Foreign Direct Investment

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Foreign Direct Investment

For a country where capital is not readily available, Foreign Direct Investment (FDI) has been an important source of funds for companies. Under FDI, overseas money, either by an individual or entity, is invested in an Indian company. According to Organization for Economic Co-operation and Development (OECD), an investment of 10% or above from overseas is considered as FDI. In India, foreign direct investment policy is regulated under the Foreign Exchange Management Act, 2000 governed by the Reserve Bank of India.

One can invest in India – either under Automatic Route which does not require approval from RBI or under Government Route, which requires prior approval from the concerned Ministries/Departments via a single window – Foreign Investment Facilitation Portal (FIFB) administered by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry, Government of India. Apart from specified 11 sectors/activities (mentioned below), where Government approval is mandatory, applications where there is a doubt over which Ministry should the application fall under, DIPP has the responsibility of identifying who would be the concerned authority. Proposals from NRIs and Export Oriented Units, applications relating to issues of equity for import of capital goods/equipment, pre-operative/pre-incorporation expenses, etc. are also handled by DIPP.

For effective handling of cases, monthly reviews by the concerned Ministries/Authorities and quarterly review meetings, co-chaired by Secretary, Department of Economic Affairs and Secretary, DIPP are also proposed to be undertaken to discuss pendency of proposals with the Government. Various categories of foreign investors – Foreign Portfolio Investors, Foreign Institutional Investors, Foreign Venture Capital Investor, Non-Resident Indians can hold stakes in Indian business entities (company, partnership firms, proprietary concerns, LLPs) subject to conditions and sectoral caps on ownerships.

FIIs/FPIs are allowed to invest and trade in equity securities, with a maximum total investment of 24 percent of the issued and paid up capital of a company. This limit can be raised up to the prescribed sectoral cap of that particular industry by passing a special resolution to the effect. Every non-resident entity is allowed to invest in India either under Automatic or Government Approval Route, except in prohibited sectors. However, individuals or entities of Bangladesh and Pakistan can invest only under Government Route. Check out list of sectors which require prior approval as well as sectors under automatic route along with relevant sectoral caps by clicking on the links.

FDI is a capital account transaction and any violation of its regulations attracts penal provisions under FEMA. RBI administers FEMA and Directorate of Enforcement, Ministry of Finance – Government of India has the authority to investigate in case of any violation of its rules.

FDI in Partnership Firm/Sole Proprietary Concern:

NRIs or Person of Indian Origin (PIO) resident outside India are allowed to contribute to the capital of a partnership firm or sole proprietorship firm or sole proprietary concern without prior approval, provided:-

  • The contribution is on non-repatriation basis
  • Investment is done as an inward remittance, or out of NRE/FCNR (B)/NRO account maintained with AD Category-1 Bank.
  • The Indian firm or proprietary concern should not be engaged in agricultural, print media or real estate business.

In the following cases, investors may apply for prior permission of RBI and Government of India, provided the last two conditions mentioned above are adhered to:

  1. Where investment is preferred to be repatriable by NRIs/PIO/OCI
  2. For investors other than NRIs/PIO/OCI

The decision for the same will be taken by RBI and Government of India on case-by-case basis.

FDI In Limited Liability Partnership

FDI in LLPs was liberalized significantly in 2015 with the objective to promote foreign investment inflows in the country. Up to 100% FDI is allowed in LLPs, provided you are adhering to the specific sectoral limits. In that case, the investment will not require any prior approval by FIPB.

  • There are no conditions relating to FDI-linked performance.
  • Foreign companies or individuals can be appointed as Designated Partner as required under Section 7 of Limited Liability Partnership Act, 2008
  • LLPs can make further downstream investment in another company or LLP. Earlier they were not permitted to make any downstream investments.
  • Repatriation of capital is permissible with adherence of appropriate pricing guidelines and reporting requirements
  • All investments should comply with relevant provisions of LLP Act, 2008.
  • LLPs can avail External Commercial Borrowings (ECBs).
  • FPIs/FVCIs can contribute to the capital of LLPs in India.
  • In case of companies with FDI, converting into LLP can be done under the automatic route if the investment in sector concerned is within corresponding sectoral limit for automatic investment route.

FDI in Private Limited Company:

A Foreign business entity can enter India via a number of alternatives, subject to general conditions mentioned in FDI Policy:

1. As an Indian Company-

  • By setting up a wholly owned subsidiary
  • Joint Venture with an Indian entity/person

2. Operate as a foreign company and be registered with the Registrar of Companies, MCA.

  • Opening up Liaison office – This type of office is only allowed to collect market information and liaison with the foreign company. They are not allowed to earn income from any activities.
  • Branch Offices – The scope of activities of BOs is much larger as compared to Liaison Offices. BOs are allowed to generate revenue by various alternatives, such as-
    • Providing professional services
    • Providing technical support for products imported/assembled/manufactured by the parent/holding company.

3. Project Offices – Set up to execute specific projects, offices are allowed in India if:-

    • The foreign entity has secured a contract in India, which will be funded via inward remittance by either a bilateral or multilateral financing agency.
    • Loan has been sanctioned by a public financial institution or bank to the Indian company contracting the project.
    • If the above conditions are not met, the foreign investor/entity will have to make an application with RBI via its AD bank.

FDI in small scale industries:

Except for the prohibited sectors, foreign investors are allowed to invest in small-scale industrial unit operating in various sectors. The investment is limited to 24% of paid-up capital of an SSI unit. To issue more than 24% to foreign investors, SSI units have to comply with the following conditions:

A) Give up its status as SSI, i.e. exceeding prescribed limits of investment in plant and machinery according to Micro, Small and Medium Enterprises Development Act, 2006.

B) Not engage in manufacture of reserved items.

C) Comply with relevant sectoral caps.

FDI Approval Process:

FDI proposals are processed following a standard operating plan devised by DIPP. The process includes:

  1. Submission of proposal and uploading documents (mentioned below) on Foreign Investment Facilitation Portal.
  2. Department of Industrial Policy and Promotion (DIPP) assigns the case to the concerned Ministry within 2 working days.
    1. Submission of physical copies to concerned department is not required in case of digitally signed documents
    2. For applications not digitally signed, online communication to applicant will be made to submit one signed physical copy of the proposal to the Competent Authority. Applicants are required to submit required documents within 5 days of such intimation.
  3. The proposal is circulated online within 2 days to Reserve Bank of India for review from FEMA perspective. All proposals are shared with Ministry of External Affairs (MEA) and Department of Revenue (DoR) for record. Any advice/comments from above mentioned departments are directly shared with concerned Administrative Ministry/Department assigned to decide on the proposal
  4. Proposals are scrutinized within 1 week and additional information/clarifications, if required, are asked for.
  5. On getting all required information, the Competent Authority is required to give out its decision in next two weeks. Approval/rejection letters are sent online to the applicant, consulted Ministries/Departments and DIPP.
  6. Where total foreign equity inflow is more than Rs.5000 crore, the Competent Authority is required to place the same to Cabinet Committee on Economic Affairs for consideration within timelines.

Documents are required for approval:

This list is not an exhaustive list – other documents may be required based for specific cases.

  1. From both Investee & Investor Companies/Entities:
  2. Certificate of Incorporation
  3. Memorandum of Association (MOA)
  4. Board Resolution
  5. Audited Financial Statement of Last Financial Year
  6. Article of Association
  7. List of Names, addresses and identification proof of all foreign collaborators of the Investor Company/Entity.
  8. Pre-and Post-investment shareholding pattern of the Investee Company
  9. An Affidavit stating that all information provided in hard copy and online is the same and correct.
  10. In case of existing ventures, copy of joint venture agreement/shareholders’ agreement/ technology transfer/trademark/brand assignment agreement (as applicable).
  11. Copy of Downstream Intimation.
  12. Copy of relevant past FIPB/SIA/RBI approvals, connected with the current proposal.
  13. Relevant Foreign Inward Remittance Certificate (FIRC) in case investment has already flowed in.
  14. High Court order in case of scheme of arrangement.
  15. Valuation certificate as approved by a certified Chartered Accountant.

Following are the sectors where Foreign Direct Investment is prohibited in India

  1. Lottery including Government or private lotteries, online lotteries, etc.
  2. Gambling, betting including casinos etc. Foreign technology collaboration, including licensing for franchise, trademarks or brand name, is also prohibited for lottery, gambling and betting activities.
  3. Chit funds
  1. Nidhi company
  2. Real estate business or construction of farm houses – This shall not include construction of townships, residential or commercial premises, roads, bridges and Real Estate Investment Trusts (REITs) registered with SEBI
  3. Cigars, cheroots, cigarillos and cigarette manufacture
  1. Sectors not open to private investment such as-
  2. Atomic Energy
  3. Railway operations (other than permitted activities).
  4. Trading in Transferable Development Rights (TDRs). TDRs means certificates issued in respect of category of land acquired for public purposes, either by the Central or State Government in consideration of surrender of land by the owner without monetary compensation, which are transferable in part or whole.