Module 5

MODULE 5

OVERSEAS INVESTMENT BY INDIAN ENTITIES

FDI is not the only monetary source, but one of the major monetary sources which has led to the
economic development in our country. Due to an outstanding performance and participation in
international trade, growing outflows of FDI, cross border mergers and acquisition activity, there
has been a change in the internationalization of firms over two decades.

Outward Foreign Direct Investment (“OFDI”) is currently being witnessed as a significant force
in the globalization of Indian economy. Decade of 2000s encountered a solid rise of Indian
speculation abroad.

Big Indian industrial houses like Tata, Birla, Mittal Steel, Reliance, Airtel, Sundaram and others
are a part of this globalization drive. These Indian firms in their mission to go worldwide and
partake in an ever far reaching worldwide business movement have not just wandered into
creating nations, yet in addition into industrialized nations. In any case, this phenomenon is not
new. From a chronicled point of view, it is comprehended that many firms from creating nations
have gone to the outside shores in 1960s.

This internationalization of Indian firms turned into an uncommon element of the Indian
economy. Sufficient consideration was attracted to this when India settled on a cognizant choice
in 1991 to open up its economy. India's tryst with financial changes and progression additionally
set this goal as outward speculation arrangement was bit by bit and logically changed. By and by,
India's aggregate endorsed OFDI is to the tune of US$16 billion of every 2009 (Ministry of
Finance, Government of India). Rise of these new speculators in the sixties from creating
countries became presently perceived as Emerging Multinational Enterprises (“EMNEs”).

The RBI has liberalized overseas investment norms for both portfolio investment as well as
direct investment. The steps are as follows:

§ Increasing the overseas investment limit to 400 per cent of the net worth from 300 per
cent of the net worth in the energy and natural resources sector like oil, gas, coal and
mineral ores.

§ Increasing the limit on overseas portfolio investment to 50 per cent of their net worth to
35 per cent of the net worth.

§ For any current or capital account transaction or a combination of both, allowing Indian
residents to remit up to US$ 250,000 per financial year.

§ Allowing mutual funds to make an aggregate investment up to US$ 5 billion in overseas
avenue.

§ Allowing borrowing from abroad to firms to finance their foreign acquisitions.

§ Exemption to the Indian Corporate from the RBI from seeking Prior permission of the
Central Government in foreign exchange for international competitive bidding (“ICB”).

§ Emerging global opportunities for trade in goods as well as services for providing liberal
access to Indian business for technology- sourcing with resourcing.

§ Encouraging the Indian industries to improve the image of Indian industries abroad and
also to adopt a spirit of self- regulation.

§ With the consent of RBI, the Registered Trusts and Societies engaged in manufacturing
or educational sector have been allowed in June 2008 to make investment in the same
sector.

5.1. OUTFLOWS OF FDI FROM INDIA TO THE WORLD
Birla with the setting up of a textile mill in Ethiopia in the year 1959 proved to be the first wave
in the Indian FDI. Birla expanded further into Africa by setting up an engineering unit in Kenya

in the year 1960. Seating up an assembly plant in Sri Lanka in the year 1962 for sewing
machines by Shri Ram group. The seventies India witnessed more outward investment.

From the year 1995 the second wave of overseas Indian Venture started in a significant manner
as in the RBI Annual Report: 2000 the foreign exchange restrictions on capital transfer (for
overseas acquisitions) were progressively eliminated. Relaxation of the Government policy
resulted in a surge of OFDI from India. The supply of OFDI from India expanded quickly from
US$ 124 million out of 1990 to US$ 1859 million of every 2000 and US$ 9569million out of
2005 (UNCTAD 2006: 305). The offer of India in the aggregate load of OFDI from creating
nations ascended from 0.08 % in 1990 to 0.21 % in 2000 and 0.75 % in 2005.5 It was a irrelevant
extent of India's GDP in 1990; however this extent ascended from 0.4 % in 2000 to 1.2 % in
2005 (UNCTAD 2006: 315).

Despite the fact that India's offer altogether creating economy FDI outpourings stayed beneath
0.5 % all through the 1990s, yet increased continuously reaching nearly 6.0 % in
2007(UNCTAD WIR: 2009). Though India remains a net FDI recipient, even then the gap
between outflows and inflows was sharply narrowing over the past few years. In 1990, annual
outflows, on average, amounted to 7 % of inflows. This increased from about 30 % to 60 %
between 2000–2005 and 2005–2007 (Athukorala 2009: 130).

India’s total FDI outflows (approved and actual) were to the tune of US$ 26 billion in 2007. The
same went up to register almost US$ 29 billion in 2009 (Ministry of Finance, Government of
India: 2009). 2006 onwards, India emerged as an important investor in the world. However, 2010
witnessed a marginal decline in outflows from India.

A favourable growth in the investment drive abroad was witnessed by the Indian Corporates
sector. The Indian companies grabbed the opportunities around the globe. According to the
RBI’s report published in July 2008, total outbound investments in joint ventures of India and
wholly owned subsidiaries (WOS) abroad grew by 53.2 % in the year 2008. Between April and
December 2007, the RBI approved 1595 proposals for outward FDI amounting to US$ 18.44
billion. Almost half of the outward FDI (43%) between April and December was flown into
manufacturing sector. The main recipients were Singapore i.e. 37%, the Netherlands i.e. 26%

and the British Virgin Islands i.e. 9%. the outbound investment trend of the developing
economies including India can be gathered from the following table

5.2. FACTORS RESPONSIBLE FOR OVERSEAS INVESTMENT
It is rightly suggested that overseas foreign direct investments from the developed countries
provide competitive advantage to these firms as they try to compensate greater risks ensuring
higher returns. When a firm is operating in another country, it usually tends to set a cost
especially in the form of lack of unfamiliarity with the foreign soil and lack of information about
the foreign markets which is not encouraged by local firms. There are no sketchy evidences to
provide a clear trend in determinants of India’s overseas expansion. However, there are few
factors which are necessary to examine the underlying factor responsible for Indies overseas
investment:

market access

economic horizontal/
implications vertical

integration

resrtrictive delivery of
policies services

image or brand access to
name technology
new product mix
securing natural
resources and raw

material

5.2.1. Market access:

By undertaking overseas acquisition transactions, the Indian firms are getting an access to the
regulated market of developed and developing countries. A good example is pharmaceutical
industry, where the Indian corporate equipped with the USFDA approved facilities are looking
for acquisition in the regulated market for ease of registration processes. The manufacturing
activities will still be in India entailing low cost advantage. Dr Reddy’s Laboratories has been a
pioneer in this acquisition drive acquiring Betapharm in Germany and Bharat Forge acquiring
Federal Forge in the USA

5.2.2. Horizontal or vertical integration:

Horizontal, in part vertical, integration was particularly noticeable in the steel sector, as also in
the chemicals sector. The striking examples are Tata Steel’s acquisitions of Corus Steel in the
UK, NatSteel in Singapore and Millennium Steel in Thailand. In addition, the acquisition of
Berger International in Singapore by Asian Paints and Dunlop Tyres in South Africa by Apollo
Tyres are also examples of horizontal expansion across borders.

5.2.3. Delivery of services:

The growth of this delivery of services immensely happened in the IT sector. Business process
outsourcing and computer software provided the push factor for the Indian companies to acquire
firms in this domain. Initial advantage in delivery of IT products and services catapulted
reputation of India firms abroad.

5.2.4. Access to technology:

Indian companies interested to produce value added products and diversify their product basket
require certain improvised technology which is not available to them. This can be obtained by
acquiring firms abroad which would provide them market expansion as well as the technology to
produce value added products at a lower cost. For instance, Tata Motors Ltd acquired Daewoo
Commercial Vehicle Company (Republic of Korea) in 2003 for US$ 118 million for accessing
the South east Asian market and the Korean firm's production facilities. Infosys Technologies
Ltd. acquired Expert Information Services Pty. Ltd (Australia) in 2003 for US$ 22.9 million to
strengthen its presence in the Australian market and to access clients of the acquired company.

Similarly, companies such as Daksh eServices10, Datamatics Technologies and Hinduja TMT
Ltd have been going abroad to expand the markets for their services and exploit growth
opportunities in other regions. Ranbaxy Technologies acquired RPG Aventis (France) in 2003
for US$ 70 million to strengthen its market position in Europe and to access strategic assets (e.g.
brand names). Access to technology is also particularly important in energy and
telecommunications, semiconductors and seed-technologies. The acquisitions of Hansen
Transmissions in Belgium by Suzlon Energy, Flag Telecom in the USA by Reliance Infocomm,
New Logic in Austria by WIPRO and of Adventa in the Netherlands by United Phosphorus are
prime examples. Access to technology was probably an important underlying factor even in the
steel, pharmaceuticals and chemicals sectors.

5.2.5. Securing natural resources and raw material:

Continuous business activities of the Indian firms require sustainable supply of raw material to
produce, hence they look for outside resources. Similarly securing natural resources is an
important factor for the growth of the companies. For instance, in 2003 Hindalco acquired two
copper mines in Australia and Oil and Natural Gas Commission (ONGC) Ltd, a state-owned
company, bought a 25 per cent stake in a Sudan oil field from Talisman Energy (Canada) for
US$ 720 million to secure the supply of resources. ONGC acquired a 20 per cent stake in
Sakhalin oil and gas field in the Russian Federation in 2001 for US$ 1.7 billion and in 2002 it
bought a 20 per cent stake in a gas field in Myanmar (UNCTAD, 2004). There were a large
number of small acquisitions in copper, coal, coke and iron ore, mostly in Australia, which
covers this dimension.

5.2.6. New product mix:

Indian companies are also going abroad to obtain a new product mix or to acquire products that
will otherwise require huge investments and a long time to manufacture indigenously. As world
market is integrating, such demands are quite often experienced.

Image or Brand name Indian firms operating in the global arena tend to acquire an international
image and vision. It promotes their brand equity. Acquisition process enhances their ownership
and financial capability, which plays a crucial role in the decision making.

Global leadership aspirations of Indian firms are also a contributing factor to this acquisition
process abroad. These are firm-specific rather than sector-specific. It is also possible that large
diversified firms seek to capture global leadership in product categories or in niche areas.

Firms like Suzlon Energy, Tata Tea, United Phosphorus, Bharat Forge, Asian Paints and most
recently Tata Steel are creating a global footprint.

5.2.7. Restrictive Policies

The lack of incentives for exports had adversely affected the growth expansion of the Indian
firms. The constraining effects of the government policies before the liberalization did not allow
the firms to form strategies that would allow them to register higher business for them.

MRTP Act also prompted these business houses to look for external territory as an escape route
for their expansion and diversification. The prime historical example of the pioneering Birla
Group provides ample evidence of this proposition that the constraining effects of government
policy was a major domestic push factor in overseas expansion (Merchant 1977, Kudaisya 2003).

The Birla Group made its major expansion drive in the late 1950s when they anticipated more
restriction on control and exchange unfolding in the business horizon. The company’s rapid
expansion began in the 1969 when the Indian Government was inching towards restriction of the
growth of “monopoly houses.”

It established India-Thai Synthetic Limited in Thailand and established joint ventures in textiles
in Philippines and went to expand its operations in Malaysia and Indonesia. All these countries
provided a favourable climate for trade and investment as they were in the process of opening
out to the outside world. This was in sharp contrast to India’s business environment.

5.2.8. Economic Implications

Pro-reforms era and progressive liberalization in India has brought about a systemic change in
the policy making of overseas investment. The last two decades especially have been one of
facilitation and encouragement for the Indian firms. The role of government as a facilitator is
significant compared to the previous four decades of its rule making and handling of Indian

economy. Indian firms to invest abroad has been a welcome step as well as given a big boost to
the outward FDI flows.

Market access for exports, possibilities of realizing economy of scale through horizontal or
vertical integration, upgrading, assimilating and developing technology, sourcing resources or
raw materials, enhancing capacity to deliver services or acquiring international brand names are
the major attractions.

Similarly, firms tend to lose their business in some ways. Increased costs, lower profits, high
maintenance, higher debt and overstretched finances can cause operational problems and delay
delivery. Investments or acquisitions in industrialized countries may raise unit costs and hence
lower profit on account of the much higher wages and the much larger overheads.

The impact of overseas investment could have serious implications on trade flows and
employment. Marketing seeking outward FDI will promote exports and resource seeking will
promote imports. The impact of efficiency seeking investment will not be possible to predict
because it will all depend on how the firms are proposing to scale up their production through
innovation, technology, inputs and level of managerial skills in the host countries. Impact of
outward investment and acquisition on domestic investment may be positive provided it crowds-
in domestic investment and negative if it crowds-out the domestic investment.

If firms are able to increase the output, it will have a positive effect on domestic employment
environment. Sectors or industries may benefit from this engagement. International investments
or acquisitions should enhance industrial competitiveness through upgrading the process,
upgrading the product, moving up the value chain or moving on to a new value chain and such
benefits may trickle down to the local firms or industry depending upon the linkages they have.

In the absence of this backward and forward linkage, the firm may improve its business
expansion outside but will lose its competitiveness and market at home. Any assessment of
developmental dimension of outward FDI always raises a key question, i.e., the trade-off
between overseas investment and domestic investment.

Faster growth of overseas investment in pro-reforms era from India reflects the policy and
climate the government pursued towards domestic investment. It explains to a point that less

attractive domestic environment becomes virtually a catalyst for external investment. This should
not make the policy makers think in terms of adopting a restrictive regime for outward FDI,
rather should make a case for infusing reforms to improve domestic investment environment.

However, Alan Rosling, who was on the board of Tata Group’s holding company during its rapid
overseas expansion expressed in a reverse manner: “the Tata’s foreign acquisitions were not
daring, they were in part defensive.” Recent acquisition of Jaguar and Land Rover (JLR) by Tata
raised some doubt in the international business community on the ability of an Indian firm to
manage Western brands.

The trouble in running an auto behemoth of JLR in nature has indicated about the wisdom of
fast-growing companies like Tata from emerging markets such as India.

5.3. LIBERALISED REMITTANCE SCHEME
On 4th February, 2004, Liberal Remittance Scheme was introduced, read with GoI Notification
G.S.R. No. 207(E) dated March 23, 2004 consult A.P. (DIR Series) Circular No. 64 dated
February 4, 2004. It is described as a liberalization measure to facilitate resident individuals to
remit funds abroad for permitted current or capital account transactions or combination of both.
From time to time, the amendments to these regulations are done to incorporate the changes in
the regulatory framework. These are then published through amendment notifications.

In reach of the contours of the Regulations, the directions to Authorized Persons under Section
11 of the Foreign Exchange Management Act (FEMA), 1999 were issued by Reserve Bank of
India. These directions provide the information about the modalities as to how the foreign
exchange business is to be conducted by the Person Authorized with a view to implement the
regulations framed, with their customers/constituents.

The existing instructions on the "Liberalized Remittance Scheme" are consolidated by this
Master Direction at one place. On reporting, reporting instructions can be found in Master
Direction (Master Direction No. 18 dated January 1, 2016)

Whenever necessary, directions can be issued by Reserve Bank to Authorized Persons through
A.P. (DIR Series) Circulars in regard to the manner in which relative transactions are to be

conducted or any change in the regulations by the Authorized Persons with their customers/
constituents. Herewith the Master Direction issued shall be amended suitably and
simultaneously.

5.3.1. Liberalized Remittance Scheme (“LRS”) of US$ 2,50,000 for resident individuals

According to the Liberalized Remittance Scheme, for any permitted current or capital account
transaction or a combination of both, the Authorized Dealers can freely allow remittances by
resident individuals up to US$ 2,50,000 per Financial Year (April-March). The Scheme is not
valid for corporate, partnership firms, HUF, Trusts, etc.

The LRS limit has been revised in stages consistent with prevailing macro and micro economic
conditions. During the period from February 4, 2004 till date, the LRS limit has been revised as
under:

Date Feb 4, Dec 20, May 8, Sep 26, Aug 14, Jun 3, May 26,

LRS 2012 2006 2007 2007 2013 2014 2015
limit
(USD) 25,000 50,000 1,00,000 2,00,000 75,000 1,25,000 2,50,000

All resident individuals including minors can avail this scheme. Form A2 must be countersigned
by the minor’s natural guardian if this scheme is to be availed by any minor.

Under this Scheme, remittances can be consolidated with respect to individual family members
to family member’s subject in accordance with its terms and conditions. However, authorization
of clubbing is not granted by other family members for capital account transactions such as
purchasing of property/ opening a bank account/investment, if they are not the co-owners/co-
partners of the overseas bank account/ investment/property. Also, the credit of the latter’s foreign
currency account can be held abroad under LRS as a resident cannot gift in foreign currency to
another resident.

Under this Scheme, transactions in the nature of remittance for margins or margin calls to
overseas exchanges/ overseas counterparty and all other transactions which are otherwise not
permissible under FEMA are not permitted.

The capital account transactions by an individual under LRS are:

§ Opening of foreign currency account abroad with a bank;
§ Purchase of property abroad;
§ Making investments abroad- acquisition of shares of a foreign company towards

professional services rendered or in lieu of Director’s remuneration; acquisition of
qualification shares of an overseas company for holding the post of Director; investment
in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory
notes; acquisition and holding shares of both listed and unlisted overseas company or
debt instruments.
§ Setting up Joint Ventures and Wholly Owned Subsidiaries (with effect from August 05,
2013) outside India for bonfire business subject to the terms & conditions stipulated in
Notification No FEMA.263/ RB-2013 dated March 5, 2013;
§ Loans in Indian Rupees to Non-resident Indians (NRIs) inclusive of extended loans who
are relatives as defined in Companies Act, 1956.

Under the Scheme, the limit of US$US$ 2,50,000 per Financial Year (FY) also
includes/subsumes remittances for current account transactions available under Para 1 of
Schedule III to Foreign Exchange Management (Current Account Transactions) Amendment
Rules, 2015 dated May 26, 2015, to individual residents. A prior permission from the Reserve
Bank of India is required for the release of foreign exchange exceeding US$ 2,50,000:

a. Private visits

Other than to Nepal and Bhutan, for private visits abroad, irrespective of the number of visits
undertaken during the year, in any one financial year, any resident individual can obtain foreign
exchange up to an aggregate amount of US$US$ 2,50,000, from an Authorized Dealer or FFMC.
Further, all tour related expenses including cost of rail/road/water transportation; cost of Euro
Rail; passes/tickets, etc. outside India; and overseas hotel/lodging expenses shall be subsumed

under the LRS limit. The tour operator can collect this amount either in Indian rupees or in
foreign currency from the resident traveler.

b. Gift/donation

US$US$ 2,50,000 in one FY can be remitted by any resident individual as gift to a person
residing outside India or as donation to an organization outside India.

c. Going abroad on employment

Foreign exchange up to US$US$ 2,50,000 per FY can be drawn by a person going abroad for
employment from any Authorized Dealer in India.

d. Immigration

Remittance of any amount of foreign exchange outside India in excess of this limit may be
allowed only towards meeting incidental expenses in the country of immigration and not for
earning points or credits to become eligible for immigration by way of overseas investments in
government bonds; land; commercial enterprise; etc. A person wanting to emigrate can draw
foreign exchange from AD Category I bank and AD Category II up to the amount prescribed by
the country of emigration or US$US$250,000.

e. Maintenance of close relatives abroad

A resident individual can remit up-to US$US$ 2,50,000 per FY towards maintenance of close
relatives [‘relative’ as defined in Section 6 of the Indian Companies Act, 1956] abroad.

f. Business trip

Attending of an international conference, seminar, specialized training, apprentice training, etc.,
by individuals are treated as business visits. A foreign exchange up to US$US$ 2,50,000 in a FY
irrespective of the number of visits undertaken during the year can be availed by resident
individuals for business trips to foreign countries.

However, if an employee is being deputed by an entity for any of the above and the expenses are
borne by the latter, such expenses shall be treated as residual current account transactions outside

LRS and may be permitted by the AD without any limit, subject to verifying the bonafides of the
transaction.

g. Medical treatment abroad

Foreign exchange up to an amount of US$ 2,50,000 or its equivalent per FY without insisting on
any estimate from a hospital/doctor, may be released by Authorized Dealers. Authorized Dealers
may release foreign exchange under general permission based on the estimate from the doctor in
India or hospital/ doctor abroad in the case when the amount exceeding the above limit. A person
who has fallen sick after proceeding abroad may also be released foreign exchange by an
Authorized Dealer (without seeking prior approval of the Reserve Bank of India) for medical
treatment outside India.

h. Facilities available to students for pursuing their studies abroad.

Foreign exchange up to US$ 2,50,000 or its equivalent to resident individuals for studies abroad
without insisting on any estimate from the foreign University may be released by AD Category I
banks and AD Category II. However, AD Category I bank and AD Category II may allow
remittances exceeding US$ 2,50,000 based on the estimate received from the institution abroad.

Under the Scheme, Remittances can be used for purchasing objects of art subject to the
provisions of other applicable laws such as the extant Foreign Trade Policy of the Government of
India.

Against self-declaration of the remitter in the format prescribed, scheme can be used for outward
remittance in the form of a DD either in the resident individual’s own name or in the name of
beneficiary with whom he intends putting through the permissible transactions at the time of
private visit abroad.

The foreign currency accounts may be used for putting through all transactions connected with or
arising from remittances eligible under this Scheme. Individuals can also open, maintain and
hold foreign currency accounts with a bank outside India for making remittances under the
Scheme without prior approval of the Reserve Bank.

11. Any kind of credit facilities to resident individuals should not be extended by banks so as to
facilitate capital account remittances under the Scheme.

12. For any purpose specifically prohibited under Schedule I or any item restricted under
Schedule II of Foreign Exchange Management (Current Account Transaction) Rules, 2000, dated
May 3, 2000, as amended from time to time, the scheme is not available for remittances in such a
case.

13. For capital account remittances to countries identified by Financial Action Task Force
(FATF) as non-co-operative countries and territories as available on FATF website www.fatf-
gafi.org or as notified by the Reserve Bank, the scheme is not available. Those individuals and
entities identified as posing significant risk of committing acts of terrorism as advised separately
by the Reserve Bank to the banks is also not permitted as remittances directly or indirectly.

14. Documentation by the remitter

A branch of an AD will have to be designated by the individual through which all the
remittances under the Scheme will be made. For purchase of foreign exchange under LRS, the
resident individual seeking to make the remittance should furnish Form A2.

15. Under the Scheme, PAN card is necessary to make remittances for capital account
transactions. However, it is not insisted upon for remittances made towards permissible current
account transactions up to US$ 25,000.

16. Facility to grant loan in rupees to NRI/ PIO close relative under the Scheme. Resident
individual is permitted to lend to a Non-resident Indian (NRI)/ Person of Indian Origin (PIO)
close relative [‘relative’ as defined in Section 6 of the Indian Companies Act, 1956] by way of
crossed cheque/ electronic transfer subject to the following conditions:

§ the loan is free of interest and the minimum maturity of the loan is one year;
§ The loan amount should be within the overall limit under the Liberalized Remittance

Scheme of US$ 2,50,000 per financial year available for a resident individual. It would
be the responsibility of the resident individual to ensure that the amount of loan granted
by him is within the LRS limit and all the remittances made by the resident individual

during a given financial year including the loan together have not exceeded the limit
prescribed under LRS;
§ The loan shall be utilized for meeting the borrower’s personal requirements or for his
own business purposes in India.
§ The loan shall not be utilized, either singly or in association with other person for any of
the activities in which investment by person’s resident outside India is prohibited,
namely:

a. The business of chit fund, or
b. Nidhi Company, or
c. Agricultural or plantation activities or in real estate business, or construction of

farm houses, or
d. Trading in Transferable Development Rights (TDRs).

Explanation: For the purpose of item (c) above, development of townships,
construction of residential/ commercial premises, roads or bridges should not be
included in the real estate business.

e. The amount of loan should be credited to the NRO a/c of the NRI / PIO. For such
amount of loan, the credit may be treated as an eligible credit to NRO a/c;

f. The amount of loan will not be remitted outside India; and
g. Loan repayment should be made by debit to the Non-resident Ordinary (“NRO”) /

Non-resident External (“NRE”) / Foreign Currency Non-resident (“FCNR”)
account of the borrower or out of the sale proceeds of the shares or by way of
inward remittances through normal banking channels or securities or immovable
property against which such loan was granted.

17. A resident individual can make a rupee gift by way of crossed cheque /electronic transfer to a
NRI/PIO who is a relative of the resident individual [‘relative’ as defined in Section 6 of the
Companies Act, 1956]. The amount should be credited to the Non-Resident (Ordinary) Rupee
Account (NRO) a/c of the NRI / PIO and credit of such gift amount may be treated as an eligible
credit to NRO a/c. Under the LRS for a resident individual, the amount to be gifted should be
within the overall bounds of US$ 250,000 per FY as permitted. It’s the responsibility of resident
donor to ensure that the gift amount is within the LRS limit and all the remittances made by the

donor during the financial year including the gift amount have not exceeded the limit prescribed
under the LRS.

5.3.2. Operational instructions to Authorized Persons

1. Under Foreign Exchange Management Act, 1999, the Authorized Persons may carefully study
the provisions of the Act / Regulations / Notifications.

2. Generally, the Reserve Bank will not prescribe the documents which should be verified by the
Authorized Persons while releasing foreign exchange for current account transactions. In relation
to this, attention of authorized persons is drawn to sub-section (5) of Section 10 of the FEMA,
1999 which provides that an authorized person shall require any person desiring to transact in
foreign exchange to make such a declaration and to give such information as will reasonably
satisfy him that the transaction will not involve and is not designed for the purpose of any
contravention or evasion of the provisions of the FEMA or any rule, regulation, notification,
direction or order issued there under.

3. To ensure compliance with provisions of sub-section (5) of section 10 of the Act, Authorized
Dealers may consider requirements or documents to be obtained by their branches, with a view
to maintaining uniform practices. .

4. On the basis of which the transaction was undertaken for verification by the Reserve Bank, a
record of any information / documentation needs to be maintained by the Authorized Dealers.
The Authorized Dealer shall refuse, in writing, to undertake the transaction and shall, if he has
reasons to believe that any contravention / evasion is contemplated by the person, report the
matter to the Reserve Bank if applicant refuses to agree with such requirement or makes
unsatisfactory compliance therewith.

5. Any instructions under the FEMA regarding the procedure to be followed in respect of
deduction of tax at source while allowing remittances to the non-residents will not be issued by
RBI. On the part of Authorized Dealers, it shall be mandatory to comply with the requirement of
the applicable tax laws.

6. Authorized Dealers are required to ensure that “Know Your Customer” (“KYC”) guidelines
have been implemented in respect of bank accounts to allow the facility to resident individuals.
While allowing they should act in accordance with the Anti-Money Laundering Rules.

7. Prior to the remittances, a minimum period of one year is required by the applicants to
maintain the bank account for capital account transactions. If a new customer of the bank is
seeking to make the remittances, Authorized Dealers should carry out due diligence on the
opening, operation and maintenance of the account. Further, the bank statement for the previous
year from the applicant should be obtained by the Authorized Dealer so as to satisfy them
regarding the source of funds. Copies of the latest Income Tax Assessment Order or Return filed
by the applicant may be obtained in the case if such a bank statement is not available.

8. The payment received out of funds belonging to the person seeking to make the remittances by
a cheque drawn on the applicant’s bank account or by debit to his account or by Demand Draft /
Pay Order should be ensured by the Authorized Dealer. The payment can also be accepted
through credit /debit/prepaid card of the card holder by Authorized Dealer.

9. The remittance not being made directly or indirectly by /or to ineligible entities should be
certified by the Authorized Dealer and that they are made in accordance with the instructions
contained herein.

10. Any kind of credit facilities to resident individuals to facilitate remittances should not be
extended by AD Bank for capital account transactions under the Scheme.

11. A record of the countries identified by FATF as non-co-operative countries and territories
may be kept by Authorized Dealer and accordingly updates the list from time to time for
necessary action by their branches handling the transactions under the Liberalized Remittance
Scheme.

12. Under this Scheme, the remittances made will be reported in the R-Return in the normal
course. In respect of remittances less than US$ 25,000, the Authorization Dealer can prepare and
keep on record dummy Form A2. Further, on a monthly basis, AD banks would also furnish
information on the number of applicants and total amount remitted under the Scheme, to the
Reserve Bank of India, through the Online Return Filing System (“ORFS”).

13. A number of Indian banks as well as foreign banks operating in India have been soliciting
(through advertisements) foreign currency deposits (from residents under LRS) or for placing at
their overseas branches. An appropriate disclosure is not contained by these advertisements at
time to guide potential depositors thereby giving rise to concerns of protecting the interest of the
resident individuals. Henceforth, other supervisory concerns are also raised as marketing in India
of schemes soliciting foreign currency deposits by foreign entities, not having operational
presence in India. Therefore, all banks, including those not having an operational presence in
India, needs to seek prior approval from RBI for the schemes being marketed by them in India to
residents.

5.4. ENTITIES AND MODE OF FOREIGN INVESTMENT BY INDIAN RESIDENTS
AND ENTITIES1

5.4.1. Guidelines
The Reserve Bank of India vide its circular No. RBI /2013- 14/117 A.P. (DIR Series) Circular
No 01, dated July 4, 2013, issued guidelines pertaining to Foreign Investment in Indian
Companies for calculation of foreign investment, transfer of ownership/ control of Indian
Company and downstream investment by Indian Companies (hereinafter referred to as the
“guidelines/new guidelines”). Major Highlights of the guidelines are discussed hereunder.

5.4.1.1. Applicability of guidelines
The said guidelines are to have a retrospective effect, where all foreign Investment made in
Indian companies after February 13, 2009, will fall under the preview of the said guidelines. Any
foreign investments made before February 13, 2009, as per the existing guidelines are outside the
ambit of new guidelines. The Indian companies shall intimate the RBI within 90 days of this
circular (I. e. up to October 2, 2013), through their Authorized dealer bank, the detailed position


1 ‘Guidelines for foreign investment in India’ (1 August 2013)
<https://www.lexology.com/library/detail.aspx?g=136e5597-665f-44d6-8fa5-0f71d96fdb59> last accessed on 18
May 2020.

on non-compliance of issue/ transfer of shares/ downstream investment as per new regulatory
framework.

5.4.1.2. Scope of guidelines

The Guidelines issued by the RBI provides the following;

Concept of direct and indirect foreign investment;

Method of calculation of total foreign investment in Indian Companies;

Guidelines for establishment of Indian Companies;

Guidelines for transfer of ownership and control of Indian Companies from resident to
non-resident; Downstream Investment by Indian Companies, which is not owned/
controlled by resident entities;

Further RBI has introduced certain definitions by the said guidelines which are discussed
hereunder:

“Company Owned by resident Indian Citizen”: Any Indian Company, in which more than
50% of the capital in the company is beneficially owned by resident Indian Citizen / Indian
Companies (i.e., ultimately owned & controlled by Indian Citizens), such company shall be
termed as Company Owned by resident Indian Citizen.

“Company controlled by resident Indian Citizen”: Any Indian Company, wherein resident
Indian Citizen have the power to appoint majority of directors will be treated as company
controlled by resident Indian citizen for the purpose of these guidelines.

"Company Owned/ Controlled by Non-resident”: Any Indian Company, wherein more than
50% beneficial interest in the capital is owned by non -resident shall be termed as Company
Owned by Non-resident and the Company, in which, nonresidents have power to appoint
majority of the directors.

“Foreign Direct Investment”: FDI means investment received by Indian Company from Non-
resident entities.

“Downstream Investment”: Downstream Investment means indirect foreign Investment by one
Indian Company in another Indian Company either by way of subscription or acquisition.

“Indirect Foreign Investment”: Indirect Foreign Investment means Investment in one Indian
Company by another Indian Company, (a) which is having foreign Investment (b) which is not
owned/ controlled by resident Indian citizen/ Indian Company owned/ controlled by Resident
Indian Citizen, (c) which is owned/ controlled by non-residents. However indirect foreign
investment in 100% owned subsidiaries of operating- cum investing/ investing companies will be
limited to foreign investment in operating- cum investing/ investing companies.

5.4.1.3. Difference between direct and indirect foreign investment
Investment by Non- resident Entity directly in Indian Company will be termed as Direct Foreign
Investment. Investment by Non-Resident entity through Indian Resident entity owned /
controlled by it will be termed as Indirect Foreign Investment.

5.4.1.4. Calculation of total foreign investment
Computing of Direct Foreign Investment: All Investment made directly by non-resident
entities in Indian Company shall be counted under Direct Foreign Investment.

Computing of Indirect Foreign Investment: All indirect investment made by investment
company in Indian company shall be counted under Indirect Foreign Investment.

Exception: indirect foreign investment in 100% owned subsidiary of operating cum investing/
investing company shall be limited to foreign investment in operating cum investing/ investing
company. This exception, is limited to only situations where the entire capital of the downstream
subsidiary is owned by the holding company.

Every Indian Company shall ensure compliance with this method of calculation at every stage of
investment in the company.

5.4.1.5. Further obligations
1. Indian Company are required to furnish full details of foreign investment/ ownership
details/ control over company information to Government of India while seeking
approval for accepting foreign investment under approval route.
2. Details regarding inter-se agreement between shareholders having effect on change in
constitution of Board of Directors and voting rights etc. shall be informed by the Indian
Companies operating in sector requiring prior approval of Government for accepting
Foreign Investment.
3. Indian Company having sectorial cap, shall ensure that balance equity (beyond sectorial
cap) shall be beneficially owned in the hands of resident Indian Citizens and Indian
Companies owned & controlled by Resident Indian Citizens.
4. Companies operating in Information & Broadcasting and Defence Sector, wherein
sectorial cap is less than 49%, shall ensure that:
§ The Company shall be owned & controlled by resident Indian citizen and Indian
Companies owned & controlled by resident Indian Citizen;
§ Largest Indian Shareholder shall hold at least 51% total equity;
§ While counting the shareholding of largest equity shareholding, equity holdings of
sector banks, Public Financial Institution shall be excluded;
§ Here the word largest Indian shareholder means and includes (I) an Indian
shareholder, which encompasses (a) his relatives, (b) Company/ Group of
companies in which he or his HUF have management & controlling interest and (ii)
Indian Company / Group of Indian Companies under same management where
Indian Company refers to company in which resident Indian/ his relative/ his HUF
jointly or singly holds at least 51% shares.
§ Resident Indian shall enter into an agreement to act as single unit for the purpose of
satisfying all the conditions of the above clause.
5. Where the beneficial interest is held by nonresident entity in terms of section 187 of
Companies Act, 1956, such investment shall be treated as Foreign Investment.
6. Calculation method discussed above shall not apply to Insurance companies.

5.4.2. Establishment of Indian companies/ transfer of ownership & control of Indian
companies
Companies operating in sectors/ activities with cap including defence production, air transport
services, ground handling services, asset reconstruction companies, private sector banking,
broadcasting, commodity exchanges, credit information companies, insurance, print media,
telecommunications and satellites are required to obtain prior Government/ FIPB approval in
following situation:

1. For establishing a company (not owned/ controlled by a resident entity) in above referred
sector with foreign investment;

2. For transfer of ownership/ control of said company from resident Indian Citizens/
Company owned & controlled by resident Indian Citizen to nonresident entity through
amalgamation/ merger/ demerger/ acquisition etc;

3. Companies operating in sector, where 100% foreign investment is allowed under
automatic route are excluded from the preview of this clause;

4. Following shall be considered for calculating Indirect Foreign Investment under this
clause:
Downstream investment by Indian Company not owned/ controlled by resident entity;
Portfolio investment by FII, NRI, QFI as on 31st march of previous year;
Investment in Form of Foreign Direct Investment, Foreign Venture Capital Investment,
Investment in ADR/ GDR/ FCCB.

5.4.3. Downstream investment by Indian company not owned & controlled by resident
entity

1. Indian Company not owned & controlled by resident Entity shall comply with all relevant
entry route sectorial conditions along with following conditions, before making any
downstream investment in another Indian company:
§ Indian Company shall intimate Department of Industrial Policy & Promotion and
Foreign Investment Promotion Board within 30 days of such investment
§ Downstream investment shall be supported by its board resolution and shareholders
agreement, if any.

§ It shall comply all applicable SEBI/ RBI guidelines pertaining with issue/ transfer/
pricing/ valuation of shares.

§ For making downstream investment, Indian Company shall use the funds brought
from abroad.

§ Only an Indian investment Company may use the internal funds for making
downstream investment, subject to compliance with following conditions:

§ It shall obtain prior requisite government/ FIPB approval regardless of amount &
extent of foreign investment.

§ In addition to this, Core Investment Companies (CIC) shall follow RBI regulatory
framework for CICs.

§ Prior Government/FIPB approval is required for making foreign investment in Indian
Company which does not have any operation or downstream investment and on
initiating the downstream investment; it will have to comply with the relevant
sectorial condition on entry route, conditionality and caps.

2. W.e.f. 31st July 2012, Investment by Banking Company incorporated in India and owned
by non-resident entities under corporate Debt Restructuring, or other loan restructuring
mechanism, or in trading books, for acquisition of shares due to defaults in loans shall not
be counted as Indirect Foreign Investment. However, their strategic downstream
investment, in their subsidiaries, joint ventures and associates shall be treated as Indirect
Foreign Investment.

5.4.4. Responsibility for compliance
At the first instance FDI recipient Indian Company is responsible for ensuring compliance with
all applicable FDI rules/ regulations/ guidelines. It shall obtain a certificate from its statutory
auditor on annual basis on status of compliance with FDI legal framework and mention the same
in its Directors Report in Annual Report. If the auditor has given qualified report, the Company
shall immediately intimate Foreign Exchange Department, Regional Office of Reserve Bank of
India in whose jurisdiction the Registered office of the Company is located and obtain an
acknowledgement from the Regional Office of having intimated it of the qualified auditor report.

5.4.5. Guidelines for calculating total foreign investment in Indian entities
In an eligible Indian entity Investment can be made by both resident Indian entities and by non-
residents. Investment by Indian entities would again compromise of both resident investment and
non- resident investment.
The table below will give a clear picture:

total investment
in an indian
company

investment by non- resident
indian entities Investment

resident Indirect Foreign direct foreign
investment Investment investment

5.4.5.1. Direct Foreign Investment

When all the investments are directly done by a non-resident entity in to the Indian company
then it would be counted towards direct foreign investment.

5.4.5.2. Indirect Foreign Investment

Following points need to be taken into consideration while calculating indirect foreign
investment:

1. The foreign investment in an Indian Company shall include all types of foreign investments
I.e.

§ Investment by FIIs, FPIs, NRIs.

§ Fully convertible preference shares.

§ Fully convertible debentures.

§ Units of an investment vehicle.

2. The foreign investment done through Indian company would not be considered for the
calculation of the indirect foreign investment in cases where the Indian Company is owned and
controlled by resident Indian citizens.

3. In cases, where the investing Indian Company is owned or controlled by non-resident entities,
then the entire investment would be considered as indirect foreign investment.

4. There is an exception to 100% owned subsidiaries. In such cases indirect foreign investment
would be limited to foreign investment in the investing company.

5.5. REFORMS IN FDI
The NDA government, in 2016 reported what it marked as a "radical progression" of the
Foreign Direct Investment (FDI) by facilitating principles for different key divisions together
with defence, civil aviation and pharmaceuticals, opening them up for full abroad possession.

The Government brought chief FDI policy reforms in a variety of sectors viz. Defence,
Construction Development, Insurance, Pension Sector, Broadcasting Sector, Tea, Coffee,
Rubber, Cardamom, Palm Oil Tree and Olive Oil Tree Plantations, Single Brand Retail Trading,
Manufacturing Sector, Limited Liability Partnerships, Civil Aviation, Credit Information
Companies, Satellites- establishment/operation and Asset Reconstruction Companies.

Actions taken on by the Government occasioned improved FDI inflows at US$ 55.46 billion in
the financial year 2015-16, as against US$ 36.04 billion during the year 2013-14. This was the
highest ever FDI inflow for a particular financial year until then. However, it was sensed that our

country has prospects to attract much more foreign investment which can be attained by further
liberalising and streamlining the FDI regime. India has been rated as the top most FDI
Investment destination by several International Agencies. Consequently, the Government
decided to present a number of amendments to the FDI Policy.

Foreign Investment in different divisions bring universal prescribed procedures and most recent
advancements prompting financial development in the nation and giving truly necessary impulse
to assembling area and employment creation in India. In accordance with the arrangement to
give lift to the assembling area and offer driving force to the 'Make in India' activity, the
Government has allowed a maker to offer its item through discount as well as retail, including
through web-based business under programmed course.

To take care of the enthusiasm of Indian SME segment, certain arrangements have been given to
FDI in retail exchanging segment. For retail exchanging of single brand items, in regard of
proposition including outside venture past 51%, sourcing of 30% of the estimation of products
bought, has been ordered to be done from India, ideally from MSMEs, town and cabin
enterprises, craftsman’s and skilled workers, in all areas.

With a view to benefit farmers, offer catalyst to sustenance handling industry and make huge
work openings, 100% FDI under Government course to trade, including through web-based
business, has been allowed in regard of nourishment items made or potentially created in India.

FDI is stickier as in it comes into a nation with a target of remaining for a more extended
timeframe and in the process adds to foundation, innovation, business and to the development of
the nation though FPI is more fluctuating as the primary goal of such speculations are higher
benefits in however much lesser time as could reasonably be expected. Aside from this different
components that have prompted the legislature of India focussing more on drawing in FDI are:

a) The private sector has restricted hunger for venture (in view of drop in the worldwide request,
downfall in local economy, banks unwilling to loan more/at lesser rate of interest)

b) The administration itself is obliged in making higher venture as it needs to deal with the
monetary shortage targets (aggravated by the issues of actualizing OROP, climb in the
compensations because of seventh Pay commission and so on.)

Subsequently, the administration of India has been presenting a great deal of changes in FDI
division producing, Insurance, Construction improvement, Asset Reconstruction Companies,
Pension Sector, Defence, single brand retailing and so on the legislature had presented
significant changes in November 2015, wherein it had changed 15 areas to draw in FDI and as a
continuation of that approach it has declared another round of changes on twentieth June 2016 of
every eight parts. These arrangements of changes could comprehensively be put under an
acronym EED-Extension, Expansion and Dilution i.e. in a few segments, the sectorial tops have
been expanded; some different parts have been brought under programmed course and in the rest
the FDI conditions have been eased accordingly.

5.5.1. Reforms

Changes announced in the policy contain the rise in sectorial caps, fetching more activities under
automatic direction and facilitation of circumstances for foreign investment. These modifications
seek to further ease the protocols governing FDI in the country and make India an eye-catching
terminus for foreign investors. The specific details are as follows:

5.6. CURRENT BUSINESS ENVIRONMENT
Business environment: -

§ Business: - it means conducting some activities like sale, purchase, manufacturing etc for
earning profit.

§ Environment: - it means surrounding of air water light etc like the same way business is
also having its own surrounding which is surrounded of demand, supply, competitors etc.

Business environment refers to sum total of all external and internal factors that influence
business.

5.6.1. Change in Business Environment after the Introduction of FDI

5.6.1.1. Advantage Manufacturing

Make in India: Government promises to give conductive environment for investors; it is assumed
that manufacturing sector in the country could reach US$ 1 Trillion by 2025, with the sector
accounting for around 25 % of the GDP and creating 90 million domestic jobs by that period.

5.6.1.2. Easy to go

Now India is providing more easier and flexible programs to the investors so that they invest
more capital in India.

5.6.1.3. Easing policy guidelines

It mainly focus at improving policies and guidelines for doing business in India its, prominent is
online availability of applying for industrial license and industrial entrepreneur memorandum

5.6.1.4. Disintegrating red-tapism

Government has increased more foreign investment limit in various sectors as insurance, and
more than 300 projects are made sure that it would be red carpet in India rather than red-tapism.

5.6.1.5. Developing infrastructure – smart cities and industrial corridors

After the announcement of an outlay of around US$ 8 billion for creating 100 smart cities by the
government, many international companies show their interest to collaborate with India
companies.

5.6.1.6. Other advantages of FDI in business environment

1. Help in improving the existing technical processes of the country.

2. Advances in technology and process it improves the competitiveness of countries in the
domestic economy.

3. Improve quality of products attempts to better human resources.

4. Expertise transfer, research and development require the fees to the high cost of
developing technology.

5.6.1.7. Disadvantage of FDI in business environment

1. Increases competition

2. The host country has a number of state secrets is something that not meant to be exposing to
the world.

3. Requires a higher travel and communication expenses.

4. Language and culture difference between the investor and host country also create problems
in the case of FDI.

5.6.1.8. FDI inflow comparison between India and China

In terms of economy China stands at a higher position as compared to India, in India per capita
income is US$ 440 whereas China per capita income is US$ 990. China offered investment much
before India did and thereby attracted raging FDI inflows in the country. In 2002 China received
US$ 52.7 billion of FDI inflow whereas India received US$ 4.67 in the same year.

5.6.1.9. India lagging behind China in FDI inflows

According to the new world bank report, India is marginally lagging behind CChina in FDI
inflow and the main reason behind this is, that, India is not skilled enough to adopt the
technological advancements at a fast pace. FDI inflows only contribute 0.8 % of India whereas
3.5 % were contributed in China in the same year. India’s high-tech industries claim for 2.3 % of
GDP whereas the high-tech industries in China contribute around 7.9 %.

5.6.1.10. Preference more in terms of FDI inflows

For investment purpose Mostly the foreign investors prefer China over India. as compared to
India China have bigger market size, developed infrastructure, macro-economic climate, cost-
effectiveness etc.

5.7. FDI AND THE CONTEMPORARY WORLD

The recent trends in the international capital markets, the listing trends etc. have drastically
changed. Today’s global economy is not only concerned with globalization but the relationship
of business systems with the regulations or the laws. While US is essentially important because
of its financial and technological wellbeing, there exist unique laws for trading in US or the
European Union where Lisbon Treaty or the Treaty on the Functioning of European Union
(TFEU) or its Common Commercial Policy for FDI, which is remarkable and fascinating. The
EU has a great competence in dominating the International market, policy and law.

The ICSID has changed the landscape for investment with its unique dispute resolution methods
relating to investments. The rules and regulations and the key provisions of the CSID convention
pave a way for foreign investment by creating ease and simplicity.

The international investment law is yet another way for tracking innovations and understanding
the concepts of investors and investments. The international agreements provide for the
definition of Investor and investment. The ‘Umbrella Clause’2 and its interpretation are now
simplified through the dispute settlement mechanism followed for Bilateral Investment Treaties.
The clauses assumed with implied wordings are the umbrella clauses but their interpretations and
methods have changed. However, the development for interpreting an umbrella clause is still
going on and something gets added to it.

The international investment agreements also provide a similar but a common mechanism to deal
with some of the fundamental issues of environment, concept of green investment, Labour and
Anti-corruption issues. It also provides for the regional and trade agreements in a common yet
this helps to solve the interaction between investment and Service Chapters for some of these.

The globalization, privatization, liberalization add to the effect and emergence of a rapid increase
in Foreign Direct Investment. The geographic factors act as a coolant and sometimes the
opposite for the foreign investments in any nation.


2 OECD Interpretation of the Umbrella Clause in Investment Agreements, working paper on investment agreements.

Foreign direct investment in USA is interesting to study where there are incentives provided for
foreign business with some limited risks involved. The tax factors of foreign business where tax
incentives for both companies as well as the individuals are the basic factors contributing to
foreign business. We all know the market structure and demographic factors associated with the
Foreign Direct Investments. Labour availability and some of the related issues are detrimental to
some kinds of foreign investment. The American Recovery &Reinvestment Act, 2009 provides
for the provisions related to foreign investment in the US. The important Sectors for foreign
investments are infrastructure investments including transportation, water, sewage, environment
and public lands, Government Buildings and facilities, Communication, information and security
technologies, energy infrastructures etc. The investor protection mechanism in USA is based on
the federal incentives and programme available to investors. The credit facility for foreign
investors and the tax information for international business are some of the promising investor
related policies.

The EU has a unique presentation of its FDI, private sector development with a fascinating
contribution to taxation. The competitiveness of EU is remarkable and is undeniable by virtue of
the statistics presented about its growth, employment and development. The foreign direct
investment in Central and Eastern Europe (“CEE”) including the countries Czech Republic,
Hungary, Poland, and Slovakia have presented a blended focus on incentives with the process of
receiving incentives and other focuses including the real estate issues etc.

The recent trends in the European countries include the move from the manufacturing to service
industries, the mover from the predominating Greenfield and Brownfield investment to more
existing foreign investors reinvesting profits in CEE. The recent levels of FDI are promising and
the current and future investment policy cannot remain unnoticed by the contemporary world.
The Lisbon Treaty, Corporate Investment Agenda, European Investment Policies, the external
investment policies, the German model of Bilateral Investment Treaties as a medium level of
Protection is some of the legal framework of the European Countries. Thus, the challenges
associated with investments in EU can be the Bilateral Investment Treaties, the FDI shift,
NAFTA and status of Mexican environment, issues with Argentina, Germany, Bolivia, Latin
America and other countries.

5.8. DOCUMENTATION AND FORMALITIES UNDER AUTOMATIC AND
APPROVAL ROUTE

The following documents need to be filed with the RBI:

details of copy of the the original
allotment foreign foreign
name of the collaboration inward
collaborators agreement remittance
/ promoters/ certificate
shareholders from the
authorised
dealer and
other
specified
information

5.8.1. Procedure under automatic route

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.

India's foreign trade policies have been formulated with a view to invite and encourage FDI in
India. The Reserve Bank of India has prescribed the administrative and compliance aspects of
FDI. A foreign company planning to set up business operations in India has the following
options:

§ investment under automatic route; and

§ Investment through prior approval of Government.

5.9. PROCEDURE UNDER GOVERNMENT APPROVAL
The categories of foreign investors who can hold stakes in Indian companies subject to
conditions and sectoral caps on ownerships are- Foreign Portfolio Investors, Foreign Institutional
Investors, Foreign Venture Capital Investors, and Non-Resident Indians.

All non-resident entities are permitted to invest in India either through the automatic or
government route. However, entities- individual or company who belong to Bangladesh and
Pakistan can only invest under the government route.

Now, investments through FDI are not simply the transfer of funds from one country to another.
FDI comes with a factor of ‘lasting control’ and is, therefore, characterized by a notion of
‘controlling ownership’.

An investment is considered ‘FDI’ if the foreign investor is given at least 10 per cent voting
rights in the business where the investment is being made.

The approval process for foreign direct investments in India are based on a standards and plan
developed by DIPP.

§ Submission of proposal and uploading document on Foreign Investment Facilitation
Portal.

§ Department of Industrial Policy and Promotion (DIPP) assigns the case to the concerned
Ministry within 2 working days.

§ Submission of physical copies to concerned department is not required in case of digitally
signed documents.

§ For applications not digitally signed, online communication to applicant will be made to
submit one signed physical copy of the proposal to the Competent Authority. Applicants
are required to submit required documents within 5 days of such intimation.

§ The proposal is circulated online within 2 days to Reserve Bank of India for review from
FEMA perspective. All proposals are shared with Ministry of External Affairs (MEA)
and Department of Revenue (DoR) for record. Any advice/comments from above

mentioned departments are directly shared with concerned Administrative
Ministry/Department assigned to decide on the proposal.
§ Proposals are scrutinized within 1 week and additional information/clarifications, if
required, are asked for.
§ On getting all required information, the Competent Authority is required to give out its
decision in next two weeks. Approval/rejection letters are sent online to the applicant,
consulted Ministries/Departments and DIPP.
§ Where total foreign equity inflow is more than Rs 5000 crore, the Competent Authority is
required to place the same to Cabinet Committee on Economic Affairs for consideration
within timelines.
§ Once the proposal is complete in all respects, the same gets approved within 8-10



5.9. COMPLAINACE ISSUES FOR NRIs
The compliance issues involved is basically based on the regulations in Foreign Exchange
Management Act and other provisions of Companies Act, 2013.

5.10. PENALTIES FOR VIOLATIONS
The penalties for violations include civil or criminal liability or both. These can be invoked by
virtue of FEMA, Companies Act, 2013 or the Reserve Bank of India depending upon the nature
of violation.