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
- 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
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 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
- Postal services
- Courier services
- Establishment or operation of satellite
- Development of integrated township
- Tea sector
- Asset Reconstruction Company
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
- From both Investee & Investor Companies/Entities:
- Certificate of Incorporation
- Memorandum of Association (MOA)
- Board Resolution
- Audited Financial Statement of Last Financial Year
- Article of Association
- List of names, identification and addresses proof of all foreign collaborators of the Investor Company.
- Post and Pre-investment shareholding pattern of the Investee Company.
- An Affidavit stating that all information provided in hard copy and online is the same and correct.
- In the case of existing ventures, copy of JV agreement/Shareholders’ agreement/ technology transfer/trademark/brand assignment agreement (as applicable).
- Copy of Downstream Intimation.
- Copy of relevant past FIPB/SIA/RBI approvals, linked with the current proposal.
- Relevant Foreign Inward Remittance Certificate (FIRC).
- Valuation certificate as approved by a certified Chartered Accountant.
- High Court order in case of Scheme of Arrangement.
Procedure to be
followed after investment under the automatic route or approval route?
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
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.
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.