Foreign Direct Investment in Small Scale Industrial Undertakings (SSI) and Micro and Small Enterprises (MSE)

In terms of the Schedule 1, an Indian company which is a small scale industrial unit and which is not engaged in any activity or in manufacture of items included in Annex A (List of activities or items for which automatic route of Reserve Bank for Investment from Persons Resident Outside India is not available) may issue shares or convertible debentures to a person resident outside India, to the extent of 24% of its paid -up capital.

However such a company may issue shares in excess of 24% of it’s paid up capital if-

(a) It has given up its small scale status,

(b) It is not engaged or does not propose to engage in manufacture of items reserved for small scale sector, and

(c) It complies with the ceilings specified in Annex B to Schedule I (This contains the list regarding the Sectoral cap on Investments by Persons Resident Outside India).

  • With the promulgation of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the extant policy for foreign direct investment (FDI) in Small Scale Industrial unit and in a company which has deregistered its small scale industry status and is not engaged or does not propose to engage in manufacture of items reserved for small scale sector, has since been reviewed and it has been decided that;
    • A company which is reckoned as Micro and Small Enterprise (MSE) (earlier Small Scale Industrial Unit) in terms of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, including an Export Oriented Unit or a Unit in Free Trade Zone or in Export Processing Zone or in a Software Technology Park or in an Electronic Hardware Technology Park, and which is not engaged in any activity/sector mentioned in Annex 2 (Contains the list regarding the sectors prohibited for FDI) may issue shares or convertible debentures to a person resident outside India (other than a resident of Pakistan and to a resident of Bangladesh under approval route), subject to the limits prescribed in Annex B to schedule 1 (This contains the list regarding the Sectoral cap on Investments by Persons Resident Outside India), in accordance with the Entry Routes and the provision of Foreign Direct Investment Policy, as notified by the Ministry of Commerce & Industry, Government of India, from time to time.
    • Any Industrial undertaking, with or without FDI, which is not an MSE, having an industrial license under the provisions of the Industries (Development & Regulation) Act, 1951 for manufacturing items reserved for the MSE sector may issue shares to persons resident outside India (other than a resident/entity of Pakistan and to a resident/entity of Bangladesh with prior approval FIPB), to the extent of 24 percent of its paid-up capital or sectoral cap whichever is lower. Issue of shares in excess of 24 percent of paid-up capital shall require prior approval of the FIPB of the Government of India and shall be in compliance with the terms and conditions of such approval.
  • Further, in terms of the provisions of MSMED Act, In the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951,
    • A Micro enterprise means where the investment in plant and machinery does not exceed twenty five lakh rupees;
    • A Small enterprise means where the investment in plant and machinery is more than twenty five lakh rupees but does not exceed five crore rupees;
  • in the case of the enterprises engaged in providing or rendering services,
    • A Micro enterprise means where the investment in equipment does not exceed ten lakh rupees;
    • A Small enterprise means where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees.

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