On March 31, 2011, the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India ("DIPP"), issued a new consolidated foreign direct investment policy, Circular 1 of 2011 ("Circular"), which supersedes all prior press notes, press releases and clarifications issued by the DIPP relating to foreign direct investment in India. The Circular reflects the current policy of the Indian Government with respect to foreign direct investment in India, and has the force of law.
The most significant changes introduced by the Circular and relevant to current foreign investors and foreign investors proposing to invest in India, are: (1) repealing of a long-standing policy which required foreign investors with existing joint ventures/tie-ups in India to seek regulatory approval before setting up another venture in the "same" field, and (2) liberalizing the pricing regulations governing convertible instruments. Both amendments are discussed briefly below. The full text of the Circular is available at http://dipp.nic.in/Fdi_Circular/FDI_Circular_012011_31March2011.pdf
1. Repealing of Press Note 1 (2005)
On December 14, 1998, the DIPP issued Press Note 18 (1998), which prohibited foreign investors with previous ventures/tie-ups in India from investing in India in the same or allied field without regulatory approval. This regime was liberalized in 2005 when the DIPP issued Press Note 1 (2005). Under Press Note 1 (2005), so long as a foreign investor did not have an existing joint venture or tie-up in India on January 12, 2005, the date on which the DIPP released the press note, the investor could invest in India under the "automatic" route, i.e., without regulatory approval. Moreover, foreign investors who did have an existing joint venture or tie-up in India on or prior to January 12, 2005, would only have to seek regulatory approval to invest in a venture in the "same" field. Prior regulatory approval to invest in a venture in an "allied" field where a joint venture or tie-up already existed in India on or prior to January 12, 2005 was dropped.
The Circular liberalizes this regime further. Now, foreign investors will not require regulatory approval where investments are being made in a new joint venture and such foreign investor had an exiting joint venture or tie-up in India on or prior to January 12, 2005 in the "same" field.
2. The Pricing of Convertible Instruments
Under the previous foreign direct investment regime in India, the pricing of convertible instruments was required to be determined "upfront" at the time of issuing such instruments. India's central bank, the Reserve Bank of India, had established that the conversion pricing and the number of equity shares to be issued consequent to conversion of convertible instruments were required to be determined by parties at the time the instruments were issued.
The Circular changes this position and has clarified that parties are free to determine the price or a formula for the conversion of convertible instruments upfront at the time of issue of the instruments. This clarification gives parties much needed flexibility in determining conversion pricing. However, it is currently unclear whether parties have the flexibility to amend a conversion formula once it has been agreed.
However, the Circular also states that the price at the time of conversion cannot be lower than the fair market value worked out, at the time of issuance of such instruments, in accordance with the Reserve Bank of India pricing guidelines (i.e., the Discounted Cash Flow method of valuation for unlisted companies and valuations in terms of the Securities and Exchange Board of India Guidelines for listed companies).