For a country like Indian where capital is not readily available at all times, Foreign Direct Investment (FDI) has been an important source of funds for companies. Under FDI, overseas money, either by an individual or entity, is invested in an Indian company.
In India, Foreign Direct Investment policy is regulated under the Foreign Exchange Management Act, 1999 governed by the Reserve Bank of India. According to the Organization for Economic Co-operation and Development (OECD), an investment of 10% or above from overseas is considered as FDI.
FEMA has acted as an important source for the growth and development of various sectors in India. The main aim of FEMA is to facilitate external trade, balance payments, promote orderly development, and maintain the foreign exchange market in India.
1.What is FDI?
Foreign Direct Investment (FDI) is an organization’s transfer of funds from one country to another in order to create ‘lasting interest.’ According to the OECD (Entity for Economic Co-operation and Development), if the entity acquires at least 10 percent of voting power in another organization, a permanent interest is calculated.
FDI’s definition isn’t limited to international capital movement alone. Its concept also includes the international movement of complementary elements of capital-such as skills, systems, management, technology, etc.
Foreign Direct Investment (FDI) is one of the Indian company’s main sources of funds. Under FDI, money from individuals or from foreign companies is invested in Indian startups and existing companies. The FDI Policy is governed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA) 2000.
In India, the Foreign Direct Investment Policy is regulated by the Reserve Bank of India’s Foreign Exchange Management Act, 1999. An investment of 10 percent or above from overseas is known as FDI, according to the Organization for Economic Co-operation and Development (OECD).
2. How can an Indian Company Receive Foreign Direct Investment?
Foreign Direct Investment in an Indian company can be made mainly through two routes:
2.1 Automatic Route for FDI
According to Regulation 16 of FEMA 20 (R), foreign investment is permitted through the automatic route without receiving any prior approval of the Government or the Reserve Bank of India, in all the activities or sectors.
In simpler words- under the Automatic Route, the non-resident investors do not require prior approval from the Government of India or RBI.
->Sectors where FDI is allowed under Automatic Route:
- Animal Husbandry
- E-commerce activities
- Textiles & Garments
- Capital Goods
2.2 Government/Approved Route
Under Govt route, approval from the Govt authorities or Ministries is required through the Foreign Investment Facilitation Portal (FIFB). FIFB is regulated by the Dept of Industrial Policy & Promotion (DIPP). This means, any and all investments not covered under Automatic Route fall under the Approved Route.
->Sectors where FDI is allowed Government Route:
- Banking & Public Sector – 20%
- Core investment company – 100%
- Food Products Retail Trading – 100%
- Multi Brand Retail Trading – 15%
3.Sectors where FDI is not allowed under both Automatic and Government Route
- Lottery business, including private lottery, online lottery, etc.
- Nidhi company
- Chit funds
- Real estate business
- Construction companies
- Casinos (gambling and betting)
- Atomic energy
4.What are the Compliances set up by FEMA for Foreign Direct Investment?
Ever since coming into existence, FEMA has acted as a crucial source in India for the growth and development of different sectors. FEMA’s main aim is to promote international trade and orderly growth, balance payments, and maintain India’s international-exchange market. Here is the list of main compliance to be followed under FEMA’s provisions:
4.1 Annual Return on Foreign Liabilities and Assets
An Annual Return must be mandatorily filed by all the Indian resident companies which have received FDI or made ODI in any of the previous financial years, including the current year. This annual return is made for foreign assets and liabilities, also known as FLA Return.
If in case the Indian Company does not have any outstanding investment with respect to Foreign Direct Investment or ODI as at the end of the reporting year, the Company is not bound to submit FLA Return.
Also, if the Indian Company has not received any fresh Foreign Direct Investment or Overseas Direct Investment (ODI), then that Company still needs to submit an FLA Return every year by 15th July.
4.2 External Commercial Borrowings
The borrower needs to report all the External Commercial Borrowings (ECB) transactions to the RBI on a monthly basis through an AD Category-I bank. The form prescribed to complete the same is ECB2 Return to be filed on a monthly basis.
4.3 Single Master Form (w.e.f. 30-06-2018)
Under the head Single Master Form FC-GPR, LLP-I, LLP-II, FC-TRS, CN, ESOP, DI, DRR, InVi (Investments vehicles) are to be filed and submitted. On September 1, 2018, The Reserve Bank of India also released a user manual to bring clarity regarding the procedure for filing a single master form, which was introduced on June 7, 2018.
This form was introduced for the purpose of integrating the existing reporting norms for foreign investment in India.
4.4 Advance Reporting Form (ARF)
If an Indian Company receives investment from outside India for the issue of shares or any other eligible securities as per the FDI Scheme, it must be reported to the Regional Office concerned of the Reserve Bank of India. The details of the amount must be provided through the AD category bank within 30 days from the date of issue of shares.
4.5 Form FC-GPR
Form FC-GPR is issued by RBI as per the Foreign Exchange Management Act, 1999. It is mainly furnished when the Company receives the foreign investment, and against such investment made, the Company allots shares to the foreign investor.
It is an obligation on the Company to file all the required details regarding such allotment of shares with the RBI within a time span of 30 days. The Company is required to use the form FC-GPR or Foreign Currency-Gross Provisional Return for submitting details with the RBI.
4.6 Form FC-TRS
The Form FC-TRS, also known as Foreign Currency Transfer, is a form that is used by shareholders resident outside India, whether it be an Indian resident or vice versa, when they transfer their shares. The form FC-TRS must be filed along with Form FC-GPR, which needs to be submitted to its authorized dealer bank, who will further submit the documents to RBI.