For a country where capital is not readily available, Foreign Direct Investment (FDI) has been an important source of funds for companies. Under FDI, overseas money, either by an individual or entity, is invested in an Indian company

FDI in India is regulated by the Foreign Exchange Management Act, 1999 (FEMA) and the master circular/ directions issued by the Reserve Bank of India (RBI) from time to time. It is also noted that the Government has notified changing the name of the Department of Industrial Policy & Promotion (DIPP) to the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry.

The DPIIT is the nodal Department for formulation of policy of the Government on FDI. It is also responsible for maintenance and management of data on inward FDI into India, based upon the remittances reported by the RBI. With a view to attracting higher levels of FDI, Government has put in place a liberal policy on FDI under which FDI up to 100% is permitted under the automatic route in most sectors/activities. The Department plays an active role in the liberalization and rationalization of the FDI policy. Towards this end, it has been constructively engaged in the extensive stakeholder consultations on various aspects of the FDI Policy.

The Foreign Investment Promotion Board (FIPB), which was the window for FDI approval under the Government route, has been abolished. The ‘Foreign Investment Facilitation Portal’ (FIFP), an administrative body to facilitate FDI applicants under approval route has been introduced. After abolition of the erstwhile FIPB, process for granting FDI approvals has been simplified wherein the work relating to processing of applications for FDI and approval of the Government thereon under the extant FDI Policy and FEMA, is now handled by the concerned Ministries/Departments. However, DPIIT is a single point interface of the Government to facilitate investors for FDI through approval route.

Foreign Direct Investment under FEMA.

Pursuant to the amendments to FEMA through Finance Act, 2015, recently, the Ministry of Finance notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”) vide Notification No. 3732(E) dated 17th October, 2019 and Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2019 [please see article Central Government now empowered to specify classes of permissible capital account transactions in respect of Non- Debt Instruments” published on tax guru on 05.10.2020]   

The RBI issued the Foreign Exchange Management (Debt Instrument) Regulations, 2019. Consequent to issue of NDI Rules by Finance Ministry, RBI has issued Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (“Regulations”) vide Notification No. G.S.R 795(E) dated 17th October, 2019.

Whilst the NDI Rules superseded the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (“the TISPRO Regulations”) as well as the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 (“the ATIP Regulations”), whereas the Debt Instruments Regulations only superseded the TISPRO Regulations.

The power is shifted to Finance Ministry for notifying any change in FDI Rules. Now the Central Government (‘CG’) will make the rules and RBI will regulate the same. The primary intent behind the notification of the NDI Rules and the Debt Instruments Regulations was to give effect to the amendments proposed in the Finance Act, 2015. Notably, under the extant regulations, the RBI was only empowered to specify classes of permissible capital account transactions. However, the Finance Act, 2015, streamlining the power division between the RBI and the CG, gave the RBI the right to specify classes of capital account transactions, involving debt instruments and a similar power to the Central Government, in respect of non-debt instruments.

With the above changes and notifications, CG becomes governing body for Non-debt transactions like investment in equity of incorporated entities, capital participation in LLPs, acquisition and dealing immovable properties, contribution to trusts, investment in units of Alternative Investment Funds (AIFs) & equity oriented mutual funds, etc. and RBI becomes governing body for debt transactions like investment in government bonds, corporate bonds, borrowings by Indian firms through loans, etc.

Even after above changes, RBI still holds the responsibility of monitoring the foreign exchange related to non-debt instruments, and so it notified FEM (Mode of Payment and Reporting of Non-debt Instruments) Regulations, 2019.

Foreign Direct Investment under NDI Rules i.e. Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

As per the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 the following terms have been defined as under-

“FDI” or “Foreign Direct Investment” means investment through equity instruments by a person resident outside India in an unlisted Indian Company; or in ten percent or more of the post issue paid-up equity capital on a fully diluted basis of a Listed Indian Company. [Rule 2(r) of NDI Rules]

“Foreign Investment” means any investment made by a person resident outside India on a repatriable basis in equity instruments of an Indian company or to the capital of an LLP. [Rule 2(s) of NDI Rules]

“Equity Instruments” means equity shares, convertible debentures, preference shares and share warrants issued by an Indian company. [Rule 2(k) of NDI Rules]

In view of the above, FDI or Foreign Direct Investment means investment through capital instruments (equity shares, debentures, preference shares and share warrants) by a person resident outside India (PROI) in an unlisted Indian company or in 10% or more of the post issue paid-up capital on a fully diluted basis of a Listed Indian Company. [herein, we are not defining PROI and the same can be find in another article]

“Foreign Portfolio Investment” (FPI) means any investment made by a person resident outside India through equity instruments where such investment is

i) less than ten percent of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or

ii) less than ten percent of the paid-up value of each series of equity instrument of a listed Indian company. [Rule 2(t) of NDI Rules]

Note- A PROI may hold foreign investment either as FDI or as FPI in any particular Indian company.

“Investment on repatriation basis” means an investment, sale or maturity proceeds of which are net of taxes, eligible to be repatriated out of India, and the expression “investment on non-repatriation basis”, shall be construed accordingly [Rule 2(ad) of NDI Rules].


Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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February 2024