We are an US-based company. Can we acquire the entire shareholding of an Indian software development company, which in turn holds the entire shareholding of an Indian company that has an ISP license?

The acquisition of the entire shareholding of the software development company would require the prior approvals, first of the Foreign Investment Promotion Board (FIPB) and thereafter of the Reserve Bank of India.

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Foreign Direct Investment (FDI) norms applicable to investing companies in the services sector may, however, impact your company's ability to acquire the entire shareholding of the software development company or its ability to continue to hold the entire shareholding of the ISP company. In terms of FDI norms in the services sector, where there is a prescribed cap for foreign investment, only the FDI in the services company is considered for the prescribed cap and FDI in the investing company is not set off against this cap if the FDI in the investing company does not exceed 49 per cent and the management of the investing company is with Indian shareholders. Hundred per cent FDI is permitted with prior FIPB approval in an ISP not providing gateways (both for satellite and submarine cables). However, FDI in an ISP with gateways is limited to 74 per cent. In either case, FDI beyond 49 per cent requires prior FIPB approval.

Consequently, if the ISP has gateways, your company may either acquire up to 74 per cent of the software development company (which will be set off against the prescribed sectoral cap in the ISP) or acquire the entire shareholding of the software development company and reduce the shareholding of the software development company in the ISP to 74 per cent in view of the prescribed cap for FDI. If the ISP is without gateways, your company may acquire the entire shareholding of the software development company, which continues to hold the entire shareholding of the ISP. In either case, in addition to prior FIPB approval for the acquisition of shares, your company will require prior FIPB approval for the continued shareholding by the software development company in the ISP (as your company's shareholding in the software development company will be set off against the prescribed sectoral cap in the ISP). Your company or the software development company can file a composite application with the FIPB for both approvals. In addition, if your company is listed in the US or other parts of the world, then your company will need to divest 26 per cent of its indirect shareholding in the ISP in favour of the Indian public within five years of the acquisition.

We are a software company set up under the Software Technology Parks (STP) scheme of the Government of India, with a private bonded warehouse license issued by the Customs authorities. We intend to re-export some of our imported warehoused goods to our parent company in the US. Will re-export of these goods entail payment of customs duty?

If the goods that you wish to re-export have not been taken out of the bonded warehoused premises of the STP unit, you can re-export these goods without payment of customs duty. In terms of Section 69 of the Customs Act, 1963, any warehoused goods (provided these goods are not prohibited goods under the Customs Act) can be exported to a place outside of India without payment of import duty if (i) the shipping bill or a bill of export has been presented in respect of such goods; (ii) the export duties, penalties, or other charges payable in respect of such goods have been paid; and (iii) an order of clearance of such goods for exportation has been made by the concerned customs officer. This facility of re-export is also provided in the Export-Import Policy 2002-2007, which states that capital goods and spares that have become obsolete/surplus can be exported by a STP unit.

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