Comprehending the ways and compliance for FDI in Private Limited Company

Better and productive communication has encouraged globalisation, the free movement of goods and resources across the world, with the relaxation of regulatory authorities. Businesses, however small or big, are going to achieve full profit and market share globally.

In background, India has become a prominents market for most companies and their interest in establishing a company in India among foreign nationals and foreign companies. FDI is one of the key ways in which foreigners can start their business in India.

Overview of FDI.

The Indian government is very involved in enhancing foreign investment in India, and has also taken policy decisions to promote them. India’s FDI policy is managed and supervised by the Department of Industrial Policy and Promotion, Trade Ministry, and Industry. A detailed circular released by DIPP services as a main FDI policy notice and the latest FDI circular issuance on 17-04-2014.

Under the regulations, FDI means investment by non-resident person/entity residing outside India in Indian entities and includes all forms of foreign investment in India, including investment by FII (foreign institutional investors), foreigners or foreign entities, NRI etc.

Foreign direct investment in private limited companies.

Subject to the FDI regulation and sectoral caps, FDI is allowed for non-resident entities. FDI for companies with online private limited company registration is subject to two methods as given below;

– Automatic route.

– Approval route.

In most of the industry, FDI is permitted up to 100% other than those limited or restricted. Where there is no automatic approval, prior approval must be obtained from the Indian government’s Foreign Investment Promotion Board (FIPB) prior to investing. In addition, citizens from Pakistan and Bangladesh can only invest on an approval route in India.

Certain equity instruments may be used to manufacture FDI. Emissions of preferred shares, equity shares and convertible debentures by Indian companies subject to the norms and guidelines defined by the authorities.

The equity shares of FDI-issued private limited companies must be of equal value. Nonetheless a newly formed entity/company or a subscription to a MOA (memorandum of association) can be given on a face value, when a company is incorporated by a foreigner or an NRI.

FDI in the following sectors is proscribed completely;

– Chit funds.

– Nidhi companies.

– Trading in TDRs (transferable developmental rights).

– Betting and gambling.

– Lottery business in online and government lottery.

– Atomic energy.

– Manufacturing of cigarillos, cigars, cheroots, and cigarettes of tobacco or tobacco substitutes.

– Construction of farmhouse or real estate business except for the development of roads or bridges, townships, regional infrastructure, city, etc.

– Sectors and activities which are not opened to private sector investment such as atomic energy, railway transport other than MRTS.

FDI under the automatic route.

FDI is already permissible under automatic route if the proposed operation does not come under the FDI prohibited or approval category in India by a foreign or non resident person. Under this path, a request for FDI is not needed in a private limited company where the expenditure does not reach the limits of the FDI cap. You can see the sector-specific FDI limit through this page.

This route needs no prior permission from FIPB or RBI for FDI. The company shall send only certain filings for FDI with RBI upon receipt of the non-resident or international investor share subscription money and the issuance of shares.

In this respect the investment cannot be made in a business that needed an industrial licence under the industrial act of 1951, or for the acquisition or financial enhancement of existing shares of an Indian company.

It is necessary to note that most sectors are entitled to 100% of FDIs under the automatic route in India, whereby FDI reports should be submitted only after issuing shares to non-resident or foreign entities. The process for starting a company in India is therefore clear and seamless for non-resident Indians and foreign nationals.

FDI under the approval route

FDI under automatic route is not allowed for the following sectors. For which prior approval of the FIPB is needed.

– Investment companies in the infrastructure and service sector.

– Petroleum sector (excluding private sector oil refineries).

– Atomic minerals.

– Print media.

– Defence and strategic industries.

– Broadcasting.

– Postal services.

– Establishment or operation of the satellite.

– Tea sector.

– Courier service.

– Asset reconstruction company.

Following documents are required to be uploaded along with the proposal.

NOTE – this list is not exhaustive, other documents are also may be needed based on the specific cases.

  1. From both investor & investee companies/entities;

– Incorporation certificate.

– MOA (memorandum of association).

– Board resolution.

– AOA (articles of association).

– Audited financial statement of last financial year.

  1. A list containing names, identification, and address proof of all foreign collaborators of the investor company.
  1. Pre and post-investment shareholding pattern of the investee company.
  2. An affidavit clarifying that all the information is given in hard copy and online is the same and correct, without any error.
  3. In case of already established and existing ventures, copy of JV agreement, shareholder’s agreement, technology transfer, brand assignment agreement, trademark (as applicable).
  4. Facsimile of downstream intimation.
  5. Facsimile of relevant past SIA/FIPB/RBI approvals attached with the current proposal.
  6. Relevant FIRC (foreign inward remittance certificate).
  7. Valuation certificate as approved by a certified CA (chartered accountant).
  8. HC (high court) order in case of a scheme of arrangement.

A procedure that needs to be followed after investment under the automatic route or approval route?

International investment allows a business to comply with reporting requirements requiring compliance with tax standards to file GST return online among others. Upon receipt of investment and after issuance of the allotment business, the RBI must be acquainted.

On receipt of application money.

Upon receipt of the application money from a non-resident, a private company requires the foreign exchange department to be acquainted with RBI within 30 days of the receipt with the deets including the foreign investor’s name and address. This intimation should connection the report of KYC on the transfer of the amount by non-resident investors from overseas banks.

On issuance of shares to non-resident investors.

A private company should issue shares within 180 days, from the date of receiving the money. It is needed to intimate about allotment of securities to the foreign exchange department within 30 days of allotment. The company should intimate in FC-GPR along with requisite documents.

Conclusion

As mentioned above, under the automatic path, FDI in a private limited company is liable for 100% FDI. The need for FDI reporting is simple and comes after obtaining funds. Therefore, starting a new business in India is trouble-free and smooth for non-resident Indians and foreigners.