Set up of an Indian company by the foreign entity (FDI)In
order to strategically invest in India, NRIs can invest in Indian Company
through Foreign Direct Investment (FDI). A person resident outside India or an
entity incorporated outside India (except for citizen of Pakistan and
Bangladesh and entities in Pakistan and Bangladesh), can invest in India,
subject to the FDI Policy of the Government of India.
Depending on the sector of the company,
percentage limits upto which investment can be made in a particular sector have
been stated in the FDI Policy. Further, FDI policy also states whether any
approvals from RBI/FIPB/Other governmental authorities is required to be
obtained or not i.e. FDI is allowed under automatic route (no permission) or
government approval route.
FDI is prohibited in the following
sectors:
(a) Lottery
Business including Government/ private lottery, online lotteries, etc.
(b) Gambling
and Betting including casinos etc.
(c) Chit
funds
(d) Nidhi
company
(e) Trading
in Transferable Development Rights (TDRs)
(f) Real
Estate Business or Construction of Farm Houses
(g) Manufacturing
of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes
(h) Activities
/ sectors not open to private sector investment e.g. Atomic energy and Railway
operations (other than permitted activities mentioned in the FDI Policy)
Note: 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.
Types of Instrument: Indian
companies can issue equity shares, fully and mandatorily convertible
debentures, fully and mandatorily convertible preference shares and warrants
subject to the pricing guidelines / valuation norms and reporting requirements
amongst other requirements as prescribed under FEMA Regulations.
The Indian company is required to
issue the equity shares within 60 days from the date of receipt of
consideration. If the shares are not issued within 60 days, the consideration
should be refunded to the investor within 15 days from the completion of 60
days
Compliances by Indian Company for FDI
Investment:
-
Form
Foreign Currency-Gross Provisional Return (FC-GPR): An Indian company issuing equity
instruments to a person resident outside India and where such issue is reckoned
as Foreign Direct Investment, defined under the rules, shall report such issue
in Form FC-GPR, not later than thirty days from the date of issue of equity
instruments.
-
Annual
Return on Foreign Liabilities and Assets (FLA): An Indian Company which has received
FDI, in the previous year including the current year, shall submit form FLA to
the Reserve Bank on or before the 15th day of July of each year.
Transfer of shares by way of Sale/Gift: Transfer of shares should be in
accordance with the prescribed guidelines under FEMA Regulations.
Further, one may have to evaluate if
Form FC-TRS is required to be filed in case of transfer of shares as per the
guidelines under FEMA Regulations. The onus of filing Form FC-TRS is of the
resident transferor/transferee, as the case may be. Such Form is required to be
filed within 60 days of transfer of
equity instruments or receipt/remittance of funds, whichever is earlier.
Remittance
of sale proceeds: AD Bank can allow the remittance of sale
proceeds of equity instruments (net of applicable taxes) directly outside India
to the seller of shares resident outside India or NRE/FCNR(B) account. The sale
of security has been made in accordance with the prescribed guidelines under
FEMA Regulations.
Updated 04/2024
A
Liaison Office (LO) (also known as Representative Office) can undertake 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 outside India. 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. It is not allowed to undertake any business
activity or commercial operation in India and cannot earn any income in India /
raise invoices. The LO can neither borrow nor lend money. The Unique
Identification Number (“UIN”) is to be quoted in all references made to
the RBI by the LO / designated AD.
LO can
undertake the following activities in India:
- Representing in India the parent
company / group companies.
- Promoting export / import from /
to India.
- Promoting technical/financial
collaborations between parent / group companies and companies in India.
- Acting as a communication channel
between the parent company and Indian companies.
Eligibility:
The
application in form FNC should be forwarded by the foreign entity through AD
Bank to the RBI which will be considered by RBI under two routes:
- Automatic Route
- Approval Route: Applications
from entities falling from NGO’s / NPO’s / Government Bodies / Departments
are considered by RBI in consultation with the Ministry of Finance.
In addition, the following eligibility criteria
are also considered by RBI:
- Profit making track record of the
foreign entity in its home country for the preceding 3 FYs for LO.
- Net worth (paid up share capital
+ free reserves – intangible assets) of USD 50,000/- for LO as per the
last audited Balance Sheet.
The approval of LO is valid for 3 years. After completion
of 3 years, an application for renewal is required to be filed with the AD Bank
for renewal of LO for another 3 years.
Without prior permission of the Reserve Bank, no person
being a citizen of / registered in Pakistan, Bangladesh, Sri Lanka,
Afghanistan, Iran, China, Hong Kong or Macau can establish in India, a LO in
India.
Kindy refer FAQ for detailed comparison of Liaison Office,
Branch Office and Project Office
Updated 04/2024
Companies
incorporated outside India and engaged in manufacturing or trading activities
are allowed to set up Branch Offices (BO) in India with specific approval of
the Reserve Bank. Such BO are permitted to represent the parent / group
companies and undertake certain activities in India. However, retail trading
activities or manufacturing / processing activities are not allowed for a BO.
Reserve Bank of India considers the track record of the applicant company,
existing trade relations with India, the activity of the company proposing to
set up office in India as well as the financial position of the company while
scrutinising the application. Profits earned by the BO are freely remittable
from India, subject to payment of applicable taxes.
A BO can undertake the following activities in
India:
- Export / Import of goods.
- Rendering professional or
consultancy services.
- Carrying out research work, in
areas in which the parent company is engaged.
- Promoting technical or financial
collaborations between Indian companies and parent or overseas group
company.
- Representing the parent company
in India and acting as buying / selling agent in India.
- Rendering services in information
technology and development of software in India.
- Rendering technical support to
the products supplied by parent / group companies.
- Foreign airline / shipping
company.
Eligibility:
The
application in form FNC should be forwarded by the foreign entity through a
designated AD Bank to RBI which will be considered by RBI under two routes:
- Automatic Route
- Approval Route: Applications from entities falling from NGO’s / NPO’s /
Government Bodies / Departments are considered by RBI in consultation with
the Ministry of
In addition, the following eligibility criteria is
also considered by RBI:- Profit making track record of the
foreign entity in its home country for the preceding 5 FYs for BO.
- Net worth (paid up share capital
+ free reserves – intangible assets) of USD 1,00,000/- for BO as per the
last audited Balance Sheet.
The
approval of BO is valid for 3 years. After completion of 3 years, an
application for renewal is required to be filed with the AD Bank for renewal of
BO for another 3 year
Without prior permission of the Reserve Bank, no
person being a citizen of / registered in Pakistan, Bangladesh, Sri Lanka,
Afghanistan, Iran, China, Hong Kong or Macau can establish in India, a BO in
India.
Kindy refer FAQ for detailed comparison of Liaison Office,
Branch Office and Project Office
Updated 04/2024
A
Project Office (PO) means a place of business established to represent the
interests of a foreign company executing a project in India. Such offices are
prohibited from undertaking or carrying on any activity other than the activity
relating to the execution of the project for which such office is established.
Eligibility:
Reserve Bank has granted general permission to
foreign companies to establish POs in India, provided they have secured a
contract from an Indian company 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 PFI or a Bank in
India for the project.
However, if the above criteria’s are not met, the
foreign entity has to approach the RBI, Central Office, for special approval.
Setting up of PO by foreign NGO / NPO / Foreign
Government Bodies / Departments are under the Government Route. Such entities
are required to apply to RBI for prior permission to establish an office in
India.
Validity:
Generally, the approval is valid till completion of the project.
Without
prior permission of the Reserve Bank, no person being a citizen of/ registered
in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or
Macau can establish in India, a PO in India.
Kindy refer FAQ for
detailed comparison of Liaison Office, Branch Office and Project Office Updated 04/2024
Under the Foreign Portfolio Investment (FPI) regime, Securities and Exchange Board of India (SEBI) has harmonized foreign institutional investors (FIIs), sub-accounts and qualified foreign investors (QFIs) regimes into a single investor class – foreign portfolio investors (FPI) and provide a single window clearance through designated depository participants (DDPs).
Procedure to register FPI:- An application is to be made to the Designated Depository Participant for registration as an FPI in the form A along with specified fee.
- SEBI has authorized NSDL to generate the registration number and certificate which shall be transmitted to its DDP, who will in turn issue electronic registration certificate to the FPI applicant.
Eligibility criteria for FPI:The applicant shall have to fulfill the following conditions to be eligible register as FPI:
- The applicant should not be a person resident in India as per the Income-tax Act, 1961.
- The applicant should not be a Non Resident Indian.
- The applicant should be a resident of a country whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding or a signatory to bilateral Memorandum of Understanding with the Board.
- The applicant should not be a resident of a country identified in the public statement of FATF as either:
a. Having a strategic Anti-Money Laundering or Combating the Financing of terrorism deficiencies to which counter measures apply or
b. Has not made sufficient progress in addressing the deficiencies or has not committed to an action plan with FATF to address such deficiencies. - The applicant should be legally permitted to invest in securities outside the country of its incorporation / place of business / establishment.
- The applicant should be authorized by its MOA / AOA / Agreement to invest in securities on its behalf or on behalf of its clients.
- The applicant should have sufficient experience, good track record, should be professionally competent, financially sound and should generally have a good reputation of fairness and integrity.
- The grant of certificate to the applicant shall be in the interest of the development of the securities market.
- If the applicant is an intermediary, he should be a fit and proper person.
- If the applicant is a bank, he should be a resident of a country whose central bank is a member of Bank for International Settlements.
Since NRI’s are not allowed to register as an FPI, a company which is majority owned by one or more NRI / PIOs shall not be allowed to make investments as an FPI. However, if such company is appropriately regulated it may be given registration as Category II FPI for the purpose of acting as investment manager for other FPIs. Alternately, a fund having NRIs as its investors is also not prohibited from obtaining registration as an FPI.
Categories of FPI:FPI may be registered in one of the following categories:
- "Category I" shall include Government and Government related investors such as central banks, Governmental agencies, sovereign wealth funds and international or multilateral organizations or agencies.
- "Category II" shall include:
• Regulated broad based funds such as mutual funds, investment trusts, insurance/reinsurance companies
• Regulated persons such as banks, asset management companies, investment managers/ advisors, portfolio managers;
• Broad based funds that are not appropriately regulated but whose investment manager is appropriately regulated:
Provided that the investment manager of such broad based fund is itself registered as Category II FPI. Provided that the investment manager undertakes that it shall be responsible and liable for all acts of commission and omission of all its underlying broad based funds and other deeds and things done by such broad based funds under these regulations.
• University funds and pension funds; and
• University related endowments already registered with the Board as Foreign institutional investors (FII) or sub-accounts.
- "Category III" shall include all others not eligible under Category I and II such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.
Banking accounts:- FPI can open a non interest bearing Special Non-Resident Rupee (“SNRR”) account and a foreign currency account with Authorized Dealer Bank. They can transfer sums, at the prevailing market rate, from foreign currency account to SNRR account for making genuine investments in securities. The Authorized Dealer Bank may transfer repatriable proceeds (after payment of applicable taxes) from SNRR account to the foreign currency account.
Others:
FPIs can invest in units of REITs, InvIts and Category III AIFs subject to certain conditions.
A. NRIs can invest in shares and convertible debentures through Portfolio Investment Scheme (PIS) and otherwise:I. PIS:PIS is a scheme of Reserve Bank of India defined in Schedule 3 of Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. As per the scheme, NRIs can purchase and sell shares and convertible debentures of Indian companies through
a registered broker on a
recognised stock exchange by routing such purchase/sale transactions through their account with a designated bank branch.
Individual NRI cannot purchase more than 5% of the paid up capital of the company / total paid up value of the convertible debentures of the company on repatriation as well as on non-repatriation benefits. The overall ceiling of 10% of the paid up capital / paid up value is applicable for all the NRI’s put together. NRI can deal with only one designated branch of the bank at any time.
The aggregate ceiling of 10% may be raised to 24% if a special resolution to that effect is passed by the General Body of the Indian company. The tracking of 10% limit is done by the RBI. RBI starts the caution at 8%.The same is published on RBI website.
Bank has to upload on daily basis the ASCII file (which shall contain the details of the PIS transactions undertaken by NRI’s for the entire Bank) on RBI portal.
II. NRIs can invest in shares or convertible debentures without limit on Non repatriation basis:NRI can purchase, without any limit, on non -repatriation basis, shares or convertible debentures of an Indian company issued whether by public issue or private placement or right issue.
B. NRI’s can invest in securities other than shares and convertible debentures:NRI’s can invest in the below-mentioned securities without the portfolio investment scheme:
|
Repatriation basis
|
Non-Repatriation basis
|
Bonds
issued by PSU and Infrastructure Debt Funds
|
Yes
|
No
|
Non-Convertible
Debentures
|
Yes
|
Yes
|
Government
securities (other than bearer securities)
|
Yes
|
Yes
|
Units
of domestic mutual fund/Money Market Mutual funds
|
Yes
|
Yes
|
Commercial
Papers
|
No
|
Yes
|
Non-convertible
/ redeemable preference shares
|
Yes
|
Yes
|
Introduction:
NRIs are the “Non-Resident Indians”,
whose contribution to the economy and growth of India has always been highly
valued by the Government. Realising the value of their contributions, the
Government of India has permitted the NRI’s to make investments in Indian
business in the form of Limited Liability Partnership (“LLP”), Proprietary
concern or Partnership Firm.
Investments by NRI’s in “LLP,
Proprietary concern or Firm” are governed by the provisions of Foreign Exchange
Management Act (“FEMA”) read with relevant rules on “Non-Debt Instrument
Foreign Exchange Management (Non-debt Instruments) Rules, 2019” (“NDI
Rules,2019”).
Here in this article, we will cover the provisions
with respect to investments by NRI’s in LLP, Proprietary concern, Firm, the
conditions subject to which investments can be made and limitations, if any, on
investments.
A.
Limited Liability Partnership (“LLP”)
Limited Liability Partnership (“LLP”) means “a partnership formed
and registered under the Limited Liability Partnership Act, 2008”. In
India, LLP form of organization is growing rapidly owing to the flexibility in
its structure and operation.
NRI’s or OCI’s are permitted to make investments in LLP in India in
accordance with the extant NDI Rules, 2019. As per the said Rules, investments
in LLP can be made on repatriation or non-repatriation basis. Further,
Companies, Trust and Partnership Firms which are owned and controlled by NRI’s
or OCI’s are also allowed to invest on non-repatriation basis. Specific
conditions as prescribed in the said Rules with respect to investments in LLP
are as under:
1. Investments on
non-repatriation basis:
We have highlighted below the key provisions to be considered were investments are made on a non-repatriation basis:
Note 1: However, it is observed that, various banks in
past have allowed repatriation of such proceeds under USD 1 million scheme. Hence, it is
advisable to seek professional advise and Bank’s guidance before undertaking
any transaction related to investment in LLP.
2. Investments on
repatriation basis:
Foreign investments in LLP can be made
on repatriation basis, subject to the following conditions:
a. Investments in LLP can be made either by way of capital contribution or
by way of acquisition or transfer of profit share of LLP
b. Foreign investment is permitted under the automatic route in LLPs
operating in sectors/ activities where 100% Foreign Direct Investment (FDI) is
allowed, through the automatic route and there are no FDI linked performance conditions.
c. Foreign Investment in LLP is subject to the compliance of LLP Act, 2008.
d. Pricing guidelines norms - The price at which
investment is made in an LLP should not be less than the fair price worked out
as per any valuation norm which is internationally accepted or adopted as per
market practice. Further, a valuation certificate to this effect shall be
issued by the Chartered Accountant or by a practicing Cost Accountant or by an
approved valuer from the panel maintained by the Central Government.
e. In case of transfer of
capital contribution or profit share from a person resident in India to a
person resident outside India, the transfer should not be for consideration
less than the fair price of capital contribution or profit share of LLP. Further, in case of transfer of capital
contribution or profit share from a person resident outside India to a person
resident in India, the transfer should not be for consideration more than the
fair price of capital contribution or profit share of LLP.
f. The amount of consideration should be paid by way of
inward remittance from abroad through banking channels out of funds held in
NRE/FCNR(B)/NRO Account maintained in accordance with the FEMA Regulation.
B. Investments in
Partnership Firm/ Proprietary Concern:
NRI’s or OCI’s are allowed to make
investments in the capital of partnership firm or a proprietary concern in
India subject to the condition that such investment can be made only a on “non
-repatriation basis”. Further, such investments are subject to the below
mentioned key provisions:
a. The firm
or proprietary concern should not be engaged in any of the following
activities:
·
Agricultural/plantation; or
·
Print media; or
· Real estate business.
Note: In general, “Real estate” means
buying and selling of property but does not include development of townships,
construction of residential/ commercial premises, roads or bridges and Real
Estate Investment Trusts (REITs) registered and regulated under the SEBI
(REITs) Regulations, 2014.
Disclaimer: It is always advisable to
take a professional help before making any investments in real estate business
activity.
b. The
amount of consideration should be paid as inward remittance from abroad through
banking channels or out of funds held in NRE/ FCNR(B)/ NRO account maintained
in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
c. The
disinvestment proceeds shall be credited only to the NRO account of the person
concerned, irrespective of the type of account from which the consideration was
paid.
d. The
amount invested for contribution to the capital of a firm, or a proprietary
concern and the capital appreciation thereon shall not be allowed to be
repatriated abroad. However,
it is observed that, various banks in past have allowed repatriation of such proceeds under USD 1 million scheme.
Hence, it is advisable to seek professional advise and Bank’s guidance before
undertaking any transaction related to investment in proprietary concern or firm.
Conclusion:
In light of the above, it can be
observed that the Government of India has provided a far stretched benefit to NRI’s
for making investments in Indian business. The above guiding provisions will
help the NRI in deciding their investment plan in India which will ultimately
result in the economic growth of the country.
RBI permission: Additionally, one may also note that,
investments by NRI’s or OCI’s in LLP, proprietorship and partnership firm in
any other manner other than above, will require prior approval of RBI.
- Updated 04/2024