All about Foreign Direct Investment in India

In the current economic environment, there are no isolated economies anymore. All countries now function on a global level. And hence we have a strong global economy, where there are very few barriers to the flow of goods and money. This opens up avenues for international investments as well. Let us learn a bit more about the Foreign Direct Investment in India.

The Foreign Direct Investment in India is undertaken in accordance with the FDI Policy. The Government of India has allowed different channels of Investment in India on the basis of the entity of the foreign national. Foreign investment refers to the direct or indirect investment done by a company or an individual in some other country.

What is Foreign Direct Investment?

Foreign Direct Investment is a self-explanatory term. FDI is when an investor from another country (foreign country) i.e. foreign investor makes an investment in a business situated in the country. Now such an investor can be an individual, firm, company, etc.

Capital instruments permitted for receiving foreign investment in an Indian company:

• 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 FDI in India:

Basically, there are two routes for FDI in India.

• Automatic Route:

In Automated Route, no approval or authority is required by the private foreign investors. He can invest in any company it wishes with no need for government approval. FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which requires prior approval of the government.

• Government Route:

Prior approval by the government is needed via this route. The application needs to be made through the Foreign Investment Facilitation Portal, which will facilitate the single-window clearance of the FDI application under the Approval Route. The application will be forwarded to the respective ministries which will act on the application as per the standard operating procedure.

Procedure to be followed after the investment is made:

A two-stage reporting procedure has to be followed:

• On receipt of share application money:

Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India under whose jurisdiction its Registered Office is located, the Advance Reporting Form, containing the following details:

• Name and address of the foreign investor
• Date of receipt of funds and the Rupee equivalent
• Name and address of the authorized dealer through whom the funds have been received
• Details of the Government approval, if any
• KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.

The Indian company has to ensure that the shares are issued within 180 days from the date of inward remittance which otherwise would result in the contravention/violation of the FEMA Compliance in India.

• Upon issue of shares to non-resident investors:

Within 30 days from the date of issue of shares, a report in Form FC-GPR together with the following documents should be filed with the Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India.

Documents to be filed with the Form FC-GPR:

Certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that:

• All the requirements of the Companies Act, 1956 have been complied with;
• Terms and conditions of the Government approval, if any, have     been complied with;
• The company is eligible to issue shares under these Regulations; and
• The company has all original certificates issued by authorized dealers in India evidencing receipt of the amount of consideration;

Certificate from the Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

Prohibition in Foreign Investment:

There are a few industries where FDI is strictly prohibited under any route. These industries are

1. Atomic Energy Generation
2. Any Gambling or Betting businesses
3. Lotteries (online, private, government, etc)
4. Investment in Chit Funds
5. Nidhi Company
6. Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc)
7. Housing and Real Estate (except townships, commercial projects, etc)
8. Trading in TDR’s
9. Cigars, Cigarettes, or any related tobacco industry

There have always been opposing views about FDI in some sensitive industries like defense, insurance, media, etc. Because of the integrity of our democracy and the safety of our nation are at stake. So, for many such industries, the FDI limits are there. For example, the defense industry allows only 49% FDI.

Foreign direct investment (FDI) in India is a major monetary source for economic development in India. Foreign companies invest directly in fast-growing private Indian businesses to take benefit of cheaper wages and changing business environment of India.