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This section outlines the procedure for Foreign Investment upto 51% in Trading companies primarily engaged in export activities. The criteria for grant of Export House, Trading House, Star Trading Houses or Super Star Trading Houses certificates as laid down in the Import Export Policy, 1992-97, is given below: Under the new norms, if eligibility is claimed on the basis of NFE, only the CIF value of all imported materials(other than capital goods) used in the relevant export will be deducted. this deduction will be made from the FOB value of the eligible exports of the relevant period made by the exporter in his own name. PROVISIONS FOR APPROVAL New Companies In the case of a new company, the Reserve Bank of India will give automatic approval for foreign investment upto 51% foreign equity on the following basis:
Existing Companies In case of existing companies already registered as Export Trading/Star Trading/Super Star Trading, the Reserve Bank will give automatic approval on an application for oreign investment upto 51% foreign equity. The approval will be subject to the following requirements : REQUIREMENT FOR PREFERENTIAL SHARE ALLOCATION On receipt of RBI approval the company must pass a special resolution under Section 81(1A) of the Companies Act proposing preferential allocation of the required volume of fresh equity to the foreign investor. In respect of the equity holdings of financial institutions in such companies, the Finance Ministry will separately advise the financial institutions that they may support such proposals provided in their commercial judgment, they are in the interest of the company. ISSUE OF SHARES AND SHARE VALUATION Following the issue of guidelines by SEBI on 11th June 1992, existing companies wishing to enhance their foreign share holding upto 51% as per the procedures outlined above will be able to make issues at the price determined by the shareholders in a special resolution under section 81(1)(A) of the Companies Act. This will apply mutatis mutandis to closely held companies. This will also apply to companies where there is no foreign share holding at present. APPLICATION PROCEDURE Applications for approval under the provisions of para 5 above will be filed with the Reserve Bank of India in the prescribed form. The Reserve Bank of India will issue the necessary permission for the foreign equity investment under the Foreign Exchange Regulation Act, 1973 (FERA). Inter-alia, this permission will include exemption from the operation of sections 26(7), 28, 29 and 31 of FERA. DIVIDEND BALANCING The Industrial policy statement provides for the monitoring of outflow of foreign exchange on account of dividend payments which are to be balanced by export earnings over a period of time and that this monitoring will be done by the Reserve Bank of India. Government have now decided to withdraw the imposition of the condition of "Dividend Balancing" on all foreign investment approvals except those in the consumer goods sector. The condition of "Dividend Balancing" will also not be applied to investments by approved international organizations like the international Finance Corporation (Washington), the DEG, the Commonwealth Development Corporation and the Asian Development Bank. The condition of Dividend Balancing is applicable only in respect of the consumer goods sector listed/specified in Annex IV. In such cases the balancing of dividend is over a period of 7 years reckoned from the date of recognition as Export House/Trading House/Star Trading House for new companies and from the date of allotment of the shares, raising the level of foreign equity to the approved level in the case of existing companies. Government Approval All other proposals for foreign investment in trading companies, which do not meet any or all of the criteria for automatic approval, are subject to procedure outlined in the Foreign Investment para of Industrial Policy. In respect of foreign investment in the consumer goods sector, dividend balancing would continue to be done on the following basis : -
In case of further clarifications please contact :
Note: - FERA to be replaced by FEMA Foreign Exchange Management Act)
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