Foreign Investment

Is Foreign Direct Investment (FDI) Allowed in an OPC?

Foreign Direct Investment (FDI) has been a critical factor in fuelling the economic growth rate of the developing world. FDI involves foreign entities investing in organizations, infrastructure, or projects in other lands by acquiring a stake in a domestic company or establishing operations. In the context of India, it has been used to boost industrial growth and significantly create employment while fostering innovation.

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A Brief Take on OPC in India

However, the One Person Company (OPC) concept was introduced in India under the Companies Act of 2013. It is one type of business setup drafted that looks at the needs and aspirations of entrepreneurs who prefer to be or have to be, on their own, to enjoy the benefits of a corporate entity without the complexities of partners or a board of directors.

OPCs follow the principles of limited liability, ease of management, and lower regulation, just like larger entities. However, the meeting point of Foreign Direct Investment and OPCs in India has raised a lot of questions.

Know About the One Person Company (OPC)

Before going into detail about FDI in OPCs, it is essential to understand what an OPC is. An OPC is an entity that, in effect, is a cross between a Sole Proprietorship and a private limited company; it allows a single entrepreneur to pursue a business venture with a corporate structure and limited liability, where the owner’s personal assets are protected from the business’s indebtedness.

As per the definition under Section 2(62) of the Companies Act, 2013, OPC means a company having only one person as a member. An OPC can operate with just one member, unlike other traditional companies, which mandate at least two directors and shareholders. This very point becomes quite beneficial to small businesses and lone entrepreneurs who wish to take advantage of becoming an incorporated company without all the hassles of forming a traditional company.

Despite the many privileges, an OPC has some limitations. First, it has to avoid non-banking financial investment activities, which are investments in the securities of any corporate body. Second, an OPC cannot convert itself into a private limited company unless two years have passed since its incorporation, the paid-up share capital is higher than INR 50 lakh, or the average annual turnover is higher than INR 2 crore.

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Exploring Foreign Direct Investment (FDI)

Foreign Direct Investment involves investments from a foreign entity into the equity of a resident company or setting up operations within the economy of the host country. It is distinguished from indirect investments, such as investments through stock markets. Foreign Direct Investment is also considered a source of economic development, modernization, and employment generation in the host country.

FDI in India is regulated by the Foreign Exchange Management Act and the guidelines formed by the Reserve Bank of India. Over the years, the government of India has liberalized a significant number of FDI norms in various sectors to make India an attractive investment destination. This has also resulted in substantial FDI inflows into the technology, manufacturing, pharmaceutical, and infrastructure industries. FDI is allowed along two routes:

1. Automatic Route: Foreign Direct Investment is allowed in specified sectors without the approval of the government or the RBI.
2. Government Route: In sectors where foreign direct investment is not allowed through the automatic route, the government must give some prior approval.

 The entry routes differ from industry to industry, as do the permissible limits and sectoral caps, all of which, in turn, change with the government’s changing and evolving economic policies.

However, ensure your OPC’s foreign investment complies with FEMA regulations to navigate FDI Compliance seamlessly.

Regulatory Framework of FDI in One Person Companies (OPCs)

The regulatory environment for FDI in OPCs faces some complexity primarily because OPCs are a relatively new concept in India based on single ownership. According to the Companies Act, 2013, an OPC is a company where one person holds all shares. In this unique ownership structure, the concept of FDI is challenging because usually, when a foreign investor tries to invest money in domestic corporations, it leads to shared ownership.

Indian law generally prohibits FDI in OPCs. One-person companies, by their very nature, are to be owned by a single shareholder who is a resident of India. Thus, this structure doesn’t complement the traditional model of FDI, where a foreign company or individual acquires shares or stakes in an Indian entity.

However, there is one important limitation to this. For example, there could be a situation where the NRI has Indian citizenship. Such an NRI can start an OPC on an FDI basis, and investment by the NRI may be treated on par with foreign direct investment under these circumstances. However, it needs to be noted that it is non-repatriation-based, which means the profits earned cannot be transferred back to the investor’s home country.

The rules are more stringent regarding investment on a repatriation basis. The Foreign Exchange Management Act (FEMA) and the Reserve Bank of India (RBI) will follow guidelines about sectoral caps, pricing, and reporting requirements. Any FDI in OPC shall necessarily have to follow these regulations.

Investment Routes and Conditions for FDI in OPCs

 FDI in OPCs is principally restricted due to their peculiar structure. However, certain conditions are considered, and NRI investment in OPCs is permitted. The investment is permitted on two basis such as a non-repatriation basis and a repatriation basis.

Investment on Non-Repatriation Basis

The non-repatriation basis investment route is considered a domestic investment. Therefore, NRIs can invest in OPCs in India just like any other Indian investor. It is easier this way than the repatriation basis because it fits better under the framework of domestic investment. Following are some of the key features and conditions of this route for investment:

• Treatment as Domestic Investment: Since the investment is treated as domestic, it is exempted from most of the restrictions and compliance matters normally applicable under FDI. This would also include the non-applicability of FEMA pricing guidelines during the investment time.

The amount invested is treated no differently than any other local investment, thus enabling the NRI to become involved in the Indian economy without the complications associated with managing foreign investment laws.

•  Source of Funds: The investment to be made should be remitted from abroad through normal banking channels or should be drawn from the Non-Resident External (NRE), Foreign Currency Non-Resident (FCNR), or Non-Resident Ordinary (NRO) account maintained in India as per the regulations of the Foreign Exchange Management (Deposit) Regulations, 2016.

• Sectoral Restrictions: This route is simpler but still has some restrictions regarding the type of industry or sectors where the investment can be made. For instance, NRIs cannot invest in OPCs involved in prohibited sectors like real estate business, construction of farmhouses, and dealing in Transferable Development Rights.

This ensures that investments are channelled into permissible industries conducive to the country’s broader economic objectives.

• Credit of Disinvestment Proceeds: In case an NRI decides to sell the OPC or its assets, the disinvestment proceeds will have to be credited to the NRO account of the NRI investor. This is a key point that establishes that the original investment itself is non-repatriable in nature; these funds will have to remain within India’s borders and cannot be repatriated back to the investor’s country of residence.

• Simplicity and Accessibility: Due to the less stringent regulatory environment encircling it, non-repatriation is a more viable entry point for NRIs to invest in Indian OPCs. It also offers a premise for promoting and encouraging domestic entrepreneurship, enabling NRIs to participate in the emerging entrepreneurship ecosystem in India with an assurance of retaining capital within the country.

In summary, investment in OPC on a non-repatriation basis provides the NRI community with easier and smoother access to participate in the growth of the Indian economy, particularly in industries or sectors in which they may be interested. The lesser regulatory burden, along with the alignment of such investment with domestic investment practices, is very appealing to the intentions of NRIs who want to help Indian entrepreneurship without getting entangled in the maze of foreign investment regulations.

Investment on Repatriation Basis

When an NRI invests on a repatriation basis, it attracts the following regulatory frameworks: sectoral caps, pricing guidelines, and reporting requirements in terms of FEMA and RBI guidelines.

• Compliance is necessary for such investments, such as filing forms like FCGPR (Foreign Currency-Gross Provisional Return), FCTRS (Foreign Currency-Transfer of Shares), and FLA (Foreign Liabilities and Assets).
• The sale proceeds of investments made through this route may be credited to an NRE account or transferred to any foreign bank account after payment of applicable taxes.
• Specific sectors, such as non-repatriation routes, are banned from investing on a repatriation basis. These activities include gambling, real estate business, manufacture of certain tobacco products, and sectors falling under reserved categories not open to private sector investments, including atomic energy and railway operations.

Conclusion

Foreign Direct Investment FDI in OPC is an intriguingly complex issue relating to the interaction between foreign investment policies and the changing entrepreneurial environment in India. Although OPC genuinely offers a different kind of corporate structural entity that caters to solo entrepreneurs with benefits such as limited liability and simplified regulatory compliances, the nature of the single-person ownership model inherently presents a challenge for the traditional FDI, which is typically based on a shared ownership model.

Indian law generally bars FDI in OPCs because of the requirement that OPCs shall be wholly owned by one resident Indian. However, NRIs can invest in OPCs upon satisfaction of certain conditions. NRI investments on a non-repatriation basis are viewed as domestic investments, which smoothes the process and aligns quite well with India’s broader economic objective of encouraging domestic entrepreneurship. Explore how your OPC can navigate the complexities of FDI regulations. Visit our website www.enterslice.com  for expert guidance for complying with foreign investment strategies.

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