Foreign Direct Investment

Regulations

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 • Exchange Control Regulations - An Overview
• FDI Conditionalities
• Permissible Activities
• Issue of Shares
Table of • Investment in LLP

Contents • Investment in Convertible Securities

• Transfer of Shares
• Downstream Investment
• FDI Reporting

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Exchange Control
Regulations
An Overview

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Dealings in Foreign
Exchange

Current Account Capital Account

Transactions Transactions
Section 5 read with Section 2(j) of FEMA Section 6 read with Section 2(e) of FEMA
FEM (Current Account FEM (Permissible Capital Account
Transactions) Rules, 2000 Transactions) Regulations, 2000

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 Current Account Transactions - Definition

• Section 2(j) of FEMA

• Any transaction which is not a capital account transaction and includes

• Payment due in connection with current business, trade, services, short term
borrowings credit
facilities in normal course of business
• Payment of interest on loans
• Income on investment
• Remittance of living expenses to parents/spouse/children
• Expenses in connection with foreign travel, education, medical etc.

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Capital Account Transactions - Definition

• Section 2(e) of FEMA

• Any transaction

• which alters the assets or liabilities outside India of persons resident in India or
• which alters assets or liabilities in India of persons resident outside India
• Including transactions referred to in section 6(3) of FEMA

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 Transactions which alters the assets or liabilities outside India of
persons resident in India
Capital Transfer or issue of any foreign security
Account
Transactions Transfer of immovable property outside India
-
Transactions Borrowing lending in foreign currency
by Resident
in India Giving of a guarantee or surety in respect of any debt,
obligation or other liability incurred owed to a person resident
outside India
 Transactions which alters assets or liabilities in India of persons
resident outside India
Capital Establishment in India of a branch, office or other place of business

Account Transfer or issue of security

Transactions
- Acquisition and transfer of immovable property in India
Transactions
Borrowing lending in Rupees
by Persons
resident Deposits

outside India Guarantees

Regulation of FDI
DIPP
(DEPARTMENT OF
INDUSTRIAL
POLICY &
PROMOTION)

MONITORED BY RBI
(RESERVE BANK OF
INDIA)

99
FDI Consolidated Policy 2017 now carries a
statement

• Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce &

Industry, Government of India makes policy pronouncements on FDI through Press
Notes/Press Releases which are notified by the Reserve Bank of India as amendments

• These notifications take effect from the date of issue of Press Notes/ Press
Releases unless specified otherwise therein

• In case of any conflict, the relevant FEMA Notification will prevail

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FEMA Regulatory Framework

Policy Legal Amendment

Ministry of Commerce and

The RBI
Industry

Press Releases FEMA 1999

Press Notes (Transfer or Issue of Security by a Person

Resident
Standard Operating Procedures Outside India)Regulations
AP DIR Circulars

Consolidated FDI Policy

Master Directions

NDI Rules (supersedes TISPRO)

FAQs

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Flow of foreign
investments

FOREIGN INVESTMENT

Repatriation Basis Non-Repatriation Basis

Foreign Portfolio Foreign

Foreign Direct Other
Venture Capital NRIs, OCIs.
Investments Investments Investments Investments

Automatic Govt. Route RFPI (FIIs, NRIs, PIOs. LLPs DR / IDR

route QFIs)

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Types of Foreign
Investment
Schedule I FDI (purchase / sale of capital instruments by PROI)

Schedule II Investment by FPIs

Schedule III NRI or OCI on repatriation basis (PIS) (Cap. Inst. On RSE)

Schedule IV NRI or OCI on Non-Repatriation Basis (Cap. Inst./ CN & LLP)

Schedule V Purchase / Sale of Securities other than capital instruments by NR

Schedule VI Investment in an LLP

Schedule VII Investment by FVCI

Schedule VIII Investment by a NR in an Investment Vehicle

Schedule IX Investment in a Depository Receipts by Non-Residents

Schedule X Issue of IDRs by Companies incorporated outside India

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FDI Conditionalities

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FDI and FDI linked performance conditions

• ‘Foreign Direct Investment’ (FDI)

• Investment through equity instruments by a person resident outside India
• in an unlisted Indian company; or
• in 10 percent or more of the post issue paid-up equity capital on a fully diluted
basis of a listed Indian company

• 'FDI linked performance conditions' means the sector specific conditions stipulated
in Schedule I of Rules for companies receiving foreign investment

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Foreign
Investment

• Foreign Investment is 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 an
LLP

• Equity Instruments:
• Equity Shares
• Fully Compulsorily Convertible Preference Shares
• Fully Compulsorily Convertible Debentures
• Share warrants

• NCRPS / OCPS - regarded as ECB

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 Automatic Route Criteria

Nature of Indian Entity

Investor

Activity

Issue Price

Mode of Payment
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Eligible investee Entity

Company

Real Estate
Investment
LLP Trusts

Infrastructure
Investment
Investment Vehicles Trusts

AIFs

Mutual Funds which

invest more than 50% in
equity
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Eligible
Investor
• Person resident outside India (‘PROI’) or an Entity incorporated outside India

• With Government Approval

• Entity of a country, which shares land border with India or
• Beneficial owner of an investment into India who is situated in or is a citizen of any such
country
• Any transfer of change of ownership of any existing or future FDI in any entity in India,
directly or indirectly, resulting in the beneficial ownership falling within the restriction

• Prohibited Sectors for aforesaid entities / citizens

• Defence, Space, Atomic Energy and other sectors prohibited for FI

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Points to Ponder

• Whether restriction on investment citizen / entity of country sharing land

borders permitted to invest in LLP / Investment Vehicles?

• Are they completely prohibited to invest in LLP / Investment Vehicles?

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Case Study

• An Indian Company has existing FDI from China – before the restrictions were
imposed recently.
• This Indian company now wants to form a downstream company.
• The downstream investment will be funded through internal accruals well within the
requirements of FEMA
• There will be no fresh FDI for the downstream investment.
• Does this still need approval from RBI in light of the recent restrictions on FDI
from neighbouring countries?

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Permissible Activities

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Permissible Activities

• Sectoral caps in Schedule I

• Sectors not included in Sectoral List – 100 % FDI is permitted

• FDI in section 8 Company with share capital. Whether in automatic route ?

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Automatic Route

• Manufacturing sector 100%

• Cash and Carry Wholesale Trading 100%
• Single brand retailing E-Commerce 100%
• B2B E-commerce 100%
• Pharmaceutical(Greenfield projects) 100%
• Pharmaceutical(Brownfield projects) Automatic upto 74%
• Construction Development 100%
• Insurance 49%
• Pension 49%
• Banking Private Sector – Automatic upto 49%

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Govt. Approval

• Multi brand retailing 51%

• Pharmaceutical (Brownfield projects) beyond 74%

• Defence beyond 49%

• Civil Aviation -Scheduled Air Transport Services/Domestic Scheduled Passenger Airline -

beyond 49% and up to 100%

• Telecom Sector -beyond 49% and up to 100%

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Sectors prohibited for FDI

• Lottery business
• Gambling and betting including casinos
• Chit Funds
• Nidhi Company
• Trading in Transferable Development Rights
• Real Estate business or construction of farm-house
• Manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or its substitutes
• Activities/Sectors not open to private sector investment – Atomic Energy, Railways, etc.
• Foreign technology collaborations for lottery business and gambling and betting activities

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Manufacture

• “Manufacture” means change in a non-living physical object or article or thing –

• resulting in transformation into new and distinct object or article or thing having a
different name, character and use; or
• bringing into existence a new and distinct object or article or thing with a different
chemical composition or integral structure.

• Whether “relabelling “, “processing” or “assembling” of products is a manufacture?

• Whether “contract manufacturing” constitutes contractor a manufacturer ?

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Manufacturing Activity

• Manufacturing activities may be either

• self manufacturing by the investee entity or
• Contract manufacturing in India through a legally tenable
contract,
• whether on Principal to Principal or
• Principal to Agent basis

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“Manufacturer” Definition – implications

• Amanufacturer is permitted to sell its products manufactured in

India through:
❖ wholesale
❖ retail
❖ e-commerce without Government Approval.

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Case Study

• A manufacturing entity having FDI wants to sell its products online through its
own website/platform.

• It has also appointed distributors to sell their manufactured products.

• It wants its distributors also to sell through the platform of the manufacturing
entity

• Is it possible?

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Investment in “Real Estate Business”

• Definition of Real Estate Business

• Dealing in land and immovable property with a view to earn profit therefrom

• Exclusion : Township development, construction & Infrastructure .

• Earning of rent/income on lease of the property, not amounting to transfer, will not
amount to real estate business.

• “Real Estate Broking Services” not considered as real estate business.

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Real Estate-
Investment
• Investment is 100% Automatic in sector of Construction-development projects

• Foreign investment is not permitted in an entity which is engaged or proposes to engage

in real estate business, construction of farm houses and trading in transferable
development rights (TDRs).

• A person resident outside India shall be permitted to exit and repatriate foreign
investment before the completion of project under automatic route, provided that a lock-
in-period of three years, calculated with reference to each tranche of foreign investment
has been completed.

• Condition of lock-in period shall not apply to Hotels and Tourist Resorts, Hospitals, Special
Economic Zones (SEZs), Educational Institutions, Old Age Homes and investment by NRIs
or OCIs.

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Real Estate-
Investment
• Exit before completion of project subject to lock in period of 3 years w.r.t. to each
tranche of FDI.

• Transfer of shares from NR to NR without repatriation of funds under automatic

route and without lock in conditionality.

• 100% FDI in completed projects for operating townships, malls/ shopping complexes,
and business centers.

• Transfer of ownership/ control of Company from R to NR is also permitted, subject to

lock in period.

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FDI in e-Commerce

• Only B2B e-commerce and not in B2C e-commerce

• 100 % FDI permitted in Marketplace based model of e-commerce
• FDI not permitted in Inventory based model of e-commerce
• Inventory of a vendor shall be deemed to be controlled by e-commerce marketplace
entity if more than 25% of purchases of such vendor are from the marketplace
entity or its group companies which shall render the business into inventory based
model.

• An entity having equity participation by e-commerce marketplace entity, or having

control on its inventory by e-commerce marketplace entity, will not be permitted to
sell its products on the platform run by such marketplace entity
• No direct or indirect influence the sale price.
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Single Brand Retail
Trading
• 100% FDI Permitted
• Branding during manufacturing
• Franchisee model permitted
• For foreign investment beyond 51 per cent, local sourcing of 30 per cent of the value of
goods purchased.
• Procurement requirement to be met in block of 5 years. Thereafter on an annual basis.
• Set off its incremental sourcing of goods from India for global operations during initial
5 years permitted

• Sourcing norms will not be applicable up to three years for products having
'state-of-art' and 'cutting-edge' technology and where local sourcing is not possible
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Investment by NRI/ OCI

• NRI / OCI / company, trust, partnership firm incorporated outside India owned
and controlled by NRI / OCI

• Permitted to make investment on non-repatriation basis in company, LLP,

Investment Vehicle, convertible notes

• NRI / OCI permitted to invest in Partnership Firm / Proprietorship Firm on non

– repatriation basis

• Prohibited investment – agricultural, plantation activity, print media, real estate business,
Nidhi company

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Investment in Investment
Vehicles
• PROI (other than citizen of Pakistan or Bangladesh) or entity incorporated outside
India (other than an entity incorporated in Pakistan or Bangladesh) permitted to
invest

• Transfer or sell or redemption of Units permitted as per rules framed by RBI / SEBI

• Investment by IV in Indian entity considered as indirect foreign investment if

• Sponsor / Manager or IM is not owned or controlled by RI

• Sponsor / Manager or IM is owned or controlled by PROI

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Issue of
Shares

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Pricing and
Valuation
Event Price of instrument

Issue of securities Not less than fair market value

Transfer (Resident to PROI) Not less than fair market value

Transfer (PROI to Resident) Not more than fair market value

Issue to PROI (by subscription to MOA) At face value subject to entry

routes and sectoral cap

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Issue Price – Recognised
Valuers

Particulars Companies Act FEMA

Issue of shares to resident Registered valuer Not Required
Issue of shares to non-resident Registered valuer CA or merchant banker

Exchange of shares - between residents Not required Not required

Exchange of shares - between residents Not required CA or Merchant banker
and non-residents
Issue of ESOP's (by an unlisted Indian Registered valuer Not required
company)

Whether pricing guidelines will be applicable in case of investment in capital

instrument by NRI on Non- Repatriation basis ?

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Bonus Issue

❿Offer made by the Indian company is in compliance with the provisions of the Companies
Act, 2013

❿Share holding on the basis of which the rights issue or the bonus issue has been made
must have been acquired and held as per the provisions of these rules

❿Whether selective Bonus Issue permissible to non-resident shareholders?

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Rights Issue

❿Price of shares offered on rights basis by the Indian company to NR shall be

❿In the case of shares of a listed company - at a price determined by the company
❿In the case of shares of an unlisted company - at a price which is not less than the
price at which the offer on right basis is made to the resident shareholders.

❿PROI exercising a right issued when he was a resident shall hold the equity instruments
acquired through such right on a non-repatriation basis.

❿PROI who has acquired a right from a person resident in India who has renounced it may
acquire equity instruments against the said rights as per pricing guidelines

❿Issue shall not result in a breach of the sectoral cap applicable to the company

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Issuance of ESOPs

❿Indian company may issue “employees’ stock option” and/ or “sweat equity shares” to its
employees or directors or employees or directors of its holding company or joint venture
or wholly owned overseas subsidiary or subsidiaries who are resident outside India
❿the scheme has been drawn either in terms of regulations issued under the SEBI or
the Companies (Share Capital and Debentures) Rules, 2014.
❿ESOPs are in compliance with the sectoral cap.
❿Where ESOPs are under the approval route or when issued to a citizen of Bangladesh
or Pakistan shall require prior government approval

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Consideration Other than Cash

❿An Indian company may issue, equity instruments to a PROI, if the Indian
investee company is engaged in an automatic route sector, against

❿Swap of equity instruments

❿Import of capital goods or machinery or equipment (excluding second-hand

machinery)

❿Pre-operative or pre-incorporation expenses (including payments of rent etc.)

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Share Swap

❿Indian company can issue equity instruments to a PROI against swap of equity
instruments if the company is engaged in an automatic route sector.

❿An investment vehicle (IV) can issue its units to PROI against swap of equity instruments
of a SPV proposed to be acquired by such IV.

❿Valuation shall be made by a Merchant Banker registered with the SEBI or an investment
banker outside India registered with the appropriate regulatory authority in the host
country.

❿When Shares are being given to the non-residents then such swap will be subjected to
the Sectoral Caps and Routes (Approval and Automatic)
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Issue of Share to Parent Company – Pre-Incorporation Expenses

❿WOS set up in India by a NR entity

❿Operating in a sector where 100 percent foreign investment is allowed in the automatic
route
❿There are no FDI linked performance conditions
❿Permitted to issue equity instruments to the said non-resident entity
❿against pre- incorporation or pre-operative expenses incurred by the said non-
resident entity up to a limit of five percent of its authorized capital or USD 500,000
whichever is less
❿the Indian Company shall report the transaction to the within thirty days from the
date of issue of equity instruments but not later than one year from date of
incorporation

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Mode of
Payment
❿Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt
Instruments) Regulations, 2019- Schedule-I:

❿by way of inward remittance through banking channels; or

❿out of funds held in NRE or FCNR(B) or Escrow account maintained in accordance

with the Foreign Exchange Management (Deposit) Regulations, 2016.

❿NRO Account- No FEMA Compliance to be made. As the transaction happens in non-

repatriation basis

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Remittance of Funds

❿Nostro vs Vostro

❿If Vostro is used to remit, there are two banks involved

❿Best is to instruct remitting foreign bank to send through Nostro

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Consideration

❿Partly paid Shares

❿Pricing is required to be determined upfront

❿25% of the total consideration is to be received by the issuer upfront.
❿Balance consideration is required to be received within a period of 12 months.

In case of listed companies, Regulation 17 of In case of unlisted companies,

the ICDR Regulations (Sec k – explanation (ii)) Non-debt Regulations

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Put Option and Call Option

❿Equity instruments can contain an optionality clause

❿Subject to a minimum lock-in period of one year or as prescribed for the specific sector,
whichever is higher
❿Without any option or right to exit at an assured price
❿Call option and Put Option Holder will not have a guaranteed exit at an assured price.

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Investment in
LLP

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Foreign Investment in LLP

❿Eligible Investors: All except (i) citizens of Pakistan and Bangladesh (ii) FPI (iii) FVCI

❿Eligible investment: Contribution to the capital of an LLP

❿Eligibility of an LLP
❿100% foreign investment is allowed under automatic route
❿No FDI-linked performance conditions.

❿Investment
❿Direct Investment in Capital Contribution
❿Acquisition or transfer of Profit Share

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Foreign Investment in LLP

❿Company having foreign investment, engaged in a sector where foreign investment upto
100% is permitted under the automatic route and there are no FDI linked performance
conditions, may be converted into a LLP under the automatic route

❿ A LLP having foreign investment, engaged in a sector where foreign investment upto
100% is permitted under the automatic route and there are no FDI linked performance
conditions, may be converted into a company under the automatic route

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Foreign Investment in LLP

❿Investment should not be less than the fair price of capital contribution or profit share of
a LLP
❿Transfer of capital contribution or profit share from RI to PROI
❿Consideration not less than the fair price of capital contribution or profit share of a
LLP.
❿Transfer of capital contribution or profit share from PROI to RI
❿Consideration not more than the fair price of the capital contribution or profit
share of an LLP.
❿Valuation certificate to be issued by CA / CWA / approved valuer
❿Mode of payment and other attendant conditions for remittance of sale or maturity
proceeds shall be specified by the Reserve Bank

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 Investment in
Convertible
Securities

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Share
Warrants
❿Share warrants are options issued by a company that entitles the warrant holder a right
to subscribe to the shares at a pre-determined price on or after a pre-determined time
period.

❿At least 25% of the consideration shall be received upfront and the balance within 18
months of the issuance of share warrants

❿Pricing and price or conversion formula shall be determined upfront

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Convertible Securities (CCDs and CCPS)

❿CCDs and CCPS (convertible securities) fall within the nomenclature “equity instruments”

❿CCDs and CCPS needs to be issued at a price equal to or more than the FMV to non-
residents

❿Price for the convertible instruments can also be a determined based on the conversion
formula which has to be determined / fixed upfront,

❿Price at the time of conversion should not be less than the fair value worked out, at the
time of issuance of these instruments

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Convertible Securities (CCDs and CCPS)

❿Transfer from resident to non-resident shall be at a price not less than the FMV

❿Transfer from non-resident to resident shall be at a price not exceeding the FMV

❿Terms of conversion are important

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Case Study

❿Company has issued CCDs to its NR Shareholders

❿It proposes to convert CCDs into CCPS and they buy-back the CCPS

❿Whether this is permitted under FEMA Regulations?

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Convertible Note

Convertible Note is an instrument:

❿Issued by a start-up company acknowledging receipt of money initially as debt

❿Repayable at the option of the holder
❿Or convertible into equity shares on agreed terms and conditions
❿Repayable/convertible within a 5 years from the date of issuance

Essentially, convertible note is an additional options for start-ups to raise capital apart from
other available sources of investment.

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Convertible Note- Rule 18

❿Any person other than Pakistani and Bangladeshi citizen

❿Can be issued by an Indian startup company for an amount of twenty-five lakh.
❿Companies engaged in sector which requires government approval can issue convertible
note only after such approval
❿Issue of equity shares against such convertible notes or any transfer of such notes shall
be in compliance with the entry route, sectoral caps, pricing guidelines and other
attendant conditions for foreign investment.
❿Mode of payment and other attendant conditions for remittance of sale or maturity
proceeds shall be specified by the Reserve Bank. (same as applicable for equity shares)

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Transfer of
Shares

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Pricing and
Valuation
Circumstances Pricing Guidelines and Valuation

1 Transfer from Resident to Non Listed company – As per SEBI

Resident
Unlisted – Not less than price as determined by Internationally accepted
pricing methodology * Valuation by Merchant Banker or CA or CMA

2 Transfer from Non-Resident to Listed company – As per SEBI

Resident
Unlisted – Not more than price as determined by Internationally accepted
pricing methodology * Valuation by Merchant Banker or CA or CMA

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Transfer of Equity Instrument Rule 9

Transfer By Transfer To Mode Nature of Permission

Non- Resident (not Non- Resident Sale/Gift General
being NRI / OCI)
Non- Resident Resident Gift General
Non- Resident Resident Sale (including buy General (subject to pricing
back or capital reduction guidelines, documentation
by Indian Company) and reporting)

Resident Non- Resident Gift Prior RBI Permission

Resident Non- Resident Sale General (subject to pricing
guidelines, documentation
and reporting)

NRI Non- Resident Sale Prior RBI Permission)

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Transfer from Resident to PROI by way of Gift

❿Prior approval of RBI required if transfer is on non-patriation basis.

❿Gift shall not exceed 5% of the paid-up capital of the company (calculated on a
cumulative basis by a single person to another single person)

❿Cumulative value of securities transferred by donor during a financial year shall not
exceed the rupee equivalent of USD 50,000.

❿Donor and donee shall be ‘relatives’ as per the Companies Act, 2013.

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Deferred Consideration

❿Deferred consideration is a portion of the purchase price that is payable by the buyer in
the future, after closing.

Deferment of purchase Alternatively, the buyer and may be indemnified by the

consideration is allowed up seller may enter into an seller for a period
to 25% of the total escrow arrangement for an exceeding
not eighteen months
consideration, in transactions amount not more than 25% from date
involving share transfers of the total consideration the
payment of the of
between residents and non- for a period not exceeding consideration,theif full total
residents, within a period of 18 months from the date of consideration the been
18 months from the date of OR OR
the transfer agreement. paid by the buyer has to
transfer agreement. the seller

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Downstream
Investment

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Downstream Investment

❿Investment made by an Indian entity that has total foreign investment in it, or an
Investment Vehicle in the capital instruments or the capital, as the case may be, of
another Indian entity

❿Indirect Foreign Investment

❿“Indirect foreign investment” means downstream investment received by an Indian

entity from another Indian entity (IE) which has received foreign investment AND

❿the IE is not owned and not controlled by resident Indian citizens or

❿is owned or controlled by persons resident outside India;

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Downstream Investment

Foreign
Investor
Outside Direct
India Foreign
Investment
India Indian Company (IC)- First
Level

Equity= 50% or more; or Indirect Foreign

Controlled by Foreign Investment
Investor
Downstream
Investment-
Second Level
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Downstream Investment: Sectoral Caps, Entry Routes and Pricing

❿Indian entity which has received indirect foreign investment shall comply with the entry
route, sectoral caps, pricing guidelines and other attendant conditions as applicable for
foreign investment.
❿Entry routes
❿Government Route
❿Automatic Route
❿Sectoral caps
❿Pricing and Valuation

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Funds for Downstream
Investment
❿Indian companies/LLPs have to bring in requisite funds from abroadfor
making downstream investment.

❿Indian Company cannot leverage funds from the domestic market. Thus they
cannot borrow and invest.

❿Companies/LLPs, with operations, canraise debt in the domestic market

for their business, but not for further downstream investments.

❿Downstream investments may be made through internal accruals (internal accruals shall
mean profits transferred to reserve account after payment of taxes).

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Case Study

❿FOCC purchasing shares from shareholders of existing Indian company

❿Shareholders comprises of
❿Indian Shareholders
❿Non-Resident Shareholders

❿What is the status of FOCC while purchasing shares from

❿Indian Shareholders
❿Non-Resident Shareholders

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Thank you!