Foreign Investment: Compliance under RBI/FEMA

Foreign Investment

Foreign Investment or FDI is mostly made in open economies as & when compared to tightly regulated economies in India

What is FDI in India & Regulatory compliance under FEMA Act?

FDI is the abbreviation of Foreign Direct Investment. FDI can be defined as an investment made in business interest by a company or individual of one country in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company.

The following is the key feature of foreign direct investment:

  • The investment made by a company in another company either establishes an effective control in the company in which investment is made.
  • Or the investing company has a substantial influence on the decision making of the company in which investment is made.

FDI is mostly made in open economies as & when compared to tightly regulated economies.

While making the foreign direct investment not only capital investment is required but also management, as well as technology, is also required.

According to the Organization for Economic Co-Operation and Development (OECD), an investment of 10% or above from overseas is considered as FDI.

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As per our report, India has become the fastest growing investment region for foreign investors. In India, FDI is regulated under the Foreign Exchange Management Act, 2000 governed by Reserve Bank of India.

Sectors in which FDI is prohibited:

There are following sectors in which FDI is prohibited:

  • Lottery Business including Government / private lottery, online lotteries, etc.
  • Gambling and Betting including casinos etc.
  • Chit funds.
  • Nidhi Company.
  • Trading in Transferable Development Rights (TDRs).
  • Real Estate Business or Construction of Farm Houses.
  • In the manufacturing of cigarettes, Cigars, or any tobacco or tobacco substitutes.

Activities/sectors not open to private sector investment e.g. (I) Atomic energy and (II) Railway operations

Entry Routes for Foreign Investment in India:

A company can make Foreign Direct Investment in India by two routes:

  • Government Route: Under the Government route the foreign investor should obtain the prior approval of the Government of India i.e. approval of :

(a) Foreign Investment Promotion Board (FIPB),

(b) Department of Economic Affairs (DEA),

(c) Ministry of Finance or Department of Industrial Policy & Promotion for the investment.  

  • Automatic Route: Under this route, the investor does not require any approval from the Reserve Bank of India or Government of India for the investment.

Sector-specific Foreign Direct Investment in India:

  1. Hotel & Tourism: 100% FDI is permissible on the automatic route.
  2. Non- Banking Financial Companies: 49% FDI is permissible in automatic route.
  3. Insurance Sector: 26% FDI is permissible in automatic route.
  4. Trading Companies: 51% FDI is permissible, but 100% FDI is permissible if the company does the following activity:
    • Bulk Import
    • Cash and wholesale trading.
  5. Call Centres: 100% FDI is permissible.
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Who can invest in India?

  • A non-resident entity (other than citizens of Pakistan and Bangladesh or an entity incorporated in Pakistan or Bangladesh who can only invest with a prior approval of FIPB) can invest in India, subject to the FDI Policy.
  • NRIs resident in Nepal and Bhutan, as well as citizens of Nepal and Bhutan, are permitted to invest in the capital of Indian companies on repatriation basis.
  • An FII i.e. Foreign Institutional Investors may invest in the capital of an Indian Company under the Portfolio Investment Scheme which limits the individual holding of an FII to 10% of the capital of the company and the aggregate limit for FII investment to 24% of the capital of the company.
  • Erstwhile OCBs which is incorporated outside India and which is not been served with the adverse notice of RBI.

How can an Indian Company receive FDI?

There are following instruments through which an Indian Company can receive FDI:

  • Equity shares issued in accordance with the provisions of the Companies Act, 2013;
  • Fully and mandatorily convertible preference shares
  • Fully and mandatorily convertible debentures.
  • Partly paid equity shares and
  • Warrants issued by an Indian company in accordance with the provision of the Companies Act, 2013 and the SEBI guidelines as the case may be.

Following requirements are to be to be compiled while making FDI:

  • Share capital declaration Form on the letterhead of the company has to be submitted to the bank (with Company seal and authorized signature) before the FDI can be credited to the Indian Companies bank account.
  • Following documents need to be submitted to the bank (Authorized Dealer)
    • FDI intimation Form
    • Covering letter
    • Foreign inward remittance certificate (FIRC) in the original.
  • Submission of FC-GPR Form along with:
    • Covering letter
    • Form FC-GPR (Part A)
    • Original FIRC
    • Certificate from Company Secretary of the company accepting investments  from foreign (if the company doesn’t have full-time CS, a certificate from PCS may be submitted)
    • Certificate from CA or Statutory Auditors indicating the manner of arriving at share price (using DCF method)
    • Copy of Letter of Intimation forwarded to RBI (as per step 3 above)
    • KYC report of foreign investor (remitting party) (would be already with us by then, refer step 2 above)
    • RBI approval for taking on record shares if already issued to the non-resident shareholder
    • MoA
    • Board resolution approving the FDI in India.
    • File Form MGT-14, Form GNL-2 and Return of Allotment in Form PAS-3 with ROC.

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