FDI-RBI Compliences

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About FDI-RBI Compliences

FDI is the abbreviation of Foreign Direct Investment. FDI can be defined as an investment made in business interest by a company or individual of one country in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company.

The following is the key feature of foreign direct investment:

  • The investment made by a company in another company either establishes an effective control in the company in which investment is made.
  • Or the investing company has a substantial influence on the decision making of the company in which investment is made.

FDI is mostly made in open economies as & when compared to tightly regulated economies.

While making the foreign direct investment not only capital investment is required but also management, as well as technology, is also required.

According to the Organization for Economic Co-Operation and Development (OECD), an investment of 10% or above from overseas is considered as FDI.

As per our report, India has become the fastest growing investment region for foreign investors. In India, FDI is regulated under the Foreign Exchange Management Act, 2000 governed by Reserve Bank of India.

Entry Routes for Foreign Investment in India

A company can make Foreign Direct Investment in India by two routes:

Government Route: Under the Government route the foreign investor should obtain the prior approval of the Government of India i.e. approval of :

  • Foreign Investment Promotion Board (FIPB)
  • Department of Economic Affairs (DEA)
  • Ministry of Finance or Department of Industrial Policy & Promotion for the investment.

Automatic Route: Under this route, the investor does not require any approval from the Reserve Bank of India or Government of India for the investment.

Complinces

The Remitting Investors should ensure that (for FDI) –

  • Funds have to flow only from the investors’ bank accounts.
  • The purpose of remittance should be stated as towards investment in share capital or as the case may be subject to FEMA compliance.
  • Know Your Customer information to be transmitted along with remittance

The Company receiving the Investment should ensure that –

  • Apply to the Bank for Foreign Inward Remittance Certificates (FIRC) indicating the receipt of remittance and the purpose of remittance as towards investment in share capital. Whereas there are few bankers who may insist on the declaration as per their banks’ format.
  • Submit Report of Receipt of FDI to the Banker within 30 days of the receipt of remittance enclosing a copy of FIRC. Obtain acknowledgment of submission from the bank.
  • Allotting Unique Identification Number (UIN) for every remittance received and awaiting communication from Reserve Bank of India.
  • • Allot shares for the remittance received within 180 days of receipt of remittance, by doing the following –
    • Obtain share valuation report from Chartered Accountant
    • Increase Authorized Share Capital, if necessary, by complying with the requirements of the Companies Act.
    • Allot shares by complying with the requirements of the Companies Act.
    • Obtain Certificate from practicing Company Secretary for the fulfillment of Companies Act compliances for FDI.
  • Submitting Part A of Form FC-GPR within 30 days of allotment by reporting allotment of FDI to the banker by enclosing the below-mentioned documents –
    • Valuation Report obtained from Chartered Accountant
    • Company law compliance certificate obtained from Company Secretary
    • Copies of FIRC
  • Submit Annual Return of Foreign Liabilities & Assets, in Part B of Form FC-GPR, with the Reserve Bank of India, External Liabilities and Assets Statistics Division, Mumbai, before 15th July of every year, also enclosing audited financials of the company.

Checklist for Foreign Direct Investment (FDI Report)

  • Check whether the company is allowed to raise FDI under Automatic Route.
  • Check sectorial caps.
  • Check whether the appropriate approval is received from FIPB/RBI before the receipt of FDI in case of approval route.
  • Checking whether the Investor is a resident of or any organization incorporated in Bangladesh / Pakistan. No Investment from Pakistan is allowed.
  • Check whether the FIPB prior approval is taken for investment from a resident of or entity incorporated in Bangladesh.
  • Check whether the FDI has come through:-
    • By inward remittance through normal banking channels; or
    • By debit to NRE/FCNR account of the person concerned maintained with an authorized dealer/authorized.
  • Check the FDI if from resident in Nepal and Bhutan as well as citizens of Nepal or Bhutan, is in Foreign Currency
  • Check whether the Instrument proposed to be issued are only the following-
    • Equity shares
    • Fully and mandatorily Convertible Debentures
    • Fully and mandatorily Convertible Preference Shares
  • Check whether the valuation is done as per FEMA 20/2000,i.e., as per CCI Guidelines
  • Check whether FDI is in an SSI and if so only up to 24% of the paid-up capital is allowed. Allotment in excess should be made only if the unit-
    • Equity shares
    • Given up its small-scale unit status.
    • Is not engaged or does not propose to engage in the manufacture of items reserved for SSI.
    • Small-scale sector complies with the sectoral caps specified in Annex -1 of the Master Circular. Further RBI has clarified that the Indian company / SSI Unit would be reckoned as having given up its SSI status, if the investment in plant and machinery exceeds the limits prescribed under the Micro, Small and Medium Enterprises (MSME)Development Act, 2006.
  • Check Whether FIRC copies have been received.
  • Checking the proposed dividend rate on Preference Share does not exceed 300 basis point above prevailing SBI Lending rate.
  • Check whether the advance reporting form is filed within 30 days of receipt of FDI along with KYC form.
  • Check whether the equity Instruments are issued within 180 days from the date of receipt of the inward remittance or by debit to the NRE/FCNR (B) account.
  • In case of debenture issue check if articles allow issue of debentures
  • Check whether Press Note 2 /2009 and 4 of 2009, if applicable are followed.
  • Check whether FEMA 24/2000 is followed for Investment in partnership firms or proprietary concern regulated under Section 2(h) of Section 47 of FEMA
  • Check whether any Press Notes have been issued and amendments are pending in the FEMA.
  • Note
    • Please mention the NIC Code in FDI report correctly
    • KYC report shall be stamped by the authorized dealer
    • Ensure that every page of the form FCGPR is signed and stamped

Frequently Asked Questions

How can an Indian company receive foreign investment?

The routes under which foreign investment can be made is as under:

  • Automatic Route: Foreign Investment is allowed under the automatic route without prior approval of the Government or the Reserve Bank of India, in all activities/ sectors as specified in the Regulation 16 of FEMA 20 (R).
  • Government Route: Foreign investment in activities not covered under the automatic route requires prior approval of the Government.

Tenor of convertible instruments will be guided by the instructions framed under the Companies Act, 2013 and the rules framed there under. However, the investee company should ensure that the price/ conversion formula of convertible capital instruments is determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations.

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 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 Pakistan or Bangladesh or an entity which is registered/ incorporated in Pakistan or Bangladesh), 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.

  • Foreign Investment means any investment made by a 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 (FDI) is the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.
  • Foreign Portfolio Investment is any investment made by a person resident outside India in capital instruments where such investment is (a) less than 10 percent of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company or (b) less than 10 percent of the paid up value of each series of capital instruments of a listed Indian company.

Fully diluted basis means the total number of shares that would be outstanding if all possible sources of conversion are exercised.

No, FDI and FPI are agnostic from the point of view of the schedule under which investment has been made. It is the percentage which defines whether it is direct or portfolio investment.

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