Overview of Inbound Investments under FEMA The introduction Foreign Exchange Management Act 1999 (FEMA) was made to regulate of foreign exchange transactions in India. This act increased the number of foreign exchange reserves in India. This act was helpful in increasing the foreign exhaching reserves in the country whilst providing a regulated and secured environment for exchange of foreign currency. Inbound investment refers to the foreign investment made by other countries in India. This is a form of foreign direct investment in India (FDI). The FDI is crucial for the economy's development as it directly affects the country's Gross Domestic Product. Therefore, it is essential to attract more inbound investment under FEMA. The Reserve Bank of India (RBI) is the primary regulatory authority for both these investments. Through this central bank, different investors can carry out activities and transactions involving inbound and outbound investments. Permitted Routes for Inbound Investments Automatic Route- This route enables 100 % investment. There is no need for permission from RBI under this route. Approval/ Government Route- In the Approval Route, there is a requirement of permission from the RBI. Due to the need for consent from RBI, there are specific compliances that must be followed There are four categories in which the investment is permitted which are - Category 1- Sectors in which FDI is permitted up to 100% under the automatic route. Category 2- Sectors in which FDI is permitted up to 100% under Government/Approval Route. Category 3- Sectors where FDI is permitted beyond a specific limit with Government. Category 4- Sectors wherein FDI is permitted up to a certain limit under both Government/Approval and Automatic routes subject to applicable laws. Sectors which require Approval for Inbound Investment under FEMA Approval from RBI is required when it comes to inbound investment under FEMA. The below sectors require prior approval from RBI: Mining, Defence/cases relating to FDI in small arms Broadcasting Print media Civil Aviation Satellites Telecom Private Security Agencies Trading(Single, Multi brand and Food Products) Financial services not regulated or regulated by more than one regulator/ Banking Public and Private (as per FDI Policy) Need for Inbound Investment under FEMA Inbound investment under FEMA is needed due to the following reasons Development of the Indian Economy Improvement of the GDP of the country Improvement of Technology Promotion of employment opportunities Regulatory Authorities under Inbound Investment The following authorities regulate inbound Investment under FEMA. DIPP- Department of Industry Policy and Promotion Reserve Bank of India Ministry of External Affairs Ministry of Revenue Eligibility criteria for Inbound Investment under FEMA The eligibility criteria for Inbound Investment are provided below. The investment must be made by a foreign investor, a venture capitalist or any other form of investor. The investment must be in the capital instruments of a domestic company 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 RBI nominated authorised dealer and investments must be through the authorised dealer or an authorised bank regulated under the Foreign Exchange Management Act, 1999. The investment must be through the automatic route or the approval route. Such investment would be structured per the country's requirements related to inbound investment structuring. There are different sectors in which foreign investment is allowed. The investment must only be for specifically permitted sectors in India. If foreign investment is for any prohibited industry, the same would not be allowed or permitted. Necessary papers for Inbound Investment Structuring The list of necessary papers for Inbound Investment is provided below. 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 of existing ventures. Board resolution of any joint venture company. Certificates of Incorporation and charter necessary papers of any joint venture/company 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 that are pooled investment funds, the details such as names and addresses of promoters, investment managers as Standard Operating Procedure for Processing FDI Proposals and 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. Procedure for Carrying out Inbound Investment Structuring There is no specific procedure for carrying out the process related to inbound investment. Any foreign company or entity wishing to carry out foreign investment in India must comply with the country's foreign investment requirements. The following procedure must be considered for inbound investment. Ascertaining the Form of Investment The investor must ascertain the form of foreign investment for inbound investment structuring. Foreign Direct Investment 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 company or entity's paid-up capital. Foreign Portfolio Investment If the investment is classified or categorised as a foreign portfolio investment. In that case, 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. Filing an Application Based on the above method, the applicant is required to apply for investment in India. There are different methods for the same. Therefore, the applicant needs to select the category for investing in the automatic route. Submission of Application and necessary papers to RBI When the applicant shall file an application with RBI, it will send the application to the DPIIT to carry out checks and other formalities related to the application. The concerned ministry would carry out these checks. If there are no issues related to the application, the same will be approved. Verification of Application and necessary papers The concerned department would verify all the necessary papers for seeking approval. Usually, the process related to approval would take about 15 working days. Once the application is approved, the approval letter is sent to the applicant.