How does a foreign company invest in India? What are the regulations pertaining to issue of shares by Indian companies to foreign collaborators/ investors?
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:
- Where provisions of Press Note 1 (2005 Series) issued by the Government of India are attracted.
- Where more than 24% foreign equity is proposed to be inducted for manufacture of items reserved for the Small Scale sector.
- FDI in sectors/activities to the extent permitted under Automatic Route does not require any prior approval either by 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 non-resident investors.
Government Route : FDI in activities not covered under the automatic route requires prior Government approval and are considered by Investment Promotion Board (FIPB), Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in . Plain paper applications carrying all relevant details are also accepted. No fee is payable.
General permission of RBI under FEMA : Indian companies having foreign investment approval through FIPB route do not require any further clearance from 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.
Which are the sectors where FDI (Foreign Direct Investment) is not allowed in India, under the Automatic Route as well as Government Route?
FDI is prohibited under Government as well as Automatic Route for the following sectors:
- Retail Trading (except single brand product retailing)
- Atomic Energy
- Lottery Business
- Gambling and Betting
- Business of Chit Fund
- Nidhi Company
- Agricultural or plantation activities (cf Notification No. FEMA 94/2003-RB dated June 18, 2003).
- Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19,2005)
- Trading in Transferable Development Rights (TDRs).
What should be done after investment is made under the Automatic Route or with Government approval?
A two-stage reporting procedure has been introduced for this purpose.
On receipt of money for investment : Within 30 days of receipt of money from the non-resident investor, the Indian company will report to the Regional office of the Reserve Bank of India, under whose jurisdiction its Registered Office is located, containing details such as:
- Name and address of the foreign investor/s
- Date of receipt of funds and their rupee equivalent
- Name and address of the authorized dealer through whom the funds have been received
- Details of the Government approval, if any
Upon the issue of shares to non-resident investors : Within 30 days from the date of issue of shares, a report in Form FC-GPR, PART A together with the following documents should be filed with the concerned Regional Office of the Reserve Bank of India.
Certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that :
- The company has complied with the procedure for issue of shares as laid down under the FDI scheme as indicated in the Notification No. FEMA 20/2000-RB dated 3rd May 2000 as amended from time to time
- The proposal is within the sectoral policy / cap permissible under the automatic route of RBI and it fulfills all the condition laid down for investments under the Automatic route namely:
- Non-resident entity/ies (other than individuals) to whom it has issued shares does / do not have any existing joint venture or technology transfer or trade mark agreement in India in the same field.
- The company is not investing in an SSI unit & the investment limit of 24 % has been observed/ requisite approvals have been obtained.
- Shares have been issued on rights basis and the shares are issued to non-residents at a price that is not lower than that at which shares are/were issued to residents. OR
- Shares issued are bonus shares. OR
- Shares have been issued under a scheme of merger and amalgamation of two or more Indian companies or reconstruction by of de-merger or otherwise of an Indian company, duly approved by a court in India.
- Shares have been issued in terms of SIA/FIPB approval No. …………dated………
- Certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares for persons residing outside India.
Are the investments and profits earned in India repatriable?
All foreign investments are freely repatriable except in the cases where NRls choose to invest specifically under non-repatriable schemes. Dividends declared on foreign investments can be remitted freely through an Authorized Dealer.
What are the regulations pertaining to issue of ADRs/GDRs by Indian companies?
Indian companies are allowed to raise capital in the international market through the issue of ADRs/GDR. They can issue ADRs/GDRs without obtaining prior approval from RBI, if it is eligible to issue ADRs/GDRs in terms of the scheme for issue of foreign currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and subsequent guidelines issued by Ministry of Finance, Government of India.
After the issue of ADRs/GDRs, the company has to file a return in the form given in Annexure 'C' to the RBI Notification No. FEMA.20/ 2000-RB dated May 3, 2000. The company is also required to file a quarterly return in a form specified in Annexure ‘D' of the same regulations.
There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate stock markets.
What is meant by Sponsored ADR & Two-way fungibility Scheme of ADR/GDR?
Sponsored ADR/GDR: An Indian company may sponsor an issue of ADR/GDR with an overseas depository against shares held by its shareholders at a price to be determined by the Lead Manager. The Operative guidelines for the same have been issued vide A.P. (DIR Series) Circular No.52 dated November 23, 2002.
Two-way fungibility Scheme: Under the limited Two-way fungibility Scheme, a registered broker in India can purchase shares of an Indian company on behalf of a person residing outside India for the purpose of converting the shares so purchased into ADRs/GDRs. The operative guidelines for the same have been issued vide A.P. (DIR Series) Circular No.21 dated February 13, 2002. The Scheme provides for purchase and re-conversion of only as many shares into ADRs/GDRs which are equal to or less than the number of shares emerging on surrender of ADRs/GDRs which have been actually sold in the market. Thus, it is only a limited two-way fungibility wherein the headroom available for fresh purchase of shares from domestic market is restricted to the number of converted shares sold in the domestic market by non-resident investors. So long ADRs/GDRs are quoted at discounts to the value of shares in domestic market; an investor will gain by converting the ADRs/GDRs into underlying shares and selling them in.
Can Indian companies issue Foreign Currency Convertible Bonds (FCCBs)?
FCCBs can be issued by Indian companies in the overseas market in accordance with Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.
The FCCB issue needs to conform to External Commercial Borrowing guidelines, issued by RBI vide Notification No. FEMA 3/2000 dated May 3, 2000 as amended from time to time.
Can I invest through Preference Shares? What are the regulations applicable in case of such investments?
Foreign investment through preference shares is treated as Foreign Direct Investment. Foreign investment in preference shares is considered as a part of share capital and fall outside the External Commercial Borrowing (ECB) guidelines/cap.
Can shares be issued against Lump sum Fee, Royalty and ECB?
Issue of equity shares against lump sum fee, royalty and External Commercial Borrowings (ECBs) in convertible foreign currency are permitted, subject to meeting all applicable tax liabilities and sector specific guidelines.
Other than issue of shares under Automatic /Government Route, what other general permissions are available under Notification No.FEMA 20 dated 3-5-2000?
Issue of shares under ESOP by Indian companies to its employees or employees of its joint venture or wholly owned subsidiary abroad who are residing outside India directly or through a Trust up to 5% of the paid up capital of the company.
Can I invest in unlisted shares issued by a company in India?
As per the regulations/guidelines issued by the Reserve Bank of India/Government of India, investment can be made in unlisted shares of Indian companies.
Can a foreigner set up a partnership/proprietorship concern in India?
Only NRls/PIOs are allowed to set up partnership/proprietorship concerns in India. Even for NRls/PIOs investment is allowed on non-repatriation basis.
Can I invest in Rights shares issued by an Indian company at a discount?
There are no restrictions under FEMA for investment in Rights shares at a discount, provided the Rights shares so issued are being offered at the same price to residents and non-residents alike.