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FAQ’s on Foreign Direct Investment in India

Query No. 1:-

What is Foreign Direct Investment in India?

Reply:-

Investment opportunity for a foreign entity or entities or person(s) to invest into the Asia’s 3rd Largest Economy (India).

 

Query No. 2:-

What are the different routes to enter into India?

Reply:-

An Indian company may receive Foreign Direct Investment under the two routes as given under:

Automatic Route.          FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

Government Route.      FDI in activities not covered under the automatic route requires prior approval of the Government which is considered by the Foreign Investment Promotion Board (FIPB).

Application can be made in Form FC-IL, which can be downloaded from this link.

The Indian company having received FDI either under the Automatic route or the Government route is required to comply with provisions of the FDI policy including reporting the FDI to the Reserve Bank.

Query No.3:-

What is the ceiling limit under Automatic Route for various sectors?

Reply:-

Generally 100% FDI is allowed under automatic route in almost all the sectors. Some of the sectors where FDI is allowed, part automatic and part approval, is as under:-

Sectors % of FDI / Equity allowed Entry Route
Insurance Sector 49% Automatic Route
Telecom Services 100% Automatic up to 49% Government route beyond 49% and up to 100%
Tea Plantation 100% Automatic up to 49% Government route beyond 49% and up to 100%
Asset Reconstruction Company 100% Automatic up to 49% Government route beyond 49% and up to 100%
Courier Services 100% Automatic Route
Single Brand product retail trading 100% Automatic up to 49%

Beyond 49% and up to 100% by approval route

Query No.4:-

Which are the sectors where FDI is not allowed in India?

Reply:-

FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

  • Atomic Energy
  • Lottery Business
  • Gambling and Betting
  • Business of Chit Fund
  • Nidhi Company
  • Agricultural and Plantations activities (f.Notification No. FEMA 94/2003-RB dated June 18, 2003).
  • Real Estate business or construction of farm houses.
  • Trading in Transferable Development Rights (TDRs).
  • Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
  • Retails trading (except single brand product retailing)

 

Query No. 5:-

What are the instruments for receiving FDI?

Reply:-

Foreign investment will be treated as FDI only if the investment is made in equity shares, fully and mandatorily convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront. Partly paid equity shares and warrants issued by an Indian company in accordance with the provision of the Companies Act, 2013 and the SEBI guidelines, as applicable, shall be treated as eligible FDI instruments w.e.f. July 8, 2014 subject to compliance with FDI scheme. The pricing and receipt of balance consideration shall be as stipulated in terms of A.P.(DIR Series) Circular No.3 dated July 14, 2014 as modified from time to time.

 

Query No. 6:-

What is Incorporated Entity?

Reply:-

Incorporated Entity means a Company or entity formed and registered under the Companies Act, 2013 or under any other previous Company Law.

 

Query No. 7:-

What is Unincorporated Entity?

Reply:-

Unincorporated entity means an establishment or entity not formed and registered under Companies Act, 2013 or under any other previous Company Law.

 

Query No. 8:-

What are the modes of payment allowed for receiving Foreign Direct Investment?

Reply:-

An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures by:

  • Inward remittance through normal banking channels.
  • Debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.
  • Conversion of royalty / lump sum / technical know-how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.
  • Conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
  • Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.

 

Query No. 9:-

Is there any time limit to issue shares /convertible debentures under FDI Scheme?

Reply:-

Shares or convertible debentures are mandatorily required to be issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B). If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B) / Escrow account, the amount shall be refunded.

Further, Reserve Bank may on an application made to it and for sufficient reasons permit an Indian Company to refund / allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.

 

Query No. 10:-

What is Joint- Venture?

Reply:-

Joint- Venture is a partnership agreement between two or more entities or persons to incorporate a separate entity for carrying on particular economic activity in which each partner take an active role in decision-making.

 

Query No. 11:-

What is Wholly-owned Subsidiary?

Reply:-

Wholly-owned Subsidiary means an Indian subsidiary company in which foreign entity has 100% stakes in its capital.

 

 

Query No. 12:-

What is Project office?

Reply:-

Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.

 

Query No. 13:-

What is Liaison office?

Reply:-

Liaison office acts as a channel of communication between the principal place of business or head office and Indian activities. Liaison office can not undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/ financial collaboration between parent company and companies in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).

 

 

Query No. 14:-

What is Branch office?

Reply:-

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:

— Export/Import of goods

— Rendering professional or consultancy services

— Carrying out research work, in which the parent company is engaged.

— Promoting technical or financial collaborations between Indian companies and parent or overseas group company.

— Representing the parent company in India and acting as buying/selling agents in India.

Permission for setting up branch offices is granted by the Reserve Bank of India (RBI). It may be noted that retail trading activities of any nature is not allowed for a branch office in India.


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