Capital Account

Transactions - FDI
CAT - Meaning
“Capital account transaction” means a transaction which alters the assets or
liabilities, including contingent liabilities, outside India of persons resident in India
or assets or liabilities in India of persons resident outside India

Majorly, CAT includes:

• Foreign Investment in India (“FDI”)

• Overseas Direct Investment (“ODI”)
• External Commercial Borrowing (“ECB”)

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Introduction

Foreign Exchange Management Act, 1999 (FEMA) aims at facilitating external

trade and payments and for promoting the orderly development and maintenance
of foreign exchange markets in India. FEMA 1999 replaced Foreign Exchange
Regulation Act 1973.

Broadly, foreign exchange transactions are classified as under:

Capital account transactions - only if and as permitted

Current account transactions - generally permissible unless prohibited

Background
The Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident outside India) Reg. 2000 (FEMA 20) dtd. 3 May 2000 substituted by
FEMA 20(R) dtd. 7 Nov. 2017

The FEMA 1999 amended by the Finance Act 2015 inter alia to realign powers
between Central Government (CG) and RBI.

Debt and Non-Debt Instruments notified by CG under S. 6(7) of FEMA 1999 -Dt.
16 Oct 2019. The CG Notification dt. 17 Oct 2019 supercedes FEMA 20(R) - The
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’)
 Foreign Exchange
Regulated by Management
Non-debt (Non-debt
Instruments Central Instruments)
Government
Rules, 2019

Foreign
Investment Foreign Exchange
Debt Regulated by Management
(Debt
Instruments RBI
Instruments)
Regulations, 2019
Non-Debt Instruments

What are Non-Debt Instruments?

• All investments in equity in incorporated entities (public, private, listed, unlisted)
• Capital participation in LLPs
• Instruments of investment as in FDI policy
• Investment in units of AIFs, REITs and InVITs
• Investment in mutual funds and ETFs which invest more than 50% in equity
• Junior most layer (e.g. equity tranche) of securitisation structure
• Acquisition, sale or dealing directly in immovable property
• Contribution to trusts
• Depository receipts issued against equity instruments

AIFs- Alternative Investment Funds (AIFs); REITs- Real Estate Investment Trust (REITs);
InVITs- Infrastructure Investment Trusts (InVITs) ETF – Exchange Traded Funds (ETFs) 6
What is Foreign Investment? | Basics
FI - Any investment made by a person resident outside India on a repatriable basis in equity
instruments of an Indian company or to the capital of LLP

FDI - Investment through equity instruments by a PROI in an unlisted Indian company; or in ten
per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed
Indian company;

Common Instruments

Compulsorily convertible Compulsorily convertible

preference shares debentures

Equity Shares Convertible Notes (Start-ups)

PROI – Person resident Outside India 7

Routes for Foreign Investment

Automatic • No prior approval required

Route • (Subject to applicable conditions)

Approval • Prior approval required from

• Government of India i.e. from Concerned Ministries
Route through the FIFP Portal

On 22nd April 2020, Govt has notified that FDI from countries which share
land border with India or the beneficial owner of an investment into India
who is situated in or is a citizen of any such country, shall invest only with
the Government approval
List of countries sharing land border with India is as follows: Pakistan,
Afghanistan, China (including Hong Kong and Macau), Nepal, Bhutan,
Bangladesh, Myanmar
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Overview of FDI |Conditions & Prohibitions
A person resident / an entity incorporated Prohibited Sectors
outside India can invest
Atomic Energy/Railways
 In an Indian company (as per the extant FDI
policy)
 Contribute to the capital of an LLP, if Real Estate Business
 LLPs formed and registered under Limited
Liability Partnership Act 2008
 Subject to certain conditions Gambling
 Bangladesh/Pakistan/Sharing Land borders :
Prior GOI Approval
Lottery Business
An NRI/OCI can contribute to the capital of a
partnership firm / proprietary concern
Chit Funds, Nidhi Co
 Non-repatriation basis : Automatic route
 Repatriation basis : RBI approval route Tobacco products

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Examples of Sectoral Caps

Automatic Route Partially Automatic

• Plantation (100%)
• Mining (100%)
• Manufacturing (100%)
• Defence
(Automatic upto 49%; Government
approval: 49% to 100%)
• Banking- Private sector
(Automatic upto 49%; Government
approval: 49% to 74%)
• Insurance
(Automatic upto 49%)
Approval Route
• Mining and mineral separation
of titanium bearing minerals and
ores, its value addition and
integrated activities (Approval
route100%)
• Satellites - Establishment and
operation (Approval route 100%)

Note: Sectoral cap is the maximum investment allowed in a sector including both direct and indirect
foreign investment. This shall be the composite limit for the investee Indian entity

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Overview of FDI |Funding
Timelines
The Indian Company shall receive the consideration
by way of :
Within 60 Allotment of shares
days

1 Inward Remittance Within 30

Filing of FC-GPR after allotment
days
• NRE/FCNR (B) A/c
2 Debit to
• Non interest bearing
within 75 Refund for non issuance of shares
escrow account in INR days
with an AD bank
>75 days
• ECB Automatic Route without
3 Conversion of
• Import payable of capital Interest

goods, pre incorporation >75 days RBI Approval Route

expenses, share swaps Interest

etc.
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Overview of FDI |
1 Issuance of non debt instruments to a person resident outside India

2 Transfer of shares by a person resident outside India to a person resident outside India

3 Transfer of shares between a resident and a person resident outside India

Automatic Route:
Automatic Route Approval Route
Sale or Gift by an NR :
 Under  Gift (R-NR)
 toprivate
a personarrangements : With
other than NRI adherence to
or OCI
pricing, reporting  Investee company requires govt approval
 to an NRI/OCI, if
extant FDI
shares and
are FEMA
held on a
regulations  Foreign investment results in a breach of the
repatriation basis
 On the stock exchange subject to pricing sectoral cap

guidelines of Route:
SEBI  Under private arrangements : Without adherence to
Approval
pricing, reporting , extant FDI and FEMA regulations
Gift by an NRI/OCI to a person resident outside India if shares are held on a non-repatriation basis

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Overview of FDI |Valuation Norms

Nature Listed Company Unlisted Company

Price should not be < the price as Price should not be < the fair value
Issue by an Indian company
per SEBI guidelines worked out by a CA

Price should not be < the price as Price should not be < the fair value
Transfer from R – NR
per SEBI guidelines worked out by a CA

Price should not be > the fair value

Transfer from NR – R Price should not be > the price as
worked out by a CA
per SEBI guidelines

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Reporting of FDI |FIRMS

FIRMS Foreign Investment Reporting and Management System - Reporting of FI in SMF

Phase I The Entity Master was made available online from June 28 to July 20,2018

• Effective September 01, 2018. the reporting of FDI, which was a two-step
procedure viz., ARF and FC-GPR is merged into a single revised FC-GPR and
will be reported through SMF
Phase
II • At present nine forms viz., FC-GPR, FC-TRS, LLP-I, LLP-II, CN, ESOP, DRR, DI &
InVi are being made available for filing in SMF

• All new filings for the above 9 forms have to be done in SMF only

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Reporting of FDI | Entity User, Business User & e-KYC
Entity User Business User e-KYC
• Every business user has to be
• A person authorized by the
• The applicant reporting the e-KYC verified before any
entity (company/
transaction in Single Master reporting can be made in the
LLP/startup) to register the
Form at FIRMS Single Master Form
entity in the Entity Master of
FIRMS application
• BU can use his login • This would ensure that only
credentials for only the entity genuine logins are made
• Would be entirely
that has authorized him/her to available in the FIRMS
responsible for the data
report the transactions application. All e-KYC would be
entered of the entity
verified by the AD banks

IFSC : ICIC0000393

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Reporting Requirements |SMF

FC-GPR FC-TRS

• Shares to be issued within 60 days • Reporting of transfer of shares between

• To be filed in FIRMS within 30 days of resident and non-resident
issuance • To be made in Form FC-TRS
• Submitted to AD within 60 days of
receipt/remittance date such
consideration/transfer in FIRMS

Form ESOP Form DRR Form LLP-I Form LLP-II

•30 days from •30 days from issue •30 days from date •60 days from date
ESOPs issue date date of receipt of of funds
consideration

Form InVi Form CN DI

•30 days from issue •30 days from date •30 days from date
date of units of issue/transfer of allotment of
capital instruments
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Thank you