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FOREIGN COLLABORATIONS IN INDIA

Q.1	What is Automatic Route for Foreign Direct Investment in India?
Q.2	What are the circumstances when the Automatic Route is not available?
Q.3	What is the alternative if the Automatic Route is not available?
Q.4	What should be done after investment is made under the Automatic Route or SIA/FIPB approval?
Q.5	At what price can a company issue shares to non-residents?
Q.6	Is Automatic Route available for purchase of existing shares by the foreign investor?
Q.7	What should be done after SIA/FIPB permission for transfer of existing shares from residents to non-residents has been obtained?
Q.8	Are all foreign investments repatriable? Whether the dividend thereon be freely repatriated?
Q.9	Is RBI permission necessary for foreigner/NRI/OCB to subscribe to Memorandum and Articles of Association?
Q.10	What is the procedure for disinvestments of capital invested?
Q.11	What are the provisions for remittance in foreign exchange on account of Foreign Technology Transfer?
Q.12	What are the parameters for foreign technology transfer under the Automatic Route of Reserve Bank of India (RBI)?
Q.13	Where Automatic Route of RBI for technology transfer is not available?
Q.14	Is RBI approval required for foreign technical collaboration under the Automatic Route? If so, what is the procedure?
Q.15	Is payment of royalty to parent companies and payment of royalty for use of trademarks and brand names without technology transfer covered under the Automatic Route of RBI?
Q.16	What are the regulations for Foreign Venture Capital Investment?



Foreign Direct Investment
Q.1	SAD	What is Automatic Route for Foreign Direct Investment in India?
Ans.		Foreign investment in India has a long history. Foreign Exchange Regulation Act (FERA) of 1973 put severe restrictions on foreign investment in India. Within the overall statutory framework provided by FERA 1973, foreign investment was guided by the Industrial Policy of Government of India and most of foreign investment was done in India with the prior approval of Government of India. The New Industrial Policy of 1991 introduced an innovation by way of an Automatic Route not requiring approval from Government of India. It was limited to 35 industries and was subject to an investment ceiling of 51% and still required approval from RBI. Over the past one decade, the scope of Automatic Route has been expanded and the requirement of RBI's approval has also been waived. The present Automatic Route allows Indian companies engaged in all industries except for certain select industries/sectors to issue shares to foreign investors up to 100% of their paid up capital in Indian companies. These selected sectors are listed in Annexure `A' of Schedule I of Reserve Bank Notification No.FEMA.20/2000-RB dated 3rd May 2000. Any investment in a company that is engaged in an activity in the sectors listed in Annexure A needs specific approval of Government of India. There are also some areas where though Automatic Route is available, foreign investors cannot invest beyond a certain percentage of the paid up capital of the Indian companies or where investment is subject to some other conditions. These areas have been listed in Annexure `B'. The notifications are available on website www.rbi.org.in


Q.2	SAD	What are the circumstances when the Automatic Route is not available?
Ans.		Foreign investors have to, however, keep in mind that they may invest freely under the Automatic Route described above but where such investment does not conform to policies of Government of India, a specific approval from Government must be sought. For example, there are Government guidelines on location of industrial units, or there are certain items like explosives or liquor that need an industrial licence. If the Indian company does not conform to the locational guidelines or needs an Industrial licence then it cannot issue shares under the Automatic Route. Automatic Route is also not available to those foreign investors who already have a financial or technical collaboration in the same or allied field or where more than 24% foreign investment is made in a company which is engaged in manufacture of an item reserved for small scale industry. Finally, Sri Lankan nationals and investors from Pakistan & Bangladesh need to apply to Government of India for investing in Indian companies


Q.3	SAD	What is the alternative if the Automatic Route is not available?
Ans.		If for any of the reasons mentioned above, the Indian company is not eligible to issue shares to foreign investors under the Automatic Route, an application may be made to Secretariat for Industrial Assistance (SIA), Ministry of Commerce & Industry, Government of India, Udyog Bhavan, New Delhi. This application can be made on plain paper by either the investee company or by the foreign investor. It will, however, be necessary to provide to the Government full details of the proposal. No RBI approval is needed after the approval of the Government.


Q.4	SAD	What should be done after investment is made under the Automatic Route or SIA/FIPB approval?
Ans.		The Indian company has to follow a two-stage reporting procedure. In the first stage, the company should make a report on plain paper to the concerned Regional Office of RBI within 30 days of receipt of funds. The report should include the name & address of foreign investor, date of receipt of funds and the amount (in rupees), name and address of the bank through whom funds are received and details of the Government approval, if any.In the second stage, the Indian company has to file a report in Form FC-GPR together with two certificates, one from Company Secretary certifying adherence to regulations etc. and the other from a Chartered Accountant indicating the manner of arriving at the issue price of shares.


Q.5	SAD	At what price can a company issue shares to non-residents?
Ans.		A newly constituted company can issue shares at par. If preferential allotment is made in a listed company, the minimum price should be in conformity with the SEBI's guidelines for preferential allotment. If preferential allotment is made by an unlisted company, the minimum price will be determined in accordance with the guidelines issued by erstwhile Controller of Capital Issues (CCI guidelines). In case of issue of right shares, the price should not be lower than that at which the offer is made to resident shareholders


Q.6	SAD	Is Automatic Route available for purchase of existing shares by the foreign investor?
Ans.		It is important to note that the Automatic Route is only for issue of fresh shares by the Indian company. Transfer of existing shares from residents to non-residents needs approval from Government of India followed by an approval from Reserve Bank of India


Q.7	SAD	What should be done after SIA/FIPB permission for transfer of existing shares from residents to non-residents has been obtained?
Ans.		Either the transferor (resident) or the transferee (non-resident) can make an application for RBI’s permission for the transfer. The application accompanied with the following documents should be submitted to concerned Regional Office of RBI under whose jurisdiction the registered office of the Indian investee company is situated: - A copy of FIPB approval. Consent letter from transferor and transferee clearly indicating the number of shares, name of Investee Company and the price at which the transfer is proposed to be effected. The present 1 post transfer shareholding pattern of the Indian investee company showing the equity participation by residents and non-residents category-wise. Copies of RBI approvals / acknowledged copies of FC-GPR evidencing the existing holdings of the non-residents. If the sellers / transferors are NRIs / OCBs, the copies of RBI approvals evidencing the shares held by them on repatriation / non-repatriation basis. Open Offer document filed with SEBI if the acquisition of shares by non-resident is under SEBI Takeover Regulations. Fair Valuation Certificate from Chartered Accountant indicating the value of shares as per the following guideline: - In the case of unlisted shares the fair value is worked out as per the erstwhile Controller of Capital Issue/s. For listed shares, the price worked out is not less than the higher of average weekly high and low quotations for 6 months and average of daily high and low quotation or two weeks preceding 30 days prior to the date of making application to FIPB. RBI issues an `in-principle' approval for the transfer. After obtaining the `in principle' approval the applicant has to apply for final permission together with original Foreign Inward Remittance Certificate and an undertaking to the effect that the shares acquired by them shall not be disposed of/transferred in favour of residents except in terms of the extant provisions of FEMA, 1999.


Q.8	SAD	Are all foreign investments repatriable? Whether the dividend thereon be freely repatriated?
Ans.		Yes. All foreign investments are on repatriation basis except for the cases where NRIs/OCBs choose to invest specifically under non-repatriable schemes. Dividends declared on foreign investments can be remitted freely through an Authorised Dealer (AD).


Q.9	SAD	Is RBI permission necessary for foreigner/NRI/OCB to subscribe to Memorandum and Articles of Association?
Ans.		Indian companies are permitted to issue shares to non-resident investors in terms of the Automatic Route as indicated in the Schedule I to the Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations 2000. It is clarified that non-resident investors can subscribe to the Memorandum & Articles of Association of those companies which are eligible to issue shares under the Automatic Route in terms of the Regulations mentioned above. In respect of companies not covered by the Automatic Route, foreign investors can subscribe to the Memorandum & Articles of Association after necessary approval for investment is obtained from SIA/FIPB.


Q.10	SAD	What is the procedure for disinvestments of capital invested?
Ans.		Non residents can sell shares on Stock Exchange without prior approval of RBI. They can approach a bank for repatriation of the sale proceeds if they hold the shares on repatriation basis and if they have necessary NOC/Tax Clearance Certificate issued by Income Tax authorities. For sale of shares through private arrangements, Regional Offices of RBI grant permission for disinvestments of foreign equity in Indian company in terms of guidelines indicated in Regulation 10.B of Notification No.FEMA.20/2000 RB dated 3rd May 2000. The sale price of shares on disinvestments is determined strictly in accordance with the guidelines prescribed under Regulation 10B(2) of the above Notification.




Foreign Technical Collaboration
Q.11	SAD	What are the provisions for remittance in foreign exchange on account of Foreign Technology Transfer?
Ans.		In terms of the provisions of Section 5 of FEMA, a person resident in India may draw foreign exchange from an Authorised Dealer for all current account transactions, except certain prohibited/restricted categories. Government of India Notification No. GSR 381(E) dated 3 rd May 2000 lays down the prohibition/restrictions mentioned above. In terms of the above-mentioned notification, an Authorised Dealer may permit an Indian company to effect remittance of technical know-how fees/royalties on account of a technical collaboration agreement entered into with a person resident outside India if the payment is made out of RFC/EEFC account of the remitter OR (b) the agreement is registered with the Reserve Bank.


Q.12	SAD	What are the parameters for foreign technology transfer under the Automatic Route of Reserve Bank of India (RBI)?
Ans.		In case the lump sum payment does not exceed US$ 2 million and payment of royalty does not exceed 5% on domestic sale and 8% on export sale, RBI may register the agreement and grant approval for remittance under the Automatic Route, if certain criteria as prescribed by the Government of India automatic approval are met.


Q.13	SAD	Where Automatic Route of RBI for technology transfer is not available?
Ans.		Proposals which do not satisfy the parameters prescribed for automatic approval by RBI, require clearance from Government of India. If the terms of any technical collaboration agreement are beyond the above mentioned parameters, the Reserve Bank will register the agreement after the company submits copy of specific permission from Government of India. Further, in terms of the policy laid down by the Government, no Automatic Approval shall be granted by the RBI for Technology Transfer proposals for any item reserved for Small Scale Sector or for any item, which requires Industrial Licence. Similarly if the foreign collaborator had a previous financial/technical collaboration with a company in India, in the same or allied activity, Automatic Route is not available. Any application requiring Government approval may be lodged in Form FC/IL (SIA) or on plain paper containing complete information regarding the proposals. Applications may be addressed to SIA (Secretariat for Industrial Assistance), Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Udyog Bhavan, New Delhi 110 011.


Q.14	SAD	Is RBI approval required for foreign technical collaboration under the Automatic Route? If so, what is the procedure?
Ans.		Yes. The procedure for getting foreign technical collaboration approvals under the said Automatic Route, together with allied information is given below: General Approval will be given for payment in connection with foreign technology for manufacture of products as also foreign technology required for services sector. The payment parameters will be a lump sum payment up to US$ 2 million and/or 5% royalty on domestic sales and 8% on exports. The prescribed lump sum/royalty rates may be subject to or net of taxes and will be calculated according to standard conditions/procedures. B. Hotel & Tourism Related Industries The term “Tourism Related Industries” will include the following: Travel/tour operating/tourist transport operating agencies. Units providing facilities for cultural, adventure and wildlife experience to tourist. Surface/air/water transport facilities for tourists. Leisure, entertainment, amusement, sports and health units for tourists. Convention/Seminar units and organisations in connection with tourism. For technology transfer in respect of Hotel & Tourism related industries, the parameters are: Lump sum fee towards technical and consultancy services up to US$ 200,000 Franchising and marketing etc. fee up to 3% on the gross room sales and Management fees up to 10% of the foreign exchange earnings to the foreign collaborator if the equity participation is at least 25%. C. Procedure for granting approval All applications for permission under the Automatic Route of RBI should be submitted on plain paper in five copies furnishing the following details, to the concerned Regional Office of Exchange Control Department, Reserve Bank of India. Name of the company with address of the registered office as well as Head Office NIC Code No. and description of the activity (whether manufacturing or service sector) Whether item of manufacture is reserved for Small Scale Sector as also whether any Industrial Licence is required. Name/Address/Country of the Foreign technical collaborator Particulars in respect of payments for Technology Transfer: Lump sum fee: (in foreign exchange as well as its rupee equivalent & No. of instalments)Royalty: percentage on domestic/export sales, period etc. and also whether lump sum/royalty is subject to or net of taxes Name and full address of Authorised Dealer through whom remittance of technical know-how fees/royalty will be made Declaration I/We hereby certify that The applicant is eligible for Automatic Approval from RBI in accordance with guidelines issued by Government. The foreign collaborator does not have any previous JV or technical collaboration or trade-mark agreement in India in the same or allied field.* b) No approval for technology transfer was obtained earlier (either from Government or from RBI under Automatic Route) in respect of products/activities for which remittance for technology transfer is sought in this application All information furnished in the application is true and correct to the best of applicant’s knowledge and belief. N.B. * This condition will not be applicable in case the Indian company is in the IT Sector. D. Documentation Applications for “Technology Transfer” need not be accompanied by any documents. On approval, the applicant will be advised to file necessary documents viz. a certified copy of the collaboration agreement and a certified copy of the Memorandum & Articles of Association of the company or copy of Partnership Deed in the case of a partnership firm or an affidavit from the Proprietor of a Proprietary firm indicating the details regarding constitution of the firm, with Authorised Dealer (AD)/concerned Regional Office (RO) of RBI. In this connection, further enquiries pertaining to mode of remittance, payment of R&D Cess etc. should be made to the concerned Authorised Dealer / Regional Office of RBI. E. Standard conditions attached to Approvals for Technology Agreement 1.(a) The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc. The payment of royalty will be restricted to the licensed capacity plus 25% in excess thereof for such items requiring industrial licence or on such capacity as specified in the approval letter. This restriction will not apply to items not requiring industrial licence. In case of production in excess of this quantum, approval of Government would have to be obtained regarding the terms of payment of royalty in respect of such excess production. No minimum guaranteed royalty would be allowed. The lump sum shall be paid in three instalments as indicated below, unless otherwise stipulated in the approval letter:- First 1/3 rd after the approval for collaboration proposal is obtained from the Reserve Bank of India and collaboration agreement is filed with the Authorised Dealer in Foreign Exchange Second 1/3 rd on delivery of know-how documentation Third and final 1/3 rd on commencement of commercial production, or four years after the proposal is approved by the Reserve Bank of India and agreement is filed with the Authorised Dealer in Foreign Exchange, whichever is earlier. The lump sum can be paid in more than three instalments, subject to completion of activities as specified above. All remittances to the foreign collaborator shall be made as per the exchange rates prevailing on the date of remittance. The applications for remittances may be made to the Authorized Dealer in Form A2 with the under noted documents: A “No Objection” certificate issued by the Income Tax authorities in the standard form or a copy of the certificate issued by the designated bank, regarding the payment of tax where tax has been paid at a flat rate of 30% to the designated bank or a declaration in terms of Sec.266 of Income Tax Act. A declaration by the applicant to the effect that the proposed remittance is strictly in accordance with the terms and conditions of the collaboration approved by RBI/Government. 5. The agreement shall be subject to Indian Laws. 6. A copy of the foreign technology transfer agreement signed by both the parties may be furnished to the following authorities: Administrative Ministry/Department (b)Department of Scientific and Industrial Research,Technology Bhavan, New Delhi 110 016. ©Concerned Regional Office of Exchange Control Department, RBI. (d) Authorised Dealer designated to service the agreement All payments made under the foreign investment and technology transfer including Rupee payments (if any) to be made in connection with engagement/deputation of foreign technical personnel such as passage fare, living expenses etc. of foreign technicians, would be liable for the levy of cess under the Research and Development Cess Act, 1986 and the Indian company while making such payments should pay the cess prescribed under the Act.


Q.15	SAD	Is payment of royalty to parent companies and payment of royalty for use of trademarks and brand names without technology transfer covered under the Automatic Route of RBI?
Ans.		Yes. Payment of lump sum up to US$ 2 million and/or royalty up to 8% on exports and 5% on domestic sales by Indian joint venture partner to overseas JV companies is allowed under the automatic route without any restriction on the duration of royalty payments. Press Note No.9 of 2000, inter-alia, provides for payment of royalty upto 2% on exports and 1% on domestic sales under automatic route for use of trademark and brand name of the foreign collaborator without technology transfer. In case of technology transfer, payment of royalty subsumes the payment of royalty for use of trademark and brand name of the foreign collaborator


Q.16	SAD	What are the regulations for Foreign Venture Capital Investment?
Ans.		A Foreign Venture Capital Investor registered with SEBI may make investment in a Venture Capital Fund for an Indian Venture Capital Undertaking, in the manner and subject to the terms and conditions specified in Schedule 6 of RBI Notification No.FEMA 20/2000-RB dated 3-5-2000. Foreign Venture Capital Investor is an investor incorporated and established outside India which proposes to make investment in Venture Capital Fund(s) or Venture Capital Undertaking(s) in India and is registered with SEBI under SEBI (Foreign Venture Capital Investors) Regulations, 2000. Indian Venture Capital Undertaking is a company incorporated in India whose shares are not listed on a recognized stock exchange in India and which is not engaged in an activity under the negative list specified by SEBI. Venture Capital Fund is a fund established in the form of a trust, a company including a body corporate and registered under the Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996 which has a dedicated pool of capital raised in a manner specified under the said Regulations and which invests in Venture Capital Undertakings in accordance with the said Regulations. SEBI registered Venture Capital Investors are allowed to invest or disinvest at a price that is mutually acceptable to the buyer and the seller/issuer.

While every care is exercised in compiling the information in terms of its authenticity, iNDEXTb is not responsible for any error of judgement or interpretation of relevant policy provisions. The version or the interpretation of the concerned department/organisation be treated as final.