Set up of an Indian company by the foreign entity (FDI)

In order to strategically invest in India, NRIs can invest in Indian Company through Foreign Direct Investment (FDI). A person resident outside India or an entity incorporated outside India (except for citizen of Pakistan and Bangladesh and entities in Pakistan and Bangladesh), can invest in India, subject to the FDI Policy of the Government of India.

Depending on the sector of the company, percentage limits upto which investment can be made in a particular sector have been stated in the FDI Policy. Further, FDI policy also states whether any approvals from RBI/FIPB/Other governmental authorities is required to be obtained or not i.e. FDI is allowed under automatic route (no permission) or government approval route.

 

FDI is prohibited in the following sectors:

(a) Lottery Business including Government/ private lottery, online lotteries, etc.
(b) Gambling and Betting including casinos etc.
(c) Chit funds
(d) Nidhi company
(e) Trading in Transferable Development Rights (TDRs)
(f) Real Estate Business or Construction of Farm Houses
(g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
(h) Activities / sectors not open to private sector investment e.g. Atomic energy and Railway operations (other than permitted activities mentioned in the FDI Policy)

Note: Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

Types of Instrument: Indian companies can issue equity shares, fully and mandatorily convertible debentures, fully and mandatorily convertible preference shares and warrants subject to the pricing guidelines / valuation norms and reporting requirements amongst other requirements as prescribed under FEMA Regulations.

 

The Indian company is required to issue the equity shares within 60 days from the date of receipt of consideration. If the shares are not issued within 60 days, the consideration should be refunded to the investor within 15 days from the completion of 60 days  

Compliances by Indian Company for FDI Investment:

 

-       Form Foreign Currency-Gross Provisional Return (FC-GPR): An Indian company issuing equity instruments to a person resident outside India and where such issue is reckoned as Foreign Direct Investment, defined under the rules, shall report such issue in Form FC-GPR, not later than thirty days from the date of issue of equity instruments.

 

-       Annual Return on Foreign Liabilities and Assets (FLA): An Indian Company which has received FDI, in the previous year including the current year, shall submit form FLA to the Reserve Bank on or before the 15th day of July of each year.

Transfer of shares by way of Sale/Gift: Transfer of shares should be in accordance with the prescribed guidelines under FEMA Regulations.

 

Further, one may have to evaluate if Form FC-TRS is required to be filed in case of transfer of shares as per the guidelines under FEMA Regulations. The onus of filing Form FC-TRS is of the resident transferor/transferee, as the case may be. Such Form is required to be filed within 60 days of transfer of equity instruments or receipt/remittance of funds, whichever is earlier. 

Remittance of sale proceeds: AD Bank can allow the remittance of sale proceeds of equity instruments (net of applicable taxes) directly outside India to the seller of shares resident outside India or NRE/FCNR(B) account. The sale of security has been made in accordance with the prescribed guidelines under FEMA Regulations.

                                                                                                                                                                                      Updated 04/2024

Transfer of Shares by way of Sale:
                                                                                             

From	To	Permission required / not
Non-Resident(other than NRI or OCB)	Non-Resident	No RBI Permission is required
NRI	NRI	No RBI Permission is required
Non-Resident	Recognized stock exchange through registered broker	No RBI Permission is required
Non-Resident	Resident	No RBI Permission is required
Resident	Non-Resident(other than OCB)	RBI and Government Permission is required in some cases

Transfer of Shares by way of Gift:
                                                                               

From	To	Permission required / not
Non-Resident(other than NRI or OCB)	Non-Resident	No RBI Permission is required
NRI	NRI	No RBI Permission is required
Non-Resident	Resident	No RBI Permission is required
Resident	Non-Resident(other than OCB)	RBI Permission is required

A Liaison Office (LO) (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The  role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the  company and its products to the prospective Indian customers. It is not  allowed to undertake any business activity or commercial operation in India and cannot earn any income in India / raise invoices. The LO can neither borrow nor lend money. The Unique Identification Number (“UIN”)  is to be quoted in all references made to the RBI by the LO / designated AD.

LO can undertake the following activities in India:

• Representing in India the parent company / group companies.
• Promoting export / import from / to India.
• Promoting technical/financial collaborations between parent / group companies and companies in India.
• Acting as a communication channel between the parent company and Indian companies.

Eligibility:

The application in form FNC should be forwarded by the foreign entity through AD Bank to the RBI which will be considered by RBI under two routes:

• Automatic Route
• Approval Route: Applications from entities falling from NGO’s / NPO’s / Government Bodies / Departments are considered by RBI in consultation with the Ministry of Finance.

In addition, the following eligibility criteria are also considered by RBI:

• Profit making track record of the foreign entity in its home country for the preceding 3 FYs for LO.
• Net worth (paid up share capital + free reserves – intangible assets) of USD 50,000/- for LO as per the last audited Balance Sheet.

 

The approval of LO is valid for 3 years. After completion of 3 years, an application for renewal is required to be filed with the AD Bank for renewal of LO for another 3 years.    

Without prior permission of the Reserve Bank, no person being a citizen of / registered in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau can establish in India, a LO in India.

Kindy refer FAQ for detailed comparison of Liaison Office, Branch Office and Project Office

                                                                                                                                                                                    Updated 04/2024

Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices (BO) in India with specific approval of the Reserve Bank. Such BO are permitted to represent the parent / group companies and undertake certain activities in India. However, retail trading activities or manufacturing / processing activities are not allowed for a BO. Reserve Bank of India considers the track record of the applicant company, existing trade relations with India, the activity of the company proposing to set up office in India as well as the financial position of the company while scrutinising the application. Profits earned by the BO are freely remittable from India, subject to payment of applicable taxes.

A BO can undertake the following activities in India:

• Export / Import of goods.
• Rendering professional or consultancy services.
• Carrying out research work, in areas in which the parent company is engaged.
• Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
• Representing the parent company in India and acting as buying / selling agent in India.
• Rendering services in information technology and development of software in India.
• Rendering technical support to the products supplied by parent / group companies.
• Foreign airline / shipping company.

Eligibility:

The application in form FNC should be forwarded by the foreign entity through a designated AD Bank to RBI which will be considered by RBI under two routes:

• Automatic Route 
• Approval Route: Applications from entities falling from NGO’s / NPO’s / Government Bodies / Departments are considered by RBI in consultation with the Ministry of 

In addition, the following eligibility criteria is also considered by RBI:

• Profit making track record of the foreign entity in its home country for the preceding 5 FYs for BO.
• Net worth (paid up share capital + free reserves – intangible assets) of USD 1,00,000/- for BO as per the last audited Balance Sheet.

 

The approval of BO is valid for 3 years. After completion of 3 years, an application for renewal is required to be filed with the AD Bank for renewal of BO for another 3 year

Without prior permission of the Reserve Bank, no person being a citizen of / registered in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau can establish in India, a BO in India.

Kindy refer FAQ for detailed comparison of Liaison Office, Branch Office and Project Office

                                                                                                                                                                                                Updated 04/2024

A Project Office (PO) means a place of business established to represent the interests of a foreign company executing a project in India. Such offices are prohibited from undertaking or carrying on any activity other than the activity relating to the execution of the project for which such office is established.

Eligibility:

Reserve Bank has granted general permission to foreign companies to establish POs in India, provided they have secured a contract from an Indian company to execute a project in India, and

• the project is funded directly by inward remittance from abroad; or
• the project is funded by a bilateral or multilateral International Financing Agency; or
• the project has been cleared by an appropriate authority; or
• a company or entity in India awarding the contract has been granted Term Loan by a PFI or a Bank in India for the project.

However, if the above criteria’s are not met, the foreign entity has to approach the RBI, Central Office, for special approval.

Setting up of PO by foreign NGO / NPO / Foreign Government Bodies / Departments are under the Government Route. Such entities are required to apply to RBI for prior permission to establish an office in India.

Validity: Generally, the approval is valid till completion of the project. 

Without prior permission of the Reserve Bank, no person being a citizen of/ registered in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau can establish in India, a PO in India.

Kindy refer FAQ for detailed comparison of Liaison Office, Branch Office and Project Office                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Updated 04/2024

Under the Foreign Portfolio Investment (FPI) regime, Securities and Exchange Board of India (SEBI) has harmonized foreign institutional investors (FIIs), sub-accounts and qualified foreign investors (QFIs) regimes into a single investor class – foreign portfolio investors (FPI) and provide a single window clearance through designated depository participants (DDPs).

Procedure to register FPI:

• An application is to be made to the Designated Depository Participant for registration as an FPI in the form A along with specified fee.
• SEBI has authorized NSDL to generate the registration number and certificate which shall be transmitted to its DDP, who will in turn issue electronic registration certificate to the FPI applicant.

Eligibility criteria for FPI:

The applicant shall have to fulfill the following conditions to be eligible register as FPI:

1. The applicant should not be a person resident in India as per the Income-tax Act, 1961.
2. The applicant should not be a Non Resident Indian.
3. The applicant should be a resident of a country whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding or a signatory to bilateral Memorandum of Understanding with the Board.
4. The applicant should not be a resident of a country identified in the public statement of FATF as either:
   a. Having a strategic Anti-Money Laundering or Combating the Financing of terrorism deficiencies to which counter measures apply or
   b. Has not made sufficient progress in addressing the deficiencies or has not committed to an action plan with FATF to address such deficiencies.
5. The applicant should be legally permitted to invest in securities outside the country of its incorporation / place of business / establishment.
6. The applicant should be authorized by its MOA / AOA / Agreement to invest in securities on its behalf or on behalf of its clients.
7. The applicant should have sufficient experience, good track record, should be professionally competent, financially sound and should generally have a good reputation of fairness and integrity.
8. The grant of certificate to the applicant shall be in the interest of the development of the securities market.
9. If the applicant is an intermediary, he should be a fit and proper person.
10. If the applicant is a bank, he should be a resident of a country whose central bank is a member of Bank for International Settlements.

Since NRI’s are not allowed to register as an FPI, a company which is majority owned by one or more NRI / PIOs shall not be allowed to make investments as an FPI. However, if such company is appropriately regulated it may be given registration as Category II FPI for the purpose of acting as investment manager for other FPIs. Alternately, a fund having NRIs as its investors is also not prohibited from obtaining registration as an FPI.

Categories of FPI:

FPI may be registered in one of the following categories:

• "Category I" shall include Government and Government related investors such as central banks, Governmental agencies, sovereign wealth funds and international or multilateral organizations or agencies.
• "Category II"  shall include:
  • Regulated broad based funds such as mutual funds, investment trusts,     insurance/reinsurance companies
  • Regulated persons such as banks, asset management companies, investment managers/ advisors, portfolio managers;
  • Broad based funds that are not appropriately regulated but whose investment manager is appropriately regulated:
  
  Provided that the investment manager of such broad based fund is itself registered as Category II FPI. Provided that the investment manager undertakes that it shall be responsible and liable for all acts of commission and omission of all its underlying broad based funds and other deeds and things done by such broad based funds under these regulations.
    •  University funds and pension funds; and
    •  University related endowments already registered with the Board as Foreign institutional investors (FII) or sub-accounts.

• "Category III" shall include all others not eligible under Category I and II such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.

Banking accounts:

• FPI can open a non interest bearing Special Non-Resident Rupee (“SNRR”) account and a foreign currency account with Authorized Dealer Bank. They can transfer sums, at the prevailing market rate, from foreign currency account to SNRR account for making genuine investments in securities. The Authorized Dealer Bank may transfer repatriable proceeds (after payment of applicable taxes) from SNRR account to the foreign currency account.

A. NRIs can invest in shares and convertible debentures through Portfolio Investment Scheme (PIS) and otherwise:

I. PIS:
PIS is a scheme of Reserve Bank of India defined in Schedule 3 of Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. As per the scheme, NRIs can purchase and sell shares and convertible debentures of Indian companies through a registered broker on a recognised stock exchange by routing such purchase/sale transactions through their account with a designated bank branch.
 
Individual NRI cannot purchase more than 5% of the paid up capital of the company / total paid up value of the convertible debentures of the company on repatriation as well as on non-repatriation benefits. The overall ceiling of 10% of the paid up capital / paid up value is applicable for all the NRI’s put together. NRI can deal with only one designated branch of the bank at any time.

The aggregate ceiling of 10% may be raised to 24% if a special resolution to that effect is passed by the General Body of the Indian company. The tracking of 10% limit is done by the RBI. RBI starts the caution at 8%.The same is published on RBI website.

Bank has to upload on daily basis the ASCII file (which shall contain the details of the PIS transactions undertaken by NRI’s for the entire Bank) on RBI portal.

II. NRIs can invest in shares or convertible debentures without limit on Non repatriation basis:
NRI can purchase, without any limit, on non -repatriation basis, shares or convertible debentures of an Indian company issued whether by public issue or private placement or right issue.

B. NRI’s can invest in securities other than shares and convertible debentures:

NRI’s can invest in the below-mentioned securities without the portfolio investment scheme:
 

	Repatriation basis	Non-Repatriation basis
Bonds issued by PSU and Infrastructure Debt Funds	Yes	No
Non-Convertible Debentures	Yes	Yes
Government securities (other than bearer securities)	Yes	Yes
Units of domestic mutual fund/Money Market Mutual funds	Yes	Yes
Commercial Papers	No	Yes
Non-convertible / redeemable preference shares	Yes	Yes

Eligibility:
An NRI or PIO resident outside India can invest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis.

A person resident outside India other than NRIs / PIO may make an application and seek prior approval of Reserve Bank, for making investment by way of contribution to the capital of a firm or a proprietorship concern or any association of persons in India. The application will be decided in consultation with the Government of India.

Investment:
Amount is invested by inward remittance or out of NRE / FCNR(B) / NRO account maintained with Authorized Dealers / Authorized Banks.

Prohibition:
The firm or proprietary concern is not engaged in any agricultural / plantation or real estate business (i.e. dealing in land and immovable property with a view to earning profit or earning income there from) or print media sector.

Repatriation:

• Amount invested shall not be eligible for repatriation outside India.
• NRIs / PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns / partnership firms with repatriation benefits. The application will be decided in consultation with the Government of India.