One remarkable feature of the contemporary world has been the proliferation of private capital flow in the form of foreign direct investment (FDI) in developing countries, especially since 1990s. Since the 1980s, multinational corporations (MNCs) have emerged as major actors in the globalization context. Governments around the world— in both advanced and developing countries—have been attracting MNCs to come to the respective countries with their FDI. This phenomenon may be related to the broader context of liberalization in which most developing and transition countries have moved to market-oriented strategies.
Among the developing countries in Asia, India and China are the two major economies that have adopted market oriented economic policies designed to attract FDI inflows. A company that goes for Foreign Direct Investment could possibly enjoy many incentives in the new country. Some of the tax benefits or concessions like low corporate tax and income tax rates could invariably boost the company’s profit.
Indian Companies are generally allowed to raise funds from abroad in following method:
(i) Foreign Direct Investment in India. (FDI)
(ii) External Commercial Borrowings. (ECB)
(iii) Foreign Currency Convertible Bonds. (FCCB)
(iv) Foreign Currency Exchangeable Bonds (FCEB)
FOREIGN DIRECT INVESTMENT IN INDIA (FDI)
Under Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No.FEMA 20/2000-RB dated May 3, 2000) the Indian Companies are allowed to raise funds from overseas investors. An Indian company which is not engaged in any activity or in manufacturing of item included the List A and List B appended may issue fresh shares subject to the condition and sectoral cap as indicated under Foreign Direct Scheme, subject to the terms and condition specified .
WHO CAN INVEST IN INDIA
There are following categories of person resident outside India who may invest in the capital of Indian Company:
1. A non-resident entity (other than citizen of Pakistan or an entity incorporated in Pakistan)
2. A citizen or entity of Bangladesh under Government Route.
3. NRI resident as well as citizen of Nepal and Bhutan on repatriation basis.
4. Erstwhile OBCs as incorporated non-resident entities.
5. An FII under the Portfolio Investment Scheme.
6. SEBI registered FIIs or NRIs through a registered broker on recognized India Stock Exchange.
7. SEBI registered Foreign Venture Capital Investor. (FVCI)
An FII may invest in the capital of an Indian Company under the Portfolio Investment Scheme which limits the Individual holding of an FII to 10% of the capital of the company and the aggregate limit for FII investment to 24% of the capital of the company. The aggregate limit of 24% can be increased to the sectoral cap/statutory ceiling as approved by RBI time to time.
INDIAN ENTITIES INTO WHICH FDI CAN BE MADE
There are below mentioned entity registered or incorporated under Indian law can raise funds against capital:
(i) An Indian Company.
(ii) Partnership Firm.
(iii) Proprietary Concern.
(iv) Indian Venture Capital Undertaking.(ICVF)
(v) Ventures Capital Fund. (VCF)
(vi) Limited Liability Partnership. (LLP)
A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest in the capital of a firm or a proprietary concern in India on non-repatriation basis.
Foreign Direct Investment in Trust other than Venture Capital Funds (VCF) is not permitted. FDI is not allowed to invest in the above mentioned entities engaged in any agricultural/plantation activity or real estate business or print media. FDI in resident entities other than those mentioned above is not permitted.
TYPE OF INSTRUMENTS
An Indian companies arrange fund from a person resident out of India by issue of following type of instrument which are given below:
1. Equity Shares.
2. Preference Shares. (Fully, Compulsory and Mandatory Convertible)
3. Debentures. (Fully, Compulsory and Mandatory Convertible)
4. Issue of Foreign Currency Convertible Bonds. (FCCBs)
5. Depository Receipts (DRs) (American Depository Receipts (ADRs)/Global Depository Receipts. (GDRs)
5. Foreign Currency Exchangeable Bonds. (FCEBs)
Indian companies which are eligible to issue shares to person resident outside India under the FDI Policy may be allowed to retain the share subscription amount in Foreign Currency Account, with the prior approval of RBI.
ISSUE PRICE OF SHARES
Price of shares issued to person resident outside India under the FDI Policy, shall not be less than:
(a) the price worked out in accordance with the SEBI guidelines/regulations, as applicable, where the shares of the company is listed on any recognized stock exchange in India;
(b) 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 recognized stock exchange in India; and
(c) the price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the RBI from time to time, where the issue of shares is on preferential allotment.
REPORTING OF FDI
(i) Reporting of Inflow
(a) An Indian Company receiving invest from outside India for issuing shares/ convertible debentures/preference shares under the FDI scheme, should report the details of the amount of consideration, to the Regional office concerned of the Reserve Bank not later than 30days from the date of receipt in the Advance Reporting Form.
(b) Indian company are required to report the details of the receipt of the amount of consideration for issue of shares/ convertible debentures through an AD Category-I bank, together with the copy of the FIRC evidencing the receipt of the remittance along with the KYC report on the non-resident investor from the overseas bank remitting the amount. The report would be acknowledged by the Regional Office concerned, which will allot a Unique Identification Number (UIN) for the amount reported.
(ii) Time frame within which shares have to be issued
The capital instruments should be issued within 180 days from the date of receipt of inward remittance received through normal banking channels including escrow account opened and maintained for the purpose or by debit to the NER/FCNR (B) account of the non-resident investor. In case the equity instruments are not issued within 180 days from the date of receipt of the inward remittance or the date of debit to the NER/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by onward remittance through normal banking channels or by credit to the NER/FCNR(B) account, as the case may be. Non-compliance with the above provision would be reckoned as a contravention under FEMA and could 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 Reserve Bank, on the merits of the case.
(iii) Reporting of Issue of Shares
(a) After issue of capital the Indian company has to file Form FC-GPR not later than 30 days from the date of issue of capital.
(b) Form FC-GPR has to be dully filled up and signed by MD/Director/Secretary of the Company and submitted to the Authorised Dealer(AD) of the company, who will forward it to the RBI.
(c) The report of the receipt of consideration as well as Form FC-GPR have to be submitted by the AD bank to the Regional office concerned of the RBI under whose jurisdiction the Registered office of the company is situated.
(d) Annual Return on Foreign Liabilities and Assets should be filed on an annual basis by the Indian Company, directly with the “Advisor, Balance of Payment Statistical Division, Department of Statistics and Information Management, RBI, C9, 8th Floor, Bandra-Kurla Complex, Bandra (E), Mumbai-400051”. This is an annual return to be submitted by 31st July every year, pertaining to all investments by way of direct/portfolio investments/re-invested earning/ other capital in the Indian company made during the previous years.
FDI is a capital account transaction and thus any violation of FDI regulations are covered by the penal provisions of the FEMA.
(1) If any person violates/contravenes any FDI Regulations, by way of breach/non-adherence/non-compliance/contravention of any rule, regulation, notification, press note, press release, circular, direction or order issued by Government of India/FIPB/RBI in exercise of the power under FEMA, he shall, upon adjudication, be liable to a penalty up to trice the sum involved in such contraventions where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable and where such contravention is continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which contravention continues.
(2) Where a person committing a contravention of any provisions of this Act or of any rules, direction or order made there under is a company, shall be deemed to be guilty of the contravention and shall be liable to be proceeding against and punished accordingly.
(3) No contravention under Foreign Exchange (Compounding Proceeding) Rules 2000, shall be compoundable unless the amount involve in such contravention is quantifiable.
Thanks & Regards
CS Ajay Mishra