A. INTRODUCTION:
Since the 1990s and with the setting up of many multinational companies in India, Foreign Direct Investment (“FDI”) has gained utmost importance with respect to capital inflow into the country. FDI is an investment made by a foreign entity which has business interests in another country. Usually, FDI takes place when an investor sets up a foreign business operation or through the acquisition of assets of the foreign company. It is very common in open markets which provide for not only the skilled workforce but also provides for growth prospects to the investor. FDI provides for global presence of an investor and was introduced under the Foreign Exchange Management Act. The Department of Industrial Policy and Promotion (“DIPP”) is the regulatory authority which regulates the FDI policy in India. The compliance aspects with respect to FDI is controlled and monitored by the Reserve Bank of India (“RBI”). Indian companies are allowed to raise funds from overseas investors under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”).
B. ROUTES:
There are two routes through which FDI is permitted in India.
1. Automatic Route: The receipt of investment from persons resident outside India in certain sectors and/or activities does not require the prior approval of RBI or Central Government, therefore, this route is considered as an automatic route. Following are the sectors/activities in which FDI is permitted through automatic route:
| Sl.
No. | Sector/Activity | % of Investment permitted- Automatic Route |
| 1. | Agriculture & Animal Husbandry | 100% |
| 2. | Plantation | 100% |
| 3. | Mining | 100% |
| 4. | Coal & Lignite | 100% |
| 5. | Petroleum & Natural Gas | 100% |
| Petroleum refining by Public Sector Undertakings | 49% | |
| 6. | Defence | Automatic upto 49% |
| 7. | Broadcasting | 100% |
| 8. | Up-linking f Non-News & Current Affairs’ TV Channels/Down-linking of TV Channels | 100% |
| 9. | Civil Aviation | 100% |
| Airports:
Greenfield Projects Existing Projects | 100% | |
| Air Transport Services: | ||
| (i) Scheduled Air Transport Service/Domestic Scheduled Passenger Airline
(ii) Regional Air Transport Service | 49% (Automatic upto 100% for NRIs and OCIs) | |
| Non-Scheduled Air Transport Service | 100% | |
| Helicopter Service or Seaplane Service | 100% | |
| Other Services under Civil Aviation Sector: | ||
| Ground handling services subject to sectoral regulations and security clearance | 100% | |
| Maintenance and Repair organizations; flying training institutes and technical training institutions | 100% | |
| 10. | Construction Development | 100% |
| 11. | Industrial Parks | 100% |
| 12. | Trading | 100% |
| 13. | Telecom Services | 49% |
| 14. | E-Commerce | 100% |
| B2B E-Commerce Activities | 100% | |
| Market place model of E-Commerce | 100% | |
| 15. | Single Brand Retail Trading | 100% |
| 16. | Asset Reconstruction Companies | 100% |
| 17. | Railway Infrastructure | 100% |
| 18. | Banking Private Sector | 49% out of 74% |
| 19. | Credit Information Companies | 100% |
| 20. | Insurance Intermediaries | 100% |
| 21. | Insurance | 49% |
| 22. | Manufacturing | 100% |
| 23. | Pharmaceuticals (Greenfield) | 100% |
| 24. | Power Exchanges | 49% |
| 25. | Pharmaceuticals (Brownfield) | 74% |
| 26. | Pension Sector | 49% |
| 27. | Infrastructure Companies in Securities Market | 49% |
| 28. | Commodities Spot Exchange | 49% |
| 29. | Duty Free Shops | 100% |
| 30. | Railway Infrastructure | 100% |
| 31. | Telecom services | Upto 49% |
| 32. | Other Financial Services | 100% |
2. Government Route: The receipt of investment from persons resident outside India in certain sectors and/or activities requires the prior approval of the government and this route is considered as government route. Following are the sectors/activities in which FDI is permitted through government route:
| Sl.
No. | Sector/Activity | % of Investment Permitted- Government Route |
| 1. | Mining and mineral separation of titanium bearing minerals and ores | 100% |
| 2. | Defence | Beyond 49% upto 100% |
| 3. | Terrestrial Broadcasting | 49% |
| 4. | Up-Linking of ‘News & Current Affairs’ TV Channels | 49% |
| 5. | Publishing of Newspaper and periodicals dealing with news and current affairs | 26% |
| Publication of Indian editions of foreign magazines dealing with news and current affairs | 26% | |
| 6. | Publishing/ Printing of Scientific and Technical Magazines | 100% |
| 7. | Publication of facsimile edition of foreign newspapers | 100% |
| 8. | Private Security Agencies | 49% |
| 9. | Multi-Brand Retailing | 51% |
| 10. | Satellites – Establishment and Operations | 100% |
| 11. | Banking-Public Sector | 20% |
| 12. | Banking- Private Sector | 49%-74% |
| 13. | Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline
Regional Air transport service | 49%-100% |
| 14. | Uploading/ Streaming of News and Current Affairs through Digital Media | 26% |
| 15. | Pharmaceuticals (Brownfield) | 74%-100% |
| 16. | Publication of Indian editions of foreign magazines dealing with news and current affairs | 26% |
| 17. | Telecom Services | Beyond 49% to 100% |
Further, it may be noted that FDI is prohibited in sectors such as lottery, gambling, chit funds, Nidhi companies, manufacturing of cigars, real estate business etc.
It shall be noted that FDI is deemed to be permitted through the automatic route if the sector/activity has not been mentioned in the NDI Rules or under the prohibited sectors/activities as laid down in the NDI Rules.
However, any investment made by a citizen of Pakistan, China, Bangladesh and all the countries sharing land borders with India requires the prior approval of the government. Investment can be made in sectors or activities other than defence, atomic energy and sectors or activities prohibited for the purpose of foreign investment.
Effective from 01st April 2020, a substantial change has been brought with respect to FPIs, stating that the aggregate limit would be the sectoral caps applicable to Indian companies, with respect to its paid-up equity capital on a fully diluted basis or such same sectoral cap percentage of paid-up value of each series of debentures or preference shares or share warrants, as laid out in NDI Rules. With the approval of the board of directors and members, by way of a special resolution and a resolution to decrease the aggregate limit to a lower threshold of 24% or 49% or 74% before 31st March, 2020 or increase the threshold limit to 49% or 74% or the sectoral cap as may be deemed fit can be made. Once the limit has been increased, the same cannot be decreased on a later date. The aggregate limit with respect to an Indian company in a sector where FDI is prohibited shall be 24 %.
C. ELIGIBLE INVESTORS:
1. Foreign Portfolio Investors (“FPI”).
2. Non-Resident Indian (“NRI”) or Overseas Citizen of India (“OCI”) on both repatriation and non-repatriation basis.
3. SEBI registered Foreign Venture Capital Investors (“FVCI”).
4. Companies, trusts and partnership firms incorporated outside India and owned and controlled by NRIs.
5. Other non-resident investors.
FPIs are allowed to purchase mutual fund units or units of category III AIF or units of the offshore fund, for the purpose of which no objection has been issued as per the SEBI (Mutual Fund) Regulations 1996. Further, if an FPI makes an investment beyond prescribed limits and does not choose to divest, the entire investment made by the FPI is considered as FDI. The amendment has further added that such divestment or the reclassification shall be subjected to further conditions as may be laid down by SEBI and RBI.
D. ELIGIBLE INVESTEE ENTITIES:
1. Indian Company: A company incorporated under the Companies Act, 1956 or the Companies Act, 2013. Any of the aforesaid eligible investors can invest in Indian companies.
2. Sole Proprietorship: Investment can be made in a sole proprietorship by NRIs and OCIs on a non-repatriation basis by way of contribution to the capital.
3. Partnership Firm: Investment can be made by NRIs and OCIs on a non-repatriation basis through contribution to the capital in the partnership firm.
4. Limited Liability Partnership (“LLP”): Investment can be made in LLPs by a person resident outside India other than citizens of countries sharing land borders with India or an entity incorporated outside India other than the countries sharing land borders with India, who/which is not an FPI or FVCI can contribute to the capital of an LLP operating in sectors/activities where foreign investment up to 100% is permitted through automatic route and where there are no FDI linked performance conditions. NRIs or OCIs can invest in LLPs on a non-repatriation basis.
5. Investment Vehicles: Investments can be made by persons resident outside other than citizens of countries sharing land borders with India or an entity incorporated outside other than the countries sharing land borders with India in units of investment vehicles.
6. Start-Ups: An entity is considered as a start-up up to a period of 10 years from the date of incorporation or registration if it is incorporated as a private limited company or a registered partnership firm or an LLP in India, whose turnover for any of the financial years since its incorporation or registration has not exceeded Rs. 100 crores and the entity is working towards innovation, development or improvement of products or processes or services or if it is a scalable business model with a high potential of employment generation or wealth creation. However, an entity formed by splitting up or reconstruction of an existing business shall not be considered as a start-up. Investment can be made by FVCIs in start-ups irrespective of the sector to which the start-up belongs.
E. INSTRUMENTS:
Indian companies can raise funds from a person resident outside India by issuing the following types of instruments.
1. Equity Shares including party paid-up shares: Equity shares are the shares issued in accordance with the Companies Act, 2013, which shall include partly paid-up shares. Partly paid-up shares which have been issued to a person resident outside India shall be fully called-up within 12 months from the date of such issue or as prescribed by RBI and 25% of the consideration, including the share premium amount, shall be received upfront from the persons resident outside India.
2. Preference Shares: shall mean fully, compulsorily and mandatorily convertible preference shares.
3. Debentures: shall mean fully, compulsorily and mandatorily convertible debentures.
4. Share Warrants: At least 25% of the consideration shall be received upfront and the balance amount shall be received within 18 months from the date of issuance of share warrants.
5. Convertible notes: A convertible note is an instrument issued by a start-up 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 the occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument. A person resident outside India other than an individual who is a citizen of any countries sharing land borders with India or an entity which is registered/ incorporated in countries sharing land borders with India may purchase convertible notes issued by an Indian start-up company for an amount of twenty-five lakh rupees or more in a single tranche. A start-up company engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with the approval of the Government. The amount of consideration should be received by inward remittance through banking channels or by debit to the NRE/ FCNR (B)/ Escrow account maintained by the person concerned.
6. Depository Receipts (“DRs”): DRs means a foreign currency-denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of eligible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes ‘global depository receipt’ as defined in the Companies Act, 2013. In accordance with the Depository Receipts Scheme, 2014, a foreign depository can issue DRs, through private placement or a public offering or any manner prevalent in the permissible jurisdictions as mentioned in the aforesaid scheme. The issue or the transfer of securities to the foreign depositories shall be in compliance with the foreign investment limit as prescribed under the Foreign Exchange Management Act, 1999. The securities issued to a foreign depository for the purpose of issuance of DRs shall not be issued at a price lesser than the price which is applicable to the mode of issue of these securities to domestic investors under the applicable laws.
7. Indian Depository Receipts (“IDR”): IDRs means any instrument in the form of a depository receipt created by a domestic depository in India and authorised by a company incorporated outside India making an issue of such depository receipts. Companies incorporated outside India can issue IDRs, to persons resident in India and outside India through a domestic depository subject to certain conditions. FPIs, NRIs or OCIs may purchase, hold or sell IDRs subject to certain terms and conditions as mentioned in the NDI Rules.
Further, Indian companies can also issue employee stock options and/or sweat equity shares to its employees, directors, directors of its holding company or joint venture or wholly-owned overseas subsidiary, subsidiaries who are residents outside India and such employee stock options shall be in compliance with the applicable sectoral cap and prior approval shall be taken from the government, when necessary.
F. PRICING GUIDELINES:
As per rule 21 of the NDI Rules following shall be the price of the equity instruments:
| Particulars | Listed Company | Un-Listed Company |
| Issue by an Indian company or transferred from a resident to non-resident – Price should not be less than | The price worked out in accordance with the relevant SEBI guidelines | The fair value worked out as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practising Cost Accountant. |
| Transfer from a non-resident to resident – Price should not be more than | The price worked out in accordance with the relevant SEBI guidelines | The fair value as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker. |
| Swap of equity instruments | The valuation of shares would be undertaken by a SEBI registered Merchant Banker or an investment banker outside India registered with the appropriate regulatory authority in the host country. | |
| Partly paid-up shares | The pricing of the partly paid equity shares shall be determined upfront. | |
| Right Issue or Bonus Issue | Rule 7 provided that in case of an unlisted Indian company, the right issue made to a person resident outside India shall not be at a price less than the price at which they have been offered to a person resident in India. Further, in case of a listed company, the price of the rights issue is to determined by the company and that the pricing guidelines shall not be applicable.
Any investment made through rights or bonus issue shall be subjected to the conditions as are applicable at the time of such issue being made. The NDI rules also mentioned an explanation stating that the provisions of Rule 7 shall be applicable to the subscription of right shares by a person resident outside India, which have been renounced by the person to whom these shares were offered to originally. This explanation was deleted. Rule 7A has been inserted which states that the pricing guidelines shall be applicable for the purpose of subscription of shares wherein the person resident outside India acquires right shares from the person resident in India to whom such shares were originally offered and were renounced subsequently. | |
| Share warrants | The pricing/conversion formula of the Share Warrants shall be determined upfront. | |
| Subscriber’s shares | Where shares in an Indian company are issued to a person resident outside India in compliance with the provisions of the Companies Act, 2013, by way of subscription to Memorandum of Association, such investments shall be made at face value subject to entry route and sectoral caps. |
The pricing guidelines shall not be applicable for investment by a person resident outside India on non-repatriation basis.
G. REPORTING REQUIREMENTS:
A single master form (“SMF”) has been introduced by RBI as on 07th June 2018 for the purpose of integrating the existing reporting norms for FDI in India. The SMF shall be filed online and the onus of the filing of this SMF lies with the person resident in India. Firstly the user shall register itself on the FIRMS website, by filling in all the required details. Once registered, the user is referred to as a business user. The business user shall fill in the details in the relevant forms:
1. Form Foreign Currency-Gross Provisional Return (“FC-GPR”): The issue of equity instruments to a person resident outside India by an Indian company when considered as foreign direct investment shall be reported in form FC-GPR to RBI, not later than 30 days from the date of issue of the equity instruments. Issue of ‘participating interest/rights’ in oil fields shall be reported in Form FC-GPR.
It is to be noted that the equity instrument has to be issued by the Indian company within sixty days from the date of receipt of the consideration. If it is not issued by the Indian company within sixty days from the date of receipt of the consideration, the amount so received has to be refunded to the person concerned by outward remittance, through banking channels or by a credit to his NRE/ FCNR (B) accounts, as the case may be, within fifteen days from the date of completion of sixty days.
2. Annual Return on Foreign Liabilities and Assets (“FLA”): Annual return on foreign liabilities and assets (FLA) shall be submitted to RBI by an Indian company which has received foreign investment, in the previous year and current year on or before 15th July each year. Year for this purpose shall mean April to March
3. Form Foreign Currency- Transfer of Shares (“FC-TRS”): This form shall be filed for the transfer of equity instruments between person resident outside India holding equity instruments in an Indian company on a repatriable basis and person resident outside India holding equity instruments on a non-repatriable basis; and a person resident outside India holding equity instruments in an Indian company on a repatriable basis and a person resident in India. The reporting shall be done by the resident transferor or transferee or the person resident outside India which is holding equity instruments on a non-repatriable basis. The transfer of equity instruments on a recognized stock exchange by a person resident outside India shall also be reported by such a person in the Form FC-TRS. Form FC-TRS shall be filed within 60 days of the transfer of equity instruments or the receipt or remittance of funds, whichever is earlier.
4. Form Employee Stock Option (“ESOP”): Form ESOP shall be filed with 30 days from the date of issue of employees stock option, where an Indian company issues employees stock option to the persons resident outside India who are its employees/directors or employees/directors of its holding company/ joint venture/ wholly-owned overseas subsidiary/ subsidiaries.
5. Form Depository Receipt Return (“DRR”): In Form DRR, the domestic custodian shall report the issue or transfer of depository receipts, within 30 days of the close of the issue.
6. Form LLP (I): An LLP shall file Form LLP (I) within 30 days from the receipt of the amount of consideration for capital contribution and acquisition of profit shares.
7. Form LLP (II): Form LLP (II) shall be filed in the event of disinvestment or transfer of capital contribution or profit share between a resident and a non-resident within 60 days from the date of receipt of funds and the same shall be reported by resident transferor or transferee.
8. Form InVI: Form InVI shall be filed by an investment vehicle which has issued its units to persons resident outside India within 30 days from the date of issue of units. The Indian entity which makes downstream investment in another Indian entity shall notify the Secretariat for Industrial Assistance, DPII within 30 days of such investment, irrespective of the allotment of equity instruments.
9. Downstream Investment: Form DI shall be filed with the RBI within 30 days from the date of allotment of equity instruments when an Indian company or investment vehicle makes an in investment in another Indian entity which is considered as indirect foreign investment for the investee Indian entity.
10. Form Convertible Notes (“CN”): Form CN shall be filed by an Indian Start-up company issuing convertible notes to persons resident outside India within 30 days of such issue and transfer to or from persons resident outside India shall be reported within 30 days from the date of transfer of such convertible notes.
A copy of the filled form along with the specified attachments which particularly includes foreign inward remittance certificate, know your customer document, board resolution copy, valuation report, consent letters, share purchase agreement (in case of transfer) and other such relevant documents shall be uploaded online and the authorized dealer bank will scrutinize the said form. The authorized dealer bank either approves or rejects the form within 5 (five) days of the filing of the form. The final authority lies with the authorized dealer bank with respect to the approval or rejection of the form, but however, RBI has the right to advise the authorized dealer bank on the approval or rejection of the form.
The person/ entity responsible for filing the reports as specified above shall be liable for payment of late submission fee, as may be decided by the RBI, in consultation with the Central Government, for any delays in reporting.
H. DOWNSTREAM INVESTMENT:
Downstream investment means an investment made by an Indian company in another Indian company through the acquisition of shares or by way of acquisition of control. When an Indian company having foreign investment which is owned or controlled by persons resident outside India makes investment in another Indian company, this concept is referred to as downstream investment. As per RBI, there will be two Indian companies, wherein an Indian company which has accepted foreign investment, in turn makes an investment in another Indian company. The Indian entity which has received such investment shall comply with the sectoral caps, entry routes, pricing guidelines and the FDI linked performance conditions as laid down in the NDI Rules. Downstream investment by LLP which is not owned or controlled by resident Indian citizens or owned or controlled by persons resident outside India is allowed in an Indian company operating in sectors where foreign investment upto 100% is permitted through automatic route and where there are no FDI linked performance conditions.
Equity instruments of an Indian company which are held by another Indian company which has received foreign investment and is not owned and controlled by resident Indians or not owned or controlled by persons resident outside India, can be transferred to a person resident outside India, subject to reporting requirements, to a person resident in India subject to pricing guidelines and to an Indian company which has received foreign investment and not owned and controlled by Indian resident citizens or owned or controlled by person resident outside India. The company making the downstream investment shall obtain a certificate its statutory officer on an annual basis and the compliance of these reports shall be mentioned in the Director’s report in the Annual report of the Indian company. The qualified report of the statutory auditor shall be immediately brought to the notice of the regional office of the RBI in whose jurisdiction the registered office of the company is located. This shall be applicable to LLPs as well.
The Indian entity making the downstream investment that is treated as indirect foreign investment for the investee Indian entity is required to bring in the requisite funds from abroad and not use borrowed funds in the domestic markets.
I. CONCLUSION:
The FDI policy has been revised and various amendments have been made over time. As a way forward the FDI policy of India has been revised to curb the opportunistic takeovers or acquisition of Indian companies due to the prevalence of COVID-19 and has ensured that entities in the countries sharing land borders with India can invest only through the government route. This move was made by the Indian government after the People’s Bank of China increased its stake in HDFC Bank to 1%, but however, the investment came through the foreign portfolio investment route. FDI being more strategic aimed at ensuring restriction on entities sharing land borders with India to acquire a beneficial interest in Indian entities. SEBI has also been involved in supervising and keeping tabs on these investments. Therefore, India has taken a step forward towards the protection of the Indian entities and is also opening doors to accepting investment in a regularized manner.
Authors: Prajakta V. Gokhale, Associate; Kriti Sanghi, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prajakta@rna-cs.com (ii) kritisanghi@samistilegal.in.
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