Foreign Direct Investment

A Practitioner’s Guide

November 2017

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Company Secretaries of India.

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Printed at Chandu Press /100/November 2017

(ii)

PREFACE

In the wake of India’s emergence as one of the fastest growing economies at the

global fora, India has also improved its ranking by one notch to 9th position as one of

the highest recipients of Foreign Direct Investment (FDI) as per World Investment Report,

2017 issued by UN Trade and Development Agency. Under the initiative of “Invest

India”, the foreign promotion arm of the government, it is estimated for India to receive

the foreign direct investment commitment worth $83.5 billion; 90% of which came in

the past 15 months. This confirms the strong confidence of the foreign investors for

investing in India’s long term prospects.

Keeping pace with Foreign Direct Investment which is a critical driver of economic

growth, the government is dedicated to ensuring a favourable policy regime along with

the robust business environment. As per the reports of Department of Industrial Policy

and Promotion (DIPP), the total FDI investments of around US$ 14.55 billion, received

during April-June 2017 is directly proportionate to the government's effort for improving

ease of doing business and relaxation in FDI norms toward yielding positive outcome.

In the era of the positive numbers accelerating the growth of FDI under various

government initiatives, schemes, policies and balancing reformed regulation for the

FDI market, it is apt for the professionals and related stakeholders to receive positive

information for further strengthening the future of FDI in the country and optimistical y

assisting in the remarkable growth of Indian economy under New India, 2022.

With a view to educate professionals and corporate executives to facilitate FDI and

opening of Industries and offices in India by foreign companies, banks and insurance

companies, the Institute has brought out this publication primarily focusing on Foreign

Exchange Management Act, Foreign Direct Investment (FDI) in India, Establishment of

Branch Office (BO)/Liaison Office (LO)/Project Office (PO) in India, Liberalized

Remittance Scheme (LRS), Remittance of Assets outside India, Compounding of

Contraventions under FEMA.

I am thankful to Advocate Sambhrant Krishna for thoroughly updating the manuscript

and other valuable inputs to the book. I also commend the dedicated efforts put in by

Mr. Chittaranjan Pal, Assistant Director and Ms. Pankila Bhardwaj, consultant in the

Institute for preparing and meticulously going through the manuscript, incorporating

various updates and finalising the final text under the able guidance and overal supervision of CS Sonia Baijal, Director of the Institute.

As a book on one of the most contemporary topics in India, it is suitable for advancing

the understanding and indulgence of readers on various facts and facets of FDI as well

as the contemporary regime of initiatives promoting FDI in the country.

I wish a happy learning experience to all its readers.

Place : New Delhi

CS (Dr.) Shyam Agrawal

Date : November 02, 2017 President The Institute of Company Secretaries of India

(ii )

(iv)

C O N T E N T S

1.

Introduction

1

2.

Entry Options & Opportunities for Business in India

11

3

Overview of Foreign Exchange Management

Act, 1999 (FEMA)

17

4

Foreign Direct Investment (FDI) in India

22

5

Establishment of Branch Office (BO)/Liaison

Office (LO)/Project Office (PO) in India

70

6

Liberalised Remittance Scheme (LRS)

85

7

Remittance of Assets Outside India

92

8

Compounding of Contraventions under FEMA

96

Appendix - I

101

Appendix - II

108

Appendix - III

111

Appendix - IV

112

Abbreviations

119

References

120

(v)

INTRODUCTION

“Sone ki chidiya”, a privileged breathe, an amicable,

opulent, incredible long lasting prosperous

economy, not then but today and in the future.

India Ranks amongst the

India’s over 1.3 billion strong population, 29 states

Top 10 FDI Destinations

and 7 union territories, 22 languages and over 1652

Globally .As per World

dialects, abundant natural resources, fertile lands,

Investment Report 2017,

cultural diversity, a mounting corporate elite, a

the favorite FDI

robust enduring creative economy and strong

Destinations remain the

influence of intel igentsia from the history viz. great

United States,

mathematicians, scientists, economists symbolically

China & India

depict the Golden bird. A tolerating, ever rising,

enthusiastic young economy with a flourished past,

liberalized and adaptable thoughts and processes

inspires for a thriving days ahead. What matters most is how India’s Foreign Direct

Investment (FDI) is an endorsement of its status as a preferred investment destination

amongst global investors.

World’s largest democracy - India is a Sovereign Socialist Secular Democratic Republic

with a Parliamentary form of government, which is federal in structure with unitary

features. India’s robust legal and political systems ensure long-term political stability.

The Indian political system is supported by Executive, Legislative and Judicial branches.

Every major branch is independent of one another.

India is one of the fastest growing economies in the world and has emerged as a key

destination for foreign investors in recent years. Economic reforms initiated in 1991

have grown in scope and scale and yielded increasingly salutary dividends. One of

them is the steady improvement in India’s relative position in the global economy,

reflected in New Delhi’s growing influence in international institutions (G-8, G-20) and

negotiating free trade areas (with ASEAN, EU). Another is the improved efficiency in

the economy and adoption of international “best practices” in the production of a

range of goods and services.

India is likely to grow at consistently higher rates (>7%) and retain its position as one of the fastest growing economies till 20201.

1.

International Monetary Fund.

1

2

Foreign Direct Investment - A Practitioner’s Guide

Doing Business 2018

As per Doing Business 2018: Reforming to Create Jobs, a World Bank Group Flagship

Publication, India jumped 30 places and entered the top 100 club in World Bank’s ease

of doing business ranking for 2018. South Asia is the only region not represented in the

top 50 ranking for ease of doing business. However, India stands out this year as one of

the 10 economies that improved the most in the areas measured by Doing Business.2

Doing Business 2018 measures regulations affecting 11 areas of the life of a business.

Ten of these areas are included in this year’s ranking on the ease of doing business:

•

Starting a Business

•

Dealing with Construction Permits

•

Getting Electricity

•

Registering Property

•

Getting Credit

•

Protecting Minority Investors

•

Paying Taxes

•

Trading Across Borders

•

Enforcing Contracts and

•

Resolving Insolvency.

Doing Business also measures labor market regulation, which is not included in 2018

ranking.

Doing Business Report 2018 - Major achievements for India

•

Starting a Business

Starting a business in India has been made faster by merging applications for

Permanent Account Number (PAN) and Tax Account Number (TAN) and by

improving the online application system. This reform applies to both Delhi and

Mumbai. Mumbai also made starting a business faster by merging the

applications for value added tax and the Profession Tax (PT).

•

Dealing with Construction Permits

India has reduced the number of procedures and time required to obtain a

building permit by implementing an online system that has streamlined the

process at the Municipality of New Delhi and Municipality of Greater Mumbai.

•

Getting Credit

India has strengthened access to credit by amending the rules on priority of

secured creditors outside reorganization proceedings and by adopting a new

2.

Doing Business 2018 : Reforming to Create Job, A World Bank Group Flagship Report.

Introduction

3

law on insolvency that provides a time limit and clear grounds for relief to the

automatic stay for secured creditors during reorganization proceedings. This

reform applies to both Delhi and Mumbai.

•

Protecting Minority Investors

India has strengthened the protection of minority investors by increasing the

remedies available in cases of prejudicial transactions between interested parties.

This reform applies to both Delhi and Mumbai.

•

Paying Taxes

Paying taxes in India has been made easier by requiring the payments to be

made electronically to the Employees Provident Fund and introducing a set of

administrative measures easing compliance with corporate income tax. This

reform applies to both Delhi and Mumbai.

•

Trading Across Borders

Import border compliance time in Mumbai has been reduced by improving

infrastructure at the Nhava Sheva Port. Export and import border compliance

costs has also been reduced in both Delhi and Mumbai by eliminating merchant

overtime fees and through the increased use of electronic and mobile platforms.

•

Enforcing Contracts

Enforcing contracts in India has made easier by introducing the National Judicial

Data Grid, which makes it possible to generate case management reports on

local courts. This reform applies to both Delhi and Mumbai.

•

Resolving Insolvency

Resolving insolvency has also been made easier by adopting a new Insolvency

and bankruptcy code that introduced a reorganization procedure for corporate

debtors and facilitated continuation of the debtor’s business during insolvency

proceedings. This reform applies to both Delhi and Mumbai.

•

Labor market regulation

India increased the mandatory length of paid maternity leave. This reform

applies to both Delhi and Mumbai

The important highlights of India’s performance as per the World Bank in the

Doing Business Report 2018 are:

1. Resolving Insolvency

a.

Rank improved from 136 to 103

b. Distance to Frontier (DTF) score improved from 32.75 to 40.75

c.

Strength of insolvency framework index increased from 6 to 8.5

d. Insolvency & Bankruptcy Code created for efficient handling of restructuring

& insolvency proceedings

e. Professional institutes set up for handling restructuring & insolvency

proceedings

4

Foreign Direct Investment - A Practitioner’s Guide

2. Paying Taxes

a.

Rank improved from 172 to 119

b. DTF score improved from 46.58 to 66.06

c.

Payments reduced from 25 to 13 in a year

d. Time reduced from 241 to 214 hours

e. Total tax rate reduced from 60.6% to 55.3% (% of profit)

f.

Post filing index improved from 4.3 to 49.31

g. Enabled electronic registration, return & payment of ESI & EPF contributions

3. Getting Credit

a.

Rank improved from 44 to 29

b. DTF score improved from 65 to 75

c.

Strength of legal rights index improved from 6 to 8

d. Credit bureau coverage increased from 21.4% to 43.5% (% of adults)

e. Increased coverage of security interest registration under SARFAESI Act

f.

Secured creditors prioritized over Government dues for purposes of recovery

4. Enforcing Contracts

a.

Rank improved from 172 to 164

b. DTF score improved from 35.19 to 40.76

c.

Cost reduced from 39.6% to 31% (% of claim)

d. Quality of judicial process index improved from 9 to 10.3

e. Dedicated commercial courts established

f.

National Judicial Data Grid (NJDG) to monitor and manage court cases

5. Protecting Minority Investors

a.

Rank improved from 13 to 4

b. DTF score improved from 73.33 to 80

c.

Strength of minority investor protection index increased from 7.3 to 8

d. Extent of conflict of interest regulation index increased from 6.7 to 7.3

e. Extent of shareholder governance index increased from 8 to 8.7

f.

Greater transparency requirements for interested parties transactions

g. Greater shareholder protection through action against directors & claims

for damages

Introduction

5

6. Construction Permits

a.

Rank improved from 185 to 181

b. DTF score improved from 32.83 to 38.80

c.

Procedures to obtain construction permits reduced from 35.1 to 30.1

d. Time reduced from 190.0 to 143.9 days

e. Cost reduced from 25.9 per cent to 23.2 per cent of warehouse value

Year

2015

2016

2017

2018

India’s EODB Ranking

134

131

130

100

A favorable demography for higher growth

India not only supports one of the largest populations in the world, but also one of the

youngest. Fifty per cent of its population is below the age of 25 and two-thirds below

the age of 35. Also, about 65 per cent of Indians are in the working age group, giving

the country a significant edge in terms of cost competitiveness and low labour costs.

Moreover, India’s labour force has a strong knowledge base with a significant English-

speaking population, making it a top destination for multinational corporations that are

looking to expand their overseas operations for market and talent.

"Two hundred and fifty million people are set to join India's workforce by 2030. As a big chunk of the population shifts into the working age group, the offshoot of that is an

increase in disposable income and conspicuous consumption. This is the most exciting

aspect of India's demographic dividend."3

The Indian consumer market will grow 2.5 times by 20254

Consumer spending in India grew from US$ 549 billion to US$ 1.06 trillion between

2006 and 2011, putting India on the path to becoming one of the world’s largest

consumer markets by 2025. India’s consumption is expected to rise 7.3 per cent annually

over the next 20 years. By 2040, nine out of every ten Indians will belong to ‘the global

middle class group’ with daily expenditures ranging between US$ 10 and US$ 100 per

person in today’s purchasing power parity terms.

Seventy per cent of this expenditure will be on discretionary items like entertainment,

healthcare, communication, education, personal products, services and so on. The

absolute number of India’s middle class will touch 1 billion by 2039.

‘Foreign Direct Investment (FDI) Inflows - A Success Story’

The early nineties was a period when the Indian economy faced a severe Balance of

Payment crisis. Exports began to experience serious difficulties. The crippling external

debts were putting pressure on economy. In view of all these developments there was

3.

Sunil Devmurari, Country Manager, Euromonitor : October 2012.

4.

investindia.gov.in.

6

Foreign Direct Investment - A Practitioner’s Guide

a serious threat of economy defaulting in respect of external payments liability. It was

under such adverse situation that the policy makers decided to adopt a more liberal and

global approach opening or liberalising its door to FDI inflows in order to restore the

confidence of foreign investors. FDI provides a situation wherein both the host and the

home nations derive some benefit. The home countries want to take the advantage of

the vast markets opened by industrial growth. Whereas the host countries get to acquire

resources ranging from financial, capital, entrepreneurship, technological know-how

and managerial skills which assist it in supplementing its domestic savings and foreign

exchange.

The evolution of FDI in India – Three Phases

The First Phase (Between 1969-1991)

•

Monopolies and Restrictive Trade Practices Commission (MRTP) in 1969,

imposed restrictions on the size of operations, pricing of products and services

of foreign companies.

•

The Foreign Exchange Regulation Act (FERA), enacted in 1973, limited the

extent of foreign equity to 40%, though this limit could be raised to 74%

for technology-intensive, export-intensive, and core-sector industries.

•

A selective licensing regime was instituted for technology transfer and royalty

payments and applicants were subjected to export obligations.

The Second Phase (Between 1991 and 2000)

•

Liberalisation of the FDI policy, as part of the Government’s economic reforms

program

•

In 1991 as per the ‘Statement on Industrial Policy’, FDI was allowed on the

automatic route, up to 51%, in 35 high priority industries.

•

A Foreign Investment Promotion Board (FIPB) was constituted to consider

cases under the government approval route.

The Third Phase (Between 2000 till date)

•

Except for prohibited sectors, rest of the activities is being kept under

automatic route.

•

Caps were gradually raised in a number of sectors/activities.

•

Proposal for foreign investment under Government Route are considered by

respective Administrative Ministry/Department.

The Government in last three years has undertaken a number of reforms in different

areas of economy. In this regard FDI policy reforms carried out by Government are

Introduction

7

nothing less than historic. The scale of reforms can be gauged from the fact that during

this period, 21 sectors covering 87 areas of FDI policy have undergone reforms. This

has resulted in increased FDI inflows which year after year is setting up new records. If

the FDI inflows of US Dollar 55.6 billion for the year ending March, 2016 were an all-

time high, the country registered FDI inflow of US Dollar 60.08 billion in the next

financial year (2016-17), thereby scaling an even higher peak.

Increased FDI inflows in the country are largely attributed to intense and bold policy

reforms the Government undertook to bring pragmatism in the FDI regime. The country

has now become the topmost attractive destination for foreign investment. A new

direction was given to FDI policy reforms in 2014 itself when conservative sectors like

Rail Infrastructure and Defence were liberalized. This was accompanied by reforms in

other sectors such as Medical Devices and Construction Development. The momentum

of positive business climate was further ignited with launch of Make in India initiative in

September 2014. The country in the year ending March 2015 received FDI of US Dollar

45.15 billion as against US Dollar 36.05 billion in the preceding fiscal.

Reform measures gained further momentum the fol owing year. FDI policy on a number

of sectors was liberalized. With a view to provide ease of doing business, licensed and

non-sensitive activities were placed under automatic route and investment caps were

raised. FDI policy provisions were radical y overhauled across sectors such as Construction

Development, Broadcasting, Retail Trading, Air Transport, Insurance and Pension among

others. In addition, initiatives such as introduction of composite caps in the FDI policy

and raising the FIPB approval limit were also undertaken to promote ease of doing

business in the country. These initiatives resulted in the country receiving the then

highest ever FDI inflow of US Dollar 55.6 billion.

The measures towards FDI policy liberalization and reforms continued in the last financial

year. A paradigm shift was made in the FDI policy on retail and other financial services

sector. For retail trading of food products, the Government permitted 100% FDI with

unqualified condition that such food products have to be manufactured and/or produced

in India. The measure promotes domestic industry, restricts imports, creates local jobs

and results in conserving valuable foreign exchange. In the Financial services sector,

Government promulgated that any financial sector activity which is regulated by any

financial sector regulator will be eligible for 100% FDI under automatic route, and

approval would be needed only for unregulated financial sector activities. During the

last financial year, FDI policy reforms were also undertaken in other sectors such as

Defence, Airport Infrastructure, Broadcasting, Animal Husbandry and Retail Trading.

The path breaking reform measures undertaken during the last financial year have resulted

in India surpassing the FDI received in 2015-16 and registering an inflow of US Dollar

60.08 billion during 2016-17, a new all time high.

It has been the endeavor of the Government to put in place an enabling and investor

friendly FDI policy. The intent all this while has been to make the FDI policy more

investor friendly and remove the policy bottlenecks that have been hindering the

investment inflows into the country. The steps taken in this direction during the last

three years have borne fruit as is evident from the ever increasing volumes of FDI

inflows being received into the country.

8

Foreign Direct Investment - A Practitioner’s Guide

FDI trends

FDI trends during the last three years, and after the launch of Make in India initiative are

presented below:

A. Trends for the period of last 3 years (2014-15 to 2016-17)

The FDI equity

The FDI equity

The overall

inflow received

inflow received

manufacturing

during the last

through

sectors have

three financial

approval route

witnessed a

years is US$

amounts to US$

growth of 4% in

114.41 billion.

The total FDI

11.69 billion,

comparison to

It shows an

inflow during

which is 64%

previous three

increase of

last three years

higher than the

financial years

40% compared

grew by 38%.

previous three

(i.e. from US$

to previous

years (US $ 7.15

48.03 billion to

period of three

billion).

US$ 50.09

financial years

billion).

(2011-12 to

2013-14) (US

$ 81.84

billion).

B. Trends after Make in India initiative (October, 2014 to March, 2017)

The FDI equity inflow received after the launch of Make in India initiative

i.e. October, 2014 to March, 2017 of 30 months is US$ 99.72 billion. It

shows an increase of 62% compared to previous 30 months before

the launch of MII initiative i.e. April 2012 to Sept. 2014 (US $ 61.41

billion).

The overall manufacturing sectors have witnessed a growth of 14% in

comparison to previous 30 months before launch of Make in India

initiative (i.e. from US$ 35.52 billion to US$ 40.47 billion).

The total FDI inflow grew by 51%, i.e. US $ 137.44 billion in comparison

to US $ 90.98 billion of the previous 30 months before the launch of

Make in India initiative i.e. April 2012 to Sept. 2014.

Introduction

9

C. Trends in the Financial Year 2016-17

The FDI equity inflow received

The FDI equity inflow received

during the F.Y. 2016-17 is US$ 43.48

through approval route during F.Y.

billion. It shows an increase of 9%

2016-17 amounts to US$ 5.90

compared to previous F.Y. 2015-16

billion, which is 65% higher than

(US $ 40.00 bil ion). It is the highest

the previous year (US $ 3.57 bil ion).

ever for a particular financial year.

The overall manufacturing sectors

The total FDI inflow grew by 8%,

have witnessed a tremendous

i.e. US $ 60.08 billion in 2016-17 in

growth of 52% in comparison to

comparison to US $ 55.56 billion of

previous F.Y. 2015-16 (i.e. from US$

the previous year. It is the highest

13.35 billion to US$ 20.26 bil ion).

ever for a particular financial year.

Prior to this, the highest FDI inflow

was reported in the F.Y. (2015-16).

Foreign Direct Investment in India

India’s Foreign Direct Investment (FDI) is an endorsement of its status as a preferred

investment destination amongst global investors. India’s steady economic liberalization

and its embrace of the global economy have been key factors in attracting FDI.

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS IN INDIA5

Amount Rupees in Crores (US$ in Million)

Rank

2014-15

2015-16

2016-17

Cumulative

%age to

(April –

(April –

(April-

inflows

total

March )

March)

March)

(April,2000 - Inflows

March, 17)

(in terms

of US $)

1.

MAURITIUS

55,172

54,706

105,587

585, 950

34%

(9,030)

(8,355)

(15,728)

(111,638)

2.

SINGAPORE

41,350

89,510

58,376

315,042

16 %

(6,742)

(13,692)

(8,711)

(54,590)

3.

JAPAN

12,752

17,275

31,588

142,260

8%

(2,084)

(2,614)

(4,709)

(25,675)

4.

U.K.

8,769

5,938

9,953

125,545

7 %

(1,447)

(898)

(1,483)

(24,591)

5.

FDI Fact Sheet : DIPP.

10

Foreign Direct Investment - A Practitioner’s Guide

Rank

2014-15

2015-16

2016-17

Cumulative

%age to

(April –

(April –

(April-

inflows

total

March )

March)

March)

(April,2000 - Inflows

March, 17)

(in terms

of US $)

5.

NETHERLANDS

20,960

17,275

22,633

117,167

6 %

(3,436)

(2,643)

(3,367)

(20,682)

6.

U.S.A.

11,150

27,695

15,957

110,532

6 %

(1,824)

(4,192)

(2,379)

(20,323)

7.

GERMANY

6,904

6,361

7,175

52,045

3 %

(1,125)

(986)

(1,069)

(9,698)

8.

CYPRUS

3,634

3,317

4,050

46,731

3 %

(598)

(508)

(604)

(9,156)

9

FRANCE

3,881

3,937

4,112

30,637

2 %

(635)

(598)

(614)

(5,725)

10.

UAE

2,251

6,528

4,539

26,187

1 %

(367)

(985)

(675)

(4,705)

189,107

262,322

291,696

1,787,555

TOTAL FDI INFLOW

FROM ALL

COUNTRIES

(30,931)

(40,001)

(43,478)

(332,112)

***

ENTRY OPTIONS & OPPORTUNITIES FOR BUSINESS

IN INDIA

To do business in India, following options are available to foreign companies:

Wholly owned subsidiary

Joint Venture with Indian partner

Foreign Institutional Investors

Liaison Office

Branch Office

Project Office

Wholly owned subsidiary : Foreign companies can set up wholly owned subsidiary

companies in India in form of private 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

11

12

Foreign Direct Investment - A Practitioner’s Guide

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.

Foreign Institutional Investor : FIIs can also invest in India in financial markets such

as pension funds, mutual funds, investment trusts and asset management companies or

their power of attorney holders. FIIs can invest in all securities in primary and secondary

markets including the equity and other instruments of companies which are listed or are

to be listed on stock exchanges of India.

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.

Entry Options & Opportunities for Business in India

13

ENTRY PROCEDURE

Incorporation of

Setting-up of

Immediate

a Company

Business

Business

Compliances

•

Obtain DIN

•

Branch Office

•

PAN

•

Draft MOA & AOA

•

Liaison Office

•

Project

Office

•

TAN

•

Filing Forms with

(Registration with

registrar

•

GST Registeration

Registrar

of

•

Obtain` Certificate

Companies and

•

FRRO

of Incorporation

approval of RBI)

•

IEC

Incorporation of a company

For registration and incorporation, application has to be filed with Registrar of Companies.

Once a company has been registered and incorporated in India, it is subject to laws and

regulations as applicable to other domestic companies in India.

There two types of companies which can be incorporated:

Private

Public

Company

Company

Private company : A private company is a company which has minimum of two

members.

By its articles, a private company has to:

•

Restrict rights to transfer its shares, if any

•

Limit its shareholders to a number of two hundred

•

Prohibit any invitation to public to subscribe any of its Securities

14

Foreign Direct Investment - A Practitioner’s Guide

Public company: A public company is defined as a company which is not a private

company. A subsidiary of a public company is also treated as a public company. A public

company is required to have a minimum seven members and three directors.

Procedure of Incorporation of Company

Following steps are required to incorporate a company:

•

Obtaining DIN (Director Identification Number)

•

Applying for name availability

•

Drafting Memorandum of Association(MOA) and Articles of Association (AOA)

•

Court stamping of MOA and AOA

•

Signing of MOA and AOA by first subscribers

•

Filing Forms with Registrar of Companies (ROC)

•

Vetting of MOA and AOA by ROC

•

Obtaining Certificate of Incorporation

•

Other State & Central level registrations

•

Meeting annual compliances.

Immediate Business Compliances

Following registrations would be required to be done, depending on nature of business:

PAN (Permanent

All income tax payers are required to obtain an income

Account Number)

tax registration number i.e. PAN

GST Registration

The registration in GST is PAN based and State specific.

Supplier has to register in each such State or Union territory

TAN (Tax Deduction

While running a business, certain payments will require

Account Number)

the payee to withhold tax. A new business is required to

obtain TAN from Income Tax Department.

FRRO (Foreigners

Foreigners coming to India on employment need to

Regional registration register with FRRO within 14 days of their arrival.

Office)

IEC (Import Export

Prior to carrying out any export or import activities, it is

Code)

mandatory to obtain an IEC from Directorate General of

Foreign Trade

Step Involved in Investment

•

Identification of structure

Entry Options & Opportunities for Business in India

15

•

Central Government approval if required

•

Setting up or incorporating the structure

•

Inflow of funds via eligible instruments and following pricing guidelines

•

Meeting reporting requirements of RBI and applicable Acts/Laws

•

Registrations/obtaining key documents like PAN etc.

•

Project approval at State/UT level

•

Finding ideal space for business activity based on various parameters like

incentives, cost, availability of man power etc.

•

Manufacturing projects are required to file Industrial Entrepreneur’s

Memorandum (IEM), some of the industries may also require industrial license

•

Construction/renovation of unit

•

Hiring of manpower

•

Obtaining licenses if any.

Entry and Investment Routes

•

Foreigners can directly invest in India either on their own or as a joint venture,

with a few exceptions with regard to investment limits and sectors.

•

No government approval is required for FDI in virtually all sectors except a

small negative list formulated by government. Sector specific guidelines are

formulated by government giving sectoral investment caps if any.

•

If an investment does not qualify for automatic approval, Competent Authority

considers the proposal.

•

Use of foreign brands names/trademarks is permitted for sales in India.

•

Indian capital markets are open to FII’s and Indian companies are allowed to

raise funds from international capital markets

•

Foreign technology collaborations are allowed with agreements on Technical

knowhow fees

•

NRI’s can invest in shares and or convertible debentures of Indian companies

on a non-repatriable basis and these investments are not considered as FDI

Other Important Aspects

•

Repatriation of investment capital and profits earned:

There are three basic points to note with respect to repatriation:

1. All foreign investments are freely repatriable, subject to sectoral policies.

Dividends declared on foreign investments can be remitted freely through an

authorised dealer.

16

Foreign Direct Investment - A Practitioner’s Guide

2. Non-residents can sell shares on the stock exchange without prior approval of

the Reserve Bank of India (RBI) and repatriate the sale proceeds through a

bank, if they hold the shares on repatriation basis and if they have to take

necessary NOC/tax clearance certificate issued by the Income Tax authorities.

3. For sale of shares through private arrangements, regional offices of the RBI

grant permission for recognized units of foreign equity in Indian company in

terms of guidelines indicated in Regulation 10.B of Notification No. FEMA.20/

2000 RB dated May 2000. The sale price of shares on recognized units is to be

determined in accordance with the guidelines prescribed under Regulation

10.B (2) of the above Notification (www.rbi.org.in).

•

Locational Restrictions : Industrial undertakings are free to select the location of

their projects. Industrial License is required if the proposed location is within 25 km

of the Standard Urban Area limits of 23 cities having population of 1 million as per

1991 census. (www.censusindia.net)

•

Environmental Clearances : Entrepreneurs are required to obtain statutory

clearances relating to pollution control and environment as necessary for setting up

an industrial project for 31 categories of industries in terms of Notification S.O. 60 (E)

dated 27.1.94 as amended from time to time, issued by the Ministry of Environment

Forests & Climate Change under The Environment (Protection) Act, 1986. Details

can be obtained at the website of Ministry of Environment, Forests & Climate Change.

Incentives

Central Government Incentives:

•

Investment allowance

•

Incentives available to units set-up in Special Economic Zones (SEZ), National

Investment & Manufacturing Zones (NIMZ) etc. and Export Oriented Units

(EOUs).

•

Exports incentives like duty drawback, duty exemption/remission schemes,

focus products & market schemes etc.

•

Areas based incentives like unit set-up in North-East region, Jammu & Kashmir,

Himachal Pradesh, Uttarakhand.

•

Sector specific incentives like Modified Special Incentive Package Scheme(M-

SIPS) in electronics.

State Government Incentives:

•

Each state government has its own incentive policy which offers various types

of incentives based on the amount of investments, project location, employment

generation, etc. The incentives differ from state to state and are generally laid

down in each state’s industrial policy.

•

The broad categories of state incentives include: stamp duty exemption for

land acquisition, refund or exemption of value added tax, exemption from

payment of electricity duty etc.

***

OVERVIEW OF FOREIGN EXCHANGE MANAGEMENT

ACT, 1999 (FEMA)

Historical Background

The Parliament had enacted the Foreign Exchange Management Act, 1999 (FEMA) to

replace the Foreign Exchange Regulation Act, 1973.The emphasis has been shifted

from ‘regulation’ to ‘management’. FEMA came into force on the 1st day of June,

2000.

Exchange Control in India dates back to 1939 when for the first time it was introduced

as a war measure under the Defense of India Rules. During the World War II September

1939, there was a shortage of foreign exchange resources. A system of exchange

control was first time introduced through a series of rules under the Defense of India

Act, 1939 on temporary basis. The foreign crisis persisted for a long time and finally it

got enacted in the statute under the title “Foreign Exchange Regulation Act, 1947.”

This was meant to last for 10 years. However, 10 years of economic development did

not ease the foreign exchange constraint, it only made things worse. Thus, FERA

permanently entered the statue book in 1957.

Subsequently, this Act was replaced by the Foreign Exchange Regulation Act, 1973

(FERA, 1973), which came into force with effect from January 1, 1974. In 1974, FERA

was completely overhauled with all offences being considered as criminal offences

with mens rea. The Enforcement Directorate could arrest any person without even

arrest warrant.

In the 1990s, consistent with the general philosophy of economic reforms a sea change

relating to the broad approach to reform in the external sector took place. In 1991

government of India initiated the policy of economic liberalization. Foreign investments

in many sectors were permitted. This resulted in increased flow of foreign exchange in

India and foreign exchange reserves increased substantially.

In 1997, the Tarapore Committee on Capital Account Convertibility (CAC), constituted

by the Reserve Bank, had indicated the preconditions for Capital Account Convertibility.

The three crucial preconditions were fiscal consolidation, a mandated inflation target

and, strengthening of the financial system. The Tarapore Committee had also

recommended change in the legislative framework governing foreign exchange

transactions.

A Bill was introduced in the Lok Sabha on 4 August, 98. The Bill was referred to the

standing committee on Finance which submitted it’s report to the House on 23

December’98 with suggestion and modifications. The 12th Lok Sabha was dissolved

before any decision could be taken on the bill. The Bill subsequently lapsed. The bill

17

18

Foreign Direct Investment - A Practitioner’s Guide

was again introduced in the 13th Lok Sabha on 25th Oct’99 and was passed in the

winter session of Parliament in 1999. The Presidential Assent was received on 29th

December, 1999. Finally FEMA came into operation w.e.f. 1st June 2000 vide G.S.R

371 (E), dated 1st May, 2000.

Accordingly, the Foreign Exchange Regulation Act (FERA) was repealed and replaced

by the new Foreign Exchange Management Act (FEMA) with effect from June 2000.

The philosophical approach was shifted from that of conservation of foreign exchange

to one of facilitating trade and payments as well as developing orderly foreign exchange

market.

Overview of FEMA

The Foreign Exchange Management Act, 1999 was enacted to consolidate and amend

the law relating to foreign exchange with the objective of facilitating external trade and

payments and for promoting the orderly development and maintenance of foreign

exchange market in India. In fact it is the central legislation that deals with inbound

investments into India and outbound investments from India and trade and business

between India and the other countries.

Free transactions on current account subject to

reasonable restrictions that may be imposed

RBI control over Capital Account Transactions

Control over realization of export proceeds

Dealings in Foreign Exchange through Authorised

The FEMA provides

Person (e.g Authorised Dealer/ Money Changer/

Off-shore Banking Unit)

Adjudication of Offences-Appeal provisions

including Special Director (Appeals) and Appellate

Tribunal

Directorate of Enforcement

Applicability

Foreign Exchange Management Act, 1999 extends to the whole of India. The Act also

applies to all branches, offices and agencies outside India owned or controlled by a

person resident in India and also to any contravention there under committed outside

India by any person to whom this Act applies.

FEMA has considerably liberalised provisions in respect of foreign exchange. However,

sometimes an extraordinary situation may arise. In such cases, Central Government can

suspend operation of any or all provisions of FEMA in public interest, by issuing a

notification. The suspension can be relaxed by issuing a notification.

Overview of Provisions of FEMA Act, 1999

19

Overall Scheme

FEMA makes provisions for dealings in foreign exchange. Broadly, all Current Account

Transactions are free. However Central Government can impose reasonable restrictions

by issuing rules (Section 3 FEMA).Capital Account Transactions are permitted to the

extent specified by RBI by issuing Regulations (Section 6 of FEMA)

FEMA envisages that RBI shal have a control ing role in management of foreign exchange.

Since RBI cannot directly handle foreign exchange transactions, it authorizes “Authorised

Persons” to deal in foreign exchange as per directions issued by RBI. (Section 10 FEMA).

RBI is empowered to issue directions to such “Authorised Persons” under Section 11.

FEMA also makes provisions for enforcement, penalties, adjudication and appeal. The

FEMA 1999 contains only basic legal framework. The practical aspects are covered in

Rules made by Central Government and Regulations made by RBI.

FDI Policy announced by Department of Industrial Policy & Promotion, Ministry of

Industries and Commerce directly relevant to understanding the provisions of FEMA.

Instructions/Guidelines etc. of Ministry of Finance and Securities and Exchange

Board of India (SEBI) become relevant when (ECB) /ADR/GDR and capital market is

involved.

Structure

The legislations, rules and regulations, regulating Foreign Exchange Management can

be divided into the following:

•

FEMA Bare Act of 49 sections (Supreme Legislation) 5 Sets of Rules made by

Ministry of Finance under section 46 of FEMA (Subordinate or delegated

Legislations)

•

Sets of Regulations made by RBI under section 47 of FEMA (Subordinate or

delegated Legislations)

•

Master Direction issued by RBI on every year

•

Foreign Direct Investment policy issued by Department of Industrial Policy and

Promotion.

•

Reserve Bank of India Notifications and Circulars

•

FEMA contains 7 Chapters divided into 49 sections of which 12 sections cover

operational part and the rest contravention, penalties, adjudication, appeals,

enforcement directorate, etc.

•

As far as transactions on account of trade in goods and services are concerned,

FEMA has by and large removed the restrictions except for the enabling provision

for the Central Government to impose reasonable restrictions in public interest.

•

The Capital Account Transactions will be regulated by RBI / Central

Government for which necessary circulars / notifications will have to be issued

under FEMA.

20

Foreign Direct Investment - A Practitioner’s Guide

CHAPTER I – Preliminary (Section 1&2)

CHAPTER II- Regulation and Management of Foreign Exchange (Section 3 –9)

CHAPTER III – Authorised Person (Section 10 –12)

CHAPTER IV – Contravention and Penalties (Section 13-15)

CHAPTER V – Adjudication and Appeal (Section 16- 35)

CHAPTER VI – Directorate of Enforcement (Section 36-38)

CHAPTER VII- Miscellaneous (Section 39 – 49)

Besides the FEMA, there are Set of Rules, Regulations and Master Directions

under the Act which help in implementation of the Act.

The Rules under FEMA

1. FEM (Encashment of Draft, Cheque, Instrument and Payment of Interest) Rules,

2000

2. FEM (Authentication of Documents) Rules, 2000

3. FEM (Current Account Transaction) Rules, 2000

4. FEM (Adjudication Proceedings and Appeal) Rules, 2000

5. FEM (Compounding Proceedings) Rules, 2000

6. The Appel ate Tribunal for Foreign Exchange (Recruitment, Salary and Al owances

and Other Conditions of Service of Chairperson and Members) Rules, 2000.

The Regulations under FEMA

1. FEM (Acquisition and Transfer of Immovable Property Outside India) Regulations,

2015

2. FEM (Borrowing and Lending in Rupees) Regulations, 2000

3. FEM (Borrowing or Lending in Foreign Exchange) Regulations, 2000

4. FEM (Deposit) Regulations, 2016

5. FEM (Export and Import of Currency) Regulations, 2015

6. FEM (Guarantees) Regulations, 2000

7. FEM (Acquisition and Transfer of Immovable Property in India) Regulations,

2000

8. FEM (Establishment in India of Branch office or a Project office or any other

Place of Business) Regulations, 2016

9. FEM (Export of Goods and Services) Regulations, 2015

Overview of Provisions of FEMA Act, 1999

21

10. FEM (Foreign Currency Accounts by a Person Resident in India) Regulations,

2015

11. FEM (Insurance) Regulations, 2015

12. FEM (Investment in Firm or Proprietary Concern in India) Regulations, 2000

13. FEM (Manner of Receipt and Payment) Regulations, 2016

14. FEM (Permissible Capital Account Transactions) Regulations, 2000

15. FEM (Possession and Retention of Foreign Currency) Regulations, 2015

16. FEM (Realization, Repatriation and Surrender of Foreign Exchange) Regulations,

2015

17. FEM (Remittance of Assets) Regulations, 2016

18. FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations,

2000

19. FEM (Foreign Exchange Derivative Contracts) Regulations, 2000

20. FEM (Transfer or Issue of any Foreign Security) Regulations, 2004

21. FEM (Crystallization of inoperative Foreign Currency Deposits) Regulations,

2014

22. FEMA. 120 (Original Notification 19)-120. F.E.M (Transfer or Issue of any foreign

Security) Regulations, 2004

23. FEM (International Financial Services Centre) Regulations, 2015

24. FEM (Regularization of Assets Held Abroad by a Person Resident in India)

Regulations, 2015

***

FOREIGN DIRECT INVESTMENT (FDI) IN INDIA

To promote Foreign Direct Investment (FDI), the Government has put in place an investor-

friendly policy, wherein except for a small negative list, most sectors are open for

100% FDI under the Automatic route. Further, the policy on FDI is reviewed on an

ongoing basis, to ensure that India remains attractive & investor friendly destination.

Changes are made in the policy after having intensive consultations with stakeholders

including apex industry chambers, Associations, representatives of industries/groups

and other organizations taking into consideration their views/comments. The FDI policy

is applicable across the sectors/ industries and equally applies to SME sector.

Understanding of Some Key Terms

‘AD Category-I Bank’ means a bank(Scheduled Commercial, State or Urban Cooperative)

which is authorized under Section 10(1) of FEMA to undertake all current and capital

account transactions according to the directions issued by the RBI from time to time.

‘Authorized Bank’ means a bank including a co-operative bank (other than an

authorized dealer) authorized by the Reserve Bank to maintain an account of a

person resident outside India.

‘Authorized Dealer’ means a person authorized as an authorized dealer under sub-

section (1) of section 10 of FEMA.

‘Authorized Person’ means an authorized dealer, money changer, offshore banking

unit or any other person for the time being authorized under sub-section (a) of

section 10 of FEMA to deal in foreign exchange or foreign securities.

‘Capital’ means equity shares; ful y, compulsorily & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures and warrants.

The equity shares issued in accordance with the provisions of the Companies Act,

as applicable, shall include equity shares that have been partly paid. Preference

shares and convertible debentures shall be required to be fully paid, and should be

mandatorily and fully convertible. Further, ‘warrant’ includes Share Warrant issued

by an Indian Company in accordance to provisions of the Companies Act, as

applicable.

‘Capital account transaction’ means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets

or liabilities in India of persons resident outside India, and includes transactions

referred to in sub-section (3) of section 6 of FEMA.

22

Foreign Direct Investment (FDI) in India

23

‘Competent Authority’ means the concerned Administrative Ministry/Department

empowered to grant government approval for foreign investment under the extant

FDI Policy and FEMA Regulations.

‘Control’ shall include the right to appoint a majority of the directors or to control

the management or policy decisions including by virtue of their shareholding or

management rights or shareholders agreements or voting agreements. For the

purposes of Limited Liability Partnership, ‘control’ wil mean right to appoint majority

of the designated partners, where such designated partners, with specific exclusion

to others, have control over all the policies of the LLP.

‘Convertible Note’ means an instrument issued by a startup company evidencing

receipt of money initially as debt, which is repayable at the option of the holder, or

which is convertible into such number of equity shares of such startup company,

within a period not exceeding five years from the date of issue of the convertible

note, upon occurrence of specified events as per the other terms and conditions

agreed to and indicated in the instrument.

‘Depository Receipt’ (DR) means a negotiable security issued outside India by a

Depository bank, on behalf of an Indian company, which represent the local Rupee

denominated equity shares of the company held as deposit by a Custodian bank in

India. DRs are traded on Stock Exchanges in the US, Singapore, Luxembourg, etc.

DRs listed and traded in the US markets are known as American Depository Receipts

(ADRs) and those listed and traded anywhere/elsewhere are known as Global

Depository Receipts (GDRs). DRs are governed by Notification No. FEMA 330/

2014-RB, issued by Reserve Bank of India.

‘Employees’ Stock Option’ means the option given to the directors, officers or

employees of a company or of its holding company or joint venture or wholly

owned overseas subsidiary/subsidiaries, if any, which gives such directors, officers

or employees, the benefit or right to purchase, or to subscribe for, the shares of the

company at a future date at a pre-determined price.

‘Erstwhile Overseas Corporate Body’(OCB) means a company, partnership firm,

society and other corporate body owned directly or indirectly to the extent of at

least sixty percent by non-resident Indians and includes overseas trust in which not

less than sixty percent beneficial interest is held by non-resident Indians directly or

indirectly but irrevocably and which was in existence on the date of commencement

of the Foreign Exchange Management (Withdrawal of General Permission to Overseas

Corporate Bodies (OCBs) ) Regulations, 2003 (the Regulations) and immediately

prior to such commencement was eligible to undertake transactions pursuant to

the general permission granted under the Regulations.

‘Foreign Currency Convertible Bond’ (FCCB) means a bond issued by an Indian

company expressed in foreign currency, the principal and interest of which is payable

in foreign currency. FCCBs are issued in accordance with the Foreign Currency

Convertible Bonds and ordinary shares (through depository receipt mechanism)

Scheme, 1993 and subscribed by a non-resident entity in foreign currency and

convertible into ordinary shares of the issuing company in any manner, either in

whole, or in part.

24

Foreign Direct Investment - A Practitioner’s Guide

‘FDI’ means investment by non-resident entity/person resident outside India in the

capital of an Indian company under Schedule 1 of Foreign Exchange Management

(Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000

‘FDI linked performance conditions’ means the sector specific conditions for companies receiving foreign investment.

‘FEMA’ means the Foreign Exchange Management Act, 1999 (42 of 1999).

‘Foreign Institutional Investor’ (FII) means an entity established or incorporated

outside India which proposes to make investment in India and which is registered

as a FII in accordance with the Securities and Exchange Board of India (SEBI) (Foreign

Institutional Investor) Regulations 1995.

‘Foreign Portfolio Investor’(FPI) means a person registered in accordance with the

provisions of Securities and Exchange Board of India (SEBI) (Foreign Portfolio Investors)

Regulations, 2014, as amended from time to time.

‘Foreign Venture Capital Investor’ (FVCI) means an investor incorporated and

established outside India, which is registered under the Securities and Exchange

Board of India (Foreign Venture Capital Investor) Regulations, 2000 {SEBI(FVCI)

Regulations} and proposes to make investment in accordance with the regulations.

‘Government route’ means that investment in the capital of resident entities by

non-resident entities can be made only with the prior approval of Government

(Competent Ministry/Department for grant of approval).

‘Group Company’ means two or more enterprises which, directly or indirectly, are

in a position to:

(i) exercise twenty-six percent or more of voting rights in other enterprise; or

(ii) appoint more than fifty percent of members of board of directors in the

other enterprise.

‘Holding Company’ would have the same meaning as defined in Companies Act,

as applicable.

‘Indian Company’ means a company incorporated in India under the Companies

Act, as applicable.

‘Indian Venture Capital Undertaking’ (IVCU) means an Indian company:

(i) whose shares are not listed in a recognised stock exchange in India;

(ii) which is engaged in the business of providing services, production or manufacture

of articles or things, but does not include such activities or sectors which are

specified in the negative list by the SEBI, with approval of Central Government,

by notification in the Official Gazette in this behalf.

‘Investment Vehicle’ shall mean an entity registered and regulated under relevant

regulations framed by SEBI or any other authority designated for the purpose and

shall include Real Estate Investment Trusts (REITs) governed by the SEBI (REITs)

Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI

Foreign Direct Investment (FDI) in India

25

(InvIts) Regulations, 2014 and Alternative Investment Funds (AIFs) governed by

the SEBI (AIFs) Regulations, 2012.

‘Investing Company’ means an Indian Company holding only investments in other

Indian company/(ies), directly or indirectly, other than for trading of such holdings/

securities.

‘Investment on repatriable basis’ means investment, the sale proceeds of which,

net of taxes, are eligible to be repatriated out of India and the expression ‘investment

on non-repatriable basis’ shall be construed accordingly.

‘Joint Venture’ (JV) means an Indian entity incorporated in accordance with the

laws and regulations in India in whose capital a non-resident entity makes an

investment.

‘Limited Liability Partnership’ means a Limited Liability Partnership firm, formed and registered under the Limited Liability Partnership Act, 2008.

‘Manufacture’, with its grammatical variations, means a change in a non-living

physical object or article or thing- (a) resulting in transformation of the object or

article or thing into a new and distinct object or article or thing having a different

name, character and use; or (b) bringing into existence of a new and distinct object

or article or thing with a different chemical composition or integral structure.

‘Non-resident entity’ means a ‘person resident outside India’ as defined under

FEMA.

‘Non-Resident Indian’ (NRI) means an individual resident outside India who is a

citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning

of section 7 (A) of the Citizenship Act, 1955. ‘Persons of Indian Origin’ cardholders

registered as such under Notification No. 26011/4/98 F.I. dated 19.8.2002 issued

by the Central Government are deemed to be ‘Overseas Citizen of India’ cardholders’

A company is considered as ‘Owned’ by resident Indian citizens if more than 50%

of the capital in it is beneficially owned by resident Indian citizens and / or Indian

companies, which are ultimately owned and controlled by resident Indian citizens.

A Limited Liability Partnership wil be considered as owned by resident Indian citizens

if more than 50% of the investment in such an LLP is contributed by resident Indian

citizens and/or entities which are ultimately ‘owned and controlled by resident

Indian citizens’ and such resident Indian citizens and entities have majority of the

profit share.

‘Person’ includes-

i. an individual,

ii. a Hindu undivided family,

iii. a company,

iv. a firm,

v. an association of persons or a body of individuals whether incorporated or not,

26

Foreign Direct Investment - A Practitioner’s Guide

vi. every artificial juridical person, not falling within any of the preceding sub-

clauses, and

vi . any agency, office, or branch owned or controlled by such person.

‘Person of Indian Origin’ (PIO) means a citizen of any country other than Bangladesh or Pakistan, if

i.

he at any time held Indian Passport; or

ii.

he or either of his parents or any of his grandparents was a citizen of India by

virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or

iii. the person is a spouse of an Indian citizen or a person referred to in sub-clause

(i) or (ii).

‘Person resident in India’ means-

i.

a person residing in India for more than one hundred and eighty-two days

during the course of the preceding financial year but does not include-

A. A person who has gone out of India or who stays outside India, in either

case-

a.

for or on taking up employment outside India, or

b. for carrying on outside India a business or vocation outside India, or

c.

for any other purpose, in such circumstances as would indicate his

intention to stay outside India for an uncertain period;

B. A person who has come to or stays in India, in either case, otherwise than-

a.

for or on taking up employment in India; or

b. for carrying on in India a business or vocation in India, or

c.

for any other purpose, in such circumstances as would indicate his

intention to stay in India for an uncertain period;

ii.

any person or body corporate registered or incorporated in India,

iii. an office, branch or agency in India owned or controlled by a person resident

outside India,

iv. an office, branch or agency outside India owned or controlled by a person

resident in India.

‘Person resident outside India’ means a person who is not a Person resident in

India.

‘Portfolio Investment Scheme’ means the Portfolio Investment Scheme referred to

in Schedules 2, 2A& 3 of FEMA (Transfer or Issue of Security by a Person Resident

Outside India) Regulations, 2000.

‘RBI’ means the Reserve Bank of India established under the Reserve Bank of India

Act, 1934.

Foreign Direct Investment (FDI) in India

27

‘Resident Entity’ means ‘Person resident in India’ excluding an individual.

‘Resident Indian Citizen’ shall be interpreted in line with the definition of ‘person resident in India’ as per FEMA, 1999, read in conjunction with the Indian Citizenship

Act, 1955.

‘SEBI’ means the Securities and Exchange Board of India established under the

Securities and Exchange Board of India Act, 1992.

‘SEZ’ means a Special Economic Zone as defined in Special Economic Zone Act,

2005.

‘SIA’ means Secretariat of Industrial Assistance in DIPP, Ministry of Commerce &

Industry, Government of India.

‘Sweat Equity Shares’ means such equity shares as issued by a company to its

directors or employees at a discount or for consideration other than cash, for providing

their know-how or making available rights in the nature of intellectual property

rights or value additions, by whatever name called.

‘Transferable Development Rights’ (TDR) means certificates issued in respect of

category of land acquired for public purposes either by the Central or State

Government in consideration of surrender of land by the owner without monetary

compensation, which are transferable in part or whole.

‘Unit’ shall mean beneficial interest of an investor in the Investment Vehicle and

shall include shares or partnership interests.

‘Venture Capital Fund’ (VCF) means a Fund registered as a ‘venture capital fund’

under SEBI (Venture Capital Funds) Regulations, 1996.

Eligible Investors under FDI

Foreign

Institutional

Erstwhile

Investor (FII)

A non-

OCBs that are

and Foreign

A non

resident

incorporated

Portfolio

resident

entity

outside India

Investors (FPI)

Indian

NRIs

A company,

A SEBI

resident in

trust and

registered

Nepal and

partnership

Foreign

Bhutan as

firm incorpo-

Venture

well as

rated outside

Capital

citizens of

India and

Investor

Nepal and

owned and

(FVCI)

Bhutan

controlled by

NRIs

28

Foreign Direct Investment - A Practitioner’s Guide

A non-resident entity can invest in India, subject to the FDI Policy except in those

sectors/activities which are prohibited. However, a citizen of Bangladesh or an entity

incorporated in Bangladesh can invest only under the Government route. Further, a

citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the

Government route, in sectors/activities other than defence, space, atomic energy and

sectors/activities prohibited for foreign investment.

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, subject to

the condition that the amount of consideration for such investment shall be paid only by

way of inward remittance in free foreign exchange through normal banking channels.

OCBs have been derecognized as a class of investors in India with effect from

September 16, 2003. 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.

A company, trust and partnership firm incorporated outside India and owned

and controlled by NRIs can invest in India with the special dispensation as available to

NRIs under the FDI Policy.

Foreign Institutional Investor (FII) and Foreign Portfolio Investors (FPI) may in

terms of Schedule 2 and 2A of FEMA (Transfer or Issue of Security by Persons Resident

Outside India) Regulations, as the case may be, respectively, invest in the capital of an

Indian company under the Portfolio Investment Scheme which limits the individual

holding of an FII/FPI below 10% of the capital of the company and the aggregate limit

for FII/FPI investment to 24% of the capital of the company. This aggregate limit of

24% can be increased to the sectoral cap/statutory ceiling, as applicable, by the Indian

company concerned through a resolution by its Board of Directors followed by a special

resolution to that effect by its General Body and subject to prior intimation to RBI. The

aggregate FII/FPI investment, individually or in conjunction with other kinds of foreign

investment, wil not exceed sectoral/statutory cap.

Only registered FIIs/FPIs and NRIs as per Schedules 2,2A and 3 respectively of Foreign

Exchange Management (Transfer or Issue of Security by a Person Resident Outside

India) Regulations, 2000, can invest/trade through a registered broker in the capital of

Indian Companies on recognised Indian Stock Exchanges.

A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to

100% of the capital of an Indian company engaged in any activity mentioned in Schedule

6 of Notification No. FEMA 20/2000, including startups irrespective of the sector in

which it is engaged, under the automatic route. A SEBI registered FVCI can invest in a

domestic venture capital fund registered under the SEBI (Venture Capital Fund)

Regulations, 1996 or a Category- I Alternative Investment Fund registered under the

SEBI (Alternative Investment Fund) Regulations, 2012. Such investments shall also be

subject to the extant FEMA regulations and extant FDI policy including sectoral caps

etc. The investment can be made in equities or equity linked instruments or debt

instruments issued by the company (including start-ups and if a startup is organised as a

Foreign Direct Investment (FDI) in India

29

partnership firm or an LLP, the investment can be made in the capital or through any

profit-sharing arrangement) or units issued by a VCF or by a Category-I AIF either

through purchase by private arrangement either from the issuer of the security or from

any other person holding the security or on a recognised stock exchange. It may also

set up a domestic asset management company to manage its investments. SEBI registered

FVCIs are also allowed to invest under the FDI Scheme, as non-resident entities, in

other companies, subject to FDI Policy and FEMA regulations.

A Non-Resident Indian may subscribe to National Pension System governed and

administered by Pension Fund Regulatory and Development Authority (PFRDA), provided

such subscriptions are made through normal banking channels and the person is eligible

to invest as per the provisions of the PFRDA Act. The annuity/ accumulated saving will

be repatriable.

ELIGIBLE INVESTEE ENTITIES

FDI in an Indian

Company

FDI in Partnership

FDI in Startup

Firm/Proprietary

Companies

Concern

FDI in

Investment

FDI in Trusts

Vehicle

FDI in Limited

Liability Partner-

ships (LLPs)

FDI in an Indian Company

Indian companies can issue capital against FDI.

30

Foreign Direct Investment - A Practitioner’s Guide

FDI in Partnership Firm/Proprietary Concern

(i) A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside

India can invest in the capital of a firm or a proprietary concern in India on non-

repatriation basis provided;

o

Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO

account maintained with Authorized Dealers/Authorized banks.

o

The firm or proprietary concern is not engaged in any agricultural/plantation

or real estate business or print media sector.

o

Amount invested shall not be eligible for repatriation outside India.

(ii) Investments with repatriation option: NRIs/PIO may seek prior permission of

Reserve Bank for investment in sole proprietorship concerns/partnership firms

with repatriation option. The application will be decided in consultation with

the Government of India.

(ii ) Investment by non-residents other than NRIs/PIO:A person resident outside

India other than NRIs/PIO may make an application and seek prior approval of

Reserve Bank for making investment in the capital of a firm or a proprietorship

concern or any association of persons in India. The application will be decided

in consultation with the Government of India.

(iv) Restrictions: An NRI or PIO is not allowed to invest in a firm or proprietorship

concern engaged in any agricultural/plantation activity or real estate business

or print media.

FDI in Trusts

FDI is not permitted in Trusts other than in Venture Capital Fund (VCF) registered and

regulated by SEBI and ‘Investment vehicle’.

FDI in Limited Liability Partnerships (LLPs)

FDI in LLPs is permitted subject to the following conditions:

(i) FDI is permitted under the automatic route in Limited Liability Partnership (LLPs)

operating in sectors/activities where 100% FDI is allowed through the automatic

route and there are no FDI-linked performance conditions.

(ii) An Indian company or an LLP, having foreign investment is also permitted to

make downstream investment in another company or LLP in sectors in which

100% FDI is allowed under the automatic route and there are no FDI-linked

performance conditions.

(ii ) Conversion of an LLP having foreign investment and operating in sectors/

activities where 100% FDI is allowed through the automatic route and there

are no FDI-linked performance conditions, into a company is permitted under

automatic route. Similarly, conversion of a company having foreign investment

and operating in sectors/activities where 100% FDI is allowed through the

automatic route and there are no FDI-linked performance conditions, into an

Foreign Direct Investment (FDI) in India

31

LLP is permitted under automatic route. FDI in LLP is subject to the compliance

of the conditions of LLP Act, 2008.

FDI in Investment Vehicle

An entity being ‘investment vehicle’ registered and regulated under relevant regulations

framed by SEBI or any other authority designated for the purpose including Real Estate

Investment Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014, Infrastructure

Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014, Alternative

Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations,2012 and notified

under Schedule 11 of Foreign Exchange Management (Transfer or Issue of Security by a

Person Resident outside India) Regulations, 2000 is permitted to receive foreign

investment from a person resident outside India (other than an individual who is citizen

of or any other entity which is registered / incorporated in Pakistan or Bangladesh),

including an Registered Foreign Portfolio Investor (RFPI) or a non-resident Indian (NRI).

FDI in Startup Companies

Start-ups can issue equity or equity linked instruments or debt instruments to FVCI

against receipt of foreign remittance, as per the FEMA Regulation. In addition, start-ups

can issue convertible notes to person resident outside India subject to the following

conditions:

1. A person resident outside India (other than an individual who is citizen of

Pakistan or Bangladesh or an entity which is registered / incorporated in Pakistan

or Bangladesh), may purchase convertible notes issued by an Indian startup

company for an amount of twenty five lakh rupees or more in a single tranche.

‘Startup Company’ means a private company incorporated under the Companies

Act, 2013 or Companies Act, 1956 and recognised as such in accordance with

notification issued by the Department of Industrial Policy and Promotion, Ministry

of Commerce and Industry, and as amended from time to time.

2. A startup company engaged in a sector where foreign investment requires

Government approval may issue convertible notes to a non-resident only with

approval of the Government.

3. A startup company issuing convertible notes to a person resident outside India

shal receive the amount of consideration by inward remittance through banking

channels or by debit to the NRE / FCNR (B) / Escrow account maintained by

the person concerned in accordance with the Foreign Exchange Management

(Deposit) Regulations, 2016, as amended from time to time.

However an escrow account for the above purpose shal be closed immediately

after the requirements are completed or within a period of six months, whichever

is earlier. However, in no case continuance of such escrow account shall be

permitted beyond a period of six months.

4. NRIs may acquire convertible notes on non-repatriation basis in accordance

with Schedule 4 of the Foreign Exchange Management (Transfer or issue of

Security by a Person Resident outside India) Regulations, 2000.

32

Foreign Direct Investment - A Practitioner’s Guide

5. A person resident outside India may acquire or transfer, by way of sale,

convertible notes, from or to, a person resident in or outside India, provided

the transfer takes place in accordance with the pricing guidelines as prescribed

by RBI. Prior approval from the Government shall be obtained for such transfers

in case the startup company is engaged in a sector which requires Government

approval.

6. The startup company issuing convertible notes shall be required to furnish

reports as prescribed by Reserve Bank of India.

ENTRY ROUTES FOR INVESTMENT

Automatic Route

Government Route

An Indian company may receive Foreign Direct Investment under the two routes as

given under:

Automatic Route

FDI is al owed under the automatic route without prior approval either of the Government

or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI

Policy, issued by the Government of India from time to time.

Government Route

FDI in activities not covered under the automatic route requires prior approval of the

Government. Proposals for foreign investment under Government route, are considered

by respective Administrative Ministry/Department.

Foreign investment in sectors/activities under government approval route wil be subject

to government approval where:

(i) An Indian company is being established with foreign investment and is not

owned by a resident entity or

(ii) An Indian company is being established with foreign investment and is not

controlled by a resident entity or

(ii ) The control of an existing Indian company, currently owned or controlled by

resident Indian citizens and Indian companies, which are owned or controlled

Foreign Direct Investment (FDI) in India

33

by resident Indian citizens, will be/is being transferred/passed on to a non-

resident entity as a consequence of transfer of shares and/or fresh issue of

shares to non-resident entities through amalgamation, merger/demerger,

acquisition etc. or

(iv) The ownership of an existing Indian company, currently owned or controlled

by resident Indian citizens and Indian companies, which are owned or control ed

by resident Indian citizens, will be/is being transferred/passed on to a non-

resident entity as a consequence of transfer of shares and/or fresh issue of

shares to non-resident entities through amalgamation, merger/demerger,

acquisition etc.

(v) It is clarified that Foreign investment shall include all types of foreign investments,

direct and indirect, regardless of whether the said investments have been

made under Schedule 1 (FDI), 2 (FII), 2A (FPI), 3 (NRI), 6 (FVCI), 9 (LLPs), 10

(DRs) and 11(Investment Vehicles) of FEMA (Transfer or Issue of Security by

Persons Resident Outside India) Regulations. FCCBs and DRs having underlying

of instruments which can be issued under Schedule 5, being in the nature of

debt, shal not be treated as foreign investment. However, any equity holding

by a person resident outside India resulting from conversion of any debt

instrument under any arrangement shall be reckoned as foreign investment.

(vi) Investment by NRIs under Schedule 4 of FEMA (Transfer or Issue of Security by

Persons Resident Outside India) Regulations will be deemed to be domestic

investment at par with the investment made by residents.

(vi ) A company, trust and partnership firm incorporated outside India and owned

and controlled by non-resident Indians will be eligible for investments under

Schedule 4 of FEMA (Transfer or issue of Security by Persons Resident Outside

India) Regulations and such investment wil also be deemed domestic investment

at par with the investment made by residents.

Competent Authority

Following are the Competent Authorities for grant of approval for foreign investment

for sectors/activities requiring Government approval:

S. No.

Activity/ sector

Administrative Ministry/

Department

(i)

Mining

Ministry of Mines

(ii)

Defence

(a) Items requiring Industrial

Department of Defence

Licence under the Industries

Production, Ministry of

(Development & Regulation)

Defence

Act, 1951, and/or Arms Act,

1959 for which the powers

have been delegated by

Ministry of Home Affairs to

DIPP

34

Foreign Direct Investment - A Practitioner’s Guide

S. No.

Activity/ sector

Administrative Ministry/

Department

(b) Manufacturing of Small Arms

Ministry of Home Affairs

and Ammunitions covered

under Arms Act 1959

(ii )

Broadcasting

Ministry of Information &

Broadcasting

(iv)

Print Media

(v)

Civil Aviation

Ministry of Civil Aviation

(vi)

Satellites

Department of Space

(vi )

Telecommunication

Department of

Telecommunications

(vii )

Private Security Agencies

Ministry of Home Affairs

(ix)

Applications involving investments

Ministry of Home Affairs

from Countries of Concern which

presently include Pakistan and

Bangladesh, requiring security

clearance as per the extant FEMA

20, FDI Policy and security

guidelines, amended from time to

time

(x)

Trading (Single brand, Multi brand

Department of Industrial Policy

and Food Product retail trading)

& Promotion

(xi)

FDI proposals by Non-Resident

-do-

Indians (NRIs)/ Export Oriented

Units requiring approval of the

Government

(xi )

Applications relating to issue of

-do-

equity shares under the FDI policy

under the Government route for

import of capital goods/machinery/

equipment (excluding second-hand

machinery)

(xii )

Applications relating to issue of

-do-

equity shares for pre-operative/pre-

Foreign Direct Investment (FDI) in India

35

S. No.

Activity/ sector

Administrative Ministry/

Department

incorporation expenses (including

payments of rent etc.)

(xiv)

Financial services activity which are

Department of Economic

not regulated by any Financial

Affairs

Sector Regulator or where only part

of the financial services activity is

regulated or where there is doubt

regarding the regulatory oversight

(xv)

Applications for foreign investment

-do-

into a Core Investment Company

or an Indian company engaged only

in the activity of investing in the

capital of other India Company/ies

(xvi)

Banking (Public and Private)

Department of Financial

Services

(xvi )

Pharmaceuticals

Department of Pharmaceuticals

Instruments for Investments

Fully,

Fully, Compulsorily

Compulsorily and

and Mandatorily

Equity Shares

Mandatorily

Convertible

Convertible

Preference Shares

Debentures

Investments can be made by non-residents in the equity shares/fully, compulsorily and

mandatorily convertible debentures/fully, compulsorily and mandatorily convertible

preference shares of an Indian company, through the Automatic Route or the Government

Route.

The Indian company having received FDI either under the Automatic route or the

Government route is required to comply with provisions of the FDI policy including

reporting the FDI to the Reserve Bank.

36

Foreign Direct Investment - A Practitioner’s Guide

Caps on Investments

Investments can be made by non-residents in the capital of a resident entity only to the

extent of the percentage of the total capital as specified in the FDI policy.

Entry Conditions on Investment

Investments by non-residents can be permitted in the capital of a resident entity in

certain sectors/activity with entry conditions. Such conditions may include norms for:

— Minimum capitalization

— Lock-in period.

Other Conditions on Investment besides Entry Conditions

Besides the entry conditions on foreign investment, the investment/investors are required

to comply with all relevant

— Sectoral laws, regulations, rules

— Security conditions, and

— State/local laws/regulations.

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

Trading in Transferable Development Rights (TDRs)

Foreign Direct Investment (FDI) in India

37

Real Estate Business* or Construction of Farm Houses

Manufacturing of cigars, cheroots, cigarillos and cigarettes, of

tobacco or of tobacco substitutes

Activities/sectors not open to private sector investment e.g.(I)

Atomic Energy and (II) Railway operations(other than permitted

activities).

Foreign technology collaboration in any form including licensing

for franchise, trademark, brand name, management contract is

also prohibited for Lottery Business and Gambling and Betting

Note*:- ‘Real estate business’ shall not include development of townships, construction

of residential /commercial premises, roads or bridges and Real Estate Investment Trusts

(REITs) registered and regulated under the SEBI (REITs) Regulations 2014.

PERMITTED SECTORS

Sector/Activity

% of Equity/

Entry Route

FDI Cap

Floriculture, Horticulture, and Cultivation of

100%

Automatic

Vegetables & Mushrooms under controlled

conditions;

Development and Production of seeds and

100%

Automatic

planting material;

Animal Husbandry (including breeding of

100%

Automatic

dogs), Pisciculture, Aquaculture, Apiculture;

Services related to agro and allied sectors

100%

Automatic

Note: Besides the above, FDI is not allowed

in any other agricultural sector/activity

Tea sector including tea plantations

100%

Automatic

38

Foreign Direct Investment - A Practitioner’s Guide

Sector/Activity

% of Equity/

Entry Route

FDI Cap

Coffee plantations

100%

Automatic

Rubber plantations

100%

Automatic

Cardamom plantations

100%

Automatic

Palm oil tree plantations

100%

Automatic

Olive oil tree plantations

100%

Automatic

Note: Besides the above, FDI is not allowed

in any other plantation sector/activity.

Mining and Exploration of metal and non

100%

Automatic

metal ores including diamond, gold, silver

and precious ores but excluding titanium

bearing minerals and its ores; subject to the

Mines and Minerals (Development &

Regulation) Act, 1957.

Coal & Lignite mining for captive

100%

Automatic

consumption by power projects, iron & steel

and cement units and other eligible activities

permitted under and subject to the

provisions of Coal Mines (Nationalization)

Act, 1973.

Setting up coal processing plants like

100%

Automatic

washeries subject to the condition that the

company shall not do coal mining and shall

not sell washed coal or sized coal from its

coal processing plants in the open market

and shall supply the washed or sized coal to

those parties who are supplying raw coal to

coal processing plants for washing or sizing.

Mining and mineral separation of titanium

100%

Automatic

bearing minerals and ores, its value addition

and integrated activities.

Mining and mineral separation of titanium

bearing minerals & ores, its value addition

and integrated activities subject to sectoral

regulations and the Mines and Minerals

(Development and Regulation Act 1957).

Foreign Direct Investment (FDI) in India

39

Sector/Activity

% of Equity/

Entry Route

FDI Cap

Exploration activities of oil and natural gas

100%

Automatic

fields, infrastructure related to marketing of

petroleum products and natural gas,

marketing of natural gas and petroleum

products, petroleum product pipelines,

natural gas/pipelines, LNG Regasification

infrastructure, market study and formulation

and Petroleum refining in the private sector,

subject to the existing sectoral policy and

regulatory framework in the oil marketing

sector and the policy of the Government on

private participation in exploration of oil and

the discovered fields of national oil

companies.

Petroleum refining by the Public Sector

49%

Automatic

Undertak ings (PSU), without any

disinvestment or dilution of domestic equity

in the existing PSUs.

Defence Industry subject to Industrial

100%

Automatic up to

license under the Industries (Development

49% Government

& Regulation) Act, 1951; and Manufacturing

route beyond

of small arms and ammunition under the

49% wherever it

Arms Act, 1959

is likely to result

in access to

modern

technology or for

other reasons to

be recorded

Teleports (setting up of up-linking HUBs/

100%

Automatic

Teleports);

Direct to Home (DTH);

100%

Automatic

Cable Networks (Multi System operators

100%

Automatic

(MSOs) operating at National or State or

District level and undertaking upgradation

of networks towards digitalization and

addressability);

Mobile TV;

100%

Automatic

40

Foreign Direct Investment - A Practitioner’s Guide

Sector/Activity

% of Equity/

Entry Route

FDI Cap

Headend - in -the Sky Broadcasting Service

100%

Automatic

(HITS)

Cable Networks (Other MSOs not

100%

Automatic

undertaking upgradation of networks towards

digitalization and addressability and Local

Cable Operators (LCOs))

Terrestrial Broadcasting FM (FM Radio), subject

49%

Government

to such terms and conditions, as specified

from time to time, by Ministry of Information

& Broadcasting, for grant of permission for

setting up of FM Radio stations

Up-linking of ‘News & Current Affairs’ TV

49%

Government

Channels

Up-linking of Non-‘News & Current Affairs’

100%

Automatic

TV Channels/ Down-linking of TV Channels

Publishing of newspaper and periodicals

26%

Government

dealing with news and current affairs

Publication of Indian editions of foreign

26%

Government

magazines dealing with news and current

affairs

Publishing/printing of scientific and technical

100%

Government

magazines/specialty journals/ periodicals,

subject to compliance with the legal

framework as applicable and guidelines

issued in this regard from time to time by

Ministry of Information and Broadcasting.

Publication of facsimile edition of foreign

100%

Government

newspapers

Airport (Greenfield projects)

100%

Automatic

Airport (Existing projects)

100%

Automatic

Foreign Direct Investment (FDI) in India

41

Sector/Activity

% of Equity/

Entry Route

FDI Cap

Scheduled Air Transport Service/ Domestic

100%

Automatic up to

Scheduled Passenger Airline

49%

(Automatic up to

100% for NRIs)

G o v e r n m e n t

route bey ond

49%

Regional Air Transport Service

100%

Automatic up to

49%

(Automatic up to

100% for NRIs)

G o v e r n m e n t

route bey ond

49%

Non-Scheduled Air Transport Services

100%

Automatic

Helicopter services / seaplane services

100%

Automatic

requiring DGCA approval

Ground Handling Services subject to

100%

Automatic

sectoral regulations and security clearance.

Maintenance and Repair organizations;

100%

Automatic

flying training institutes; and technical

training institutions.

Construction-development projects (which

100%

Automatic

would include development of townships,

construction of residential/commercial

premises, roads or bridges, hotels, resorts,

hospitals, educational institutions,

recreational facilities, city and regional level

infrastructure, townships)

Industrial Parks -new and existing

100%

Automatic

Satellites - establishment and operation,

100%

Government

subject to the sectoral guidelines of

Department of Space/ISRO

42

Foreign Direct Investment - A Practitioner’s Guide

Sector/Activity

% of Equity/

Entry Route

FDI Cap

Private Security Agencies

74%

Automatic up to

49%

G o v e r n m e n t

route bey ond

49% and up to

74%

Telecom Services

100%

Automatic up to

(including Telecom Infrastructure Providers

49%

Category-I)

Government

All telecom services including Telecom

route beyond

Infrastructure Providers Category-I, viz.

49%

Basic, Cellular, United Access Services,

Unified License (Access Services), Unified

License, National/International Long

Distance, Commercial V-Sat, Public Mobile

Radio Trunked Services (PMRTS), Global

Mobile Personal Communications Services

(GMPCS), All types of ISP licenses, Voice

Mail/Audiotex/UMS, Resale of IPLC, Mobile

Number Portability Services, Infrastructure

Provider Category-I (providing dark fibre,

right of way, duct space, tower) except Other

Service Providers.

Cash & Carry Wholesale Trading/Wholesale

Trading (including sourcing from MSEs)

100%

Automatic

E-commerce activities

100%

Automatic

Single Brand product retail trading

100%

Automatic up to

49% Government

route bey ond

49%

Multi Brand Retail Trading

51%

Government

Duty Free Shops

100%

Automatic

Railway Infrastructure

100%

Automatic

Foreign Direct Investment (FDI) in India

43

Sector/Activity

% of Equity/

Entry Route

FDI Cap

Construction, operation and maintenance of

the following:

(i) Suburban corridor projects through

PPP,

(ii) High speed train projects,

(ii ) Dedicated freight lines,

(iv) Rolling stock including train sets,

and

loc omotives/coac hes

manufacturing and maintenance

facilities,

(v) Railway Electrification,

(vi) Signaling systems,

(vi ) Freight terminals,

(vii ) Passenger terminals,

(ix) Infrastructure in industrial park

pertaining to railway line/sidings

including electrified railway lines

and connectivities to main railway

line and

(x) Mass Rapid Transport Systems.

Asset Reconstruction Company’ (ARC)

100%

Automatic

Banking- Private Sector

74%

Automatic up to

49%

G o v e r n m e n t

route bey ond

49% and up to

74%.

Banking - Public Sector subject to Banking

20%

Government

Companies (Acquisition & Transfer of

Undertakings) Acts 1970/80. This ceiling

(20%) is also applicable to the State Bank of

India and its associate Banks.

Credit Information Companies

100%

Automatic

44

Foreign Direct Investment - A Practitioner’s Guide

Sector/Activity

% of Equity/

Entry Route

FDI Cap

Infrastructure companies in Securities

49%

Automatic

Markets, nam ely, stoc k exc hanges,

commodity exchanges, depositories and

clearing corporations, in compliance with

SEBI Regulations

Insurance Company

49%

Automatic

Insurance Brokers

49%

Automatic

Third Party Administrators

49%

Automatic

Surveyors and Loss Assessors

49%

Automatic

Other Insurance Intermediaries appointed

49%

Automatic

under the provisions of Insurance Regulatory

and Development Authority Act, 1999 (41

of 1999)

Pension Sector

49%

Automatic

Power Exchanges registered under the

49%

Automatic

Central Electricity Regulatory Commission

(Power Market) Regulations, 2010.

White Label ATM Operations

100%

Automatic

Financial Services activities regulated by

100%

Automatic

financial sector regulators, viz., RBI, SEBI,

IRDA, PFRDA, NHB or any other financial

sector regulator as may be notified by the

Government of India.

Pharmaceutical (Greenfield)

100%

Automatic

Pharmaceutical (Brownfield)

100%

Automatic up to

74%

G o v e r n m e n t

route bey ond

74%

Foreign Direct Investment (FDI) in India

45

CONDITIONS OF FDI IN MAJOR SECTOR

E-Commerce

Activity

Insurance

Single Brand

Product Retail

Trading

Assets

Multi Brand

Reconstruction

Retail Trading

Companies

FDI in E-Commerce Activities

Subject to provisions of FDI Policy, e-commerce entities would engage only in Business

to Business (B2B) e-commerce and not in Business to Consumer (B2C) e-commerce.

E-commerce means buying and selling of goods and services including digital products

over digital & electronic network.

E-commerce entity means a company incorporated under the Companies Act 1956 or

the Companies Act 2013 or a foreign company covered under section 2 of the Companies

Act, 2013 or an office, branch or agency in India as provided in section 2(v) (iii) of

FEMA 1999, owned or controlled by a person resident outside India and conducting the

e-commerce business.

Inventory based model of e-commerce means an e-commerce activity where inventory

of goods and services is owned by e-commerce entity and is sold to the consumers

directly.

Marketplace based model of e-commerce means providing of an information technology

platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

Other Conditions of Investment

•

100% FDI under automatic route is permitted in marketplace model of e-

commerce.

46

Foreign Direct Investment - A Practitioner’s Guide

•

FDI is not permitted in inventory based model of e-commerce.

•

Digital & electronic network will include network of computers, television

channels and any other internet application used in automated manner such as

web pages, extranets, mobiles etc.

•

Marketplace e-commerce entity will be permitted to enter into transactions

with sellers registered on its platform on B2B basis.

•

E-commerce marketplace may provide support services to sellers in respect of

warehousing, logistics, order fulfillment, call centre, payment collection and

other services.

•

E-commerce entity providing a marketplace will not exercise ownership over

the inventory i.e. goods purported to be sold. Such an ownership over the

inventory will render the business into inventory based model.

•

An e-commerce entity will not permit more than 25% of the sales value on

financial year basis affected through its marketplace from one vendor or their

group companies.

•

In marketplace model goods/services made available for sale electronically on

website should clearly provide name, address and other contact details of the

seller. Post sales, delivery of goods to the customers and customer satisfaction

will be responsibility of the seller.

•

In marketplace model, payments for sale may be facilitated by the e-commerce

entity in conformity with the guidelines of the Reserve Bank of India.

•

In marketplace model, any warrantee/ guarantee of goods and services sold

will be responsibility of the seller.

•

E-commerce entities providing marketplace wil not directly or indirectly influence

the sale price of goods or services and shall maintain level playing field.

•

Guidelines on cash and carry wholesale trading of FDI Policy will apply on B2B

e-commerce.

•

Subject to the conditions of FDI policy on services sector and applicable laws/

regulations, security and other conditionalities, sale of services through e-

commerce will be under automatic route.

FDI in Single Brand Product Retail Trading

In Single Brand product retail trading, 49% FDI is allowed under Automatic route and

beyond 49% under Government route.

(1) Foreign Investment in Single Brand product retail trading is aimed at attracting

investments in production and marketing, improving the availability of such

goods for the consumer, encouraging increased sourcing of goods from India,

Foreign Direct Investment (FDI) in India

47

and enhancing competitiveness of Indian enterprises through access to global

designs, technologies and management practices.

(2) FDI in Single Brand product retail trading would be subject to the following

conditions:

(a) Products to be sold should be of a ‘Single Brand’ only.

(b) Products should be sold under the same brand internationally i.e. products

should be sold under the same brand in one or more countries other than

India.

(c) ‘Single Brand’ product-retail trading would cover only products which are

branded during manufacturing.

(d) A non-resident entity or entities, whether owner of the brand or otherwise,

shal be permitted to undertake ‘single brand’ product retail trading in the

country for the specific brand, directly or through a legal y tenable agreement

with the brand owner for undertaking single brand product retail trading.

The onus for ensuring compliance with this condition will rest with the

Indian entity carrying out single-brand product retail trading in India. The

investing entity shall provide evidence to this effect at the time of seeking

approval, including a copy of the licensing/franchise/sub-licence agreement,

specifically indicating compliance with the above condition. The requisite

evidence should be filed with the RBI for the automatic route and to

competent authority for cases involving approval.

(e) In respect of proposals involving foreign investment beyond 51%, sourcing

of 30% of the value of goods purchased, wil be done from India, preferably

from MSMEs, village and cottage industries, artisans and craftsmen, in all

sectors. The quantum of domestic sourcing will be self-certified by the

company, to be subsequently checked, by statutory auditors, from the

duly certified accounts which the company will be required to maintain.

This procurement requirement would have to be met, in the first instance,

as an average of five years’ total value of the goods purchased, beginning

1st April of the year of the commencement of the business i.e. opening of

the first store. Thereafter, it would have to be met on an annual basis. For

the purpose of ascertaining the sourcing requirement, the relevant entity

would be the company, incorporated in India, which is the recipient of

foreign investment for the purpose of carrying out single-brand product

retail trading.

(f) Subject to the conditions, a single brand retail trading entity operating

through brick and mortar stores, is permitted to undertake retail trading

through e-commerce.

(3) Application seeking permission of the Government for FDI exceeding 49% in

a company which proposes to undertake single brand retail trading in India

would be made to the Secretariat for Industrial Assistance (SIA) in the

Department of Industrial Policy & Promotion. The applications would specifically

indicate the product/product categories which are proposed to be sold under a

48

Foreign Direct Investment - A Practitioner’s Guide

‘Single Brand’. Any addition to the product/product categories to be sold under

‘Single Brand’ would require a fresh approval of the Government. In case of

FDI up to 49%, the list of products/product categories proposed to be sold

except food products would be provided to the RBI.

FDI in Multi Brand Retail Trading

In Multi Brand Retail Trading, 51% FDI allowed under Government route.

(1) FDI in multi brand retail trading, in all products, will be permitted, subject to

the following conditions:

(i) Fresh agricultural produce, including fruits, vegetables, flowers, grains,

pulses, fresh poultry, fishery and meat products, may be unbranded.

(ii) Minimum amount to be brought in, as FDI, by the foreign investor, would

be US $ 100 million.

(ii ) At least 50% of total FDI brought in the first tranche of US $ 100 million,

shall be invested in 'back-end infrastructure' within three years, where

‘back-end infrastructure’ will include capital expenditure on all activities,

excluding that on front-end units; for instance, back-end infrastructure wil

include investment made towards processing, manufacturing, distribution,

design improvement, quality control, packaging, logistics, storage, ware-

house, agriculture market produce infrastructure etc. Expenditure on land

cost and rentals, if any, will not be counted for purposes of backend

infrastructure. Subsequent investment in backend infrastructure would be

made by the MBRT retailer as needed, depending upon its business

requirements.

(iv) At least 30% of the value of procurement of manufactured/processed

products purchased shal be sourced from Indian micro, small and medium

industries, which have a total investment in plant & machinery not

exceeding US $ 2.00 million. This valuation refers to the value at the time

of installation, without providing for depreciation. The ‘smal industry’ status

would be reckoned only at the time of first engagement with the retailer,

and such industry shall continue to qualify as a ‘small industry’ for this

purpose, even if it outgrows the said investment of US $ 2.00 million

during the course of its relationship with the said retailer. Sourcing from

agricultural co-operatives and farmers co-operatives would also be

considered in this category. The procurement requirement would have to

be met, in the first instance, as an average of five years’ total value of the

manufactured/processed products purchased, beginning 1st April of the

year during which the first tranche of FDI is received. Thereafter, it would

have to be met on an annual basis.

(v) Self-certification by the company, to ensure compliance of the conditions

at serial nos. (ii), (iii) and (iv) above, which could be cross-checked, as and

when required. Accordingly, the investors shall maintain accounts, duly

certified by statutory auditors.

Foreign Direct Investment (FDI) in India

49

(vi) Retail sales outlets may be set up only in cities with a population of more

than 10 lakh as per 2011 Census or any other cities as per the decision of

the respective State Governments, and may also cover an area of 10 kms

around the municipal/urban agglomeration limits of such cities; retail

locations will be restricted to conforming areas as per the Master/Zonal

Plans of the concerned cities and provision will be made for requisite

facilities such as transport connectivity and parking.

(vi ) Government will have the first right to procurement of agricultural

products.

(vii ) The above policy is an enabling policy only and the State Governments/

Union Territories would be free to take their own decisions in regard to

implementation of the policy. Therefore, retail sales outlets may be set up

in those States/Union Territories which have agreed, or agree in future, to

allow FDI in MBRT under this policy. The list of States/Union Territories

which have conveyed their agreement is at (2) below. Such agreement, in

future, to permit establishment of retail outlets under this policy, would be

conveyed to the Government of India through the Department of Industrial

Policy & Promotion and additions would be made to the list at (2) below

accordingly. The establishment of the retail sales outlets wil be in compliance

of applicable State/Union Territory laws/ regulations, such as the Shops

and Establishments Act etc.

(ix) Retail trading, in any form, by means of e-commerce, would not be

permissible, for companies with FDI, engaged in the activity of multi-

brand retail trading.

(2) List of States/Union Territories are:

1. Andhra Pradesh

2. Assam

3. Delhi

4. Haryana

5. Himachal Pradesh

6. Jammu & Kashmir

7. Karnataka

8. Maharashtra

9. Manipur

10. Rajasthan

11. Uttarakhand

12. Daman & Diu and Dadra and Nagar Haveli (Union Territories)

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Foreign Direct Investment - A Practitioner’s Guide

FDI in Asset Reconstruction Companies

100 % FDI allowed in ‘Asset Reconstruction Company’ (ARC). ‘Asset Reconstruction

Company’ (ARC) means a company registered with the Reserve Bank of India under

Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement

of Security Interest Act, 2002 (SARFAESI Act).

Conditions for Investment in ARC:

(i) Persons resident outside India can invest in the capital of Asset Reconstruction

Companies (ARCs) registered with Reserve Bank of India, up to 100% on the

automatic route.

(ii) Investment limit of a sponsor in the shareholding of an ARC will be governed

by the provisions of Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002, as amended from time to time.

Similarly, investment by institutional / non-institutional investors will also be

governed by the said Act, as amended from time to time.

(ii ) The total shareholding of an individual FII/FPI shall be below 10% of the total

paid-up capital.

(iv) FIIs/FPIs can invest in the Security Receipts (SRs) issued by ARCs. FIIs/FPIs

may be allowed to invest up to 100 per cent of each tranche in SRs issued by

ARCs, subject to directions/guidelines of Reserve Bank of India. Such investment

should be within the relevant regulatory cap as applicable.

(v) All investments would be subject to provisions of the Securitisation and

Reconstruction of Financial Assets and Enforcement of Security Interest Act,

2002, as amended from time to time.

FDI in Insurance

49% FDI is allowed in (i) Insurance Company (ii) Insurance Brokers (iii) Third Party

Administrators (iv) Surveyors and Loss Assessors (v)Other Insurance Intermediaries

appointed under the provisions of Insurance Regulatory and Development authority

Act, 1999 (41 of 1999) under Automatic route .

Conditions of Investment

(a) No Indian Insurance company shall allow the aggregate holdings by way of

total foreign investment in its equity shares by foreign investors, including

portfolio investors, to exceed forty-nine percent of the paid up equity capital of

such Indian Insurance company.

(b) The foreign investment up to forty-nine percent of the total paid-up equity of

the Indian Insurance Company shall be allowed on the automatic route subject

to approval/verification by the Insurance Regulatory and Development Authority

of India.

(c) Foreign investment in this sector shall be subject to compliance with the

provisions of the Insurance Act, 1938 and the condition that Companies

receiving FDI shall obtain necessary license /approval from the Insurance

Foreign Direct Investment (FDI) in India

51

Regulatory & Development Authority of India for undertaking insurance and

related activities.

(d) An Indian Insurance company shal ensure that its ownership and control remains

at al times in the hands of resident Indian entities as determined by Department

of Financial Services/ Insurance Regulatory and Development Authority of India

as per the rules/regulations issued by them from time to time.

(e) Foreign portfolio investment in an Indian Insurance company shall be governed

by the provisions contained in sub-regulations (2), (2A), (3) and (8) of Regulation

5 of FEMA Regulations, 2000 and provisions of the Securities and Exchange

Board of India (Foreign Portfolio Investors) Regulations, 2014.

(f) Any increase in foreign investment in an Indian Insurance company shall be in

accordance with the pricing guidelines specified by Reserve Bank of India

under the FEMA Regulations.

(g) The foreign equity investment cap of 49 percent shall apply on the same terms

as above to Insurance Brokers, Third Party Administrators, Surveyors and Loss

Assessors and Other Insurance Intermediaries appointed under the provisions

of the Insurance Regulatory and Development Authority Act,1999

(h) Provided that where an entity like a bank, whose primary business is outside

the insurance area, is allowed by the Insurance Regulatory and Development

Authority of India to function as an insurance intermediary, the foreign equity

investment caps applicable in that sector shall continue to apply, subject to the

condition that the revenues of such entities from their primary (i.e., non-insurance

related) business must remain above 50 percent of their total revenues in any

financial year.

(i) The Certain provisions relating to ‘Banking-Private Sector’, shall be applicable

in respect of bank promoted insurance companies.

TYPES OF INSTRUMENTS THAT CAN BE USED UNDER FDI

1. Indian companies can issue equity shares, fully, compulsorily and mandatorily

convertible debentures and fully, compulsorily and mandatorily convertible

preference shares subject to pricing guidelines/valuation norms prescribed under

FEMA Regulations. The price/conversion formula of convertible capital

instruments should be determined upfront at the time of issue of the instruments.

The price at the time of conversion should not in any case be lower than the

fair value worked out, at the time of issuance of such instruments, in accordance

with the extant FEMA regulations [as per any internationally accepted pricing

methodology on arm’s length basis for the unlisted companies and valuation in

terms of SEBI (ICDR) Regulations, for the listed companies].

Optionality clauses are allowed in equity shares, fully, compulsorily and

mandatorily convertible debentures and fully, compulsorily and mandatorily

convertible preference shares under FDI scheme, subject to the following

conditions:

(a) There is a minimum lock-in period of one year which shall be effective

from the date of allotment of such capital instruments.

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Foreign Direct Investment - A Practitioner’s Guide

(b) After the lock-in period and subject to FDI Policy provisions, if any, the

non-resident investor exercising option/right shal be eligible to exit without

any assured return, as per pricing/valuation guidelines issued by RBI from

time to time.

2. Other types of Preference shares/Debentures i.e. non-convertible, optionally

convertible or partially convertible for issue of which funds have been received

on or after May 1, 2007 are considered as debt. Accordingly all norms applicable

for ECBs relating to eligible borrowers, recognized lenders, amount and maturity,

end-use stipulations, etc. shall apply. Since these instruments would be

denominated in rupees, the rupee interest rate will be based on the swap

equivalent of London Interbank Offered Rate (LIBOR) plus the spread as

permissible for ECBs of corresponding maturity.

3. The inward remittance received by the Indian company vide issuance of DRs

and FCCBs are treated as FDI and counted towards FDI.

4. Acquisition of Warrants and Partly Paid Shares - An Indian Company may issue

warrants and partly paid shares to a person resident outside India subject to

terms and conditions as stipulated by the Reserve Bank of India in this behalf,

from time to time.

5. Issue of Foreign Currency Convertible Bonds (FCCBs) and Depository Receipts

(DRs)

(a) FCCBs/DRs may be issued in accordance with the Scheme for issue of

Foreign Currency Convertible Bonds and Ordinary Shares (Through

Depository Receipt Mechanism) Scheme, 1993 and DR Scheme 2014

respectively, as per the guidelines issued by the Government of India there

under from time to time.

(b) DRs are foreign currency denominated instruments issued by a foreign

depository in a permissible jurisdiction against a pool of permissible securities

issued or transferred to that foreign depository and deposited with a

domestic custodian.

(c) A person will be eligible to issue or transfer eligible securities to a foreign

depository, for the purpose of converting the securities so purchased into

depository receipts in terms of Depository Receipts Scheme, 2014 and

guidelines issued by the Government of India there under from time to

time.

(d) A person can issue DRs, if it is eligible to issue eligible instruments to

person resident outside India under Schedules 1, 2, 2A, 3, 5 and 8 of the

FEM (Transfer or Issue of Security by a person Resident outside India)

Regulations, 2000, as amended from time to time.

(e) The aggregate of eligible securities which may be issued or transferred to

foreign depositories, along with eligible securities already held by persons

resident outside India, shall not exceed the limit on foreign holding of

such eligible securities under the relevant regulations framed under FEMA,

1999.

Foreign Direct Investment (FDI) in India

53

(f) The pricing of eligible securities to be issued or transferred to a foreign

depository for the purpose of issuing depository receipts should not be at

a price less than the price applicable to a corresponding mode of issue or

transfer of such securities to domestic investors under the relevant

regulations framed under FEMA, 1999.

(g) The issue of depository receipts as per DR Scheme 2014 shall be reported

to the Reserve Bank by the domestic custodian as per the reporting

guidelines for DR Scheme 2014.

6. (i) Two-way Fungibility Scheme: A limited two-way Fungibility scheme has

been put in place by the Government of India for ADRs/GDRs. Under this

Scheme, a stock broker in India, registered with SEBI, can purchase shares

of an Indian company from the market for conversion into ADRs/GDRs

based on instructions received from overseas investors. Re-issuance of

ADRs/GDRs would be permitted to the extent of ADRs/GDRs which have

been redeemed into underlying shares and sold in the Indian market.

(ii) Sponsored ADR/GDR issue: An Indian Company can also sponsor an issue

of ADR/GDR. Under this mechanism, the company offers its resident

shareholders a choice to submit their shares back to the company so that

on the basis of such shares, ADRs/GDRs can be issued abroad. The proceeds

of the ADR/GDR issue are remitted back to India and distributed among

the resident investors who had offered their Rupee denominated shares

for conversion. These proceeds can be kept in Resident Foreign Currency

(Domestic) accounts in India by the resident shareholders who have

tendered such shares for conversion into ADRs/GDRs.

ISSUE/ TRANSFER OF SHARES

•

The capital instruments should be issued within 180 days from the date of

receipt of the inward remittance received through normal banking channels

including escrow account opened and maintained for the purpose or by debit

to the NRE/FCNR (B) account of the non-resident investor.

•

In case, the capital instruments are not issued within 180 days from the date of

receipt of the inward remittance or date of debit to the NRE/FCNR (B) account,

the amount of consideration so received should be refunded immediately to

the non-resident investor by outward remittance through normal banking

channels or by credit to the NRE/FCNR (B) account, as the case may be.

•

Non-compliance with the above provision would be reckoned as a contravention

under FEMA and would attract penal provisions. In exceptional cases, refund

of the amount of consideration outstanding beyond a period of 180 days from

the date of receipt may be considered by the RBI, on the merits of the case.

Issue price of shares

Price of shares issued to persons resident outside India under the FDI Policy, shall not be

less than –

a.

the price worked out in accordance with the SEBI guidelines, as applicable,

54

Foreign Direct Investment - A Practitioner’s Guide

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 international y 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.

However, where non-residents (including NRIs) are making investments in an Indian

company in compliance with the provisions of the Companies Act, as applicable, by

way of subscription to its Memorandum of Association, such investments may be made

at face value subject to their eligibility to invest under the FDI scheme.

Foreign Currency Account

Indian companies which are eligible to issue shares to person’s resident outside India

under the FDI Policy may be allowed to retain the share subscription amount in a

Foreign Currency Account, with the prior approval of RBI.

Transfer of shares and convertible debentures

Subject to FDI sectoral policy (relating to sectoral caps and entry routes), applicable

laws and other conditionalities including security conditions, non-resident investors can

also invest in Indian companies by purchasing/acquiring existing shares from Indian

shareholders or from other non-resident shareholders. General permission has been

granted to non-residents/NRIs for acquisition of shares by way of transfer subject to the

following:

(a) A person resident outside India (other than NRI and erstwhile OCB) may transfer

by way of sale or gift, the shares or convertible debentures to any person

resident outside India (including NRIs). Government approval is not required

for transfer of shares in the investee company from one non-resident to another

non-resident in sectors which are under automatic route. In addition, approval

of Government will be required for transfer of stake from one non-resident to

another non-resident in sectors which are under Government approval route.

(b) NRIs may transfer by way of sale or gift the shares or convertible debentures

held by them to another NRI.

(c) A person resident outside India can transfer any security to a person resident in

India by way of gift.

(d) A person resident outside India can sell the shares and convertible debentures

of an Indian company on a recognized Stock Exchange in India through a stock

broker registered with stock exchange or a merchant banker registered with

SEBI.

(e) A person resident in India can transfer by way of sale, shares/ convertible

Foreign Direct Investment (FDI) in India

55

debentures (including transfer of subscriber’s shares), of an Indian company

under private arrangement to a person resident outside India, subject to the

guidelines.

(f) General permission is also available for transfer of shares/convertible debentures,

by way of sale under private arrangement by a person resident outside India to

a person resident in India, subject to the guidelines.

(g) The above general permission also covers transfer by a resident to a non-

resident of shares/convertible debentures of an Indian company, engaged in

an activity earlier covered under the Government Route but now falling under

Automatic Route, as well as transfer of shares by a non-resident to an Indian

company under buyback and/or capital reduction scheme of the company.

(h) The Form FC-TRS should be submitted to the AD Category-I Bank, within 60

days from the date of receipt of the amount of consideration. The onus of

submission of the Form FC-TRS within the given timeframe would be on the

transferor/transferee, resident in India. However, in cases where the NR investor,

including an NRI, acquires shares on the stock exchanges under the FDI scheme,

the investee company would have to file form FC-TRS with the AD Category-

I bank.

The sale consideration in respect of equity instruments purchased by a person resident

outside India, remitted into India through normal banking channels, shall be subjected

to a Know Your Customer (KYC) check by the remittance receiving AD Category-I bank

at the time of receipt of funds. In case the remittance receiving AD Category-I bank is

different from the AD Category-I bank handling the transfer transaction, the KYC check

should be carried out by the remittance receiving bank and the KYC report be submitted

by the customer to the AD Category-I bank carrying out the transaction along with the

Form FC-TRS.

A person resident outside India including a Non-Resident Indian investor who has already

acquired and continues to hold the control in accordance with the SEBI (Substantial

Acquisition of Shares and Takeover) Regulations can acquire shares of a listed Indian

company on the stock exchange through a registered broker under FDI scheme provided

that the original and resultant investments are in line with the extant FDI policy and

FEMA regulations in respect of sectoral cap, entry route, mode of payment, reporting

requirement, documentation, etc.

Escrow : AD Category-I banks have been given general permission to open escrow

account and Special account of non-resident corporate for open offers/exit offers and

delisting of shares. The relevant SEBI (Substantial Acquisition of Shares and Takeovers)

Regulations, 2011 (SAST) Regulations or any other applicable SEBI Regulations/provisions

of the Companies Act, as applicable will be applicable. AD Category-I banks have also

been permitted to open and maintain, without prior approval of RBI, non-interest bearing

escrow accounts in Indian Rupees in India on behalf of residents and/or non-residents,

towards payment of share purchase consideration and/or provide Escrow facilities for

keeping securities to facilitate FDI transactions subject to the terms and conditions

specified by RBI. SEBI authorised Depository Participants have also been permitted to

open and maintain, without prior approval of RBI, Escrow accounts for securities subject

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Foreign Direct Investment - A Practitioner’s Guide

to the terms and conditions as specified by RBI. In both cases, the Escrow agent shall

necessarily be an AD Category-I bank or SEBI authorised Depository Participant (in case

of securities’ accounts). These facilities will be applicable for both issue of fresh shares

to the non- residents as well as transfer of shares from/to the non- residents.

In case of transfer of shares between a resident buyer and a non-resident seller or

vice-versa, not more than twenty five per cent of the total consideration can be paid

by the buyer on a deferred basis within a period not exceeding eighteen months from

the date of the transfer agreement. For this purpose, if so agreed between the buyer

and the seller, an escrow arrangement may be made between the buyer and the

seller for an amount not more than twenty five per cent of the total consideration for

a period not exceeding eighteen months from the date of the transfer agreement or

if the total consideration is paid by the buyer to the seller, the seller may furnish an

indemnity for an amount not more than twenty five per cent of the total consideration

for a period not exceeding eighteen months from the date of the payment of the full

consideration.

However the total consideration finally paid for the shares must be compliant with the

applicable pricing guidelines.

Prior Permission of RBI in Certain Cases for Transfer of Capital Instruments

In the following cases prior approval of RBI is required:

•

Transfer of capital instruments from resident to non-residents by way of

sale

•

Transfer of any capital instrument, by way of gift by a person resident in

India to a person resident outside India. While forwarding applications

to Reserve Bank for approval for transfer of capital instruments by way

of gift, the documents should be enclosed

•

Transfer of shares from NRI to non-resident.

(i) Transfer of capital instruments from resident to non-residents by way of sale

where:

(a) Transfer is at a price which falls outside the pricing guidelines specified by

the Reserve Bank from time to time.

(b) Transfer of capital instruments by the non-resident acquirer involving

deferment of payment of the amount of consideration. Further, in case

Foreign Direct Investment (FDI) in India

57

approval is granted for a transaction, the same should be reported in Form

FC-TRS, to an AD Category-I bank for necessary due diligence, within 60

days from the date of receipt of the full and final amount of consideration.

(ii) Transfer of any capital instrument, by way of gift by a person resident in India to

a person resident outside India. While forwarding applications to Reserve Bank

for approval for transfer of capital instruments by way of gift, the documents

should be enclosed. Reserve Bank considers the following factors while

processing such applications:

(a) The proposed transferee (donee) is eligible to hold such capital instruments

under Schedules 1, 4 and 5 of Notification No. FEMA 20/2000-RB dated

May 3, 2000, as amended from time to time.

(b) The gift does not exceed 5 per cent of the paid-up capital of the Indian

company/each series of debentures/each mutual fund scheme.

(c) The applicable sectoral cap limit in the Indian company is not breached.

(d) The transferor (donor) and the proposed transferee (donee) are close relatives

as defined in Section 2 (77) of Companies Act, 2013, as amended from

time to time.

(e) The value of capital instruments to be transferred together with any capital

instruments already transferred by the transferor, as gift, to any person

residing outside India does not exceed the rupee equivalent of USD 50,000

during the financial year.

(f) Such other conditions as stipulated by Reserve Bank in public interest from

time to time.

(ii ) Transfer of shares from NRI to non-resident.

In the Following Cases, Approval of RBI is not Required

Transfer of shares from a Non-Resident to Resident under the FDI

scheme where the pricing guidelines under FEMA, 1999 are not met

Transfer of shares from Resident to Non-Resident

58

Foreign Direct Investment - A Practitioner’s Guide

A. Transfer of shares from a Non-Resident to Resident under the FDI scheme where

the pricing guidelines under FEMA, 1999 are not met provided that:

(i) The original and resultant investment are in line with the extant FDI policy and

FEMA regulations in terms of sectoral caps, conditionalities (such as minimum

capitalization, etc.), reporting requirements, documentation, etc.;

(ii) The pricing for the transaction is compliant with the specific/explicit, extant

and relevant SEBI regulations/guidelines (such as IPO, Book building, block

deals, delisting, exit, open offer/substantial acquisition/SEBI SAST, buy back);

and

(ii ) Chartered Accountants Certificate to the effect that compliance with the relevant

SEBI regulations/guidelines as indicated above is attached to the form FC-TRS

to be filed with the AD bank.

B. Transfer of shares from Resident to Non-Resident:

(i) where the transfer of shares requires the prior approval of the Government as

per the extant FDI policy provided that:

(a) the requisite approval of the Government has been obtained; and

(b) the transfer of shares adheres with the pricing guidelines and documentation

requirements as specified by the Reserve Bank of India from time to time.

(ii) where the transfer of shares attract SEBI (SAST) Regulations subject to the

adherence with the pricing guidelines and documentation requirements as

specified by Reserve Bank of India from time to time.

(ii ) where the transfer of shares does not meet the pricing guidelines under the

FEMA, 1999 provided that:

(a) The resultant FDI is in compliance with the extant FDI policy and FEMA

regulations in terms of sectoral caps, conditionalities (such as minimum

capitalization, etc.), reporting requirements, documentation etc.;

(b) The pricing for the transaction is compliant with the specific/explicit, extant

and relevant SEBI regulations/guidelines (such as IPO, Book building, block

deals, delisting, exit, open offer/substantial acquisition/SEBI SAST); and

(c) Chartered Accountants Certificate to the effect that compliance with the

relevant SEBI regulations/guidelines as indicated above is attached to the

form FC-TRS to be filed with the AD bank.

(iv) where the investee company is in the financial sector provided that:

(a) Any ‘fit and proper/due diligence’ requirements as regards the non-resident

investor as stipulated by the respective financial sector regulator, from

time to time, have been complied with; and

(b) The FDI policy and FEMA regulations in terms of sectoral caps,

conditionalities (such as minimum capitalization, pricing, etc.), reporting

requirements, documentation etc., are complied with.

Foreign Direct Investment (FDI) in India

59

CONVERSION OF ECB/LUMP SUM FEE/ROYALTY ETC. INTO EQUITY

(I) Indian companies have been granted general permission for conversion of

External Commercial Borrowings (ECB) (excluding those deemed as ECB) in

convertible foreign currency into equity shares/ful y compulsorily and mandatorily

convertible preference shares, subject to the fol owing conditions and reporting

requirements:

(a) The activity of the company is covered under the Automatic Route for FDI

or the company has obtained Government approval for foreign equity in

the company;

(b) The foreign equity after conversion of ECB into equity is within the sectoral

cap, if any;

(c) Pricing of shares is as per the issue price of shares;

(d) Compliance with the requirements prescribed under any other statute and

regulation in force; and

(e) The conversion facility is available for ECBs availed under the Automatic or

Government Route and is applicable to ECBs, due for payment or not, as

well as secured/unsecured loans availed from non-resident collaborators.

(II) General permission is also available for issue of shares/preference shares against

lump sum technical know-how fee, royalty due for payment, subject to entry

route, sectoral cap and pricing guidelines (as per the issue price of shares)and

compliance with applicable tax laws. Further, issue of equity shares against any

other funds payable by the investee company, remittance of which does not

require prior permission of the Government of India or Reserve Bank of India

under FEMA, 1999 or any rules/ regulations framed or directions issued there

under, or has been permitted by the Reserve Bank under the Act or the rules

and regulations framed or directions issued there under is permitted, provided

that:

(a) The equity shares shall be issued in accordance with the extant FDI

guidelines on sectoral caps, pricing guidelines etc. as amended by Reserve

bank of India, from time to time;

(b) The issue of equity shares under this provision shall be subject to tax laws

as applicable to the funds payable and the conversion to equity should be

net of applicable taxes.

(III) A wholly owned subsidiary set up in India by a non-resident entity, operating in

a sector where 100 percent foreign investment is allowed in the automatic

route and there are no FDI linked conditionalities, may issue equity shares or

preference shares or convertible debentures or warrants to the said non-resident

entity against pre-incorporation/ pre-operative expenses incurred by the said

non-resident entity up to a limit of five percent of its capital or USD 500,000

whichever is less, subject to the conditions laid down below:

(a) Within thirty days from the date of issue of equity shares or preference

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Foreign Direct Investment - A Practitioner’s Guide

shares or convertible debentures or warrants but not later than one year

from the date of incorporation or such time as Reserve Bank of India or

Government of India permits, the Indian company shal report the transaction

in the Form FC-GPR (See Appendix - I) to the Reserve Bank.

(b) The valuation of the equity shares or preference shares or convertible

debentures or warrants shal be subject to the provisions of Schedule 1 of the

FEM (Transferor Issue of Security by a person resident outside India) Regulations.

(c) A certificate issued by the statutory auditor of the Indian company that the

amount of pre-incorporation/pre-operative expenses against which equity

shares or preference shares or convertible debentures or warrants have

been issued has been utilized for the purpose for which it was received

should be submitted with the FC-GPR form.

Explanation : Pre-incorporation/pre-operative expenses shall include

amounts remitted to Investee Company’s account, to the investor’s account

in India if it exists, to any consultant, attorney or to any other material/

service provider for expenditure relating to incorporation or necessary for

commencement of operations.

(IV) Issue of equity shares under the FDI policy is allowed under the Government

route for the following:

(i) import of capital goods/ machinery/ equipment (excluding second-hand

machinery), subject to compliance with the following conditions:

(a) Any import of capital goods/machinery etc., made by a resident in

India, has to be in accordance with the Export/Import Policy issued by

Government of India/as defined by DGFT/FEMA provisions relating to

imports.

(b) The application clearly indicating the beneficial ownership and identity

of the Importer Company as well as overseas entity.

(c) Applications complete in al respects, for conversions of import payables

for capital goods into FDI being made within 180 days from the date

of shipment of goods.

(ii) Pre-operative/pre-incorporation expenses (including payments of rent etc.),

subject to compliance with the following conditions:

(a) Submission of FIRC for remittance of funds by the overseas promoters

for the expenditure incurred.

(b) Verification and certification of the pre-incorporation/pre-operative

expenses by the statutory auditor.

(c) Payments should be made by the foreign investor to the company

directly or through the bank account opened by the foreign investor as

provided under FEMA Regulations.

(d) The applications, complete in all respects, for capitalization being made

Foreign Direct Investment (FDI) in India

61

within the period of 180 days from the date of incorporation of the

company.

General conditions

(i) All requests for conversion should be accompanied by a special resolution of

the company.

(ii) Government’s approval would be subject to pricing guidelines of RBI and

appropriate tax clearance.

ISSUE OF RIGHTS/BONUS SHARES

FEMA provisions al ow Indian companies to freely issue Rights/Bonus shares to existing

non-resident shareholders, subject to adherence to sectoral cap, if any.

Such issue of bonus/rights shares has to be in accordance with other laws/statutes like

the Companies Act, as applicable, SEBI (Issue of Capital and Disclosure Requirements)

Regulations, 2009 (in case of listed companies), etc.

The offer on right basis to the person’s 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.

Additional allocation of rights share by residents to non-residents

(i) Existing non-resident shareholders are allowed to apply for issue of additional

shares/fully, compulsorily and mandatorily convertible debentures/fully,

compulsorily and mandatorily convertible preference shares over and above

their rights share entitlements.

(ii) The investee company can allot the additional rights share out of unsubscribed

portion, subject to the condition that the overal issue of shares to non-residents

in the total paid-up capital of the company does not exceed the sectoral cap.

ACQUISITION OF SHARES UNDER SCHEME OF MERGER/DEMERGER/

AMALGAMATION

(I) Mergers/demergers/ amalgamations of companies in India are usual y governed

by an order issued by a competent Court on the basis of the Scheme submitted

by the companies undergoing merger/demerger/amalgamation.

(II) Once the scheme of merger or demerger or amalgamation of two or more

Indian companies has been approved by a Court in India, the transferee company

or new company is allowed to issue shares to the shareholders of the transferor

company resident outside India, subject to the conditions that:

(i) the percentage of shareholding of persons resident outside India in the

transferee or new company does not exceed the sectoral cap, and

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Foreign Direct Investment - A Practitioner’s Guide

(ii) the transferor company or the transferee or the new company is not engaged

in activities which are prohibited under the FDI policy.

Note: Government approval would not be required in case of mergers and

acquisitions taking place in sectors under automatic route.

ISSUE OF EMPLOYEES STOCK OPTION SCHEME (ESOPS) / SWEAT EQUITY

An Indian company may issue “employees’ stock option” and/or “sweat equity shares”

to its employees/directors or employees/directors of its holding company or joint venture

or whol y owned overseas subsidiary/subsidiaries who are resident outside India, provided

that :

(a) The scheme has been drawn either in terms of regulations issued under the

Securities Exchange Board of India Act, 1992 or the Companies (Share Capital

and Debentures) Rules, 2014 notified by the Central Government under the

Companies Act 2013, as the case may be.

(b) The “employee’s stock option”/ “sweat equity shares” issued to non-resident

employees/directors under the applicable rules/regulations are in compliance

with the sectoral cap applicable to the said company.

(c) Issue of “employee’s stock option”/ “sweat equity shares” by a company

where foreign investment is under the approval route shal require prior approval

of Government of India.

(d) Issue of “employee’s stock option”/ “sweat equity shares” under the applicable

rules/regulations to an employee/director who is a citizen of Bangladesh/Pakistan

shall require prior approval of the Government of India.

(e) The issuing company shall furnish to the Regional Office concerned of the

Reserve Bank of India under whose jurisdiction the registered office of the

company operates, within 30 days from the date of issue of employees’ stock

option or sweat equity shares, a return as per the Form-ESOP.

SHARE SWAP

(i) In cases of investment by way of swap of shares, irrespective of the amount,

valuation of the shares will have to be made by a Merchant Banker registered

with SEBI or an Investment Banker outside India registered with the appropriate

regulatory authority in the host country.

(ii) Approval of the Government will also be a prerequisite for investment by swap

of shares for sector under Government approval route.

(ii ) No approval of the Government is required for investment in automatic route

sectors by way of swap of shares.

PLEDGE OF SHARES

(A) A person being a promoter of a company registered in India (borrowing

company), which has raised external commercial borrowings, may pledge the

shares of the borrowing company or that of its associate resident companies for

Foreign Direct Investment (FDI) in India

63

the purpose of securing the ECB raised by the borrowing company, provided

that a no objection for the same is obtained from a bank which is an authorised

dealer.

The authorized dealer, shall issue the no objection for such a pledge after

having satisfied itself that the external commercial borrowing is in line with the

extant FEMA regulations for ECBs and that:

(i) the loan agreement has been signed by both the lender and the borrower,

(ii) there exists a security clause in the Loan Agreement requiring the borrower

to create charge on financial securities, and

(ii ) the borrower has obtained Loan Registration Number (LRN) from the Reserve

Bank:

and the said pledge would be subject to the following conditions:

(a) the period of such pledge shall be co-terminus with the maturity of the

underlying ECB;

(b) in case of invocation of pledge, transfer shall be in accordance with the

extant FDI Policy and directions issued by the Reserve Bank;

(c) the Statutory Auditor has certified that the borrowing company wil utilized/

has utilized the proceeds of the ECB for the permitted end use/s only.

(B) Non-residents holding shares of an Indian company, can pledge these shares in

favour of the AD bank in India to secure credit facilities being extended to the

resident investee company for bonafide business purpose, subject to the

following conditions:

(i) in case of invocation of pledge, transfer of shares should be in accordance

with the FDI policy in vogue at the time of creation of pledge;

(ii) submission of a declaration/ annual certificate from the statutory auditor of

the investee company that the loan proceeds will be / have been utilized

for the declared purpose;

(ii ) the Indian company has to follow the relevant SEBI disclosure norms; and

(iv) pledge of shares in favour of the lender (bank) would be subject to Section

19 of the Banking Regulation Act, 1949.

(C) Non-residents holding shares of an Indian company, can pledge these shares in

favour of an overseas bank to secure the credit facilities being extended to the

non-resident investor/non-resident promoter of the Indian company or its

overseas group company, subject to the fol owing:

(i) loan is availed of only from an overseas bank;

(ii) loan is utilized for genuine business purposes overseas and not for any

investments either directly or indirectly in India;

(ii ) overseas investment should not result in any capital inflow into India;

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Foreign Direct Investment - A Practitioner’s Guide

(iv) in case of invocation of pledge, transfer should be in accordance with the

FDI policy in vogue at the time of creation of pledge; and

(v) submission of a declaration/annual certificate from a Chartered Accountant/

Certified Public Accountant of the non-resident borrower that the loan

proceeds will be / have been utilized for the declared purpose.

REMITTANCE AND REPATRIATION

Remittance of sale

Remittance on

Repatriation of

Repatriation of

proceeds/

winding up/

Dividend

Interest

Remittance on

liquidation of

winding up/

Companies

Liquidation of

Companies

Remittance of sale proceeds

(i) Sale proceeds of shares and securities and their remittance is ‘remittance of

asset’ governed by The Foreign Exchange Management (Remittance of Assets)

Regulations, 2000 under FEMA.

(ii) AD Category-I bank can allow the remittance of sale proceeds of a security

(net of applicable taxes) to the seller of shares resident outside India, provided

the security has been held on repatriation basis, the sale of security has been

made in accordance with the prescribed guidelines and NOC/tax clearance

certificate from the Income Tax Department has been produced.

Remittance on Winding Up/Liquidation of Companies

AD Category-I banks have been allowed to remit winding up proceeds of companies in

India, which are under liquidation, subject to payment of applicable taxes. Liquidation

may be subject to any order issued by the court winding up the company or the official

liquidator in case of voluntary winding up under the provisions of the Companies Act, ,

as applicable.

Foreign Direct Investment (FDI) in India

65

AD Category-I banks shal allow the remittance provided the applicant submits:

(a) No objection or Tax clearance certificate from Income Tax Department for the

remittance.

(b) Auditor's certificate confirming that all liabilities in India have been either fully

paid or adequately provided for.

(c) Auditor's certificate to the effect that the winding up is in accordance with the

provisions of the Companies Act, as applicable.

(d) In case of winding up otherwise than by a court, an auditor's certificate to the

effect that there are no legal proceeding spending in any court in India against

the applicant or the company under liquidation and there is no legal impediment

in permitting the remittance.

Repatriation of Dividend

(i) Dividends are freely repatriable without any restrictions (net after Tax deduction

at source or Dividend Distribution Tax, if any, as the case may be).

(ii) The repatriation is governed by the provisions of the Foreign Exchange

Management (Current Account Transactions) Rules, 2000, as amended from

time to time.

Repatriation of Interest

(i) Interest on fully, mandatorily & compulsorily convertible debentures is also

freely repatriable without any restrictions (net of applicable taxes).

(ii) The repatriation is governed by the provisions of the Foreign Exchange

Management (Current Account Transactions) Rules, 2000, as amended from

time to time.

MODES OF PAYMENT ALLOWED FOR RECEIVING FDI IN AN INDIAN

COMPANY

An Indian company issuing shares/ convertible debentures to a person resident outside

India shall receive the amount of consideration by:

(a) inward remittance through normal banking channels;

(b) debit to NRE/ FCNR (B) account of a person concerned maintained with an AD

Category I bank;

(c) 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;

(d) conversion of royalty/ lump sum/ technical know-how fee due for payment or

conversion of ECB;

(e) conversion of pre-incorporation/ pre-operative expenses incurred by the a non-

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Foreign Direct Investment - A Practitioner’s Guide

resident entity up to a limit of five percent of its capital or USD 500,000 whichever

is less;

(f) conversion of import payables/ pre incorporation expenses/ can be treated as

consideration for issue of shares with the approval of FIPB;

(g) against any other funds payable to a person resident outside India, the remittance

of which does not require the prior approval of the Reserve Bank or the

Government of India: and

(h) Swap of capital instruments, provided where the Indian investee company is

engaged in a Government route sector, prior Government approval shall be

required

If the shares or convertible debentures are not issued within 180 days from the date of

receipt of the inward remittance or date of debit to NRE/ FCNR (B)/ Escrow account,

the amount shall be refunded.

Further, Reserve Bank may on an application made to it and for sufficient reasons permit

an Indian Company to refund/ allot shares for the amount of consideration received

towards issue of security if such amount is outstanding beyond the period of 180 days

from the date of receipt.

REPORTING OF FDI

Reporting of

Reporting

FCCB/DR

of Inflow

Issues

Reporting of

Reporting of

issue of

Non-Cash

shares

Reporting

of transfer

of shares

Foreign Direct Investment (FDI) in India

67

Reporting of Inflow

(i) An Indian company receiving investment from outside India for issuing shares/

convertible debentures/preference shares under the FDI Scheme, should report

the details of the amount of consideration to the Regional Office concerned of

the Reserve Bank not later than 30 days from the date of receipt in the Advance

Reporting Form.

(ii) Indian companies are required to report the details of the receipt of the amount

of consideration for issue of shares/convertible debentures, through an AD

Category-I bank, together with a copy/ies of the FIRC/s evidencing the receipt

of the remittance along with the KYC report on the non-resident investor from

the overseas bank remitting the amount. The report would be acknowledged

by the Regional Office concerned, which will allot a Unique Identification

Number (UIN) for the amount reported.

(ii ) An Indian company issuing partly paid equity shares, shall furnish a report not

later than 30 days from the date of receipt of each call payment.

Reporting of issue of shares

(i) After issue of shares (including bonus and shares issued on rights basis and

shares issued under ESOP and against Convertible Notes)/fully, mandatorily &

compulsorily convertible debentures/fully, mandatorily & compulsorily

convertible preference shares, the Indian company has to file Form FC-GPR,

(See Appendix - I) not later than 30 days from the date of issue of shares.

(ii) Form FC-GPR has to be duly fil ed up and signed by Managing Director/Director/

Secretary of the Company and submitted to the Authorized Dealer of the

company, who will forward it to the Reserve Bank. The following documents

have to be submitted along with the form:

(a) A certificate from the Company Secretary of the company certifying that:

(A) all the requirements of the Companies Act, as applicable, have been

complied with;

(B) terms and conditions of the Government of India approval, if any,

have been complied with;

(C) the company is eligible to issue shares; and

(D) the company has all original certificates issued by authorized dealers

in India evidencing receipt of amount of consideration.

Note: For companies with paid up capital with less than Rs.5 crore, the

above mentioned certificate can be given by a practicing company secretary.

(b) A certificate from SEBI registered Merchant Banker or Chartered Accountant

indicating the manner of arriving at the price of the shares issued to the

persons resident outside India.

(c) The report of receipt of consideration as well as Form FC-GPR have to be

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Foreign Direct Investment - A Practitioner’s Guide

submitted by the AD Category-I bank to the Regional Office concerned of

the Reserve Bank under whose jurisdiction the registered office of the

company is situated.

Note: An Indian company issuing partly paid equity shares shall file a report

in form FC-GPR to the extent they become paid up.

(d) Annual return on Foreign Liabilities and Assets should be filed on an annual

basis by the Indian company, directly with the Reserve Bank. This is an

annual return to be submitted by 15th of July every year, pertaining to all

investments by way of direct/portfolio investments/reinvested earnings/

other capital in the Indian company made during the previous years (i.e.

the information submitted by 15th July will pertain to all the investments

made in the previous years up to March 31). The details of the investments

to be reported would include all foreign investments made into the

company which is outstanding as on the balance sheet date. The details of

overseas investments in the company both under direct/portfolio investment

may be separately indicated.

(e) Issue of bonus/rights shares or stock options to persons resident outside

India directly or on amalgamation/merger/demerger with an existing Indian

company, as well as issue of shares on conversion of ECB/royalty/lumpsum

technical know-how fee/import of capital goods by units in SEZs, has to be

reported in Form FC-GPR. (See Appendix - I)

Reporting of transfer of shares

(i) Reporting of transfer of shares between residents and non-residents and vice-

versa is to be done in Form FC-TRS.

(ii) The Form FC-TRS should be submitted to the AD Category-I bank, within 60

days from the date of receipt of the amount of consideration.

(ii ) The onus of submission of the Form FC-TRS within the given timeframe would

be on the transferor/transferee, resident in India.

(iv) In cases where the NR investor, including an NRI, acquires shares on the stock

exchanges under the FDI scheme, the investee company would have to file

form FC-TRS with the AD Category-I bank. The AD Category-I bank, would

forward the same to its link office. The link office would consolidate the Form

FC-TRS and submit a monthly report to the Reserve Bank.

Reporting of Non-Cash

Details of issue of shares against conversion of ECB have to be reported to the Regional

Office concerned of the RBI, as indicated below:

(i) In case of full conversion of ECB into equity, the company shall report the

conversion in Form FC-GPR to the Regional Office concerned of the Reserve

Bank as well as in Form ECB-2 to the Department of Statistics and Information

Management (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai-

400 051, within seven working days from the close of month to which it

Foreign Direct Investment (FDI) in India

69

relates. The words "ECB wholly converted to equity" shall be clearly indicated

on top of the Form ECB-2. Once reported, filing of Form ECB-2 in the subsequent

months is not necessary.

(ii) In case of partial conversion of ECB, the company shall report the converted

portion in Form FC-GPR to the Regional Office concerned as well as in Form

ECB-2 clearly differentiating the converted portion from the non-converted

portion.”The words "ECB partially converted to equity" shall be indicated on

top of the Form ECB-2. In the subsequent months, the outstanding balance of

ECB shall be reported in Form ECB-2 to DSIM.

Reporting of FCCB/DR Issues

The domestic custodian shall report the issue/transfer of sponsored/unsponsored

depository receipts as per DR Scheme 2014 in ‘Form DRR’ within 30 days of close of

the issue/ program.

ADHERENCE TO GUIDELINES/ORDERS

(i) FDI is a capital account transaction and thus any violation of FDI regulations are

covered by the penal provisions of the FEMA.

(ii) Reserve Bank of India administers the FEMA and Directorate of Enforcement

under the Ministry of Finance is the authority for the enforcement of FEMA.

The Directorate takes up investigation in any contravention of FEMA.

***

ESTABLISHMENT OF BRANCH OFFICE (BO)/

LIAISON OFFICE (LO)/PROJECT OFFICE (PO) IN INDIA

Establishment of branch office/ liaison office / project office or any other place of

business in India by foreign entities is regulated in terms of Section 6(6) of Foreign

Exchange Management Act, 1999 read with Foreign Exchange Management

(Establishment in India of a branch office or a liaison office or a project office or any

other place of business) Regulations, 2016 and amended from time to time.

Branch Office

Branch office in relation to a company, means any establishment described as such by

the company.

Permitted activities for a branch office in India of a person resident outside India

Normally, the branch office should be engaged in the activity in which the parent

company is engaged.

(i) Export/import of goods.

(ii) Rendering professional or consultancy services.

(ii ) Carrying out research work in which the parent company is engaged.

(iv) Promoting technical or financial col aborations between Indian companies and

parent or overseas group company.

(v) Representing the parent company in India and acting as buying/ selling agent

in India.

(vi) Rendering services in Information Technology and development of software in

India.

(vi ) Rendering technical support to the products supplied by parent/group

companies.

(vii ) Representing a foreign airline/shipping company.

Liaison Office

Liaison Office means a place of business to act as a channel of communication between

the principal place of business or Head Office or by whatever name called and entities

in India but which does not undertake any commercial /trading/ industrial activity,

directly or indirectly, and maintains itself out of inward remittances received from abroad

through normal banking channel.

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Establishment of BO/LO/PO in India

71

Permitted activities for a liaison office in India of a person resident outside India

(i) Representing the parent company / group companies in India.

(ii) Promoting export / import from / to India.

(ii ) Promoting technical/ financial col aborations between parent / group companies

and companies in India.

(iv) Acting as a communication channel between the parent company and Indian

companies.

Project Office

Project office means a place of business in India to represent the interests of the

foreign company executing a project in India but excludes a Liaison Office.

Parameters of project office

A foreign company may open project office/s in India provided it has secured from an

Indian company, a contract to execute a project in India, and

(i) the project is funded directly by inward remittance from abroad; or

(ii) the project is funded by a bilateral or multilateral International Financing Agency;

or

(ii ) the project has been cleared by an appropriate authority; or

(iv) a company or entity in India awarding the contract has been granted term loan

by a Public Financial Institution or a bank in India for the Project.

The Hon’ble Supreme Court vide its interim orders dated July 4, 2012 and

September 14, 2015, passed in the case of the Bar Council of India vs A.K.

Balaji & Ors., has directed RBI not to grant any permission to any foreign law

firm, on or after the date of the said interim order, for opening of LO in India.

Hence, no foreign law firm shall be permitted to open any LO in India til further

orders/notification in this regard. However, foreign law firms which have been

granted permission prior to the date of interim order for opening LOs in India

may be allowed to continue provided such permission is still in force. No fresh

permissions/ renewal of permission shall be granted by the Reserve Bank/AD

Category-I banks respectively till the policy is reviewed based on, among others,

final disposal of the matter by the Hon’ble Supreme Court.

General criteria

(i) Applications from foreign companies (a body corporate incorporated outside

India, including a firm or other association of individuals) for establishing BO/

LO/ PO in India shall be considered by the AD Category-I bank as per the

guidelines given by Reserve Bank of India (RBI). If the principal business of the

entity resident outside India falls under sectors where 100 percent Foreign

Direct Investment (FDI) is allowed in terms Foreign Exchange Management

(Transfer or issue of Security by a Person Resident outside India) Regulations,

2000., as amended from time to time, and the entity seeks to open a BO/LO/

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Foreign Direct Investment - A Practitioner’s Guide

PO, the AD Category-I bank may consider such applications under the delegated

powers.

(ii) An application from a person resident outside India for opening of a BO/LO/

PO in India shal require prior approval of Reserve Bank of India in the fol owing

cases:

The applicant is a citizen of or is registered/incorporated

in Pakistan

The applicant is a citizen of or is registered/incorporated in

Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or

Macau and the application is for opening a BO/LO/PO in Jammu

and Kashmir, North East region and Andaman and Nicobar Islands;

The principal business of the applicant falls in the four sectors

namely Defence, Telecom, Private Security and Information

and Broadcasting.*

The applicant is a Non-Government Organisation (NGO),

Non-Profit Organisation, Body/ Agency/ Department of a

foreign government.**

* In the case of proposal for opening a PO relating to defence sector, no separate

reference or approval of Government of India shall be required if the said non-resident

applicant has been awarded a contract by/ entered into an agreement with Ministry of

Defence or Service Headquarters or Defence Public Sector Undertakings. No separate

approval is required from Reserve Bank of India for such cases only.

** Such applications may be forwarded by the AD Category-I bank to the General

Manager, Reserve Bank of India, Central Office Cell, Foreign Exchange Department, 6,

Sansad Marg, New Delhi - 110 001 who shall process the applications in consultation

with the Government of India.

Establishment of BO/LO/PO in India

73

(ii ) The non-resident entity applying for a BO/LO in India should have a financial y

sound track record viz:

Branch Office/

Track Record

Liaison Office

Branch Office

A profit making track record during the immediately

preceding five financial years in the home country

and net worth of not less than USD 100,000 or its

equivalent.

Net Worth [total of paid-up capital and free reserves,

less intangible assets as per the latest Audited Balance

Sheet or Account Statement certified by a Certified

Public Accountant or any Registered Accounts

Practitioner by whatever name called].

Liaison Office

A profit making track record during the immediately

preceding three financial years in the home country

and net worth of not less than USD 50,000 or its

equivalent.

An applicant that

May submit a Letter of Comfort (LOC) from its parent/

is not financially

group company, subject to the condition that the

sound and is a

parent/ group company satisfies the prescribed criteria

subsidiary of

for net worth and profit.

another company

Procedure for Establishment

(i) The application for establishing BO / LO/ PO in India may be submitted by the

non-resident entity in Form FNC (See Appendix - II) to a designated AD

Category - I bank (i.e. an AD Category – I bank identified by the applicant with

whom they intend to pursue banking relations) along with the prescribed

documents and the LOC, wherever applicable.

Following are the prescribed documents:

a.

Copy of the Certificate of Incorporation / Registration; Memorandum of

Association and Articles of Association attested by the Notary Public in the

country of registration.

[If the original Certificate is in a language other than in English, the same

may be translated into English and notarized as above and cross verified/

attested by the Indian Embassy/ Consulate in the home country].

b. Audited Balance sheet of the applicant company for the last three/ five

years in case of branch office/liaison office respectively.

[If the applicants’ home country laws/regulations do not insist on auditing

of accounts, an Account Statement certified by a Certified Public Accountant

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Foreign Direct Investment - A Practitioner’s Guide

(CPA) or any Registered Accounts Practitioner by any name, clearly showing

the net worth may be submitted]

c.

Bankers' Report from the applicant’s banker in the host country / country

of registration showing the number of years the applicant has had banking

relations with that bank.

d. Power of Attorney in favour of signatory of Form FNC (See Appendix - II)

in case the Head of the overseas entity is not signing the Form FNC.

The AD Category-I bank shall after exercising due diligence in respect of

the applicant’s background, and satisfying itself as regards adherence to

the eligibility criteria for establishing BO/LO/PO, antecedents of the

promoter, nature and location of activity of the applicant, sources of funds,

etc., and compliance with the extant KYC norms grant approval to the

foreign entity for establishing BO/LO/PO in India.

(ii) However, before issuing the approval letter to the applicant, the AD Category-

I bank shall forward a copy of the Form FNC along with the details of the

approval proposed to be granted by it to the General Manager, Reserve Bank

of India, CO Cell, New Delhi, for allotment of Unique Identification Number

(UIN) to each BO/LO.

After receipt of the UIN from the Reserve Bank, the AD Category-I bank shall

issue the approval letter to the non-resident entity for establishing BO/LO in

India. This is in order to enable the Reserve Bank to keep, maintain and upload

up-to-date list of all foreign entities which have been granted permission for

establishing BO/LO in India, on its website.

(ii ) The validity period of an LO is generally for three years, except in the case of

Non-Banking Finance Companies (NBFCs) and those entities engaged in

construction and development sectors, for whom the validity period is two

years only.

The validity period of the project office is for the tenure of the project.

(iv) An applicant that has received permission for setting up of a BO/LO/PO shall

inform the designated AD Category I bank as to the date on which the BO/

LO/PO has been set up. The AD Category I bank in turn shall inform Reserve

Bank accordingly. In case an approval granted by the AD bank has either been

surrendered by the applicant or has expired without any BO/LO/PO being set

up, the AD Category I bank shall inform RBI accordingly.

(v) The approval granted by the AD Category I bank should include a proviso to

the effect that in case the BO/LO/PO for which approval has been granted is

not opened within six months from the date of the approval letter, the approval

shall lapse. In cases where the non-resident entity is not able to open the

office within the stipulated time frame due to reasons beyond its control, the

AD Category-I bank may consider granting extension of time for a further

period of six months for setting up the office. Any further extension of time

shall require the prior approval of Reserve Bank of India in this regard.

(vi) All applications for establishing a BO/LO in India by foreign banks and insurance

Establishment of BO/LO/PO in India

75

companies wil be directly received and examined by the Department of Banking

Regulation (DBR), Reserve Bank of India, Central Office and the Insurance

Regulatory and Development Authority (IRDA), respectively. No UIN for such

representative offices is required from the Foreign Exchange Department,

Reserve Bank of India.

(vi ) There is a general permission to non-resident companies for establishing BO in

the Special Economic Zones (SEZs) to undertake manufacturing and service

activities subject to the conditions that:

a.

such BOs are functioning in those sectors where 100% FDI is permitted;

b. such BOs comply with Chapter XXII of the Companies Act, 2013; and

c.

such BOs function on a stand-alone basis.

Opening of bank account by BO/LO/PO

(i) An LO may approach the designated AD Category I Bank in India to open an

account to receive remittances from its Head Office outside India. It may be

noted that an LO shall not maintain more than one bank account at any given

time without the prior permission of Reserve Bank of India. The permitted

Credits and Debits to the account shall be:

a.

Credits

1. Funds received from Head Office through normal banking channels

for meeting the expenses of the office.

2. Refund of security deposits paid from LO’s account or directly by the

Head Office through normal banking channels.

3. Refund of taxes, duties etc., received from tax authorities, paid from

LO’s bank account.

4. Sale proceeds of assets of the LO.

b. Debits

Only for meeting the local expenses of the office.

(ii) A BO may approach any AD Category-I Bank in India to open an account for its

operations in India. Credits to the account should represent the funds received

from Head Office through normal banking channels for meeting the expenses

of the office and any legitimate receivables arising in the process of its business

operations. Debits to this account shal be for the expenses incurred by the BO

and towards remittance of profit/winding up proceeds.

(ii ) Any foreign entity except an entity from Pakistan who has been awarded a

contract for a project by the Government authority/Public Sector Undertakings

or are permitted by the AD to operate in India may open a bank account

without any prior approval of the Reserve Bank. An entity from Pakistan shall

need prior approval of Reserve Bank of India to open a bank account for its

project office in India.

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Foreign Direct Investment - A Practitioner’s Guide

(iv) AD Category – I banks can open non-interest bearing foreign currency account

for POs in India subject to the following:

a.

The PO has been established in India, with the general / specific permission

of Reserve Bank of India, having the requisite approval from the concerned

Project Sanctioning Authority concerned as per FEM (Establishment in India

of Branch Office or a Project Office or any other Place of Business

Regulations, 2016).

b. The contract governing the project specifically provides for payment in

foreign currency.

c.

Each PO can open two foreign currency accounts, usual y one denominated

in USD and other in home currency of the project awardee, provided both

are maintained with the same AD Category–I bank.

d. The permissible debits to the account shall be payment of project related

expenditure and credits shall be foreign currency receipts from the Project

Sanctioning Authority and remittances from parent/group company abroad

or bilateral / multilateral international financing agency.

e. The responsibility of ensuring that only the approved debits and credits are

allowed in the foreign currency account shall rest solely with the AD

Category–I bank. Further, the accounts shall be subject to 100 per cent

scrutiny by the Concurrent Auditor of the respective AD Category–I bank.

f.

The foreign currency accounts have to be closed at the completion of the

project.

Annual Activity Certificate by BO/LO/PO

(i) The Annual Activity Certificate (AAC) (See Appendix - III) as at the end of

March 31 each year along with the required documents needs to be submitted

by the following:

a.

In case of a sole BO/ LO/PO, by the BO/LO/PO concerned;

b. In case of multiple BOs / LOs, a combined AAC in respect of all the

offices in India by the nodal office of the BOs / LOs.

The LO/BO needs to submit the AAC to the designated AD Category -I

bank as well as Director General of Income Tax (International Taxation),

New Delhi whereas the PO needs to submit the AAC only to the designated

AD Category -I bank.

(ii) The designated AD Category - I bank shall scrutinize the AACs and ensure that

the activities undertaken by the BO/LO are being carried out in accordance

with the terms and conditions of the approval given.

In the event of any adverse findings reported by the auditor or noticed by the

designated AD Category -I bank, the same should immediately be reported to

the General Manager, Reserve Bank of India, CO Cell, New Delhi, along with

the copy of the AAC and their comments thereon.

Extension of validity period of the approval of LO and PO

(i) Requests for extension of time for LOs may be submitted before the expiry of

Establishment of BO/LO/PO in India

77

the validity of the approval, to the AD Category-I bank concerned under whose

jurisdiction the LO/nodal office is located. The designated AD Category - I bank

may extend the validity period of LO/s for a period of 3 years from the date of

expiry of the original approval / extension granted if the applicant has complied

with the following conditions and the application is otherwise in order:

a.

The LO should have submitted the Annual Activity Certificates for the

previous years and

b. The account of the LO maintained with the designated AD Category – I

bank is being operated in accordance with the terms and conditions

stipulated in the approval letter.

Such extension has to be granted, as expeditiously as possible as and in

any case not later than one month from the receipt of the request under

intimation to the General Manager, Reserve Bank of India, CO Cell, New

Delhi quoting the reference number of the original approval letter and the

UIN. Reserve Bank shall update the information on its website immediately.

(ii) Further, entities engaged in construction and development sectors and Non-

Banking Finance Companies are permitted to open a liaison office for two

years only. No further extension would be considered for liaison offices of

entities which are Non-Banking Finance Companies and those engaged in

construction and development sectors (excluding infrastructure development

companies). Upon expiry of the validity period, the offices shall have to either

close down or be converted into a Joint Venture / Wholly Owned Subsidiary in

conformity with the extant Foreign Direct Investment policy.

Registration with police authorities

Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or

Pakistan desirous of opening BO/LO/PO in India shall have to register with the state

police authorities. Copy of approval letter for ‘persons’ from these countries shall be

marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security

Division-I, Government of India, New Delhi for necessary action and record.

Application for additional offices and activities

(i) Requests for establishing additional BOs / LOs may be submitted to the AD

Category-I bank in a fresh FNC form. However, the documents mentioned in

form FNC need not be resubmitted, if there are no changes to the documents

already submitted earlier.

a.

If the number of offices exceeds 4 (i.e. one BO / LO in each zone viz;

East, West, North and South), the applicant has to justify the need for

additional office/s and it shall require prior approval of RBI.

b. The applicant may identify one of its offices in India as the Nodal Office,

which will coordinate the activities of all of its offices in India.

c.

Whenever the existing BO/LO is shifting to another city in India, prior

approval from the AD Category-I bank is required. However, no permission

is required if the LO/BO is shifted to another place in the same city subject

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Foreign Direct Investment - A Practitioner’s Guide

to the condition that the new address is intimated to the designated AD

Category-I bank. Changes in the postal address may be intimated to the

CO Cell, New Delhi by the AD Category-I bank at the earliest.

(ii) Requests for undertaking activities in addition to what has been permitted

initially (Annex C) by Reserve Bank of India/ AD Category-I bank may be

submitted by the applicant to the Reserve Bank through the designated AD

Category -I bank justifying the need.

Extension of fund and non-fund based facilities

AD Category-I bank, may based on their business prudence, Board approved policy and

compliance to extant rules/regulations stipulated by DBR, RBI extend fund/non-fund

based facilities to BOs/POs only.

Remittance of profit/surplus

Remittance of profit/surplus

BOs are permitted to remit outside

AD Category – I bank can permit

India profit of the branch net of

intermittent remittances by POs

applicable Indian taxes, on

pending winding up / completion of

production of the following

the project provided they are satisfied

documents to the satisfaction of the

with the bonafides of the transaction,

AD Category-I bank

subject to the fol owing

1. A certified copy of the

1.

Submits an Auditors / Chartered

audited Balance Sheet and

Accountants Certificate to the effect

Profit and Loss account for

that sufficient provisions have been

the relevant year ; and

made to meet the liabilities in India

including Income Tax, etc;

2.

A Chartered Accountant’s

2.

An undertaking from the PO that the

certificate.

remittance will not, in any way, affect

the completion of the project in India

and that any shortfall of funds for

meeting any liability in India will be

met by inward remittance from abroad

Establishment of BO/LO/PO in India

79

i.

BOs are permitted to remit outside India profit of the branch net of applicable

Indian taxes, on production of the following documents to the satisfaction of

the AD Category-I bank through whom the remittance is effected:

a.

A certified copy of the audited Balance Sheet and Profit and Loss account

for the relevant year.

b. A Chartered Accountant’s certificate certifying

I. the manner of arriving at the remittable profit;

II. that the entire remittable profit has been earned by undertaking the

permitted activities; and

III. that the profit does not include any profit on revaluation of the assets

of the branch.

ii.

AD Category – I bank can permit intermittent remittances by POs pending

winding up / completion of the project provided they are satisfied with the

bonafides of the transaction, subject to the following:

a.

The PO submits an Auditors’ / Chartered Accountants’ Certificate to the

effect that sufficient provisions have been made to meet the liabilities in

India including Income Tax, etc.

b. An undertaking from the PO that the remittance will not, in any way,

affect the completion of the project in India and that any shortfall of funds

for meeting any liability in India will be met by inward remittance from

abroad.

Closure of BO/LO/PO

1.

Requests for closure of the BO / LO/ PO and submit the application

along with following documents for remittance of winding up

proceeds of BO / LO/ PO to the designated AD Category - I bank

•

Copy of the Reserve Bank's/AD Category-I bank’s approval

•

Auditor's certificate ;

•

Confirmation from the applicant/parent company that no legal proceedings is pending in any Court in India ;

•

A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013;

•

The designated AD Category - I banks has to ensure that the BO / LO/ PO had filed their

respective AACs ; and

•

Any other document/s, specified by Reserve Bank of India/AD Category-I bank.

2.

Designated AD Category-I bank may allow remittance of winding up

proceeds in respect of offices of banks and insurance companies, after

obtaining copies of permission of closure from the sectoral regulators

along with the documents mentioned above.

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Foreign Direct Investment - A Practitioner’s Guide

(i) Requests for closure of the BO / LO/ PO and allowing the remittance of

winding up proceeds of BO / LO/ PO may be submitted to the designated AD

Category - I bank by the BO/ LO/ PO or their nodal office, as the case may be.

The application for winding up may be submitted along with the following

documents:

a.

Copy of the Reserve Bank's/AD Category-I bank’s approval for establishing

the BO/ LO/ PO.

b. Auditor's certificate:

(i) indicating the manner in which the remittable amount has been arrived

at and supported by a statement of assets and liabilities of the applicant

and indicating the manner of disposal of assets;

(ii) confirming that all liabilities in India including arrears of gratuity and

other benefits to employees, etc. of the office have been either fully

met or adequately provided for; and

(ii ) confirming that no income accruing from sources outside India

(including proceeds of exports) has remained unrepatriated to India.

c.

Confirmation from the applicant/parent company that no legal proceedings

in any Court in India are pending against the BO / LO/ PO and there is no

legal impediment to the remittance.

d. A report from the Registrar of Companies regarding compliance with the

provisions of the Companies Act, 2013, in case of winding up of the BO /

LO in India, wherever applicable.

e. The designated AD Category - I banks has to ensure that the BO / LO/ PO

had filed their respective AACs.

f.

Any other document/s, specified by Reserve Bank of India/AD Category-

I bank while granting approval.

(ii) Designated AD Category-I bank may al ow remittance of winding up proceeds

in respect of offices of banks and insurance companies, after obtaining copies

of permission of closure from the sectoral regulators along with the documents

mentioned above.

Transfer of assets of BO/LO/PO

Proposals for transfer of assets may be considered by the AD Category-I bank only from

BOs/LOs/POs who are adhering to the operational guidelines such as submission of

AACs (up to the current financial year) at regular annual intervals with copies endorsed

to DGIT (International Taxation); have obtained PAN from IT Authorities and have got

registered with ROC under the Companies Act 2013, if necessary. Also,

(i) Transfer of assets by way of sale to the JV/WoS be allowed by AD Category-I

bank only when the non-resident entity intends to close their BO/LO/PO

operations in India.

(ii) A certificate is to be submitted from the Statutory Auditor furnishing details of

assets to be transferred indicating their date of acquisition, original price,

Establishment of BO/LO/PO in India

81

depreciation till date, present book value or written down value (WDV) value

and sale consideration to be obtained. Statutory Auditor should also confirm

that the assets were not re-valued after their initial acquisition. The sale

consideration should not be more than the book value in each case.

(ii ) The assets should have been acquired by the BO/LO/PO from inward

remittances and no intangible assets such as good will, pre-operative expenses

should be included. No revenue expenses such as lease hold improvements

incurred by the BO/LO can be capitalised and transferred to JV/WOS.

(iv) AD Category-I bank must ensure payment of al applicable taxes while permitting

transfer of assets.

(v) Credits to the bank accounts of BO/LO/PO on account of such transfer of

assets will be treated as permissible credits.

(vi) Donation by BO/LO/PO of old furniture, vehicles, computers and other office

items etc. to NGOs or other not-for-profit organisations may be permitted by

the AD category-I banks after satisfying itself about the bonafide of the

transaction.

Checklist for BO/LO/PO

1. Register with the Registrar of

A BO/LO/PO or any other place of business

Companies (ROC)

by whatever name called is required to

register with the Registrar of Companies

(ROCs) once it establishes a place of

business in India if such registration is

required under the Companies Act, 2013.

2. Application to an Authorised

A person resident outside India desiring to

Dealer Category-I bank

establish a branch office or a liaison office

(Form FNC)

or a project office or any other place of

business in India shal submit an application

in Form FNC to an Authorised Dealer

Category-I bank.

3. Profit Making Track Record

A branch office or a liaison office or a project

office need to meet the profit making track

record.

4. Permissible Activities

A branch office or a liaison office or a project

office shal undertake or carry on permissible

activities and shall not undertake or carry on

any other activity unless otherwise specifical y

permitted by the Reserve Bank.

5. Obtain Permanent Account

The BOs / LOs shall obtain Permanent

Number (PAN)

Account Number (PAN) from the Income

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Foreign Direct Investment - A Practitioner’s Guide

Tax Authorities on setting up of their office

in India and report the same in the AACs.

6. LO upgrade into a BO

The existing PAN and bank accounts can be

continued when an LO is permitted to

upgrade into a BO.

7. Transaction

Each BO/ LO/PO are required to transact

through one designated AD Category-I bank

only who shall be responsible for the due

diligence and KYC norms of the BO/LO/

PO. BO /LO/PO, present in multiple

locations, are required to transact through

their designated AD.

8. Annual Activity Certificate(AAC) The branch office/liaison office shall submit

the Annual Activity Certificate as at the end

of March 31 along with the audited financial

statements including receipt and payment

account on or before September 30 of that

year.

9. BO/LO/PO change their

BO/LO/PO can change their existing AD

existing AD Category-I bank

Category-I bank subject to both the AD

banks giving consent in writing for the

transfer and the transferring AD bank

confirming submission of all AACs and

absence of any adverse features in

conducting the account by the BO/LO/PO.

10. Acquisition of property by

Acquisition of property by BO/PO shall be

BO/PO

governed by the guidelines issued under

Foreign Exchange Management (Acquisition

and transfer of immovable property outside

India) Regulations.

11. Carry out permitted/ incidental

As per section 6 (3) (h) of the Foreign

activities from leased property

Exchange Management Act, 1999, BOs/

LOs/POs have general permission to carry

out permitted/ incidental activities from

leased property subject to lease period not

exceeding five years.

12. Term Deposit Account

AD Category-I bank can allow term deposit

account for a period not exceeding 6 months

in favour of a BO/LO/PO of a person

Establishment of BO/LO/PO in India

83

resident outside India provided the bank is

satisfied that the term deposit is out of

temporary surplus funds and the BO/LO/

PO furnishes an undertaking that the maturity

proceeds of the term deposit wil be utilised

for their business in India within 3 months of

maturity. However, such facility may not be

extended to shipping/airline companies.

13 The foreign entities who

In case a BO/LO has been established and

may have established LO or

continues to exist without approval of the

BO in the pre-FEMA period

Reserve Bank, such BO/LO may approach

their AD Category-I bank to regularise their

offices under FEMA 1999, even if permission

of Reserve Bank was not required as per the

regulations existing at the time of setting

up of the office. Such cases may be brought

to the notice of Reserve Bank immediately

for allotment of UIN. The foreign entities

who may have established LO or BO with

the permission from the Government of India

in the pre-FEMA period shall also approach

their AD Category–I bank with a copy of

the said approval for allotment of a UIN by

the Reserve Bank.

14 Change in the name of the

Change in the name of the existing LO/BO

existing LO/BO

may be permitted by the AD Category-I bank

only if the non-resident entity changes its

name without change in ownership and if

the application to this effect is received with

the Board resolution for change of name and

documents/certificate from ROC India

showing change of name. The change in

name of the BO/LO should be reported to

FED, CO Cell, New Delhi. Where change

in name is requested on account of

acquisitions or mergers of foreign entities

involving change in ownership, the acquired

entity or new entity is required to apply afresh

by closing the existing entity. Foreign entities

should note that the approvals are given by

the Reserve Bank/AD Category-I bank after

detailed scrutiny as per laid down guidelines

and FDI policies and hence the approvals

given to one foreign entity is not

transferrable to another foreign entity.

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Foreign Direct Investment - A Practitioner’s Guide

15. Change in the Top

Change in the Top Management or CEO/

Management

MD/CMD etc. of the BO/LO does not

require prior approval from the Reserve

Bank/AD Category-I bank. However, AD

Category-I bank should be intimated about

the same.

16. Closure of the Branch office/

Requests for closure of the branch office/

Liaison office

liaison office may be submitted to the

Authorised Dealer Category - I bank along

with the copy of the Reserve Bank's/

Authorised Dealer Category-I bank’s

approval for establishing the office; Auditor's

certificate; Confirmation from the applicant/

parent company that no legal proceedings

in any Court in India are pending against

the office and there is no legal impediment

to the remittance; A report from the

Registrar of Com panies regarding

compliance with the provisions of the

Companies Act, 2013, in case of winding

up of the branch office/liaison in India and

any other document/s specified by the

Reserve Bank/Authorised Dealer Category-

I bank while granting approval.

17. Remittance of winding up

Remittance of winding up proceeds of branch

proceeds

or liaison office established in India shall be

governed by the guidelines issued under

Foreign Exchange Management (Remittance

of Assets) Regulations.

***

LIBERALISED REMITTANCE SCHEME (LRS)

As a liberalization measure to facilitate resident individuals to remit funds abroad for

permitted current or capital account transactions or combination of both Reserve Bank

of India also issues “Liberalised Remittance Scheme.

Under the Liberalised Remittance Scheme, Authorised Dealers may freely allow

remittances by resident individuals up to USD 2,50,000 per Financial Year (April-March)

for any permitted current or capital account transaction or a combination of both. The

Scheme is not available to corporates, partnership firms, HUF, Trusts etc.

The LRS limit has been revised in stages consistent with prevailing macro and micro

economic conditions. During the period from February 4, 2004 till date, the LRS limit

has been revised as under:

(Amount in USD)

Feb 4,

Dec 20, May 8,

Sep 26,

Aug 14

Aug 14,

May 26,

2004

2006

2007

2007

2013

2014

2015

LRS limit (USD)

25,000

50,000

1,00,000

2,00,000

75,000

1,25,000

2,50,000

The Scheme is available to all resident individuals including minors. In case of remitter

being a minor, the Form A2 must be countersigned by the minor’s natural guardian.

Remittances under the Scheme can be consolidated in respect of family members

subject to individual family members complying with its terms and conditions. However,

clubbing is not permitted by other family members for capital account transactions such

as opening a bank account/investment/purchase of property, if they are not the co-

owners/co-partners of the overseas bank account/ investment/property. Further, a resident

cannot gift to another resident, in foreign currency, for the credit of the latter’s foreign

currency account held abroad under LRS.

Al other transactions which are otherwise not permissible under FEMA and those in the

nature of remittance for margins or margin calls to overseas exchanges/ overseas

counterparty are not allowed under the Scheme.

The permissible capital account transactions by an individual under LRS

opening of foreign currency account abroad with a bank;

•

purchase of property abroad;

•

making investments abroad- acquisition and holding shares of both listed and

unlisted overseas company or debt instruments;

85

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Foreign Direct Investment - A Practitioner’s Guide

•

acquisition of qualification shares of an overseas company for holding the post

of Director; acquisition of shares of a foreign company towards professional

services rendered or in lieu of Director’s remuneration;

•

investment in units of Mutual Funds, Venture Capital Funds, unrated debt

securities, promissory notes;

•

setting up Wholly Owned Subsidiaries and Joint Ventures (with effect from

August 05, 2013) outside India for bonafide business subject to the stipulated

terms & conditions

•

extending loans including loans in Indian Rupees to Non-resident Indians (NRIs)

who are relatives as defined in Companies Act, 1956.

The permissible Current Account Transactions by an individual under LRS

The limit of USD 2, 50,000 per Financial Year (FY) under the Scheme also includes/

subsumes remittances for current account transactions such as:

Private visit

Gift/donation

Going abroad on employment

Emigration

Maintenance of close relatives abroad

Business trip

Medical treatment abroad

Studies abroad

Liberalised Remittance Scheme (LRS)

87

Release of foreign exchange exceeding USD 2, 50,000, requires prior permission from

the Reserve Bank of India.

a.

Private visits

For private visits abroad, other than to Nepal and Bhutan, any resident individual

can obtain foreign exchange up to an aggregate amount of USD 2,50,000,

from an Authorised Dealer or FFMC, in any one financial year, irrespective of

the number of visits undertaken during the year.

Further, al tour related expenses including cost of rail/road/water transportation;

cost of Euro Rail; passes/tickets, etc. outside India; and overseas hotel/lodging

expenses shall be subsumed under the LRS limit. The tour operator can col ect

this amount either in Indian rupees or in foreign currency from the resident

traveller.

b. Gift/donation

Any resident individual may remit up-to USD 2,50,000 in one FY as gift to a

person residing outside India or as donation to an organization outside India.

c.

Going abroad on employment

A person going abroad for employment can draw foreign exchange up to USD

2,50,000 per FY from any Authorised Dealer in India.

d. Emigration

A person wanting to emigrate can draw foreign exchange from AD Category I

bank and AD Category II up to the amount prescribed by the country of

emigration or USD 250,000. Remittance of any amount of foreign exchange

outside India in excess of this limit may be allowed only towards meeting

incidental expenses in the country of immigration and not for earning points or

credits to become eligible for immigration by way of overseas investments in

government bonds; land; commercial enterprise; etc.

e. Maintenance of close relatives abroad

A resident individual can remit up-to USD 2,50,000 per FY towards maintenance

of close relatives [‘relative’ as defined in Section 6 of the Indian Companies

Act, 1956] abroad.

f.

Business trip

Visits by individuals in connection with attending of an international conference,

seminar, specialised training, apprentice training, etc., are treated as business

visits. For business trips to foreign countries, resident individuals can avail of

foreign exchange up to USD 2,50,000 in a FY irrespective of the number of

visits undertaken during the year.

However, if an employee is being deputed by an entity for any of the above

and the expenses are borne by the latter, such expenses shall be treated as

residual current account transactions outside LRS and may be permitted by the

AD without any limit, subject to verifying the bonafides of the transaction.

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Foreign Direct Investment - A Practitioner’s Guide

g. Medical treatment abroad

Authorised Dealers may release foreign exchange up to an amount of USD

2,50,000 or its equivalent per FY without insisting on any estimate from a

hospital/doctor. For amount exceeding the above limit, Authorised Dealers

may release foreign exchange under general permission based on the estimate

from the doctor in India or hospital/ doctor abroad. A person who has fallen

sick after proceeding abroad may also be released foreign exchange by an

Authorised Dealer (without seeking prior approval of the Reserve Bank of India)

for medical treatment outside India.

In addition to the above, an amount up to USD 250,000 per financial year is

allowed to a person for accompanying as attendant to a patient going abroad

for medical treatment/check-up.

h. Facilities available to students for pursuing their studies abroad

AD Category I banks and AD Category II, may release foreign exchange up to

USD 2,50,000 or its equivalent to resident individuals for studies abroad without

insisting on any estimate from the foreign University. However, AD Category I

bank and AD Category II may al ow remittances (without seeking prior approval

of the Reserve Bank of India) exceeding USD 2,50,000 based on the estimate

received from the institution abroad.

Documentation by the remitter

•

The individual will have to designate a branch of an AD through which all the

remittances under the Scheme will be made. The resident individual seeking

to make the remittance should furnish Form A2 for purchase of foreign exchange

under LRS.

•

It is mandatory to have PAN card to make remittances under the Scheme for

capital account transactions. However, PAN card need not be insisted upon for

remittances made towards permissible current account transactions up to USD

25,000.

•

Investor who has remitted funds under LRS can retain, reinvest the income

earned on the investments. At present, the resident individual is not required

to repatriate the funds or income generated out of investments made under

the Scheme. However, a resident individual who has made overseas direct

investment in the equity shares; compulsorily convertible preference shares of

a JV/WoS outside India or ESOPs, within the LRS limit, shall have to comply

with the terms and conditions prescribed by the overseas investment guidelines

under Foreign Exchange Management (Transfer or Issue of any Foreign Security)

(Amendment) Regulations, 2013.

REMITTANCE FACILITIES TO PERSONS OTHER THAN INDIVIDUALS

Gift/donation

General permission is available to persons other than individuals to remit towards donations

Liberalised Remittance Scheme (LRS)

89

up-to one per cent of their foreign exchange earnings during the previous three financial

years or USD 5,000,000, whichever is less, for

(a) creation of Chairs in reputed educational institutes,

(b) contribution to funds (not being an investment fund) promoted by educational

institutes; and

(c) contribution to a technical institution or body or association in the field of

activity of the donor Company.

Any additional remittance in excess of the same shall require prior approval of the

Reserve Bank of India.

Procedure of remittance

Applications for remittances for purposes other than those specified above may be

forwarded to the Reserve Bank of India together with

(a) details of their foreign exchange earnings during the last 3 years,

(b) brief background of the company’s activities,

(c) purpose of the donation and (d) likely benefits to the corporate.

Commission to agents abroad for sale of residential flats or commercial plots

in India

Remittances by persons other than individuals shall require prior approval of the Reserve

Bank of India if commission per transaction to agents abroad for sale of residential flats

or commercial plots in India exceeds USD 25,000 or five percent of the inward remittance

whichever is more.

Remittances towards consultancy services

Remittances by persons other than individuals shall require prior approval of the Reserve

Bank of India if remittances exceed USD 10,000,000 per project for any consultancy

services in respect of infrastructure projects and USD 1,000,000 per project, for other

consultancy services procured from outside India.

Remittances towards re-imbursement of pre-incorporation expenses

Remittances by persons other than individuals shall require prior approval of the Reserve

Bank of India for remittances exceeding five per cent of investment brought into India

or USD 100,000 whichever is higher, by an entity in India by way of reimbursement of

pre-incorporation expenses.

Payment of fees in foreign currency - Embassy affiliated educational institutions

Authorised Dealers may sell foreign exchange towards payment of fees to schools/

educational institutions under the administrative control of foreign embassies.

Remittance towards payments of collected subscription to overseas TV media

company

Authorised dealers may allow cable operators or collection agents in India of overseas

90

Foreign Direct Investment - A Practitioner’s Guide

TV media companies, to remit subscription collected from subscribers in India/

advertisement charges collected from the advertisers who are eligible to advertise on

overseas TV channels without any prior permission from the Reserve Bank.

Bids in foreign currency for projects to be executed in India

Persons resident in India are permitted to incur liability in foreign exchange and to make

or to receive payments in foreign exchange, in respect of global bids where the Central

Government has authorised such projects to be executed in India.

In such cases, authorised dealers may sell foreign exchange to the concerned resident

Indian company which has been awarded the contract.

Sale of overseas telephone cards

Authorised Dealers may al ow agents in India of the overseas organisations issuing pre-

paid telephone cards to remit the sale proceeds of such cards, net of their commission,

to the issuers of the telephone cards.

Liberalization of foreign technical collaboration agreements

AD Category-I banks may permit drawal of foreign exchange by persons for payment of

royalty and lump-sum payment under technical collaboration agreements without the

approval of Ministry of Commerce and Industry, Government of India.

Drawal of foreign exchange for remittance for purchase of trademark or

franchise in India

AD Category-I banks may permit drawal of foreign exchange by person for purchase of

trademark or franchise in India without approval of the Reserve Bank.

Remittances for making tour arrangements by agents

Authorised Dealers may effect remittances at the request of agents in India who

have tie-up arrangements with hotels/ agents, etc., abroad for providing hotel

accommodation or making other tour arrangements for travel from India, provided the

Authorised Dealer is satisfied that the remittance is being made out of the foreign

exchange purchased by the traveller concerned from an Authorised Person (including

exchange drawn for private travel abroad) in accordance with the Rules, Regulations

and Direction in force.

•

Authorised Dealer may open foreign currency accounts in the name of agents

in India who have tie up arrangements with hotels/ agents, etc., abroad for

providing hotel accommodation or making other tour arrangements for travel ers

from India provided:-

(i) the credits to the account are by way of depositing :-

a.

collections made in foreign exchange from travellers; and

b. refunds received from outside India on account of cancellation of

bookings / tour arrangements, etc., and

(ii) the debits in foreign exchange are for making payments towards hotel

accommodation, tour arrangements etc. outside India.

Liberalised Remittance Scheme (LRS)

91

•

Authorised Dealer may allow tour operators to remit the cost of rail/ road/

water/transportation charges outside India without any prior approval from the

Reserve Bank, net of commission/ mark up due to the agent. The sale of

passes/ ticket in India can be made either against the payment in Indian Rupees

or in foreign exchange released for visits abroad.

•

In respect of consolidated tours arranged by travel agents in India for foreign

tourists visiting India and neighbouring countries like Nepal, Bangladesh, Sri

Lanka etc. against advance payments/ reimbursement through an Authorised

Dealer, part of the foreign exchange received in India against such consolidated

tour arrangement, may require to be remitted from India to these neighbouring

countries for services rendered by travel agents and hoteliers in these countries.

Authorised Dealer may allow such remittances after verifying that the amount

being remitted to the neighbouring countries (inclusive of remittances, if any,

already made against the tour) does not exceed the amount actually remitted

to India and the country of residence of the beneficiary is not Pakistan.

Prohibited Transactions

1. Remittance out of lottery winnings.

2. Remittance of income from racing/riding etc. or any other hobby.

3. Remittance for purchase of lottery tickets, banned /proscribed magazines,

football pools, sweepstakes etc.

4. Payment of commission on exports made towards equity investment in Joint

Ventures / Wholly Owned Subsidiaries abroad of Indian companies.

5. Remittance of dividend by any company to which the requirement of dividend

balancing is applicable.

6. Payment of commission on exports under Rupee State Credit Route, except

commission up to 10% of invoice value of exports of tea and tobacco.

7. Payment related to "Call Back Services" of telephones.

8. Remittance of interest income on funds held in Non-Resident Special Rupee

(Account) Scheme.

***

REMITTANCE OF ASSETS OUTSIDE INDIA

Remittance outside India by a person whether resident in India or not, of assets in

India, governed under the Foreign Exchange Management (Remittance of Assets)

Regulations, 2016.

'Remittance of assets' means remittance outside India of funds in a deposit with a bank/

firm/ company, provident fund balance or superannuation benefits, amount of claim or

maturity proceeds of insurance policy, sale proceeds of shares, securities, immovable

property or any other asset held in India in accordance with the provisions of the Foreign

Exchange Management Act, 1999 (FEMA) or rules/ regulations made under FEMA.

Remittances by individuals not being NRIs/ PIOs

Authorised Dealer may allow remittance of assets by a foreign national where:

(i) the person has retired from employment in India;

(ii) the person has inherited from a person referred to in section 6(5) of the Act;

(ii ) the person is a non-resident widow/widower and has inherited assets from

her/his deceased spouse who was an Indian national resident in India.

The remittance should not exceed USD one million per financial year. This

limit, however, will not cover sale proceeds of assets held on repatriation basis.

In case the remittance is made in more than one instalment, the remittance of

all instalments should be made through the same AD on submission of

documentary evidence.

(iv) the remittance is in respect of balances held in a bank account by a foreign

student who has completed his/ her studies, provided such balance represents

proceeds of remittances received from abroad through normal banking channels

or rupee proceeds of foreign exchange brought by such person and sold to an

authorised dealer or out of stipend/ scholarship received from the Government

or any organisation in India.

These facilities are not available for citizens of Nepal or Bhutan or a PIO.

Remittances by NRIs/ PIOs

‘Non-Resident Indian’ (NRI) means a person resident outside India who is a citizen of India.

A ‘Person of Indian Origin (PIO)’ is a person resident outside India who is a citizen

92

Remittance of Assets outside India

93

of any country other than Bangladesh or Pakistan or such other country as may be

specified by the Central Government, satisfying the following conditions:

a.

Who was a citizen of India by virtue of the Constitution of India or the Citizenship

Act, 1955 (57 of 1955); or

b. Who belonged to a territory that became part of India after the 15th day of

August, 1947; or

c.

Who is a child or a grandchild or a great grandchild of a citizen of India or of a

person referred to in clause (a) or (b); or

d. Who is a spouse of foreign origin of a citizen of India or spouse of foreign

origin of a person referred to in clause (a) or (b) or (c).

PIO wil include an ‘Overseas Citizen of India’ cardholder within the meaning of Section

7(A) of the Citizenship Act, 1955.

Authorised Dealer may allow NRIs/ PIOs, on submission of documentary evidence, to

remit up to USD one million, per financial year:

(i) out of balances in their non-resident (ordinary) (NRO) accounts/ sale proceeds

of assets/ assets acquired in India by way of inheritance/ legacy;

(ii) in respect of assets acquired under a deed of settlement made by either of his/

her parents or a relative as defined in Companies Act, 2013. The settlement

should take effect on the death of the settler;

(ii ) in case settlement is done without retaining any life interest in the property i.e.

during the lifetime of the owner/ parent, it would tantamount to regular transfer

by way of gift and the remittance of sale proceeds of such property would be

guided by the extant instructions on remittance of balance in the NRO account;

In case the remittance is made in more than one instalment, the remittance of all

instalments should be made through the same Authorised Dealer. Where the remittance

is to be made from the balances held in the NRO account, the Authorised Dealer

should obtain an undertaking from the account holder stating that the said remittance is

sought to be made out of the remitter’s balances held in the account arising from his/

her legitimate receivables in India and not by borrowing from any other person or a

transfer from any other NRO account and if such is found to be the case, the account

holder will render himself/ herself liable for penal action under FEMA.

Remittances by companies/ entities

Authorised Dealers may allow remittances by Indian companies under liquidation on

directions issued by a Court in India/ orders issued by official liquidator in case of

voluntary winding up on submission of:

a.

Auditor's certificate confirming that all liabilities in India have been either fully

paid or adequately provided for.

b. Auditor's certificate to the effect that the winding up is in accordance with the

provisions of the Companies Act, 1956.

94

Foreign Direct Investment - A Practitioner’s Guide

c.

In case of winding up otherwise than by a court, an auditor's certificate to the

effect that there are no legal proceedings pending in any court in India against

the applicant or the company under liquidation and there is no legal impediment

in permitting the remittance.

Authorised Dealers may also allow Indian entities to remit their contribution towards

the provident fund/ superannuation/ pension fund in respect of their expatriate staff

resident but “not permanently resident” in India.

Remittances/Winding up proceeds of Branch Office/ Liaison Office

Authorised Dealer may permit remittance of assets on closure or remittance of winding

up proceeds of branch office/ liaison office (other than project office) on submission of

the fol owing documents:

(i) A copy of the Reserve Bank's permission for establishing the branch office /

liaison office in India.

(ii) Auditor’s certificate:

a.

indicating the manner in which the remittable amount has been arrived

and supported by a statement of assets and liabilities of the applicant, and

indicating the manner of disposal of assets;

b. confirming that al liabilities in India including arrears of gratuity and other

benefits to the employees etc., of the branch office / liaison office have

been either fully met or adequately provided for;

c.

confirming that no income accruing from sources outside India (including

proceeds of exports) has remained un-repatriated to India;

d. confirming that the branch office / liaison office has complied with all

regulatory requirements stipulated by the Reserve Bank of India from time

to time regarding functioning of such offices in India;

(ii ) a confirmation from the applicant that no legal proceedings are pending in any

Court in India and there is no legal impediment to the remittance; and

(iv) a report from the Registrar of Companies regarding compliance with the

provisions of the Companies Act, 2013, in case of winding up of the office in

India.

Remittance of assets requiring RBI approval

Prior approval of the Reserve Bank is necessary for remittance of assets where:

a.

Remittance is in excess of USD 1,000,000 (US Dollar One million only) per

financial year

(i) on account of legacy, bequest or inheritance to a citizen of foreign state,

resident outside India;

(ii) by NRIs/ PIOs out of the balances held in NRO accounts/ sale proceeds of

assets/ the assets acquired by way of inheritance/ legacy.

Remittance of Assets outside India

95

b. Hardship will be caused to a person if remittance from India is not made to

such a person.

Remittance of funds from the sale of assets in India held by a person, whether resident

in or outside India, not covered under the directions stipulated above wil require approval

of the Reserve Bank.

Income-tax clearance

The remittances are subject to payment of applicable taxes in India. Reserve Bank of

India wil not issue any instructions under FEMA clarifying tax issues. It shal be mandatory on the part of Authorised Dealers to comply with the requirement of tax laws, as

applicable.

***

COMPOUNDING OF CONTRAVENTIONS

UNDER FEMA

Introduction

Contravention is a breach of the provisions of the Foreign Exchange Management Act

(FEMA), 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issued

there under. Compounding refers to the process of voluntarily admitting the

contravention, pleading guilty and seeking redressal. The Reserve Bank is empowered

to compound any contraventions as defined under section 13 of FEMA, 1999 except

the contravention under section 3(a), for a specified sum after offering an opportunity

of personal hearing to the contravener. It is a voluntary process in which an individual or

a corporate seeks compounding of an admitted contravention. It provides comfort to

any person who contravenes any provisions of FEMA, 1999 [except section 3(a) of the

Act] by minimizing transaction costs. Willful, malafide and fraudulent transactions are,

however, viewed seriously, which will not be compounded by the Reserve Bank.

Any person who contravenes any provision of the FEMA, 1999 [except section 3(a)] or

contravenes any rule, regulation, notification, direction or order issued in exercise of

the powers under this Act or contravenes any condition subject to which an authorization

is issued by the Reserve Bank, can apply for compounding to the Reserve Bank.

Applications seeking compounding of contraventions under section 3(a) of FEMA, 1999

may be submitted to the Directorate of Enforcement.

Power to compound by Reserve Bank

Amount

Compounding Authority

In case where the sum involved in

Assistant General Manager of the

such contravention is ten lakhs rupees

Reserve Bank of India

or below

In case where the sum involved in

Deputy General Manager of

such contravention is more than rupees

Reserve Bank of India

ten lakhs but less than rupees forty lakhs

In case where the sum involved in the

General Manager of Reserve Bank

contravention is rupees forty lakhs or

of India

more but less than rupees hundred lakhs

In case the sum involved in such

Chief General Manager of the

contravention is rupees one hundred

Reserve Bank of India

lakhs or more

96

Compounding of Contraventions under FEMA, 1999

97

Delegation of Powers to Regional Offices

As a measure of customer service and in order to facilitate the operational convenience,

compounding powers have been delegated to the Regional Offices of the Reserve

Bank of India to compound the following contraventions of FEMA, 1999.

Brief Description of Contravention

Compounding Authority

Delay in reporting inward remittance

Regional Offices of the Reserve Bank

received for issue of shares.

of India

Delay in filing form FC(GPR) after

Regional Offices of the Reserve Bank

issue of shares.

of India

Delay in filing the Annual Return on

Regional Offices of the Reserve Bank

Foreign Liabilities and Assets (FLA

of India

Return), by all Indian companies

which have received Foreign Direct

Investment in the previous year(s)

including the current year

Delay in issue of shares/refund of share

Regional Offices of the Reserve Bank

application money beyond 180 days,

of India

mode of receipt of funds, etc.

Violation of pricing guidelines for issue

Regional Offices of the Reserve Bank

of shares.

of India

Issue of ineligible instruments such as

Regional Offices of the Reserve Bank

non - convertible debentures, partly

of India

paid shares, shares with optionality

clause, etc.

Issue of shares without approval of RBI

Regional Offices of the Reserve Bank

or FIPB respectively, wherever required.

of India

Delay in submission of form FC -TRS

Regional Offices of the Reserve Bank

on transfer of shares from Resident to

of India

Non-Resident.

Delay in submission of form FC-TRS

Regional Offices of the Reserve Bank

on transfer of shares from Non-Resident

of India

to Resident.

Taking on record transfer of shares by

Regional Offices of the Reserve Bank

investee company, in the absence of

of India

certified from FC-TRS.

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Foreign Direct Investment - A Practitioner’s Guide

Brief Description of Contravention

Compounding Authority

Contraventions relating to acquisition

FED, CO Cell, New Delhi

and transfer of immovable property

outside India

Contraventions relating to acquisition

FED, CO Cell, New Delhi

and transfer of immovable property in

India

Contraventions relating to establish-

FED, CO Cell, New Delhi

ment in India of Branch office, Liaison

Office or Project office

Contraventions falling under Foreign

FED, CO Cell, New Delhi

Exchange Management (Deposit)

Regulations, 2000

Application for Compounding

•

Al applications for compounding may be submitted together with the prescribed

fee of Rs.5000/- by way of a demand draft drawn in favour of “Reserve Bank

of India” and payable at the concerned Regional Office and by way of a demand

draft drawn in favour of “Reserve Bank of India” and payable at Mumbai for

cases submitted to the Compounding Authority, [Cell for Effective

implementation of FEMA (CEFA)], Foreign Exchange Department, Reserve Bank

of India, Central Office, Mumbai.

•

Along with the application in the prescribed format, the applicant may also

furnish the details relating to Foreign Direct Investment, External Commercial

Borrowings, Overseas Direct Investment and Branch Office / Liaison Office, as

applicable, a copy of the Memorandum of Association and latest audited balance

sheet along with an undertaking that they are not under investigation of any

agency such as DOE, CBI, etc. in order to complete the compounding process

within the time frame.

•

In case the application has to be returned where required approvals are not

obtained from the authorities concerned or in case of incomplete application

for any other reason, the application fees of Rs.5000/- received along with the

application will be returned by crediting the same to the applicant’s account

through NEFT as per the ECS mandate and details of their bank account as

furnished along with the application. The application wil be treated as incomplete

without these details.

•

The applicants are also advised to bring to the notice of the compounding

authority change, if any, in the address/ contact details of the applicant during

the pendency of the compounding application with Reserve Bank.

Compounding of Contraventions under FEMA, 1999

99

Pre-requisite for Compounding Process

•

In respect of a contravention committed by any person within a period of three

years from the date on which a similar contravention committed by him was

compounded under the Compounding Rules, such contraventions would not

be compounded and relevant provisions of the FEMA, 1999 shall apply. Any

second or subsequent contravention committed after the expiry of a period of

three years from the date on which the contravention was previously

compounded shall be deemed to be a first contravention.

•

Contraventions relating to any transaction where proper approvals or permission

from the Government or any statutory authority concerned, as the case may

be, have not been obtained, such contraventions would not be compounded

unless the required approvals are obtained from the concerned authorities.

•

Cases of contravention such as those having a money laundering angle, national

security concerns and/or involving serious infringements of the regulatory

framework or where the contravener fails to pay the sum for which contravention

was compounded within the specified period in terms of the compounding

order, shal be referred to the Directorate of Enforcement for further investigation

and necessary action under FEMA, 1999 or to the authority instituted for

implementation of the Prevention of Money Laundering Act 2002, or to any

other agencies, for necessary action as deemed fit.

•

In this connection, it is clarified that whenever a contravention is identified by

the Reserve Bank or brought to its notice by the entity involved in contravention

by way of a reference other than through the prescribed application for

compounding, the Bank will continue to decide

•

whether a contravention is technical and/or minor in nature and, as such,

can be dealt with by way of an administrative/ cautionary advice;

•

whether it is material and, hence, is required to be compounded for which

the necessary compounding procedure has to be followed or

•

Whether the issues involved are sensitive / serious in nature and, therefore,

need to be referred to the Directorate of Enforcement (DOE). However, once

a compounding application is filed by the concerned entity suo moto, admitting

the contravention, the same will not be considered as ‘technical’ or ‘minor’ in

nature and the compounding process shall be initiated in terms of section 15

(1) of Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign

Exchange (Compounding Proceedings) Rules, 2000.

Scope and Procedure for Compounding

•

On receipt of the application for compounding, the Reserve Bank shal examine

the application based on the documents and submissions made in the application

and assess whether contravention is quantifiable and, if so, the amount of

contravention.

•

The Compounding Authority may call for any information, record or any other

documents relevant to the compounding proceedings. In case the contravener

fails to submit the additional information/documents called for within the

specified period, the application for compounding will be liable for rejection.

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Foreign Direct Investment - A Practitioner’s Guide

•

The following factors, which are only indicative, may be taken into consideration

for the purpose of passing compounding order and adjudging the quantum of

sum on payment of which contravention shal be compounded

•

the amount of gain of unfair advantage, wherever quantifiable, made as a

result of the contravention;

•

the amount of loss caused to any authority/ agency/ exchequer as a result of

the contravention;

•

economic benefits accruing to the contravener from delayed compliance or

compliance avoided;

•

the repetitive nature of the contravention, the track record and/or history of

non-compliance of the contravener;

•

contravener’s conduct in undertaking the transaction and in disclosure of full

facts in the application and submissions made during the personal hearing; and

any other factor as considered relevant and appropriate.

Issue of the Compounding Order

•

The Compounding Authority shal pass an order of compounding after affording

an opportunity of being heard to al the concerned as expeditiously as possible

as and not later than 180 days from the date of application on the basis of the

averments made in the application as well as other documents and submissions

made in this context by the contravener during the personal hearings.

•

The time limit for this purpose would be reckoned from the date of receipt of

the completed application for compounding by the Reserve Bank.

•

If the applicant opts for appearing for the personal hearing, the Reserve Bank

would encourage the applicant to appear directly for it rather than being

represented / accompanied by legal experts / consultants, as compounding is

only for admitted contraventions. Appearing for or opting out of personal hearing

does not have any bearing whatsoever on the amount imposed in the

compounding order. If the authorized representative of the applicant is unavailable

for the personal hearing, the Compounding Authority may pass the order based

on available information/ documents.

•

The Compounding Order shal specify the provisions of the FEMA, 1999 or any

rule, regulation, notification, direction or order issued in exercise of the powers

under FEMA, 1999 in respect of which contravention has taken place along

with details of the contravention.

•

One copy of the compounding order issued under sub rule (2) of Rule 8 of

Foreign Exchange (Compounding Proceedings) Rules, 2000 shall be supplied

to the applicant (the contravener) and also to the Adjudicating Authority, where

the compounding of any contravention is made after making of a complaint

under sub-section (3) of section 16 of the FEMA, as the case may be.

•

To ensure more transparency and greater disclosure, it has been decided to

host the compounding orders passed on the Reserve Bank’s website

(www.rbi.org.in).

***

Appendix- I

FORM FC-GPR

(To be filed by the company through its Authorised Dealer Category – I bank with the

Regional Office of the RBI under whose jurisdiction the Registered Office of the company

making the declaration is situated as and when shares/convertible debentures / others

are issued to the foreign investor, along with the documents mentioned in item No. 5

of the undertaking enclosed to this form. All fields are mandatory).

Permanent Account Number

(PAN) of the investee company

given by the Inc ome Tax

Department

Date of issue of shares /

convertible debentures/others

No.

Particulars

(In Block Letters)

1.

Name of the Investee Company

Address of the Registered Office of the

Investee Company with City, District

and State clearly mentioned

Telephone

Fax

e-mail

State

Registration No. given by Registrar of

Companies and Date of Incorporation.

Whether existing company or new

Existing company /

company (strike off whichever is not

New company

applicable)

(Brownfield) ( Greenfield)

If existing company, give registration

number allotted by RBI for FDI, if any

101

102

Foreign Direct Investment - A Practitioner’s Guide

2.

Description of the main business activity

NIC Code

Location of the project and NIC code

for the district where the project is

located

(a) Detailed address including Name,

City, District and State

(b) Code for District

(c) Code for State

Percentage of FDI allowed as per FDI

policy (Sectoral cap under FDI Policy)

State whether FDI is allowed under

Automatic Route /

Automatic Route or Approva l Route

Approval Route

(strike out whichever is not applicable)

(If under approval route, give relevant

approval No. with date)

3

Details of the foreign investor / collaborator1* (Details of foreign residence

to be given. Indian address if any should not be given)

Name

Address

Country

Constitution / Nature of the investing

Entity

[Specify whether

1. Individual

2. Com pany (Plea se specify if

erstwhile OCB)

3. FII

4. FVCI#

5. Foreign Trust

6. Private Equity Fund

1*

If there is more than one foreign investor/collaborator, separate Annex may be included for items 3 and 4 of the Form.

#

The investment/s is/are made by FVCI under FDI Scheme in terms of Schedule I to Notification No.

FEMA 20/2000-RB dated May 3, 2000.

Appendix

103

7. Pension / Provident Fund

8. Sovereign Wealth Fund (SWF)2

9. Partnership / Proprietorship Firm

10. Financial Institution

11. NRIs / PIO

12. Others (please specify)]

Date of incorporation:

4

Particulars of Shares / Convertible Debentures /others Issued

(a) Nature and date of issue

Nature of issue

Date of issue

Number of shares/

convertible

debentures/others

01

IPO / FPO

02

Preferential allotment /

private placement

03

Rights

04

Bonus

05

Conversion of ECB

06

Conversion of royalty

(including lump sum

payments)

07

Conversion against

import of capital

goods by units in SEZ

08

ESOPs

09

Share Swap

10

Others

(please

specify)

Total

2

SWF means a Government investment vehicle which is funded by foreign exchange assets, and which manages those assets separately from the official reserves of the monetary authorities.

104

Foreign Direct Investment - A Practitioner’s Guide

(b) Type of security issued

No. Nature of

Number Maturity Face value

Premium

Issue

Amount of

security

Price

inflow*

per

security

01

Equity

02

Compulsorily

Convertible

Debentures

03

Compulsorily

Convertible

Preference

shares

04

Others (please

specify)

Total

i) In case the issue price is greater than the face value please give break up of the

premium received.

ii)* In case the issue is against conversion of ECB or royalty or against import of

capital goods by units in SEZ, a Chartered Accountant's Certificate certifying

the amount outstanding on the date of conversion

(c) Break up of premium

Amount

Control Premium

Non competition fee

Others@

Total

@ Please specify the nature

(d) Total inflow (in Rupees) on account of issue

of shares / convertible debentures/others

to non-residents (including premium, if any)

vide

(i) Remittance through AD:

(ii) Debit to NRE/FCNR/Escrow A/c with

Bank_________

(ii ) Others (please specify)

Date of reporting of (i) and (i ) above to RBI

under Para 9 (1) A of Schedule I to

Notification No. FEMA 20 /2000-RB dated

May 3, 2000, as amended from time to time.

Appendix

105

(e) Disclosure of fair value of shares issued**

We are a listed company and the market

value of a share as on date of the issue is*

We are an un-listed company and the fair

value of a share is*

** before issue of shares *(Please indicate as applicable) 5. Post issue pattern of shareholding

Equity

Compulsorily convertible

Preference Shares/

Debentures/others

Investor category

No.

Amount

No.

Amount

of

(Face

of

(Face

shares

Value)

%

shares

Value)

%

Rs.

Rs.

a)

Non-Resident

01 Individuals

02 Companies

03 FIIs

04 FVCIs#

05 Foreign Trusts

06 Private Equity Funds

07 Pension/ Provident

Funds

08 Sovereign Wealth Funds

09 Partnership/ Proprietor-

ship Firms

10 Financial Institutions

11 NRIs/PIO

12 Others (please specify)

Sub Total

b) Resident

Total

#

The investment/s is/are made by FVCI under FDI Scheme in terms of Schedule I to Notification No.

FEMA 20/2000-RB dated May 3, 2000.

106

Foreign Direct Investment - A Practitioner’s Guide

DECLARATION TO BE FILED BY THE AUTHORISED REPRESENTATIVE OF

THE INDIAN COMPANY: (Delete whichever is not applicable and authenticate)

We hereby declare that:

1. We comply with the procedure for issue of shares / convertible debentures as

laid down under the FDI scheme as indicated in Notification No. FEMA 20/

2000-RB dated 3rd May 2000, as amended from time to time.

2. The investment is within the sectoral cap / statutory ceiling permissible under

the Automatic Route of RBI and we fulfil all the conditions laid down for

investments under the Automatic Route namely (strike off whichever is not

applicable).

(a) Shares issued on rights basis to non-residents are in conformity with

Regulation 6 of the RBI Notification No FEMA 20/2000-RB dated 3rd May

2000, as amended from time to time.

OR

(b) Shares issued are bonus.

OR

(c) Shares have been issued under a scheme of merger and amalgamation of

two or more Indian companies or reconstruction by way of de-merger or

otherwise of an Indian company, duly approved by a court in India.

OR

(d) Shares are issued under ESOP and the conditions regarding this issue have

been satisfied

3. Shares have been issued in terms of Government approval No.______________

dated ____________________

4. The foreign investment received and reported now wil be utilized in compliance

with the provision of a Prevention of Money Laundering Act 2002 (PMLA) and

Unlawful Activities(Prevention) Act, 1967 (UAPA). We confirm that the

investment complies with the provisions of al applicable Rules and Regulations

5. We enclose the following documents in compliance with Paragraph 9 (1) (B) of

Schedule 1 to Notification No. FEMA 20/2000-RB dated May 3, 2000:

(i) A certificate from our Company Secretary certifying that

(a) all the requirements of the Companies Act, 1956 have been complied

with;

(b) terms and conditions of the Government approval, if any, have been

complied with;

(c) the company is eligible to issue shares under these Regulations; and

(d) the company has all original certificates issued by authorised dealers

Appendix

107

in India evidencing receipt of amount of consideration in accordance

with paragraph 8 of Schedule 1 to Notification No. FEMA 20/2000-

RB dated May 3, 2000.

(ii) A certificate from SEBI registered Merchant Banker / Chartered

Accountant indicating the manner of arriving at the price of the shares

issued to the persons resident outside India.

6. Unique Identification Numbers given for all the remittances received as

consideration for issue of shares/ convertible debentures/others (details as

above), by Reserve Bank.

R

R

(Signature of the Applicant)* :________________________________________

(Name in Block Letters) :___________________________________________

(Designation of the signatory) :_________________________________________

Place:

Date:

(* To be signed by Managing Director/Director/Secretary of the Company)

CERTIFICATE TO BE FILED BY THE COMPANY SECRETARY3 OF THE INDIAN

COMPANY ACCEPTING THE INVESTMENT

(As per Para 9 (1) (B) (i) of Schedule 1 to Notification No. FEMA 20/2000-RB dated May

3, 2000)

In respect of the abovementioned details, we certify the following:

1. All the requirements of the Companies Act, 1956 have been complied with.

2. Terms and conditions of the Government approval, if any, have been complied

with.

3. The company is eligible to issue shares / convertible debentures/others under

these Regulations.

4. The company has all original certificates issued by AD Category – I banks in

India, evidencing receipt of amount of consideration in accordance with paragraph

8 of Schedule 1 to Notification No. FEMA 20/2000-RB dated May 3, 2000.

(Name & Signature of the Company Secretary) (Seal)

FOR USE OF THE RESERVE BANK ONLY:

Registration Number for the FC-GPR:

Unique Identification Number allotted to

the Company at the time of reporting

receipt of remittance

3.

If the company doesn’t have full time Company Secretary, a certificate from practicing Company Secretary may be submitted

108

Foreign Direct Investment - A Practitioner’s Guide

Appendix- II

FNC

Application for Establishment of Branch/Liaison Office in India

I.

General Instructions to Applicants:

The application form shall be completed and submitted to the AD Category - I

bank designated by the applicant for onward transmission to the Chief General

Manager-in -Charge, Reserve Bank, Foreign Exchange Department, Foreign

Investment Division, Central Office, Fort, Mumbai – 400001 along with the

documents mentioned in item (viii) of the Declaration.

No.

Details

Particulars

1.

Full name and address of the applicant.

Date and Place of incorporation / registration

Telephone Number(s)

Fax Number(s)

E-mail ID

2.

Details of capital

•

Paid-up capital

•

Free Reserves/Retained earnings as per last

audited Balance Sheet/Financial Statement

•

Intangible assets, if any

3.

Brief description of the activities of the applicant.

4.

i)

Value of goods imported from and / or

exported to India by the applicant during

each of the last three years: a) Imports from

India; b) Exports to India

i )

Particulars of existing arrangements if any,

for representing the company in India.

iii) Particulars of the proposed Liaison/ Branch

Office:

a)

Details of the activities/ services proposed

to be undertaken/ rendered by the office.

b) Place where the office will be located.

c)

Phone number

d) E-mail ID

Appendix

109

No.

Details

Particulars

e) Expected number of employees (with

number of foreigners)

5.

•

Name and address of the banker of the

applicant in the home country

•

Telephone & Fax Number

•

E-mail ID

6.

Any other information which the applicant

company wishes to furnish in support of this

application.

7.

For Non-profit / Non-Government Organisations:

(i) Details of activities carried out in the host

country and other countries by the applicant

organization.

(ii) Expected level of funding for operations in

India.

(ii ) Copies of the bye-laws, Articles of

Association of the organisation.

DECLARATION

We hereby declare that:

(i) The particulars given above are true and correct to the best of our knowledge

and belief.

(ii) Our activities in India would be confined to the activities indicated in column

4(i i) (a) above.

(ii ) If we shift the office to another place within the city, we shall intimate the

designated AD Category - I bank and the Reserve Bank. In the event of shifting

the Office to any other city in India, prior approval of the Reserve Bank will be

obtained.

(iv) We will abide by the terms and conditions that may be stipulated by the

Government of India / Reserve Bank / designated AD Category - I bank from

time to time.

(v) We, hereby commit that we are agreeable to a report / opinion sought from

our bankers abroad by the Government of India /Reserve Bank.

(vi) We understand that the approval, if granted, is from FEMA angle only. Any

other approvals / clearances, statutory or otherwise, required from any other

110

Foreign Direct Investment - A Practitioner’s Guide

Government Authority/ Department/ Ministry will be obtained before

commencement of operations in India.

(vi ) We have no objection to the Reserve Bank placing the details of approval in

public domain.

(vii ) We enclose the following documents:

a.

1. Copy of the Certificate of Incorporation / Registration attested by the

Notary Public in the country of registration

[If the original Certificate is in a language other than in English, the

same may be translated into English and notarized as above and cross

verified/attested by the Indian Embassy/ Consulate in the home

country].

b. 2. Latest Audited Balance sheet of the applicant company.

[If the applicants’ home country laws/regulations do not insist on

auditing of accounts, an Account Statement certified by a Certified

Public Accountant (CPA) or any Registered Accounts Practitioner by

any name, clearly showing the net worth may be submitted]

1. Bankers' Report from the applicant’s banker in the host country / country

of registration showing the number of years the applicant has had

banking relations with that bank.

(Signature of Authorised Official of the Applicant Company)

Name:

Designation:

Place:

Date:

Appendix

111

Appendix- III

Annual Activity Certificate

(To be submitted as on March 31,…….on or before April 30,………).

To whomsoever it May Concern

This is to certify and confirm that during the period from _______to________________,

the Branch/Liaison Office/s with PAN No. ___________ of M/s__________________

(UIN- ) has/ have undertaken only those activities that have been specifically permitted

by the Reserve Bank vide its approval letter/s No/s. _______dated______________and

has/have complied with the terms and conditions specified in the above mentioned

letter/s.

_______________________________

(Signature of the Auditor/s)

(Name of the Chartered Accountant)

ICAI Membership No.:

Address:

Place:

Date:

112

Foreign Direct Investment - A Practitioner’s Guide

Appendix- IV

FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI)

FROM APRIL, 2000 to MARCH, 2017

(up dated up to March, 2017)

CUMULATIVE FDI FLOWS INTO INDIA (2000-2017):

A. TOTAL FDI INFLOWS (from April, 2000 to March, 2017):

1. CUMULATIVE AMOUNT OF FDI INFLOWS

US$

(Equity inflows + ‘Re-invested earnings’ +‘Other capital’)

-

484,351

Million

2. CUMULATIVE AMOUNT OF FDI EQUITY INFLOWS

Rs.

US$

(excluding, amount remitted through RBI’s NRI Schemes)

1,787,022

331,991

Crore

Million

B. FDI INFLOWS DURING FOURTH QUARTER OF FINANCIAL YEAR 2016-

17 (JANUARY, 2017 TO MARCH, 2017):

1. TOTAL FDI INFLOWS INTO INDIA

US$

(Equity inflows + ‘Re-invested earnings’ + ‘Other capital’)

-

12,194

(as per RBI’s Monthly bulletin)s

Million

2. FDI EQUITY INFLOWS

Rs.

US$

51,311

7,634

Crore

Million

C. FDI EQUITY INFLOWS (MONTH-WISE) DURING THE FINANCIAL YEAR

2016-17:

Financial Year 2016-17

Amount of FDI

Equity inflows

( April-March )

(In Rs. Crore)

(In US$ mn)

1.

April, 2016

22,345

3,362

2.

May, 2016

13,271

1,983

3.

June, 2016

15,111

2,245

4.

July, 2016

27,430

4,081

5.

August, 2016

32,150

4,803

6.

September, 2016

34,366

5,149

7.

October, 2016

41,353

6,195

Appendix

113

Financial Year 2016-17

Amount of FDI

Equity inflows

( April-March )

(In Rs. Crore)

(In US$ mn)

8.

November, 2016

31,631

4,677

9.

December, 2016

22,727

3,347

10

January, 2017

27,067

3,976

11

February, 2017

8,118

1,210

12

March, 2017

16,126

2,448

2016-17 (From April, 2016 to

March, 2017)#

291,696

43,478

2015-16 (form April, 2015 to

March, 2016) #

262,322

40,001

%age growth over last year

(+)11%

(+)9%

D. FDI EQUITY INFLOWS (MONTH-WISE) DURING THE CALENDAR YEAR

2017:

Calendar Year 2017

Amount of FDI Equity inflows

(Jan.-Dec.)

(In Rs. Crore)

(In US$ mn)

1.

January, 2017

27,067

3,976

2.

February, 2017

8,118

1,210

3.

March, 2017

16,126

2,448

Year 2017 (up to March, 2017) #

51,311

7,634

Year 2016 (up to March, 2016) #

71,259

10,559

%age growth over last year

(-)28%

(-)28%

Note: (i) Country & Sector specific analysis is available from the year 2000 onwards, as Company-wise details are provided by RBI from April, 2000 onwards only.

# Figures are provisional, subject to reconciliation with RBI, Mumbai.

114

Foreign Direct Investment - A Practitioner’s Guide

E. SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial

years):

Amount Rupees in Crores (US$ in Million)

Ranks

2014-15

2015-16

2016-17

2014-15

Cumulative %age to

(April-

(April –

(April –

(April –

Inflows

total

March)

March)

March )

March)

(April,2000 - Inflows

March, 17)

(in terms

of US $)

1.

MAURITIUS

55,172

54,706

105,587

585,950

(9,030)

(8,355)

(15,728)

(111,638)

34%

2.

SINGAPORE

41,350

89,510

58,376

315,042

16 %

(6,742)

(13,692)

(8,711)

(54,590)

3.

JAPAN

12,752

17,275

31,588

142,260

8%

(2,084)

(2,614)

(4,709)

(25,675)

4.

U.K.

8,769

5,938

9,953

125,545

7 %

(1,447)

(898)

(1,483)

(24,591)

5.

NETHERLANDS

20,960

17,275

22,633

117,167

6 %

(3,436)

(2,643)

(3,367)

(20,682)

6.

U.S.A.

11,150

27,695

15,957

110,532

6 %

(1,824)

(4,192)

(2,379)

(20,323)

7.

GERMANY

6,904

6,361

7,175

52,045

3 %

(1,125)

(986)

(1,069)

(9,698)

8.

CYPRUS

3,634

3,317

4,050

46,731

3 %

(598)

(508)

(604)

(9,156)

9

FRANCE

3,881

3,937

4,112

30,637

2 %

(635)

(598)

(614)

(5,725)

10.

UAE

2,251

6,528

4,539

26,187

1 %

(367)

(985)

(675)

(4,705)

TOTAL FDI

189,107

262,322

291,696

1,787,555

-

INFLOW FROM

ALL COUNTRIES *

(30,931)

(40,001)

(43,478)

(332,112)

*Includes inflows under NRI Schemes of RBI.

Note:

(i)

Cumulative country-wise FDI equity inflows (from April, 2000 to March, 2017)

are at – Annex-‘A’.

(ii) %age worked out in US$ terms & FDI inflows received through FIPB/SIA+

RBI’s Automatic Route + acquisition of existing shares only.

Appendix

115

F.

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS:

Amount in Rs. Crores (US$ in Million)

Ranks

Sector

2014-15

2015-16

2016-17

Cumulative %age to

(April-

(April –

(April –

Inflows

total

March)

March)

March )

(April,

Inflows

20000 -

(in terms

March, 17)

of US $)

1.

SERVICES

SECTOR **

27,369

45,415

58,214

316,568

18 %

(4,443)

(6,889)

(8,684)

(59,476)

2.

COMPUTER

SOFTWARE &

14,162

38,351

24,605

136,789

7 %

HARDWARE

(2,296)

(5,904)

(3,652)

(24,669)

3.

CONSTRUC-

TION DEVE-

LOPMENT

4,652

727

703

114,639

TOWNSHIPS,

HOUSING,

BUILT-UP

(769)

(113)

(105)

(24,293)

7 %

INFRASTRUC-

TURE

4.

TELE-

17,372

8,637

37,435

130,164

7 %

COMMUNI-

CATIONS

(radio paging,

cellular

mobile, basic

(2,895)

(1,324)

(5,564)

(23,946)

telephone

services)

5.

AUTOMOBILE

INDUSTRY

16,760

16,437

10,824

92,218

5 %

(2,726)

(2,527)

(1,609)

(16,674)

6.

DRUGS &

PHARMACEU-

TICALS

9,052

4,975

5,723

75,820

4 %

(1,498)

(754)

(857)

(14,707)

116

Foreign Direct Investment - A Practitioner’s Guide

Ranks

Sector

2014-15

2015-16

2016-17

Cumulative %age to

(April-

(April –

(April –

Inflows

total

March)

March)

March )

(April, 00 -

Inflows

March, 17)

(in terms

of US $)

7.

TRADING

16,755

25,244

15,721

84,557

4 %

(2,728)

(3,845)

(2,338)

(14,211)

8.

CHEMICALS

(OTHER THAN

4,658

9,664

9,397

68,952

4 %

FERTILIZERS)

(763)

(1,470)

(1,393)

(13,293)

9.

POWER

4,296

5,662

7,473

60,087

3 %

(707)

(869)

(1,113)

(11,589)

10.

METALLUR-

GICAL

INDUSTRIES

2,196

2,982

9,647

53,074

3 %

(359)

(456)

(1,440)

(10,331)

Note:

(i)

** Services sector includes Financial, Banking, Insurance, Non-Financial /

Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis

(ii) FDI Sectoral data has been revalidated / reconciled in line with the RBI, which

reflects minor changes in the FDI figures (increase/decrease) as compared to

the earlier published2sectoral data.

Appendix

117

Abbreviations

AAC

:

Annual Activity Certificate

AD

:

Authorised Dealer

ADR

:

American Depository Receipt

AIFs

:

Alternative Investment Funds

AOA

:

Article of Association

ARC

:

Asset Reconstruction Company

BO

:

Branch Office

BTQ

:

Basic Travel Quota

B2B

:

Business to Business

B2C

:

Business to Consumer

CAC

:

Capital Account Convertibility

CBI

:

Central Bureau of Investigation

CEO

:

Chief Executive Officer

CEFA

:

Cell for Effective implementation of FEMA

CMD

:

Chief Managing Director

CPA

:

Certified Public Accountant

DBR

:

Department of Banking Regulation

DIN

:

Director Identification Number

DIPP

:

Department of Industrial Policy and Promotion

DOE

:

Department of Energy

DR

:

Depository Receipt

DSIM

:

Department of Statistics and Information Management

ECB

:

External Commercial Borrowings

EODB

:

Ease of Doing Business

EOUs

:

Export Oriented Units

ESOPS :

Employees Stock Option Scheme

FCCB

:

Foreign Currency Convertible Bond

FC-GPR :

Foreign Currency - General Purchase Register

FCNR

:

Foreign Currency Non-Repatriable Account

118

Foreign Direct Investment - A Practitioner’s Guide

FC-TRS :

Foreign Currency- Transfer of Shares

FDI

:

Foreign Direct Investment

FED

:

Foreign Exchange Department

FEMA

:

Foreign Exchange Management Act

FERA

:

Foreign Exchange Regulation Act

FII

:

Foreign Institutional Investor

FPI

:

Foreign Portfolio Investor

FRRO

:

Foreigners Regional Registration Office

FVCI

:

Foreign Venture Capital Investor

FY

:

Financial Year

GDP

:

Gross Domestic Product

GDR

:

Global Depository Receipt

GMPCS :

Global Mobile Personal Communications Services

GST

:

Goods and Services Tax

HUF

:

Hindu Undivided Family

InvIts

:

Infrastructure Investment Trusts

ICDR

:

Issue of Capital and Disclosure Requirements

IEC

:

Import Export Code

IEM

:

Industrial Entrepreneur’s Memorandum

IPO

:

Initial Public Offer

IVCU

:

Indian Venture Capital Undertaking

JV

:

Joint Venture

KYC

:

Know Your Customer

LIBOR :

London Interbank Offered Rate

LLP

:

Limited Liability Partnership

LO

:

Liaison Office

LOC

:

Letter of Comfort

LRN

:

Loan Registration Number

LRS

:

Liberalised Remittance Scheme

MD

:

Managing Director

Appendix

119

MII

:

Make in India Initiative

MOA

:

Memorandum of Association

MRTP

:

Monopolies and Restrictive Trade Practices

M-SIPS :

Modified Special Incentive Package Scheme

NIMZ

:

National Investment & Manufacturing Zones

NGO

:

Non-Profit Organisation

NOC

:

No Objection Certificate

NRE

:

Non Resident Rupee Account

NRI

:

Non-Resident Indian

NRO

:

Non-Residential Ordinary account

OCB

:

Erstwhile Overseas Corporate Body

OECD :

Organisation for Economic Co-operation and Development

PAN

:

Permanent Account Number

PFRDA :

Pension Fund Regulatory and Development Authority

PIO

:

Person of Indian Origin

PMRTS :

Public Mobile Radio Trunked Services

PO

:

Project Office

PRI

:

Person Resident in India

RBI

:

Reserve Bank of India

RFPI

:

Registered Foreign Portfolio Investor

ROC

:

Registrar of Companies

SARFAESI Act : Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act

SAST

:

Substantial Acquisition of Shares and Takeovers

SEBI

:

Securities and Exchange Board of India

SEZ

:

Special Economic Zones

SIA

:

Secretariat of Industrial Assistance

SRs

:

Security Receipts

TAN

:

Tax Deduction Account Number

120

Foreign Direct Investment - A Practitioner’s Guide

TDR

:

Transferable Development Rights

UIN

:

Unique Identification Number

UT

:

Union Territory

VCF

:

Venture Capital Fund

WDV

:

Written Down Value

WoS

:

Wholly owned Subsidiary

References

1. Government of India, Ministry of Commerce & Industry (Press Information

Bureau Release, dated 19-May-2017).

2. Chartered Secretary Journal (November 2011), Article-Provisions of FEMA, 1999

and Rules and Regulations there under.

3. Consolidated FDI Policy 2017, (DIPP), Ministry of Commerce and Industries.

4. RBI Master Direction - Establishment of Branch Office (BO)/ Liaison Office

(LO)/ Project Office (PO) or any other place of business in India by foreign

entities.

5. RBI Master Direction - Remittance of Assets.

6. RBI Master Direction - Liberalised Remittance Scheme (LRS).

7. RBI Master Direction - Other Remittance Facilities.

8. http://investindia.gov.in/advantage-india/.

***