FDI in India
Table of content
1.0 REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT (FDI) IN INDIA
2.0 MEANING OF FDI IN INDIA
3.0 ELIGIBLE ENTITIES FOR INVESTING IN INDIA
4.0 ELIGIBLE ENTITIES INTO WHICH INVESTMENT CAN BE MADE
5.0 INSTRUMENTS FOR RECEIVING FDI IN AN INDIAN COMPANY
6.0 ENTRY LEVEL PROCESS AND STRATEGY
7.0 FOREIGN INVESTMENT PROMOTION BOARD
8.0 PROHIBITED SECTORS OF FDI
9.0 PERMITTED SECTORS AND SECTOR SPECIFIC POLICY FOR FDI
10.0 DOWNSTREAM INVESTMENTS BY AN INDIAN COMPANY THAT IS NOT OWNED AND/OR CONTROLLED BY RESIDENT ENTITY/ENTITIES
REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT (FDI) IN INDIA
The regulatory framework governing Foreign Direct Investment (FDI) in India consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.
The policy with respect to FDI is regulated by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, in the Government of India. The Circular on Consolidated FDI Policy, issued by DIPP, which is updated every year, makes provisions in respect of FDI, foreign technical collaborations, royalty payments, joint ventures abroad etc.
The DIPP makes policy pronouncements on FDI through Press Notes/ Press Releases. Till May 2015, DIPP has issued twelve press notes in this regard. These press notes/press releases are notified by the Reserve Bank of India (RBI) as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No. FEMA 20/2000-RB dated May 3, 2000). These notifications take effect from the date of issue of Press Notes/ Press Releases, unless specified otherwise therein. In case of any conflict, the relevant FEMA Notification will prevail. Also the RBI issues a Master circular every year in July on “Foreign Investments in India” compiling the regulatory framework and instructions issued by the Reserve Bank on the subject which automatically stands withdrawn and replaced by a new master circular in the next year.
The procedural instructions regarding FDI are issued by the RBI vide A.P. Dir. (series) Circulars. [RBI authorizes ‘Authorised Persons’ to deal with matters related to foreign exchange, FDI etc as per directions issued by RBI in this regard. These directions are issued through these A.P (Dir) circulars where A.P stands for ‘Authorised Person’ and DIR stands for ‘Directions’]
Foreign Investment in India can broadly be divided into the following:
- Foreign Direct Investment (FDI) - by person resident outside India – through the automatic route or government route of approval.
- Foreign Portfolio Investment - by Non resident Indians (NRIs) and Foreign Institutional Investors (FIIs)
- Investments in Government Securities, Non-convertible Debentures etc. – by NRIs, FIIs, Persons of Indian Origin (PIO) etc.
- Foreign Venture Capital Investments (SEBI registered)
- Investments on Non-Repatriable basis – by NRI and PIO
As per the Consolidated FDI Policy (effective from May 12th, 2015), “FDI” is defined to mean “investment by non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000”.
The following persons can invest in India subject to the under-mentioned stipulations:
1). Non-Resident Indian and Non-Resident Entities
A non-resident Indian or entity can invest in India subject to the FDI policy of the Government.Non-Resident Indian (NRI) means an individual resident outside India who is a citizen of India or is a person of Indian origin. Person of Indian Origin (PIO) means a citizen of any country other than Bangladesh or Pakistan, if:
- he at any time held an Indian Passport
- he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or
- the person is a spouse of an Indian citizen or a person referred to in sub-clause (i) or (ii).
Whereas, ‘Non-Resident Entity’ means a person resident outside India as defined under FEMA 1999. The definition in FEMA of a "Person Resident outside India" is simply put as “a person who is not Resident in India."
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 a repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels. A person who is a citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Scheme, with the prior approval of the Foreign Investment Promotion Board (FIPB) [i.e through Government Route]. Further, a person who is a citizen of Pakistan or an entity incorporated in Pakistan, may, with the prior approval of the FIPB, [i.e through Government Route] invest in an Indian company under FDI Scheme, subject to the prohibitions applicable to all foreign investors and the Indian company, receiving such foreign direct investment, should not be engaged in sectors /activities pertaining to defence, space and atomic energy.
A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
2). Overseas Corporate Bodies (OCBs)
OCBs have been derecognized as a class of investors in India with effect from September 16, 2003.
However, 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 the Government of India if the investment is through the Government route; and with the prior approval of RBI if the
investment is through Automatic route. However, before making any fresh FDI under the FDI scheme, an erstwhile OCB should through their AD bank, take a one time certification from RBI that it is not in the adverse list being maintained with the Reserve Bank of India.
Erstwhile Overseas Corporate Body means a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least 60% by non-resident Indian and includes overseas trust in which not less than 60% beneficial interest is held by non-resident Indian directly or indirectly but irrevocably and which was in existence on the date of commencement of the Foreign Exchange Management (Withdrawal of General Permission to Overseas Corporate Bodies (OCBs) ) Regulations, 2003 (the Regulations) and immediately prior to such commencement was eligible to undertake transactions pursuant to the general permission granted under the Regulations.
3). Securities and Exchange Board of India (SEBI) registered Foreign Institutional Investors (FIIs) and Non resident Indians (NRIs) as per Schedules 2 and 3 respectively of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000, can invest/trade through a registered broker in the capital of Indian Companies on recognised Indian Stock Exchanges
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.
A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to 100% of the capital of an Indian Venture Capital Undertaking (IVCU) and may also set up a domestic asset management company to manage the fund.
4). Qualified Foreign Investors (QFIs)
QFls are permitted to invest through SEBI registered Depository Participants (DPs) only in equity shares of listed Indian companies through recognized brokers on recognized stock exchanges in India as well as in equity shares of Indian companies which are offered to public in India in terms of the relevant and applicable SEBI guidelines/regulations.
FDI can be made into the following entities subject to specified conditions:
- In an Indian Company
- In Partnership Firm / Proprietary Concern
- In Limited Liability Partnerships (LLPs):
- In Venture Capital Funds (VCF)
- In Trusts: FDI in Trusts other than VCF is not permitted.
FDI in resident entities other than those mentioned above is not permitted.
A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest in the capital of a firm or a proprietary concern in India on non-repatriation basis provided:
- The amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with
Authorized Dealers / Authorized banks.
- The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business or print media sector.
- Amount invested shall not be eligible for repatriation outside India.
Investments with repatriation option: NRIs/PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns/partnership firms with repatriation option. The application will be decided in consultation with the Government of India.
In case of a person resident outside India other than NRIs/PIO, they may make an application and seek prior approval of Reserve Bank for making investment in the capital of a firm or a proprietorship concern or any association of persons in India. The application will be decided in consultation with the Government of India.
However, an NRI or PIO is not allowed to invest in a firm or proprietorship concern ‘engaged in any agricultural/plantation activity or real estate business or print media’.
FDI is permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI- linked performance conditions. An Indian company or an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP in sectors in which 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions. FDI in LLP is subject to the compliance of the conditions of LLP Act, 2008
FDI can be made in India through the following modes, subject to certain conditions under each mode:
- Issuance of fresh shares by the company
- Acquisition by way of transfer of existing shares by person resident in or outside India
- Issue of Rights / Bonus shares
- Issue of shares under Employees Stock Option Scheme (ESOPs)
- Conversion of External Commercial Borrowings (ECB) / Lumpsum Fee / Royalty / Import of capital goods by units in Special Economic Zones (SEZs) in to Equity/ Import payables / Pre incorporation expenses
- Issue of shares by Indian Companies under American Depository Receipts (ADR) / Global Depository Receipts (GDR)
- FDI through issue/transfer of ‘participating interest/right’ in oil fields to a non-resident
Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA Regulations.
An Indian company may receive FDI under the two routes as given:
- Automatic Route - FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
- Government Route - FDI in activities not covered under the automatic route requires prior approval of the Government which is considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.
The Indian company having received FDI either under the Automatic route or the Government route is required to comply with provisions of the FDI policy including reporting the FDI to the Reserve Bank.
Mode of receipt of consideration
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 by:
(i) inward remittance through normal banking channels.
(ii) debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.
(iii) conversion of royalty / lump sum / technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.
(iv) conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
(v) 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.
If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B) / Escrow account, the amount shall be refunded. Further, 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.
FDI can be made in India through the following modes, subject to certain conditions under each mode:
- Issuance of fresh shares by the company
- Acquisition by way of transfer of existing shares by person resident in or outside India
- Issue of Rights / Bonus shares
- Issue of shares under Employees Stock Option Scheme (ESOPs)
- Conversion of External Commercial Borrowings (ECB) / Lumpsum Fee / Royalty / Import of capital goods by units in Special Economic Zones (SEZs) in to Equity/ Import payables / Pre incorporation expenses
- Issue of shares by Indian Companies under American Depository Receipts (ADR) / Global Depository Receipts (GDR)
- FDI through issue / transfer of ‘participating interest / right’ in oil fields to a non resident
Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA Regulations.
An Indian company may receive FDI under the two routes as given:
- Automatic Route - FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
- Government Route - FDI in activities not covered under the automatic route requires prior approval of the Government which is considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.
The Indian company having received FDI either under the Automatic route or the Government route is required to comply with provisions of the FDI policy including reporting the FDI to the Reserve Bank.
Mode of receipt of consideration
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 by:
(i) inward remittance through normal banking channels.
(ii) debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.
(iii) conversion of royalty / lump sum / technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.
(iv) conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
(v) 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.
If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B) / Escrow account, the amount shall be refunded. Further, 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.
A foreign company planning to set up business operations in India has the following options:
- Incorporate a company under the Companies Act, 2013, 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.
As mentioned above as well, investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, through the Automatic Route or the Government Route. Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the Government of India for the investment. Under the Government Route, prior approval from the Government of India is required. Proposals for foreign investment under Government route, are considered by FIPB.
The Foreign Investment Promotion Board (FIPB) is a government body that offers a single window clearance for proposals on Foreign Direct Investment (FDI) in India that are not allowed access through the automatic route. FIPB is an inter-ministerial body which examines and discusses proposals for foreign investments in the country for sectors with caps, sources and instruments that require approval under the FDI Policy on a regular basis. The Minister of Finance, considers the recommendations of the FIPB on proposals for foreign investment up to 5000 crore. Proposals involving foreign investment of more than 5000 crore require the approval of the Cabinet Committee on Economic Affairs (CCEA).
There is a system in place for online filing of applications for FIPB/Government Approval. Guidelines for e-filing of applications, filing of amendment applications and instructions to applicants are available at FIPB’s website (http://finmin.nic.in/) and (http://www.fipbindia.com).
FDI is completely prohibited in the following sectors:
- Lottery Business including Government /private lottery, online lotteries, etc.
- Gambling and Betting including casinos 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.)
- 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. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).
- Agricultural or Plantation Activities
It is clarified that partnership firms /proprietorship concerns having investments as per Foreign Exchange Management Act 1999 (FEMA) regulations are not allowed to engage in print media sector.
The details of the entry route applicable and the maximum permissible foreign investment /sectoral cap in an Indian Company are determined by the sector in which it is operating.
Sectoral caps on certain investments in certain financial services are listed below. In the following sectors/ activities, FDI up to the limit indicated against each sector/activity is allowed, subject to applicable laws/ regulations; security, and other conditions. Investments by non-residents can be permitted in the capital of a resident entity in certain sectors/activities with entry conditions. Such conditions may include norms for minimum capitalization, lock-in period, etc. Wherever there is a requirement of minimum capitalization, it shall include the share premium received along with the face value of the share, only when it is received by the company upon issue of the shares to the non-resident investor. Amount paid by the transferee during the post-issue transfer of shares beyond the issue price of the share, cannot be taken into account while calculating the minimum capitalization requirement. The entry conditions in various sectors/activities are detailed in the column titled ‘Description of Activity/Items/Conditions’.
Downstream investment by an Indian company, which is not owned and/ or controlled by resident entity/entities, into another Indian company, would be in accordance/compliance with the relevant sectoral conditions on entry route, conditionalities and caps, with regard to the sectors in which the latter Indian company is operating.
A company is considered as ’Owned’ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or Indian companies, which are ultimately owned and controlled by resident Indian citizens.
A Limited Liability Partnership will be considered as owned by resident Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and/or entities which are ultimately 'owned and controlled by resident Indian citizens’ and such resident Indian citizens and entities have majority of the profit share
Downstream investments by Indian companies/LLPs will be subject to the following conditions:
- Such a company has to notify Secretariat for Industrial Assistance, DIPP and FIPB of its downstream investment in the form available at http://www.fipbindia.com within 30 days of such investment, even if capital instruments have not been allotted along with the modality of investment in new/existing ventures (with/without expansion programme);
- downstream investment by way of induction of foreign equity in an existing Indian Company to be duly supported by a resolution of its Board of Directors as also a Shareholders’ Agreement, if any;
- issue/transfer/pricing/valuation of shares shall continue to be in accordance with applicable SEBI/RBI guidelines;
- For the purpose of downstream investment, the Indian companies making the downstream investments would have to bring in requisite funds from abroad and not use funds borrowed in the domestic market. This would, however, not preclude downstream operating companies, from raising debt in the domestic market.
