Foreign Direct Investment (FDI) in India

An “FDI” or “Foreign Direct Investment” refers to an investment through equity instruments by a resident outside India, in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital, on a fully diluted basis, of a listed Indian company. Some of the benefits that encourage foreign investors to get involved in an FDI, include the market diversification, local expertise, lower labour costs, tax incentives, etc.

The FDI definition itself indicates an investment by foreign parties into India, so applying for an FDI is not a question related to FDI in India.

Example: A US based technology company XYZ INC invests and acquires a majority stake in an Indian company - ABC Pvt. Ltd., to boost its research and development.

Some of the benefits that encourage foreign investors to get involved in an FDI, include the market diversification, local expertise, lower labour costs, tax incentives, etc.

1. What is the limit for an FDI?

There is no limit for an FDI, however, there is a limit for the investment, sectoral wise.

2. In which sector is an FDI allowed?

• 100% Automatic Route:
• Agriculture, Plantation sector, Mining and Exploration of metal and non-metal ores, Mining - Coal & Lignite, Manufacturing, Broadcasting Carriage Services (Teleports, DTH, Cable Networks, Mobile TV, HITS), Broadcasting Content Services - Up-linking of ‘Non-News & Current Affairs’ TV Channels/Down-linking of TV Channels, Airports - Greenfield, Airports - Brownfield, Air Transport Service - Non-Scheduled, Air Transport Service - Helicopter Services/Seaplane Services, Other services under the Civil Aviation Sector - Ground Handling Services, Other services under the Civil Aviation Sector - Maintenance and Repair organisations; flying training institutes; and technical training institutions, Construction Development, Industrial Parks - new and existing, Trading - Wholesale, Trading - E-commerce activities, Trading - SBRT, Duty Free Shops, Railway Infrastructure*, Asset Reconstruction Companies, Credit Information Companies, Intermediaries or Insurance Intermediaries, White Label ATM Operations, Other Financial Services, Pharmaceuticals - Greenfield, Petroleum & Natural Gas - Exploration activities of Oil and Natural Gas fields
• Proposals involving FDI beyond <49>% in sensitive areas, from the security point of view, to be brought by the Ministry of Railways before the Cabinet Committee on Security (CCS) for consideration, on a case to case basis.
  Source: https://dipp.gov.in/ - Sectors Under Automatic Route with Conditions
• Up to 100% Automatic route:
• Infrastructure Company in the Securities Market - 49%
• Insurance - up to 49%
• Pension - 49%
• Petroleum Refining (By PSUs) - 49%
• Power Exchanges - 49%
• Up to 100% FDI, permitted under the Government route:
• Banking and Public Sector - 20%
• Broadcasting Content Services - 49%
• Core Investment Company - 100%
• Food Products Retail Trading - 100%
• Mining and Minerals separation of titanium bearing minerals and ores, it’s value addition and integrated activities - 100%
• Multi-Brand Retail Trading - 51%
• Print Media (publications/printing of scientific and technical magazines/speciality journals/periodicals and facsimile edition of foreign newspapers) - 100%
• Print Media (publishing of newspaper, periodicals and Indian editions of foreign magazines dealing with news and current affairs) - 26%
• Satellite (Establishment and operations) - 100%
• Up to 100% FDI, permitted under Automatic and Government:
• Airport transport services (Scheduled Air Transport Service/Domestic Scheduled Passenger Airline; Regional Air Transport Service) – up to 49% (auto) (up to 100% under automatic route for NRIs) + above 49% (Govt.)
• Banking (Private sector) - up to 49% (auto) + above 49% (Govt.)
• Biotechnology (brownfield) - up to 74% (auto) + above 74% (Govt.)
• Defence – up to 74% (auto) + above 74% (Govt.)
• Pharmaceuticals (Brownfield) - up to 74% (auto) + above 74% (Govt.
• Private Security Agencies - up to 74% (auto) + above 74% (Govt.)
• Telecom Services - up to 49% (auto) + above 49% (Govt.).

Note: All the information pertaining to the sectors, as stated above, is in line with the extant Consolidated FDI Policy issued by DPIIT, as amended from time to time.

3. In which sectors is FDI not allowed?

Investment by a Resident Outside India is prohibited in the following sectors:

• Lottery Business, including Government/Private/Online lotteries
• Gambling and betting, including casinos
• Chit funds (except for investments made by NRIs and OCIs on a non-repatriation basis)
• Nidhi company (Mutual Benefit Funds 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. The prohibition is on manufacturing of the products mentioned and foreign investment in other activities relating to these products, including wholesale cash and carry, retail trading etc. will be governed by the sectoral restrictions laid down in Regulation 16 of FEMA 20(R)
• Activities/sectors not open to the Private Sector Investment viz., (i) Atomic energy and (ii) Railway operations
• Foreign technology collaboration in any form, including licensing for franchise, trademark, brand name, management contract is also prohibited for lottery business and gambling and betting activities.

4. Who is eligible for an FDI?

Answered in the question ‘In which sector is FDI allowed?’

5. What are the FDI rules?

FDI is governed by the NDI guidelines released on Oct 17, 2019. For more details, visit: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0

6. What is an FDI Certificate?

There is no separate certificate called an FDI Certificate. However, post the receipt of the FDI amount, an AD Bank issues a ‘Foreign Inward Remittance Certificate (FIRC)’ to customers, with the remittance details and the purpose of investment.

SMF is the master form on which the reporting for the Foreign Investment, Forms (Foreign Currency – Gross Provisional Return (FC-GPR), Foreign Currency – Transfer of Shares (FC-TRS), Limited Liability Partnership – I (LLP-I), Limited Liability Partnership – II (LLP-II), Convertible Notes (CN), Employee Stock Option Plan (ESOP), Depository Receipts (DRR), Downstream Investment (DI), Investment Vehicle (InVi)) can be done. At the same time, Entity Master is the form where the details of the company and foreign investment pattern are recorded.

Business User (BU) is the applicant who would be reporting the transaction on behalf of the company in SMF at Foreign Investment Reporting and Management System (FIRMS) portal. BU can do the filing for different entities, but the registration for login credentials should be done separately for each entity.

Entity User is the person who is authorised by the company and is solely responsible for entering/updating the Foreign Investment details of the entity on Entity Master.

To modify the existing details on Entity Master, a request has to be made by sending an e-mail to fedsupport@rbi.org.in and helpfirms@rbi.org.in by attaching a scan copy of the request letter from an authorised representative of the company. The e-mail should contain necessary details of the company and the changes needed in the below format:

• User ID:
• Company Identification Number (CIN)/ Limited Liability Partnership (LLP) Number: 
• Registered e-mail ID:
• Issue description (reasons for the change):
• Changes needed to be done:

Technical issues like not receiving Login IDs, user credentials not working, etc. can be resolved by sending a request e-mail to fedsupport@rbi.org.in through registered e-mail ID.

Authorised Dealer (AD) Banks would have only chosen branches which handle the registrations and the forms reported on FIRMS portal. So, while selecting the IFSC, it is needed to ensure that the reporting is made to the concerned branch of the AD Bank. The IFSC to be entered by the users who choose ICICI Bank as their AD Bank is ICIC0000393.

In the case of reporting for Invi, Business User registration can be made directly and the entity master registration is not required.

Upon SMF implementation, the two-step reporting procedure of FDI i.e. submission of ARF and FC-GPR separately has been merged into a single revised FC-GPR. So, FC-GPR can be filed directly on SMF without any submission of ARF.

In cases where the filing had been initiated on ebiz portal, the errors related to the same filing has to be addressed and the related documents are to be submitted the RBI Regional office through AD Bank.

The reporting for the issue of shares to multiple investors can be done on single FC-GPR-SMF form if the date and nature of the issue are the same for all the investors.

The forms rejected on SMF cannot be resubmitted. The fresh form has to be filled again by considering the errors raised during the previous rejection.

In case excess/shortfall of the funds is due to foreign exchange fluctuations, the permissible amount of deviation is 0.5% of the total amount of consideration and up to a maximum value of INR 10,000.

LLP-I filing is done at the time of reporting the capital contribution made by a person resident outside India, while LLP-II filing is to be made for reporting the disinvestment/transfer of capital contribution from a person resident outside India to a person resident in India and vice versa.

Foreign Direct Investment to Indirect Foreign Investment: FC-TRS form has to be filed first for the reduction in FDI, and subsequently DI reporting has to be done for the increase in Indirect Foreign Investment.

Indirect Foreign Investment to Foreign Direct Investment: Firstly, the entity master has to be updated with the changes in investment pattern and then FC-TRS form has to be filed.

(a) Form FCTRS shall be filed for transfer of equity instruments as per the rules, between:

i. person resident outside India holding equity instruments in an Indian company on a repatriable basis and person resident outside India holding equity instruments on a non-repatriable basis; and

ii. person resident outside India holding equity instruments in an Indian company on a repatriable basis and a person resident in India.

Transfer of equity instruments in accordance with the rules by way of sale between a person resident outside India holding equity instruments on a non-repatriable basis and person resident in India is not required to be reported in Form FC-TRS.

(b) Transfer of equity instruments on a recognised stock exchange by a person resident outside India shall be reported by such person in Form FC-TRS.

(c) Transfer of equity instruments prescribed in Rule 9(6) of the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019, shall be reported in Form FC-TRS on receipt of every tranche of payment. The onus of reporting shall be on the resident transferor/transferee.

(d) Transfer of 'participating interest/rights' in oil fields shall be reported in Form FC-TRS.

(e) Form FC-TRS is required to be filed by the Indian company buying back shares in a scheme of merger/ de-merger/ amalgamation of Indian companies approved by National Company Law Tribunal (NCLT)/ competent authority.

The form FC-TRS shall be filed within sixty days of transfer of equity instruments or receipt/ remittance of funds whichever is earlier.

Source: https://www.rbi.org.in/

Form LLP II: The transfer/disinvestment of capital contribution or profit share between a resident and non-resident or vice versa shall be filed in Form LLP (II) within sixty days from the date of receipt/remittance of funds. The responsibility of reporting shall be on the resident transferor/transferee.

The onus of reporting shall be on the resident transferor/transferee or the person resident outside India holding equity instruments on a non-repatriable basis, as the case may be.

Source: https://www.rbi.org.in/

Yes, LLPs receiving foreign investment are allowed to make downstream investment in other limited liability company or LLP in those sectors where 100% FDI is permitted through automatic route.

No, as per Foreign Exchange Management (Remittance of Assets) regulations, 2016 governing remittance of assets, filing of FC-TRS is not allowed as there is no transfer of shares.

A convertible note is an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.

Source: https://www.rbi.org.in/

The option exercised by such a PROI which was issued to him/her when he/she was a resident in India will be on non-repatriation basis.

Form ESOP is to be filed at the time of issue of ESOP within 30 days from the issue date, and the Indian Company will file it.

There is only Form ESOP to be filed at the time of issue of ESOP. However, at the time of exercise of ESOP, Form FC-GPR and if the ESOPs are linked to American Depository Receipt/ Global Depository Receipt (ADR/GDR), Form DRR is to be filed upon exercise of such ESOPs.

Form Depository Receipts (DRR) is filed whenever there is issue or transfer of DRR issued by a foreign depository in a permissible jurisdiction on the back of eligible securities issued or transferred to that foreign depository and deposited with a domestic custodian (custodian of securities registered with the Securities and Exchange Board of India (SEBI) in accordance with the SEBI (Custodian of Securities) Regulations, 1996) and includes GDR as defined in the Companies Act, 2013 (18 of 2013) subject to the terms and conditions specified in Schedule IX as per Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

Source: http://egazette.nic.in/

The domestic custodian shall report the issue/ transfer of sponsored/ unsponsored Depository Receipts as per DR Scheme 2014 in Form DRR within 30 days of close of the issue/programme.

It will not be considered in the sectoral cap.

In such cases wherever the amount is being repatriated in subsequent tranches, for every subsequent tranche Form DRR shall be filed within 30 days from the date of remittance as a subsequent Form DRR to the Form DRR as filed at the time of issue of DRs as follows:

• Step 1: Using the left navigation button, select File Return and then Single Master Form.
• Step 2: Select return type as Form DRR. If the reference number of the earlier filed
• Form DRR is known, enter the same in the field Return Reference Number and click on search return. Or else, enter the from date and search return. Select the initial filed Form DRR and open the same upon clicking on the reference number.
• Step 3: At the top right, select the button "ADD subsequent return". Enter the amount repatriated in the current tranche in INR and no other field needs to be entered. The values in Total amount repatriated in India and the amount kept abroad are updated accordingly. Check the details under the tab "Tranche details".
• Step 4. Check the declaration and attach the Foreign Invert Remittance Certificate (FIRC) for the amount repatriated in the "Other attachments" and click on "Submit" button at top right.

Source: https://firms.rbi.org.in/

Entity Master Update is not required for Form InVi.

An InVI to An Investment Vehicle which has issued its units to a person resident outside India shall file Form InVi with the Reserve Bank within 30 days from the date of issue of units.

Source: https://www.rbi.org.in/

Downstream Investment is an indirect foreign investment, whereby an Indian company having FDI which is owned or controlled by foreign person/entities invests in the equity instruments of another Indian company.

'Owned and Controlled' by 'non-resident entities' means

• "Owned" by 'non-resident entities', if more than 50% of the equity interest in it is beneficially owned by non-residents
• "Controlled" by 'non-resident entities', if non-residents have the power to appoint a majority of its directors.

Indian Entity making DI shall submit Form DI within 30 days from the date of allotment of the equity instruments.

Downstream foreign investment is subject to the following conditions:

• Indirect Foreign Investor must notify the Secretariat for Industrial Assistance, Department for Promotion of Industry and Internal Trade (DPIIT) within 30 days of the DI, even if the equity instrument has not been allotted. The DI must be approved by the board and shareholder (where necessary) of the Investee Entity.
• The investment must comply with entry route, sectoral caps, pricing guidelines prescribed by RBI and SEBI.
• DI must be made through inward remittance of funds from abroad and not from funds borrowed from domestic markets. The DIs are made through internal accruals.

The onus of compliance with the above conditions is on the entity making the DI at each level, and the statutory auditor must provide a certificate to this effect.

Yes, resident has to obtain prior approval from the Reserve Bank subject to the following conditions:

(i) Gift <= 5% of paid-up capital/Debentures/Mutual Funds of Indian company

(ii) The donor and the donee shall be "relatives" within the meaning in Clause (77) of Section 2 of the Companies Act, 2013;

(iii) Value of all gifts of donor to be less than USD 50,000

(iv) Other conditions, as mentioned in Non-Debt Instruments Rules, 2019 Chapter III; Rule 9 Sub-rule (4)

Yes, the transaction is allowed under Automatic Route.

FC-TRS to be filed by Resident party within 60 days from the date of transfer of equity instruments.

Yes, transaction is allowed under Automatic Route.

A prior Government approval shall be obtained for any transfer in case the company is engaged in a sector that requires Government approval.

(i) Consent letter: Consent letter between donor and donee for the transfer to be attached as other attachment.

(ii) Relevant regulatory approvals, wherever applicable.

(iii) Non-resident declaration.

(iv) Other documents as required by AD banks.

Transfer of shares from a single non-resident shareholder donor to multiple resident donees.

(i) The investee company may make filing in Form FC-TRS on behalf of all resident transferees or one resident shareholder may file the return on behalf of all the resident shareholders. 

(ii) Enter the non-resident details in the Seller section.

(iii) In the Buyer section, enter as multiple donees.

(iv) In the Particulars of transfer, enter the consolidated transfer details.

(vi) All other required documents may be entered as per the user manual for FIRMS.  

(vii) Applicant shall have to attach the list of donees as attachment under "other attachments".

This procedure is specific to only the instant case. If you happen to come across such a case, kindly mark an e-mail to RBI at helpfirms@rbi.org.in  and get a written confirmation.