Businesses that want to set up offices in a foreign country have to follow several compliances....
Foreign Direct Investment (FDI) has been an essential source of funds for countries where capital is not readily available. Through Foreign Direct Investment, an individual or entity can invest overseas money in an Indian Company. The Foreign Direct Investment policy in India is regulated under the Foreign Exchange Management Act (FEMA), 1999, and governed by the Reserve Bank of India (RBI). As per the data provided by the Organization for Economic Co-operation and Development (OECD), an investment of more than 10% or 10% from overseas is considered as FDI.
FEMA acts as an essential source for the growth and development of various sectors in India. The primary aim of FEMA is to facilitate external trade, promote orderly development, and balance payments and also to maintain foreign exchange in India. Below is the list of important provisions for foreign investment compliance under FEMA:
As per FEMA, all the forex-related offenses are civil offences, whereas FERA regarded them as criminal offences. Additionally, there are other guidelines, too, that must be followed. They are as follows:
Foreign Direct Investment or FDI can be made through two routes. They are:
As per Regulation 16 of FEMA 20 (R), foreign investment is permitted through the automatic route without receiving any prior approval of the Government or the Reserve Bank of India, in all the activities or sectors.
Activities that are not covered in FDI under automatic route needs prior approval of the Government. The Government has provided proper guidelines regarding the same.
Capital Instruments can be referred to as equity shares, preference shares, debentures, and share warrants issued by an Indian Company.
Equity Shares: The shares issued in accordance with the provisions of Companies Act, 2013, are known as equity shares. It includes partly paid equity shares issued on or after 8th July, 2014.
Share warrants: Share warrants that have been issued on or after 8th July, 2014 is considered as capital instruments.
Debentures: ‘Debentures’ here means fully, mandatorily, and compulsorily convertible debentures.
Preference shares: ‘Preference’ shares for this purpose means fully, compulsorily and mandatorily convertible preference shares.
For the purpose of Foreign Direct Investment, the persons who can acquire Capital Instruments on the stock exchanges are as follows:
A person resident outside India needs to file form FC-TRS for the purpose of transfer of capital instruments by way of sale in accordance with FEMA 20 R, from:
One does not need to file the form FC-TRS for the following:
The compliances prescribed by FEMA for Foreign Direct Investment are as follows:
An Annual Return must be mandatorily filed by all the Indian resident companies which have received FDI or made ODI in any of the previous financial years, including the current year. This annual return is made for foreign assets and liabilities, also known as FLA Return.
If in case the Indian Company does not have any outstanding investment with respect to Foreign Direct Investment or ODI as at the end of the reporting year, the Company is not bounded to submit FLA Return.
Also, if the Indian Company has not received any fresh Foreign Direct Investment or Overseas Direct Investment (ODI), then that Company still needs to submit an FLA Return every year by 15th July.
Any resident individual or an Indian party or entity who has made any Overseas direct Investment needs to submit an Annual Performance Report (APR) IN Form ODI Part II to the AD bank. This report is filed with respect to Joint Venture (JV), Wholly Owned Subsidiaries (WOS) outside India. This must be done on or before 31st December every year.
The borrowers need to report all the external commercial borrowings or ECB transactions to the RBI on a monthly basis through an AD Category-I bank. The form prescribed to complete the same is ECB2 Return to be filed on a monthly basis.
Form FC-GPR, LLP-I, LLP-II, FC-TRS, CN, ESOP, DI, DRR, InVi needs to be filed and submitted under the head Single Master form. The Reserve Bank of India has also released a user manual to bring clarity regarding the procedure for filing a single master form, which was introduced on 7th June, 2018. This form was introduced for the purpose of integrating the existing reporting norms for foreign investment in India.
If an Indian Company receives investment from outside India for the issue of shares or any other eligible securities as per the FDI Scheme, the same must be reported to the Regional Office concerned of the Reserve Bank. The details of the amount must be provided through the AD category bank within 30 days from the date of issue of shares.
This form is issued by RBI as per the Foreign Exchange Management Act, 1999. This form is furnished when the Company receives the foreign investment and against such investment made the Company allots shares to the foreign investor. It is the duty of the Company to file all the required details regarding such allotment of shares with the RBI. Then the RBI within a time span of 30 days has to use the form FC-GPR or Foreign Currency-Gross Provisional Return for submitting details with the RBI.
The FC-TRS is also known as Foreign Currency Transfer. It is a form that is used by a shareholder resident outside India, whether it be an Indian resident or vice versa, when they transfer their shares. The form FC-TRS must be filed along with Form FC-GPR, which needs to be submitted to its authorized dealer bank, who will further submit the same document to RBI.
A resident individual and an Indian party is required to submit form ODI while making an overseas investment. The concerned party must submit the share certificates or any other documentary evidence of investment made in foreign JVs or WOS. The certificate must be submitted to the designated AD within 30 days.
Foreign Portfolio Investors (FPIs), Overseas Citizens of India (OCIs), Non-Resident Indians (NRIs), Multilateral Development Bank, Foreign Central Banks, Long term investors like the Sovereign Wealth Funds, Multilateral Agencies/ Endowment Funds, Insurance Funds and Pension Funds having done registration with SEBI as a Long Term Investor can invest in other securities as mentioned in Schedule 5 to Notification No FEMA 20.
Foreign Venture Capital Investor’ (FVCI) refers to an investor that is incorporated and established outside India. It must also complete its registration process with the Securities and Exchange Board of India under the Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000.
There are no restrictions under the FEMA for making investment in the Rights shares, which is issued at a discount by an Indian company according to the provisions of the Companies Act, 2013. The actual offer on rights basis made to the persons resident outside India is as follows:
One can invest in India via Automatic Route which does not require approval from RBI or as per the Government Route, which requires prior approval from the concerned Ministries or Departments via a single-window – Foreign Investment Facilitation Portal (FIFB) administered by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry, Government of India. All proposals are shared with the Ministry of External Affairs (MEA) and the Department of Revenue (DoR) for the record. Any advice or comments from the above-mentioned departments are directly shared with the concerned Administrative Ministry or Department assigned to decide on the proposal. Proposals are scrutinized within one week, and additional information or clarifications, if required, are asked for. On getting all the required information, the Competent Authority needs to give out its decision.
Also, Read: Types of Foreign Investment in India.