Hello Friends, myself Ankit Misra, a member of Institute of Company Secretaries of India. I am happy to be here with you and it is my constant endeavor to share with you my knowledge over different topics of FEMA and this time I would like to discuss on Foreign Direct Investment (or FDI) under FEMA.
Friends as we discussed in our previous session about Overseas Direct Investment that in case of ODI, Indian investors invest in the capital instruments of foreign entities and this involves outflow of funds from India to overseas. However, Foreign Direct Investment is opposite to ODI. Under, FDI, foreign investors make investment in the capital instruments of Indian Companies, LLPs and it involves inflow of funds into India. Capital instruments here include equity shares, preference shares, share warrants and debentures.
Before going further, it is also important to understand the difference between Foreign Direct Investment and Foreign Portfolio Investment. Foreign Portfolio Investment (FPI) is used only in case of investment in listed Companies where the foreign investment is less the 10% of the paid up capital of the Capital and in case, investment goes above 10%, then it will be termed as FDI. FPI is not applicable in unlisted Companies and in unlisted companies, only FDI terminology can be used irrespective of post investment shareholding percentage. If FPI increases 10% of Paid up Capital, it will be termed as FDI and once it become FDI, it will always remain FDI even when investment goes below 10% of Paid up capital of listed Indian Company.
One more important question arise here that can a foreigner make FDI in proprietorship concern or partnership, the answer to this is NO. Only NRI or Overseas Citizens of India (OCI card holders) can invest in proprietorship concern or partnership
To start with, we need to check the eligibility of Indian entity to receive FDI. There are some activities which are strictly prohibited for receiving FDI. Regulation 15 of Foreign Exchange Management (Transfer or Issue of security by a Person Resident outside India) Regulation, 2017 prescribed that FDI is prohibited in:
i. Lottery Business whether it be Government / private or online lottery;
ii. Gambling and betting including casinos;
iii. Chit funds;
iv. Nidhi Companies;
v. Trading in Transferable Development Rights (TDRs);
vi. Real Estate Business or Construction of Farm House. Real Estate here again does not include development of townships, construction of residential / commercial premises, roads, bridges.
vii. Manufacturing of Cigars, cigarettes of tobacco or of tobacco substitutes;
viii. Sectors like Atomic energy, railway operations; and
ix. Foreign technology collaboration in any form including licensing for franchise.
So, currently 9 sectors are prohibited to receive FDI and Companies planning to receive FDI should assure that these activities are not in their Object Clause of Memorandum of Association. If they have such activities, then they should amendment their Object Clause accordingly.
So, after confirming the eligibility, next step is to check the Sectoral cap of receiving FDI. Regulation 16 of Foreign Exchange Management (Transfer or Issue of security by a Person Resident outside India) Regulation, 2017 prescribed sectoral cap of receiving FDI and Companies needs to assure that upto the allowed limit, FDI can be received without Government or RBI approval and beyond that, Companies have to seek prior approval of Government for receiving FDI. RBI keeps a constant watch over sectoral cap and they amend it time to time as per their policy and therefore it is necessary to keep watch over updated limits.
Now next step is the procedure of receiving FDI. Friends, receiving FDI in Company not only required compliances of FEMA regulations but also require compliances of Companies Act, 2013 like section 42, 62 for issue and allotment of shares under Private Placement or Preferential allotment, filing of return of allotment with ROC and issue of share certificates to investors. Under RBI, time limit for share allotment is 180 days from the receipt of share application money whereas under Companies Act, shares have to be allotted with 60 days of receipt of Share Application Money otherwise it has to be refunded within 15 days of expiry of 60 days. So, in a nut shell, time limit for share allotment for FDI in Company is 60 days.
We always needs to understand the Valuation guidelines in this regard before issuing shares. We can divide valuation concept into two parts:
Part I: Issue by Indian Company or transfer of shares from resident to non-resident:
In this case, value of shares should not be less than price:
a. worked out under SEBI guidelines in case of listed Company, and
b. fair value worked out as per internationally accepted pricing methodology for valuation on arm length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a Practicing Cost Accountant
Part II: In case of transfer of shares from a non-resident to resident
In this case, value of shares should not be more than price:
a. worked out under SEBI guidelines in case of listed Company, and
b. fair value worked out as per internationally accepted pricing methodology for valuation on arm length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker
So, you have to issue shares, receive Share Application Money from Foreign Investor in a separate Bank Account and make allotment as per Companies Act, 2013. And after that, you need to file Form FC-GPR through Form SMF in FIRMS portal after login. Before 01st September, 2018, it was submitted through ebiz portal of Government with two separate forms:
i. Advance Reporting Format (ARF) within 30 days of receipt of Fund; and
ii. Form FC-GPR with 30 days of share allotment.
However, after the change in filing procedure, FDI reporting can now be done through FIRMS portal of RBI. FIRM here means Foreign Investment Reporting and Management system. Now, instead of 2 separate forms which are ARF and FC-GPR, only a Single Master Form (SMF) needs to be filed through FIRM portal for FDI reporting. User manual of FIRM is available in portal itself and user hasto be fully conversant with it for registration and reporting purpose before filing.
So, before reporting FDI in FIRMS portal, you need following details and documents to be ready:
i. Name, address and Constitution of Foreign investor;
ii. Type of Capital instruments, number of instruments, Face Value, Premium, issue size;
iii. Name and address of Authorized Dealer Bank. Pls take note that FDI can only be routed through AD Bank and not in cash.
iv. Please also remember to obtain Original copy of Foreign Inward Remittance Certificate (FIRC) from AD Bank before reporting;
v. Pre and Post shareholding Pattern of investee Company;
vi. Valuation certificate from a Chartered Accountant and certificate from a Practicing Company Secretary
After submission, Form will be processed at AD Bank level and it is advisable to follow up with AD Bank for timely processing. AD Bank, if found Form in order, submit it to RBI for approval. RBI will approve your reporting if they found OK otherwise they mark it for re-submission.
Now friends, before I conclude, it is also important for all of us to understand the cases where we need to file Form FC-TRS with RBI. FC-TRS also can be filed through FIRMS portal of RBI under SMF Form and selecting Form FC-TRS. FC-TRS needs to be filed in following cases:
i. When a person resident outside India holding capital instruments of Indian Company on repatriable basis transferring those capital instruments to another person resident outside India who will hold those shares on non-repatriable basis;
ii. When a person resident outside India holding capital instruments of Indian Company on non-repatriable basis transferring those capital instruments to another person resident outside India who will hold those shares on repatriable basis;
iii. When a person resident outside India holding capital instruments of Indian Company on repatriable basis transferring those capital instruments to a person resident in India; and
iv. a person resident in India holding capital instruments in an Indian company to a person resident outside India holding capital instruments on repatriable basis
In opposite to the above, FC-TRS is not required for:
i. for transfer of shares of an Indian company from a non-resident holding the shares on non-repatriable basis to a resident and vice versa.
ii. for transfer of shares from a person resident outside India holding capital instruments in an Indian company on a repatriable basis to a person resident outside India holding capital instruments on a repatriable basis
iii. for transfer of shares by way of gift.
The onus of reporting is on the resident (transferor or transferee) or the person resident outside India holding capital instruments on a non-repatriable basis, as the case may be. The form FC-TRS has to be filed with the AD bank within sixty days of receipt/ remittance of funds or transfer of capital instruments whichever is earlier.
So, friends, I feel I have covered this vast topic in a summary manner upto my knowledge and there remains any area untouched, you are welcome to ask me at my e-mail id [email protected]