Nov 3, 2011

Amendment of FDI Policy and liberalization of norms for realization of export proceeds

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Amendment of FDI Policy and liberalization of norms for realization of export proceeds

  • Amendment in Foreign Direct Investment (FDI) Policy

Recently, in FDI Circular 2 of 2011 effective from 1st October 2011, DIPP had inserted a para to totally derecognize all Equity Instruments with in-built Options or supported by Options as Foreign Direct Investment. It categorized all such instruments as ECB. After much outcry from Industry, Advisory Firms and Investors especially the Foreign Private Equity firms and with a view to avoid the risk of fall in FDI inflow, Department of Industrial Policy & Promotion (DIPP) has finally maintained status quo ante , vide press release dated 31st October 2011. As per the release, Para No. of the above Circular stands deleted. The deleted para read as follows:

“Only equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI. Equity instruments issued/transferred  to  non-residents  having  in-built  options  or  supported  by  options  sold  by  third  parties  would  lose  their equity character and such instruments would have to comply with the extant ECB

The restriction had made life tougher for foreign investors and there was ambiguity as to the applicability of clause prospectively or retrospectively. There was a huge concern among foreign investors, whether or not their investments in India without any formal agreement would guarantee them assured return and/or provide easy exit route. This much-sought welcome move by the department will surely give them a sigh of relief and also boost the foreign direct investments.

  • Export of Goods and Software – Realization and Repatriation of export proceeds – Liberalization

The Reserve Bank of India (RBI) vide A.P. (DIR Series) Circular No.40, has extended the date of relaxation about enhancement in the period of realization and repatriation to India of the amount representing the full export value of goods or software exported, from six months to twelve months from the date of export upto 30th September, 2012.

Further, the provisions regarding realization and repatriation of export proceeds by Special Economic Zone and exports made to warehouses established outside India remain unchanged.

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