Foreign Direct Investment (FDI)


The concept of globalization is not new to the business world, it has evolved over centuries based on the experiences of governments and businesses around the world. It gained popularity in late 19th-century India. Globalization opens the gates for expanding businesses worldwide. It not only aids businessmen but also helps alleviate shortages of goods and services. It has created opportunities for economic growth and the exchange of knowledge in fields such as Science, Technology, Defence, and Agriculture. However, it has also brought about some challenges that require careful consideration.

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In the era of globalization, cross-border transactions have become a part of daily business activities. In response to the surge in international trade, the Central Government, in conjunction with the Reserve Bank of India, abolished the then-existing law, the Foreign Exchange Regulation, and implemented the new Foreign Exchange Management Act. The Foreign Exchange Management Act of 1999 (hereinafter referred to as “FEMA”) was implemented with the objective of managing cross-border transactions, simplifying and easing external trade and payments, managing a company’s foreign exchange resources, screening suspicious transactions, ensuring an effective compliance framework for the smooth handling of cross-border transactions, and ensuring that all transactions in the foreign exchange market are legitimate.

This article will explore the compliance requirements under FEMA and related laws for foreign companies seeking to expand their business in India or through acquisitions funded by Foreign Direct Investment for their Indian subsidiary.


Parent Company: The concept of a Parent Company is not explicitly defined in Indian legislation; however, the term “Holding Company” is often used interchangeably with it. A Parent Company is a corporation that operates its own business while also controlling the business operations of one or more subsidiaries. A company becomes a Parent Company by acquiring or controlling more than a 50% stake in an existing or newly formed company.

Subsidiary Company:The term “Subsidiary” is not explicitly defined in the FEMA Act, Regulations, or Circulars. Nevertheless, under Section 2(87) of the Companies Act, 2013, a Subsidiary Company is defined within the context of a Holding or Parent Company. It is a company in which the holding or parent company controls more than half of the total share capital or controls the composition of the Board of Directors.


The Capital is an initial fuel to start the engine of the business. Foreign entities looking to expand their business horizons in India can infuse funds through the following methods:-

  1. ‘FDI’ or ‘Foreign Direct Investment’ means investment through capital instruments by a person resident outside India in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company;

Note: – In case an existing investment by a person resident outside India in capital instruments of a listed Indian company falls to a level below ten percent, of the post issue paid-up equity capital on a fully diluted basis, the investment shall continue to be treated as FDI;

Explanation: – Fully diluted basis means the total number of shares that would be outstanding if all possible sources of conversion are exercised.Consolidated FDI Policy Circular of 2020[1].

  1. External Commercial Borrowings (ECB)are commercial loans raised by eligible resident entities from recognized non-resident entities, which can be either the Parent Company or other companies. These borrowings must conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, and more. It’s important to note that these parameters apply in totality and not on a standalone basis.Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations[2].


  1. Foreign Direct Investment: Every Company who is issuing, transferring shares or forming a new company with non-resident person is required to report the Foreign Investment received with 30 days in case of fresh issue or formation of new company or 60 days in case of transfer of shares of receipt of fund.The RBI has consistently endeavored to simplify the process of reporting foreign investments[3]. In this regard, the Single Master Form (SMF Portal) was introduced, effective from June 30, 2018. This portal serves as a unified platform for reporting all forms of foreign investments received by Indian subsidiary companies. Here is the procedure for filing the form FC-GPR (Foreign Currency-Gross Provisional Return):
  2. Creation of Business User in the SMF portal;
  3. Creation of Entity User in the SMF portal. Entity Unser data is a single master data of the company will consist the record of the all the reporting of the company from the inception;
  4. Preparation of the form under the category of FC-GPR and attached the entire necessary document for the purpose of reporting.

In addition to the one-time reporting mentioned above, every company is required to report the balance of Foreign Assets and Liabilities (FLA) through the FLAIR Portal to the RBI. This report should be submitted promptly on or before July 15. If the reporting is based on Audited Financial Statements and is done on July 15, then reporting is required to be completed by September 30.

  1. External Commercial Borrowings:Any company planning to obtain a loan from its Parent Company or any other corporate body outside India is required to obtain a Loan Registration Number (LRN) from the Reserve Bank. To obtain an LRN, the company must submit a duly certified form ECB, which contains the complete terms and conditions of the external commercial borrowing, in duplicate to the designated AD Category I bank. Subsequently, the AD Category I bank will forward one copy to the Director, Reserve Bank of India, Department of Statistics and Information Management, External Commercial Borrowings Division.

The company is required to report ECB transactions in Form ECB-2 through the AD Category I Bank on a monthly basis, within seven working days from the close of the month. If there are no transactions during a particular month, a Nil Return should be submitted. The Company is required to report the draw down amount during the month, Balance amount of loan to be drawn in future, utilisation of fund and balance outstanding, debit servicing, revised repayment schedule, hedging details if any, Foreign Exchange earnings and expenditure corresponding to the ECB, if any, for the last three financial years, outstanding principal amount and certificate form either from a Chartered Accountant or from a Company Secretary certifying the information stated in commensurate with the ECB guidelines.


The concept of late submission fees was introduced by the RBI for delayed in reporting of Foreign Investment, External Commercial Borrowings and Overseas Investment transaction in 2017. However, different structure of LSF is applicable to different category of reporting. To ensure uniformity in dealing with the same category of non-compliances, the RBI issued Circular No. 16 dated 30/09/2022.

Source: Sandeep Hegde

Henceforth, the following matrix shall be used for the calculation of LSF, where applicable:Circular No. RBI/2022-23/122 A.P. (DIR Series) Circular No.16 dated 30 September 2022[4].

Type of Reporting Delay Applicable LSF
Form ODI Part-II/ APR, FCGPR (Part B), FLA Returns, Form OPI, evidence of investment or any other return which does not capture flows or any other periodical reporting.




INR 7,500

FC-GPR, FC-TRS, Form ESOP, Form LLP(I), Form LLP(II), Form CN, Form DI, Form InVi, Form ODI-Part I, Form ODI-Part III, Form FC, Form ECB, Form ECB-2, revised Form ECB or any other return which captures reporting of non-fund based transactions or any other transactional reporting.  


INR [7,500 + (0.025% × A × n)]


“N” is the number of years of delay in submission rounded-upwards to the nearest month and expressed up to 2 decimal points.Where an advice has been issued for payment of LSF and such LSF is not paid within 30 days, such advice shall be considered as null and void and any LSF received beyond this period shall not be accepted. If the applicant subsequently approaches for payment of LSF for the same delayed reporting, the date of receipt of such application shall be treated as the reference date for the purpose of calculation of “N”.

“A” is the amount involved in the delayed reporting. Maximum LSF amount will be limited to 100 per cent of ‘A’ and will be rounded upwards to the nearest hundred. LSF amount is per return. However, for any number of Form ECB-2 returns, delayed submission for each LRN will be treated as one instance for the fixed component. Further, ‘A’ for any ECB-2 return will be the gross inflow or outflow (including interest and other charges), whichever is more.


This is a brief overview of the compliance requirements for Foreign Investment discussed in the blog. It illustrates how a complex, critical, and strict time-bound structure is established by the legislature, which must be followed by Foreign Investors investing in India. The compliance framework surrounding FDI also encompasses other statutes such as the Companies Act, 2013, FEMA, and Share Stamping Provisions. Adhering to these regulatory frameworks will ensure the growth and prosperity of foreign companies while also contributing to the growth of the Indian economy

Author: Aashish Negi and Dishi Mishra, in case of any queries please contact/write back to us via email to or at Khurana & Khurana, Advocates and IP Attorney.

[1]Consolidated FDI Policy, 2020, EMBASSY OF INDIA, 2020 (India)

[2]RESERVE BANK OF INDIA, visited Oct. 19, 2023).

[3] The Companies Act, 2013, No. 18, Act of Parliament, 2013 (India).

[4]RESERVE BANK OF INDIA, visited Oct. 19, 2023).

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