India is expected to attract foreign FDI of US$ 120-160 billion per year by 2025, according to a CII and EY report.

Let us get to know how the FDI is regulated in India, the permissible routes and basic compliance related to the same.

Foreign direct investment (FDI) is when an entity (Individual/Body corporate) acquires business ownership in an entity outside home country. With respect to India, FDI means setting up of a business or acquiring business stake in the already existing Company by investors from outside India.

India ranked 63rd in ease of Doing Business Index 2020, which makes India an attractive destination to attract Foreign investments. After the economic reforms of 1991, India has seen a surge in FDI and is among one of the top countries in the world to have received highest FDI. With FDI, Indian companies not only gain the benefit of money, but it comes with knowledge, technology and skill of the investor.

In India, FDI is regulated by Ministry of Finance through RBI and Ministry of Commerce and Industry through Department for Promotion of Industry and Internal Trade (DPIIT).

RBI has formulated various acts and rules, for ex: Foreign Exchange Management Act, 1999 (“FEMA”) and DPIIT keeps on issuing various press notes for the purpose of FDI regulation.

FDI in India has 3 routes:

1. Automatic route: No prior approval is required. Permitted sectors includes IT, manufacturing, infrastructure

2. Approval route: Prior approval is required from concerned ministries. sectors includes Defence, Print media, pharmaceuticals, civil aviation, telecom

3. Prohibited sectors: FDI is prohibited in Lottery Business including Government/private lottery, online lotteries, etc., Gambling and Betting including casinos etc., Chit funds, Nidhi company etc.

Eligible entities which can receive FDI in India are Indian Companies, LLPs, Startups, Partnership firms, proprietary concerns subject to applicable rules and regulations.

In return, Indian companies issue them equity shares, Fully compulsory and mandatorily convertible debentures into Equity Shares; Fully compulsory and mandatorily convertible preference shares into Equity Shares. In LLPs they get to contribute in capital and gain profit share.

Recently, Indian regulators have introduced the concept of convertible notes for startups, wherein a Startup can issue convertible notes with a minimum value of Rs. 25Lakh each to each investor. This has enabled foreign investors to acquire convertible notes of Indian startups.

Concept of FDI in India has come up with various rules and regulations to comply which are as follows:

1. FCGPR: to be filed with RBI upon issuance of fresh shares to non-residents within 30 days of issue of shares

2. FCTRS: to be filed with RBI upon transfer of shares between resident and non-resident, Non resident (repatriable) and / Non resident (non-repatriable) within 60 days

FDI in India A brief discussion

3. FORM CN: Indian startup Company needs to file Form CN within 30days of issue of Convertible Notes

4. FORM LLP I: to be filed when received LLP contribution from Non-residents within 30 days

5. Return of Foreign Assets and Liabilities (FLA): It is an Annual Return which is required to be submitted by those entities which have received FDI and/or made overseas investments in any of the previous years including the current year i.e., entities which have Foreign Assets or Liabilities in their Balance Sheets. Due date for such return is 15th July of every year.

This is not an exhaustive list of compliance. Other forms also needs to be filed as per the event, for ex. Form DRR (for issue of depository receipts).

(The author of this article is a Practicing Company Secretary and can be reached at [email protected])

Disclaimer: The contents of this article are solely for informational purpose. It does not constitute professional advice or a formal recommendation. No part of this article should be distributed or copied without express written permission of the author.

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