Foreign Direct Investment (FDI)

Introduction

As the world turned to a global village, India leaped ahead of its Peer Countries due to its several investment opportunities, huge growth potential and favorable business environment and become hub of Foreign Investment. The steady growth of foreign investment in the Country since the past few years has become one of the pivotal factors in determining the pace of growth of Indian Economy. The foreign Investment in India is not only a growth driver for India Inc. but it also it plays a vital role in granting confidence and trustworthiness to the present as well as potential stakeholders of the organization besides earning International repute and recognition for the country. Infusion of foreign funds in the veins of Indian Economy has largely stimulated the growth of Indian Economy and with the government further liberalizing and streamlining the Foreign Investment policies and procedures, is hopefully supposed to play a crucial role even for the times to come

FDI Policy

FDI is primarily governed by the Foreign Exchange Management Act, 1999 (FEMA) which lays down the broad framework under which Government of India through various regulatory bodies create, review and regulate the detailed provisions. The Government of India through Department of Industrial Policy & Promotion (DIPP) releases two comprehensive FDI policy in an year vide its Circulars which are effective from April 1 and October 1 of each year, the said FDI Policy combines all the prior policies/regulations relating to FDI in India in a single document . Every consolidated FDI policy circular, substitutes the last policy circular.

Modes of Foreign Investment in the Company

‘Foreign investment’ refers to an investment in an enterprise by a Non-Resident whether it involves new capital or re-investment of earnings. Foreign investment is of two kinds – (i) Foreign Direct Investment (FDI) and (ii) Foreign Portfolio Investment. Any non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy. The government of India has also specified the class of entities in which the Foreign Investment can be made and with respect to each set of entities there are separate guidelines and criteria to be followed. Indian Company being one of the recognized entities for receiving Foreign Investment, FDI in such entities flows under two routes – (a) Automatic Route and (b) Approval Route.

Automatic Route

All Foreign Direct Investment proposals which do not require the approval of Foreign Investment Promotion Board are said to be investment under Automatic Route. This route is available to all sectors or activities that do not have a “sector cap” i.e. where 100% foreign ownership is permitted or where investment up to sectoral cap is allowed without approval.

Approval Route

All Foreign Direct Investment proposals, wherein the proposed investment in Indian Company is above the prescribed sector caps or where the proposed investment is in such sectors where investment is allowed only pursuant to approval, falls under the approval route.

Instruments for receiving Foreign Investment

The investment as aforesaid may be made in the Indian companies in any of the following modes:

• equity shares,
• fully, compulsorily and mandatorily convertible debentures and

fully, compulsorily and mandatorily convertible preference shares

In case any Unlisted Company issues any of the aforesaid instrument, than their pricing shall be determined by Discounted Cash Flow (DCF) method of valuation and in case of any listed company, according to method provided in SEBI (ICDR) Regulations. In case of convertible instrument the price or conversion formula of such instruments should be determined upfront at the time of their issuance. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the valuation method as provided aforesaid.

Inwards remittance through the issuance of Depository Receipts and Foreign Currency Convertible Bonds (FCCB) are also counted towards FDI.

Sectoral caps with reference to Foreign Investment

The government of India has, for the purpose of ensuring maximum economic growth and at the same time maintaining National interest divided the business activities into three different sectors. Each of the sectors has specified industries and procedures under its purview and specifies conditions to be followed with a view to infuse Foreign Investment in such specific industry of the sector. Such Sectors includes:-

1. Prohibited Sectors – Sectors wherein Foreign Investment is strictly prohibited i.e wherein no application for approval can be made.
2. Restricted Sector – Sectors wherein Foreign Investment is permitted under automatic approval up to a specified percentage and for any increase beyond such specified percentage, approvals is required or per se there are certain sectors wherein foreign investment is allowed only pursuant to approvals.

100% Automatic Sectors – Sectors under Automatic Route means such sectors wherein 100% investment is allowed without seeking any governmental approvals.

Foreign Investment – Overview of implications involved

As and when the question regarding infusion of Foreign Funds arise, the first criteria to be verified is regarding which sectors such industry falls. In case of Automatic Route, the non-resident investor or the Indian company does not require any approval from Governmental authority, whereas, under the Restricted Sectors, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance may be required. With specific reference to certain specified sectors, Foreign Equity should be infused after seeking approval and abiding by the policies & regulations of concerned authority as well such as SEBI, TRAI, IRDA, MIB etc.

Cases requiring approval

For proposals involving FDI under the Government route the following approval levels operate within the Foreign Investment Promotion Board i.e. though the requisite application would be filed by the applicant to the FIPB, it would be disposed of following the specified manner:-

While granting approval to any application filed with the FIPB the FIPB takes into consideration and scrutinize various important aspects therein a brief flow chart of the procedure followed therein is specified below:-

The FIPB is instructed not to change or impose additional conditions in any specific letter of approval pursuant to grant of such letter of approval to any Non-resident investor, Guidelines for e-filing of applications, filing of amendment applications and instructions to applicants are available at FIPB’s website (http://finmin.nic.in/ ) and (http://www.fipbindia.com ).

Procedural implications with reference to Foreign Investment

In seeking foreign Investment under automatic route or under approval route post acquiring requisite approval, the following issues must be taken care of:-

• The Indian company receiving foreign investment should report the details of the amount of consideration to the Regional Office of concerned RBI through its Category 1 Authorized Dealer not later than 30 days from the date of receipt. Such report should be accompanied with copy of FIRC/s evidencing the receipt of the remittance and the KYC report on the non-resident investor from the overseas bank remitting the amount, upon submission of which a Unique Identification Number (UIN) for the amount reported would be allotted to the entity.
• The Capital Instrument must be issued within 180 days of the date of receipt of the inward remittance or by debit to the NRE/FCNR (B) account of the non-resident investor. In case the same is not done within the specified time frame the amount should be refunded to such non-resident shareholder.
• The Capital Instrument must be priced in accordance with the valuation methodology provided.
• After issue of shares (including shares issued on rights basis and shares issued under ESOP)/fully, mandatorily & compulsorily convertible debentures / fully, mandatorily & compulsorily convertible preference shares, the Indian company has to file Form FC-GPR, to the Regional Office of concerned RBI through its Category 1 Authorized Dealer not later than 30 days from the date of issue of Shares along with requisite annexure.
• Separate forms are prescribed for reporting of non cash issuance and FCCB/ADR/GDR issues.

Conclusion

One of the main element which could lead to the improvement in the economic condition of the Country is the increase in the inflow of foreign investment. Towards such initiative the Government has time and again being simplifying procedural aspects and making its guidelines user friendly whether such user be a Foreign investor or the investee company seeking any approval. Though such steps are steadily taken by the Government however it’s essential that a steady flow of such policies is maintained so that foreign investment for future also continues to rise.