Foreign Direct Investment (FDI) in India

Introduction and Objectives

When a person residing outside india invests funds by way investment in capital instrument of an Indian entity then it is called FDI and it is regulated by FEMA Act and RBI Regulation in india.  FDI helps to develop economy by way of capital inflow, expertise in technology, and management. The main objectives of FDI includes facilitating capital inflow, promoting industrial growth and employment generation, enhancing technology transfer and innovation, and encouraging global competitiveness. The methods through which FDI can be invested in india includes – Subscription to the Memorandum of Association, Merger, Demerger, Amalgamation, Preferential allotment, Private Placement, Purchase of shares from the Indian residents or companies, Right Issue, Bonus Issue. However, due to complex tax structure, complex regulation and policy uncertainty FDI has also faced challenges. 

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FDI Entry Routes

Two routes are available for FDI in india namely:

A. Automatic Route:

Automatic route was introduced for the promotion of FDI in india. It is a permission to invest in different sector of india without prior approval of the government and it includes sectors such as manufacturing, infrastructure, fintech (with conditions), and e-commerce (marketplace model) often fall under this route.

B. Government Approval Route:

In this route there is prior approval required from the government or RBI. Sectors include defence, telecom, print media, multi-brand retail, and investments from countries sharing land borders with India.

Apart from that there are many sectors where FDI is prohibited like Lottery Business, Chit Funds, Gambling and betting etc.

On the fresh issue of shares following reporting are required:

1.Reporting for inflow of capital

(a)    AD branch will report on account of issuance of shares in the returns in normal course of business.

(b)   Any FDI inflows in shares or convertible debentures under FDI Scheme needs to be reported to RBI through AD Category Bank Within 30 days.

(c)    The details should be reported along with Copy of FIRC and KYC of non- resident investors.

(d)  Unique Identification Number (UIN) shall be allotted after acknowledging by RBI for the amount reported.

(e)   the Indian company has to file Form FC-GPR through its AD Category I bank, within 30 days from the date of issue of shares

Documents need  to be submitted at the time of filing of form FCGPR.

(i) A certificate from the Company Secretary certifying includes all the requirements of the Companies Act, 2013 have been complied with, terms and conditions of the Government approval, if any have been complied with, the company is eligible to issue shares under these Regulation and the company has all original certificates issued AD banks in india evidencing receipt of amount of consideration.

A valuation reports are required by Chartered Accountant or Merchant Banker regarding the price of shares issued to the person resident outside india.

2. Reporting of Transfer of shares

The transaction reported is for transfer of equity shares / Compulsorily Convertible Preference shares/ Convertible Debentures of an Indian entity from Resident to a Non-Resident and vice versa through its AD Bank.

The transaction for transfer is reported in Form FC – TRS to the AD Bank within 60 days of transfer of capital instruments or receipt/ remittance of funds whichever is earlier.

3. Key Compliances under FEMA for FDI

1.Know Your Customer (KYC)

At the time of receiving foreign remittance KYC is mandatory and it is responsibility of AD Bank (Authorized Dealer) to collect and provide the details like Name, address country of residence and source of funds of the remitter.

2. Allotment of Shares

Shares should be allotted within 60 days  from the date of receiving the subscription money . If not completed within the 60 days, then within 15 days from the date after expiry of 60 days the funds must be returned.

3. Reporting of Shares Allotted (FC-GPR)

The form FC-GPR is filed within the 30 days of allotment of shares through RBI FIRMS portal with the required documents like Board Resolution, Valuation Certificate, CS Certificate and FIRC, KYC documents.

4. Reporting of Transfer of Shares (FC-TRS)

Form FC- TRS required to be filed when shares are transferred from resident to nonresidents investors and vice versa through online portal of RBI. The applicable time limit is 60 days from the date of transfer.

5. FLA Returns

It is annual based compliance and filed on or before 15^th July every year online through FLAIR portal and applicable on company that received FDI or made ODI.   

Author:  CS Prahalad Kumar Principal Associate at Khurana and Khurana, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.