Frequently Asked Questions – FDI

Q:1 Who can invest in India?

Ans: A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy.  A citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Policy, only after approval from Government of India.

Q:2 Whether residents of Nepal and Bhutan can invest in India?

Ans: NRI’s resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.

Q:3 Types of Instruments that can be issued by Indian companies to foreigners?

Ans: Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA Regulations. The pricing of the capital instruments should be decided/determined upfront at the time of issue of the instruments.

Other types of Preference shares/Debentures  i.e.  non-convertible,  optionally convertible or partially convertible for issue of which funds have been received on or after May 1, 2007 are considered as debt.  Accordingly all norms applicable for ECBs relating to eligible borrowers, recognized lenders, amount and maturity, end-use stipulations, etc. shall apply.

Q:4 Into which Indian Entities FDI can be made?

Ans: Indian companies including those which are micro and small enterprises (MSEs) can issue capital against FDI.

Q:5 Whether FDI in Partnership Firm / Proprietary Concern is permitted?

Ans: A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can vest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided;

  • Amount  is  invested  by  inward  remittance  or  out  of  NRE/FCNR(B)/NRO   account maintained with Authorized Dealers / Authorized banks.
  • The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business or print media sector.
  • Amount invested shall not be eligible for repatriation outside India.
  • Investments with repatriation benefits: NRIs/PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns/partnership firms with repatriation benefits.  The application will be decided in consultation with the Government of India.

Q:6 What are conditions on issue/Transfer of shares by Indian entities to foreigners?

Ans: The capital instruments should be issued within 180 days from the date of receipt of the inward remittance or by debit to the NRE/FCNR (B) account of the non-resident investor.  In case, the capital instruments are not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be.  Non-compliance with the above provision would be reckoned as a contravention under FEMA and would attract penal provisions.  In exceptional cases, refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt may be considered by the RBI, on the merits of the case.

Q:7 What would be issue price of shares issued to non-residents?

Ans: Price of shares issued to persons resident outside India under the FDI Policy, shall not be less than -

  • The price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company is listed on any recognised stock exchange in India;
  • The fair valuation of shares done by a SEBI registered Category – I Merchant Banker or  a Chartered Accountant as per the discounted free cash flow method, where the shares of the company is not listed on any recognised stock exchange in India ; and
  • The price as applicable to transfer of shares from resident to non-resident as per the pricing   guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment.

Q:8 What are the Entry Routes for foreign investment in India?

Ans: Investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, through two routes; the Automatic Route and the Government Route. Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the RBI or Government of India for the investment. Under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required. Proposals for foreign investment under Government route as laid down in the FDI policy from time to time, are considered by the Foreign Investment Promotion Board (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance.

Q:9 What are the Guidelines for consideration of FDI proposals under Approval Route by FIPB?

Ans: The following guidelines are laid down to enable the FIPB to consider the proposals for FDI and formulate its recommendations.

  • All applications should be put up before the FIPB by its Secretariat within 15 days and it should be ensured that comments of the administrative ministries are placed before the Board either prior to/or in the meeting of the Board.
  • Proposals should be considered by the Board keeping in view the time frame of thirty (30) days for communicating Government decision.
  • In cases in which either the proposal is not cleared or further information is required in order to obviate delays presentation by applicant in the meeting of the FIPB should be resorted to.
  • While considering cases and making recommendations, FIPB should keep in mind the sectoral requirements and the sectoral policies vis-à-vis the proposal (s).
  • FIPB would consider each proposal in its totality.
  • The Board should examine the following while considering proposals submitted to it for consideration.

While considering cases and making recommendations, FIPB should keep in mind the sectoral requirements and the sectoral policies vis-à-vis the proposal (s).

  • Whether the items of activity involve industrial licence or not and if so the considerations for grant of industrial licence must be gone into;
  • Whether the proposal involves any export projection and if so the items of export and the projected destinations.
  • Whether the proposal has any strategic or defence related considerations.

Q:10 What are the approval levels for cases to be approved under Government Route?

Ans: The following approval levels shall operate for proposals involving FDI under the Government route i.e. requiring prior Government approval:

  • The Minister of Finance who is in-charge of FIPB would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs.1200 crore.
  • The recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 1200 crore would be placed for consideration of CCEA. The FIPB   Secretariat in DEA will process the recommendations of FIPB to obtain the approval of Minister of Finance and CCEA.
  • The CCEA would also consider the proposals which may be referred to it by the FIPB/ the   minister of Finance (in-charge of FIPB).

Q:11 Which are sectors prohibited for foreign investment in India?

Ans: FDI is prohibited in the following activities/sectors:

  • Retail Trading (except single brand product retailing)
  • Lottery Business including Government /private lottery, online lotteries,etc.
  • Gambling and Betting including casinos etc.
  • Business of chit fund
  • Nidhi Company
  • Trading in Transferable Development Rights (TDRs)
  • Real Estate Business or Construction of Farm Houses
  • Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
  • Activities / sectors not opened to private sector investment including Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).Besides foreign investment in any form, foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also completely prohibited for Lottery Business and Gambling and Betting activities.

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