Transcript Profile of Luthra & Luthra

Legal Aspects of FDI
&
Joint Ventures
Presented by:
Mohit Saraf, Partner
Luthra & Luthra
Law Offices
April 20, 2001
L&L/MDI/FDI-JV
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Agenda
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Modes of FDI
Manner of Direct Investment
Automatic Route
Existing Companies
Investment by NRI/ OCB
FIPB Clearance
Foreign Investment in Small Scale Sector
Repatriation
April 20, 2001
L&L/MDI/FDI-JV
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Agenda (Cont’d.)
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ADR/ GDR/ FCCB
Entry Strategy
Wholly Owned Subsidiaries
Joint Venture
Joint Venture - Procedure
Issues
Lender Concerns
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Modes of FDI
• Direct Investments in Indian Companies by
Foreign Companies/ Non-resident
• Global Depository Receipt (GDR)/ American
Deposit Receipts (ADR)/ Foreign Currency
Convertible Bonds (FCCB)
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Manner of Direct Investment
• FDI is freely allowed in all sectors including the
services sector, except where the existing and
notified sectoral policy does not permit FDI
beyond the ceiling.
• Routes
– by RBI (Automatic)
– FIPB clearance
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Automatic Route
• All items /activities except the following fall
under automatic route.
– Proposals that require an Industrial Licence, which
includes: • the item requiring an Industrial Licence under the Industries
(Development and Regulation) Act 1951;
• foreign investment being more than 24 percent in the equity
capital of units manufacturing items reserved for small-scale
industries; and
• all items which requires an industrial licence in terms of
locational policy notified by the government under the new
industrial policy of 1991
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Automatic Route (Cont’d.)
– Proposals in which the foreign collaborator has
previous joint venture or technology transfer/ trademark
agreement in the same or allied field in India.
– Proposals falling outside sectoral policy /caps or under
sectors in which FDI is not permitted. Some of the
activities or items (13 in total) for which automatic
route of RBI is not available - banking, civil aviation,
atomic energy, defence and strategic industries, print
media, broadcasting, postal, housing and real estate
development sector for investment from persons other
than NRI/OCB.
– Proposals relating to acquisition of shares in an existing
Indian company in favour of a foreign/ NRI/OCB
investors.
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Existing Companies
• For existing companies with an expansion
programme the additional requirements for
automatic approval are:
– the increasing equity level must result of the expansion
of the equity base of the existing company
– the money to be remitted should be foreign currency
and
– the proposed expansion programme should be
predominantly in the sector.
• Otherwise, the proposal would need Government
approval through the FIPB.
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Existing Companies (Cont’d.)
• For existing companies without any expansion
programme the additional requirements for
eligibility for automatic approval are:
– that they are predominantly engaged in the industries
under automatic routes.
– the increasing equity level must be from expansion of
the equity base; and
– the foreign equity must be in foreign currency.
• Otherwise, the proposal would need Government
approval through the FIPB.
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Automatic Route
• Prior Approval of RBI not necessary.
• Notification to RBI within 30 days of inward
remittances.
• Filing within 30 days of issuance of shares.
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FIPB Clearance
• Proposals that do not quality for automatic
approval.
• Guidelines issued for consideration of proposal by
FIPB.
• No further clearance from RBI necessary - only
notification of receipt of inward remittance and
filing of prescribed documentation upon issuance
of shares.
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Investment by NRI/ OCB
• Investment by NRI/OCB is treated as FDI. In
some sectors like real housing and estate
development, FDI is not permitted, however,
NRI/OCB are allowed to invest. In aviation sector
this category is permitted to invest up to 100% in
which otherwise foreign equity of only 40% is
allowed.
• Investment made by the NRI/OCB is fully
repatriable except in the case of real estate, which
has a 3-year lock-in period on original investment
and 16% cap on dividend repatriation.
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Foreign Investment in Small Scale
Sector
• The equity holding by other units including
foreign equity in a small-scale undertaking is
permitted up to 24%. However, there is no bar on
higher equity holding for foreign investment if the
unit is willing to give up its small-scale status. In
case of foreign investment beyond 24% in a smallscale unit, which manufactures small scale,
reserved item(s), an industrial licence carrying a
mandatory export obligation of 50% would need
to be obtained.
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Repatriation
• Investment and return are freely repatriable,
except where the approval is subject to specific
conditions such as lock in period on original
investment, dividend cap, foreign exchange
neutrality etc as per the notified sectoral policy.
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ADR/ GDR/ FCCB
• No ceiling on investment.
• Consistent track record for good performance for
three years – relaxable for infrastructure projects.
• No restriction on number to be floated in a
financial year.
• No end use restriction except for ban on
investment in real-estate & stock market.
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Entry Strategy
• Wholly Owned Subsidiaries
• Joint Ventures
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Wholly Owned Subsidiaries
• Approval from FIPB
• Criteria
– where only “holding” operation is involved and all
subsequent/ downstream investments to be carried out
with prior approval of the Government;
– where proprietary technology is sought to be protected
or sophisticated technology is proposed to be brought
in;
– where at least 50% of production is to be exported;
– proposals for consultancy; and
– proposals for power, roads, ports and industrial model
towns/ industrial parks or estates.
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Joint Venture
• “Any arrangement whereby two or more parties
co-operate in order to run a business or to achieve
a commercial objective”.
• Nature of joint venture will depend on its own
facts and on the resources and wishes of parties.
– New business
– Existing business
• Company law, partnership law and/or contract law
- taxation, intellectual property, etc.
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Joint Venture (Cont’d.)
• Rationale:
– to limit capital investment required and exposure to
risks.
– to reduce manufacturing costs & other overheads by
achieving economics of scale.
– parties may have complementary skills or resources.
– established distribution/ marketing set up of the Indian
partners.
– established contacts of the Indian partner which help
smoothen the process of setting up of operations.
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Joint Venture - Procedure
• Identification of partner
• Negotiation
• Due diligence
• Regulatory approval
• Incorporation of Company
• Issue of shares, registration with Govt. approval.
• Documentation
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Issues
• Ownership interest Vs. Control
• Management of business
– No. of directors
• Warranties, due diligence & price adjustment
• Non-compete
• Tax
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Issues (Cont’d.)
• Minority protection issues
– Mode
• exercise of statutory rights - limited scope, effective only in
clear cases of oppression
• purely contractual provisions
– Affirmative Vote
• Transferability
– Right of first refusal
– Valuation
– Restrictive legend
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Issues (Cont’d.)
• Deadlock & dispute resolution
– Committees/ CEO’s
– “Tag Along Rights”/ “Put Options”
• Termination
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breach of terms
insolvency
change of control
reduction in ownership interest
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Issues (Cont’d.)
• Conflict between Articles and JVA
• Voting Agreement Vs. Fiduciary Responsibility of
the Board
• Minority Protection Rights
– Should company be a party
– “Except otherwise provided
Severability
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in
the
articles”
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Lender Concerns
• JV company
• Promoters ‘Lock in’ Period
• Board representation
• Dividend distribution
• Affirmative vote
• Deadlock
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