Decoding - FDI

First few thoughts that appear in our mind as we hear about Foreign Direct Investment or FDI as it popularly known are FDI in multi brand retail, wallmart, loss of business for small and medium enterprises, etc. Instead of such myopic approach towards FDI, a broader view is required to understand the very basics of same.

Meaning

An investment made by a company or entity based in one country, into a company or entity based in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is a contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made.

FDI in India

Department of Industrial Policy and Promotion (DIPP) is the regulatory body for determining policies relating to FDI in India. With effect from 31.03.2010, DIPP has started issuing Master Circulars (bi-yearly) in relation to FDI policy, instead of earlier practice of issuing press notes which were all scattered. Apart from this Government has also set up Foreign Investment Implementation Authority (FIIA) as one stop window for liaising with various Government agencies for speedy implementation of projects.

Who can invest in India?

A non-resident entity can invest in India, subject to the FDI Policy. A citizen of Bangladesh can invest only under the Government route. A citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors other than defence, space and atomic energy.

An unincorporated body or a body not registered under relevant statues outside India is not allowed to make Foreign Direct Investment (FDI) in India.

Entities into which FDI can be made

FDI in Indian Company:

Indian companies can issue capital against FDI. (Capital means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures)

FDI in Partnership firm / Proprietary Concern:

Investment by Non-Resident NRI / PIO

With non – repatriation option – can invest in the capital of a firm or a proprietary concern

With repatriation option – prior permission of RBI is required in consultation with Govt. of India

** An NRI or PIO (Person of Indian Origin) is not allowed to invest in a firm or proprietorship concern engaged in any agricultural / plantation activity or real estate or print media.

Investment by Non-Resident other than NRI / PIO

Prior approval of RBI is required. The application will be decided in consultation with Government of India.

FDI in Venture Capital Fund (VCF):

If a domestic VCF is set up as a trust, a person resident outside India (PROI) can invest in such VCF subject to approval of FIPB. However, if a domestic VCF is set up as an incorporated company under the Companies Act, then a PROI can invest in such domestic VCF under the automatic route of FDI scheme, subject to pricing guidelines, reporting requirements, mode of payment, minimum capitalization norms, etc.

FDI in Trusts:

Other than VCF, FDI in Trusts are not permitted.

FDI in Limited Liability Partnership (LLPs):

FDI are allowed, through the Government approval route, only in LLPs operating in sectors / activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions. LLPs with FDI are not allowed to operate in agricultural / plantation activity, real estate business or print media.

FDI in other Entities:

FDI in resident entities other than those mentioned above is not permitted.

Entry Routes for Investment

Investment can be made by non-resident through the Automatic Route or the Government Route. Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the Government of India for the investment. Under the Government Route, prior approval of the Government of India is required. Proposal for foreign investment under the Government route are considered by Foreign Investment Promotion Board (FIPB). Guidelines for e-filing of application and instructions are available at FIPB’s website – http://finmin.nic.in , http://www.fipbindia.com

Investment can be made by non-resident in the capital of a resident entity only to the extent of the percentage of the total capital as specified in the FDI policy in other words investment cannot go beyond the sectoral cap specified.

In case of sectors with caps on foreign investment, if by acquisition of shares of Indian company, ownership or control of Indian company is getting transferred to non-resident entity, Government / FIPB approval is required. No such approval is required where there are no sectoral caps.