Inbound Investment into India - FDI - Foreign Direct Investment , FPI- Foreign Portfolio Investment

Inbound Investment - Foreign Direct Investment in India




Automatic Route 
FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require prior approval of the Government:

 i) where provisions of Press Note 1 (2005 Series) issued by the Government of India are attracted.

 ii) where more than 24% foreign equity is proposed to be inducted for manufacture of items reserved for the Small Scale sector.

 iii) FDI in sectors/activities to the extent permitted under Automatic Route   does not require any prior approval either by the Government or the Reserve Bank of India. 

The investors are only required to notify the Regional Office concerned of  the Reserve Bank of India within 30 days of receipt of inward remittances and file the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the non-resident investors. 

Government Route 
 FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Application can be made in Form FC-IL; Plain paper applications carrying all relevant details are also accepted. Decision of the FIPB usually conveyed in 4-6 weeks. Thereafter, filings have to be made by the Indian company with the RBI 

Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve Bank of India for receiving inward remittance and issue of shares to the non-resident investors. The companies are required to notify the concerned Regional Office of the Reserve Bank of India of receipt of inward remittances within 30 days of such receipt and submit form FC-GPR within 30 days of issue of shares to the non-resident investors. 


Update on Forms to be filed on receipt of FDI

RBI vide circular No. 40 dated 1st February 2016, has enabled filing online returns with Reserve Bank of India with a view to promoting the ease of reporting of transactions related to Foreign Direct Investment (FDI).

The Reserve Bank of India, under the aegis of the e-Biz project of the Government of India has enabled online filing of the following returns with the Reserve Bank of India viz.
·   Advance Remittance Form (ARF) which is used by the companies to report the FDI inflows to RBI;
·   FCGPR Form which a company submits to RBI for reporting the issue of eligible instruments to the overseas investor against the above mentioned FDI inflow; and
·   FCTRS Form which is submitted to RBI for transfer of securities between resident and person outside India.

At present both the options, i.e. online filing and physical filing of above mentioned forms, are available to the users. Based on the experience it has been decided that beginning February 8, 2016 the physical filing of forms ARF, FCGPR and FC-TRS will be discontinued and forms submitted in online mode only through e-Biz portal will be accepted.

To read the full circular please click here

What is considered as FDI - Foreign Direct Investment

Foreign investment is reckoned as FDI only if the investment is made in equity shares of an Indian company or fully and mandatorily convertible preference shares or  fully and mandatorily convertible debentures “with the pricing being decided upfront as a figure or based on the formula that is decided upfront”**.

Routes for FDI flow in to Indian companies:
 An Indian company may receive Foreign Direct Investment under the two routes as given under:
i. Automatic Route
FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
ii. Government Route
FDI 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.

Modes of payment allowed for receiving Foreign Direct Investment in an Indian company:
An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures by:
(i) inward remittance through normal banking channels.
(ii) debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.
(iii) conversion of royalty / lump sum / technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.
(iv) conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
(v) 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.

Procedure to be followed after investment is made under the Automatic Route or with Government approval
A two-stage reporting procedure has to be followed
Stage – 1: Reporting about inward remittance received :
Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Foreign Exchange Department, jurisdiction Regional Office of the Reserve Bank of India.
Documents to be submitted at RBI  regional offices:
1.      Advance Reporting Form (Annexure II) duly filled & signed by the client
2.      Name and address of the foreign investor/s
3.      Date of receipt of funds and the Rupee equivalent;
4.      Name and address of the authorised dealer through whom the funds have been received;
5.      Details of the Government approval, if any; and
6.      KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.
Time limit for issue of shares/Debentures:
The Indian company has to ensure that the shares/Debentures shall be  issued within 180 days from the date of inward remittance or date of debit to NRE / FCNR (B) / Escrow account.
Violation: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.
Relaxation: 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.

Stage – 2 : Reporting about issue of FDI Instruments i.e shares/FCPS/FCD:
The company shall report Within 30 days from the date of issue to the jurisdictional regional office of the Reserve bank of India with following documents
1.Form FC-GPR (Annexure I) duly filled & signed By Managing Director/Directors/secretary
2. Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.
3.Certified copies of Foreign Inward Remittance certificate (FIRC’s)

Are the investments and profits earned in India repatriable:
All foreign investments are freely repatriable (net of applicable taxes) except in cases where:
Ø  The foreign investment is in a sector like Construction and Development Projects and Defence wherein the foreign investment is subject to a lock-in-period

Ø  NRIs choose to invest specifically under non-repatriable schemes.
Further, dividends (net of applicable taxes) declared on  foreign investments can be remitted freely through an Authorised Dealer bank.

**No upfront pricing – consequences: Any foreign investment into an instrument issued by an Indian company which does not involve upfront pricing of the instrument should be reckoned as Eternal Commercial Borrowing and have to comply with the ECB guidelines.( and not FDI guidelines)

Options for Foreign Company to set up operations in India
Summary:
As a Foreign Company
·         Liaison/Representation Office
·         Project office
·         Branch office
As an Indian Company
·         Joint Venture
·         Subsidiary Company (Wholly owned)
Procedureal brief for a Foreign Company
Option 1: Setting up of Liaison / Representation Office in India or Project office or Branch office
Step 1: Requires permission of RBI (Form FNC 1)
Step 2: Set up office/ branch in India
Step 3: Intimate concerned Registrar of Companies (ROC) within 30 days from the date of setting up office, along with prescribed information & documents
Benefits:
-       This liaison / representation office can act only as a channel of communication for foreign company, and its role can be to collect information about potential Indian consumers and serve them information related to foreign company products or services. However,  It can though promote export/import from/to India and also facilitate technical/financial collaboration.
-       Project office is suitable for a foreign company looking to undertake a temporary project/site office in India
-      Low compliance costs and direct legal control / arm of foreign company
-      Repatriation of surplus is permitted
Drawbacks:
-       No commercial activity (directly or indirectly) is permitted to undertake in India for a liaison office
-       No other activities other than related to project are permitted
-       It can’t earn any income in India
-       Such offices may be considered as foreign company for Income tax and therefore branch income earned in India attracts tax @ 40% + applicable cess (where branch income = profit attributable to branch operations compared to overall / global operations
As an Indian Company
Option 2: Setting up another company in India as an Indian company
Under this option, foreign company and/ or directors of the foreign company can become promoter and float the company (Wholly owned Subsidiary) Or
Relatives of foreign directors, who are resident of India, can be made promoter of the Indian company (Joint Venture)
Benefits:
1.     No permission required from RBI unless foreign funds are used by that new company
2.     Compliance cost is relatively low compared to foreign branch
3.     Income of the Indian company will be taxed @ 30% + applicable Cess
4.     As the Indian company will issue invoices to foreign company for the work undertaken by it, so that transfer prices between them can be planned to ensure optimization of taxes.
Drawback:
1.     Repatriation of profit is restricted
2.     Foreign direct investment (FDI) is permitted only to the extent sectoral equity caps allowed by FDI policy
3.     Procedural aspects to be followed as per Department of Industrial Policy & Promotion, Government of India (www.dipp.nic.in).
Note: If the turnover of the new entity (under both the options) exceeds Rs. 15 Cr per annuam, transfer pricing between them may be examined under Indian Income Tax, in addition to an independent transfer pricing report by a qualified CA along with tax return of the new entity




Foreign Portfolio Investment vs Foreign Direct Investment

DEFINITION of 'Foreign Portfolio Investment - FPI'

Securities and other financial assets passively held by foreign investors. Foreign portfolio investment (FPI) does not provide the investor with direct ownership of financial assets, and thus no direct management of a company. This type of investment is relatively liquid, depending on the volatility of the market invested in. It is most commonly used by investors who do not want to manage a firm abroad.

'Foreign Portfolio Investment - FPI'


Foreign portfolio investment typically involves short-term positions in financial assets of international markets, and is similar to investing in domestic securities. FPI allows investors to take part in the profitability of firms operating abroad without having to directly manage their operations. This is a similar concept to trading domestically: most investors do not have the capital or expertise required to personally run the firms that they invest in.

Foreign portfolio investment differs from foreign direct investment (FDI), in which a domestic company runs a foreign firm. While FDI allows a company to maintain better control over the firm held abroad, it might make it more difficult to later sell the firm at a premium price. This is due to information asymmetry: the company that owns the firm has intimate knowledge of what might be wrong with the firm, while potential investors (especially foreign investors) do not.
The share of FDI in foreign equity flows is greater than FPI in developing countries compared to developed countries, but net FDI inflows tend to be more volatile in developing countries because it is more difficult to sell a directly-owned firm than a passively owned security.


Govt Liberalises FDI policy to boost Inflows


The new circular issued by the Department of Industrial Policy and Promotion (DIPP) recently, states that under the new norms, Indian companies have been allowed to issue equity against import of capital goods and liberalise conditions for seeking foreign investment for production and development of agriculture seeds.

The facility of conversion of capital goods import into equity was earlier available for companies raising external commercial borrowings (ECBs).

Union Commerce and Industry Minister Anand Sharma said the Circular 1 of 2011 third edition of the Consolidated FDI Policy was part of ongoing efforts of procedure simplification and FDI rationalisation which will go a long way in inspiring investor confidence.


The government also removed the restrictive condition of obtaining prior approval of Indian companies for making investments in the same field. The circular said, “It is expected that this measure will promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI and technology inflows into the country.”