Overview

Foreign and institutional investors when investing in companies or purchase companies, directly invest in India. This form of investment is called inbound investment or foreign direct investment. FDI in India is crucial to the development of the economy. This will directly affect the Gross Domestic Product of the country. Therefore, it is essential to attract more inbound investment under FEMA. Inbound investment or FDI can be made through two permitted routes. The permitted routes are as follows:

• Automatic Route- Under the Automatic Route, there is no permission required from the RBI. 100% investment can be made through this.
• Approval/ Government Route- Under the Approval Route, there is a requirement of permission from the RBI. As consent is required from the RBI, there are specific compliances to be followed.

There are four categories in which the investment is permitted. The categories are

• Category 1- Sectors in which FDI is permitted up to 100% under the automatic route.
• Category 2- Sectors in which FDI is permitted up to 100% under Government/Approval Route.
• Category 3- Sectors in which FDI is permitted beyond the certain limit with Government.
• Category 4- Sectors wherein FDI is permitted up to certain limit under both Government/Approval and Automatic routes subject to applicable laws.

Areas requiring approval under inbound investment under FEMA

Approval from RBI is required when it comes to inbound investment under FEMA. Areas below require prior approval from RBI:

• Mining, Defence/cases relating to FDI in small arms
• Broadcasting
• Print media
• Civil Aviation
• Satellites
• Telecom
• Private Security Agencies
• Trading(Single, Multi brand and Food Products)
• Financial services not regulated or regulated by more than one regulator/ Banking Public and Private (as per FDI Policy)

Why inbound investment is necessary under FEMA?

• Development of Indian Economy.
• Improves the GDP of the country.
• Helps in improving technologies.
• Promotes employment opportunities. 

That regulates inbound investment

FEMA is regulated by the following:

• DIPP- Department of Industry Policy and Promotion
• Reserve Bank of India
• Ministry of External Affairs
• Ministry of Revenue

Eligibility criteria

• The investor should be a Foreign Investor, Venture Capitalist or Non-Resident Indian
• The investment must be through the automatic route or the approval route.
• The investment should be for permitted activities.

The process of obtaining inbound investment under FEMA

• Inbound investment under FEMA is through two routes:
• 1. Automatic Route
• 2. Approval Route

• Foreign Direct investment is through a person who is resident outside India. The investment is through the following ways:
• 1. An unlisted Indian company
• 2. 10% or more of the post issue paid-up equity capital on a fully diluted basis

• Foreign Portfolio investment is an investment made by a person resident outside India where such investment is:
• 1. less than 10 per cent of the post-issue paid-up equity capital on a fully diluted basis of a listed company or
• 2. Less than 10 per cent of the paid-up value of each set of capital instruments of a listed Indian company.

• For making an application for inbound investment under FEMA under the approval route, the procedure is called Standard Operating Procedure (SOP)
• This procedure can be found in the following link
• The approval form is sent via the DIPP (Department of Industry Policy and Promotion) to the RBI to receive any comments regarding compliance checks with FEMA.
• FEMA will provide these compliance checks within two business days. These proposals will be submitted to the Ministry of External Affairs and the Department of Revenue
• DIPP will provide clarifications 15 days
• Approval letters or rejection letters will be sent to the applicant online within two weeks.

Required Documents

• Certificate of Incorporation of the Investee & Investor Companies/Entities
• Memorandum of Association (MOA) of the Investee & Investor Companies/Entities 
• Board Resolution of the Investee & Investor Companies/Entities
• Audited Financial Statement of Last Financial Year of the Investee & Investor Companies/Entities
• Article of Association of the Investee & Investor Companies/Entities
• List of Names and addresses of all foreign collaborators along with Passport Copy/ Identification Proof of the Investor Company/Entity.
• Diagrammatic representation of the flow and funds from the original investor to the Investee Company and Pre and Post shareholding pattern of the Investee Company.
• An affidavit stating that all information provided in hard copy and online is the same and correct.
• A signed copy of the JV agreement/shareholders agreement/ technology transfer/trademark/brand assignment agreement (as applicable), in case there are existing ventures
• Board resolution of any joint venture company.
• Certificates of Incorporation and charter documents of any joint venture/company, which is a party to the proposed transaction.
• Copy of Downstream Intimation.
• Copy of relevant past FIPB/SIA/RBI approvals, connected with the current Proposal (in case of amendment proposal).
• Foreign Inward Remittance Certificate (FIRC) in case investment has already come in and in case of post-facto approval.
• In the cases of investments by entities which themselves are pooled investment funds, the details such as names and addresses of promoters, investment managers as Standard Operating Procedure for Processing FDI Proposals well as all the contributors to the investment fund.
• List of the downstream companies of the Indian company and the details of the equity held by the Indian Company along with the details of the activities of the companies.
• High Court order in case of a scheme of arrangement.
• Valuation certificate as approved by a Chartered Accountant.
• Non-compete clause certificate of the investor and investee company in case of investment in the pharmaceutical sector.
• Certificate of statutory auditors as mandated in the FDI policy, as applicable.
• Standard Operating Procedure (SOP) form

How Servzone can help with inbound investment in India

• We help in processing the documentation regarding inbound investment in India.
• We submit the documentation to the RBI.
• We monitor and track the status of the application on behalf of our client.
• We will get notifications regarding the licence update from the RBI.
• We have value for time and money.
• We also offer compliance services for RBI and FEMA.

What does foreign investment, foreign direct investment and foreign portfolio investment mean?

Foreign Investment means any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an LLP.

Direct Investment (FDI) is the investment through capital instruments by a person resident outside India:

• In an unlisted Indian company; or

• In 10 per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.

Foreign Portfolio Investment is any investment made by a person resident outside India in capital instruments where such investment is:

• Less than 10 per cent of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company or

• Less than 10 per cent of the paid-up value of each series of capital instruments of a listed Indian company.

Difference between a repatriable basis and a non-repatriable basis?

• Repatriable basis is the ability to move financial assets from a foreign country to the investor’s country of origin. Non-repatriable basis means the investor cannot move the finance assets from the foreign country.

Routes for Inbound Investment under FEMA?

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

• 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 Regulation 16 of FEMA 20 (R).

• Approval Route/ Government Route: Foreign investment in activities not covered under the automatic route requires prior approval of the Government.

Is any approval required for an entity that has received foreign investment under the automatic route and the area was subsequently brought under the approval route?

As long as the foreign shareholding in the entity remains the same, and there is no corporate action pursuant to the sector being brought under the approval route, approval is not required

Can foreigners establish a partnership/proprietorship concern in India?

As per the current regulations, foreigners are not allowed to establish partnership/ proprietorship concerns in India. Only NRIs are allowed to establish partnership/ proprietorship concerns.

What are the sectors in which FDI is banned??

FDI is prohibited in the following sectors:

• Lottery business, including government/private lottery, online lotteries, etc.

• Gambling and betting including casinos etc.

• Chit funds; Nidhi company (the companies doing business of borrowing from members and lending to members only).

• Trading in transferable development rights (TDRs).

• Real estate business or construction of farmhouses

• Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or tobacco substitutes.

• Activities/sectors not open to private sector investment.

Can FDI be invested in all sectors?

Yes, FDI can be invested in all sectors. This includes even the start-up sector and the SME sector.

What to do after an investment is made under the automatic route or after government approval?

On receipt of the foreign direct investment (FDI), the Indian company receiving the investment for issuing shares/ debentures should report the details to the Regional Office concerned of the Reserve Bank of India (RBI) within 30 days from the date of receipt in the Advance Reporting Form. Steps for reporting of investment vary for shares, depository receipts and other instruments.