Brief Introduction

Brief Introduction

The Foreign Investment in India is undertaken in accordance with the FDI Policy which is formulated and announced by the Government of India.

The Government of India has allowed different channels of Investment in India on basis of the entity of the foreign national.

Foreign Investment in India can be summarized in the below mentioned points:

introduction

Foreign Direct Investment in India

Foreign Direct Investment (FDI) in India is undertaken in accordance with the FDI Policy which is formulated and announced by the Government of India.

Investment in Indian companies can be made by both non-resident as well as resident Indian entities. Any non-resident investment in an Indian company is “Direct Foreign Investment”.

Investment by resident Indian entities could again comprise both resident and non-resident investments. Thus, such an Indian company would have “Indirect Foreign Investment” if the Indian investing company has foreign investment in it. The indirect investment can also be a cascading investment, i.e. through multi-layered structure.

Types of Instruments to invest in India

  • Equity shares.
  • Fully Compulsorily and Mandatorily convertible Debentures.
  • Fully Compulsorily and Mandatorily convertible Preference shares.
  • Issue of other types of preference shares such as non-convertible, optionally convertible or partially convertible, has to be in accordance with the guidelines applicable for External Commercial Borrowings (ECBs).

Entry Routes for Investment in India

Under the Foreign Direct Investments (FDI) Scheme, investments can be made in shares, mandatorily and fully convertible debentures and mandatorily and fully convertible preference shares of an Indian company by non-residents through two routes:

  • Automatic Route- Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment.
  • Government Route- Under the Government Route, the foreign investor or the Indian company should obtain prior approval of the Government of India(Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance or Department of Industrial Policy & Promotion, as the case may be) for the investment.

Who can invest in India?

  • A non-resident entity (other than citizens of Pakistan and Bangladesh or an entity incorporated in Pakistan or Bangladesh who can only invest with a prior approval of FIPB) can invest in India, subject to the FDI Policy.
  • NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis.
  • Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government route and with the prior approval of RBI if the investment is through Automatic route.
  • An FII may invest in the capital of an Indian Company under the Portfolio Investment Scheme which limits the individual holding of an FII to 10% of the capital of the company and the aggregate limit for FII investment to 24% of the capital of the company

Mode of Payment

An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures:

  • Inward remittance through normal banking channels.
  • Debit to NRE / FCNR account of a person concerned maintained with an AD (Category I) bank.
  • Conversion of Royalty / Lump sum / Technical know-how fee due for payment, import of capital goods by units in SEZ or conversion of ECB shall be treated as consideration for issue of shares.
  • Conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
  • Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD (Category I) bank on behalf of residents and non-residents towards payment of share purchase consideration.

Further, the Reserve Bank may on an application made to it and for sufficient reasons, permit an Indian Company to refund / allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.

Prohibition on Foreign Investment in India

Foreign investment in any form is prohibited in a company which is engaged or proposes to engage in the following activities:-

  • Business of chit fund
  • Nidhi company
  • Agricultural or plantation activities
  • Real estate business or construction of farm houses (does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships).
  • Trading in Transferable Development Rights (TDRs).
  • Lottery Business including Government /private lottery, online lotteries, etc.( 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).
  • Gambling and Betting including casinos etc.
  • Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
  • Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

Modes of Investment under Foreign Direct Investment Scheme

  • Issuance of fresh shares by the company
  • Acquisition by way of transfer of existing shares by person resident in or outside India:
    1. Sale or Gift of Shares/ Convertible debentures by person resident in or outside India
    2. Sale of Shares/ Convertible debentures on the Stock Exchange by person resident outside India
    3. Transfer of shares/convertible debentures from Resident to Person Resident outside India
    4. Acquisition of shares under the FDI scheme by a non-resident on a recognized Stock Exchange
  • Issue of Rights / Bonus shares
  • Issue of shares under Employees Stock Option Scheme (ESOPs)
  • Conversion of ECB / Lump-sum Fee / Royalty / Import of capital goods by units in SEZs in to Equity/ Import payables / Pre incorporation expenses
  • Issue of shares by Indian Companies under ADR / GDR
  • Through issue / transfer of ‘participating interest / right’ in oil fields to a non resident

Acquisition of shares under Scheme of Merger / Amalgamation

Mergers and amalgamations of companies in India are usually governed by an order issued by a competent Court on the basis of the Scheme submitted by the companies undergoing merger/amalgamation.

Once the scheme of merger or amalgamation of two or more Indian companies has been approved by a Court in India, the transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject to the conditions that :

  • the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap, and
  • the transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy (refer para 7(c)).

Remittance of sale proceeds

AD Category – I bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate from the Income Tax Department has been produced.

Remittance on winding up/liquidation of Companies

AD Category – I banks have been allowed to remit winding up proceeds of companies in India, which are under liquidation, subject to payment of applicable taxes.
AD Category – I banks shall allow the remittance provided the applicant submits:

  • No objection or Tax clearance certificate from Income Tax Department for the remittance.
  • Auditor’s certificate confirming that all liabilities in India have been either fully paid or adequately provided for.
  • Auditor’s certificate to the effect that the winding up is in accordance with the provisions of the Companies Act, 1956.
  • In case of winding up otherwise than by a court, an auditor’s certificate to the effect that there is no legal proceedings pending in any court in India against the applicant or the company under liquidation and there is no legal impediment in permitting the remittance.

Guidelines for calculation of total foreign investment, i.e. direct and indirect foreign investment in an Indian company

All investments made directly by non-resident entities into the Indian company would be counted towards ‘Direct Foreign Investment’.

Investment by resident Indian entities could again comprise both resident and non-resident investments. Thus, such an Indian company would have ‘Indirect Foreign Investment’ if the Indian investing company has foreign investment in it.

  • The methodology for calculation of total foreign investment would apply at every stage of investment in Indian companies and thus in each and every Indian company.
  • The full details about the foreign investment including ownership details etc. in Indian company and information about the control of the company would be furnished by the Company to the Government of India at the time of seeking approval.
  • In any sector, where Government approval is required for foreign investment and in cases where there are any inter-se agreements between share-holders which have an effect on the appointment of the Board of Directors or on the exercise of voting rights or of creating voting rights disproportionate to shareholding or any incidental matter thereof, such agreements will have to be informed to the approving authority.
  • In all sectors attracting sectoral caps, the balance equity i.e. beyond the sectoral foreign investment cap, would specifically be beneficially owned by/held with/in the hands of resident Indian citizens and Indian companies, owned and controlled by resident Indian citizens.

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