The RBI has laid down FEMA regulations for regulating how FDI flows in India and the procedure to be followed for their compliance.

There are two procedures for receiving Foreign Direct investment in an Indian Co. – the Automatic and the Government Route.

Automatic route: FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

Government route: FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, 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.

How is FDI received in books of the Indian Company?

Foreign investment is considered as FDI only if the investment is made in equity shares, fully and mandatory convertible preference shares and fully and mandatory convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront.

Partly paid equity shares and warrants issued by an Indian company in accordance with the provision of the Companies Act, 2013 and the SEBI guidelines, as applicable, shall be treated as eligible FDI instruments w.e.f. July 8, 2014 subject to compliance with FDI scheme.

Any foreign investment into an instrument issued by an Indian company which:

  • gives an option to the investor to convert or not to convert it into equity or
  • does not involve upfront pricing of the instrument as a date would be reckoned as ECB and would have to comply with the ECB guidelines.

Note: The FDI policy provides that the price/ conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [valuation as per any internationally accepted pricing methodology on arm’s length basis for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies] without any assured return.

Where is FDI received in books of Indian Company?

An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures by:

  • inward remittance through normal banking channels.
  • debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.
  • conversion of royalty / lump sum / technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.
  • conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
  • debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.

If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B) / Escrow account, the amount shall be refunded. Further, Reserve Bank may on an application made to it and for sufficient reasons permit an Indian Company to refund / allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.

What is the Compliance Procedure to be followed for FDI?

First Compliance on receipt of share application money

Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India, under whose jurisdiction its Registered Office is located, the Advance Reporting Form, containing the following details :

  • Name and address of the foreign investor/s;
  • Date of receipt of funds and the Rupee equivalent;
  • Name and address of the authorised dealer through whom the funds have been received;
  • Details of the Government approval, if any; and
  • KYC report on the non-resident investor from the overseas bank remitting the amount of consideration

Second Compliance for timely issue of instruments

The Indian company has to ensure that the shares are issued within 180 days from the date of inward remittance which otherwise would result in the contravention / violation of the FEMA regulations.

Third Compliance on issue of shares

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 Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India, along with:

  • Certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying
    • 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 investment is within the sectoral cap / statutory ceiling permissible under the Automatic Route of the Reserve Bank and it fulfills all the conditions laid down for investments under the Automatic Route, OR Shares have been issued in terms of SIA/FIPB approval No. ——————— dated ——————– (enclosing the FIPB approval copy)
  • Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.
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