Foreign Investment in India

A person resident outside India can invest in India through

• Equity Instruments (Non-Debt Instruments – NDI Rules, 2019)

1. Equity Shares
2. Fully, compulsorily and mandatorily converibles debentures
3. Optionally convertible/ partially convertible debentures issued up to June 7, 2007 are deemed to be covered under NDI rules till their original maturity
4. Fully, compulsorily and mandatorily convertible preference shares.
5. Non-convertible/ optionally convertible/ partially convertible preference shares issued up to April 30, 2007 are deemed to be covered under NDI rules till their original maturity.
6. Share warrants

 

• Debt Instruments: (External Commercial Borrowings – ECB guidelines, 2018)

1. Non- convertible debentures
2. Optionally convertible/ partially convertible debentures issued after June 7, 2007
3. Non-convertible/ optionally convertible/ partially convertible preference shares issued after April 30, 2007

 

Equity Instruments (Non-Debt Instruments – NDI Rules, 2019):

Conditions:

• A person resident outside India may invest in equity instruments subject to entry routes viz Automatic and Government approval route, sectoral caps and attendant conditionalities as prescribed in Schedule 1 of NDI Rules, 2019.
• A person resident outside India may purchase equity instruments of a listed Indian company on a stock exchange in India on satisfying the below specified conditions:

1. The person resident outside India making the investment has already acquired control of such company in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 and continues to hold such control,
2. The consideration can also be paid out of the dividend payable by the investee company, provided the dividend amount has been credited to a specially designated non-interest bearing rupee account.

• A wholly owned subsidiary set up in India by a non-resident entity, operating in 100% foreign investment allowable automatic sector, may issue equity instruments to the non-resident entity against pre-incorporation expenses incurred by that non-resident entity, subject to a limit of 5% of its authorized capital or USD 500,000, whichever is less.
• An Indian company can issue equity instruments to a person resident outside India against:

1. Swap of equity instruments
2. Import of capital goods or machinery or equipment
3. Pre-incorporation expenses
4. Any funds payable by it.

 

Prohibited Sectors:

• Lottery Business including Government/ private lottery, online lotteries.
• Gambling and betting including casinos.
• Chit funds
• Nidhi company
• Trading in Transferable Development Rights (TDRs).
• Real Estate Business or Construction of farm houses.
• Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
• Activities/sectors not open to private sector investment viz., (i) Atomic energy and (ii) Railway operations
• Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for lottery business and gambling and betting activities

 

Pricing Guidelines:

The equity instruments shall be issued as per the following valuation norms issued and shall not be less than the price worked out:

• In case of a listed company as per SEBI guidelines
• In case of a company in delisting process as per SEBI guidelines
• In case of unlisted company valuation is done as per internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a

1. Chartered Accountant; or
2. Merchant Banker; or
3. Practicing Cost Accountant

• In case of share warrants, their pricing and the price or conversion formula should be determined upfront at the time of issue of the instrument.
• In case of swap of equity instruments, valuation involved in the swap arrangement shall have to be made by a Merchant Banker registered with SEBI or an investment banker outside India registered with the appropriate regulatory authority in the host country.

These pricing guidelines shall not be applicable for investment in equity instruments by a person resident outside India on a non-repatriation basis.

 

Mode of Payment:

• The amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in NRE/FCNR (B)/Escrow account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
• Equity instruments shall be issued to the person resident outside India making such investment within 60 days from the date of receipt of the consideration or from the date of receipt of each call payment in case of partly paid equity shares.
• Where such equity instruments are not issued within 60 days from the date of receipt of the consideration the same shall be refunded by outward remittance within 15 days from the date of completion of 60
• An Indian company issuing equity instruments may open a foreign currency account with an Authorised Dealer in India in accordance with Foreign Exchange Management Regulations, 2016.

 

Remittance of Sale Proceeds shall be subject to the following conditions:

• It shall be through an authorised dealer (net of applicable taxes) and shall be credited to the NRE/ FCNR (B) of the person concerned.
• The security should be held by the seller on repatriation basis
• The security should have been sold in compliance with the pricing guidelines or the Reserve Bank’s approval should have been obtained.

 

Rights Issue or Bonus Issue:

A person resident outside India can make investment in rights issue or bonus issue subject to the following conditions:

• Such issue shall not result in a breach of the sectoral cap applicable to the company
• For listed Indian company, the rights issue to persons resident outside India shall be at a price determined by the company.
• For unlisted Indian company, the rights issue to persons resident outside India shall not be at a price less than the price offered to persons resident in India.

The above conditions shall also be applicable in case of a renunciation of rights issue to a person resident outside India by the person to whom it was offered.

 

Reporting Requirements:

Form	Purpose of Filing	Prescribed Time Limit
Advance Remittance Form (ARF)	To report receipt of consideration pursuant to issue of capital instruments (Instruments) reckoned as Foreign Direct Investment (FDI)	Within 30 days from date of receipt of consideration
Foreign Currency Gross Provisional Return (FC-GPR)	To report issue of Instruments to a person resident outside India (PROI) reckoned as FDI Issue of participating interest/ right’s in oil fields shall also be reported in form FC-GPR	Within 30 days from date of issue of capital instruments
Annual Return on Foreign Liabilities and Assets (FLA)	To report foreign liabilities and assets of an Indian company or LLP which has received FDI or capital contribution, respectively in previous year including current year	By 15th July of each year
Foreign Currency Transfer of Shares (FCTRS)	To report transfer of Instruments between PROI and person resident in India	Within 60 days from the date of transfer of Instruments, or date of receipt of funds; whichever is earlier
Employees’ Stock Option (ESOP)	To report issue of shares under employee stock option scheme to the directors/ employees	Within 30 days from date of issue of ESOP
Convertible Notes (CN)	To report issue of convertible notes by Indian startup company to PROI. To report transfer of convertible notes of Indian startup company to or from PROI	Within 30 days from the date of issue Within 30 days from the date of transfer