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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:
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.
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.
A foreign entity can acquire the following securities on an Indian company under foreign direct investment:
There are two routes for investing in India. The following are the routes prescribed by the government:
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:
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.
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:
The following are the methods used for subscribing to shares in an Indian company:
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.
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:
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:
Under the Master Circular, portfolio investments are only specifically for entities that are registered under a recognized stock exchange.
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).
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.
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.
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:
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:
Payment shall be made for the acquisition of such securities through normal banking channels.
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: