Author: A Practitioner's Guide
Date: 2019-01-10T10:42:26.421473+00:00

Foreign Direct Investment

A Practitioner’s Guide

November 2017

Price : Rs. 150/- ( Excluding postage)

© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

All rights reserved. No part of this book may be translated or copied in any
form or by any means without the prior written permission of The Institute of

Company Secretaries of India.

Published by :

THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

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New Delhi - 110 003

Phones : 45341000, 41504444 o Fax : 24626727

E-mail : info@icsi.edu; Website : www.icsi.edu

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.

70

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/.

***