Q1. What is the meaning of “Foreign Investment”?
Ans:- 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. FDI is the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company, or (b) in 10 percent or more of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company.
Q2. What is the meaning of “Foreign Direct Investment in India or FDI in India”?
Ans:- FDI in India is the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in 10 percent or more of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company.
Q3. What is “Foreign Portfolio Investment in India”?
Ans:- “Foreign Portfolio Investment in India” is any investment made by a person resident outside India in capital instruments where such investment is (a) less than 10 percent of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company or (b) less than 10 percent of the paid-up value of each series of capital instruments of a listed Indian company.
Q4. How to receive FDI in India?
Ans:- The routes under which FDI in India can be made through:
- Automatic Route: Foreign Investment in India 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 Regulation 16 of FEMA 20 (R).
- Government Route: Foreign investment in India in activities not covered under the automatic route requires prior approval of the Government.
Q5. What are capital instruments permitted for receiving Foreign Investment in India?
Ans:- “Capital Instruments” means equity shares, debentures, preference shares, and share warrants issued by the Indian company.
Equity shares: Equity shares are those issued in accordance with the provisions of the Companies Act, 2013, and will include partly paid equity shares issued on or after July 8, 2014.
Share warrants: Share warrants issued on or after July 8, 2014, will be considered as capital instruments.
Debentures: ‘Debentures’ means fully, compulsorily, and mandatorily convertible debentures.
Preference shares: ‘Preference’ shares means fully, compulsorily, and mandatorily convertible preference shares.
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 capital 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.
Q6. How do Persons Resident outside India make Foreign Investments in India?
Ans:- Unless otherwise specifically stated, any foreign investment in India made by a person resident outside India shall be subject to the entry routes, sectoral caps, or the investment limits, as the case may be, and the attendant conditionalities for making such foreign investment in India. A person resident outside India may make foreign investments in India as stated hereinafter.
(1) Subscribe/ purchase/ sale of equity instruments of an Indian company is permitted as per the directions.
(2) Purchase/ sale of equity instruments of a listed Indian company on a recognized stock exchange in India by Foreign Portfolio Investors is permitted as per the directions.
(3) Purchase/ sale of equity instruments of a listed Indian company on a recognized stock exchange in India by a Non-Resident Indian (NRI) or Overseas Citizen of India (OCI) on a repatriation basis is permitted as per the directions.
(4) Purchase/ sale of equity instruments of an Indian company or Units or contribution to capital of a LLP or a firm or a proprietary concern by a Non-Resident Indian (NRI) or Overseas Citizen of India (OCI) on a Non-Repatriation basis is permitted as per the specified directions.
(5) Investment in a Limited Liability Partnership (LLP) is permitted as per the directions.
(6) Investment by a Foreign Venture Capital Investor (FVCI) is permitted as per the directions.
(7) Investment in an Investment Vehicle is permitted as per the directions.
(8) Issue/ transfer of eligible instruments to a foreign depository for the purpose of issuance of depository receipts by eligible person(s) is permitted as per the directions.
(9) Purchase/ sale of Indian Depository Receipts (IDRs) issued by Companies Resident outside India is permitted as per directions.
(10) Investment by other non-resident Investors as per the directions.
(11) Acquisition through rights issue or bonus issue
(a) A person resident outside India having investment in an Indian company is permitted to invest in the equity instruments (other than share warrants) issued by such company as a rights issue or a bonus issue subject to specified conditions.
(b) An individual who is a person resident outside India exercising a right which was issued when he/ she was a person resident in India can hold the equity instruments so acquired on exercising the right on a non-repatriation basis.
(c) With effect from November 12, 2002, the Indian investee company could, on an application made to it, allot to existing shareholders who are persons resident outside India additional equity instruments (other than share warrants) as a rights issue over and above their rights entitlement subject to individual or sectoral caps, as the case may be.
(d) Renunciation of rights:
(i) A person resident in India and a person resident outside India may subscribe to additional shares over and above the shares offered on rights basis by the company and also renounce the shares offered either in full or part thereof in favor of a person named by them.
(ii) The facility at point 11(c) and point 11(d) would not be available to investors who have been allotted such shares as Overseas Corporate Bodies (OCBs).
(iii) A person resident outside India who has acquired a right from a person resident in India who has renounced it may acquire equity instruments (other than share warrants) against the said rights as per pricing guidelines specified under Rule 21 of the NDI Rules.
(iv) The equity instruments to be acquired on renunciation of rights shall be subject to the same conditions including restrictions in regard to repatriability as applicable to the original holding against which rights issue has been made.
(12) Issue of Employees’ Stock Options (ESOP) and Sweat Equity Shares:
(a) An Indian company is permitted to issue “employees’ stock option” and/ or “sweat equity shares” to its employees/ directors or employees/ directors of its holding company or joint venture or wholly owned overseas subsidiary/ subsidiaries who are resident outside India, subject to the specified conditions.
(b) An individual who is a person resident outside India exercising an option which was issued when he/ she was a person resident in India shall hold the equity instruments so acquired on exercising the option on a non-repatriation basis.
(13) Issue of Convertible Notes by an Indian startup company:
(13.1) A person resident outside India (other than an individual who is a citizen of Pakistan or Bangladesh or an entity which is registered/ incorporated in Pakistan or Bangladesh), is permitted to invest in convertible notes issued by an Indian startup company for an amount of twenty-five lakh rupees or more in a single tranche.
(13.2) A startup company, engaged in a sector where investment by a person resident outside India requires Government approval, can issue convertible notes to a person resident outside India only with such approval.
(13.3) The Issue of equity shares against such convertible notes should be in compliance with the entry route, sectoral caps, pricing guidelines, and other attendant conditions for foreign investment.
(13.4) The payment consideration can be received by inward remittance through banking channels or by debit to the NRE/ FCNR (B)/ Escrow account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016. The escrow account maintained for this purpose should be closed immediately after the requirements are completed or within a period of six months, whichever is earlier. Such an escrow account shall not be permitted to continue beyond a period of six months.
(13.5) An NRI or an OCI may acquire convertible notes on a non-repatriation basis in accordance with the specified instructions.
(13.6) A person resident outside India can acquire or transfer by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the entry routes and pricing guidelines.
(13.7) Convertible notes as an investment option were permitted for startup companies with effect from January 10, 2017.
(13.8) The convertible note may either be converted to equity shares or repaid within 5 years from the date of the issue at the option of the holder. Repayment or sale proceeds may be remitted outside India or credited to the NRE/ FCNR (B) account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016
(14) Merger or demerger or amalgamation of Indian companies: In case a Scheme of merger or amalgamation of two or more Indian companies or reconstruction by way of demerger or otherwise of an Indian company has been approved by the National company Law Tribunal (NCLT)/ Competent Authority, the transferee company or the new company, as the case may be, can issue equity instruments to the existing holders of the transferor company who are resident outside India, subject to the specified conditions.
Q7. What are “Downstream investment and Indirect Foreign Investment” in India?
Ans:- Downstream investment is the investment 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.
If the investor company has total foreign investment in it and is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India then such investment shall be “Indirect Foreign Investment” for the investee company.
Q8. What is “FDI in India on repatriation basis and FDI in India on non-repatriation basis”
Ans:- Foreign Direct Investment in India/ FDI in India on a repatriation basis means an investment, the sale/ maturity proceeds of which are, net of taxes, eligible to be repatriated out of India. The expression investment on a non-repatriation basis may be construed accordingly.
Q9. Who can acquire capital instruments on the stock exchanges in India?
Ans:- The following persons can acquire capital instruments on the stock exchanges:
(1) FPIs registered with SEBI
(2) NRIs
(3) Other than (1) and (2) above, a person resident outside India, can acquire capital instruments on the stock exchange, subject to the condition that the investor has already acquired and continues to hold control of such company in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations and subject to specified conditions.
Q10. Within how many time periods does the capital instrument have to be issued by the Indian company under FDI in India?
Ans:- The capital instrument has to be issued by the Indian company within sixty days from the date of receipt of the consideration.
If the capital instruments are not issued by the Indian company within sixty days from the date of receipt of the consideration, the amount so received has to be refunded to the person concerned by outward remittance, through banking channels or by credit to his NRE/ FCNR (B) accounts, as the case may be, within fifteen days from the date of completion of sixty days.
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