FDI in Private Limited Company

Narendra Kumar

30 Nov, 2020

FDI is the best and cheapest mode to raise funds in a private limited company.

What is FDI?

FDI stands for Foreign Direct Investment. Foreign Direct Investment is an investment form of controlling Business. Any investment made in Indian entities by non-resident is called Direct Foreign Investment. FDI in India is undertaken as per the FDI policy issued by the government from time to time.

Investment in Indian entity by Indian can be classified under two category, i.e., by a resident or by non-resident. Any Indian entity holds foreign investment and invests in another Indian Entity will amount to Indirect Foreign Investment, i.e., through a multi-layer structure.

FDI include all kind of investments by Falls, NRI investment, foreigner or foreigner entity.

Many relaxations of regulatory regimes have encouraged foreign entity to enter into Indian Market. All small and big entity are expanding their business to the international market to maximize profits and growth. FDI is one of the routes for foreign market to enter into Indian Market.

FDI in Private Limited Company

Indian Government has shown a keen interest in increasing Foreign Investment. The private limited company is mostly preferred for the business. The private limited company is easy to raise funds. These types of companies have greater flexibility and limited liability.

Foreign Direct Investment under private limited company is bifurcated under two routes which are the Automatic route or Approval route. FDI is permitted up to 100% in most of the sectors other than those sectors which are capped or restricted

Automatic Route:

Under Automatic route, Foreign Direct Investment in private company is allowed without any prior approval or perhaps Reserve Bank of India in the sectors/activities as per the FDI policy issued by the Authority.

Approval Route:

Under the approval route, FDI in private company can be made with the approval of the government. The prior approval from Foreign Investment Promotion Board shall obtain before an investment is made. The activities like a proposal for investments or technical collaboration approval becomes necessary. The permission is granted when the Foreign Investment Promotion Board (FIPB) recommended it to a government for approval. Further, entities of Bangladesh or Pakistan has to go under approval route only.

Prohibited Sector for FDI

• Atomic Energy
• Lottery business including government lottery and online lottery

(Even foreign collaboration, franchise, trademark, brand name, management contract is prohibited)

• Gambling and betting including casino (even foreign collaboration, franchise, trademark, brand name, management contract is prohibited)
• The business of chit funds
• Nidhi Company
• Trading in transferable development rights
• Real estate business or construction of farmhouse (except development of townships, roads or bridges, city, and regional infrastructure, etc.,)
• Manufacturing of cigars, cheroots, cigarillos, and cigarettes tobacco or tobacco substitutes
• Activity/sector not opened to private sector investment [e.g., Atomic energy and Railway Transport (other than Mass Rapid Transport Systems)].

FDI in Private Company under Approval Route

• Petroleum sector (except for private sector oil refining), Natural gas/LNG Pipelines
• Investing companies in Infrastructure & Service Sector
• Defense and strategic industries
• Atomic minerals
• Print media
• Broadcasting
• Postal services
• Courier services
• Establishment or operation of the satellite
• Development of integrated township
• Tea sector
• Asset Reconstruction Company.

Procedure to be followed after investment under the Automatic Route or with Government approval?

Under foreign investment, a company needs to comply with the reporting norms. On receipt of investment and after an issue of allotment company need to intimate the Reserve Bank of India.

On receipt of Application Money:

On receiving the application money from non-residents, a private company needs to intimate foreign exchange department in RBI within 30 days of receipt along with the details like name and address of foreign investor. The above intimation shall attach the KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.

Upon Issue of Shares to Non-resident Investors:

After receiving the money the private limited company shall issue the shares within 180 days of receiving the money. The intimation of allotment of securities shall be given to Foreign Exchange Department within 30 days of the allotment. Private Company shall intimate in FCGPR along with the required documents to Authority.

Conclusion

In a majority of the sectors, FDI in Private Limited Company is eligible for 100% FDI under the automatic route. The requirement of FDI report filing is easy and comes after the receiving of money. Therefore the process of starting a business in India becomes easy and smooth for Foreign Nationals and Non-Resident Indians.