Foreign Direct Investment In India: Law And Procedure

1.1 What is FDI? Foreign Direct Investment is an investment when a foreign company or individual acquires the stakes in the ownership of a business situated in another country. In terms of Rule 2(r) of Foreign Exchange Management (Non-debt Instruments) Rules, 2019, "Foreign Direct Investment means investment through equity instruments by a person resident outside India in an unlisted Indian company; or in ten percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company." Since the 1991 LPG reforms, foreign direct investment in India has grown considerably and recently India recorded its highest ever FDI inflow figures worth $83 billion[1]. FDI forms an essential component of foreign capital that helps the economy, in the long run, to become self-sufficient and sustainable. Besides that, FDI also helps develop strategic sectors, technology transfer, knowledge creation, more innovation, competition, and job creation among other benefits. 1.2 How is it different from FPI? Foreign Portfolio Investment is different from FDI in the sense that through FPI the main aim of the investors is to secure their interests by purchasing the stocks, bonds, cash equivalents etc. of a company. It is more like a purchasing or selling securities in a stock market. This type of investments comes under the head of short term financial gain where an investor only purchases the financial assets of the company. Whereas, in FDI, an investor not only purchases the financial assets but also invests in physical assets, thereby taking the control over managerial and decision making process of the company. That's why FDI is considered as a stable investment than FPI because it creates a 'lasting interest' in the economy of a country. There is also difference in terms of percentage which defines whether it is direct or portfolio investment. As per mandate, FPI is less than 10 percent of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company or less than 10 percent of the paid up value of each series of capital instruments of a listed Indian company. 1.3 Under which law is it governed? Foreign Investment in India, is primarily governed and regulated by Foreign Exchange Management Act, 1999. Presently, the FDI framework in India is primarily governed by the Consolidated Foreign Direct Investment Policy Circular dated 15-10-2020, as amended through various Circular/Press Notes/Press Releases issued by the Department for Promotion of Industry and Internal Trade (DPIIT), Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 dated 17.10.2019 notified by the Department of Economic Affairs (DEA), Ministry of Finance, Government of India which superseded the erstwhile Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017. The payment of inward remittance and reporting requirements are stipulated under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 issued by the Reserve Bank of India (RBI). 1.4 How can a Company in India receive Foreign Investment? Non-residents can make investments in capital instruments of an Indian company's which includes equity shares, debentures, preference shares and share warrants via the Automatic Route or the Government Route. Under the Automatic Route, no prior approval of the government is required, whereas in Government Route, prior approval of government is required. The appropriate Administrative Ministry/Department evaluates proposals for foreign investment under the Government route. Foreign Investment Facilitation Portal (FIFP) is the Government of India's new online single point interface for investors to enable Foreign Direct Investment. This portal is intended to ease the single-window clearance of applications that are in the approval process.[4] Besides this, a investor has to follow the sectoral cap or limit that is specified for each sector in the table of Schedule I of FEM (Non-debt Instruments), 2019 Rules. The investors must also abide by all applicable rules and regulations, security conditions, and state/local laws/regulations. 1.5 Procedure to be followed after Investment After receiving Inward remittance through normal banking channel or in NRE/FCNR(B)/Escrow account maintained with an authorized dealer or bank in India, the Indian company is required to report to the relevant Regional Office of Reserve Bank of India. All the reporting is required to be done through the Single Master Form (SMF) available on the Foreign Investment Reporting and Management System (FIRMS) platform at https://firms.rbi.org.in.[5] Previously, reporting was required in two stages: first, after receiving funds, filling the Advance Reporting Form (ARF), and second, following allotment, using the Form Foreign Currency-Gross ...

Foreign Direct Investment In India: Law And Procedure

Mohammad Sumamah

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