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Highlights of changes brought by FDI Circular 2 of 2011

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Shruti Priya

Below are some of the key changes introduced in the fourth edition of the Circular 2 of 2011’ [1]  are as follows:

Exemption of construction-development activities in the education sector and in old-age homes, from the general conditions applicable to the the construction-development sector

FDI into construction development activities in the education sector and in respect of old-age homes has been exempted from the conditionalities imposed on FDI in the construction development sector in general i.e. minimum area and built-up area requirement; minimum capitalization requirement; and lock-in period. These conditionalities perhaps posed a constraint to FDI coming into these areas since educational institutions like schools, colleges, universities etc. as well as old-age homes have their own special requirements which do not necessarily fit these conditionalities.

Inclusion of ‘apiculture’, under controlled conditions, under the agricultural activities permitted for FDI

FDI has been allowed upto 100% under the automatic route in apiculture under controlled conditions. Apiculture is an important agro-based industry and has the potential of bringing in high economic returns with comparatively low levels of investment.

 

Inclusion of ‘basic and applied R&D on bio-technology pharmaceutical sciences/life sciences’, as an ‘industrial activity’, under industrial parks

FDI, up to 100%, under the automatic route, is permitted in existing and new industrial parks. Under the existing regime, industrial parks cover specified sectors.

The coverage has been expanded to specifically include research and development in bio-technology, pharmaceutical and life sciences, given the urgent need to augment research and development infrastructure in these areas as also expand the production facilities.

Revised limit of 26% for foreign investment in Terrestrial Broadcasting/ FM radio

The foreign investment limit for FM radio has been enhanced to 26% from the earlier 20%. This change ensures conformity of the foreign investment limit in this sector with other similar activities in the Information & Broadcasting sector.

Conversion of imported capital goods/machinery and pre-operative/pre-incorporation expenses to equity instruments

Conversion of imported capital goods/machinery and pre-operative/pre-incorporation expenses to equity instruments had been permitted in the last Circular on FDI policy, effective 1 April, 2011.  It was stipulated that such conversions must be made within a period of 180 days of the date of shipment of capital goods/machinery or retention of advance against equity and that payments made through third parties would not be allowed. This conveyed the sense that the onus of conversion is on the investor with no allowance for the FIPB process involved. This has been clarified through the present amendment, under which the time limit for making applications for such conversions will be 180 days. Further, payments for pre-operative/incorporation expenses can now be made directly by the foreign investor to the company or through a bank account, opened by the foreign investor, as provided under the FEMA regulations.

 

Introduction of provisions on ‘pledging of shares’ and opening of non-interest bearing escrow accounts, subject to specified conditions

 

As previously discussed, pledge of shares of an Indian company which has raised external commercial borrowings, or that of its associate resident companies for the purpose of securing the ECB raised by the borrowing company, has been allowed subject to conditions. The policy also now provides for opening and maintaining AD Category – I banks without the prior approval of RBI, non-interest bearing Escrow accounts in Indian Rupees in India, on behalf of non-residents, towards payment of share purchase consideration and/or for keeping securities to facilitate FDI transactions, subject to the terms and conditions specified by RBI.  This will streamline the process for bringing in FDI and provide the investors with options.

 

Further, the sectoral section of the policy has been re-arranged, to provide for grouping of services under ‘financial services’, ‘other services’ and ‘information services’. The Circular has also been re-organised, with a view to grouping of similar subjects under common chapters.

 

 

 

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