1. What payment methods are permitted for receiving Foreign Direct Investment in an Indian company?
An Indian company that issues shares or convertible debentures to a person residing outside of India must receive the consideration by:
inward payment through customary banking channels;
debit to a person's NRE or FCNR (B) account held with an AD Category I bank;
With FIPB approval, conversion of import payables/pre-incorporation expenses can be treated as consideration for the issuance of shares.
debit to a non-interest bearing Escrow account in Indian rupees opened with AD Category I bank approval and maintained with the AD Category I bank on behalf of residents and non-residents for payment of share purchase consideration;
Conversion of royalty/ lump sum/ technical know-how fee due for payment or conversion of ECB;
conversion of pre-incorporation/pre-operative expenses incurred by a non-resident entity up to 5% of capital or USD 500,000, whichever is less;
against any other funds whose remittance is not subject to prior approval by the Reserve Bank or the Government of India and which are payable to a person residing outside of India: and
Swap of capital instruments, provided that prior Government approval is necessary where the Indian investee company is involved in a Government route sector.
2. Does the RBI need to approve the extension of compulsorily convertible debentures (CCDs) or compulsorily convertible preference shares (CCPS)?
The guidelines established under the Companies Act of 2013 and the rules established thereunder will be used to determine the tenor of convertible instruments. At the time the instruments are issued, the investee business should make sure that the price and conversion formula of convertible capital instruments are predetermined. The price at the time of conversion must never be less than the fair value calculated when such instruments were issued in compliance with the current FEMA regulations.
3. What is a convertible note?
Upon the occurrence of certain events as per the terms and conditions agreed to and stated in the instrument, a convertible note is an instrument issued by a start-up company that documents the receipt of money initially as debt. It is repayable at the option of the holder or convertible into such number of equity shares of the startup company within a period not exceeding five years from the date of issue of the convertible note.
4. Who is eligible to invest in a convertible note, and what are the requirements?
A person residing outside of India may buy convertible notes issued by an Indian start-up firm for a sum of twenty-five lakh rupees or more in a single tranche (other than a person who is a citizen of Pakistan or Bangladesh or an entity which is registered/incorporated in Pakistan or Bangladesh). A start-up business operating in an industry where foreign investment is subject to government clearance may only issue convertible notes to a non-resident with government approval. The payment for the consideration shall be made via inward remittance through banking channels or by debiting the account holder's NRE/FCNR(B)/escrow account.
5. How can an Indian business attract foreign investment?
The following are the possible avenues for foreign investment:
Automatic Route: Under the automatic route, foreign investment is permitted in all activities and sectors listed in Annex B of Schedule 1 to Notification No. FEMA 20 without the need for previous permission from the government or the Reserve Bank of India.
Government Route: Activities not covered by the automatic route that include foreign investment must first have government clearance; these activities are reviewed by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, and Ministry of Finance. Form FC-IL, which can be downloaded from http://www.dipp.gov.in, can be used to submit applications. Applications sent on plain paper with all necessary information are also accepted. There is no charge.
6. What kind of instruments can international investors use to invest in Indian businesses?
An Indian company may attract foreign capital by issuing
Equity shares issued in accordance with the 2013 Companies Act's provisions,
fully convertible preference shares, and equity shares issued in conformity with the Companies Act of 2013. When issuing convertible securities, the price and conversion formula should be decided upon in advance and in no event be less than the fair value calculated at that time in line with FEMA 20.
warrants and partially paid equity shares issued by an Indian firm in conformity with the SEBI recommendations and the Companies Act, 2013, as applicable. Pricing and receipt of the remaining consideration must follow the guidelines in A.P. (DIR Series) Circular No.3, dated July 14, 2014, as amended from time to time.
The aforementioned are referred to as "FDI compliant instruments" and may include an optionality provision, but only after a minimum lock-in term of one year or as required for the particular sector, whichever is higher, and without any option or right to exit at a guaranteed price.
The following securities are regarded as FDI compliant: non-convertible/optionally convertible/partially convertible preference shares issued as of and up to April 30, 2007, and optionally convertible/partially convertible debentures issued up to June 7, 2007, till their original maturity. In accordance with the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange Regulations), 2000, as amended from time to time, non-convertible/optionally convertible/partially convertible preference shares and optionally convertible/partially convertible debentures issued after April 30, 2007, as well as after June 7, 2007, are considered debt and must adhere to certain requirements.
7. Which industries are restricted from receiving foreign investment?
The following industries are off-limits to foreign investment:
Lottery operations, such as public and private lotteries online, etc.
casinos and other forms of gambling
Manufacturing of cigarettes, cigars, cheroots, and other tobacco products or tobacco alternatives
Real estate investment or building farm houses
Chit funds
Transferable Development Rights Trading (TDRs)
Nidhi Corporation
activities/sectoral investments not permitted in the private sector, such as Atomic energy and railroad operations are two examples (other than permitted activities mentioned in entry 18 of Annex B)
It should be noted that foreign technological partnership in any form, including licencing for franchises, trademarks, brand names, and management contracts, is illegal for activities involving lotteries, gambling, and betting.
8. What rules apply when existing shares are transferred from non-residents to residents or from residents to non-residents?
According to Section 2(ze) of FEMA, 1999, "transfer" is defined as "sale, purchase, acquisition, mortgage, pledge, gift, loan, or any other form of transfer of right, possession, or lien."
Without the Reserve Bank of India's prior approval and subject to the restrictions outlined in FEMA 20, the following share transfers are permitted:
Transfer by way of sale or gift between any two foreign nationals who are neither NRIs or OCBs; If the company is operating in a sector that needs government clearance, prior government approval must be acquired for any transfer.
the selling or gift of shares by an NRI to another NRI;
If the company is involved in a sector that needs government approval, prior authorisation must be acquired before making any transfers.
gift given to a resident by a person who lives outside of India;
transfer by way of a person residing outside of India selling shares on a reputable stock market;
transfer by a resident to a person outside of India by way of sale or gift, subject to the restrictions set forth in Regulation 10 of FEMA 20;
9. What happens if the share transfer from a resident to a non-resident does not fit into the aforementioned category?
The Reserve Bank or the Government of India must approve the cases.
Share transfers made by residents that need government clearance include:
(1) Share transfers made by businesses operating in regulated industries.
(2) Transfer of shares that exceeds the applicable sectoral cap and results in foreign investments in the Indian company.
Transferring shares requires Reserve Bank approval in advance
(1) A person residing in India who wishes to give any security to a resident of another country must first acquire permission from the Reserve Bank.
(2) Every other circumstance that isn't covered by general permission.
10. What payment and crediting procedures are used when transferring shares between residents and non-residents?
Shares purchased by a person who resides outside of India must have the selling consideration sent to India through regular banking procedures.
Payment can be done by debiting the buyer's Special Non-Resident Rupee Account if they are a Foreign Institutional Investor (FII) or Foreign Portfolio Investor (FPI).
If the purchaser is an NRI, the money must be sent to India via regular banking channels or by debiting his NRE/FCNR (B) accounts. If an NRI purchases shares on a non-repatriation basis, the consideration may also be deducted from his NRO account.
Share sale revenues (net of taxes) from individuals residing outside of India may be transferred abroad.
The sale revenues in the case of a FII/ FPI may be credited to that entity's unique Non-Resident Rupee Account.
In the case of an NRI, the sale proceeds (net of taxes) may be credited to his NRE or FCNR (B) accounts if the shares sold were held on a repatriation basis; however, if the shares were not, the sale proceeds should only be credited to his NRO account, subject to payment of taxes.
If the shares were held on a repatriation basis, the sale proceeds of shares sold by an ex-OCB may be directly transferred outside of India; however, if the shares were held on a non-repatriation basis, the sale proceeds may be credited to the ex-NRO OCB's (Current) Account subject to the payment of taxes, with the exception of ex-OCBs whose accounts have been frozen by the Reserve Bank.
11. Are Indian investments and profits reimbursable abroad?
Except in situations where the investment is made or kept on a non-repatriation basis or when the sectoral condition clearly includes non-repatriation, all foreign investments are reimbursable (net of relevant taxes).
Additionally, as current income, dividends and profits from foreign investments (net of relevant taxes) may be transferred outside of India via an Authorised Dealer bank.
12. What rules apply to the issuance and valuation of shares for already-established businesses?
The following pricing rules will apply:
The cost of shares issued by an Indian corporation or transferred from an Indian resident to an international resident shall not be less than:
a. the price calculated in accordance with the pertinent SEBI standards in the case of a listed Indian firm;
b. the valuation of capital instruments completed in accordance with any generally recognised pricing technique for valuation on an arm's length basis and duly approved by a chartered accountant or, in the case of an unlisted Indian company, a SEBI licenced merchant banker.
It should be noted that, in the case of convertible capital instruments, the instrument's price and conversion formula should be established in advance, at the time the instrument is issued. The price at the time of conversion must never be less than the fair value calculated when such instruments were issued in compliance with the current FEMA regulations.
Shares transferred from an individual residing outside India to an individual residing inside India may not be purchased for more than:
a. the price calculated in accordance with the pertinent SEBI standards in the case of an Indian firm that is listed;
b. the valuation of capital instruments completed in accordance with any generally recognised pricing technique for valuation on an arm's length basis and duly approved by a chartered accountant or, in the case of an unlisted Indian company, a SEBI-licensed merchant banker.
The guiding premise is that the investor who resides outside of India will not receive an assured exit price at the time the investment or agreement is made and will instead exit at the price in effect at the time of exit.
13. What alternative share-issuing methods are there that are permitted by general consent?
The following are examples of FDI-compliant instruments that Indian corporations may issue:
ESOP
Sweat Equity
Bonus
Rights
Swap of Shares
mergers, de-mergers, amalgamations, etc of Indian Companies.
against any other money that are owed to a person who lives outside of India and whose transfer doesn't need the Reserve Bank's or the government's prior consent.
14. Can a foreigner establish a proprietorship or partnership in India?
In India, only NRIs are permitted to establish partnerships or sole proprietorships on a non-repatriation basis.
15. Can a foreign investor purchase discounted Rights shares from an Indian company?
Investment in rights shares issued at a discount by an Indian company is not restricted by FEMA, provided that the rights shares are being offered to residents and non-residents at the same price. The following shall be the offer on a right basis to those residing outside of India:
if shares of a firm are traded on a reputable Indian stock exchange, at a price set by the company; and
at a price that is not less than the price at which the offer is made to resident shareholders in the case of shares of a firm not listed on a recognised stock exchange in India.
16. Can an AD bank allow pledge of shares of an Indian company held by non-resident investor in favour of an Indian bank or an overseas bank or NBFC?
According to the instructions and in accordance with the terms and conditions outlined in the AP (DIR Series) Circular No. 57 from May 2, 2011, and the AP (DIR Series) Circular No. 141 from June 6, 2014, the same has indeed been authorised.
17. Can a non-resident purchase shares on the stock exchange?
On the stock exchanges, the following people may purchase FDI-compliant instruments:
FPIs and FIIs registered with SEBI
NRIs
A non-resident, other than a portfolio investor, may purchase shares on the stock exchange through a registered broker, provided that the non-resident investor has already acquired and is maintaining control in accordance with the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, i.e., that he has met the minimum stake requirement under the SEBI Regulations in accordance with the instructions in AP (DIR Series) Circular No. 38, dated September 1.
18. What modes of payment will be accepted by non-residents who are allowed to purchase shares on the stock exchange?
Non-Residents who are eligible to purchase shares under the plan may do so using one of the following methods:
through inward remittances made via regular banking methods, or
by method of debiting the account the person in question has with an authorised dealer or bank for NREs or FCNRs;
by debiting a non-interest-bearing Escrow account (kept in Indian Rupees) with the AD bank, as permitted by the Foreign Exchange Management (Deposit) Regulations, 2000;
If the right to receive the dividend is established and the dividend amount has been credited to a specially designated non-interest bearing rupee account for the acquisition of shares on the trading floor of the stock exchange, the consideration amount may also be paid out of the dividend payable by the Indian investee company in which the said non-resident holds control.
19. What are the guidelines for the transfer of shares in exchange for a delayed payment?
If shares are being transferred from a resident buyer to a non-resident seller or vice versa, the buyer may pay up to 25% of the total consideration on a delayed basis no later than 18 months from the transfer agreement's signing. The sum deferred may also take the form of an escrow or an indemnification. The pricing guidelines should always be followed.
20. What exactly are indirect foreign investment and downstream investment?
An investment made in another Indian company is referred to as a downstream investment. The investment will be considered "Indirect Foreign Investment" for the investee company if the investor company is not owned and controlled by citizens of India who reside in India, or by persons who reside outside of India.
21. What does "direct foreign investment" consist of?
According to Schedules 1, 2, 2A, 3, 6, 8, and 10 of Notification No. FEMA.20/2000-RB, dated May 3, 2000, as modified from time to time, "direct foreign investment" refers to foreign investment received by an Indian firm from a person residing outside of India.
22. Does it count as indirect foreign investment for an investee company if an Indian company (owned and managed by non-residents) purchases non-FDI compliant securities from another Indian company?
For the investee company, this investment will not be regarded as an indirect foreign investment.
23. What is the status of investments made before the RBI published the directions, which were released in 2013 for the period beginning on February 13, 2009?
In order to comply with these requirements, downstream investments completed in conformity with the policies in effect prior to February 13, 2009 would not need to be modified. After the specified date, all additional investments would be subject to these rules. It was necessary to notify the Reserve Bank by October 3, 2013, in order for the Reserve Bank to recognise downstream investments made between February 13, 2009 and June 21, 2013, which are not in compliance with these requirements, as compliant situations.
24. What rules apply to registered foreign portfolio investors' (FPIs') investments in portfolios?
Investment by FPI registered in accordance with SEBI guidelines including deemed RFPI [erstwhile FII) is permitted. Investment by individual FPIs should be less than 10 per cent of the paid up capital of the Indian company on a fully diluted basis. The aggregate investment by FPIs should not exceed 24 per cent of the paid up capital of an Indian Company on a fully diluted basis. The aggregate limit of 24 percent can be increased by the Indian company concerned up to the sectoral cap/ statutory ceiling, as applicable, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively.
25. What rules apply to portfolio investments made by NRIs?
Under the Portfolio Investment Scheme, non-resident Indians (NRIs) are permitted to buy or sell FDI-compliant securities issued by Indian corporations on stock exchanges. The NRI must submit an application for this purpose to a bank's designated branch that handles portfolio investments. The approved branch must be used for all sell and purchase transactions.
An NRI may purchase up to 5% of the fully diluted paid up capital of an Indian company in the form of shares. When all NRIs are combined, they cannot acquire more than 10% of the company's paid-up value. With the consent of its Board of Directors and General Body by a resolution and a special resolution, respectively, the concerned Indian firm may increase the aggregate limit of 10 percent up to 24 percent.
26. Can people who live outside of India purchase government bonds, Treasury bills, corporate debt, and other securities?
Foreign Portfolio Investors (FPIs), Non-Resident Indians (NRIs), Foreign Central Banks, Multilateral Development Banks, and Long-Term Investors such as Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds, and Pension Funds that are registered with SEBI may invest in other securities as described in Schedule 5 to Notification No. FEMA 20.
27. How might an FVCI go about investing?
An FVCI could
purchase the aforementioned securities or instruments from either the issuer or any other party holding such securities or instruments;
pursuant to the terms of the SEBI (FVCI) Regulations, 2000, as amended from time to time, invest in securities on a registered stock exchange;
Any security or instrument it is permitted to invest in may be purchased from or transferred to a person located in or outside of India, via purchase or other means, at a price acceptable to both the buyer and the seller/issuer; and
receive the revenues from the liquidation of Cat-I AIFs, VCFs, or schemes or funds that those AIFs or VCFs have established.
28. What are the permitted sectors for foreign venture capital investors?
An FVCI may make an investment in an Indian business that is:
Biotechnology
IT related to hardware and software development
Nanotechnology
Seed research and development
Research and development of new chemical entities in pharmaceutical sector
Dairy industry
Poultry industry
Production of bio-fuels
Hotel-cum-convention centres with seating capacity of more than three thousand.
Infrastructure sector.
29. How will the FVCI be able to pay back the investment?
The amount of consideration for any investment made by an FVCI must be paid through inbound remittance from outside via banking channels, out of monies held in a foreign currency account, and/or from a Special Non-Resident Rupee (SNRR) account that the FVCI maintains with an AD bank in India. The SNRR account and foreign currency account must only be used for transactions covered by the applicable Schedule.
30. How can the FVCI use the sale/maturity proceeds?
The sale or maturity proceeds (net of taxes) of the securities may be transferred outside of India, credited to a special non-resident rupee account of the FVCI, or remitted to a foreign currency account.
31. What is an investment vehicle?
Investment vehicles include Real Estate Investment Trusts (REITs), which are governed by the SEBI (REITs) Regulations, 2014; Infrastructure Investment Trusts (InvIts), which are governed by the SEBI (InvIts) Regulations, 2014; and Alternative Investment Funds (AIFs), which are governed by the SEBI (AIFs) Regulations, 2012. Investment vehicles are also defined as entities registered and regulated under relevant regulations framed by SEBI or any other authority designated.
32. Who can invest in an investment vehicle, and how should they invest?
Subject to the restrictions outlined in Schedule 11 to Notification No. FEMA 20, anyone who resides outside of India may invest in units of Investment Vehicles.
A person residing outside of India who has bought or purchased units of an investment vehicle is permitted to sell, transfer, or redeem the units in any manner in accordance with SEBI regulations or Reserve Bank directives.
Units may be issued in exchange for capital assets of a Special Purpose Vehicle (SPV) that the Investment Vehicle is considering purchasing.
If the investor is qualified to keep an NRE or FCNR (B) account, the consideration for the investment must be made by an inward remittance through banking channels, a swap of shares of a Special Purpose Vehicle, or out of monies retained in the account.
The sale or maturity revenues of the units may be sent outside of India or may, if appropriate, be deposited to the NRE or FCNR (B) account.
33. What guidelines apply to downstream investments made by investment vehicles?
If either the Sponsor, the Manager, or the Investment Manager I is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India, the investment made by an Investment Vehicle into an Indian company or an LLP will be considered indirect foreign investment for the investee company or the LLP, as the case may be. The amount of funds invested in the corpus of the investment vehicle by individuals residing outside of India shall not be taken into consideration for determining whether or not the downstream investment of the investment vehicle in question constitutes indirect foreign investment.
A Category III Alternative Investment Fund with Foreign Investment may only invest in securities or other instruments that an FPI is permitted to do so in accordance with the Act and any rules or regulations that have been enacted thereunder.
34. What different reporting requirements are there for foreign investments?
The Master Direction on Reporting under the Foreign Exchange Management Act of 1999 specifies the reporting obligations.
35. How does FDI money get to you?
The Automatic method and the Government route are the two ways that an entity resident outside of India can invest in equity shares, fully, compulsorily, and mandatorily convertible preference shares, and compulsorily convertible debentures of an Indian firm.
36. What does FDI's automatic route mean?
AUTOMATIC ROUTE: In order to make investments in India, a non-resident investor or an Indian company is not required to obtain previous government approval. Therefore, prospects for foreign direct investment can be pursued without first obtaining government consent.
37. What is the FDI GOVERNMENT route?
GOVERNMENT ROUTE: Before making an investment, this route calls for government of India approval. The relevant Administrative Ministry Department evaluates proposals for foreign investments made via the government route. Here, the government and various cabinets must approve the procedure of foreign investments for an Indian company.
38. How may foreign investment be obtained in India?
An Indian company seeking investment in India has two options: the Automatic path and the Government route. The Indian government is not needed to give consent in advance under the automated route. However, prior approval is required when using the government's approval process.
39. How can one attract foreign investment?
The Automatic route and the Government route are two ways that an Indian firm can get foreign investment. Under the automated approach, previous government approval is not necessary. However, the official path for approval necessitates a prior approval from the GOI.
40. What is the new FDI policy?
The new FDI policy eased the stringent local sourcing requirements for single-brand retail, significantly opening India's borders to foreign direct investment. Additionally, it liberalised FDI in multi-brand retail and permitted 100% FDI in commercial coal mining.
41. What is the FDI procedure?
In India, there are two possible paths for FDI: the automatic route, which requires no prior government approval, and the government route, which requires such clearance.
42. What are the standards for foreign direct investment?
The Indian government has amended the rules for foreign direct investment in a number of industries, including digital media, single- and multi-brand retail, contract manufacturing, and aviation.
43. What is the Department of Industrial Policy and Promotion?
The DIPP keeps an eye on other industries that fall under its purview as well as the nation's industrial development. Additionally, it is in charge of enacting laws and formulating policies pertaining to intellectual property rights in the fields of patents, trademarks, industrial designs, and geographical indications of origin for goods.
44. How does Dipp registration work?
Through the International Investment Implementation Authority, the Department of Industrial Policy and Promotion (DIPP) assists foreign investors who are having difficulty having their applications implemented. The Standard Operating Procedure (SOP) was created by the DIPP in June 2017 to process Foreign Direct Investment (FDI) in industries and undertakings that call for prior government clearance.
45. Who is the DIPP secretary?
Piyush Goyal is the current minister, and Secretary Guruprasad Mohapatra is the top official.
46. How do I get a DIPP certificate?
To become certified, you must register with the DIPP.
47. Which is the best investment option in India?
India is a vast country with many chances spread out in several industries, from information technology and construction to digital media.
48. Describe the FCRA fund.
The Foreign Contribution Regulation Act of 1976, also known as the FCRA, is a statute of the Indian government that governs the reception of foreign contributions or aid to Indian territory from countries outside of India. This is crucial to ensuring that such help does not have an impact on India's political condition or any other circumstance.
49. Why is the FCRA required?
For the purpose of regulating foreign contributions and foreign hospitality, FCRA is required. It is essential for the legitimacy of the legislative election, social harmony, and the general good.
50. Describe a soft loan.
A soft loan typically has terms that are advantageous to the borrower. Business loans made in the form of bank loans, credit extended to suppliers and customers, and shareholder loans are referred to as foreign soft loans for businesses or overseas borrowings.
51. What distinguishes a hard loan from a soft loan?
Soft loans are given with terms that are more advantageous for the borrower than hard loans, which are typically granted by a private individual or investor and may have stricter terms and interest rates than those of a bank.
52. Why Should I Invest in India?
India has the largest democracy and a flourishing economy. It offers several chances in a variety of industries, including information technology and construction.
53. What are equity inflows from FDI?
Direct foreign investment Equity inflows are investments made by a foreign entity in another country's business. This type of investment is distinguished by a sense of control over the business.
54. What is foreign equity?
Foreign equity is an investment made by a company based outside of the country in which the investment is made.
55. What are FDI inflows?
Foreign direct investment (FDI) is an investment made by a foreign entity (either an individual or a corporation) in the business of another country. Now, FDI is more than just the transfer of money; it is also a form of controlling ownership, which distinguishes it from foreign portfolio investment.
56. What is an ECB?
External Commercial Borrowings, or ECBs, are a financial instrument that allows Indian corporations to obtain foreign currency from non-resident or foreign sources.
57. What are external commercial borrowings and how do they work?
External Commercial Borrowings are essentially loans from non-resident entities to invest in the domestic country's commercial activities. There are two options for ECB: the automatic route, which requires no prior approval from the GOI, and the government route, which requires approval.
58. What is the distinction between FDI and ECB?
External commercial borrowings are any type of funding that is not provided by equity. Foreign Direct Investment occurs when foreign funds are used to finance equity capital.
59. How do non-governmental organisations obtain funding?
Obtaining capital is difficult for non-profit organisations, so they frequently rely on donations, government-funded campaigns, charity, CSR, and foreign funding through a foreign funding advisor for an Indian NGO.
