FDI Compliances in India: A Complete Overview

FDI Compliance in India

In the countries where capital is not easily available Foreign Direct Investment (FDI) is a vital source of funds for such countries. Under the FDI Compliances in India, the money overseas is available for investment in an organization established in India. In India, the Foreign Direct Investment (FDI) policy is regulated under the FEMA (Foreign Exchange Management Act), 1999. The Reserve Bank of India (RBI) governs the Foreign Direct Investment Policy of India.

As per the international regulatory authority Organization for Economic Cooperation and Development (OECD), an investment of more than 10% or 10% from overseas is considered as FDI. In this article, we will discuss the FDI Compliances in India.                      

What is FDI Compliances in India?

Under FDI Compliances in India, the overseas money either by an entity or individual is invested in a Corporation in India. Under FDI Compliances in India, an investment can be made by a person or company in one country for business interest in another country. Such an investment can be made to either obtain business resources or set up business operations in another country. An example of such an investment is controlling or ownership interest in a foreign organization.

There are two types of FDI Compliances in India. The following FDI Compliances in India stands for the flow of money, which are as follows:

  • Inward FDI
  • Outward FDI

The Inward FDI Compliances in India happens when an investment of foreign capital is made in local resources. Such investment results in low-interest rates and tax breaks.

The Outward FDI is a reverse flow of the inward FDI Compliances in India. Outward FDI Compliances in India are also known as direct investment abroad. This outward net inflow is also known as a stock of foreign direct investment and stands for the collective number for a given time period.

The different bodies constituted for FDI Compliances in India are as follows:

  • Foreign Investment Promotion Council (FIPC);
  • Foreign Investment Promotion Board (FIPB);
  • Secretariat for Industrial Assistance (SIA);
  • Department of Industrial Policy & Promotion (DIPP); and
  • Foreign Investment Implementation Authority (FIIA).

FDI Compliances in India for different Corporations

Any foreign corporation can invest through the various FDI Compliances in India in the following entities:

FDI Compliances in Partnership Firm

Persons of Indian Origin (PIO) or NRIs (residents outside India) are permitted to contribute to the capital of the Partnership Firm. No prior approval is required for such a contribution.

There are certain conditions which are to be satisfied before any such contribution in a Partnership firm which is as follows:

  • The contribution made by individuals is on non-repatriation basis.
  • The investment made by individuals done as inward payment or out of NRE/FCNR (B)/NRO accounts that are maintained with AD Category-1 Banks.
  • The Partnership firm should not be engaged in print media, agricultural, or real estate business.
  • The investors can also apply for a prior permission of the Reserve Bank of India (RBI) and Government of India (GOI) in the following cases:
    • Where the investment made by the person is preferred to be repatriable by PIO (Person of Indian Origin) or NRIs.
    • For the investors other than PIO (Person of Indian Origin) or NRIs.
  • The decision for the prior approval will be taken by the Reserve Bank of India (RBI) and the Government of India (GOI) based on different cases.
  • Partnership firms and sole proprietary concerns set up abroad are not allowed to establish Branch or liaison offices in India.
READ  All you need to know about Authorised Person under FEMA

FDI Compliances for a Limited Liability Partnership

FDI in Limited Liability Partnership (LLP’s) was liberalized expressively in the year 2015. The primary objective was to promote and enhance foreign investment inflows in the country. In LLP’s up to 100% FDI is allowed, provided the person concerned is obeying the explicit sectoral limits.

In the case where the person is already adhering to the sectoral limits, the investment will not require any prior approval by the RBI under the approval route.

The primary points to be considered are as follows:

  • No conditions concerning the FDI-linked performance are there.
  • An individual or Foreign company may be appointed as the required Designated Partner under Section 7 of the Limited Liability Partnership Act, 2008.
  • Limited Liability Partnerships are allowed to make any further downstream investment in an LLP or another company. Previously, LLPs were not permitted to make any type of downstream investments.
  • Repatriation of the capital invested is permissible with adherence to proper pricing guidelines and requirements of reporting.
  • All the investments are required to comply with the relevant provisions of the Limited Liability Partnership Act, 2008.
  • Limited Liability Partnerships can also avail of the ECB’s (External Commercial Borrowings).
  • FPIs (Foreign Portfolio Investors) or FVCIs (Foreign Venture Capital Investors) can also contribute to the capital of LLPs in India.
  • In the case of the companies with Foreign Direct Investment (FDI), conversion into an LLP can be done. Such a conversion can be done under the automatic route. Under the automatic route, the conversion is possible only if the investment in the concerned sector is within the corresponding sectoral limit.

FDI Compliances for a Private Limited Company

Any business entity overseas can enter the territory of India through a number of alternatives. There are certain general conditions that are required to be followed.

The general conditions are mentioned in the FDI Policy, which is as follows:

  • As an Indian Entity or Company:
FDI Compliances for a Private Limited Company
  • The Operation should be as a foreign company, and the registration of the company should be with the Registrar of Companies (ROC) under the Ministry of Corporate Affairs.
  • A Liaison, branch office or a foreign office should be set up in India. The Liaison Office is only permitted to collect all the required market information and liaison for the foreign company. The foreign companies are not allowed to earn any type of income from any activities.
  • The foreign companies are also required to open Branch Offices. The primary scope of the activities of Branch Offices is much broader as compared to the other Liaison Offices.
READ  Understanding the legal aspects of Adjudicating Authority under FEMA

Branch Offices are permitted to generate revenue by many alternatives, such as:

FDI Compliances
  • The foreign companies are also required to open certain Project Offices. Project Offices are set up to execute specific projects. The establishment of Project Offices in India is allowed under the following cases:
    • The foreign entity has already secured a contract in India, which will be funded through inward remittance by a bilateral or multilateral financing agency.
    • The loan is sanctioned by any public financial institution or bank to the Indian company contracting the project.
  • In case the conditions, as mentioned earlier, are not met, the foreign investor/entity is required to make an application with the Reserve Bank of India through its AD category bank.
  • Branch, Liaison, and Project Offices of foreign companies in India are required to open a non-interest-bearing current account. The bank accounts are opened in the Reserve Bank of India (RBI) through the AD Banks.

The application for setting up of offices in India is required to be made in Form FNC-1 to Reserve Bank of India along with:

  • Incorporation Certificate of Company attested by Notary Public or Indian Embassy in their home country.
  • Memorandum of Association certified by Notary Public or Indian Embassy in their home country.
  • Articles of Association certified by Notary Public or Indian Embassy in their home country.
  • The latest Audited Balance Sheet of the company.

The FNC-1 form is required to be submitted to the designated AD bank for any further submission. The submissions are made to the relevant department of the Reserve Bank of India (RBI) (Foreign Investment Division) at Mumbai.

The NRIs are also permitted to contribute to the capital of companies in India. Such a contribution can be made by investing in the shares on Recognized Stock Exchanges under the Portfolio Investment Route. The investment done by the people can be repatriable or non-repatriable. The maximum limit of investment is 10% of the paid-up capital of the relevant company.

The above-mentioned maximum limit can be raised by up to 24%. Such an extension can only be done by passing a special resolution for the same in the company.

The investment is made as an inward remittance, or through an NRE/FCNR (B)/NRO account maintained with the AD Category-1 Banks. A detailed report of all such investments is required to be filed with the Reserve Bank of India by AD Bank.

READ  Foreign Investors to Pay Higher Taxes Starting from April 1

FDI Compliances in Small Scale Industries

The foreign investors are permitted to invest in small-scale industrial units operating in several sectors. These small-scale industries do not include the prohibited sectors. The investment in small-scale industries is restricted to 24% of the paid-up capital of an SSI unit.

For issuance of more than 24% to the foreign investors, the SSI units are required to comply with the following conditions:

  • Give up the status as SSI, i.e., exceeding the minimum prescribed limits of investment in machinery and plant and according to Micro, Small, and medium enterprises (MSME) Development Act, 2006[1].
  • Not engage in the manufacturing of reserved items.
  • Should be in Compliance with the appropriate sectoral caps.

What are the additional guidelines set up by FEMA for FDI Compliances in India?

The additional guidelines for FDI Compliances in India are as follows:

  • FEMA does not apply to Indian citizens who are residing outside India. This condition is checked by calculating the total number of days a person resided in India during the preceding financial years. It was also specified that even a branch, an office, or an agency could be a ‘person’ for the purpose of checking the residency.
  • FEMA authorized the Central Government of India to impose certain restrictions and supervise the following three things:
    • payments made to a person outside India or any receipts from them,
    • forex, and
    • foreign security deals.
  • Under FEMA foreign exchange transactions can be divided into two categories – capital account and current account. In a capital account transaction, the alteration occurs to the liabilities and assets outside India or inside India but of a person who is a resident outside India. Any transaction that changed the overseas liabilities and assets for an Indian resident in a foreign country, or vice versa, is classified as a capital account transaction. Any other transaction comes under the category of the current account.
  • FEMA also specifies the areas around acquisition or holding of forex that require certain permission of the Reserve Bank of India (RBI) or the Government of India (GOI).


A person or company overseas can invest in India through the Automatic Route. This Route does not require any prior approval from the Reserve Bank of India. On the other hand, prior approval is required if a person or company invests in India through the Government Route. The Government Route requires prior approval from the concerned Ministries or Departments.

The foreign investor is required to go through the FDI Compliances in India. There are certain general requirements that a foreign investor is required to adhere before making any investments in India. To make an investment in India, a person or company overseas is necessary to consult an experienced professional.

We at Enterslice have trained professionals to help you understand all the essential FDI Compliances in India. Our professionals will assist and help you with the concept of FDI in India. Our professionals will ensure the efficient and timely completion of your work.

Also, read: Analysis on Types of Foreign Investment in India: FPI, FDI and FI

Trending Posted