Foreign Direct Investment (FDI) Scenario in India
  • The Indian government’s favorable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. According to World Investment Report 2016 released by the United Nations Conference on Trade and Development (UNCTAD), India continues to be among the top ten countries in terms of foreign direct investment inflows globally and the fourth in developing Asia, as per UNCTAD.
  • India’s FDI inflows have increased by 18% from 39.32 billion in 2015 to $46.4 billion in 2016, and the growth has been across the board, as per the Quarterly Fact Sheet  on Foreign Direct Investment (FDI) by DIPP.
  • India will require around US$ 1trillion in the 12th Five-Year Plan (2012–17), to fund infrastructure growth covering sectors such as highways, ports, and airways. It would require support from FDI flows.
  • DIPP figures indicate that the Government’s efforts to improve ease of doing business and relaxation in FDI norms are yielding results.
Top sectors of the economy which are attracting FDI in India (Year 2016-2017)
Sector 2016-17 (April’16 – December’16) (In US$ Millions)
SERVICES SECTOR ** 7,553
CONSTRUCTION DEVELOPMENT: TOWNSHIPS, HOUSING, BUILT-UP INFRASTRUCTURE 99
TELECOMMUNICATIONS (radio paging, cellular mobile, basic telephone services) 5,539
COMPUTER SOFTWARE & HARDWARE 1,814
AUTOMOBILE INDUSTRY 1,453
DRUGS & PHARMACEUTICALS 687
TRADING 2,000
CHEMICALS (OTHER THAN FERTILIZERS) 783
POWER 961
METALLURGICAL INDUSTRIES 1,259

Note: (i)** Services sector includes Financial, Banking, Insurance, Non-Financial / Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis (ii) FDI Sectoral data has been revalidated / reconciled in line with the Reserve Bank of India, which reflects minor changes in the FDI figures (increase/decrease) as compared to the earlier published sectoral data

Top countries investing in India
Country 2016-17 (April’16 – December’16 ) (In US$ Millions)
MAURITIUS 12,819
SINGAPORE 7,115
JAPAN 4,249
U.K. 1,266
U.S.A. 1,940
NETHERLANDS 2,500
GERMANY 907
CYPRUS 559
FRANCE 419
UAE 613
FDI Policy of Government of India

An Indian Company A in which there is Foreign Investment as per the Foreign Direct Investment policy of the Government of India (FDI Policy) can further invest in another Indian Company B. This is termed as Downstream Investment. The manner in which this indirect foreign investment in Company B is determined is explained below.
For the purpose of Downstream Investment there exist three categories of companies:
• Operating Company: An Indian Company, which undertakes operations in various economic activities and sectors. Foreign investment in an operating company has to be in compliance with sectoral conditions of the FDI policy.
• Investment Company: An Indian Company holding only investments in another Indian company, directly or indirectly, other than for trading of such holdings/securities. Foreign Investment in an Investing Company requires FIPB approval, regardless of the amount or extent of foreign investment. The Indian Company into which the Investment Company makes downstream Investments has to comply with the FDI policy.
• Operating-cum-investing company: Foreign investment in such a company has to be in compliance with the FDI policy. An operating-cum-investing company can make Downstream Investment in another Indian Company in terms of the FDI policy.
• Non-operating Company: Foreign investment into an Indian company which does not have any operations (non- operating) requires FIPB approval regardless of the amount of foreign investment. A non-operating company deciding to commence operations has to be in compliance with the sectoral caps and other conditions of the FDI policy.

Examples of Downstream Investment
  • Where Company A has a foreign investment of less than 50%, and it further invests in Company B such investment in Company B, would not be taken as an indirect foreign investment but will be considered as Indian investment through Company A.
  • Where a Company A has more than 50% foreign investment and:
    • Invests 26% in company B, the entire 26% investment by Company A would be considered as an indirect foreign investment in Company B.
    • Invests 90% in Company B, the entire 90% investment in Company B would be considered as indirect foreign investment in Company B.
  • Where Company A has 65% foreign investment and makes 100% Downstream Investment in Company B, the indirect foreign investment in Company B is considered 65%.
ECB Revised Framework 2017- Simplification for General Corporate Purposes
  • External Commercial Borrowings, more commonly referred to as ECB, includes bank loans, buyers’ credit, suppliers’ credit, foreign currency convertible bonds, financial lease, foreign currency exchangeable bonds and securitized instruments which can be availed by specified Indian borrowers from recognized foreign lenders for the permitted end-uses under the regulations notified by the Reserve Bank of India (‘RBI’) from time to time. Any borrowing from a recognised foreign lender, whose minimum average maturity period is three years or more, qualifies as an ECB. Due to the prolonged duration of such borrowings, they qualify as medium and long term debts and thus, can be termed to be capital account transactions as defined under the Foreign Exchange Management Act, 1999. (Schedule I of Foreign Exchange Management (Permissible Capital Account Transaction) Regulations, 2000.)
  • ECB can be obtained either through automatic or approval route, depending on the restrictions in force from time to time. For automatic route, the cases are examined by the concerned Authorised Dealer Banks (‘AD Banks’), whereas under the approval route, the prospective borrowers are required to send their requests to the RBI through their concerned AD Banks.
  • This section focuses on a limited aspect of ECBs i.e. general corporate purposes, in view of the reformative outlook of the RBI.
  • In 2013 (Vide Circular No. 31 dated September 04, 2013), the RBI for the first time permitted the then eligible borrowers to avail ECB from their direct foreign equity holders with minimum average maturity of 7 years, for general corporate purposes, subject to certain other conditions specified therein, under the approval route.
  • In 2014,(Vide Circular No. 130 dated May 16, 2014) the RBI further permitted the then eligible borrowers to obtain ECB from direct equity holders for general corporate purposes (including working capital requirement), under the automatic route.
  • In 2015 (Vide Circular No. 32 dated November 30, 2015), the RBI issued a revised framework (‘Revised Framework 2015’) of ECB policy for further simplification of the procedure for availing ECB, inter-alia, for general corporate purposes. With the said Revised Framework, the eligible Indian borrowers could raise ECB from direct equity holder, indirect equity holder or from a group company with a minimum average maturity period of 5 years.
  • In March 2016 (External Commercial Borrowings (ECB) – Revised framework under A.P. (DIR Series) Circular No. 56 dated March 30, 2016), RBI further liberalised the ECB framework by allowing companies in infrastructure sector, non-banking financial companies – infrastructure finance companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core Investment Companies (CICs) to raise ECB from recognised foreign lenders (including direct equity holder, indirect equity holder or from a group company) under Track I eligible borrowers of the Revised Framework 2015 with a minimum average maturity period of 5 years.
  • In October 2016 (External Commercial Borrowings (ECB) by Start-ups under A.P. (DIR Series) Circular No. 13 dated October 27, 2016), RBI permitted Start-up entities to access ECB for meeting their business expenses subject to certain other conditions specified therein. The Ministry of Commerce and Industry, Government of India, vide Notification No. GSR180 (E) dated February 17, 2016 provides that an entity should be considered as a Start-up entity, for the first five years from its incorporation/registration, with a turnover in any financial year not exceeding USD 38.46 Million (USD 1 = INR 65), and if it is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property rights.
ECB – Former Regime
  • Under the former regime, eligible borrowers were only permitted to avail ECB for general corporate purposes from foreign direct equity holders, under approval route/automatic route, subject to the specified conditions.
  • Following conditions existed under both, automatic route as well as approval route:
    • Eligible borrowers were permitted to avail ECB from the foreign direct equity holders, up to USD 5 million or its equivalent, if the foreign direct equity holders were holding minimum 25% equity holding in the borrowing entity.
    • Minimum average maturity period for availing ECB for general corporate purposes was 7 years. Also, no prepayment was allowed before the expiry of the said 7 years of minimum average maturity period.
  • The conditions which distinguished availing ECB under automatic route/approval route were as under:
    • In case of automatic route, the eligible borrowers were permitted to avail ECB from the foreign direct equity holders beyond USD 5 million or its equivalent, if
      • the foreign direct equity holders were holding minimum 25% equity holding in the borrowing entity and
      • ECB liability: equity ratio (‘ECB Ratio’) was not more than 4:1 i.e. ECB liability of the borrower (including all outstanding ECBs and the proposed one) towards the foreign equity holder was not more than 4 times of the equity contributed by the foreign direct equity holder.
    • Whereas, in case of approval route, the eligible borrowers were permitted to avail ECB from the foreign direct equity holders beyond USD 5 million or its equivalent, if
      • The foreign direct equity holders were holding minimum 25% equity holding in the borrowing entity and
      • ECB liability: equity ratio was not more than 7:1 i.e. ECB liability of the borrower (including all outstanding ECBs and the proposed one) towards the foreign equity holder was not more than 7 times of the equity contributed by the foreign direct equity holder.
  • In case of automatic route, the borrower was entitled to a maximum of USD 200 million ECB in a financial year in hotels, hospitals and software sectors, and a maximum of USD 750 million in manufacturing and infrastructure sector in a financial year.
  • Whereas, in case of approval route, the borrower was entitled ECB beyond USD 200 million in a financial year in hotels, hospitals and software sectors, and ECB beyond USD 750 million in a financial year the manufacturing and infrastructure sectors.
ECB – New Regime pursuant to liberalisation in 2015 & 2016

Revised Framework 2015 segregates ECB broadly into following three tracks(External Commercial Borrowings, Trade Credit , Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers dated January 01, 2016):

Track I Medium term foreign currency denominated ECB with minimum average maturity period of 3 years for ECB up to USD 50 million or its equivalent/5 years for ECB beyond USD 50 million or its equivalent. For companies in infrastructure sector, non-banking financial companies – infrastructure finance companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core Investment Companies (CICs), Foreign Currency Convertible Bonds (FCCBs)/Foreign Currency Exchangeable Bonds (FCEBs), the minimum average maturity period is 5 years irrespective of amount of ECB.
Track II Long term foreign currency denominated ECB with minimum average maturity period of 10 years irrespective of the amount of ECB.
Track III Indian Rupee denominated ECB with minimum average maturity period of 3/5 years. 3 years for ECB up to USD 50 million or its equivalent.5 years for ECB beyond USD 50 million or its equivalent. For companies in infrastructure sector, non-banking financial companies – infrastructure finance companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core Investment Companies (CICs), Foreign Currency Convertible Bonds (FCCBs)/Foreign Currency Exchangeable Bonds (FCEBs), the minimum average maturity period is 5 years irrespective of amount of ECB.
  • The Revised Framework 2015 had bifurcated the permitted sectors of the older regime where ECB was permitted for general corporate purposes under 3 Tracks viz. Track I, Track II and Track III. RBI has updated the said Tracks from time to time by issuing various circulars.
  • Presently, Track I eligible borrowers which can avail ECB for general corporate purposes include companies in manufacturing and software development sectors, shipping and airlines companies, Small Industries Development Bank of India (SIDBI), units in Special Economic Zone (SEZs), Export Import Bank of India (EXIM Bank) – only under the approval route, companies in infrastructure sector, Non-Banking Financial Companies – Infrastructure Finance Companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core Investment Companies (CICs);
  • Track II eligible borrowers which can avail ECB for general corporate purposes includes Track I eligible borrowers, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts(INVITs) coming under the regulatory framework of Securities and Exchange Board of India (SEBI) and Track III eligible borrowers which can avail ECB for general corporate purposes includes Track II eligible borrowers, NBFCs coming under the regulatory purview of RBI, NBFCs- Micro Finance Institutions (NBFCs-MFI), not for profit companies registered under the Companies Act, 1956/2013, societies, trusts and cooperatives (registered under the Societies Registration Act, 1860, Indian Trust Act, 1882 and State-level Cooperative Act/Multi-level Cooperative Act/State-level mutually aided Cooperative Acts respectively), non-government organisation (NGOs) which are engaged in micro finance activities, companies engaged in miscellaneous services viz. research and development (R&D), training (other than educational institutions), companies supporting infrastructure, companies providing logistics services, developers of Special Economic Zones (SEZs)/National Manufacturing and Investment Zones (NMIZs).
  • Although, the Revised Framework 2015 clearly states that Track I eligible borrowers can avail medium term foreign currency denominated ECB for general corporate purposes (including working capital) from foreign equity holders with a minimum average maturity period of 5 years, it appears that all Track II eligible borrowers can avail long term foreign currency denominated ECB for general corporate purposes (including working capital) from all the recognized lenders excluding overseas/ subsidiaries of Indian banks, with a minimum average maturity period of 10 years.
  • It also appears that all Track III eligible borrowers can avail Indian rupee denominated ECB for general corporate purposes (including working capital) from all the recognized lenders excluding overseas/ subsidiaries of Indian banks and foreign equity holder, with a minimum average maturity period of 3/5 years as specified hereinabove.
  • Under the Revised Framework 2015, the definition of the ‘foreign equity holder’ was simplified and it includes:
    • A direct foreign equity holder with a minimum direct equity shareholding of 25% in the borrower entity,
    • An indirect equity holder with a minimum indirect equity shareholding of 51% in the borrower entity or
    • A group company with a common overseas parent.
  • The individual limits, on the other hand, have remained the same for companies in manufacturing, infrastructure and software development sector. The following table explains the proposed model for obtaining ECBs in the permitted sectors-
Individual limits (per financial year) Manufacturing and Infrastructure Sector including Hospitals and Hotels Software Development Sector Other Sectors
Up to USD 200 Million or its equivalent Automatic Route Automatic Route Automatic Route
Up to USD 500 Million or its equivalent Automatic Route Automatic Route Automatic Route
Up to USD 750 Million or its equivalent Automatic Route Automatic Route Automatic Route
Beyond USD 750 Million or its equivalent Automatic Route Automatic Route Automatic Route
  • Under the Revised Framework 2015, the criteria for determining the applicable route i.e. approval route/ automatic route is still largely based on individual limits.
  • With RBIs initiative to liberalize financing for Start-up entities in 2016, they are now allowed to avail ECB for general corporate purposes under the automatic route with minimum average maturity period of 3 years for ECB up to USD 3 million or equivalent per financial year from lender(s)/ investor(s), who are residents of a country, who is a member of Financial Action Task Force (FATF) or member of FATF- Style Regional Bodies and not from any country who has been recognised as a jurisdiction
    • Having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply, or
    • That has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies. However, overseas branches/ subsidiaries of Indian banks and overseas wholly owned subsidiary/ joint venture of an Indian company shall not be considered as recognized lenders for ECB to be raised by Start-up entities.
    • Further, ECB Ratio will not be applicable, in case of Start-up entities.
Conclusion

It is pertinent to note that ECBs have developed as an instrumental mode of investment into Indian companies, which is of prime importance when the Indian Government has initiated Make in India campaign wherein the sole objective is to make FDI policy more progressive and turn India into the most coveted investment destination of the world.