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UPDATES FOR STRATEGIC MANAGEMENT, ALLIANCES AND INTERNATIONAL TRADE

PROFESSIONAL
PROGRAMME

UPDATES FOR
STRATEGIC MANAGEMENT,
ALLIANCES AND INTERNATIONAL
TRADE
MODULE 3

(Relevant for Students Appearing in June, 2016

Examination)

DisclaimerThis document has been prepared purely for academic purposes only and it does not necessarily
reflect the views of ICSI. Any person wishing to act on the basis of this document should do so
only after cross checking with the original source.

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UPDATES FOR STRATEGIC MANAGEMENT, ALLIANCES AND INTERNATIONAL TRADE

These Updates are to facilitate the students to acquaint themselves with the amendments in
relevant laws upto December, 2015, applicable for June, 2016 Examination. The students are
advised to read their Study Material along with these Updates.
In the event of any doubt, students may write to the Institute for clarifications at
academics@icsi.edu

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UPDATES FOR STRATEGIC MANAGEMENT, ALLIANCES AND INTERNATIONAL TRADE

STRATEGIC MANAGEMENT, ALLIANCES AND INTERNATIONAL TRADE

Module III

Chapter 10
Foreign Collaborations and Joint Ventures

FOREIGN DIRECT INVESTMENT POLICY 2015

It is the intent and objective of the Government of India to attract and promote foreign direct
investment in order to supplement domestic capital, technology and skills, for accelerated
economic growth. Foreign Direct Investment, as distinguished from portfolio investment, has
the connotation of establishing a lasting interest in an enterprise that is resident in an
economy other than that of the investor.
The Government has put in place a policy framework on Foreign Direct Investment, which is
transparent, predictable and easily comprehensible. This framework is embodied in the
Circular on Consolidated FDI Policy, which may be updated every year, to capture and keep
pace with the regulatory changes, effected in the interregnum. The Department of Industrial
Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India
makes policy pronouncements on FDI through Press Notes/Press Releases which are notified
by the Reserve Bank of India as amendments to the Foreign Exchange Management (Transfer
or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification
No.FEMA 20/2000-RB dated May 3, 2000). These notifications take effect from the date of
issue of Press Notes/ Press Releases, unless specified otherwise therein. In case of any
conflict, the relevant FEMA Notification will prevail. The procedural instructions are issued
by the Reserve Bank of India vide A.P. (DIR Series) Circulars. The regulatory framework,
over a period of time, thus, consists of Acts, Regulations, Press Notes, Press Releases,
Clarifications, etc.

Entry routes for investments in India

Under the Foreign Direct Investments (FDI) Scheme, investments can be made in shares,
mandatorily and fully convertible debentures and mandatorily and fully convertible
preference shares of an Indian company by non-residents through two routes:

Automatic Route: Under the Automatic Route, the foreign investor or the Indian
company does not require any approval from the Reserve Bank or Government of
India for the investment.
Government Route: Under the Government Route, the foreign investor or the Indian
company should obtain prior approval of the Government of India(Foreign Investment
Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of
Finance or Department of Industrial Policy & Promotion, as the case may be) for the
investment.

Eligibility for Investment in India

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UPDATES FOR STRATEGIC MANAGEMENT, ALLIANCES AND INTERNATIONAL TRADE

i.

ii.

iii.

A person resident outside India or an entity incorporated outside India, can invest in
India, according to the FDI Policy of the Government of India and Foreign Exchange
Management (Transfer or issue of security by a person resident outside India)
Regulations, 2000. It may be noted that a person who is a citizen of or an entity
incorporated in Bangladesh/ Pakistan can invest in India under the FDI Schemewith
the prior approval of the FIPBsubject to terms and conditions mentioned in FDI
Policy andForeign Exchange Management (Transfer or issue of security by a person
resident outside India) Regulations, 2000.
NRIs, resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are
permitted to invest in shares and convertible debentures of Indian companies under
FDI Scheme on repatriation basis, subject to the condition that the amount of
consideration for such investment shall be paid only by way of inward remittance in
free foreign exchange through normal banking channels.
Overseas Corporate Bodies (OCBs) have been de-recognised as a class of investor in
India with effect from September 16, 2003. Erstwhile OCBs which are incorporated
outside India and are not under adverse notice of the Reserve Bank can make fresh
investments under the FDI Scheme as incorporated non-resident entities, with the
prior approval of the Government of India if the investment is through the
Government Route; and with the prior approval of the Reserve Bank, if the
investment is through the Automatic Route. However, before making any fresh FDI
under the FDI scheme, an erstwhile OCB should through their AD bank, take a one
time certification from RBI that it is not in the adverse list being maintained with the
Reserve Bank of India.

ADs should also ensure that OCBs do not maintain any account other than NRO current
account in line with the instructions as per A.P. (DIR Series) Circular No. 14 dated
September 16, 2003. Further, this NRO account should not be used for any fresh investments
in India. Any fresh request for opening of NRO current account for liquidating previous
investment held on non-repatriation basis should be forwarded by the AD bank to Foreign
Exchange Department, Reserve Bank of India, Central Office, Mumbai. However, ADs
should not close other category of accounts (NRE / FCNR / NRO) for OCBs which are in the
adverse list of the Reserve Bank of India. These accounts are to be maintained by the
respective AD banks in the frozen status.
Type of instruments
i) Indian companies can issue equity shares, fully and mandatorily convertible debentures,
fully and mandatorily convertible preference shares and warrants subject to the pricing
guidelines / valuation norms and reporting requirements amongst other requirements as
prescribed under FEMA Regulations.
ii) Prior to December 30, 2013, issue of other types of preference shares such as nonconvertible, optionally convertible or partially convertible, were to be in accordance with the
guidelines applicable for External Commercial Borrowings (ECBs). On and from December
30, 2013 it has been decided that optionality clauses may henceforth be allowed in equity
shares and compulsorily and mandatorily convertible preference shares/debentures to be
issued to a person resident outside India under the Foreign Direct Investment (FDI) Scheme.
The optionality clause will oblige the buy-back of securities from the investor at the price
prevailing/value determined at the time of exercise of the optionality so as to enable the

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investor to exit without any assured return. The provision of optionality clause shall be
subject to the following conditions:
(a) There is a minimum lock-in period of one year or a minimum lock-in period as prescribed
under FDI Regulations, whichever is higher (e.g. defence sector where the lock-in period of
three years has been prescribed). The lock-in period shall be effective from the date of
allotment of such shares or convertible debentures or as prescribed for defence sector.
(b) After the lock-in period, as applicable above, the non-resident investor exercising
option/right shall be eligible to exit without any assured return, as under:
(i) In case of a listed company, the non-resident investor shall be eligible to exit at the market
price prevailing at the recognised stock exchanges;
(ii) In case of unlisted company, the non-resident investor shall be eligible to exit from the
investment in equity shares of the investee company at a price as per any internationally
accepted pricing methodology on arms length basis, duly certified by a Chartered
Accountant or a SEBI registered Merchant Banker.
The guiding principle would be that the non-resident investor is not guaranteed any assured
exit price at the time of making such investment/agreements and shall exit at the fair price
computed as above at the time of exit, subject to lock-in period requirement, as applicable.
Pricing guidelines
Fresh issue of shares: Price of fresh shares issued to persons resident outside India under the
FDI Scheme, shall be :

on the basis of SEBI guidelines in case of listed companies.

not less than fair value of shares determined by a SEBI registered Merchant Banker or
a Chartered Accountant as per as per any internationally accepted pricing
methodology on arms length basis.

The pricing guidelines as above are subject to pricing guidelines as enumerated in paragraph
above, for exit from FDI with optionality clauses by non-resident investor.
The above pricing guidelines are also applicable for issue of shares against payment of lump
sum technical know how fee / royalty due for payment/repayment or conversion of ECB into
equity or capitalization of pre incorporation expenses/import payables (with prior approval of
Government).
The pricing of the partly paid equity shares shall be determined upfront and 25% of the total
consideration amount (including share premium, if any), shall also be received upfront; The
balance consideration towards fully paid equity shares shall be received within a period of 12
months.
The time period for receipt of the balance consideration within 12 months shall not be
insisted upon where the issue size exceeds rupees five hundred crore and the issuer complies
with Regulation 17 of the SEBI (Issue of Capital and Disclosure Requirements(ICDR))
Regulations regarding monitoring agency. Similarly, in case of an unlisted Indian company,

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the balance consideration amount can be received after 12 months where the issue size
exceeds rupees five hundred crores. However, the investee company shall appoint a
monitoring agency on the same lines as required in case of a listed Indian company under the
SEBI (ICDR) Regulations. Such monitoring agency (AD Category -1 bank) shall report to the
investee company as prescribed by the SEBI regulations, ibid, for the listed companies.
The pricing of the warrants and price/ conversion formula shall be determined upfront and
25% of the consideration amount shall also be received upfront. The balance consideration
towards fully paid up equity shares shall be received within a period of 18 months;
The price at the time of conversion should not in any case be lower than the fair value worked
out, at the time of issuance of such warrants, in accordance with the extant FEMA
Regulations and pricing guidelines stipulated by RBI from time to time. Thus, Investee
company shall be free to receive consideration more than the pre-agreed price.
It is clarified that where the liability sought to be converted by the company is denominated
in foreign currency as in case of ECB, import of capital goods, etc. it will be in order to apply
the exchange rate prevailing on the date of the agreement between the parties concerned for
such conversion. Reserve Bank will have no objection if the borrower company wishes to
issue equity shares for a rupee amount less than that arrived at as mentioned above by a
mutual agreement with the ECB lender. It may be noted that the fair value of the equity
shares to be issued shall be worked out with reference to the date of conversion only.
It is further clarified that the principle of calculation of INR equivalent for a liability
denominated in foreign currency as mentioned at paragraph 3 above shall apply, mutatis
mutandis, to all cases where any payables/liability by an Indian company such as, lump sum
fees/royalties, etc. are permitted to be converted to equity shares or other securities to be
issued to a non-resident subject to the conditions stipulated under the respective Regulations.
However, where non-residents (including NRIs) are making investments in an Indian
company in compliance with the provisions of the Companies Act, 2013, by way of
subscription to its Memorandum of Association, such investments may be made at face value
subject to their eligibility to invest under the FDI scheme.
Additional conditions for issue of partly paid shares and warrants
(a) The Indian company whose activity/ sector falls under government route would require
prior approval of the Foreign Investment Promotion Board (FIPB), Government of India for
issue of partly-paid shares/ warrants.
(b) The forfeiture of the amount paid upfront on non-payment of call money shall be in
accordance with the provisions of the Companies Act, 2013 and Income tax provisions, as
applicable;
(c) The company while issuing partly paid shares or warrants shall ensure that the sectoral
caps are not breached even after the shares get fully paid-up or warrants get converted into
fully paid equity shares. Similarly, the Non-resident investors acquiring partly paid shares or
convertible debentures or warrants shall ensure that the sectoral caps are not breached even
after the shares get fully paid-up or warrants get converted into fully paid equity shares.

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(d) The deferment of payment of consideration amount or shortfall in receipt of consideration

amount as per applicable pricing guidelines by the foreign investors will not be covered under
these guidelines so as to be treated as subscription to partly paid shares and warrants. Thus,
the Investee company under these guidelines for issue/transfer of partly-paid shares/warrants,
shall require to comply with the requirements under the Companies Act, 2013 for issuance of
partly paid shares and warrants;
Issue of shares by SEZs against import of capital goods: In this case, the share valuation has
to be done by a Committee consisting of Development Commissioner and the appropriate
Customs officials.
Right Shares: The price of shares offered on rights basis by the Indian company to nonresident shareholders shall be:
i.
ii.

In the case of shares of a company listed on a recognised stock exchange in India, at a

price as determined by the company.
In the case of shares of a company not listed on a recognised stock exchange in India,
at a price which is not less than the price at which the offer on right basis is made to
the resident shareholders.

Acquisition / transfer of existing shares (private arrangement). The acquisition of existing

shares from Resident to Non-resident (i.e. to incorporated non-resident entity other than
erstwhile OCB, foreign national, NRI, FII) would be at a:-;
(a) negotiated price for shares of companies listed on a recognized stock exchange in India
which shall not be less than the price at which the preferential allotment of shares can be
made under the SEBI guidelines, as applicable, provided the same is determined for such
duration as specified therein, preceding the relevant date, which shall be the date of purchase
or sale of shares. The price per share arrived at should be certified by a SEBI registered
Merchant Banker or a Chartered Accountant.
(b) negotiated price for shares of companies which are not listed on a recognized stock
exchange in India which shall not be less than the fair value worked out as per any
internationally accepted pricing methodology for valuation of shares on arms length basis,
duly certified by a Chartered Accountant or a SEBI registered Merchant Banker. Further,
transfer of existing shares by Non-resident (i.e. by incorporated non-resident entity, erstwhile
OCB, foreign national, NRI, FII) to Resident shall not be more than the minimum price at
which the transfer of shares can be made from a resident to a non-resident as given above.
The pricing of shares / convertible debentures / preference shares should be decided /
determined upfront at the time of issue of the instruments. The price for the convertible
instruments can also be a determined based on the conversion formula which has to be
determined / fixed upfront, however the price at the time of conversion should not be less
than the fair value worked out, at the time of issuance of these instruments, in accordance
with the extant FEMA regulations.
The pricing guidelines as above are subject to pricing guidelines as enumerated in
paragraph above, for exit from FDI with optionality clauses by non-resident investor.
Mode of Payment

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An Indian company issuing shares /convertible debentures under FDI Scheme to a person
resident outside India shall receive the amount of consideration required to be paid for such
shares /convertible debentures by:
(i) inward remittance through normal banking channels.
(ii) debit to NRE / FCNR account of a person concerned maintained with an AD category I
bank.
(iii) conversion of royalty / lump sum / technical know how fee due for payment /import of
capital goods by units in SEZ or conversion of ECB, shall be treated as consideration for
issue of shares.
(iv) conversion of import payables / pre incorporation expenses / share swap can be treated as
consideration for issue of shares with the approval of FIPB.
(v) debit to non-interest bearing Escrow account in Indian Rupees in India which is opened
with the approval from AD Category I bank and is maintained with the AD Category I bank
on behalf of residents and non-residents towards payment of share purchase consideration.
If the shares or convertible debentures are not issued within 180 days from the date of receipt
of the inward remittance or date of debit to NRE / FCNR(B) / Escrow account, the amount of
consideration shall be refunded. Further, the Reserve Bank may on an application made to it
and for sufficient reasons, permit an Indian Company to refund / allot shares for the amount
of consideration received towards issue of security if such amount is outstanding beyond the
period of 180 days from the date of receipt.

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Chapter 13
WTO MINISTERIAL CONFERENCES
TENTH WTO MINISTERIAL CONFERENCE, NAIROBI, 20151
Nairobi Package
The WTO's 10th Ministerial Conference was held in Nairobi, Kenya, from 15 to 19 December 2015.
It culminated in the adoption of the "Nairobi Package", a series of six Ministerial Decisions on
agriculture, cotton and issues related to least-developed countries (LDCs). A Ministerial Declaration
outlining the Package and the future work of the WTO was adopted at the end of the five-day
Conference.
The Nairobi Package pays fitting tribute to the Conference host, Kenya, by delivering commitments
that will benefit in particular the organizations poorest members. The Nairobi Package contains a
series of six Ministerial Decisions on agriculture, cotton and issues related to least-developed
countries. These include a commitment to abolish export subsidies for farm exports, which was hailed
as the most significant outcome on agriculture in the organizations 20-year history.
The other agricultural decisions cover public stockholding for food security purposes, a special
safeguard mechanism for developing countries, and measures related to cotton. Decisions were also
made regarding preferential treatment for least developed countries (LDCs) in the area of services and
the criteria for determining whether exports from LDCs may benefit from trade preferences.

Agreements on agriculture
A centrepiece of the Nairobi Package is a Ministerial Decision on Export Competition, including a
commitment to eliminate subsidies for farm exports.
A number of countries are currently using export subsidies to support agriculture exports. The legallybinding decision would eliminate these subsidies and prevent governments from reverting to tradedistorting export support in the future.
Under the decision, developed members have committed to remove export subsidies immediately,
except for a handful of agriculture products, and developing countries will do so by 2018. Developing
members will keep the flexibility to cover marketing and transport costs for agriculture exports until
the end of 2023, and the poorest and food-importing countries would enjoy additional time to cut
export subsidies.
The decision contains disciplines to ensure that other export policies are not used as a disguised form
of subsidies. These disciplines include terms to limit the benefits of financing support to agriculture
exporters, rules on state enterprises engaging in agriculture trade, and disciplines to ensure that food

https://www.wto.org/english/news_e/news15_e/mc10_19dec15_e.htm

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aid does not negatively affect domestic production. Developing countries are given longer time to
implement these rules.
Ministers also adopted a Ministerial Decision on Public Stockholding for Food Security Purposes.
The decision commits members to engage constructively in finding a permanent solution to this issue.
Under the Bali Ministerial Decision of 2013, developing countries are allowed to continue food
stockpile programmes, which are otherwise in risk of breaching the WTO's domestic subsidy cap,
until a permanent solution is found by the 11th Ministerial Conference in 2017.
A Ministerial Decision on a Special Safeguard Mechanism (SSM) for Developing Countries
recognizes that developing members will have the right to temporarily increase tariffs in face of
import surges by using an SSM. Members will continue to negotiate the mechanism in dedicated
sessions of the Agriculture Committee.
In addition, a Ministerial Decision on Cotton stresses the vital importance of the cotton sector to
LDCs. The decision includes three agriculture elements: market access, domestic support and export
competition.
On market access, the decision calls for cotton from LDCs to be given duty-free and quota-free
access to the markets of developed countries and to those of developing countries declaring that
they are able to do so from 1 January 2016. The domestic support part of the cotton decision
acknowledges members' reforms in their domestic cotton policies and stresses that more efforts
remain to be made. On export competition for cotton, the decision mandates that developed
countries prohibit cotton export subsidies immediately and developing countries do so at a later date.

Decisions of benefit to LDCs

The Nairobi Package also contains decisions of specific benefit to LDCs, including enhanced
preferential rules of origin for LDCs and preferential treatment for LDC services providers.
Preferential rules of origin for LDCs
The Ministerial Conference adopted a decision that will facilitate opportunities for least-developed
countries' export of goods to both developed and developing countries under unilateral preferential
trade arrangements in favour of LDCs.
The decision in Nairobi builds on the 2013 Bali Ministerial Decision on preferential rules of origin for
LDCs. The Bali Decision set out, for the first time, a set of multilaterally agreed guidelines to help
make it easier for LDC exports to qualify for preferential market access.
The Nairobi Decision expands upon this by providing more detailed directions on specific issues such
as methods for determining when a product qualifies as made in an LDC, and when inputs from
other sources can be cumulated or combined together into the consideration of origin. It calls
on preference-granting members to consider allowing the use of non-originating materials up to 75%
of the final value of the product.

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The decision also calls on preference-granting members to consider simplifying documentary and
procedural requirements related to origin.

LDC trade in services

The Ministerial Decision on Implementation of Preferential Treatment in Favour of Services and
Service Suppliers of Least Developed Countries and Increasing LDC Participation in Services Trade
extends the current waiver period under which non-LDC WTO members may grant preferential
treatment to LDC services and service suppliers. The waiver, adopted in December 2011, runs 15
years. The Ministerial Decision extends this an additional four years, or until 31 December 2030.
The waiver allows WTO members to deviate from their most-favoured nation obligation under the
General Agreement on Trade in Services (GATS). To date, 21 members have submitted notifications
granting preferences to LDC services and service suppliers. The decision also instructs the WTO's
Trade in Services Council to encourage discussions among members on technical assistance aimed at
increasing the capacity of LDCs to participate in services trade. It also sets up a review to monitor the
operation of the notified preferences.

WTO members secure landmark $1.3 trillion IT trade deal

In another significant outcome from the Nairobi Ministerial, WTO members representing major
exporters of IT products agreed on 16 December on the timetable for implementing a landmark deal
to eliminate tariffs on 201 information technology products valued at over $1.3 trillion per year.
Negotiations on the expanded Information Technology Agreement (ITA) were conducted by 53 WTO
members, including both developed and developing countries, which account for approximately 90
per cent of world trade in these products. However, all WTO members will benefit from the
agreement, as they will all enjoy duty-free market access to the markets of the members eliminating
tariffs on these products.
The list of 201 products was originally agreed by the ITA participants in July 2015.
This breakthrough followed months of intensive negotiations among the ITA participants. Their
review of draft schedules involved a process whereby each of them indicated over what timeframe
and how they intended to implement the elimination of duties on these products.
For every product on the list, ITA participants have negotiated the level of reductions and over how
many years it will fully eliminate the tariffs. As a result of these negotiations, approximately 65% of
tariff lines will be fully eliminated by 1 July 2016. Most of the remaining tariff lines will be
completely phased out in four stages over three years. This means that by 2019 almost all imports of
the relevant products will be duty free.

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