CS Vikas Gupta
India is one of the fastest growing economies since last few years and witnessed a large amount of foreign investment in various sector. Foreign Direct Investment (FDI) in India is undertaken in accordance with the FDI Policy which is formulated and announced by the Government of India. The Government of India has allowed different channels of Investment in India on basis of the entity of the foreign national.
Who can invest in India?
• A non-resident entity (other than citizens of Pakistan and Bangladesh or an entity incorporated in Pakistan or Bangladesh who can only invest with a prior approval of FIPB) can invest in India, subject to the FDI Policy.
• NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis.
• Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government route and with the prior approval of RBI if the investment is through Automatic route.
Entry Options for Business in India
To do business in India, following options are available to foreign companies:
SETTING UP A NON-CORPORATE ENTITY
Liaison office: A liaison or a representative office can be opened in India subject to approval by Reserve Bank of India. Such an office can undertake liaison activities on its company’s behalf. A liaison office can also undertake:
• Representing parent/group companies in India
• Promoting import/export in India
• Promoting technical/financial collaborations on parent company/group’s behalf
• Coordinating communications between parent/group companies and Indian companies.
Branch Office: Foreign companies can conduct their business in India through its branch office which can be opened after obtaining a specific approval from Reserve Bank of India. A branch office can undertake following activities:
• Import & export of goods
• Rendering professional or consultancy services
• Carrying out research work in area which its parent company is engaged
• Promoting technical/financial collaborations on behalf of parent company/ overseas group company
• Representing parent/group companies in India and acting as buying/selling agent in India
• Providing IT services and developing software in India
• Providing technical support for products supplied by parent company/group.
Project office: If a foreign company is engaged by an Indian company to execute a project in India, it may set up a project office without obtaining approval from Reserve Bank of India subject to prescribed reporting compliances. As applicable in case of a branch office, a project office is treated as an extension of foreign company and is taxed at the rate applicable to foreign companies.
SETTING UP A CORPORATE ENTITY
Wholly owned subsidiary: Foreign companies can set up wholly owned subsidiary companies in India in form of companies subject to FDI guidelines. A wholly owned or a subsidiary company has the maximum flexibility to conduct business in India when compared with a liaison or branch office and has following salient features:
• Funding can be done via equity, debt (foreign as well as local) and internal accruals
• Indian transfer pricing regulations apply
• Repatriation of dividends is allowed without approvals.
Joint Venture with Indian partner: Foreign companies can also set up joint venture with Indian or foreign companies in India. There are no separate laws for joint ventures in India and laws governing domestics companies apply equally to joint ventures.
ENTITY INTO WHICH FDI CAN BE MADE
(i) Indian Company
(ii) Partnership Firm/Proprietary Concern
(iii) Venture Capital Fund
(iv) Limited Liability Partnerships
Entry routes for investments in India
Under the Foreign Direct Investments Scheme, investments can be made in shares, mandatorily and fully convertible debentures and mandatorily and fully convertible preference shares of an Indian company by non-residents through two routes:
(i) Automatic Route: Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment.
(ii) Government Route: Under the Government Route, the foreign investor or the Indian company should obtain prior approval of the Government of India (Foreign Investment Promotion Board) for the investment.
Type of instruments
(i) Equity shares
(ii) Fully and mandatorily convertible debentures
(iii) Fully and mandatorily convertible preference shares
(iv) Optionally convertible preference shares/debentures, subject to some conditions
(v) Foreign Currency Convertible Bonds/Depository Receipts.
Modes of Investment under Foreign Direct Investment Scheme
(i) Issuance of fresh shares by the company
(ii) Acquisition by way of transfer of existing shares by person resident in or outside India
(iii) Issue of Rights / Bonus shares
(iv) Issue of shares under Employees Stock Option Scheme (ESOPs)
(v) Conversion of ECB / Lumpsum Fee / Royalty / Import of capital goods by units in SEZs in to Equity/ Import payables / Pre incorporation expenses
(vi) Issue of eligible securities under Depository Receipt Scheme
(vii) FDI – through issue / transfer of ‘participating interest/right’ in oil fields to a non resident
(viii) Acquisition of shares under Scheme of Merger / Amalgamation
(i) Fresh issue of shares or Conversion of ECB/Lump sum Fee/Royalty etc. into Equity: Price of shares issued to persons resident outside India shall not be less than –
(a) the price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company are listed on any recognised stock exchange in India;
(b) the fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on arm’s length basis, where the shares of the company are not listed on any recognised stock exchange in India; and
(c) the price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment.
(ii) Subscription to Memorandum of Association: Where non-residents (including NRIs) are making investments in an Indian company in compliance with the provisions of the Companies Act, 2013, by way of subscription to its MOA, such investments may be made at face value subject to their eligibility to invest under the FDI scheme.
(iii) Transfer of shares: Price of shares transferred by way of sale by resident to a non-resident shall not be less than-
(a) the price at which the preferential allotment of shares can be made under the SEBI guidelines, as applicable, where the shares of the company are listed on any recognised stock exchange in India;
(b) the fair to be determine by a SEBI registered Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on arm’s length basis, where the shares of the company are not listed on any recognised stock exchange in India;
(iv) Issue of Rights/Bonus Shares: The price of shares offer on right basis to the persons resident outside India shall be:
(a) in the case of shares of a company listed on a recognized stock exchange in India, at a price as determined by the company;
(b) in the case of shares of a company not listed on a recognized stock exchange in India, at a price which is not less than the price at which the offer on right basis is made to resident shareholders.
Mode of Payment
(ii) Inward remittance through normal banking channels.
(iii) Debit to NRE/FCNR account of a person concerned maintained with an AD category I bank.
(iv) Conversion of royalty/lump sum/technical know how fee due for payment/import of capital goods by units in SEZ or conversion of ECB, shall be treated as consideration for issue of shares.
(v) Conversion of import payables/pre incorporation expenses/share swap can be treated as consideration for issue of shares with the approval of FIPB.
(vi) Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.
Prohibition on foreign investment in India
Foreign investment in any form is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as Trusts) which is engaged or proposes to engage in the following activities:
(a) Business of chit fund
(b) Nidhi company
(c) Agricultural or plantation activities
(d) Real Estate Business, or Construction of Farm Houses
(e) Trading in Transferable Development Rights (TDRs)
(f) Lottery Business including Government/ private lottery, online lotteries, etc.
(g) Gambling and Betting including casinos etc.
(h) Chit funds
(i) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
(j) Activities / sectors not open to private sector investment e.g. (I) Atomic energy and (II) Railway operations (other than permitted activities).
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