Foreign Investment in Indian Companies | Foreign Investment

foreign investment in indian companies

Foreign investment in Indian Companies

Foreign investment in indian companies- Foreign Exchange Management Act, 1999 has replaced Foreign Exchange Act, 1973 and it has come into effect from 01.06.2016.

Following are the objective of FEMA:

  • To facilitate external trade and payments
  • To promote the development and also the maintenance of foreign markets in India.

According to the Organization for Economic Co-operation and Development (OCED), an investment of 10% or above from overseas is considered as Foreign Direct Investment.

A major monetary source, Foreign Direct Investment in India is a key driver of the country’s economic growth. FDI is made by the foreign entities in Indian Companies with the motive of acquiring control in Indian Companies. It may be noted that an entity that is not incorporated abroad under any law (for ex: trust, unregistered partnerships, etc) cannot make a foreign direct investment in India.

Whenever FDI is made, India has the following option to set up:

  • As an incorporated entity registered under the Companies Act, 2013 or under previous company law.
  • Wholly owned subsidiaries
  • Joint ventures; or
  • forming an office of a foreign company in India through
  • Liaison Office/Representative Office
  • Project Office
  • Branch Office

Such office can undertake activities permitted under the Foreign Exchange Management (established in India of Branch Office or other places of Business) Regulations, 2000.

Foreign Direct Investment in Limited Liability Partnerships

FDI in LLPs is permitted however, it is subject to the below conditions:

a). FDI is allowed only through govt. Approval route and only in permitted sectors.

b). LLP is not allowed to work in an agricultural plantation activity, or in print media, or real estate business.

c). Downstream investment is allowed however, only in permitted sectors

Note: External Commercial Borrowings (ECBs) are loans made in India by non-resident lenders in foreign currency to Indian borrowers. It includes commercial bank loans, buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds, etc.

Portfolio Investment Scheme

Portfolio Investment Scheme enables Non-Resident Indians to invest in Indian stock and bonds.

According to Schedule 3 of the Foreign Exchange Management Act 2000, NRIs can purchase and sell shares as well as convertible debentures of companies registered in India through a recognized Stock exchange by routing these transactions through their account with a designated bank branch.

Investment by Foreign Institutional Investors (FIIS)

First of all, Foreign Institutional Investors have to get themselves registered with SEBI to make investments under the Portfolio Investment Scheme.

Investment in Equity Shares

A Foreign Institutional Investor may purchase, sell shares and convertible debentures of an Indian company through a registered broker on recognized stock Exchanges on repatriation basis, subject to the satisfaction of the following conditions:

  1. Paid-up value of shares or convertible debentures purchased by each Foreign Institutional Investor shall not exceed 10% of the total paid-up value of equity shares/ convertible debentures of an Indian Company.
  2. Paid-up value of shares or convertible debentures purchased by all Foreign Institutional Investors shall not exceed 24% of the total paid-up value of equity shares / convertible debentures of an Indian Company.

However, this limit of 24% can be increased up to sectoral cap with the approval of the shareholders of the Indian Company by way of a Special Resolution.

It may be noted that the ceiling of 24% does not include investments made by Foreign Institutional Investors through offshore funds, Global Depository Receipts and Foreign Convertible Bonds.

Investment in other securities

A foreign institutional investor registered with SEBI may purchase the following securities on repatriation basis:

  • Government securities
  • Treasury bills
  • Units of Domestic Mutual Funds
  • Non- convertible debentures/ bonds issued by an Indian Company.

The payment for aforesaid investments (equity shares as well as securities) shall be made either inward remittances only through normal banking channels or out of funds held in Foreign Currency Account or Special Resolution Resident Rupee Account maintained by FII with an Authorized Dealer.

Investment by Non- Resident (NRIs)

Investment in equity shares

A non-resident may purchase, sell shares and convertible debentures of an Indian Company through a registered broker on recognized Stock Exchange on repatriation/ non- repatriation basis, subject to the satisfaction of following conditions:

  1. Paid-up value of shares/ convertible debentures purchased by each resident Indian shall not exceed 5% of the total paid-up value of equity shares/ convertible debentures of an Indian Company.
  2. Paid-up value of shares or convertible debentures (Deb.) purchased by all Non-Resident Indians shall not exceed 10% of the total paid-up value of equity shares/ convertible debentures of an Indian Company.

However, this limit of 10% can be increased to 24% with the approval of the shareholders of the Indian Company by way of Special Resolution.

It may be noted that the ceiling of 10%/ 24% shall not include investments made by non- resident Indians through offshore funds, Global Receipts, and Foreign Currency Convertible Bonds. Foreign Investment in Indian Companies

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Investment in other Securities

Non- resident Indians shall purchase the following securities without any limit on repatriation basis:

  • Government securities.
  • Treasury bills.
  • Units of Domestic Mutual Funds
  • Non- convertible Bonds issued by Public Sector Undertakings
  • Shares of public sector enterprises being disinvested by our Government.

Non-resident Indians may purchase the following securities without any limit on non- repatriation basis:

  • Government securities
  • Units of Domestic Mutual Funds
  • Treasury bills
  • Units of money market (MM) mutual funds in India
  • National Saving Certificate

The payment for aforesaid investments (equity shares as well as other securities) on a repatriation basis shall be made either by way of inward remittance through normal banking channels or out of funds held in Non- resident( External ) Rupee Account or Foreign Currency Non- resident Account.

The payment for aforesaid investments ( equity shares as well as other securities) on non- repatriation basis shall be made either by way of inward remittance through normal banking channels or out of funds held in Non- resident ( external ) Rupee Account or Foreign Currency Non- resident Account or Non- resident ( Ordinary) Rupee Account. Foreign Investment in Indian Companies

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Overseas Investment by Indian Entity

Direct Investment outside India in Joint venture/Wholly owned subsidiary

Any Company from India shall not make any direct investment in a foreign entity engaged in Real estate or Banking business. A Person Resident in India (PRI) can make direct investment outside India only with the prior approval of RBI. However, if the following conditions are satisfied, then RBI approval is not required:

  1. Total financial commitments of the Indian party in Joint Venture/ Wholly-owned Subsidiary shall not exceed 100% of its net worth as per the last audited Balance Sheet. However, the ceiling on investment in JV/WOS does not apply to investment out of balance in EEFC (Exchange Earners Foreign Currency Account) Account and out of the proceeds of ADR/GDR.
  2. Direct investment(s) can be made in the overseas JV/WOS engage in bonafide business activity.
  3. The Indian party routes all transactions relating to an investment in WOS/JV through an Authorized dealer to be designated by it. However, the Indian party may designate different branches for different JV/WOS outside India.
  4. The Indian party shall submit ODA to the designated branch of an authorized dealer for onward transmission to RBI.

NOTE: Unique Identification Number: RBI allot UIN for each JV/WOS outside India and the Indian Company shall quote such number in all its communications and reports to RBI and the authorized dealer.

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