Jurisdiction - India
India – Foreign Exchange Update.

9 February, 2015


  • Pursuant to Press Note 10 of 2014 dated December 03, 2014 issued by the Department of Industrial Policy and Promotion (‘DIPP’) the conditions regulating foreign direct investment (‘FDI’) in the construction development sector (relating to townships, housing and built-up infrastructure) has been revised. The key revisions include:

i. The requirement to develop minimum area for service plots, which was previously 10 hectares, has been removed. For construction development projects, the minimum built-up area has been reduced from 50,000 square meters to 20,000 square meters;

ii. The minimum capitalization requirements for both wholly-owned subsidiaries and joint undertakings is now USD 5m, which must be infused within 6 (six) months of the commencement of the project, being the date of approval by the relevant statutory authority of the building plan / layout plan. Subsequent tranches of FDI can be brought in within 10 years from the commencement of the project or before the completion of the project, whichever occurs earlier;

iii. Earlier, foreign investors were permitted to exit under the automatic route after 3 (three) years from completion of minimum capitalization or from the date of receipt of each instalment of FDI, whichever is later. A foreign investor can now exit on the completion of the project or development of trunk infrastructure, i.e. roads, water supply, street lighting, drainage and sewerage. Repatriation of FDI or transfer of stake by one non-resident to another before completion of the project will be allowed only with the approval of the Foreign Investment Promotion Board;

iv. The earlier requirement of developing at least 50% of the project within 5 (five) years from the date of obtaining statutory approvals, has been altogether removed;

v. Investee companies / joint ventures, which commit 30% of the total project cost for low cost affordable housing, are not required to comply with the conditions set out in ‘i’ and ‘ii’ above. Further, the conditions set out in ‘i’, ‘ii’, and ‘iii’ above will not apply to hotels and tourist resorts, hospitals, special economic zones, educational institutions, old age homes and investment by non-resident Indians; and

vi. 100% FDI will be permitted in completed projects for operation and management of townships, malls, shopping complexes and business centres. Further, the Indian investee company will only be allowed to sell developed plots.

  • By way of a circular dated December 8, 2014, the RBI has notified the increase in the FDI ceiling limits in the defence sector from 26% to 49%. In light of the clarification dated June 26, 2014 issued by DIPP with respect to the list of defence items requiring industrial licenses and dual use items i.e. items having military as well as civilian applications, other than those specifically mentioned in the list, not requiring industrial license, the RBI has permitted FDI up to 49% under the Government route in the defence sector. However, portfolio investments cannot exceed 24% of the investee company, and will be under the automatic route.

  • The RBI has, by way of a circular dated December 08, 2014, permitted 100% FDI in the railway infrastructure sector under the automatic route. Accordingly, FDI has been permitted in respect of the following activities in relation to construction, operation and maintenance in the railway sector (i) suburban corridor projects through public private partnership, (ii) high speed train projects, (iii) dedicated freight lines, (iv) rolling stock including train sets, and locomotives/coaches manufacturing and maintenance facilities, (v) railway electrification, (vi) signalling systems, (vii) freight terminals, (viii) passenger terminals, (ix) infrastructure in industriparks pertaining to railway line/sidings including electrified railway lines and connectivities to main railway line and (x) mass rapid transport systems.

The RBI has further stated that FDI beyond 49% of the equity of the investee company in sensitive areas from a security point of view will be considered by the Cabinet Committee on Security (CCS) on a case to case basis.

  • The Reserve Bank of India (‘RBI’) has, by way of its circular dated December 29, 2014 and effective from December 3, 2014, liberalized the regulations in relation to creation of charge on (i) the shares of a wholly owned subsidiary (‘WOS’) / joint venture (‘JV’) / step down subsidiary (‘SDS’) in favour of domestic / overseas lenders, (ii) domestic assets in favour of overseas lenders to the JV / WOS / SDS and (iii) overseas assets in favour of domestic lenders, under the Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 (‘ODI Regulations’) in order to grant more flexibility to an Indian party. Briefly, the circular provides for the following three provisions, which are subject to prescribed conditions:

i. Creation of charge on shares of JV/WOS/ SDS in favour of domestic/overseas lender: The designated authorized dealer bank (‘AD’) is now entitled to permit the pledge of shares of the JV/WOS/SDS (irrespective of the level) of an Indian party in favour of a domestic / overseas lender for securing the funded and/or non-funded facility to be availed of by the Indian party or by its group companies/sister concerns/associate concerns or by any of its JV/WOS/SDS (irrespective of the level) under the automatic route.

ii. Creation of charge on the domestic assets in favour of overseas lenders to the JV/ WOS/SDS: Instead of obtaining prior RBI approval (as was the earlier requirement), the AD is now permitted to authorise the creation of charge (by way of pledge, hypothecation, mortgage, or otherwise) on the domestic assets of an Indian party in favour of an overseas lender for securing the funded and/non-funded facility to be availed of by the JV/WOS/SDS of the Indian party under the automatic route.

iii. Creation of charge on overseas assets in favour of domestic lender: Instead of obtaining prior RBI approval (as was the earlier requirement), the AD is now permitted to authorize creation of charge (by way of hypothecation, mortgage, or otherwise) on the overseas assets (excluding the shares) of the JV/WOS/SDS of an Indian party in favour of a domestic lender for securing the funded and/or non-funded facility to be availed of by the Indian party or by its group companies/sister concerns/associate concerns or by any of its overseas JV/WOS/SDS (irrespective of the level) under the automatic route.

  • The Department Related Parliamentary Standing Committee on Commerce (‘Committee’) by way the 115th Report, dated December 22, 2014, on foreign direct investment (‘FDI’) in the pharmaceutical sector (‘Report’) has recommended that the Government place an absolute ban on foreign direct investment in brown field pharma units. The Committee proposed that a ceiling may be fixed for introductory prices of generic drugs in the country at any time that there is an increase in the price of such generic drugs of 10% or more, in order to keep prices of drugs in check and ensure access by the public to good quality medicines.

  • In India, medical devices are part of the Drugs & Cosmetics Act, 1940 and fall under the pharmaceuticals sector. All the conditions set out under the Consolidated FDI Policy Circular 2014 (‘FDI Policy’) for the pharmaceuticals sector, including the condition relating to ‘non-compete clause’, apply to brownfield investment proposals in medical device industry. This condition is not relevant to ‘medical devices’ industry of the country where the country is substantially import dependent and the sector is adversely impacted because of the lack of adequate capital and required technology. In view of the same, pursuant to the press release dated December 24, 2014, it has been notified that the Cabinet approved the proposal to amend the FDI Policy such that the conditions applicable for FDI in brownfield projects in pharmaceuticals sector will not be applicable to greenfield as well as brownfield projects in relation to the medical devices industry.

  • The Department of Industrial Policy and Promotion (‘DIPP’) released its year end review for 2014 on December 24, 2014. Following are key measures undertaken by DIPP to bring industry and manufacturing centre stage for economic growth in 2014 in relation to foreign investments:

i. Ease of doing business: Major initiatives have been taken for improving ‘Ease of Doing Business’ in India through simplification and rationalization of the existing rules and introduction of information technology to make governance more efficient and effective.

ii. Make in India: This program was launched globally on September 25, 2014 with 25 thrust sectors and a dedicated portal with back end support up to sectoral and state levels for facilitation.

iii. E-Biz Project: The project envisages setting up a G2B portal to serve as a one stop shop for delivery of services to investors and addresses the needs of business and industry through the entire life cycle of the business.

iv. Japan plus: DIPP has set up a special management team to facilitate and fast track investment proposals from Japan. The team known as “Japan Plus” has been operationalized with effect from October 8, 2014.

  • RBI has, by way of its circular dated November 25, 2014, clarified that Indian companies or their ADs are not permitted to issue any direct or indirect guarantee or create any contingent liability or offer any security in any form for borrowings raised by overseas holding/associate/ subsidiary/ group companies (‘Overseas Group Companies’) unless the same is explicitly permitted under relevant regulations. RBI has further clarified that Indian companies or their authorized dealer banks using structures that contravene such requirements will be liable for penal action under FEMA.

  • By way of notification dated October 21, 2014 the Central Government notified the Depository Receipts Scheme, 2014 (‘DR Scheme’), which has become effective from December 15, 2014. The DR Scheme has replaced the existing Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 except to the extent relating to foreign currency convertible bonds.

As per the DR Scheme, an Indian company or any other issuer of permissible securities or any person holding permissible security, who has not been prohibited from accessing the capital markets or dealing in securities, are eligible to issue or transfer permissible securities to a foreign depository for issuing depository receipts. A foreign depository may issue depository receipts by way of a public offering or private placement or in any other manner prevalent in the permissible jurisdiction. The DR Scheme inter alia stipulates provisions regarding the pricing in relation to the issue of permissible securities, mode of transfer of permissible securities for issue of depository receipts, rights and duties of a foreign depository and obligations imposed on the domestic custodian.



For further information, please contact:


Zia Mody, AZB & Partners



Abhijit Joshi, AZB & Partners 



Shuva Mandal, AZB & Partners 



Samir Gandhi, AZB & Partners



Percy Billimoria, AZB & Partners 



Aditya Bhat, AZB & Partners 



AZB & Partners Capital Markets Practice Profile in India


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