KEY CHANGES IN CONSOLIDATED FDI POLICY

The Department for Promotion of Industry and Internal Trade (DPIIT) (formerly known as “Department of Industrial Policy & Promotion (DIPP)”) is the nodal Department for formulation of the policy of the Government on Foreign Direct Investment (FDI). It is also responsible for maintenance and management of data on inward FDI into India, based upon the remittances reported by the Reserve Bank of India.

The FDI policy is reviewed on an ongoing basis, with a view to making it more investor-friendly. To attract higher levels of FDI, Government has put in place a liberal policy on FDI, under which FDI up to 100%, is permitted, under the automatic route, in most sectors/activities. Significant changes have been made in the FDI policy regime in recent times, to ensure that India remains an increasingly attractive investment destination. The Department plays an active role in the liberalization and rationalization of the FDI policy. Towards this end, it has been constructively engaged in extensive stakeholder consultations on various aspects of the FDI policy.

The Consolidated FDI Policy Circular of 2020 was released by the DPIIT on October 29, 2020 and was made effective from October 15, 2020.

The Consolidated FDI Policy is a compilation of various decisions and policy pronouncements taken by the government with regard to FDI in different sectors. It is a policy framework on FDI, which is transparent, predictable and comprehensible. This framework can be updated on annual basis, to capture and keep pace with the regulatory changes, effected in the interregnum.

The present consolidation subsumes and supersedes all Press Notes / Press Releases / Clarifications / Circulars issued by the DPIIT, which were in force as on October 15, 2020 and reflects the FDI Policy as on October 15, 2020.

Key changes in Consolidated FDI Policy

The changes in consolidated FDI Policy as listed below are compiled based on the comparison between previously existing Consolidated FDI Policy, 2017 and newly introduced Consolidated FDI Policy, 2020 which may include the amendments made by Press Notes / Press Releases / Clarifications / Circulars issued by the DPIIT in the middle duration of these two policies.

·        Eligible Investors - An entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.

 

·        Foreign Portfolio Investors (FPI) may make investments in the manner and subject to the terms and conditions specified in Schedule II of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

 

·        A Foreign Venture Capital Investor (FVCI) may make investments in the manner and subject to the terms and conditions specified in Schedule VII of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

 

·        Establishment of branch office, liaison office or project office or any other place of business in India shall be governed by the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016. Further, acquisition or transfer of immovable property in India by citizens of certain countries shall be regulated as per the relevant provisions under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, as amended from time to time.

 

·        Foreign Investment in Investing Companies registered as Non-Banking Financial Companies (NBFC) with the RBI, being overall regulated, would be under 100% automatic route.

 

·        Foreign Investment in Core Investment Companies (CICs) and other investing companies, engaged in the activity of investing in the capital of other Indian company(ies)/LLPs, is permitted under Government approval route.

 

·        In Defence Sector, FDI up to 74% under automatic route shall be permitted for companies seeking new industrial licenses. (Previously, it was allowed up to 49% under automatic route)

 

·        Infusion of fresh foreign investment up to 49%, in a company not seeking industrial license or which already has Government approval for FDI in Defence, shall require mandatory submission of a declaration with the Ministry of Defence in case change in equity /shareholding pattern or transfer of stake by existing investor to new foreign investor for FDI up to 49%, within 30 days of such change. Proposal for raising FDI beyond 49% from such companies will require Government approval.

 

·        Foreign Investments in the Defence Sector shall be subject to scrutiny on grounds of National Security and Government reserves the right to review any foreign investment in the Defence Sector that affects or may affect national security.

 

·        In Broadcasting Content Services Sector, FDI up to 26% under Government Route shall be permitted for companies which are under Uploading/Streaming of News & Current Affairs through Digital Media.

 

·        It is clarified that real-estate broking service does not amount to real estate business and 100% foreign investment is allowed in the activity under automatic route.

 

·        E-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only.

 

·        E-commerce marketplace entity with FDI shall have to obtain and maintain a report of statutory auditor by 30th of September every year for the preceding financial year confirming compliance of the e-commerce guidelines.

 

·        In Single Brand Product Retail Trading, FDI up to 100% is allowed under Automatic Route. (Previously, it was allowed up to 49% under Automatic Route and beyond 49% under Government Route)

 

·        In Insurance Sector, FDI up to 100% is allowed under Automatic Route to Intermediaries or Insurance Intermediaries including insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, Surveyors and Loss Assessors and such other entities, as may be notified by the Insurance Regulatory and Development Authority of India from time to time. (Previously, FDI up to 49% was allowed under Automatic Route to Insurance Companies and Insurance Intermediaries whereas now 49% cap is only on Insurance companies)

 

·        The condition of Indian owned and controlled, shall not be applicable to Intermediaries and Insurance Intermediaries and composition of the Board of Directors and key management persons shall be as specified by the concerned regulators from time to time.

 

·        The foreign direct investment proposals shall be allowed under the automatic route subject to verification by the Authority and the foreign investment in intermediaries or insurance intermediaries shall be governed by the same terms as provided under rules 7 and 8 of the Indian Insurance Companies (Foreign Investment) Rules, 2015, as amended from time to time.

 

·        The insurance intermediary that has majority shareholding of foreign investors shall undertake the following:

 

i.                 be incorporated as a limited company under the provisions of the Companies Act, 2013;

 

ii.                at least one from among the Chairman of the Board of Directors or the Chief Executive Officer or Principal Officer or Managing Director of the insurance intermediary shall be a resident Indian citizen;

 

iii.               shall take prior permission of the Authority for repatriating dividend; Consolidated FDI Policy 2020 Department for Promotion of Industry and Internal Trade 63

 

iv.               shall bring in the latest technological, managerial and other skills;

 

v.                shall not make payments to the foreign group or promoter or subsidiary or interconnected or associate entities beyond what is necessary or permitted by the Authority;

 

vi.               shall make disclosures in the formats to be specified by the Authority of all payments made to its group or promoter or subsidiary or interconnected or associate entities;

 

vii.             composition of the Board of Directors and key management persons shall be as specified by the concerned regulators;

 

·        The reporting structure of FDI was changed with effect from September 01, 2018. The Reserve Bank has introduced an online application, FIRMS (Foreign Investment Reporting and Management System), which provides for the SMF. With the implementation of SMF, the reporting of FDI, which was presently a two-step procedure viz., ARF and FC-GPR was merged into a single revised FC-GPR. With effect from September 01, 2018, five forms viz., FC-GPR, FC-TRS, LLPI, LLP-II and CN were being made available for filing in SMF. The other three forms viz., ESOP, DI, and DRR were made available for filing with effect from October 23, 2018. With effect from September 01, 2018, all new filings for the 5 forms and other three forms viz., ESOP, DRR and DI with effect from October 23, 2018 have to be done in SMF only.

 

     Disclaimer

It is intended to provide helpful information and legal guidance with respect to the subject matter, determining the changes in the consolidated FDI Policy. The entire contents have been prepared based on the relevant policies or circulars existing at the time of preparation of article. The information cited on this article has been verified to the best of the author’s abilities and every effort has been made to keep the information error-free. Suggestions or feedback to improve the contents of the article are welcomed. The contents and information contained in the article is merely for educational and informational purposes and does not constitute a professional advice or a legal opinion. The contents of the article have been prepared based on the personal views of the author and may vary according to one’s interpretation of law. The author assumes no responsibility for the consequences of the use of such information. In no event the author shall be liable to anyone for the damage resulting from, arising out of or in connection with the use of such content or information.

Udyam Registration Process by MSMEs

The Ministry of Micro, Small and Medium Enterprises (MSMEs) vide its publication of notification in Gazette of India dated 26^th June, 2020 has specified the new form and procedure for filing the memorandum to be known as “UDYAM REGISTRATION” with effect from 1^st day of July, 2020.

Highlights of new process of MSME registration:

Ø  The new process of MSME registration can be done online at www.udyamregistration.gov.in portal.

Ø  The process will be completely online, paperless and based on self-declaration. There won’t be any requirement to upload documents, papers, certificates or proof.

Ø  Adhaar Number will be required for registration.

Ø  Udyam Registration Number will be allotted and Udyam Registration Certificate will be issued after successful registration of MSME under such portal. This certificate will have a dynamic QR Code from which the web page on our Portal and details about the enterprise can be accessed.

Ø  There will be no need for renewal of Registration.

Ø  PAN and GST linked details on investment and turnover of enterprises will be taken automatically from the respective Government databases.

Ø  The new online system of Ministry will be fully integrated with Income Tax and GSTIN systems.

Ø  Those who have EM-II or UAM registration or any other registration issued by any authority under the Ministry of MSME, will also have to re-register themselves under this new portal.

Ø  All enterprises registered till 30th June, 2020, shall be re-classified in accordance with this notification.

Ø  The existing enterprises registered prior to 30th June, 2020, shall continue to be valid only for a period up to the 31^st day of March, 2021. 

Ø  No enterprise is supposed to file more than one Udyam Registration. However, any number of activities including manufacturing or service or both may be specified or added in one Registration.

Ø  Government's facilitation mechanism in the name of ‘Single Window Systems’ at Champions Control Rooms will facilitate registration process and handholding of MSMEs and DICs will act as ‘Single Window Facilitation Systems’ and help people in their Districts.

Ø  There will be no fee for filing Udyam Registration.

Ministry has expressed confidence that this process will be extremely simple, seamless and entrepreneur friendly. It will set an example in Ease of Doing Business, not only in India but internationally. It will reduce transaction time and costs. Entrepreneurs and Enterprises can focus on their real work and become globally competitive.

At the same time, looking to some private websites projecting as Government website, Ministry has clarified that except this portal of Government of India (www.udyamregistration.gov.in) and Government's Single Window Facilitation Systems, no other private online or offline system, service, agency or person is authorized or entitled to do MSME Registration or undertake any activity related with that process.

EFFECT OF COVID-19 ON MSME

 

The spread of Coronavirus across the world and imposition of lockdowns and social distancing by government to curb its roll out has led to a huge impairment to the economy of several countries across the world. Some sectors have been hit dismally while others finding the better ways to get through in this downfall. Like other sectors of the Indian economy, MSMEs have been smacked poorly due to lockdown imposed by the government to tackle Covid-19 pandemic. However, even before the current crisis, MSMEs growth has been marred by several challenges due to small scale of operations and limited financial and operational resources. From a worldwide perspective, it has been recognized that micro, small and medium enterprises (MSMEs) play a vital role in economic development, as they have been the primary sources of job/employment creation and output growth, not only in less developed countries but also in developed countries. MSMEs have been accepted as the engine of economic growth and for promoting equitable development.

 

In India, MSME sector usually faces tribulation while any major event is brought out by the government or by the economy drive. Starting from demonetization, implementation of GST to slowdown of the economy MSME sector has already been facing distress. The outbreak of coronavirus has further hit the MSME sector fiercely. MSME sector being a crucial part of the economy shall be dealt with in a very lenient manner. The business activities of non-essential items have been highly impacted due to imposition of lockdown. The business activities of essential items were also impacted due to certain government restrictions, disturbance in smooth trade process and panic among the masses.

 

With the introduction of financial package announced by Finance Minister Smt. Nirmala Sitaraman there shall be a sight of small relief to all the businesses specially MSMEs. With the vision of Prime Minister of India Shri. Narendra Modi to make “AATMANIRBHAR BHARAT” or “self-reliant India” and promote “Make-in-India” the businesses will strive harder and utilize the opportunity outrightly. Economy, Infrastructure, System, Demography and Demand are the strongest pillars of self-reliant India. There is a need to bring a change in the technology and infrastructure sector. With the improvement in technology and infrastructure, other sectors will be benefitted and have an urge to grow with the help utilizing new and advanced technologies. Financial sector is already facing a downfall and there is a great need to improve the financial conditions to support the economy.

 

Being the fastest growing economy, we shall create more awareness about MSME sector and focus on generating more employment, improved industrialization, decrease in imports, increase in exports, updation of technology, competitive businesses, knowledge development, wealth creation and economy growth. By registering and availing the benefits and schemes under MSME will help to achieve the growth and economies of scale. Taking into consideration all the difficult conditions and necessary measures which are already brought up and the measures to be further brought up by the government and various regulatory authorities, MSMEs shall make the best utilization of such measures initiated by government and strive harder to sustain and grow in the affecting economy.

VALUATION FOR TRANSFER OF SHARES FROM RESIDENT TO NON-RESIDENT

Valuation refers to the process of determining the present value of the asset being valued. The need for valuation of shares arises while performing certain transactions such as issue of further shares in the form of Right shares, merger and acquisitions, transfer of undertaking, etc.

Valuation is usually performed by Chartered Accountant, Cost Accountant, SEBI registered Merchant Banker, Registered Valuer or any other person as may be authorized by various laws. To derive the price of shares, various methodologies are used taking into consideration, the size of the Company and purpose of the valuation. For publicly traded shares of listed Companies, the company valuation is typically referred to as the market capitalization whereby, the value of the Company equals the total number of outstanding shares multiplied by the price of the shares.

Generally, various laws demand different valuation methods and the person who is authorized to perform the valuation. For a transaction with respect to transfer of unquoted equity shares from Indian resident to non-resident or Corporate, following laws shall be complied in terms of valuation:

1.       Section 247 of Companies Act, 2013.

Where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities under the provision of this Act, such valuation shall be performed by a registered valuer who is qualified and experienced member of registered valuers’ organization. Such registered valuer shall make an impartial, true and fair valuation in accordance with internationally accepted valuation standards.

2.       Section 50CA, Section 56(2)(x) and Rule 11UA(1)(c)(b) of the Income-tax Rules, 1962.

Section 50 CA:

The consideration received by the transferor as part of the proposed transaction by the company shall not be less than the fair market value (FMV) as prescribed under rule 11UAA of the Income Tax Rules, 1962, which makes reference to methodology as stated in Rule 11UA (1)(c) as on the date of transfer.

Section 56(2)(x):

The consideration paid by transferee shall not be less than the FMV. If such consideration paid by transferee is less than the FMV then the difference shall be chargeable as other income to the extent of difference between the FMV and Consideration.

Rule 11UA(1)(c)(b):

Any transfer of unquoted (unlisted) shares shall be subject to determination of Fair market value calculated in accordance with the method (formula) as prescribed in the above-mentioned rule which shall not be less than book value of shares which has to be certified by a Category-I Merchant banker or Chartered Accountant and if the Valuation is done by DCF method it is compulsorily to be done by Category – I Merchant Banker.

3.       Pricing guidelines on valuation of capital instruments by Reserve Bank of India under FEMA Regulations.

When shares of an unlisted Company are transferred from a resident to non-resident, price shall not be less than the fair value worked out as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant.

In order to make valuation of shares in line with global business valuation practices, Reserve Bank of India (RBI) has introduced revised valuation guidelines for FDI allowing use of any internationally accepted pricing methodology which until few years back was based on Discounted Cash Flow (DCF) method only.  The Discounted Cash Flow (DCF) method is a prominent method based on the Income Approach of valuation, which is entirely based on the ‘future cash earning capacity’ of any business and thus, often leads to an optimum value scenario. While performing valuation on Discounted Cash Flow (DCF) method, the fair value is obtained while considering appropriate future growth potential and cash earning capacity. 

These guidelines emphasize on applying the revised pricing guidelines on an arm’s length basis, which helps Indian companies to comply with not only the RBI but also with transfer pricing regulations.

 

 

 

POLICY MEASURES TO UPLIFT MSME SECTOR

Ø  Introduction of topic

From a worldwide perspective, it has been recognized that micro, small and medium enterprises (MSMEs) play a vital role in economic development, as they have been the primary sources of job/employment creation and output growth, not only in less developed countries but also in developed countries. MSMEs have been accepted as the engine of economic growth and for promoting equitable development.

Like other sectors of the Indian economy, MSMEs have been hit badly due to lockdown imposed by the government to tackle Covid-19 pandemic. However, even before the current crisis, MSMEs growth has been marred by several challenges.

In order to revive the Indian economy amidst Covid-19 pandemic, the government has come up with various benefits and packages for the MSME sector which may help to scale up the businesses of such micro, small and medium enterprises with the spirit of “Aatmanirbhar Bharat” or “self-reliant India”.

Ø  Meaning of MSME-

MSME stands for Micro, Small, and Medium Enterprises. In accordance with the Micro, Small, and Medium Enterprises Development (MSMED) Act in 2006, the enterprises are classified into two divisions:

Manufacturing enterprises – engaged in the manufacturing or production of goods in any industry

Service enterprises – engaged in providing or rendering services

Ø  New MSME Definition

The revised definition of MSME will benefit the large number of enterprises to conform under the definition of MSME and get entitled to the benefits being awarded to MSMEs.

 Revised MSME Classification

Composite Criteria: Investment and Annual Turnover
Classification	Micro	Small	Medium
Manufacturing & Services	Investment < Rs. 1 cr. and Turnover < Rs.5 cr.	Investment< Rs. 10 cr. and Turnover < Rs.50 cr.	Investment < Rs. 50 cr. and Turnover < Rs.250 cr.

Ø  How and where to register?

Obtain udyog aadhar at https://udyogaadhaar.gov.in/ with the help of Aadhar number.

Ø  Benefits of MSME Registration

·         Avail various schemes introduced by government for MSMEs

·         Protection against the delay in payment from Buyers i.e. maximum period for payment for purchase from MSME shall not exceed 45 days, in case of delay, the buyer is liable to pay interest to the supplier, at 3 times of bank rate

·         50% reduction in fee for filing patents and trademarks

·         Exemption provided while applying for government tenders

·         Under bank loan, 15% import subsidy on fully automatic machinery (capital subsidy for modern technology)

·         Financial support for participating in foreign business exposure from the Government of India

·         Becomes easy to get licenses, approvals and registrations, irrespective of field of business

·         Compensation of ISO certificate expenditure

·         Loans without guarantee, low-interest rates on loan

·         Concession in electricity bills

·         Registered MSMEs gets tariff subsidies and tax and capital subsidies

·         Gets exemption under Direct Tax Laws

Ø  Some Government initiatives to promote newly MSMEs

·         Recently introduced CHAMPIONs portal

It has been felt necessary to put up and promote a unified, empowered, robust, bundled and technology driven platform for helping and promoting the Micro, Small and Medium Enterprises (MSMEs) of the country. As the name suggests it will aim at Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength. Accordingly, the name of the system is CHAMPIONS. This is basically for making the smaller units big by helping and handholding.

Three basic objectives of the CHAMPIONS:

o    To help the MSMEs in this difficult situation in terms of finance, raw materials, labour, permissions, etc.

o    To help the MSMEs capture new opportunities including manufacturing of medical items & accessories.

o    To identify the sparks, i.e., the bright MSMEs who can withstand at present and become national and international champions.

It is a one stop solution for everything related to MSME starting from MSME registration to procuring resources, seeking guidance, giving suggestions and registering grievances.

·         MSME Samadhan

·         MSME Sambandh

·         MSME Sampark

·         Enterpreneurship and Skill Development programs

·         MSME Databank

·         PMEGP e-portal

·         Infrastructure Development programs

Ø  Some Government schemes to promote MSMEs

·         Prime Minister Employment Generation Programme (PMEGP)

·         Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE)

·         Interest Subvention Scheme

·         Credit Linked Capital Subsidy Scheme for technology upgradation

·         Gram Udyog Vikas Yojna

·         And many more schemes

Ø  Who provides MSME/SME Loans?

·         Entities registered under MSME can avail loans from following:

·         Small Industries Development Bank of India (SIDBI)

·         National Small Industries Corporation (NSIC)

·         Regional Rural Banks (RRBs)

·         Scheduled Commercial Banks (SCBs)

·         North Eastern Development Finance Corporation (NEDFi)

·         Other banks and NBFCs

Ø  Certain measures by government for businesses (including MSMEs) – a step towards AATMANIRBHAR BHARAT:

·         Rs. 3 lakh crores collateral free automatic loans for businesses including MSMEs

o    Borrowers with upto Rs. 25 crore outstanding and Rs. 100 crore turnover are eligible to avail such loan

o    Loans to have 4 year tenor with moratorium of 12 months on principal repayment

o    Interest to be capped

o    100% credit guarantee cover to Banks and NBFCs on principal and interest

o    Scheme can be availed till 31^st October, 2020

o    No guarantee fee

o    No fresh collateral

·         Rs. 20,000 crores subordinate debt for for MSMEs

o    Functioning MSMEs which are NPA or are stressed will be eligible

o    Promoters of MSME will be given debt by banks, which will then be infused by promoter as equity in the unit.

o    Government will provide a support of Rs. 4000 crores to CGTMSE

o    CGTMSE will provide partial credit guarantee support to banks

·         Rs. 50,000 crores equity infusion through MSME fund of funds

o    Funds of funds (FoF) with corpus of Rs. 10,000 crores will be set up

o    Provide equity funding for MSMEs with growth and potential viability

o    FoF will be operated through Mother fund and few Daughter funds

o    Will help to expand MSME size as well as capacity

o    Will encourage MSMEs to get listed on main board of Stock exchanges

·         Rs. 45,000 crores partial credit guarantee scheme 2.0 for NBFCs

o    NBFCs / HFCs / MFIs with low credit rating require liquidity to do fresh lending to MSMEs and individuals

o    Existing PCGS scheme to be extended to cover borrowings such as primary issuance of bonds / CPs of such entities

o    First 20% of loss will be borne by the guarantor i.e., Government of India

o    AA paper and below including unrated paper will be eligible for investment

·         Revision of MSME Definition (revised definition of MSME as mentioned above)

o    Investment limit to be revised upwards

o    Additional criteria of turnover being introduced

o    Distinction between manufacturing and service sector to be eliminated

·         Global tenders to be disallowed upto Rs. 200 crores

o    Indian MSMEs and other Companies have often faced unfair competition from foreign companies. Therefore, global tenders will be disallowed in government procurement tenders upto Rs. 200 crores

o    It will help MSMEs to increase their business

o    It will be a step towards self-reliant India and support Make in India

·         Other measures

o    E-market linkages for MSMEs to be promoted to act as a replacement for trade fairs and exhibitions

o    Fintech will be used to enhance transaction based lending using data generated by the e-marketplace

o    MSME receivables from Government and Central Public Sector Undertakings (CPSEs) to be released in 45 days

o    Rs. 30,000 crores special liquidity schemes for NBFCs /  HFCs / MFIs

Ø  Conclusion

Being the fastest growing economy, we shall create more awareness about MSME sector and focus on generating more employment, improved industrialization, decrease in imports, increase in exports, updation of technology, competitive businesses, knowledge development, wealth creation and economy growth. By registering and availing the benefits and schemes under MSME will help to achieve the growth and economies of scale.