INDIA: WHAT INVESTORS NEED TO KNOW ABOUT FOREIGN DIRECT INVESTMENT?

Since 1990s, India initiated economic and financial reforms aimed to integrate the economy at the global level. Foreign Direct Investment (FDI) is as an important driver of economic growth and development for the country. Therefore, the Government has been making serious efforts to attract and facilitate FDI. As a result, India has changed from a very restrictive regime for FDI to a more liberal one.

Foreign investment in India is regulated by the Foreign Exchange Management Act, 1999 (FEMA) and its amendments/changes, order/allied rules, Press Notes, etc. The Department of Industrial Policy & Promotion (DIPP) makes policy pronouncements on FDI throughout Press Notes / Press Releases which are notified by the Reserve Bank of India (RBI). All Press Notes/ Press Releases are available at the website of DIPP. The Foreign Investment Promotion Board (FIPB) is also responsible for regulating foreign investment in accordance with the industrial policy.

Indian legislation establishes two kinds of foreign investment: (i) Foreign Direct Investment (FDI) and (ii) Foreign Portfolio Investment (FPI). A foreign investor may invest in India as a FII (Foreign Institutional Investor) or as a Foreign Venture Capital Investor (FVCI). Last but not least, Indian legal framework provides two different routes for FDI, as follows: AutomaticRoute and Government Route. Under the Automatic Route no prior approval is required. On the contrary, prior approval is needed from FIPB for the Government Route. Sectors where approval from the FIPB is required include defense related matters, air transport services, ground handling services, asset reconstruction companies, banking, broadcasting, commodity exchanges, credit information companies, insurance, print media, telecommunications and satellites. Besides that, FIPB’s approval is necessary for all kind of FDI in these sectors where: an Indian company is being established with foreign investment and is owned by a nonresident entity; or, an Indian company is being established with foreign investment and is controlled by a nonresident entity; or, the control of an existing Indian company will be/is being transferred/passed on to a non-resident entity; or, the ownership of an existing Indian company will be/is being transferred/passed on to a non-resident.

India prohibits FDI in the following activities: Retail Trading (except single brand product retailing); Lottery Business including Government /private lottery, online lotteries, etc.; Gambling and Betting including casinos etc.; Business of chit fund; Nidhi company; Trading in Transferable Development Rights (TDRs); Real Estate Business or Construction of Farm Houses; Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes; Activities / sectors not opened to private sector investment including Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems)

FDI in a wide range of sectors does not require any prior approval (Automatic Route), provided the level of foreign investment does not exceed specified percentages. If FDI proposed investment exceeds the maximum limit amount under the Automatic Route, the approval of the FIPB is required. For instance, approval of the FIPB is required for investments over 49 per cent in telecommunications or investments over 26 per cent in insurance sector or foreign investment in information technology and manufacturing over 100 per cent.

Figure 1: Some sectors and percentage Cap

Sectors	Cap
Airports •          Existing	74%
Alcohol distillation and brewing	100%
Banking (Private Sector)	74%
Coal and Lignite mining (specified)	100%
Coffee, Rubber processing and warehousing	100%
Floriculture, Horticulture and Animal Husbandry	100%
Specified Hazardous chemicals	100%
Industrial Explosives Manufacturing	100%
Insurance	26%
Mining (Precious metals, Diamonds and stones)	100%
Non banking finance companies ( conditional)	100%
Petroleum and Natural gas •          Refining (private companies)	100%

Foreign capital is freely repatriated, except for FDI under non-repatriate schemes or FDI subject to certain policies related to the sector or activity. Remittance of profits abroad is possible, after accomplishment of certain formalities. It is important to note that profits retained for more than one year are considered re-invested and their remittance further requires special approval.

The legal framework for FDI in India is under development. As FDI is an important driver of economic growth, the Indian Government has been making important regulatory changes to attract FDI. The Indian process of economic liberalization, including privatization of state-owned companies and dismantling the licence raj policy among others, has allowed India to progressively change from a very restrictive regime for FDI – licence raj – to a more liberal one. Nevertheless, some FDI issues still remain to be addressed by the country in order to achieve more sustainable economic growth based on foreign investments.

Ligia Maura Costa. Partner at Ligia Maura Costa, Advocacia, full professor at FGV-EAESP. Author of the book: BRIC. Doing Business in BRIC Countries. Legal Aspects. (2012). v. 1, São Paulo: Quartier Latin.

WHAT FOREIGN INVESTORS NEED TO KNOW ABOUT FOREIGN DIRECT INVESTMENT IN BRAZIL?

 

In recent years, many foreign investors are attracted by the large Brazilian market and the economic growth of the country. Besides that, the fact that Brazil will host the 2014 World Cup and 2016 Olympics has also been an important decision making vector for investors. However, before investing in Brazil, it is important to get acquainted with some legal aspects related to foreign direct investments (FDI) in the country. It is true that all forms of FDI are welcome by the Brazilian Constitution, but especially FDI that represents a commitment to economic development. A number of limitations and restrictions to foreign capital for some specific sectors do apply as per the Brazilian Constitution, such as defense and air transport related matters, among others. Expropriation of domestic or foreign investment is prohibited by the Brazilian Constitution, except in exceptional cases such as public interest. Since 1995, Brazilian Constitution places no difference between domestic and foreign capital.

The main legal statute governing foreign investments in Brazil was enacted in 1962, more than forty years ago (Law n. 4,131, as amended by Law n. 4,390 of 1964, both regulated by Decree n. 55,762 of 1965). It is a positive point for investors the fact that the most important law on FDI in the country has been in force for so long time and has not suffered substantial changes during these last years.

Exchange control and foreign investment policies in Brazil are established by the National Monetary Council (Conselho Monetário Nacional), under the supervision of the Ministry of Finance. And, the supervision of the day-by-day control over foreign capital inflows and outflows is performed by the Brazilian Central Bank (Banco Central do Brasil – BACEN).

No prior government authorization neither minimum investment approval nor local participation condition is required for FDI – apart for few exceptions such as financial institutions, insurance companies, and similar entities under the regulatory authority of BACEN. No government approval or consent is required for remittance of profits abroad, as long as the company does not have a negative net equity. No minimum period is imposed by Brazilian law to repatriation of foreign capital. As per Brazilian legislation, BACEN may limit or prohibit remittances of profits and capital repatriation in case of serious balance of payment difficulties. This exception, however, has never been applied by the country not even during the 1980s Brazilian moratorium.

The most common form of FDI in Brazil is in cash capital. Certain restrictions and a rigorous control apply to FDI in assets such as goods, machinery and equipment. FDI has to be registered with BACEN online electronic system called RDE-IED (Registro Declaratório Eletrônico de Investimentos Externos Diretos – Electronic Registration System for Cross-Border Financial Transactions) within 30 days of the date that the cash capital enters Brazil or within 90 days of customs clearance for assets capital contributions. Foreign capital registration is done in the same currency that has entered the country or in the currency of the residence of the investor for foreign capital in the form of assets.

The legal framework for FDI in Brazil is by far quite stable until now, especially if compared with the other three BRIC countries (Russia, India and China). It is a proof of legal certainty and assurance for investors. Besides, the electronic registration system of FDI, mainly cash capital, is easy, fast and efficient. Thus, the bureaucratic problems that investors and locals usually face when doing business in Brazil do no actually apply regarding FDI registration procedures. This is also a very positive point for investors. FDI in Brazil may play a leading role to improve industry diversification, generating employment and strengthening the economic local system in order to assist the country to be ready for the two major world events: the 2014’s World Cup and the 2016’s Olympic Games.

 

Ligia Maura Costa. Partner at Ligia Maura Costa, Advocacia, full professor at FGV-EAESP. Author of the book: BRIC. Doing Business in BRIC Countries. Legal Aspects. (2012). v. 1, São Paulo: Quartier Latin.

 

 

Why Look at BRIC Countries

The new millennium has marked the beginning of a new era. The Giant is awaking (Brazil), the Bear is coming back (Russia), the Tiger is rising (India) and the Dragon is roaring (China). Here come the BRIC countries. For many years now, the world has been watching with excitement to BRIC’s rapid economic growth. BRIC countries have an insatiable desire for investments, for goods and for services. In fact, the world’s demand for energy and commodities, the singularity of the outsourcing service and the globalization that has allowed capital to become increasingly mobile, bringing countries’ economies closer, helped to speedy BRIC’s growth. BRIC’s economic miracle can take the rest of the world’s breast away, or almost. The rise of BRIC has created a different world order, much more complex and dynamic. BRICs together represent almost more than half of the world today’s population. These leading emerging countries and rapidly growing economies represent a total market of over 2.7 billion people. Besides, BRIC’s major cities are full of life and joy! No doubt that this number of people represents an enormous market and purchasing power. Shiny new office buildings, consumer expensive brand products from all over the world, superb residential towers… Actually, the wealthy of the world’s economy over the next decades depends on what will happen in these countries in the near future, which in turn will foster global political and socio-economic changes. BRIC countries are a new landscape of opportunities. The assumption seems unavoidable: any person simply must at least try to understand how to get into BRIC countries. And, yes, there are great opportunities in these fastest and large growing markets. BRIC countries markets are the markets that have the highest potential to grow nowadays, providing sufficient room for both domestic and foreign companies to spread further. That’s the reason why it is so important to look at BRIC countries.

Ligia Maura Costa. Partner at Ligia Maura Costa, Advogada, full professor at FGV-EAESP. Author of the book: BRIC. Doing Business in BRIC Countries. Legal Aspects. (2012). v. 1, São Paulo: Quartier Latin.