Investment in India

Foreign Investment in India

I. Foreign Direct Investment

The Industrial Policy governs the Foreign Direct Investment in India. Both – FEMA and Industrial Policy (including consolidated FDI Policy) – should be read together to have a full picture. Sectoral limits for Foreign Direct Investments and Investments by NRIs are almost at par excepting the sector of Housing and Real Estate Development, and Domestic Airlines. Various avenues and policy for foreign investment are covered in brief. For FDI purposes an NRI means an individual resident outside India who is a citizen of India.

Investment is generally allowed in an Indian company, which is engaged in any business. Branches, liaison offices and project offices can be opened for limited purposes. In SEZs, non-residents can invest as a branch/unit, Joint Venture or a Wholly Owned Subsidiary on automatic basis. Investment in a proprietorship, partnership or Association of Persons, is subject to RBI permission in certain cases.

Investment can be made by an incorporated entity, or individuals. Unincorporated entities cannot invest. However, citizens and incorporated entities of Pakistan and Bangladesh are permitted to invest under the FDI Scheme only after obtaining prior Government approval. The Indian Company in which the investment is proposed should not be engaged/should not engage in sectors/activities pertaining to space and atomic energy and sectors/activities prohibited for foreign investment. Citizens and incorporated entities of Bangladesh can invest only after obtaining prior Government approval.

List of FDI:-

When investment in India can be made in almost ANY sector without any approval from any authority, this is known as the “Automatic route”. Even for the small list of sectors or investment exceeding permissible sectoral caps, which are not under the “automatic route”, a specific approval should be taken from Secretariat of Industrial Assistance (SIA)/Foreign Investment Promotion Board (FIPB)/Government of India/Department of Economic Affairs (DEA).

FDI is prohibited in the following activities/sectors:

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., Atomic Energy.
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.

FDI is also permitted in LLPs

• Entry Route – Automatic route in LLP’s operating in sectors/ activities where 100% FDI is allowed through Automatic Route and there are no FDI linked performance conditions.
• Capital Contribution - An LLP can receive foreign capital contribution only by cash consideration, received by inward remittance, through normal banking channels or by debit to NRE/FCNR account of the person concerned, such account being maintained with an authorised dealer/ bank.
• Investment in LLPs by Foreign Portfolio Investors (FPIs) and Foreign Venture Capital Investors (FVCIs) is not permitted.
• LLPs are not permitted to avail External Commercial Borrowings (ECBs).

FDI in LLP is subject to compliance of the LLP Act, 2008

Reporting Requirements

With a view to promoting ease of reporting of transactions under foreign direct investment, the Reserve Bank of India, under the aegis of the e-Biz project of the Government of India has enabled the filing of the following returns with the Reserve Bank of India viz.

• Advance Remittance Form (ARF) – used by the companies to report the foreign direct investment (FDI) inflow to RBI; and
• FCGPR Form – which a company submits to RBI for reporting the issue of eligible instruments to the overseas investor against the abovementioned FDI inflow.
• FCTRS – which the non-resident has to submit to the AD at the time of transfer of shares / debentures between a resident and a non-resident along with other necessary documents.

The Forms are to be digitally signed. The forms are required to be filed online. The certificates and other documents to be filed will have to be scanned and uploaded together.

An Indian Company should report the following through e-biz portal:

• Details of the investment from outside India not later than 30 days from the date of receipt along with copies of FIRCs evidencing the receipt of the remittance along with the KYC report.
• Reporting of issue of capital instruments in the Form FC-GPR not later than 30 days from the date of issue of capital instruments.
• Reporting of transfer of capital instruments in the Form 
  FC-TRS within 60 days from the date of receipt of funds or date of transfer whichever is earlier.
• Reporting of issue of shares against non cash consideration (Details of issue of shares against conversion (full/partial) of ECB).
• Reporting of FCCB/ADR/GDR issues within 30 days from the date of closing of the issue.
• A Company Secretary’s certificate also has to be filed in the specified format confirming fulfilment of various legal requirements.
• A Chartered Accountant’s or statutory auditor’s certificate indicating the manner of arriving at the price at which the capital instruments have been issued, is also required to be submitted.
• Thereafter, every year before July 15, Annual return on Foreign Liabilities and Assets has to be filed directly with the Director, Balance of Payment Statistical Division, RBI detailing all investments by way of direct / portfolio / 
  re-invested earnings / others in the Indian company during the preceding financial year.

Allotment of shares has to be done within 60 days from the date of receipt of inward remittance or debit to NRE / FCNR (B) account, as the case may be.

Foreign Portfolio Investor (FPIs)

FPIs such as Pension Funds, Investment Trusts, Asset Management Companies, etc., who have obtained registration from SEBI, are permitted to invest on full repatriation basis under FDI Policy as well as under in the Indian Primary & Secondary Stock Markets (including OTCEI) including in unlisted, dated Government Securities, Treasury Bills, ‘to be listed’ debt securities, Units of Domestic Mutual Funds and commercial paper without any lock-in period.

Limits on investments are:

1. The total holdings of all FPIs in any Company will be subject to a ceiling of 24% of its total paid-up capital or paid up value of each series debentures or preference shares or share warrants. The Company concerned can raise this ceiling of 24% up to the sectoral cap/statutory ceiling as applicable.
2. A single FPI cannot hold more than 10% of the paid-up capital or paid up value of each series debentures or preference shares or share warrants of any Company.
3. A FPI may trade in all exchange trade derivative contracts approved by SEBI from time-to-time subject to the limits as prescribed in by SEBI.
4. A FPI, having 10% or more than 10% of total paid-up capital or paid up value of each series debentures or preference shares or share warrants, the total investment made by the FPI shall be re-classified as FDI subject to the conditions as specified by SEBI and RBI.

II. Foreign Venture Capital Investor (FVCI)

FVCIs can invest in securities, issued by an Indian Company engaged in sectors which are permitted for the same and even those securities which are not listed on recognised stock exchange at the time of issue of such securities. They can also invest in securities issued by a Start-up enterprise irrespective of their sector/activity. A registered Foreign Venture Capital Investor (FVCI) may, through the Securities and Exchange Board of India, apply to the Reserve Bank for permission to invest in a VCF or in a scheme floated by such VCFs. The domestic VCF must however be registered with SEBI. The registered FVCI may purchase equity/ equity linked instruments/debt/debt instruments, debentures of a VCF through Initial Public Offer or Private Placement or in units of schemes/funds set up by a VCF. The amount of consideration for investment in VCFs shall be paid out of inward remittance from abroad through normal banking channels or a Special Non-Resident Rupee (SNRR) account maintained in accordance with the FEM (Deposit) Regulations, 2016. There is no limit on investments, but if the investment is in capital instruments then the sectoral caps, entry routes and attendant conditions shall apply. Form FC-GPR – Part ‘A’ has to be filed with RBI, through the company’s bankers, within 30 days of allotment of securities. Form FC-TRS will be applicable in case of transfer of shares between a resident and non-resident.

III. International Financial Institutions

Multilateral Development Banks, which are specifically permitted by the Government to float rupee bonds in India, are permitted to purchase Government dated securities.

IV. Investments by Non-Resident Employees of Indian Companies, etc.

An Indian Company can issue shares up to 5% of its paid-up capital to its employees or employees of its overseas joint venture or wholly owned subsidiary resident outside India, under a SEBI approved Employees Stock Options Scheme. These shares cannot however be issued to employees who are citizens of Pakistan/Bangladesh without Government Approval.

V. Investments by NRIs / PIOs

NRI can invest in shares and convertible debentures of Indian companies. OCB are barred from investments. They can invest as any other foreign company i.e., additional investment facilities available to NRIs now cannot be exercised through OCB. However, OCB who have existing investments in India can be granted case-by-case approval by RBI for additional investments.

Foreign investment policy for foreigners applies equally to NRI for repatriable investment. There are only two sectors – Real Estate Development and Domestic Airlines – where investment facilities are different for NRIs and foreigners.

RBI has granted general permission to NRI / PIO to acquire shares from other NRI / PIO.

NRIs from Nepal are also permitted to make direct investments on repatriation basis if they remit funds in foreign exchange.

Portfolio Investment in companies, other than those engaged in the print media sector, listed on Stock Exchanges permitted up to 5% for each NRI subject to overall ceiling of 10% of the company's capital. The company concerned can increase this limit of 10% to 24%.

NRI may invest in exchange traded derivative contracts approved by SEBI from time-to-time out of INR funds held in India on non- repatriation basis subject to the limits prescribed by SEBI.

NRIs are permitted to invest up to 100% in PSE Capital/PSU Bonds, Government Securities (other than Bearer Securities), units of UTI & instruments of domestic Mutual Funds (referred to in Section 10 (23D) of the Income-tax Act, 1961).

Purchase of shares by NRIs from existing resident shareholders is permitted under the automatic route if the specified conditions are satisfied.

NRI/PIO can invest on non-repatriation basis in all sectors except plantations, nidhis, chit funds and real estate trading. In such cases restrictions placed on investments made on repatriation basis will also not apply.

NRIs can repatriate their investments which were originally made on non-repatriation basis subject to RBI approval if:

1. The original investment was made in foreign exchange under the FDI Scheme, and
2. The sector / activity in which the investment was made is proposed to be converted into repatriable equity and is under the automatic route for FDI.

If the above two conditions are not met approval will have to be obtained from the government for conversion of non-repatriable equity into repatriable equity.

NRIs are now permitted to credit the sale proceeds of FDI investment in their NRE/FCNR (B) accounts, provided the investment was received by way of remittance from abroad or by way debit to NRE/FCNR (B) account of the investor.

VI. Conversion into equity

An Indian company can issue, subject to certain terms and conditions, equity shares / preference shares under the Approval Route:

1. By way of conversion of ECB (other than import dues deemed as ECB or Trade Credit), lump sum technical knowhow fees, royalty or any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or RBI.
2. By way of conversion of monies payable against import of capital goods/machineries/equipment (other than second- hand machineries).
3. Against receipt of money from overseas investor towards pre-operative/pre-incorporation expenses (including payments of rent, etc.).

VII. Investment Facilities in brief