Foreign Direct Investment (FDI) Regulatory Framework and Approval Process By CS Tanuj Saxena



Foreign Investment means any investment made by person resident outside India on a repatriable basis in capital instruments of an Indian Company or to the capital of an LLP.

Foreign Direct Investment is the investment through capital instruments by person resident outside India as follows:-

  1. In an unlisted Indian Company or

  2. In 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian Company

Important Crux:-

  1. Capital Instrument:- It refers to Equity, Preference, Debentures and Share Warrants issued by Indian Company. 
  1. Person resident outside India:- Person include Individual and corporate resident outside India.
  1. Unlisted Indian Company:- Company incorporated under the provision of Companies Act, 2013 and the same is not listed in any recognized stock exchange.
  1. Paid-up Equity Capital:- Company do generally have capital to start the business and here paid up equity capital refers to actual contribution of promoter to company for the commencement of business.
  1. Fully Diluted Basis:- It means the total number of shares that would be outstanding if all possible sources of conversion are exercised.
  1. Listed Indian Company:- Company incorporated under the Companies Act, 2013 and it is listed in Recognized Stock Exchange.
  1. Investment:- It means to subscribe, acquire, hold or transfer any security or unit issued by a person resident in India

Negative Lists:-

Government of India has prohibited investment by a person resident outside India in the following sectors:-

  1. Lottery Business, Gambling and bettings,
  1. Chit Fund Business, Nidhi Companies, Trading in Transferable Development Rights,
  1. Real Estate Business or Construction of Farm Houses,
  1. Activities/ sector not open to private sector investment like atomic energy and Railway operations,

Further any investment by a person/entity who is a Citizen/incorporated of/at Bangladesh or Pakistan requires prior approval from Government.

Other than Negative list, there is Sectoral Cap limit as per the regulatory requirement of entity govern here in India to be complied accordingly to proceed further.

Entry Routes:-

There are Two Major Routes for Receiving Foreign Direct Investment in India from any person resident outside of India:-

1. Automatic Route:-

Under this route, there is no need of any Government Approval. However the investor and investee should consider the sectoral limit if any as per FDI Regulations.

2. Approval Route:-

Under this route, the investee company and investor both need to get approval from Government of India. The approval authority for this is “Department for promotion of Industry and Internal Trade, Ministry of Commerce and Industry”. There is website called “Foreign Investment Facilitation Portal” as single point interface to submit the proposal and get the approval from Government of India for foreign investment in the entity. 

Reporting Requirement:-

Irrespective of route and sector, every Foreign Direct Investment is required to report in the given time frame to the Foreign Exchange Department of Reserve Bank of India at the time of receipt of such investment from person resident outside India.

Foreign Exchange Department of RBI has simplified the reporting structure and implemented the Single Master Form since 7th June, 2018 for reporting of Foreign Direct Investment in Investee Company.

Steps/Modes of Reporting:-

1 – Investee Entity need to register itself in RBI FIRMS Portal:- On this tab, the entity receiving foreign direct investment are registered and it is done by authorized person. So authority letter is most to obtain on that particular person for filing the details and get it registered at RBI FIRMS Portal, called Entity Master.

2 – Investee Entity should authorize the person to file forms in RBI FIRMS Portal as Business User Registration. On this again, the investor/person authorize to report the foreign investment, after log in made details in the prescribed form along with supporting documents thereon.

The approving authority for the both case is Authorised Dealer Bank. So Authorised Dealer Bank is Required to Solve the queries and complexity at first end to submit the required form and filing within given time frame.

Checklist :-

  1. Authority letter for authorized person to get the entity registered and obtaining the Business User Registration for filing. PAN Card of Entity and PAN Card of Authorized Person.

  2. Foreign Inward Remittance Letter (FIRC) from Authorised Dealer Bank

  3. Know Your Customer (KYC) of Foreign Investor issued by Bank

  4. Certificate of Incorporation, Memorandum of Association, Articles of Association and Board Resolution (only in case of Foreign Investor is an entity)

  5. Copy of Resolution(EGM Resolution) for allotment of shares 

  6. Copy of Certificate of Incorporation and Memorandum of Association (in case of subscription money)

  7. Copy of Valuation Report from a Chartered Accountant

  8. Copy of certificate from a Practicing Company Secretary

In case of investment requiring Government Approval, first investee need to receive the approval from Department of Industrial Promotion then only the filing at RBI FIRMS Portal.

Government Approval Process for Foreign Direct Investment:

Investment which required Government Approval shall file an application via its designated portal for submission of plan and proposal for approval. Therefore Investee entity which is required to take approval from Government of India to materialize the Foreign Direct Investment, required to file an application to Foreign Investment Facilitation Portal under Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry.

Checklist for Government Approval:-

  1. Summary of proposal of company/entity letterhead

  2. Certificate of Incorporation, Memorandum of Association and Article of Association

  3. Board Resolution

  4. Audited Financial Statement of last financial year

  5. Income Tax Return of Last Year

  6. Passport Copy/Identification Proof

  7. Diagrammatic representation of the flow and funds from the original investor to the investee company and pre and post shareholding pattern of the Investee Company  

  8. FIRC Copy

  9. Self-certification of the documents/for affidavit

  10. Valuation Certificate as approved by a CA

As per this List of documents and Information's, Application can be placed online and within 10 days of online application, physical documents need to be submitted to Office of DPIIT, New Delhi. 

In this way, any investee entity here in India can regularize their Foreign Direct Investment and initiate its business accordingly.

Lex comply

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