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Guide to Foreign Direct Investment (FDI) | Company Vakil

What is a foreign direct investment?

A foreign direct investment (FDI)  is an investment that is made by an individual or a firm situated in one country into a business that is situated in another country. Generally, a foreign direct investment takes place when a company establishes it’s business in a foreign country. When an individual or a firm establishes a foreign operation base, it requires capital and tangible assets including establishing ownership or controlling interest in a foreign company.  An FDI is very different from a portfolio investment where only equities in a foreign business are bought in controversion to FDI where money is invested in a foreign business.

Breaking Down FDI

Foreign Direct Investment is usually done in open economies as there are above-average growth prospects for the investor, as opposed to tightly regulated economies. This type of investment does not necessarily only mean monetary investments. It may also include provisions for management and technology.

What are the different methods of FDI?

This type of investment can be made in a mixture of ways along with the compliance to the FDI rules :

  1. An opening of a subsidiary or associate company in a foreign country.
  2. Acquiring a controlling interest in an existing foreign company.
  3. Merger or joint venture with a foreign company.

What are the sectors in which FDI is prohibited?

There are certain sectors in the economy where Foreign Direct Investment is prohibited. They are:

  1. Government, private or online lotteries.
  2. Gambling, Betting, Casinos.
  3. Chit funds. It is a kind of savings scheme practiced in India. It refers to a transaction in which a number of people set aside a fixed amount of money in a specified period of time and at the end of the stipulated period, the entire money shall go to the person whose name is picked by a draw of chits or any other method mutually agreed upon.
  4. Nidhi companies. These are the kind of companies whose main business is lending and borrowing money between their members.
  5. Real estate business or construction of farm houses.
  6. Manufacturing of cigars, cheroots, cigarillos, and cigarettes.
  7. Sectors which are not open to private investments. For example,
    The atomic energy sector,  The Railway sector (excluding permitted operations)
  8. Trading in Transferable Development Rights (TDRs)

Who can invest in India?

The following individuals/entities can invest in India subject to the FDI rules :

  1. A non-resident entity.
  2. NRIs, as well as citizens of Nepal and Bhutan, can invest in India on a repatriation basis.
  3. Foreign Institutional Investors may invest in an Indian company under the “Portfolio Investment Scheme” subject to its limitations and restrictions.
  4. Erstwhile OCBs (corporate bodies that are owned by non-residents of India, directly or indirectly, up to 60% )

Who cannot invest in India?

Citizens or Pakistan or Bangladesh, or entities incorporated in Pakistan or Bangladesh cannot invest in India without the prior approval of the Foreign Investment Promotion Board (FIPB) subject to compliance with the FDI rules.

What are the different routes through which one can invest in India?

A foreign direct investment in India can be done through two routes :

Government route, which requires the prior approval of the FIPB, DEA and The Ministry of Finance or Department of Industrial Policy and Promotion.

Automatic route, which does not require any RBI or government approvals. 

What are the things that must be taken into account while doing a foreign direct transaction?

There are a couple of things that must be kept in mind while investing in a foreign company and while receiving funds from a foreign firm or an individual.

While investing in a foreign company, one should ensure that, 

  1. The funds must flow only from the investors’ bank accounts.
  2. The idea of remittance ( sum of money that is actually transacted) should be stated as towards investment in share capital or as the case may be subject to the rules mentioned in FEMA.
  3. Know Your Customer ( KYC) information should be sent forward along with the actual remittance.

While receiving an investment from a foreign company, one should ensure that,

  1. An application 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 is made. However,  there are few bankers who may insist on the declaration as per their banks’ format.
  2. Submission of the Report of Receipt of the FDI to the banker is done within 30 days of the receipt of remittance enclosing a copy of FIRC. One should obtain an acknowledgment of submission from the bank.
  3. The allotment of a Unique Identification Number (UIN) for every remittance received and awaiting communication from Reserve Bank of India should comply with.
  4. Within 180 days of receiving the remittance, the allocation of shares should be done in the following manner :
    • By obtaining a share valuation report from Chartered Accountant
    • By increasing the Authorized Share Capital, if necessary. This should be done in compliance with the Companies Act.
    • By allotting shares in compliance with the requirements of the Companies Act.
    • By obtaining a certificate from a practicing Company Secretary.
  5. Within 30 days of allotting the shares, Part A of the form FC-GPR should be submitted along with the following documents :
    • A Valuation Report that is obtained from a Chartered Accountant.
    • A Company law compliance certificate which is obtained from a Company Secretary
    • Copies of the Foreign Inward Remittance Certificate
    • After that, one should submit the Annual Return of Foreign Liabilities & Assets which are mentioned in Part B of the FC-GPR to the Reserve Bank Of India every year before 15th of June.

In conclusion,

Foreign Direct Investment (FDI)  is an appealing and exciting concept through which small or medium scale companies can make fast-paced growth and enter the world of globalization. However, it cannot be denied that there are a number of factors that might influence a company’s decision to enter a new market such as availability of resources, the political stability, and the nation’s openness to regional and international trade. While investing, an investor needs to critically analyze the opportunity for growth in the sector that he is planning to invest in.

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