Understanding FDI in a Private Limited Company

Greater connectivity and relaxation of regulatory regimes have encouraged globalization and the free flow of capital across countries and ultimately increase FDI in private limited company. Businesses, both big and small, are going international to win market share and maximize profits.

In this context, India has become a key market for most businesses and their tremendous interest among foreign companies and foreign nationals to set up a business in India. Foreign Direct Investment (FDI) is one of the most popular routes for foreigners to start a business in India.

Foreign Direct Investment overview

The Indian Government is keen on increasing foreign investment in India and has taken various policy decisions to encourage FDI. The FDI Policy in India is regulated by the Department of Industrial Policy and Promotions (DIPP), Ministry of Commerce and Industry. A consolidated circular issued by the Department of Industrial Policy and Promotions services as an important policy note on FDI and the latest FDI Circular was issued 17-4-2014.

As per regulations, FDI means investment by the non-resident entity/person resident outside India in Indian Entities and includes all types of foreign investment in India including investment by Foreign Institutional Investors, NRI, foreigners or foreign entities, etc.

FDI in private limited company

FDI is allowed for non-resident entities, subject to the FDI Policy and sectoral caps. FDI in a Private Limited Company falls under two routes:

• Automatic route
• Approval route

FDI is permitted up to 100% in most of the sectors other than those sectors which are capped or restricted. In cases where automatic approval is not allowed, prior approval from the Foreign Investment Promotion Board (FIPB) of the Government of India must be obtained before the investment. Further, citizens/entities of Bangladesh or Pakistan can invest in India, only under the approval route.

FDI can be made through various equity instruments. Indian companies can issue equity shares, preference shares and convertible debentures, subject to the norms and guidelines as prescribed by the Authorities.

The equity shares of a Private Limited Company issued under FDI must be at fair value. However, in the case of a newly incorporated entity or subscription to the Memorandum of Association during Private Limited Company Registration by an NRI or Foreigner, the shares can be issued at a face value.

FDI in the following sectors is prohibited completely:

• Atomic Energy
• Lottery business including government and online lottery.
• Gambling and betting
• Chit funds
• Nidhi Companies
• Trading in transferable development rights(TDRs)
• Real estate business or construction of farmhouse except for the development of townships, roads or bridges, city, and regional infrastructure, etc.,
• Manufacturing of cigarillos, cigars, cheroots and cigarettes of tobacco or tobacco substitutes
• Activity/sector not opened to private sector investment [e.g. Atomic energy and Railway Transport (other than Mass Rapid Transport Systems)]

FDI under automatic route

If the activity proposed by the foreign or non-resident entity in India, doesn’t come under the FDI prohibited or approval category, FDI under the automatic route is permissible. Under the automatic route, an application for FDI in the Private Limited Company is not required, if the investment is within the FDI cap. The sector wise FDI Cap in India can be viewed in this link:

Under the automatic route, no such prior permission of the FIPB or RBI is required for FDI. The Company must only file certain filings relating to the FDI with the Reserve Bank of India after receipt of the share subscription money from the foreign or non-resident investor and issuance of shares.

Further, under the automatic route, the investment cannot be made in a Company that required an Industrial License under the Industries Act, 1951 or for the acquisition of existing shares of another Indian Company or financing expansion.

It is important to note that, majority of the sectors in India are eligible for 100% FDI under the automatic route, wherein an FDI report has to be filed only after the issuance of shares for the foreign or non-resident entity. Therefore, the process of starting a business in India for Foreign Nationals and Non-Resident Indians is very smooth and easy.

FDI under approval route

FDI under the automatic route is not permitted for the following sectors. Hence, prior approval of the FIPB is required.

• Petroleum sector (except for private sector oil refining)
• Investing companies in Infrastructure & Service Sector
• Defense and strategic industries
• Atomic minerals
• Print media
• Broadcasting
• Postal services
• Courier services
• Establishment or operation of satellite
• Development of integrated township
• Tea sector
• Asset Reconstruction Company

The following documents are required to be uploaded along with the proposal. 

Please note, this list is not exhaustive – other documents may be required based on specific cases. 

1. From both Investee & Investor Companies/Entities: 
2. Certificate of Incorporation 
3. Memorandum of Association (MOA) 
4. Board Resolution 
5. Audited Financial Statement of Last Financial Year 
6. Article of Association 
7. List of names, identification and addresses proof of all foreign collaborators of the Investor Company. 
8. Post and Pre-investment shareholding pattern of the Investee Company. 
9. An Affidavit stating that all information provided in hard copy and online is the same and correct. 
10. In the case of existing ventures, copy of JV agreement/Shareholders’ agreement/ technology transfer/trademark/brand assignment agreement (as applicable). 
11. Copy of Downstream Intimation. 
12. Copy of relevant past FIPB/SIA/RBI approvals, linked with the current proposal. 
13. Relevant Foreign Inward Remittance Certificate (FIRC).
14. Valuation certificate as approved by a certified Chartered Accountant. 
15. High Court order in case of Scheme of Arrangement.

Procedure to be followed after investment under the automatic route or approval route?

Under foreign investment, a Company is required to comply with the reporting norms. On receipt of investment and after an issue of allotment Company need to intimate the RBI.

On receipt of application money

On receiving the application money from non-residents, a Private Company needs to intimate foreign exchange department in RBI within 30 days of receipt along with the details like name and address of foreign investor. The above intimation shall attach the KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.

Upon issue of shares to non-resident investors

After receiving the money the private limited Company shall issue the shares within 180 days. It is required to intimate about allotment of securities to Foreign Exchange Department within 30 days of the allotment. The company shall intimate in FC-GPR along with the required documents.

Conclusion

In a majority of the sectors, Foreign Direct Investment in Private Limited Company is eligible for 100% FDI under the automatic route. The requirement of FDI report filing is easy and comes after receipt of the funds. Therefore the process of starting a business in India becomes trouble-free and smooth for Foreign Nationals and Non-Resident Indians.