Guidelines on Master Circular for Foreign Investment in India (Part-I)

Mater Circular for Foreign

Foreign investment in India is allowed by the Government of India. The Government of India and RBI (Reserve Bank of India) have come up with the master circular on foreign investment in India. This master circular acts as a constitution for foreign exchange regulations in India. The Government of India, along with RBI, has brought out the Foreign Exchange Management Act, 1999 (FEMA), to deal with foreign exchange regulations. Under Section 6(3) of the FEMA, the provisions of foreign investment in India are enumerated.

The RBI, from time to time, brings up notifications and circulars for foreign investment in India. Out of the notifications and circulars, the master circular is one of the main amendments to foreign exchange regulations. The master circular on foreign investment in India has been developed from time to time by the RBI.

The master circular on foreign investment governs the mode of investments in India and the permissible structures for accepting foreign investment in India. Apart from this, the master circular covers the compliances required for various entities such as companies, partnership firms, limited liability partnership firms, and non-resident Indians.

RBI gives directions to authorized banks/authorized dealers (category-I) for carrying out transactions related to foreign investment in India. The 2015 master circular is divided into two parts. Part I covers the Schematic representation for foreign direct investment.

Part I of the Master Circular covers the following:

  • Section I deals with Foreign Direct Investment (FDI).
  • Section II deals with Foreign Investment under Portfolio Schemes (PIS).
  • Section III deals with Foreign Venture Capital Investments.
  • Section IV deals with other investments made by foreign companies in India.
  • Section V deals with the reporting requirements of foreign investment in India for FDI and Portfolio Scheme.

Part II of the Master Circular deals with investments in a partnership firm and sole proprietorship firm. Apart from this, part II also has forms for foreign investment compliance.
 This article will be covering part I of the master circular on foreign investments in India.

Section I of the Master Circular- Foreign Direct Investment

Foreign Direct Investment must be differentiated from Overseas Direct Investment. FDI is considered as direct investment by a foreign company, a non-resident Indian, a foreign wholly-owned subsidiary in an Indian entity. The scheme of FDI in India was brought out by the Department of Industrial Policy and Promotion (DIPP). Apart from this, the Government of India, Ministry of Commerce and Ministry of External Affairs have guided the applicability of foreign direct investment in India.

Under the FDI policy, foreign companies are allowed to subscribe or purchase shares of an Indian company. The government would require prior approval under specific sectors.

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A foreign entity can acquire the following securities on an Indian company under foreign direct investment:

  • Compulsory Convertible Preference Shares;
  • Convertible Debentures; and
  • Equity Shares.

There are two routes for investing in India. The following are the routes prescribed by the government:

Routes for Foreign Investment
  • Automatic Route- In the Automatic Route, no prior approval is required from the Government of India. Therefore an investor can invest 100% of the FDI through the automatic route. A non-resident investor, going through the automatic route does not require any form of prior approval from the government for carrying out an investment.
  • Approval Route/ Government Route- The approval route is also called the government route. Under the government route, prior approval is required from the Government of India. In 2020, the government of India has amended the requirements for investments from neighbouring countries that share land borders with India. Prior approval (Government Approval) is required from Bangladesh, Nepal, Bhutan, Pakistan, Myanmar, Afghanistan, and China before making foreign investment in India.

Investments under this are also allowed by Erstwhile OCB, which is formed outside India. However, the investments made by Erstwhile OCB have to be according to the prescribed RBI guidelines. For this purpose, a certificate is required from the RBI.

Foreign direct investment is allowed for securities such as equity securities, convertible notes, and CCPS. Usually, the above instruments are only issued to a non-resident investor or a foreign company for FDI. Under the routes of FDI, the Indian company would generally offer an optionality clause to the foreign company.

The optionality clause will include the following:

  • Buyback of shares or securities from the foreign investor or the Non-resident Indian; and
  • Minimum Lock-In period of one year.

This clause would apply to foreign investors and non-resident Indians. The lock-in period is for one year. After this period, the foreign investor is allowed to sell the security. Under no circumstance is the foreign investor bound to the security after the closure of the lock-in period.

Pricing Guidelines for FDI under the Master Circular

The pricing of securities must be under the standards which are governed internationally. Pricing for shares and securities is different for listed and unlisted companies.

The following are the prices:

  • Listed Companies- Prices are predetermined and go by the guidelines of the SEBI listing regulations.
  • Unlisted companies- Prices are determined on an arm’s length basis. However, the pricing has to be carried out by a SEBI registered merchant banker or a chartered accountant. The prices of shares are required to be determined as per international standards.

Mode of Payment by a foreign investor / NRI under the Master Circular

The following are the methods used for subscribing to shares in an Indian company:             

  • Any form of inward remittance carried out through normal banking channels. This is carried out when the remittance is sent from a foreign bank to the Indian bank.
  • The relevant NRE/ FCNR account maintained by the Authorised Bank (Category-I) is debited for subscribing to the shares of the company.
  • Conversion of External Commercial Borrowings can be taken as consideration for the issue of shares.
  • Royalty/ Capital Fee/ Lump sum or Technical Knowhow for capital goods imported into the country is the consideration for the shares.
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What are the modes of transfer of shares under FEMA?

An Indian company can transfer shares to a foreign investor. Apart from this, shares can also be transferred from a resident in India to a person resident outside India.

The shares can be transferred to the following parties.

  • From a Non-resident Indian to Another Non-Resident Indian- Shares can be transferred by way of sale or purchase. Shares can also be transferred by way of gift.
  • From a Non-resident Indian to a Resident Indian- Shares under this method can be transferred by way of sale or by a gift.
  • Person Resident in India to Person Resident outside India- Shares transferred by an Indian resident to a foreign investor would be through the FDI route. The foreign investor has to subscribe to the shares in the Indian company and make payments.
  • A resident Indian can also transfer person Resident in India to Person Resident outside India under the Government Route- Shares can be transferred to a foreign investor under the government route. Prior approval is required for the same from the respective government department and sector regulatory authority.

Section II of the Master Circular- Foreign Investment under the Portfolio Investment Scheme

A portfolio is considered as a cluster of securities in a registered stock exchange. Stock exchanges in India are governed by the Securities and Exchange Board of India. The law which regulates stock exchanges in India is the Securities and Exchange Board of India Act, 1992. Therefore foreign investment under a portfolio has to comply with the requirements of the RBI and the SEBI. Any form of foreign investment in a portfolio is called as Portfolio Investment Scheme (PIS).

The following foreign entities are allowed to invest under the Portfolio Investment Scheme:

  • Foreign Institutional Investors- These investors have to be registered with the requirements of the SEBI. They are allowed to acquire and purchase shares and securities in a listed company.
  • Non-Resident Indians- Non-resident Indians are also permitted by the Authorised dealer and RBI to invest in the portfolio investment scheme.

For the operation of the portfolio investment scheme, the investors have to operate as per the requirements of the RBI.

There are particular conditions which have to be followed for investment under the portfolio investment scheme:

  • A foreign portfolio investor can invest in freely transferable securities such as equity, preference shares, bonds, derivatives of mutual funds.
  • The Securities have to be registered in a recognized stock exchange.
  • The investment made in an FPI should not be more than 10% of the paid-up equity share capital.
  • For a listed entity, the portfolio investment should not be more than 10%.
  • For a non-resident investor, the paid-up capital should be up to 5% of the investment.

Under the Master Circular, portfolio investments are only specifically for entities that are registered under a recognized stock exchange.

Section III of the Master Circular- Investment through the Foreign Venture Capital Investor (FVCI)

This section deals with foreign venture capital investors (FVCI). A FVCI is a financial institution registered with SEBI. A foreign venture capital investor can invest in the Indian Venture Capital Undertaking (IVCU) or a Venture Capital Fund (VCF).

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Investment by a Foreign Venture Capital investor would be subject to approval from the RBI. They would also be subject to sector caps from the prescribed regulatory authority.

An IVCU is understood as an entity or a company that does not have its shares listed in a recognized stock exchange. Apart from this, the IVCU does not take part or have any form of negative activity listed under the SEBI regulations. A Venture Capital Fund can be understood as a trust or a corporation that is registered under the Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996, which has a cluster of securities as per the SEBI regulations. The fund also invests in different venture capital undertakings as per the regulations.

Mode of Operation of FVCI under Master Circular

FVCI can purchase debentures and securities of an IVCU or a venture capital fund. These units are purchased through a scheme that is arranged by the venture capital fund. Securities are purchased through public offers of securities or private placement of securities. FVCI is also permitted to invest in a stock exchange as per the SEBI venture capital fund regulations.

When approval for operating is given to the FVCI, the RBI will request the FVCI to open a non-resident bearing rupee account with the authorized bank category-I. Authorized banks are allowed to provide forward cover to the FVCI for inward remittance from the FVCI.

Section IV of the Master Circular- Investment in other Foreign Securities

Non-resident Indians are also allowed to invest in other securities. The proceeds from the investment in the above securities will be either repatriable or non-repatriable.

NRIs can purchase and acquire the following on a Non-Repatriable Basis:

  • Convertible Debentures;
  • Warrants issued by the Indian Company;
  • Government Securities;
  • Treasury Bills; and
  • Domestic Mutual Funds.

NRIs are not allowed to make any form of investments in Small Savings Schemes, including the Public Provident Fund.
For non-repatriable investment, the sale proceeds will be credited to the NRO account.

NRIs can purchase and acquire the following on a Repatriable Basis:

  • Government Dated Securities without any Limit;
  • Domestic Mutual Funds;
  • Bonds under a Public Sector Undertaking;
  • Shares in Public Sector Enterprises; and
  • National Pension Scheme.

Payment shall be made for the acquisition of such securities through normal banking channels.

Section V of the Master Circular- Reporting compliances for FDI and PIS

This section of the Master Circular speaks about the compliances required for FDI and PIS.

Some of the reporting that is required to be carried out by the Indian Company is as follows:

  • A fresh issue of shares- Submission of R-returns required.
  • FC-GPR Compliance- For the issue of shares for FDI. This compliance must be carried out within 30 days of issue of shares.
  • Annual Return on Foreign Assets and Liabilities- for FDI received in the previous year or the current year, this compliance has to be provided.
  • FII Reporting under the Portfolio Investment Scheme.
  • NRI investment reporting under the PIS scheme.


The Master Circular on foreign investment provides guidelines for different modes of foreign investment in India. Out of all the above modes of foreign investment, Foreign Direct investment is one of the most used methods to invest in India. Investments under this route can be made under the automatic route or the approval route. Foreign portfolio investment is an investment made by a foreign investor in a portfolio. FVCI is an investor that invests in an IVCU or VCF. NRIs are allowed to make investments in government securities on a repatriable and non-repatriable basis. Compliances have to be reported on time under FEMA[1] reporting norms to avoid penalties.

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