Inbound Investment Structuring- An Overview
In order to understand the meaning of inbound investment structuring, it is crucial to understand the meaning of investment structuring. Investment structuring is the way in which an entity structures its undertakings in order to be compliant with the relevant laws in India.
Inbound investment can be any form of investment which is transferred from a country outside India. Such investments can come from Sri Lanka and Nepal also. Hence different forms of investment can come into India.
Prior to passing the Foreign Exchange Management Act, 1999 (FEMA) the government of India were reluctant to cater to any form of foreign investment needs. The act which governed foreign exchange in India prior to FEMA was the Foreign Exchange Regulation Act, 1973 (FERA). There were stringent penalties as a result of the FERA. This deterred foreign investment opportunities in the country.
Hence the parliament passed the FEMA act which is lenient when it came to foreign direct investment in the country. Since 1991 the government has brought out different forms of amendments and notification which affects foreign investment in India. All these changes has affected the way in which companies carry out inbound investment structuring in India.
Regulatory Authority/ Body for Inbound Investment Structuring
The main regulatory authority or body for inbound investment structuring is the Reserve Bank of India (RBI). The RBI brings out several notifications from time to time to create some form of leniency when it comes to areas related to inbound investment structuring in the country.
Apart from this the government has brought out the Foreign Exchange Management Act, 1999 (FEMA) which regulates the amount of foreign investment in the country. Apart from regulation, the way in which foreign investment is allowed in India is also regulated by FEMA.
Since the implementation of FEMA, the government has brought out different routes for foreign investment in India.
The DPIIT is another body which brings out notifications and circulars related to foreign investment in the country.
Routes for Foreign Investment
The following are the routes for foreign investment in the country
- Automatic Route
Under the Automatic route 100% foreign direct investment is allowed in the country. An entity under this form of route can invest up to 100 % foreign investment in the country. There is no requirement for any form of government permission for investment under this route. Hence, if a particular investment is allowed under this route, there is no requirement for any approval from the government.
- Approval Route
Under the approval route, government permission is required. Government permission would be the concerned regulatory authority which is the RBI. Apart from this, for sector specific approval, there are different ministries and bodies which are established by the government o f India. If a particular investment in a sector falls under the approval route then government permission must be required.
Types of Foreign Investment for Inbound Investment Structuring
The following are the types of foreign investment for inbound investment structuring:
- Foreign Direct Investment
Foreign direct investment is a form of foreign investment which is carried out by foreign institutional investors, NRI and other forms of entities. Usually this form of investment is utilised by private equity investors and angel investors. If the investment is made in the capital instruments of:
• An unlisted entity or company
• If the investment or foreign investment is more than 10 % of the paid up capital of the entity or the company.
Such investment is known as foreign direct investment. FDI is one of the types of structuring which is utilised by foreign entity or a foreign company.
- Foreign Portfolio Investment
Usually a portfolio would comprise of a group of investors or shares or securities in the particular portfolio. Compliance has to be maintained by the entities which are regulated under this form of system. Usually a foreign entity or a foreign company would invest in the securities of a company which is registered in an Indian recognised stock exchange. Such securities have to be compliant with the regulations of SEBI. The main law that regulates foreign portfolio investment is the Securities Exchange Board of India (Foreign Portfolio Investment) Regulations, 2014.
- Foreign Investment
A foreign investment is usually a form of investment which is made by an individual. However the following requirements have to be complied related to foreign investments:
• Such investment has to be made on a repatriable basis
• The investment can be made on the capital instruments of a partnership or a company.
Hence inbound investment structuring can be made through the following basis.
Benefits of Inbound Investment Structuring
The following are the benefits of inbound investment structuring:
- Compliance with Law
An entity or company following the principles related to inbound investment structuring would be compliant with the relevant provisions of law. There won’t be any issues if the foreign company and the Indian entity ensure that the principles related to structuring are followed.
- Development of Economy
It is well said that more foreign investment in the country, the better it is for the development of the economy. More amount of foreign investment in the country would also improve the GDP of the country and contribute to other factors.
- Promotes Opportunities Related to Employment
A foreign company or an entity which is set up abroad investing in India would definitely generate more growth to the country. Apart from this, the amount of employment opportunities would also improve through this form of inbound investment structuring.
- Develops regulation related to technology and fintech
More investment in the country means more research and development opportunities through some form of transfer of resources from a country outside India to India.
Eligibility Criteria for Inbound Investment Structuring
- The investment must be coming from a foreign investor, a venture capitalist or any other form of investor.
- The investment must be in the capital instruments of a domestic company which is established in India. Hence the investment must be on the purchase or acquisition of capital instruments in the Indian company. A foreign company can invest in the shares, securities and other debentures of the Indian company.
- The mode of investment must be through a Reserve Bank nominated authorised dealer. Such investments must be through the authorised dealer or an authorised bank which is regulated under the provisions of the Foreign Exchange Management Act, 1999.
- Investment must be through the automatic route or the approval route. Such investment would be structured as per the requirements related to inbound investment structuring in the country.
- There are different sectors in which foreign investment is allowed. The investment must only be for specific permitted sectors in India. If the foreign investment is for any prohibited sector, then the same would not be allowed or permitted.
Procedure for Carrying out Inbound Investment Structuring
There is no specific procedure for carrying out the process related to inbound investment structuring. Any foreign company or entity wishing to carry out foreign investment in India must be compliant with the requirements related to foreign investment in the country. The following procedure must be considered for inbound investment structuring:
- Form of Investment
First and foremost, the form of foreign investment must be considered for the purpose of inbound investment structuring:
• FDI- Then the investment must be carried out in an unlisted company in India or the amount of investment must be more than 10% of the paid up capital of the company or the entity.
• Foreign Portfolio Investment-If the investment is classified or categorised as a foreign portfolio investment, then such investment must be less than 10% of the paid up capital of the company or the investment must be less than 10% of the paid-up value of each set of capital instruments of a listed Indian company.
Hence the applicant before carrying out the procedure related to inbound investment restructuring has to first give thought of the process related to the same.
- Make an Application
Based on the above method, the applicant would make an application for the investment in India. There are different methods of making. Hence the applicant would have to select the category for making the investment under the automatic route.
If the applicant wants to go through the approval route, then Foreign Investment Facilitation Portal (FIFP) has to be considered. With this the standard operation procedure (SOP) to make the application must be considered. Prior approval would be required, from the RBI for the automatic route.
The RBI would send the application to the DPIIT to carry out checks and other formalities related to the application. These checks would be carried out by the concerned ministry. If there is no form of issues related to the application, then the same would be approved.
- Verification of Application
All the documents for seeking approval would be verified by the concerned department. Usually the process related to approval would take about 15 working days. Once the application is approved, then the approval letter would be sent to the applicant.
- Foreign Portfolio Investment
Some companies utilise the principles related to setting inbound investment structuring by investing in securities of companies which are listed in recognised stock exchanges. Such routes of foreign investment would be through the FPI route.
When considering the investment through the FPI route there is a separate method for which RBI compliance is required.
Many companies utilise the FPI route by setting up a holding form of company in Mauritius and using this entity to invest in securities and shares. Through this holding company, some form of capital gains tax neutrality can be achieved. Countries such as Mauritius and other offshore countries have entered into tax treaties with India. Hence there would be some form of exemption for the sale of shares in which an Indian company is considered. Capital gains tax would be exempted.
Updates on Inbound Investment Structuring
In April 2020, the government came out with a notification related to countries that share land borders with India. As per this notification, countries that share land borders with India would not be permitted to invest in India through the automatic route. All approvals have to be made through the government under the approval route. There are seven countries that share land borders with India. As per this notification, the principle of beneficial ownership would also be considered.
Hence if a citizen from a country that shares land borders with India also considers investing in India then the approval route would be required to be considered.
Documents for Inbound Investment Structuring
- Certificate of Incorporation of the Investee & Investor Companies/Entities
- Memorandum of Association (MOA) of the Investee & Investor Companies/Entities
- Board Resolution of the Investee & Investor Companies/Entities
- Audited Financial Statement of Last Financial Year of the Investee & Investor Companies/Entities
- Article of Association of the Investee & Investor Companies/Entities
- List of Names and addresses of all foreign collaborators along with Passport Copy/ Identification Proof of the Investor Company/Entity.
- Diagrammatic representation of the flow and funds from the original investor to the Investee Company and Pre and Post shareholding pattern of the Investee Company.
- An affidavit stating that all information provided in hard copy and online is the same and correct.
- A signed copy of the JV agreement/shareholders agreement/ technology transfer/trademark/brand assignment agreement (as applicable), in case there are existing ventures
- Board resolution of any joint venture company.
- Certificates of Incorporation and charter documents of any joint venture/company, which is a party to the proposed transaction.
- Copy of Downstream Intimation.
- Copy of relevant past RBI approvals, connected with the current Proposal (in case of amendment proposal).
- Foreign Inward Remittance Certificate (FIRC) in case investment has already come in and in case of post-facto approval.
- In the cases of investments by entities which themselves are pooled investment funds, the details such as names and addresses of promoters, investment managers as Standard Operating Procedure for Processing FDI Proposals well as all the contributors to the investment fund.
- List of the downstream companies of the Indian company and the details of the equity held by the Indian Company along with the details of the activities of the companies.
- High Court order in case of a scheme of arrangement.
- Valuation certificate as approved by a Chartered Accountant.
- Non-compete clause certificate of the investor and investee company in case of investment in the pharmaceutical sector.
- Certificate of statutory auditors as mandated in the FDI policy, as applicable.
- Standard Operating Procedure (SOP) form.