Article of Foreign Direct Investment

What is Foreign Direct Investment (‘FDI’) ?
‘FDI’ means investment by non‐resident entity/person resident outside India in the capital of an Indian
company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident outside India) Regulations, 2000. FDI can be done by a non resident entity, non‐resident
person, Foreign Institutional Investor (FII), Foreign Portfolio Investor (FPI), Foreign Venture Capital
Investor (FCVI), Qualified Foreign Investor.  
For investing in India by a non‐resident entity, only those sectors/activities which are not
prohibited under the FDI Policy shall be considered. For eg: FDI is prohibited in Lottery Business,
Gambling and Betting including casinos etc, Chit funds, Nidhi Company, Trading in Transferable
Development Rights (TDRs), Real Estate Business or Construction of Farm Houses, Manufacturing of
cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes, Activities/sectors not
open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid
Transport Systems).  
However, the policy has laid down certain restrictions/ limitations for investment proposed to be done
by citizens of Bangladesh, Pakistan or an entity incorporated in Bangladesh, Pakistan.  
FDI can be done either in following entities, FDI in resident entities other than those mentioned below is
not permitted.
FDI in India Entities can be done against issue of Shares  
Indian companies can issue securities like equity shares, fully, compulsorily and mandatorily convertible
debentures and fully, compulsorily and mandatorily convertible preference shares and these shall be
subject to pricing guidelines/valuation norms prescribed under FEMA Regulations.
Warrants and partly paid shares can be issued to person/(s) resident outside India only after approval
through the Government route1.  
Compliances to be done by an Indian company for allotment of shares to a foreign investor are as
detailed below:

1. Determination of Entry Route
Investments can be made by a foreign investor either through the Automatic Route or the Government
Route. Under the Automatic Route, the non‐resident investor or the Indian company does not require
any approval from Government of India for the investment. Under the Government Route, prior
An Indian
Limited Liability
Venture Capital Trusts
approval of the Government of India (power delegated to Reserve Bank of India) is required. Proposals
for foreign investment under Government route, are considered by Foreign Investment Promotion
2. Determination of Caps on Investments/ Other Sector Specific Conditions
Investments can be made by non‐residents in the capital of a resident entity only to the extent of the
percentage of the total capital as specified in the FDI policy. The cap and other conditions applicable to
the sector where investment is proposed to be made should be determined.  
3. Convening of Board Meeting to approve issue of Shares
Indian Company shall issue a 7 day notice to convene a meeting of the Board of Directors to consider
and approve the issue of shares to the non‐resident. The Company shall also approve the Letter of Offer
(in case the shares are proposed to be allotted on Rights Basis). In case shares of the Company are
proposed to be allotted on Private Placement basis, the Board shall  
• approve the Record of Private Placement in Form PAS‐5,  
• Letter of offer which shall be subject to approval of members in the General Meeting, and  
• Notice of General Meeting to be held for approval of Letter of Offer in Form PAS‐4 to be issued
to the foreign investor.
Further, in case of Private placement, monies received on application shall be kept in a separate bank
account in a scheduled bank and shall not be utilized for any purpose other than—
• for adjustment against allotment of securities; or
• for the repayment of monies where the company is unable to allot securities.
Further, in case of issue of shares on Preferential basis, special resolution shall be required to be passed
by the shareholders of the company in a General Meeting.
4. Convening of General Meeting (in case of Private Placement & Preferential Allotment)
When General Meeting of the Company is held to issue shares on private placement or preferential
allotment basis, the Company shall file necessary e‐forms with the Registrar of Companies as mentioned
• Form MGT‐14 for filing of Special Resolution passed in General Meeting.
• Form MGT‐14 for issue of securities (not applicable in case of Private Companies)
• For GNL‐2 for filing Form PAS 5 along with Form PAS‐4 (Applicable only in case of Private
5. Receipt of Foreign Remittance
Foreign Investor shall on receipt of Letter of Offer may either accept, decline or renounce the offer.
Where the offer is accepted, foreign investor shall proceed with submitting a signed application for
subscribing the shares offer. It shall then remit the amount of consideration required to be paid to an
Indian Company for issue of shares. There are various modes of payment like inward remittance through
normal banking channel, debit to NRE/ FCNR Account, debit to non‐interest bearing Escrow account etc.
On receipt of foreign remittance by the Authorised Dealer Bank (‘AD Bank’) of the Indian Company,
process for obtaining the Foreign Inward Remittance Certificate (‘FIRC’) shall be initiated by the Indian
6. Submission of Advance Reporting Form to RBI
On receipt of foreign investment, the Indian Company shall report the details of the amount of
consideration received to the Regional Office concerned of the Reserve Bank not later than 30 days from
the date of receipt in the Advance Reporting Form prescribed by RBI as Annexure‐5 together with
copy/ies of the FIRC/s evidencing the receipt of the remittance, KYC report (prescribed by RBI as Annex‐
6) of the non‐resident investor from the overseas bank remitting the amount. The report would be
acknowledged by the Regional Office concerned, who will allot a Unique Identification Number (UIN) for
the amount reported.
7. Convening of Board Meeting to approve Allotment of Shares
Company shall allot its securities within 60 days (180 days as per FEMA Act, 1999, stricter term shall
prevail) from the date of receipt of the application money for such securities and if the company is not
able to allot the securities within that period, it shall repay the application money to the subscribers
within fifteen days from the date of completion of sixty days and if the company fails to repay the
application money within the aforesaid period, it shall be liable to repay that money with interest at the
rate of twelve per cent per annum from the expiry of the sixtieth day.
8. Post Allotment Compliances
a) After allotment of shares, the Indian company shall file Return of Allotment in e‐Form PAS‐3 with
Registrar of Companies within 30 days from the date of allotment.
b) Further, the Company shall submit Form FC‐GPR (prescribed by RBI) to Regional Office concerned
of the Reserve Bank within 30 days from the date of allotment of shares.
Form FC‐GPR shall be duly filled up and signed by Managing Director/Director/Secretary of the Company
and submitted to the Authorized Dealer of the company, who will forward it to the Reserve Bank and
following documents shall be submitted along with the form:  
i. A certificate from the Company Secretary of the company certifying that:  
ii. A certificate from SEBI registered Merchant Banker or Chartered Accountant indicating the
manner of arriving at the price of the shares issued to the persons resident outside India.
It is to be noted here that in the current scenario, companies can file various Forms under Foreign
Exchange Management Act, 1999 through an online Platform named as eBiz by simply registering
themselves on its website The forms in this case shall be required to be digitally signed
by the director.
c) Issue of Share Certificate/ Demat of shares by filing of Corporate Action Form.
In case shares are issued in physical Form, Company shall issue the share certificate to the shareholder
within 2 months from the date of allotment.
In cases where shares are issued in dematerialized form, Corporate Action Form for credit of shares
allotted shall be submitted with concerned Depository & Registrar & Transfer Agent.
d) Updation of Register of Members & Register of share Application & Allotment

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