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The government of India has brought out various modes of foreign investment through which an individual or a company can invest in. These types of foreign investment would have specific requirements related to compliance with the laws of the land. Apart from this, various authorities also have control over the amount of foreign investment that comes into a country. Ever since the liberalization of markets in 1991, the amount of foreign investment in India improved at a rapid pace. In 1991, the Controller of Capital issues (CIC) was repealed. After this move, the markets opened up to foreign investments from foreign institutional investors and Non-Resident Indians. This move was the major eye-opener for the markets to develop.
Foreign companies established their footprints in India either by setting up branch offices and representative offices. These moves by foreign companies increased the gross domestic product of the country. It also promoted healthy competition amongst domestic companies and international companies. All the types of foreign investment in India have contributed to the development of foreign exchange reserves in the country. Over the years, the types of foreign investment have grown into different forms of capital contribution to the economy.
According to the International Monetary Fund (IMF), the Gross Domestic Product of India has risen to 7%. Sources say that this percentage is supposed to remain constant. In the year 2017-18, the GDP of India was steady at 7.4% and 2018-19; the GDP reduced to 7.3%. The effect of COVID-19 has drastically reduced the amount of economic activity in India. The government of India has brought out stringent changes in the Foreign Direct Investment Route in India due to the lockdown.
Neighbouring countries that share borders with India are supposed to take approval under the government route before investing in particular sectors. This was a radical change due to the increased ownership percentage in HDFC by Peoples Bank of China. Sources say that the gross domestic product was supposed to be more than 7%. However, the effect of COVID-19 has significantly reduced this chance of reaching the minimum average GDP.
However, the Government of India has taken different measures to improve GDP. Some of the actions taken are the implementation of Goods and Services Tax (GST). Apart from this, another step taken by the Government of India is the introduction of Insolvency and Bankruptcy Code (IBC), which has been of vital significance to the case progression of bankruptcy cases. These measures have improved the amount of GDP in the country. Added to this is the amount of foreign exchange that is brought into the country. Through these measures, the Government of India can keep the GDP at a stable rate.
Since the liberalization of the markets in India, there has been a significant outflow of funds from India. Because of this, foreign reserves have reduced in India and only increased the importing patterns of the country. However, this has changed over the years. India is one of the attractive destinations for foreign investment. There are a vast amount of options and alternatives given to foreign investors to invest in India. The types of foreign investment in India are the following:
The above types of foreign investment help India to improve the amount of foreign exchange reserves. However, the types of foreign investment in India keep developing at a rapid pace. The government of India has taken initiatives to make more alternatives in the types of foreign investment which are allowed for a foreign investor in India.
A foreign portfolio investment is a foreign investment which is done in a pool of securities. These securities would be regulated under the Companies’ Act 2013, Foreign Exchange Management Act 1999, and the Reserve Bank of India. This form of investment is made through foreign investors in securities that are listed in the stock exchange. Apart from this, investments can be made in other securities. This framework is considered as the FPI framework. This framework is regulated by the securities exchange board of India (SEBI). SEBI is the primary authority for controlling the securities market in India. Therefore Foreign Portfolio Investment (FPI) would come under the purview of SEBI.
According to the Securities Exchange Board of India (Foreign Portfolio Investment) Regulations, 2014, the license for FPI registration can be obtained through the following procedure:
An investor to invest in Foreign Portfolio Investment has to make an application to the concerned authority. This application has to be made in the format as required. The applicant has to also submit the prescribed documents to the authority. This method is necessary to obtain the FPI Licence.
After this step, the Designated Depository Party (DDP) acts as a local custodian of the SEBI would scrutinize the application for being registered as an FPI. After examining the application, the DDP would grant a license to the applicant to be a registered FPI.
The application is made in a particular format. Based on the background of risk that is taken by the investor, the following would be the categories which the investor can consider for the investment:
There are compliances with all types of foreign investment in India. Like the types of foreign investment in India, an FPI also has to comply with the laws laid down by authorities. When an applicant or an entity wants to invest in foreign portfolio investment, then the applicant must obtain the necessary license and registration.
Apart from this, the FPI applicant has to open bank accounts in its name. It also has to open a bank account for depository purposes. For this, the FPI applicant would need to provide the necessary documentation (FPI form and other documents) to the bank to carry out the process of opening a bank account.
The investors who come from Category II and Category III require information on the executives of the company. A natural person’s information would be provided for identifying the individual as the Beneficial Owner (BO) of the FPI. The information regarding the BO must be provided to the local custodian.
An FPI can invest in securities that can be transferred, such as equity, preference shares, bonds, derivatives of mutual funds. However, these securities have to be registered in the Indian Capital Markets. As long as compliances are followed, an investment in the above securities can be made. There are restrictions applicable to all types of foreign investment in India. Before applying or investing in types of foreign investment in India, the investor has to be compliant with the regulations.
When it comes to equity securities, an FPI is only permitted to invest in listed equities. Investment, which is made by a pool of FPI, should not exceed 10%. This means that a foreign portfolio investor should not invest more than 10% in a listed entity. The investment should not be more than 10% of the paid-up capital of the listed entity.
For a private sector bank, the amount of percentage is limited to 5%. If such control would go more than 10%, then the foreign portfolio investment would be converted to foreign direct investment, and it would come under the authority and regime of the RBI. Hence different types of foreign investment have certain compliances to be followed.
When these forms of investments are made in debt securities, then a different approach is taken. The RBI governs investment by an FPI in debt security. In 2018 the RBI brought out an amendment that affected the investment by an FPI in debt security. Due to this, the amount of investment in debt securities has drastically reduced by an FPI.
A bank account has to be opened by FPI. This bank account is a normal account which is used by resident Indians. The account has to be opened with the authorized dealer/authorized bank. All the investments made either inbound or outbound are made through the authorized dealer/authorized bank.
Proceeds of the sale, which are made in India and outside India, can only be realized once the tax has been paid. Borrowing funds in India is not allowed for an FPI. An FPI cannot earn interest. When it comes to taxation of a Foreign Portfolio Investor, then every FPI is required to obtain Tax Identification. They also have to submit annual returns.
In a commentary and white paper which was issued by the RBI, the following points were observed:
Though there are many types of foreign investment in India, the FPI would be considered as a beneficial investment route for foreign investors who target securities in the market. With other types of foreign investment, the government has taken relevant considerations to improve the amount of FPIs in India.
Apart from FPI, Foreign direct investment (FDI) is another investment option which foreign investors use. This option is used extensively by foreign private equity and venture capitalists. The RBI has issued guidelines for foreign direct investment in India. Any form of investment which is done through capital instruments in:
Fully diluted shares are the shares, which are outstanding shares. These shares would be allowed to be traded in the market after they are converted. Capital instruments are shares, bonds, preference shares and debentures. These instruments have to be compliant with the laws related to Foreign Exchange Management Act 1999.
FDI is one of the types of foreign investment which can be made through the above routes.
Read our article:Foreign Investment: Compliance under RBI/FEMA
Therefore FDI is one of the types of foreign investment in India. There are various compliances related to Foreign Direct Investment in India.
Foreign Investment is an investment made by an individual outside India. The following have to be satisfied for foreign investment:
Types of foreign investment in India include- Foreign Portfolio Investment, Foreign Direct Investment, and Foreign Investment. Based on the requirement of the investor, the Government of India has brought out various modes for foreign investment in India. For investing in a Foreign Portfolio Investment, the applicant would require to register with the concerned authority. Apart from this, the applicant has to open a bank account for dealing with remittances. If an investor wants to invest in capital and security markets, then foreign portfolio investment would be a credible option. If an investor wants to invest in a capital instrument in a company, then the foreign direct investment route would be considered. If an investor wants to repatriate the funds back to the investor country and such investment is made in capital instruments of a company, then the investment is considered as a foreign investment. Therefore the types of foreign investments have different compliances in India.
See Our Recommendation: Chinese Investment in India under the Government Approval.