Introduction and Meaning
Foreign Investment is any investment made by a person resident outside India (PROI) /foreigner on a repatriable basis in equity instruments of an Indian Company or to the capital of an Indian LLP.
A PROI may hold foreign investment either as Foreign Direct Investment or as Foreign Portfolio Investment in any Indian company as per the limits and conditions mentioned by the regulatory authority.
‘Foreign Direct Investment’ (FDI) is the investment through equity instruments by forigner
(a) in an unlisted Indian company; or
(b) in 10% or more of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company.
Note:
- Equity Instruments are equity shares, convertible debentures, preference shares and share warrants issued by an Indian company.
- Fully diluted basis means the total number of shares that would be outstanding if all possible sources of conversion are exercised.
- Investment on a repatriation basis means an investment where the sale proceeds, after taxes, can be sent back to source country out of India.
- If at any point, foreigner’s stake in a listed company drops below 10%, it will still be considered as FDI.
Regulatory: The power to regulate FDI or Foreign Investment in capital instruments has shifted from the RBI to the Central Government. Now, the RBI only oversees debt instruments, but it still handles valuation and reporting requirements for FDI.
The Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry regulates the FDI policy.
The Government of India has put in place a policy framework on FDI, which is transparent, predictable and easily comprehensible. This framework is embodied in the Circular on Consolidated FDI Policy, which may be updated on an annual basis, to capture and keep pace with the regulatory changes. The FDI Policy describes general conditions of FDI, procedure for Government Approval, Sector Specific conditions on FDI including Sectoral caps.
Some of the methods through which foreign investors can invest in India under FDI are:
1) Subscription to the Memorandum of Association;
2) Purchase of shares from Indian Residents/Companies;
3) Conversion of convertible notes;
4) Swap of capital instruments;
5) Units of Investment Vehicles;
6) Depository Receipts;
7) Preferential allotment/Private placement/Private arrangement;
8) Rights Issue / Bonus Issue;
9) Merger/De-merger/Amalgamation.
The Indian Company must receive the investment funds through:
1) Inward Remittance through banking channels;
2) Debit to NRE/ FCNR(B)/ Escrow Account if the foreigner has such account in India;
3) Issue of equity shares by an Indian company against any funds payable by it to the investor;
4) Swap of equity instruments.
Note:
- Equity instruments shall be issued to the foreigner within 60 days from the date of receipt of the consideration.
- If equity instruments aren’t issued within 60 days, the investment amount must be refunded back via outward remittance or credited to the investor’s NRE/FCNR (B) account as the case maybe.
FDI in the equity instruments of an Indian company can be made through two routes:
1) Automatic Route: In which the investment by foreigner does not require the prior approval from the Central Government.
2) Approval Route: In which investment by foreigner requires prior Government approval. Foreign investment received under this route shall be in accordance with the conditions stipulated by the Government in its approval.
Sectoral Caps:
Sectoral cap defines the upper limit of FDI which is allowable in India for a particular sector. The total foreign investment shall not exceed the % limit defined by sectoral cap.
Below is the list of Prohibited sectors for FDI where foreign investment is not allowed:
1) Lottery Business including Government/ private lottery, online lotteries.
2) Gambling and betting including casinos.
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 viz., (i) Atomic energy and (ii) Railway operations
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.
*Real estate business shall not include development of townships, construction of residential or commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations, 2014.
Reporting Requirements for FDI
1) Form Foreign Currency-Gross Provisional Return (FC-GPR): When an Indian company issues equity instruments to a foreign investor, it must report this transaction in Form FC-GPR within 30 days of issuing the equity instruments on FIRMS Portal of RBI.
2) Annual Return on Foreign Liabilities and Assets (FLA): An Indian Company which has received FDI or an LLP which has received investment by way of capital contribution in the previous year including the current year, shall submit form FLA to the RBI on or before the 15th day of July of each year on FLAIR portal of RBI. For the purpose of FLA Return, Year shall be reckoned as April to March.
3) Form Foreign Currency-Transfer of Shares (FC-TRS): This form is filed in case of transfer of shares or convertible debentures of an Indian Corporation from a resident to a Non-Resident/Non-Resident Indian and vice versa by means of Sale.
Due date : The form FCTRS shall be filed within 60 days of transfer of equity instruments or receipt /remittance of funds whichever is earlier.
4) There are other forms such as :
- Form Employees’ Stock Option (ESOP)
- Form Depository Receipt Return (DRR)
- Form LLP (I)
- Form LLP (II)
- LEC(FII)
- LEC(NRI)
- Form InVI
- Downstream Investment
- Form Convertible Notes (CN)
In case of delay in reporting, Late Submission Fees will be applicable to the person responsible for filling. Hence it is important to check with Professional or FEMA Expert on applicable filing due dates and do timely compliance.
