FEMA

Key Aspects under FEMA Inbound Regulations

FEMA Inbound Regulations

Inbound Investment means any investment made by a foreign investor in the capital instruments of Indian Companies. The trend of inbound investment rose after the LPG reform in 1991. As the economies opened up for doing business at an international level, there was a transfer of technology, development of industries, innovation, increase in employment opportunities. The country which channeled more inbound investment witnessed economic growth and development. In this way, Inbound Investment started to play a major role in the economic growth and development of the country and became a key source for foreign non-debt investments. In this blog, we will discuss FEMA Inbound Regulations.

With the LPG Reform in 1991, the Government of India also introduced various reforms in the domestic laws of the country. It framed laws to attract inbound investments. Since, then the FEMA inbound regulations have been consistently eased to attract more investment. Any inbound investment in India is subject to the FEMA Act & Regulations, Companies Act, etc. In this article, we will be dealing with the FEMA Inbound Regulations relating to inbound investments.

Majorly, the Inbound Investment in India is made under the FDI Policy announced by the Government of India and is governed by the FEMA, 1999[1] as amended from time to time. FEMA Regulations prescribe the mode of investments i.e. the procedure for the receipt of funds, issue of equity or preference shares or convertible debentures and reporting of the investments to the RBI. Inbound investment can take place either directly or through joint ventures in all sectors except those which have been specifically prohibited.

Entry Routes for making inbound investments – FEMA Inbound Regulations

The Reserve Bank of India is the primary authority responsible for inbound investments under FEMA Inbound Regulations. As per Regulation 16 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulation, 2017 there are two routes provided for making inbound investments:

1) Automatic Route

2) Government Approval Route.

Under the Automatic Route, no approval from RBI is required. However, under the government approval route, specific compliances are required to be made for getting the approval. On the basis of the routes, the investment is categorized into four:

  1. Sectors where 100% FDI is permitted under automatic route.
  2. Sectors where 100% FDI is permitted but with government approval.
  3. Sectors where FDI beyond a specific limit require Government approval.
  4. Sectors, where FDI is permitted under both routes, are subject to a certain limit.
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Types of Inbound Investments

  1. Foreign Direct Investment (FDIs) – This is the main source of inbound investments in India. FDIs can be made in made either in a listed company or an unlisted company. Any foreign investment in a listed company which goes beyond 10% capital of the company will be termed as an FDI. Further, all foreign investments made in unlisted companies are termed as FDI.
  2. Foreign Portfolio Investments (FPIs) – FPI is an investment in an Indian listed company where foreign investments upto 10% of the capital of the company are permissible. However, where the FPI crosses 10% of the paid-up capital, it becomes an FDI. Once it is an FDI, it will not become an FPI even if the capital falls below 10% of the paid-up capital of a listed company.
  3. Foreign Investment – It is an investment made by a foreigner on a repatriable basis in the capital instruments of a partnership or a company.

Sectors Prohibited from making Inbound Investments under FEMA Inbound Regulations

As per Regulation 15 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulation, 2017 and unless otherwise specifically provided in the Act or the rules or regulations framed, the following activities are strictly prohibited from receiving inbound investments:

  1. Lottery Business including Government/ private lottery, online lotteries
  2. Gambling and betting including casinos
  3. Chit funds
  4. Nidhi company
  5. Trading in Transferable Development Rights (TDRs)
  6. Real Estate Business or Construction of Farm Houses.
  7. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
  8. Activities/ sectors not open to private sector investment e.g. (I) Atomic energy and (II) Railway operations
  9. Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities
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Eligibility criteria for investors making an inbound investment as per FEMA Inbound Regulations

The FEMA Inbound regulations provide for the formulation of FDI Policies. The FDI Policy, 2020, prescribes the following criteria for making an inbound investment:

  1. A non-resident entity can invest in India subject to the condition that the country to which the entity belongs does not share a border with India or the beneficial owner of the investment is neither situated nor is a citizen of any country sharing a border with India. If the entity is based in a country sharing a border with India or the beneficial owner of the investment is based in a country sharing a border with India then such inbound investments can only be possible under the Government approval route further, such inbound investments cannot be made in the sectors of defence, space, atomic energy and sectors prohibited for foreign investment. Additionally, if there is a transfer of ownership of any existing or future inbound investment which directly or indirectly results in the transfer of beneficial ownership to an entity sharing a border with India then such beneficial ownership will also require Government Approval.
  2. Citizens and NRI residents can make investments on a repatriation basis and the amount of consideration shall be paid by way of inward remittance in free foreign exchange through normal banking channels.
  3. Only those Overseas Corporate Bodies (OCBs) which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments otherwise the OCBs were derecognized from making investments in India.
  4. Special dispensation is provided to those companies, trust and partnership firms owned and controlled by NRIs and willing to invest in India.
  5. Under Schedule II of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, FPIs can make investments.
  6. As per Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, the registered FPIs and NRIs can invest in the capital of Indian Companies through a registered broker.
  7. As per the terms and conditions provided under Schedule VII of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Foreign Venture Capital Investors (FVCI) can make investments.
  8. NRIs and OCBs are also eligible to subscribe to National Pension System provided it has to be done through normal banking channels and the person investing is eligible to invest as the provisions of the Pension Fund Regulatory and Development Authority (PFRDA).
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Eligibility criteria for an Indian Entity to receive an inbound investment

As per the FDI Policy, any Indian Company, Partnership firm or proprietary concern is eligible to receive inbound investment subject to the following conditions:

  • Any investment by an NRI in a partnership firm or proprietary concern on a non-repatriation basis shall be by way of inward remittance or out of the account maintained by Authorized banks/dealers.
  • NRIs have to seek prior approval from the RBI to invest in a sole proprietorship or partnership concerned with the repatriation option.
  • A non-resident has to get prior approval from the RBI to invest in a firm or a proprietorship concern. In consultation with the Government of India, RBI will decide whether or not to grant such consultation.
  • NRIs are restricted from investing in any agricultural or plantation activity, real estate, and print media.

Conclusion

From the above, it is clear that the policies for inbound investments (under FEMA Inbound Regulations) have been liberalized by the Indian Government. Almost all sectors welcome inbound investment except those explicitly prohibited. Such liberal policies have made India one of the most attractive economies to invest in. After the 2020 amendment, India has also witnessed a rise in inbound investment despite the global pandemic and lockdown situation. Having a liberal law might facilitate huge investments however, such laws must also ensure safety. Investment from the wrong hands may compromise the safety of the nation. It is important to maintain proper checks and balances while making laws welcoming foreign investors.

Also Read: FEMA and Taxation issues in Inbound Investments

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