FAQ ON FDI IN INDIA

BUSINESS REGISTRATION IN INDIA - FAQ's ON FDI

Who can invest in India?

Any person who is not residing in India, or an entity not established in India (except for an entity based in Pakistan) can make their investment in India, subject to the FDI Policy. However, a Bangladeshi citizen, or an entity established in Bangladesh, needs approval from the Indian Government to make an investment.

Whether residents of Nepal and Bhutan can invest in India?

On a repatriation basis, NRIs from Nepal and Bhutan and citizens of Nepal and Bhutan are permitted to make an investment in the capital of Indian companies, if the condition that the amount for such investment is paid only as an inward remittance in free foreign exchange through normal banking channels, is met.

How many categories of Instruments are there, which can be issued to foreigners by Indian companies?

Equity shares mandatorily convertible debentures and completely compulsorily convertible preference shares can be issued by Indian companies. However, this is subject to pricing guidelines or valuation specifications which the FEMA Regulations prescribe. At the time of instruments issue itself, the pricing of the capital instruments has to be determined.

If the funds for issuing of The Preference shares/Debentures i.e. non-convertible, optionally convertible or partially convertibles are received on or after May 1, 2007, these instruments are considered as debt. This will result in the application of stipulations which are applicable for recognized lenders, ECBs relating to eligible borrowers, amount and maturity, end-use stipulations, etc.

FDI can be made into which Indian entities?

FDI can be issues by all Indian companies inclusive of micro and small enterprises (MSEs).

Whether FDI in Partnership Firm / Proprietary Concern is permitted?

Following the below given guidelines, A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can contribute to the capital of a firm or a proprietary concern in India on non-repatriation basis -

  1. Amount is invested by inward remittance or out of FCNR(B)/ NRE/NRO account maintained with Authorized Dealers / Authorized banks.
  2. The firm or proprietary concern is not part of any agricultural/plantation or real estate business or print media sector.
  3. Amount invested shall not be eligible for repatriation outside India.
  4. Investments with repatriation benefits: Partnership firms with repatriation benefits/ NRIs/PIO may get prior permission of Reserve Bank in order to make investment in sole proprietorship concerns. The Government of India will also be consulted for the application.
What are the norms of issue or transfer of shares to foreigners by Indian entities?

The capital instruments have to be issued within duration of 180 days after the receipt is made for the inward remittance or by debit to the NRE/FCNR (B) account of the non-resident investor. If this does not happen, the amount of consideration which is received has to be promptly refunded to the non-resident investor by outward remittance either via normal banking channels or by credit to the NRE/FCNR (B) account. Failing to comply with the above provision shall be considered to be a contravention under FEMA attracting penal consequences. Some exceptions can be made for amounts remaining unpaid beyond a period of 180 days. This will be in accordance to the decision taken by the RBI. However, Companies Act, 2013 specifically provides for allotment of shares within 60 days from the date of inward remittance. Thus, on combined reading, it may be inferred that allotment shall be made within 60 days of inward remittance and FC-GPR shall be filed within that duration.

What would be issue price of shares issued to non-residents?

Under the FDI policy, share prices to NRIs cannot be less than -

  • The price fixed following the SEBI guidelines, where the company shares are listed on any recognized stock exchange in India.
  • The proper share valuation by a SEBI registered Category - I Merchant Banker or a Chartered Accountant according to the discounted free cash flow method, where the company shares are not listed on a stock exchange that is recognized and
  • The price as which can be applied to share transfer between resident and non-resident governed by pricing guidelines which the RBI lays down from time to time, when there is preferential allotment of share issuing.
What are the Entry Routes for foreign investment in India?

Non-residents can invest in the equity shares/fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, via two routes, the Automatic Route and the Government Route. Under the Automatic Route, RBI or Govt of India approval is not required for the non-resident investor or the Indian company to make an investment. Under the Government Route, the Government of India needs to give its express approval through Foreign Investment Promotion Board. Proposals for foreign investment under Government route as laid down in the FDI policy are considered by the Foreign Investment Promotion Board (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance.

What are the basic Guidelines under Approval Route by FIPB for consideration of FDI proposals?

The FIPB can consider the proposals for FDI and formulate its recommendations based on the following guidelines.

  1. The Secretariat needs to put up all applications should be put up before the FIPB before the end of 15 days, and it should ensure that the comments of the administrative ministries are placed before the Board .This can be done before or during the meeting of the board.
  2. Proposals should be considered by the Board within thirty (30) days for Government decision communication.
  3. The applicant should be present in the FIPB meeting where either the proposal is not cleared or more data is needed to obviate delays.
  4. While considering cases and making recommendations, the sectoral requirements and the sectoral policies should be considered by the FIPB vis-à-vis the proposal (s).
  5. FIPB would consider each proposal in its totality.
  6. When considering proposals, the Board should examine the following:
    While considering cases and making recommendations, FIPB should ensure sectoral requirements and the sectoral policies vis-à-vis the proposal (s).
    • If the components of activities involved industrial licence or not. If so then, the considerations for permit of industrial licence must be proceeded.
    • If the proposal involves any export projection and if so the items of export and the projected location.
    • If the proposal involves any strategic or defense related considerations.
What are the different approval levels for cases under Government Route?

The approval levels required for proposals involving FDI under the Government route (requiring Govt approval) are:

  • The Minister of Finance who is in-charge of FIPB shall deal with recommendations of FIPB on proposals with total foreign equity inflow having a value upto Rs.1200 crore.
  • On proposals with total foreign equity inflow of more than Rs. 1200 crore, the recommendations of FIPB would be placed for consideration of CCEA. The FIPB Secretariat in DEA will process these suggestions to obtain the approval of Minister of Finance and CCEA.
  • The FIPB or the minister of Finance can refer the proposals to the CCEA.
Which are sectors prohibited for foreign investment in India?

In the following activities/sectors, foreign direct investment is prohibited:

  1. Lottery Business including Government / private lottery, online lotteries, etc.
  2. Gambling and Betting including casinos etc.
  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 (other than permitted activities mentioned in entry 18 of Annex B).

Note: 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.