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FAQ on Foreign Investment in India RBI
1. What are the forms in which business can be conducted by a foreign company in India?
  • A foreign company planning to set up business operations in India has the following options :
  • As an incorporated entity by incorporating a company under the Companies Act,1956 through.
    • Joint Ventures; or
    • Wholly Owned Subsidiaries.
  • As an unincorporated entity through.
    • Liaison Office/Representative Office.
    • Project Office.
    • Branch Office.
2. 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 :
    • Activities/items that require an Industrial License;
    • Proposals in which the foreign collaborator has an existing financial / technical collaboration in India in the ‘same’ field,
    • Proposals for acquisition of shares in an existing Indian.
    • All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.
  • FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.
Government Route
  • FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign 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 RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.
3. Which are the sectors where FDI 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:
  • i. Retail Trading
  • ii. Atomic Energy
  • Lottery Business
  • Gambling and Betting
  • Housing and Real Estate business
  • Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea plantations)].

4. 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 foreign investor, the Indian company will report to the Regional Office of RBI under whose jurisdiction its Registered Office is located, a report containing details such as:
    • Name and address of the foreign investors
    • Date of receipt of funds and their rupee equivalent
    • Name and address of the authorised dealer through whom the funds have been received, and
    • Details of the Government approval, if any;
  • On issue of shares to foreign investor:
  • Certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.
5. What are the guidelines for transfer of existing shares from residents to non-residents or non-residents to residents?

Transfer from Non-Resident to Non-Resident:

A: Transfer by way of sale:
  • A person resident outside India can freely transfer share/convertible debenture by way of sale to a person resident in India as under:
    • Any person resident outside India, (not being a non-resident Indian or an overseas corporate body), can transfer by way of sale the shares/convertible debentures to any person resident outside India; subject to the condition that the acquirer or transferee does not have any previous venture or tie up in India in the same field or sector.
    • A non-resident Indian (NRI) may transfer by way of sale, the shares/convertible debentures held by him to another NRI only.
    • Any person resident outside India may sell share/convertible debenture acquired in accordance with FEMA Regulations, on a recognized Stock Exchange in India through a registered broker.
    • A non-resident Indian or Overseas Corporate Body can transfer by way of sale, shares only to a non-resident Indian.
B: Transfer by way of Gift:
  • A person resident outside India can freely transfer share/convertible debenture by way of gift to a person resident in India as under:
    • Any person resident outside India, (not being a non-resident Indian or an overseas corporate body), can transfer by way of gift the shares/convertible debentures to any person resident outside India; subject to the condition that the acquirer or transferee does not have any previous venture or tie up in India in the same field or sector.
    • A non-resident Indian (NRI) may transfer by way of gift, the shares/convertible debentures held by him to another NRI only.
    • Any person resident outside India may transfer share/convertible debenture to a person resident in India by way of gift;share/convertible debenture to a person resident in India by way of gift;
Transfer from Resident to Non-Resident:

A: Transfer by way of sale-General Permission under Regulation 10 of Notification No. FEMA 20/2000-RB dated May 3, 2000.
  • A person resident in India may transfer to a person resident outside India any share/convertible debenture of an Indian Company whose activities fall under the Automatic Route for FDI subject to the Sectoral Limits, shall transfer such shares/debentures by way of sale subject to the following:
  • Indian Company whose shares or convertible debentures are proposed to be transferred shall not be engaged in rendering any financial service; (financial services means service rendered by banking and non-banking companies regulated by the Reserve Bank, insurance, companies regulated by Insurance Regulatory and Development Authority (IRDA) and other companies regulated by any other financial regulator as the case may be).
  • The transfer shall not fall within the purview of the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997; and.
  • The concerned parties shall adhere to pricing guidelines, documentation and reporting requirements for such transfers as may be specified by Reserve Bank, from time to time.
B: Transfer by way of gift:
  • A person resident in India can transfer shares to a person resident outside India in the following ways:
  • A person resident in India who proposes to transfer to a person resident outside India [other than erstwhile OCBs] any security, by way of gift, shall make an application to the Central Office of Foreign Exchange Department, Reserve Bank furnishing the following information, namely :
  • Name and address of the transferor and the proposed transferee.
  • Relationship between the transferor and the proposed transferee.
  • Reasons for making the gift;
6. What if the transfer from resident to non-resident does not fall under the above facility?
  • In case the transfer does not fit into any of the above, either the transferor (resident) or the transferee (non-resident) can make an application for RBI’s permission for the transfer.
  • A copy of FIPB approval.
  • Consent letter from transferor and transferee clearly indicating the number of shares, name of Investee Company and the price at which the transfer is proposed to be effected.
  • The present/post transfer shareholding pattern of the Indian investee company showing the equity participation by residents and nonresidents category-wise.
  • Copies of RBI approvals/acknowledged copies of FC-GPR evidencing the existing holdings of the non-residents.
  • If the sellers/transferors are NRIs / OCBs, the copies of RBI approvals evidencing the shares held by them on repatriation / non-repatriation basis.
  • Open Offer document filed with SEBI if the acquisition of shares by non-resident is under SEBI Takeover Regulations.
  • Fair Valuation Certificate from Chartered Accountant indicating the value of shares as per the following guideline:
  • In the case of unlisted shares the fair value is worked out as per the erstwhile Controller of Capital Issue/s.
  • For listed shares, the price worked out is not less than the higher of average weekly high and low quotations for 6 months and average of daily high and low quotation or two weeks preceding 30 days prior to the date of making application to FIPB.
7. Are the investments and profits earned in India repatriable?
  • All foreign investments are freely repatriable except for the cases where NRIs choose to invest specifically under non-repatriable schemes. Dividends declared on foreign investments can be remitted freely through an Authorised Dealer.
8. What are the guidelines on issue and valuation of shares in case of existing companies?
  • Allotment of shares on preferential basis shall be as per the requirements of the Companies Act, 1956, which will require special resolution in case of a public limited company.
  • In case of listed companies, valuation shall be as per the RBI/SEBI guidelines as follows: The issue price shall be either at:
    • The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date or
    • The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the two weeks preceding the relevant date.
  • In case of unlisted companies, valuation shall be done in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.
9. 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/GDRs. 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 proforma 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 and stock markets.
10. 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 resident 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 the domestic market. In case of ADRs/GDRs being quoted at premium, there will be demand for reverse fungibility, i.e. purchase of shares in domestic market for re-conversion into ADRs/GDRs. The scheme is operationalised through the Custodians of securities and stockbrokers under SEBI.
11. Can Indian companies issue Foreign Currency Convertible Bonds (FCCBs)?
  • FCCBs can be issued by Indian companies in the overseas market, 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-RB dated May 3, 2000 as amended from time to time.
12. 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. Proposals are processed either through the automatic route or FIPB as the case may be. Foreign investment in preference share is considered as part of share capital and fall outside the External Commercial Borrowing (ECB) guidelines/cap. Preference shares to be treated as foreign direct equity for purpose of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. If the preference shares are structured without such conversion option, they would fall outside the foreign direct equity cap.
13. Can shares be issued against Lumpsum 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.
14. Other than issue of shares under Automatic Route/Government Route, what other general permissions are available under RBI Notification No.FEMA 20 dt.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 resident outside India directly or through a Trust up to 5% of the paid up capital of the company.
  • Issue and acquisition of shares by non-residents after merger or demerger or amalgamation of Indian companies.
  • Issue shares or preference shares or convertible debentures on right basis by an Indian company to a person resident outside India.
15. Can I invest in unlisted shares issued by a company in India?
  • Yes. As per the regulations/guidelines issued by RBI/Government of India, investment can be made in unlisted shares of Indian companies.
16. Can a foreigner set up a partnership/proprietorship concern in India?
  • No. Only NRIs/PIOs are allowed to set up partnership/proprietorship concern in India. Even for NRIs/PIOs investment is allowed only on non-repatriation basis.
17. Can I invest in Right shares issued by an Indian company at a discount?
  • There are no restrictions from RBI for investment in Right shares at a discount, provided the rights shares so issued are being offered at the same price to residents and non-residents.
II - Foreign Technical Collaboration

1. What are the payment parameters for foreign technology transfer under the Automatic Route of RBI? How should royalty be calculated?
  • Payment for foreign technology collaboration by Indian companies are allowed under the automatic route subject to the following limits :
  • Lump sum payments not exceeding US$2 million;
  • Royalty payable being limited to 5 percent for domestic sales and 8 percent for exports, without any restriction on the duration of the royalty payments.
  • The royalty limits are net of taxes and are calculated according to standard conditions.
  • The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc.
  • RBI has delegated the powers to ADs to make payment of royalty under such agreements. The requirement of registration of the agreement with the Regional Office of RBI has been done away with.
2. What should be done, if Automatic Route of RBI for technology transfer is not available?
  • Proposals which do not satisfy the parameters prescribed for automatic route of RBI, require clearance from Ministry of Commerce, Department of Industrial Policy and Promotion, Government of India.
III - Portfolio Investment

1. What are the regulations regarding Portfolio Investments by Foreign Institutional Investors (FIIs)?
  • Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000. FIIs include Asset Management Companies, Pension Funds, Mutual Funds, Investment Trusts as Nominee Companies, Incorporated/ Institutional Portfolio Managers or their Power of Attorney holders, University Funds, Endowment Foundations, Charitable Trusts and Charitable Societies.
  • EBI acts as the nodal point in the registration of FIIS. RBI has granted General Permission to SEBI Registered FIIs invest in India under the Portfolio Investment Scheme.
  • All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body.
2. What are the regulations for Foreign Venture Capital Investment?
  • A Foreign Venture Capital Investor registered with SEBI may make investment in a Venture Capital Fund for an Indian Venture Capital Undertaking, in the manner and subject to the terms and conditions specified in Schedule 6 of RBI Notification No.FEMA 20/2000-RB dated 3-5-2000 as amended from time to time.
3. What are the regulations regarding Portfolio Investments by NRIs/PIOs
  • Non Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply to a designated branch of a Bank which deals in Portfolio Investment. All sale/purchase transaction is to be routed through the designated branch.
  • An NRI or a PIO can purchase shares up to 5% of the paid up capital of an Indian company. All NRIs/PIOs taken together cannot purchase more than 10% of the paid up value of the company. (This limit can be increased by the Indian company to 24% by passing a General Body resolution).
  • The sale proceeds of the repatriable investments can be credited to the NRE/NRO etc. accounts of the NRI/PIO whereas the sale proceeds of non-repatriable investment can be credited only to NRO accounts.
  • The sale of shares will be subject to payment of applicable taxes.
IV: Procedure for opening Branch/Project/Liaison Office

1. How can foreign companies open Liaison/Project/Branch office in India?
  • Foreign company can set up Liaison/Branch Offices in India after obtaining approval from RBI. RBI has given general permission to foreign companies to establish Project Offices in India subject to certain conditions.
2. What is the procedure to be followed for obtaining Reserve Bank's approval for opening Liaison Office/Representative Office?
  • A Liaison office can carry on only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office abroad. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers.
  • The companies desirous of opening a liaison office in India may make an application in form FNC-1 along with the documents mentioned therein to Foreign Investment Division, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai. This form is available in www.rbi.org.in.
  • Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Regional Office in whose jurisdiction the office is set up. Liaison/representative offices have to file an Activity Certificate on annual basis from a Chartered Accountant to the concerned Regional Office of the RBI, stating that the Liaison Office has undertaken only those activities permitted by RBI.
3. What is the procedure for setting up Project Office?
  • Foreign companies are granted projects in India by Indian entities. General Permission has been granted by RBI vide Notification No. FEMA 95/2003-RB dated July 2, 2003 to foreign companies to open Project Office/s in India provided they have secured from an Indian company, a contract to execute a project in India, and.
  • the project is funded directly by inward remittance from abroad; or
  • the project is funded by a bilateral or multilateral International Financing Agency; or
  • the project has been cleared by an appropriate authority; or
  • a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
  • However, if the above criteria are not met, or if the parent entity is established in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, such applications have to be forwarded to Central Office of the Foreign Exchange Department of the Reserve Bank of India at Mumbai for approval.
4. What is the procedure for setting up Branch office?
  • Reserve Bank permits companies engaged in manufacturing and trading activities abroad to set up Branch Offices in India for the following purposes:
  • To represent the parent company/other foreign companies in various matters in India e.g. acting as buying/selling agents in India
  • To conduct research work in the area in which the parent company is engaged.
  • To undertake export and import activities and trading on wholesale basis.
  • To promote possible technical and financial collaborations between the Indian companies and overseas companies.
  • Rendering professional or consultancy services.
  • Rendering services in Information technology and development of software in India.
  • Rendering technical support to the products supplied by the parent/Group companies.
  • A branch office is not allowed to carry out manufacturing, processing activities directly/indirectly. A Branch Office is also not allowed to undertake Retail Trading activities of any nature in India. Branch Offices have to submit Activity Certificate from a Chartered Accountant on an annual basis to the Central Office of FED. For annual remittance of profit Branch Office may submit required documents to an authorised dealer.
  • Permission for setting up branch offices is granted by the Reserve Bank of India. RBI considers the track record of the Applicant Company, existing trade relations with India and financial position of the company while scrutinising the application.
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