Foreign Investments in India

I.Foreign Investments

1: How can an Indian company receive foreign investment?

The routes under which foreign investment can be made is as under:

a. Automatic Route: Foreign Investment is allowed under the automatic route without prior approval of
the Government or the Reserve Bank of India, in all activities/ sectors as specified in the Annex B of
Schedule 1 to Notification No. FEMA 20.
b. Government Route: Foreign investment in activities not covered under the automatic route requires
prior approval of the Government which are considered by the Foreign Investment Promotion Board
(FIPB), Department of Economic Affairs, Ministry of Finance.
c.
d. 2: What are the instruments for receiving foreign investment in an Indian company?

An Indian Company can receive foreign investment by issue of

a. Equity shares issued in accordance with the provisions of the Companies Act, 2013;
b. Fully and mandatorily convertible preference shares, and fully and mandatorily convertible debentures.
The price/ conversion formula of convertible instruments should be determined upfront at the time of
issue of the instruments and should not in any case be lower than the fair value worked out, at the
time of issuance of such instruments, in accordance with FEMA 20
c. Partly paid equity shares and warrants issued by an Indian company in accordance with the provision of
the Companies Act, 2013 and the SEBI guidelines, as applicable, The pricing and receipt of balance
consideration shall be as stipulated in terms of A.P.(DIR Series) Circular No.3 dated July 14, 2014 as
modified from time to time.

The above shall be known as “FDI compliant instruments” and can contain an optionality clause subject
to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher,
but without any option or right to exit at an assured price.

Non-convertible/ optionally convertible/ partially convertible preference shares issued as on and up to

April 30, 2007 and optionally convertible/ partially convertible debentures issued up to June 7, 2007 till
their original maturity are reckoned to be FDI compliant instruments. Non-convertible/ optionally
convertible/ partially convertible preference shares issued after April 30, 2007 and optionally
convertible/ partially convertible debentures issued after June 7, 2007 shall be treated as debt and
shall require conforming to External Commercial Borrowings guidelines regulated under Foreign
Exchange Management (Borrowing and Lending in Foreign Exchange Regulations), 2000, as amended
from time to time.
 3: Whether extension of compulsorily convertible preference shares (CCPS) or compulsorily
convertible debentures (CCDs) requires RBI approval?

Tenor of convertible instruments will be guided by the instructions framed under the Companies Act,
2013 and the rules framed thereunder. However, the investee company should ensure that the price/
conversion formula of convertible capital instruments is determined upfront at the time of issue of the
instruments. The price at the time of conversion should not in any case be lower than the fair value
worked out, at the time of issuance of such instruments, in accordance with the extant FEMA
regulations.

4: What is a convertible Note?

A Convertible Note is an instrument issued by a start-up company evidencing receipt of money initially
as debt, which is repayable at the option of the holder, or which is convertible into such number of
equity shares of such startup company, within a period not exceeding five years from the date of issue
of the convertible note, upon occurrence of specified events as per the other terms and conditions
agreed to and indicated in the instrument.

5: Who can invest in a convertible Note and what are the instructions in this regard?

A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an
entity which is registered/ incorporated in Pakistan or Bangladesh), may purchase convertible notes
issued by an Indian start-up company for an amount of twenty five lakh rupees or more in a single
tranche. A start-up company engaged in a sector where foreign investment requires Government
approval may issue convertible notes to a non-resident only with approval of the Government. The
amount of consideration should be received by inward remittance through banking channels or by
debit to the NRE/ FCNR (B)/ Escrow account maintained by the person concerned.

6: What are the modes of payment allowed for receiving Foreign Direct Investment in an Indian
company?

An Indian company issuing shares/ convertible debentures to a person resident outside India shall
receive the amount of consideration by:

a. inward remittance through normal banking channels;

b. debit to NRE/ FCNR (B) account of a person concerned maintained with an AD Category I bank;
c. debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the
approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of
residents and non-residents towards payment of share purchase consideration;
d. conversion of royalty/ lump sum/ technical know-how fee due for payment or conversion of ECB;
e. conversion of pre-incorporation/ pre-operative expenses incurred by the a non-resident entity up to a
limit of five percent of its capital or USD 500,000 whichever is less;
f. conversion of import payables/ pre incorporation expenses/ can be treated as consideration for issue
of shares with the approval of FIPB;
g. against any other funds payable to a person resident outside India, the remittance of which does not
require the prior approval of the Reserve Bank or the Government of India: and
h. Swap of capital instruments, provided where the Indian investee company is engaged in a Government
 route sector, prior Government approval shall be required

If the shares or convertible debentures are not issued within 180 days from the date of receipt of the
inward remittance or date of debit to NRE/ FCNR (B)/ Escrow account, the amount shall be refunded.
Further, Reserve Bank may on an application made to it and for sufficient reasons permit an Indian
Company to refund/ allot shares for the amount of consideration received towards issue of security if
such amount is outstanding beyond the period of 180 days from the date of receipt.

7: Which are the sectors where foreign investment is prohibited?

Foreign investment is prohibited in the following sectors:

i. Lottery Business including Government / private lottery, online lotteries, etc.

ii. Gambling and Betting including casinos etc.
iii. Chit funds
iv. Nidhi company
v. Trading in Transferable Development Rights (TDRs)
vi. Real Estate Business or Construction of Farm Houses
vii. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
viii. Activities / sectors not open to private sector investment e.g. (I) Atomic energy and (II) Railway
operations (other than permitted activities mentioned in entry 18 of Annex B).

Note: Foreign technology collaboration in any form including licensing for franchise, trademark, brand
name, management contract is also prohibited for Lottery Business and Gambling and Betting
activities.

8: What are the guidelines for transfer of existing shares from non-residents to residents or residents
to non-residents?

The term ‘transfer’ is defined under FEMA, 1999 as "sale, purchase, acquisition, mortgage, pledge, gift,
loan or any other form of transfer of right, possession or lien” {Section 2 (ze) of FEMA, 1999}.

The following share transfers are allowed without the prior approval of the Reserve Bank of India
subject to the conditions laid down in FEMA 20:

a. Transfer by way of sale or gift between a person resident outside India (not being a NRI or an OCB) and
any person resident outside India;

Prior Government approval shall be obtained for any transfer in case the company is engaged in a
sector which requires Government approval.Transfer of shares by way of sale or gift by a NRI to any
NRI;
Prior Government approval shall be obtained for any transfer in case the company is engaged in a
sector which requires Government approval
b. Transfer by way of gift by a person resident outside India to a resident;
c. Transfer by way of sale on a recognized stock exchange by a person resident outside India;
d. Transfer by way of sale or gift by a resident to a person outside India subject to conditions prescribed in
 Regulation 10 of FEMA 20;

9: What if the transfer of shares from resident to non-resident does not fall under the above
category?

The cases have to be approved by Government of India or the Reserve Bank

(a) Transfer of Shares by Resident which requires Government approval

(1) Transfer of shares of companies engaged in sector falling under the Government Route.

(2) Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral
cap applicable.

(b) Transfer of shares requiring prior permission of the Reserve Bank

(1) A person resident in India, who intends to transfer any security, by way of gift to a person resident
outside India, has to obtain prior approval from the Reserve Bank.

(2) Any other case not covered by General Permission.

10: What is the method of payment and remittance/ credit of sale proceeds in case of transfer of
shares between resident and non-resident?

a. The sale consideration in respect of the shares purchased by a person resident outside India shall be
remitted to India through normal banking channels.
b. In case the buyer is a Foreign Institutional Investor (FII) / Foreign Portfolio Investor (FPI), payment can
be made by debit to its Special Non-Resident Rupee Account.
c. In case the buyer is an NRI, the payment shall be remitted to India through normal banking channel or
by way of debit to his NRE/FCNR (B) accounts. If the shares are acquired on non-repatriation basis by
NRI, the consideration can also be paid by debit to his NRO account.
d. The sale proceeds of shares (net of taxes) sold by a person resident outside India) may be remitted
outside India.
e. In case of FII/ FPI the sale proceeds may be credited to its special Non-Resident Rupee Account.
f. In case of NRI, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may
be credited to his NRE/ FCNR (B) accounts and if the shares sold were held on non-repatriation basis,
the sale proceeds should be credited only to his NRO account subject to payment of taxes.
g. The sale proceeds of shares (net of taxes) sold by an erstwhile OCB may be remitted outside India
directly if the shares were held on repatriation basis and if the shares sold were held on non-
repatriation basis, the sale proceeds may be credited to its NRO (Current) Account subject to payment
of taxes, except in the case of erstwhile OCBs whose accounts have been blocked by Reserve Bank.

11: Are the investments and profits earned in India repatriable?

All foreign investments are repatriable (net of applicable taxes) except in cases where the investment
is made or held on non-repatriation basis or where the sectoral condition specifically mentions non-
 repatriation.

Further, dividends/ profits (net of applicable taxes), on foreign investments, being current income can
be remitted outside India through an Authorised Dealer bank.

12: What are the guidelines on issue and valuation of shares in case of existing companies?

The pricing shall be as per the following guidelines:

(1) The price of shares issued by an Indian company or transferred from a person resident in India to a
person resident outside India shall not be less than:

a. the price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company;
b. the valuation of capital instruments done as per any internationally accepted pricing methodology for
valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered
Merchant Banker, in case of an unlisted Indian Company.

Note: in case of convertible capital instruments, the price/conversion formula of the instrument should
be determined upfront at the time of issue of the instrument. The price at the time of conversion
should not in any case be lower than the fair value worked out, at the time of issuance of such
instruments, in accordance with the extant FEMA regulations.

(2) The price of shares transferred by a person resident outside India to a person resident in India shall
not exceed:

a. the price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company;
b. the valuation of capital instruments done as per any internationally accepted pricing methodology for
valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered
Merchant Banker, in case of an unlisted Indian Company.

Note: The guiding principle would be that the person resident outside India is not guaranteed any
assured exit price at the time of making such investment/ agreement and shall exit at the price
prevailing at the time of exit.

(3) In case of swap of shares, subject to the condition that irrespective of the amount, valuation
involved in the swap arrangement will have to be made by a Merchant Banker registered with SEBI or
an Investment Banker outside India registered with the appropriate regulatory authority in the host
country.

(4) Where shares in an Indian company are issued to a person resident outside India in compliance with
the provisions of the Companies Act, 2013, by way of subscription to Memorandum of Association,
such investments shall be made at face value subject to entry route and sectoral caps.

These pricing guidelines shall not be applicable for investment by a person resident outside India on
non-repatriation basis.
 13: What are the other modes of issues of shares for which general permission is available?

FDI compliant instruments, as applicable can be issued by Indian companies as follows:

a. ESOP
b. Sweat Equity
c. Bonus
d. Rights
e. Swap of Shares
f. On merger/ de-merger/ amalgamation etc of Indian companies
g. Against any other funds payable to a person resident outside India, the remittance of which does not
require the prior approval of the Reserve Bank or the Government of India.

14: Can a foreigner set up a partnership/ proprietorship concern in India?

Only NRIs are allowed to set up partnership/ proprietorship concerns in India on non-repatriation basis.

15: Can a foreign investor invest in Rights shares issued by an Indian company at a discount?

There are no restrictions under FEMA for investment in Rights shares issued at a discount by an Indian
company, provided the rights shares so issued are being offered at the same price to residents and
non-residents. The offer on right basis to the persons resident outside India shall be:

a. in the case of shares of a company listed on a recognized stock exchange in India, at a price as
determined by the company; and
b. in the case of shares of a company not listed on a recognized stock exchange in India, at a price which is
not less than the price at which the offer on right basis is made to resident shareholders.

16: Can an AD bank allow pledge of shares of an Indian company held by non-resident investor in
favour of an Indian bank or an overseas bank or NBFC?

Yes, the same has been allowed vide the instructions and subject to compliance with the terms and
conditions as mentioned in the AP (Dir. Series) Circular No 57 dated May 2, 2011 and A.P. (DIR Series)
Circular No.141 dated June 6, 2014.

17: Is a non-resident permitted to acquire shares on stock exchange?

Answer: The following persons can acquire FDI compliant instruments on the stock exchanges:

a. FPIs and FIIs registered with SEBI

b. NRIs
c. A non-resident, other than portfolio investor, is eligible to acquire shares on stock exchange through a
registered broker subject to the condition that the non-resident investor has already acquired and
continues to hold the control in accordance with SEBI (Substantial Acquisition of Shares and Takeover)
Regulations i.e. he has complied with the minimum stake requirement under SEBI Regulations as per
instructions contained in AP (DIR Series) Circular No. 38 dated September 6, 2013.
 18: What will be the modes of payment for non-residents permitted to acquire shares on stock
exchange?

Non-Residents permitted to acquire shares under the scheme can use following modes for payment of
shares:

a. by way of inward remittance through normal banking channels, or

b. by way of debit to the NRE/ FCNR account of the person concerned maintained with an authorised
dealer/ bank;
c. by debit to non-interest bearing Escrow account (in Indian Rupees) maintained in India with the AD
bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2000;
d. the consideration amount may also be paid out of the dividend payable by Indian investee company, in
which the said non-resident holds control, provided the right to receive dividend is established and the
dividend amount has been credited to specially designated non-interest bearing rupee account for
acquisition of shares on the floor of stock exchange.

19: What are the instructions for transfer of shares against deferred payment?

In case of transfer of shares between a resident buyer and a non-resident seller or vice-versa, not more
than twenty five per cent of the total consideration can be paid by the buyer on a deferred basis within
a period not exceeding eighteen months from the date of the transfer agreement. The amount
deferred can also be either in the form of an indemnity or an Escrow. In all cases the pricing guidelines
should be complied with.

20: What is the concept of downstream investment and Indirect Foreign Investment?

Downstream investment is investment by one Indian company in another Indian company. If the
investor company is not owned and not controlled by resident Indian citizens or owned or controlled by
persons resident outside India then such investment shall be “Indirect Foreign Investment” for the
investee company.

21: What will be the composition of ‘direct foreign investment’?

The concept ‘direct foreign investment’ means foreign investment received by an Indian company
from a person resident outside India in terms of Schedules 1, 2, 2A, 3, 6, 8 and 10 of the Notification
No. FEMA.20/2000-RB dated May 3, 2000, as amended from time to time.

22: Whether an Indian company (owned and controlled by non-residents) investing in non-FDI
compliant instruments issued by another Indian company will be considered as Indirect Foreign
Investment for the investee company?

This investment shall not be considered as indirect foreign investment for the investee company.

23: Since the instructions were issued by RBI in 2013 for the period commencing from February 13,
2009, what is the status of investment made prior to the issue of the instructions?

Downstream investment made in accordance with the guidelines in existence prior to February 13,
2009 would not require any modification to conform to these regulations. All other investments, after
the said date, would come under the ambit of these regulations. Downstream investments made
between February 13, 2009 and June 21, 2013 which is not in conformity with these regulations should
have been intimated to the Reserve Bank by October 3, 2013 for treating such cases as compliant with
these regulations.

II. Foreign Portfolio Investment

24: What are the regulations regarding Portfolio Investments by registered Foreign Portfolio
Investors (FPIs)?

Investment by FPI registered in accordance with SEBI guidelines including deemed RFPI [erstwhile FII)
is permitted. Investment by individual FPIs should be less than 10 per cent of the paid up capital of the
Indian company on a fully diluted basis. The aggregate investment by FPIs should not exceed 24 per
cent of the paid up capital of an Indian Company on a fully diluted basis. The aggregate limit of 24
percent can be increased by the Indian company concerned up to the sectoral cap/ statutory ceiling, as
applicable, with the approval of its Board of Directors and its General Body through a resolution and a
special resolution, respectively.

25: What are the regulations regarding Portfolio Investments by NRIs?

Non- Resident Indian (NRIs) can purchase or sell FDI compliant instruments of Indian companies on the
Stock Exchanges under the Portfolio Investment Scheme. For this purpose, the NRI has to apply to a
designated branch of a bank, which deals in Portfolio Investment. All sale/ purchase transactions are to
be routed through the designated branch.

An NRI can purchase shares up to 5 per cent of the paid up capital of an Indian company on a fully
diluted basis. All NRIs taken together cannot purchase more than 10 per cent of the paid up value of
the company. The aggregate limit of 10 percent can be increased by the Indian company concerned up
to 24 percent, with the approval of its Board of Directors and its General Body through a resolution and
a special resolution, respectively.

III. Investment in other securities

26: Can persons resident outside India invest in Government Securities/ Treasury bills/ corporate
debt/ other securities?

Foreign Portfolio Investors (FPIs), Non-Resident Indians (NRIs), Foreign Central Banks, Multilateral
Development Bank, Long term investors like Sovereign Wealth Funds (SWFs), Multilateral Agencies,
Endowment Funds, Insurance Funds, Pension Funds which are registered with SEBI Long Term Investors
may invest in other securities as specified in Schedule 5 to Notification No FEMA 20.

IV. Foreign Venture Capital Investment

27: Where can a Foreign Venture Capital Investor (FVCI) invest?

 A SEBI registered Foreign Venture Capital Investor may purchase

a. securities, issued by an Indian company engaged in any sector mentioned at the answer to question 28
and whose securities are not listed on a recognised stock exchange at the time of issue of the said
securities;
b. securities issued by a start-up, irrespective of the sector in which it is engaged;
c. units of a Venture Capital Fund (VCF) or of a Category I Alternative Investment Fund (Cat-I AIF) or units
of a scheme or of a fund set up by a VCF or by a Cat-I AIF, subject to the terms and conditions as may
be laid down by the Reserve Bank.

28: How can an FVCI make the investment?

An FVCI may

a. purchase the securities/ instruments mentioned above either from the issuer of these securities/
instruments or from any person holding these securities/ instruments;
b. invest in securities on a recognized stock exchange subject to the provisions of the SEBI (FVCI)
Regulations, 2000, as amended from time to time;
c. acquire, by purchase or otherwise, from, or transfer, by sale or otherwise, to, any person resident in or
outside India, any security/ instrument it is allowed to invest in, at a price that is mutually acceptable to
the buyer and the seller/ issuer; and
d. receive the proceeds of the liquidation of VCFs or of Cat-I AIFs or of schemes/ funds set up by the VCFs
or Cat-I AIFs.

29: Which are sectors in which a Foreign Venture Capital Investor is allowed to invest?

An FVCI can invest in an Indian company engaged in

1. Biotechnology
2. IT related to hardware and software development
3. Nanotechnology
4. Seed research and development
5. Research and development of new chemical entities in pharmaceutical sector
6. Dairy industry
7. Poultry industry
8. Production of bio-fuels
9. Hotel-cum-convention centres with seating capacity of more than three thousand.
10. Infrastructure sector.

30: How can the FVCI make payment for the investment?

The amount of consideration for all investment by an FVCI has to be made through inward remittance
from abroad through banking channels or out of funds held in a foreign currency account and/ or a
Special Non-Resident Rupee (SNRR) account maintained by the FVCI with an AD bank in India. The
foreign currency account and SNRR account shall be used only and exclusively for transactions under
the relevant Schedule.
31: How can the sale/ maturity proceeds taken by the FVCI?

The sale/ maturity proceeds (net of taxes) of the securities may be remitted outside India or credited
to the foreign currency account or a Special Non-resident Rupee Account of the FVCI maintained.

[Reference: RBI Publications]