of Indian Origin as well as Indian citizens living abroad.

Coal Mines Bill

Parliament of India Photo credit: Wikimedia Commons

Parliament of India
Photo credit: Wikimedia Commons

The Lower House of Parliament, the Lok Sabha, approved the Coal Mines (Special Provisions) Bill, 2015. The law seeks to make the process of granting coal mine leases more transparent. The Upper House, the Rajya Sabha, has yet to pass the law. The leasing process has been criticized for lack of transparency and corruption.

Foreign Direct Investment – Generally

The Department of Industrial Policy and Promotion (“DIPP”) is proposing to raise the FDI threshold from 12,000 million rupees to 30,000 million rupees. The Government may increase the threshold at which Cabinet approval for foreign investments becomes necessary, making India a more attractive venue for FDI. The goal is to attract foreign investments, particularly in infrastructure and manufacturing sectors. Currently, investments exceeding the 12,000 million limit require the approval of the Cabinet Committee on Economic Affairs.

TransLegal has advised clients on foreign direct investment regulations in the food & beverage as well as the hospitality sectors.

Foreign Direct Investment – Housing Sector

The Government has relaxed the rules related to repatriating FDI in the housing sector. In December 2014, the Government implemented these new rules by decreasing the required built-up area and capital needs. In March 2015, the DIPP clarified that the existing three-year lock-in will no longer apply, and under normal circumstances, an investor can exit on an automatic basis upon completion of the project or after the construction of basic infrastructure, such as roads, water supply and drainage. The Foreign Investment Promotion Board (“FIPB”) can approve earlier exits on a case by case basis.

The minimum built-up area requirement for development projects has been reduced from 50,000 square meters to 20,000 square meters, and minimum capital investment by foreign companies has been decreased substantially from US$ 10 million to US$ 5 million. In addition, the government has introduced an exemption to the minimum floor area and the capital requirements when an investor / joint venture company commits at least 30 % of the total project cost to low-cost housing.

 Foreign Direct Investment – Insurance and Pension Sectors

 In March 2015, the Indian Parliament passed the Insurance Laws (Amendment) Bill, 2015. The bill raises the foreign direct investment (“FDI”) cap in insurance companies from 26% to 49%. This increased FDI cap directly increases the allowable FDI in the pension sector: the Pension Fund Regulatory and Development Authority Act ties FDI limits in the pension sector to those in the insurance sector. This increase presents important opportunities for foreign companies in both sectors.

National Stock Exchange of India Photo credit: Wikimedia Commons

National Stock Exchange of India
Photo credit: Wikimedia Commons

Import / Export Documentary Requirements 

In March 2015, the Directorate General of Foreign Trade (“DGFT”) issued a notification drastically reduced the mandatory documents required for importing and exporting goods to three (3) documents. For imports, the mandatory documents are: bill of lading / airway bill; commercial invoice / packing list; and bill of entry. For exports, the mandatory documents are: bill of lading / airway bill; commercial invoice / packing list; and shipping bill / bill of export.

Intellectual Property

India’s IP Office now allows electronic filing for new applications for design & geographical indications. Previously, e-filing was only available for trademarks and patent applications.

Labor Law

 The 2015 Union Budget proposes the following amendments to applicable labor laws. First, the government seeks to provide increased flexibility for employee contributions to the Employee Provident Fund (“EPF”). Employees would be allowed to choose to participate in the EPF or a New Pension Scheme (to be developed). The proposal also provides that employees with incomes below certain monthly thresholds would have the option not to contribute to the EPF, without affecting or reducing the employer’s mandated contribution. In addition, the amendments would allow employers to offer employees participation in the Employee State Insurance (“ESI”) or a different health insurance product duly approved by the Insurance Regulatory Development Authority (“IRDA”).

Money Laundering

Presidential Standard of India Photo credit: Wikimedia Commons

Presidential Standard of India
Photo credit: Wikimedia Commons

Amendments to existing laws have been proposed to prevent money laundering. Two independent laws have been submitted to address unaccounted-for monies held offshore and dubious domestic transactions. Persons found to violate the law will be subject to prosecution and steep penalties. To implement these measures, amendments have been proposed to the Prevention of Money Laundering Act (“PMLA”), 2002 and the Foreign Exchange Management Act (“FEMA”). Under the proposed amendments, concealment of income and assets and evasion of tax related to foreign assets will be subject to prison sentences of up to 10 years. Each transaction in violation of the law will be treated separately, and offenders will not be allowed to reach an out-of-court resolution through the Settlement Commission. Those found guilty of tax evasion will be subject to penalties of 300% the tax that would have been paid on the concealed income and assets.

Call TransLegal with your questions concerning Indian laws and regulations and how they may impact your proposed FDI projects.

Benefits of BRICS New Development Bank for Brazil

Francisco A. Laguna & Annapurna Nandyal

This week, we conclude our 4-part series on the BRICS’ New Development Bank (NDB), focusing on the potential benefits the NDB could offer Brazil, the only BRICS country in the Western Hemisphere.

The closest BRICS to Brazil is South Africa

The closest BRICS to Brazil is South Africa

Brazil is one of the world’s largest growing economies. In comparison to other BRICS, Brazil is seen as soft rising power rising, and it tends to be underrated: the country’s growth rate was just 3% in 2013, while China and India had 8% and 6%, respectively. Notwithstanding, Brazil is hot on the international stage: it held this year’s World Cup; it will soon be the home of the 2016 Olympics; and it hosted the 2014 Sixth Annual BRICS Summit this year. Heads of other South American states participated in the Summit for the first time, and the event turned out to be one of the region’s most significant geopolitical summits in recent history. Continue reading

Benefits of BRICS New Development Bank for India

Francisco A. Laguna & Annapurna Nandyal

 Today, we continue our series on the impact of the BRICS New Development Bank (NDB), focusing on the potential benefits the NDB may provide India as well as a possible focuses the NDB can use to compete with historical institutions such as the World Bank and the IMF.

The 2008 global recession affected most parts of the world, and India was no exception. Apart from challenging economic conditions, there was a widespread criticism of the previous government’s policies which took a toll on the Indian economy. India’s newly elected Modi government, which recently completed its first 100 days, has promised to revive the economy and improve the ease of doing business in the country. As pointed out earlier in this series, it was India that proposed the establishment of a BRICS bank as a way of aligning the growing economies of the five emerging powers with those of the developed nations. India hopes to benefit greatly from the formation of the NDB and play a more prominent role in the global order in the 21st century.

Emblem of India Photo Credit: Zscout370 via Wikimedia Commons

Emblem of India
Photo Credit: Zscout370 via Wikimedia Commons

The NDB is already providing impetus for the BRICS to increase intra-member trade and investment. For instance, the tense relations between India and China have been an open secret despite the fact that they are strategic trade partners in Asia. Recently, trade volumes have lessened; however, after the creation of the NDB, the two countries have vowed to correct the decline. Since BRICS economies can trade in their local currencies instead of dollars, the Indian government has allowed domestic infrastructure companies to borrow yuan-denominated loans from the Chinese government to pay for imports from China. Continued improving relations between these two most populous countries could result in profound, short-term economic benefits.

The NDB is also influencing India’s relationship with Russia. India is the third largest importer of energy, and it may become the largest energy consumer. With instability in Middle East and West Asia, India is reaching out to traditional partners, like Russia, for help. Since 2005, India and Russia have been negotiating a gas project. After the announcement of NDB in July, both countries are actively working toward concluding the agreement. Analysts feel the countries’ increasing common interests could help finalize this much-needed energy deal.

Rupee Notes

Rupee Notes

Another energy-related event may also affect India. In a major shift in the policy, the World Bank has announced that it would restrict funding to new coal projects in developing countries and only fund the poorer nations on a case-by-case basis. As a result, developed countries such as US, United Kingdom and Netherlands have decided to stop funding coal projects. Many new coal plants are being built around the world, and the majority is or will be located in India and China. The new policy obviously impacts India: China can fund its own projects; India cannot. India’s extreme dependence on coal plants for its electricity generation and alternative source of income to fund coal projects must be addressed as quickly as possible. The NDB could play a crucial role by urging India and other developing countries to adopt solar panels and clean energy methods and offer cheaper loans for such power projects, while providing financing for existing coal projects.

Besides improving trade among the member states, the NDB needs to have broad policy framework to make the bank robust. For instance, climate change could have a profound impact on the BRICS. Global warming will have severe effect on developing countries affecting agriculture and tourism. The bank could focus on utilizing its funds on climate projects and educate poorer countries on climate change policy. In fact, BRICS leaders have advised their finance ministers to work out modalities for the bank to include environmental safeguards. This could help the NDB emerge as a bigger player in the future, thereby increasing the BRICS global economic influence.

TransLegal has correspondent offices in each of the BRICS. Contact us with your questions concerning doing business in Brazil, Russia, India, China and / or South Africa.