Comprehensive guide on Foreign Direct Investment (FDI) in India

1. Introduction

Foreign Direct Investment (FDI) in India can be done through foreign investors on their own or through Joint Ventures. There are two types of approval for foreign investment:

• Automatic Route: Most sectors allow FDI through this route, meaning that filing and intimating the government regarding FDI details fulfills regulatory compliance.
• Approval Route: Certain sectors require prior government approval before investment.

All FDI, whether through the automatic route or approval route, is scrutinized by the Ministry of Commerce and Industry. The Indian government has liberalized FDI norms, especially under the ‘Make in India’ initiative, further easing investment opportunities.

2. Investment Facilitation Portals

To facilitate foreign investment, the Department for Promotion of Industry and Internal Trade (DPIIT) provides the Foreign Investment Facilitation Portal (FIFP), where foreign investors can submit FDI applications or proposals. The FIFP can be accessed online at www.fifp.gov.in.

The Government of India has also introduced other platforms to assist investors:

• www.investindia.gov.in – Provides investment insights across various Indian states.
• www.indiainvestmentgrid.gov.in – Showcases recent investment opportunities in India.

3. Eligible Investors

The following entities are eligible to invest in India:

• Non-resident entities (except in prohibited sectors)
• NRIs, citizens of Nepal and Bhutan investing on a repatriation basis
• Overseas Corporate Bodies (OCBs) not under RBI’s adverse notice
• Foreign Portfolio Investors (FPIs)
• Foreign Venture Capital Investors (FVCIs)

4. FDI Approval Process

With effect from 05th August 2022, all applications for FDI approval must be applied through the National Single Window System (NSWS) only (www.nsws.gov.in).

5. Entry Routes for Investment

FDI can be made through:

• Automatic Route: No prior government approval required.
• Government Route: Requires prior approval from the respective administrative ministry/department.

6. Eligible Investee Entities

• Indian Companies: Can issue capital against FDI.
• Partnership Firms/Proprietary Concerns: NRIs can invest on a non-repatriation basis.
• Limited Liability Partnerships (LLPs): FDI is allowed under the automatic route in sectors with 100% FDI and no performance-linked conditions.
• Investment Vehicles: Entities registered and regulated under SEBI regulations.
• Startups: Can issue equity or debt instruments to Foreign Venture Capital Investors (FVCIs).

7. Sectoral Caps & Conditions

FDI is permitted up to specified caps in various sectors, with some requiring government approval. Certain industries impose entry conditions like minimum capitalization and lock-in periods.

Sectoral Caps for FDI in India

8. Downstream Investment

An eligible Indian entity can invest in another Indian company/LLP through indirect foreign investment (downstream investment), subject to FDI rules.

9. Documentation for Government Approval

Key documents include:

• Summary of proposal
• Certificate of Incorporation
• Memorandum & Articles of Association
• Board Resolutions
• Financial statements
• Valuation certificates (if applicable)
• Sector-specific documents (e.g., pharma approvals)

With expert assistance from Return Filings, you can ensure a smooth Foreign Direct Investment (FDI) compliance hassle free. For professional assistance, reach out to us on email: info@returnfilings.com or on whatsapp: https://wa.me/919910123091.

10. Additional Resources

For further reading:

• Setting Up Indian Subsidiary: Step-by-Step Registration Guide
• Setting Up Liaison Office in India: Step-by-Step Registration Guide
• Setting Up Branch Office in India: Step-by-Step Registration Guide
• Setting Up Project Office in India: Step-by-Step Registration Guide

Frequently Asked Questions (FAQs) related to Foreign Direct Investment (FDI) in India

A. FDI Policy and Prohibited Sectors

1. Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route?

FDI is prohibited in the following sectors:

1. • Lottery Business: This includes government/private lotteries, online lotteries, etc. The prohibition extends to any form of foreign technology collaboration, including licensing for franchise, trademark, brand name, or management contracts.  
   • Gambling and Betting: This covers casinos and all other forms of gambling and betting activities. Similar to lotteries, foreign technology collaboration is also prohibited.  
   • Chit Funds: These are informal savings and credit schemes prevalent in India.  
   • Nidhi Company: These are companies that accept deposits from and lend to their members.
   • Trading in Transferable Development Rights (TDRs): TDRs are certificates that allow the transfer of development potential from one piece of land to another.  
   • Real Estate Business or Construction of Farm Houses: This excludes integrated townships development.  
   • Manufacturing of Cigars, Cheroots, Cigarillos, and Cigarettes: This prohibition applies to the manufacturing of these tobacco products or tobacco substitutes.  
   • Sectors Not Open to Private Sector Investment: This includes sectors like atomic energy and railway operations (with specific exceptions for permitted activities).  

B. Procedure After Investment

2. What is the procedure to be followed after investment is made under the Automatic Route or with Government approval?

Indian companies, including MSEs, can issue capital against FDI. The procedure involves two key reporting steps:  

2. • (a) On receipt of share application money: Within 30 days of receiving the funds, the Indian company must report to the RBI Regional Office (under whose jurisdiction the company’s registered office is located) through the bank where the funds were received. This is done using Form ARF (Advanced Remittance Form) and includes details like the foreign investor’s name and address, date and rupee equivalent of funds received, the authorized dealer’s name and address, details of government approval (if any), and a KYC report on the investor from the overseas bank.  
   • (b) Upon issue of shares to non-resident investors: Within 30 days of issuing the shares, the company must file Form FC-GPR with the same RBI Regional Office through the receiving bank. This form requires specific documentation (as specified by RBI).  

Refund of Investment: If shares are not issued within 60 days of receiving the funds, the amount must be immediately refunded to the non-resident investor.

Filing FLA Return: Every Indian company receiving FDI must file the Annual Return of Foreign Liabilities and Assets by July 15th of the relevant year. Failure to file on time is a FEMA violation and can lead to penalties.  

C. Consequences of Non-Compliance

3. What are the consequences of failure to comply with the above requirements?

Non-compliance with FEMA provisions can result in significant penalties. Penalties can be up to three times the amount involved in the contravention (if quantifiable) or up to Rs. 2 lakh (if not quantifiable). Continuing contraventions can attract further penalties of up to Rs. 5,000 per day. Alternatively, the company/person in default can apply to the RBI’s Directorate of Enforcement for compounding of contraventions under FEMA.  

D. Transfer of Shares

4. What are the guidelines for transfer of existing shares from non-residents to residents or residents to non-residents?

The term “transfer” under FEMA includes sale, purchase, acquisition, mortgage, pledge, gift, loan, or any other form of transfer of right, possession, or lien. Specific permissions cover sale and gift:  

4. • (a) Transfer by way of sale:
     
     • Transfers from non-residents (other than NRIs/erstwhile OCBs) to residents or other non-residents are generally permitted, with some restrictions if the transferee has existing ventures in the same or allied field in India.  
     • NRIs can transfer shares among themselves.
     • Sale of shares on a recognized stock exchange in India through a registered broker is allowed.  
     • Sale to a resident is permitted subject to pricing guidelines, documentation, and reporting requirements.
     • Shares purchased under the Portfolio Investment Scheme by NRIs/erstwhile OCBs cannot be transferred by private arrangement.  
   • (b) Transfer by way of gift: A resident can gift shares to a non-resident (other than erstwhile OCBs) if the Indian company’s activities fall under the automatic route of the FDI scheme, and the transfer complies with sectoral limits, pricing guidelines, documentation, and reporting requirements. However, this is not allowed if the transfer falls under SEBI takeover regulations, if the price doesn’t adhere to RBI guidelines, or if the investee company’s activity is outside the automatic route and FIPB approval is required.
5. Can a person resident in India transfer security by way of gift to a person resident outside India?

Yes, but the resident must apply to the RBI’s Central Office with details of the transferor and transferee, their relationship, reasons for the gift, and valuation certificates from a Chartered Accountant (or issuer, in case of mutual funds). The gift may be permitted if the donee is eligible to hold the security, the gift doesn’t exceed 5% of the company’s paid-up capital, sectoral caps are not breached, the parties are relatives (as defined in the Companies Act), the gift value plus any other gifts to non-residents in the calendar year doesn’t exceed USD 25,000, and other conditions are met.

6. What if the transfer of shares from resident to non-resident does not fall under the above categories?

In such cases, either the transferor or the transferee can apply to the RBI for permission, along with FIPB approval (if needed), consent letters from both parties, shareholding patterns, copies of RBI approvals for existing holdings, open offer documents (if applicable), and a fair valuation certificate from a SEBI-registered Category-I Merchant Banker or Chartered Accountant (using DCF method for unlisted companies and SEBI guidelines for listed companies).

7. What are the reporting obligations in case of transfer of shares between resident and non-resident?

The transaction must be reported by submitting Form FC-TRS to the AD Category-I bank within 60 days of the consideration receipt/remittance. The resident party is responsible for filing the form.  

8. What is the method of payment and remittance/credit of sale proceeds in case of transfer of shares between resident and non-resident?

The sale consideration must be remitted through normal banking channels. FIIs/FPIs can use their Special Non-Resident Rupee Accounts. NRIs can use NRE/FCNR(B) accounts or NRO accounts (for non-repatriable shares). Sale proceeds (net of taxes) can be remitted outside India or credited to specific accounts (NRE/FCNR(B) for repatriable shares, NRO for non-repatriable shares). OCBs have specific rules for repatriation.  

E. Repatriation of Investments and Profits

9. Are the investments and profits earned in India repatriable?

All foreign investments are repatriable (net of taxes) unless specifically made on a non-repatriation basis or subject to sectoral conditions. Dividends/profits (net of taxes) can be remitted outside India through an authorized dealer bank.  

F. Issue and Valuation of Shares

10. What are the guidelines on issue and valuation of shares in case of existing companies?

Share pricing must adhere to specific guidelines:

10. • For listed companies, the price should be as per SEBI guidelines.
    • For unlisted companies, valuation should be done by a CA or SEBI-registered Merchant Banker using internationally accepted pricing methodology (arm’s length basis).  
    • Convertible instruments’ price/conversion formula should be determined upfront, and the conversion price should not be lower than the fair value at issuance.  
    • Share transfers from non-resident to resident should not exceed the price determined by SEBI guidelines (for listed companies) or valuation by CA/Merchant Banker (for unlisted companies).  
    • The guiding principle is no assured exit price for the non-resident investor.
    • Share swaps require valuation by a SEBI-registered Merchant Banker or equivalent foreign Investment Banker.  
    • Shares issued to a non-resident at the time of incorporation can be at face value.
    • These guidelines don’t apply to non-repatriable investments.
11. Can a foreign investor invest in Preference Shares? What are the regulations applicable in case of such investments?

Yes, but the preference shares should be fully and mandatorily convertible into equity within a specified time to be considered FDI. Other preference shares fall under ECB norms.  

12. Can shares be issued against Lumpsum Fee, Royalty and ECB?

Yes, subject to pricing guidelines and sectoral caps, shares can be issued against royalty/lumpsum fees due for technology/know-how and against External Commercial Borrowings (ECB).  

13. What are the other modes of issues of shares for which general permission is available under RBI Notification No. FEMA 20 dated May 3, 2000?

Other permitted modes include ESOPs, sweat equity, bonus issues, rights issues, share swaps, issues on merger/demerger/amalgamation, and issues against other funds payable to a non-resident (requiring no prior RBI/Government approval).

14. Can a foreign investor invest in shares issued by an unlisted company in India?

Yes, investments are permitted in shares of unlisted Indian companies, as per RBI/Government regulations.

15. Can a foreigner set up a partnership/proprietorship concern in India?

Only NRIs/PIOs are allowed to set up partnership/proprietorship concerns in India, and that too on a non-repatriation basis

16. Is a non-resident permitted to acquire shares on stock exchange?

Yes, FPIs/FIIs registered with SEBI, NRIs, and other non-residents (subject to certain conditions like holding control as per SEBI regulations) can acquire shares on stock exchanges.

17. What will be the modes of payment for non-residents permitted to acquire shares on stock exchange?

Payment can be made through inward remittance, debit to NRE/FCNR accounts, debit to non-interest-bearing Escrow accounts, or from dividends payable by the investee company (credited to a designated account).

G. Other generally asked questions related to FDI in India:

18. What is FDI and how does it work?

FDI is an investment made by a foreign entity into a business or asset in another country. It establishes a lasting interest and often involves some degree of control over the enterprise.

19. What are the benefits of FDI for India?

FDI can bring in capital, technology, expertise, and create jobs, boosting economic growth.

20. How can I attract FDI to my business?

Have a strong business plan, demonstrate growth potential, comply with regulations, and network with potential investors.

21. What is the difference between FDI and FII?

FDI involves a long-term investment and some control, while FII (Foreign Institutional Investment) is often shorter-term and involves portfolio investments in stocks, bonds, etc.

22. How do I get government approval for FDI in India?

Applications are submitted through the Foreign Investment Facilitation Portal (FIFP) for sectors requiring government approval.

23. What are the latest FDI policies in India?

Refer to the Department for Promotion of Industry and Internal Trade (DPIIT) website for the most up-to-date policies.

24. How can I find FDI investors for my project in India?

Through investment banks, online platforms, industry events, and networking.

25. What are the tax implications of FDI in India?

Contact us for specific advice on withholding taxes, capital gains tax, etc.

26. What is the role of the RBI in FDI regulations?

The RBI plays a key role in regulating FDI inflows and outflows, ensuring compliance with FEMA regulations.

27. What are the different entry routes for FDI in India?

Automatic route and government approval route, depending on the sector and investment amount.

28. What are the sectoral caps for FDI in India?

Certain sectors have limits on the percentage of foreign investment allowed.

29. How do I report FDI inflows to the RBI?

Through Form FC-GPR and other reporting mechanisms.

30. What are the penalties for non-compliance with FDI regulations?

Financial penalties and other legal actions.

31. How can I repatriate profits from FDI in India?

Profits can be repatriated after paying applicable taxes.

32. What is the process for setting up a wholly owned subsidiary in India by a foreign company?

Involves incorporating a company in India and complying with FDI regulations.