PROCEDURES FOR FOREIGN INVESTMENT IN INDIA

BUSINESS REGISTRATION IN INDIA - PROCEDURES

What are the forms in which Business Registration in India can be conducted by a Foreign Company?

A foreign company planning to set up business operations in India may:

Company Incorporation in India under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.
Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

What is the procedure for receiving Foreign Direct Investment in an India Company Incorporation?

An Indian company may receive Foreign Direct Investment under the two routes as given under :

i) Automatic Route :

FDI up to 100 per cent is allowed under the automatic route in almost all the activities/sector. FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India. Sectors /Activities not permitted under automatic route have to take approval from FIPB (Government Route) for investing in India.

ii) Government Route:

FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve Bank of India for receiving inward remittance and for the issue of shares to the non-resident investors.

The Indian company having received FDI either under the Automatic route or the Government route is required to report in the Form FC-GPR, Annexure II, the details of the receipt of the amount of consideration for issue of equity instrument viz. shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares through an AD Category –I Bank, together with copy/( ies) of the FIRC evidencing the receipt of inward remittances along with the Know Your Customer (KYC) report on the non-resident investors from the overseas bank remitting the amount, to the Regional Office concerned of the Reserve Bank of India within 30 days from the date of receipt of inward remittances. Further, the Indian company is required to issue the equity instrument within 180 days, from the date of receipt of inward remittance or debit to NRE/FCNR (B) account in case of NRI/ PIO.

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.

After issue of shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares, the Indian company has to file the required documents in Form FC-GPR with bank in which funds were received. Bank will forward the FC-GPR and the documents to Regional office of Reserve Bank of India.

Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route?

FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

Lottery Business including Government / private lottery, online lotteries, etc.
Gambling and Betting including casinos etc.
Chit funds
Nidhi company
Trading in Transferable Development Rights (TDRs)
Real Estate Business or Construction of Farm Houses
Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
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.

What is the procedure to be followed after investment is made under the Automatic Route or with Government approval?

Indian companies including those which are micro and small enterprises (MSEs) can issue capital against FDI.

a) On receipt of share application money :

Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Regional Office concerned of the Reserve Bank of India, under whose jurisdiction its Registered Office is located, through bank in which funds have been received in Form ARF (Advanced Remittance Form), containing the following details:

Name and address of the foreign investors
Date of receipt of funds and the Rupee equivalent
Name and address of the authorized dealer through whom the funds have been received
Details of the Government approval, if any and
KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.

b) Upon issue of shares to non-resident investors :

Within 30 days from the date of issue of shares, a report in Form FC-GPR together with the following documents should be filed with the Regional Office concerned of the Reserve Bank of India through bank in which investment has been received.

Refund of Investment amount: In case, equity shares are not issued within 60 days of receipt of funds, the amount shall be refunded immediately to the non-resident investor.

Filing FLA Return: Every Indian company receiving FDI has to file Annual Return of Foreign Liabilities and Assets by 15th July of the relevant year. Non-filing of the return before due date will be treated as a violation of FEMA and penalty clause may be invoked for violation of FEMA.

What are the consequences of failure to comply with the above requirements?

If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.

Alternatively, the person/ company in default may also voluntarily apply for compounding of contraventions under FEMA, 1999 to the Reserve Bank by submitting the application to the Directorate of Enforcement.

What are the guidelines for transfer of existing shares from non-residents to residents or residents to non-residents?

A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can vest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided

a) Transfer of shares/ fully and mandatorily convertible debentures from Non-Resident to Resident:

The term ‘transfer’ is defined under FEMA as including "sale, purchase, acquisition, mortgage, pledge, gift, loan or any other form of transfer of right, possession or lien” {Section 2 (ze) of FEMA, 1999}. The FEMA Regulations give specific permission covering the following forms of transfer i.e. transfer by way of sale and gift. These permissions are discussed below :

Transfer of shares/ fully and mandatorily convertible debentures by way of sale :
A person resident outside India can freely transfer shares/ fully and mandatorily convertible debenture by way of sale to a person resident in India as under :
- Any person resident outside India (not being a NRI or an erstwhile OCB), can transfer by way of sale the shares/ fully and mandatorily convertible debentures to any person resident outside India or an NRI may transfer by way of sale, the shares/ fully and mandatorily convertible debentures held by him to another NRI only provided that the person to whom the shares are being transferred has obtained prior permission of the Central Government to acquire the shares if he has previous venture or tie up in India through investment in shares or debentures or a technical collaboration or a trade mark agreement or investment by whatever name called in the same field or allied field in which the Indian company whose shares are being transferred is engaged.
- Any person resident outside India may sell shares/ fully and mandatorily convertible debenture acquired in accordance with the FEMA Regulations, on a recognized Stock Exchange in India through a registered broker.
- Any person resident outside India may also sell share or convertible debenture of an Indian company to a resident subject to adherence to pricing guidelines, documentation and reporting requirements as specified from time to time.
- Shares/convertible debentures of Indian companies purchased under Portfolio Investment Scheme by NRIs and erstwhile OCBs cannot be transferred, by way of sale under private arrangement.

Transfer of shares/ fully and mandatorily convertible debentures by way of Gift :
A person resident in India may transfer by way of sale to a person resident outside India any shares/ fully and mandatorily convertible debenture of an Indian company whose activities (other than financial service sector activities1) fall under the Automatic Route of the FDI Scheme provided the parties concerned comply with the FDI sectoral limits, pricing guidelines, documentation and reporting requirements for such transfers, as may be specified by the Reserve Bank of India, from time to time.

However, the above general permission is not available where :
1. The transfer of shares/ fully and mandatorily convertible debentures falls within the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended from time to time.
2. The transfer of shares/ fully and mandatorily convertible debentures is at a price which does not adhere to the pricing guidelines specified by the Reserve Bank of India from time to time.
3. The activity of the Indian investee company falls outside the automatic route and where FIPB approval has been obtained for the said transfer.

Can a person resident in India transfer security by way of gift to a person resident outside India?

A person resident in India who proposes to transfer security by way of gift to a person resident outside India [other than an erstwhile OCBs] shall make an application to the Central Office of the Foreign Exchange Department, Reserve Bank of India furnishing the following information, namely:

Name and address of the transferor and the proposed transferee
Relationship between the transferor and the proposed transferee
Reasons for making the gift.
In case of Government dated securities, treasury bills and bonds, a certificate issued by a Chartered Accountant on the market value of such securities.
In case of units of domestic mutual funds and units of Money Market Mutual Funds, a certificate from the issuer on the Net Asset Value of such security.
In case of shares/ fully and mandatorily convertible debentures, a certificate from a Chartered Account on the value of such securities according to the guidelines issued by the Securities & Exchange Board of India or the Discounted Free Cash Flow Cash (DCF) method with regard to listed companies and unlisted companies, respectively.
Certificate from the Indian company concerned certifying that the proposed transfer of shares/convertible debentures, by way of gift, from resident to the non-resident shall not breach the applicable sectoral cap/ FDI limit in the company and that the proposed number of shares/convertible debentures to be held by the non-resident transferee shall not exceed 5 per cent of the paid up capital of the company.
The transfer of security by way of gift may be permitted by the Reserve bank provided :
1. The donee is eligible to hold such security under Schedules 1, 4 and 5 to Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.
2. The gift does not exceed 5 per cent of the paid up capital of the Indian company/ each series of debentures/ each mutual fund scheme
3. The applicable sectoral cap/ foreign direct investment limit in the Indian company is not breached
4. The donor and the donee are relatives as defined in section 6 of the Companies Act, 1956.
5. The value of security to be transferred by the donor together with any security transferred to any person residing outside India as gift in the calendar year does not exceed the rupee equivalent of USD 25,000.
6. Such other conditions as considered necessary in public interest by the Reserve Bank.

What if the transfer of shares from resident to non-resident does not fall under the above categories?

In case the transfer does not fit into any of the above categories, either the transferor (resident) or the transferee (non-resident) can make an application to the Reserve Bank for permission for the transfer of shares. The application has to be accompanied with the following documents:

A copy of the FIPB approval (if required).
Consent letter from transferor and transferee clearly indicating the number of shares, name of the investee company and the price at which the transfer is proposed to be effected.
The present/post transfer shareholding pattern of the Indian investee company showing the equity participation by residents and non-residents category-wise.
Copies of the Reserve Bank of India's approvals/ acknowledged copies of FC-GPR evidencing the existing holdings of the non-residents.
If the sellers/ transferors are NRIs / OCBs, the copies of the Reserve Bank of India's approvals evidencing the shares held by them on repatriation / non-repatriation basis.
Open Offer document filed with the SEBI if the acquisition of shares by non-resident is under SEBI Takeover Regulations.
Fair Valuation Certificate from the SEBI registered Category-I-Merchant Banker or Chartered Accountant indicating the value of shares as per the following guidelines :
1. where shares of an Indian company are listed on a recognized stock exchange in India, the price of shares transferred by way of sale shall not be less than the price at which a preferential allotment of shares can be made under the SEBI Guidelines, as applicable, provided that the same is determined for such duration as specified therein, preceding the relevant date, which shall be the date of purchase or sale of shares.
2. where the shares of an Indian company are not listed on a recognized stock exchange in India, the transfer of shares shall be at a price not less than the fair value to be determined by a SEBI registered Category – I - Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow (DCF) method.

What are the reporting obligations in case of transfer of shares between resident and non-resident ?

Transaction should be reported by submission of form FC-TRS to the AD Category – I bank, within 60 days from the date of receipt/remittance of the amount of consideration. The onus of submission of the form FC-TRS within the given timeframe would be on the resident in India, the transferor or transferee, as the case may be.

What is the method of payment and remittance/credit of sale proceeds in case of transfer of shares between resident and non-resident ?

The sale consideration in respect of the shares purchased by a person resident outside India shall be remitted to India through normal banking channels.
In case the buyer is a Foreign Institutional Investor (FII) / Foreign Portfolio Investor (FPI), payment can be made by debit to its Special Non-Resident Rupee Account.
In case the buyer is an NRI, the payment shall be remitted to India through normal banking channel or by way of debit to his NRE/FCNR (B) accounts. If the shares are acquired on non-repatriation basis by NRI, the consideration can also be paid by debit to his NRO account.
The sale proceeds of shares (net of taxes) sold by a person resident outside India) may be remitted outside India.
In case of FII the sale proceeds may be credited to its special Non-Resident Rupee Account.
In case of NRI, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to his NRE/FCNR(B) accounts and if the shares sold were held on non repatriation basis, the sale proceeds may be credited to his NRO account subject to payment of taxes.
The sale proceeds of shares (net of taxes) sold by an erstwhile OCB may be remitted outside India directly if the shares were held on repatriation basis and if the shares sold were held on non-repatriation basis, the sale proceeds may be credited to its NRO (Current) Account subject to payment of taxes, except in the case of erstwhile OCBs whose accounts have been blocked by Reserve Bank.

Are the investments and profits earned in India repatriable?

All foreign investments are repatriable (net of applicable taxes) except in cases where the investment is made or held on non-repatriation basis or where the sectoral condition specifically mentions non-repatriation.

Further, dividends/ profits (net of applicable taxes), on foreign investments, being current income can be remitted outside India through an Authorised Dealer bank.

What are the guidelines on issue and valuation of shares in case of existing companies?

The pricing shall be as per the following guidelines:

(1) The price of shares issued by an Indian company or transferred from a person resident in India to a person resident outside India shall not be less than:

the price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company;
the valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker, in case of an unlisted Indian Company.

Note: in case of convertible capital instruments, the price/conversion formula of the instrument should be determined upfront at the time of issue of the instrument. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations.

(2) The price of shares transferred by a person resident outside India to a person resident in India shall not exceed:

the price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company;
the valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker, in case of an unlisted Indian Company.

Note: The guiding principle would be that the person resident outside India is not guaranteed any assured exit price at the time of making such investment/ agreement and shall exit at the price prevailing at the time of exit.

(3) In case of swap of shares, subject to the condition that irrespective of the amount, valuation involved in the swap arrangement will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.

(4) Where shares in an Indian company are issued to a person resident outside India in compliance with the provisions of the Companies Act, 2013, by way of subscription to Memorandum of Association, such investments shall be made at face value subject to entry route and sectoral caps.

These pricing guidelines shall not be applicable for investment by a person resident outside India on non-repatriation basis.

Can a foreign investor invest in Preference Shares? What are the regulations applicable in case of such investments?

Yes. Foreign investment through preference shares is treated as foreign direct investment. However, the preference shares should be fully and mandatorily convertible into equity shares within a specified time to be reckoned as part of share capital under FDI. Investment in other forms of preference shares requires to comply with the ECB norms.

Can shares be issued against Lumpsum Fee, Royalty and ECB?

An Indian company eligible to issue shares under the FDI policy and subject to pricing guidelines as specified by the Reserve Bank from time to time, may issue shares to a person resident outside India :

being a provider of technology / technical know-how, against Royalty / Lumpsum fees due for payment and
against External Commercial Borrowing (ECB) (other than import dues deemed as ECB or Trade Credit as per RBI Guidelines).
Provided, that the foreign equity in the company, after the conversion of royalty / lumpsum fee / ECB into equity, is within the sectoral cap notified, if any.

What are the other modes of issues of shares for which general permission is available under RBI Notification No. FEMA 20 dated May 3, 2000?

FDI compliant instruments, as applicable can be issued by Indian companies as follows:

ESOP
Sweat Equity
Bonus
Rights
Swap of Shares
On merger/ de-merger/ amalgamation etc of Indian companies
Against any other funds payable to a person resident outside India, the remittance of which does not require the prior approval of the Reserve Bank or the Government of India.

Can a foreign investor invest in shares issued by an unlisted company in India?

Yes. As per the regulations/guidelines issued by the Reserve Bank of India/Government of India, investment can be made in shares issued by an unlisted Indian company.

Can a foreigner set up a partnership/ proprietorship concern in India?

Only NRIs/PIOs are allowed to set up partnership/proprietorship concerns in India on non-repatriation basis.

Is a non-resident permitted to acquire shares on stock exchange?

The following persons can acquire FDI compliant instruments on the stock exchanges:

FPIs and FIIs registered with SEBI
NRIs
A non-resident, other than portfolio investor, is eligible to acquire shares on stock exchange through a registered broker subject to the condition that the non-resident investor has already acquired and continues to hold the control in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations i.e. he has complied with the minimum stake requirement under SEBI Regulations as per instructions contained in AP (DIR Series) Circular No. 38 dated September 6, 2013.

What will be the modes of payment for non-residents permitted to acquire shares on stock exchange?

Non-Residents permitted to acquire shares under the scheme can use following modes for payment of shares:

by way of inward remittance through normal banking channels, or
by way of debit to the NRE/ FCNR account of the person concerned maintained with an authorised dealer/ bank;
by debit to non-interest bearing Escrow account (in Indian Rupees) maintained in India with the AD bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2000;
the consideration amount may also be paid out of the dividend payable by Indian investee company, in which the said non-resident holds control, provided the right to receive dividend is established and the dividend amount has been credited to specially designated non-interest bearing rupee account for acquisition of shares on the floor of stock exchange.