Who is eligible to make Foreign Direct Investment in India? Which all entities are permitted to receive FDI? Are there any restricted sector for FDI?

The intent and objective of the Government of India behind promoting Foreign Direct Investment is to supplement domestic capital, technology and skills, for accelerated economic growth. Foreign Direct Investment was introduced with an idea to establish a lasting interest in a resident entity other than that of the investor. Foreign investment comes into India in various forms. Following the reforms path, the Reserve Bank of India (RBI) has liberalised the provisions relating to such investments. The Reserve Bank of India has permitted foreign investment in almost all sectors, with a few exceptions. In many sectors, no prior approval from the Government of India or the Reserve Bank of India is required for non-residents investing in India. The Non- Resident Indians have the flexibility of investing under the options of repatriation and non-repatriation.

Eligible Investors: Foreign Direct Investment

The Foreign Direct Investment Policy has listed down the following investors who are eligible to invest in India –

1. A non-resident entity can invest by way of subscribing, purchasing or selling of equity instruments of an Indian Company in all the sectors/activities expect those prohibited under the FDI Policy. No investments are allowed in those restricted sectors (listed below). Further, it has explicitly provided that the entities of the country who shares the land border with India (i.e, Pakistan, Afghanistan, China, Bhutan, Nepal, Myanmar and Bangladesh) would require government approval before making any foreign investment.

It further goes on to state that if the beneficial owner of any investment, transfer of any existing or future FDI in India are situated in the country which requires government approval then in that case also, government approval becomes necessary, irrespective of the country where the registered owner is situated.

# equity instruments means equity shares, convertible debentures, preference shares and share warrants issued by an Indian company;

2. Non-Resident Indians as well as citizens of Nepal and Bhutan are permitted to invest in the capital of the Indian Company on a repatriation basis. However, the amount of consideration for such investment shall be paid by way of inward remittance in free foreign exchange through normal banking channels.

# capital means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures and share warrants.

# a repatriation basis means sale or maturity proceeds of an investment of which are net of taxes, eligible to be repatriated out of India.

3. Erstwhile Overseas Corporate Body (OCBs) which are incorporated outside India and are not under the adverse notice of Reserve Bank of India can make fresh FDI under the FDI policy, with prior approval of government if the investment is through approval route or with prior approval of RBI, if the investment is through automatic route.

4. A company, trust and partnership firm incorporated outside India owned and controlled by non-resident Indians can invest in India on a non-repatriation basis.

5. Foreign Portfolio Investors (FPI) may purchase or sell equity instruments of an Indian Company listed or to be listed on a recognized stock exchange in India under the Portfolio Investment Scheme which limits the individual holding of an FPI below 10% of the capital of the company and the aggregate limit for FPI investment to 24% of the capital of the company.

However w.e.f April 1, 2020, the aggregate limit shall be the sectoral caps applicable to the Indian companies with an option to decrease the limit by way of passing a special resolution. In case the company which has decreased its threshold limits, decides to increase the aggregate limit, can increase its threshold.

Note: Once the threshold is increased, the company cannot reduce the aggregate limit to a lesser threshold.

6. A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute upto 100% of the capital of an Indian Company engaged in sectors like biotechnology, IT related to hardware and software development, nanotechnology, seed research and development, research and development of new chemicals, entities in pharmaceutical sectors, dairy industry, poultry industry, production of bio-fuels, hotel cum convention centres with seating capacity of more than three thousand and Infrastructure Sector.

Further, FVCI can invest in units of Venture Capital Fund(VCF) or Category I AIFs or units of a scheme or of a fund set up by a VCF or by a Category I AIFs, equity or equity linked or debt instrument issued by a startup companies (irrespective of the sector in which the startup is engaged.)

7. A non-resident Indian or Overseas Citizen of India (OCI) may subscribe to the National Pension System governed and administered by Pension Fund Regulatory and Development Authority (PFRDA), provided that such person shall be eligible to invest in accordance to the the provisions of the PFRDA Act.

Further it is stated that the annuity or the accumulated saving will be on a repatriable basis. However, the NRI or OCI may offer such instruments as permitted by the Reserve Bank from time to time as collateral to the recognised Stock Exchanges in India for their transactions in exchange traded derivative contracts.

Eligible Entities: Foreign Direct Investment

1. Indian Companies

Indian Companies can issue capital against FDI.

2. Partnership Firm/Proprietary Concern

It can issue capital against FDI only on non-repatriation basis provided such firm is not engaged in any agricultural or plantation activity or print media or real estate business.

3. Trust

FDI is not permitted in trusts other than in Foreign Venture Funds registered and regulated with SEBI and Investment Vehicle.

4. Limited Liability Partnerships (LLPs)

FDI is permitted under automatic route in LLPs operating in sectors/activities where 100% FDI is permitted through automatic route and there are no FDI linked performance conditions.

Further a Company or an LLP having a foreign investment, engaged in sector where foreign investments upto 100% is permitted and there are no FDI linked performance conditions, may be converted in LLP or Company, as the case may be, under automatic route.

# FDI linked performance conditions means the sector specific conditions for purchase and sale of equity instruments of an Indian Company by a person resident outside India.

5. Investment Vehicle

An investment vehicle registered and regulated under regulations framed by SEBI or any other authority designated for the purpose including regulations governed by SEBI (Real Estate Investment Trusts) Regulations, 2014, SEBI (Infrastructure Investment Trusts) Regulations, 2014, SEBI (Alternate Investment Funds) Regulations, 2012 is permitted to receive foreign investment from person resident outside India (other than person or entity registered in Pakistan or Bangladesh), including an Registered Foreign Portfolio Investor or Non-Resident Indian.

6. Startup Companies

Start-ups can issue equity or equity linked instruments or debt instruments to FVCI against receipt of foreign remittance. It can also issue convertible notes to person resident outside India (other than individual or entity registered in Pakistan or Bangladesh) amounting to twenty five lakhs rupees or more in single tranche.

Further, a start-up company engaged in sector where investment requires government approval may issue convertible notes to non- resident only with approval of the Government.

# convertible notes means an instrument issued by a startup company acknowledging receipt of money initially as debt, repayable at the option of the holder, or which is convertible into such number of equity shares of that company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per other terms and conditions agreed and indicated in the instrument;

FDI in resident entities other than those mentioned above shall not be permitted.

Entry Routes in India

Investments can be made by non- residents in the equity shares, fully, compulsorily and mandatorily convertible debentures and preference shares of an Indian Company through automatic routes or government route.

Automatic Route

Under automatic route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment.

Government Route

Under the Government Route, prior approval of the Government of India is required. Proposals for foreign investment under Government route, are considered by respective Administrative Ministry/Department.

Note: Besides the entry conditions on foreign investment, the investment/investors are required to comply with all relevant sectoral laws, regulations, rules, security conditions, and state/local laws/regulations.

Restricted List for FDI

Foreign Direct Investment is strictly prohibited in the following sector:

1. Lottery business including Government or private lottery, online lotteries, etc.
2. Gambling and betting including casinos, etc
3. Chit funds
4. Nidhi Company
5. Trading in Transferable Development Rights
6. Real Estate Business (except development of townships, contrcution of residential or commercial premises, road and bridges and Real Estate Investment Trusts (REITs) registered under SEBI.
7. Manufacturing of cigars, cheroots, cigarillos and cigarettes, tobacco or tobacco substitute.
8. Activities/ sectors not open to private sector investment eg. Atomic Energy, Railway Operations (except those permitted under the permitted sector, entry routes and sectoral caps for total foreign investment)

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.

Hope this answer is useful to you and gives you a better clarity on eligibility for FDI. In case of any queries or assistance , feel free to write to me at anjalibansalcs@gmail.com