Written by Jelena Marijanović, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) offered by Lawsikho as part of her coursework. Jelena is a practicing lawyer working on debt management and banking in Montenegro, Europe.
As a diploma course, it tends to provide a practical insight for solving a problem relating to the subject matter by providing real life or hypothetical situations where the student has to, based on the concept and previous judgements, solves these situations. Here, in this situation, a company, Savdhaan insurance brokers limited having its registered office in Mumbai is looking to receive foreign direct investments from InsureWel Inc. having its registered office in New York. Its share capital consists of INR 2 crores consisting of 20 lacs equity shares.
|Investor||InsureWel Inc, NY|
|Investee||Savdhaan insurance brokers ltd, MUM|
|Capital||INR 2 crores/ 20 lacs equity shares|
What is the sectoral cap to which InsureWel will be the subject for investment in Savdhaan?
When the foreign investor is interested to invest in an Indian company, it is important to examine all the issues related to particular sector/activity the investee company is involved in. Is investor allowed to invest in that industry at all? If he is allowed, can he invest without limit or there are certain restrictions? The sectoral cap is the limit which represents the maximum shareholding percent foreign investor can acquire through FDI. In some cases, the sectoral cap is set in a way that it marks the point starting from which the government approval is needed, e.g. in brownfield pharmaceutical sector 100% FDI is allowed, but up to 74% under the automatic route, and above 74% under the approval route. However, in other cases sectoral cap is restrictive, which means that it marks the limit above which the FDI is prohibited. Detailed provisions on FDI guidelines can be found in Consolidated FDI Policy from August 28, 2017.
In this case, the foreign investor is interested to invest in an Indian company, which, according to its name, is operating in the insurance sector. Aforementioned FDI Policy contains detailed provisions on insurance sector investments under point 5.2.22. According to it, an investment in the insurance sector has a sectoral cap of 49%, meaning that a foreign direct investment up to 49% is allowed through automatic route, without government approval. Above this limit, an investment in this sector is prohibited. In terms of this particular investment, it means that investee can automatically issue 49% of its shares to the investor, but larger shareholding percentage than this cannot be acquired or held through FDI.
How to determine the price at which the shares can be issued?
In case the investee’s shares are issued to the investor under the FDI policy, the price is determined differently depending on whether the investee company is listed or unlisted. If the investee company is listed, the share price is determined in accordance with the SEBI guidelines. If the investee company is unlisted, as it is the case with Savdhaan, share price is determined by a SEBI registered Category I Merchant Banker or a Chartered Accountant, and it shall represent a fair valuation of shares which is made based on internationally accepted pricing methodologies on arm’s length basis (same as it would be on open market).
How exactly should they receive the amount of investment? Which formalities are required to be completed for receiving the investment amount?
The consideration received through investment shall be remitted into India through normal banking channels, and the receiving bank must be an Authorised Dealer Category I Bank. The receiving bank must check the transaction through KYC (know your customer) process. In case that two different banks are handling the transfer transaction and receiving the consideration, KYC check shall be done by receiving bank, while the KYC report and FC-TRS form are submitted by the customer to the bank which is handling the transfer transaction.
The receiving bank further issues a document which serves as a proof of foreign transfer to India called FIRC – Foreign Inward Remittance Certificate. This document is issued to investee company, which through the Authorised Dealer Bank should report details of such transfer to Regional Office of the RBI. The report is submitted in a prescribed form, with a copy of FIRC and KYC report. This report shall be acknowledged by the Office of RBI by an identification number which is given to reported amount.
What is the compliance required after allotment of shares?
Within 30 days deadline from the day the shares are issued, the investee company must file the FC- GPR form through its authorized dealer, and signed by its managing director or company secretary. This submission must also contain:
– a certificate of compliance provided by company’s full time or practicing secretary,
– certificate issued by Statutory Auditor or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the investor,
– the report of receipt of consideration
It is important to mention that under the currently applicable Consolidated FDI Policy, FDI in insurance sector shall be subject to compliance with Insurance Act from 1938, as well as the condition that companies from this sector which are receiving FDI shall obtain necessary license/approval from the Insurance Regulatory and Development Authority for undertaking insurance and related activities.
Can the dividend on shares invested by the foreign investor be repatriated?
In case there is no lock-in, net dividends can be repatriated through automatic route, without restriction, after dividend distribution tax (DDT) is deducted at its current rate, with applicable surcharge, if any. Since the dividend is to be paid to foreign investor by the Indian investee, the dividends do not create the obligation to withhold tax but are rather taxed in the country where the dividends are being received (in this case the US). There is a number of bilateral Double Tax Avoidance Agreements which exempt foreign-source income from taxation. Also, it is important to examine if the tax of capital gains can be applied in any of the countries.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.