India: Corporate Law Alert - April 10, 2013

Last Updated: 19 April 2013
Article by Amit Kapur

Department of Industrial Policy and Promotion issues Consolidated Foreign Direct Investment Policy

The Department of Industrial Policy and Promotion ("DIPP") has issued the Consolidated Foreign Direct Investment Policy ("FDI Policy"). The FDI Policy came into effect on April 5, 2013.

The FDI Policy has incorporated the following Press Notes/RBI Circular which were issued in the preceding year:

Press Note/RBI Circular


Press Note 2 of 2012

Downstream investment by a banking company incorporated in India, which is owned and/or controlled by non-residents/ a non-resident entity/ non-resident entities

Press Note 3 of 2012

Investment by citizens of Pakistan and entities incorporated in Pakistan

Press Note 4 of 2012

Amendments to the policy on foreign direct investment in Single Brand Product Retailing

Press Note 5 of 2012

Review of policy on foreign direct investment in Multi Brand Retail Trading

Press Note 6 of 2012

Review of policy on foreign direct investment in the Civil Aviation sector

Press Note 7 of 2012

Review of policy on foreign investment in companies operating in the Broadcasting Sector

Press Note 8 of 2012

Policy on foreign investment in Power Exchanges

Press Note 9 of 2012

Conditions relating to setting up of step down (operating) subsidiaries by NBFCs having foreign investment above 75% and below 100% with a minimum capitalization of USD 50 Million

RBI A.P. (DIR Series) Circular No. 36 dated September 26, 2012

Valuation for investment made by subscribing to the Memorandum of Association of an Indian company

In addition to the aforementioned changes, the following changes have been carried out in the FDI Policy:

  • Dividend payments on equity shares held by QFIs: The policy provides that dividendpayments on equity shares held by QFIs caneither be remitted directly or credited to singlenon - interest bearing Rupee accounts. Earlier,payments could be credited to single Rupeepool bank accounts. (Clause
  • FDI in LLP: The policy clarifies that in the case of a company with FDI converting into an LLP, the provisions regarding the form of foreign capital participation specifying that only the cash consideration is allowed would be optional as it is in the case of companies. (Clause 3.2.5(j))
  • Asset Reconstruction Companies: FDI in Asset Reconstruction Companies has been increased from 40% to 74% of the paid up share capital. Further, this subsumes investment from both FIIs and FDI investors. (Clause
  • Pharmaceuticals: The FDI Policy has clarified that the Government may at the time of granting approval to brown field pharmaceutical companies incorporate appropriate conditions in the approval. (Clause 6.2.18)
  • Form FC-GPR: Form FC-GPR (Annexure I to FDI Policy) has been revised with, inter-alia the following changes:

(a) Other securities besides equity shares and compulsorily convertible debentures being included; and

(b) A declaration relating to utilization of funds in accordance with the Prevention of Money Laundering Act 2002 and Unlawful Activities (Prevention) Act, 1967 has been included.

  • Annual Return on Foreign Liabilities and Assets: The Annual Return on ForeignLiabilities and Assets (Annexure 7 to the FDIPolicy) has been substantially amended.

Department of Industrial Policy and Promotion announces National Manufacturing Policy - Guidelines for Establishment of National Investment and Manufacturing Zones

The DIPP has announced the National Manufacturing Policy on March 22, 2013 which focuses on the establishment of National Investment and Manufacturing Zones ("NIMZs").

The Government of India has announced this policy with the objective of enhancing manufacturing's share in the GDP to 25% within a decade, and creating over 100 million jobs.

The NIMZs are envisaged as integrated industrial townships with state of the art infrastructure and land use on the basis of zoning, clean and energy efficient technology, necessary social infrastructure, skill development facilities etc. To provide a productive environment for persons transitioning from the primary sector to the secondary and tertiary sectors.

The policy is based on the principle of industrial growth in partnership with the State governments. There is also a major focus on the rationalization and simplification of procedures and regulations.

Clarification by Ministry of Corporate Affairs under Section 372A (3) of the Companies Act, 1956

The Ministry of Corporate Affairs ("MCA") has vide Circular No. 06/2013 dated March 14, 2013 highlighted that the Budget 2013-14 authorizes the Central Government to issue tax free bonds that carry a lower rate of interest.

However, there has been a poor response to these as Section 372A (3) of the Companies Act, 1956 ("Act") inter alia provides that no loan to any body corporate is to be made at a rate of interest lower than the prevailing bank rate, that is the standard rate made public under Section 49 of the Reserve Bank of India Act, 1934.

The MCA vide the aforementioned circular has clarified that in cases where the effective yield (effective rate of return) on tax free bonds is greater than the yield on the prevailing bank rate, there is no violation of Section 372A(3) of the Act.

Amendment of Companies (Directors Identification Number) Rules, 2006

The MCA has vide Notification dated March 15, 2013 amended the Companies (Directors Identification Number) Rules, 2006. As per the amendment, the Central Government or Regional Director, Northern Region or any officer so authorised can, upon being satisfied, deactivate or cancel a Director's Identification Number ("DIN") for a person, after the verification of proof attached to the application received for such deactivation/cancellation.

The said circular specifies that cancellation or deactivation of DIN can be done in the following cases:

  • the DIN is found to be in duplicate;
  • the DIN was obtained in a wrongful manner or by fraudulent means;
  • death of the concerned individual;
  • the concerned individual has been declared a lunatic by the competent court; or
  • the concerned individual has been adjudged as insolvent.

The notification further provides that in case the DIN has been obtained in a 'wrongful manner' or through 'fraudulent means', the person to whom the DIN belongs will be given an opportunity to be heard, prior to the cancellation of such DIN.

Amendment of Companies (Acceptance of Deposits) Rules, 1975

The MCA vide Notification dated March 21, 2013 has issued the Companies (Acceptance of Deposits Amendment) Rules, 2013 ("Amendment Rules") to amend the Companies (Acceptance of Deposits) Rules, 1975 ("Acceptance of Deposit Rules"). The Amendment Rules have amended one of the exclusions to "deposits" (as set out in Rule 2(b) of the Acceptance of Deposit Rules). The Amendment Rules have substituted the exception set out in Rule 2(b)(x) with the following:

(a) any amount raised by the issue of a bond or debentures secured by the mortgage of any fixed assets referred to in Schedule VI of the Act excluding intangible assets of the company or with an option to convert them into shares in the company.

(b) Provided that in the case of such bonds or debentures secured by the mortgage of any fixed assets referred to in Schedule VI of the Act, excluding intangible assets the amount of such bonds or debentures, shall not exceed the market value of such fixed assets.

Prior to the Amendment Rules, the exclusion stated that the amount raised by the issue of bonds or debentures, such bonds or debentures secured by the mortgage of any immoveable property, shall not exceed the market value of such immovable property.

The Amendment Rules have also amended Rule 11A of the Acceptance of Deposit Rules by granting power to the Regional Director, Registrar of Companies or any other officer of the Central Government to make a complaint under Section 58AAA of the Act.

Foreign Investment in India by SEBI registered FIIs in Government Securities and Corporate Debt

The Reserve Bank of India ("RBI") vide Circular No. A.P. (DIR Series) Circular No. 94 dated April 01, 2013 has revised the existing limits to simplify and merge the existing debt limits.



Eligible Investor


Government securities including treasury bills

USD 25 billion

FIIs, QFIs and Long term investors registered with SEBI- SWFs, Multilateral agencies, Pension/ Insurance/ Endowment Funds, Foreign Central Banks.

Eligible Investors may invest in Treasury Bills up to USD 5.5 billion within the limit of USD 25 billion

Eligible instruments as referred to in Schedule 5

Of Notification No. FEMA 20/2000 – R dated May 3, 2000

USD 51 billion

FIIs, QFIs and Long term investors registered with SEBI- SWFs, Multilateral agencies, Pension/ Insurance/ Endowment Funds, Foreign Central Banks.

Eligible Investors may invest in Commercial Papers up to USD 3.5 billion within the limit of USD 51 billion

Non-resident Indians who were not subject to any limits for investment in Government Securities as well as corporate debt will continue to be regulated as per the extant guidelines. The aforementioned changes came into effect on April 1, 2013.

Core Investment Companies – Guidelines on Investment in Insurance

The RBI has vide Circular No. DNBS (PD) CC. No. 322/03.10.001/2012-13 dated April 1, 2013 provided guidelines for investment by Core Investment Companies ("CICs") in an insurance joint venture. Any CIC registered with the RBI will be permitted to set up a joint venture company for undertaking insurance business with risk participation subject to the satisfaction of the conditions stipulated in the Circular.

Published April 10, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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