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The basics of Foreign Investment in India – one must know

Foreign companies who want to do business in India have the option of setting up a subsidiary company or branch office. They can bring in funds through automatic route or through government route. In this article, we will write about the basics of foreign investment in India

 

Nature of business

  • Those foreign companies who wish to set up business in India have to check whether the nature of business is prohibited for Foreign Investment in India. Read our article “Sectors where Foreign Direct Investment is prohibited” to know more about it.
  • If the business is not figuring in prohibited list, check whether the investment is allowed under automatic route.
  • Lastly, if the business is not appearing in both the lists mentioned above, investment is possible with a prior permission from government of India. 

 

Setting up of entities

After the foreign entity is clear about the FDI policy, they can look at setting up business(read more) operations in India either as

  • A private limited company(read more) incorporated under the Companies Act, 2013; or
  • As a joint venture with an Indian entity; or
  • As a wholly owned subsidiary (WOS); or
  • Branch office, Liaison Office, Project office or representative office of their parent company.

 (Also Read  Can Non Resident Indian (NRI) invest in Partnership firm or a proprietary concern?)

 

Getting remittance (money) in the venture

Once the company/business entity is set up, foreign company can get funds into India (also called as FDI) through the following –

  • Automatic Route means getting funds without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy.
  • Government Route – If FDI in activities not covered under the automatic route prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance to be obtained.

 

Nature of remittance

  • Foreign remittance has to come towards Equity shares, fully and mandatorily fully convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront.
  • Any investments being made such as non-convertible preference will be considered as External Commercial Borrowings (ECB). ECB has a separate set of rules which will discuss in exclusive article later.

 

Issue of Shares and reporting thereon

  • Report to RBI on receipt of money Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India (RBI).
  • Allotment of shares The Indian company has to ensure that the shares are issued within 180 days from the date of inward remittance which otherwise would result in the contravention / violation of the FEMA regulations. If shares are not issued within 180 days, then the said amount to be refunded or seek special approval from RBI. 
  • Report to RBI after allotment of shares – Within 30 days from the date of issue of shares, a report in Form FC-GPR- PART A together with the documents such as Chartered Accountant certificate, Company Secretary Certificate, etc should be filed with the Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India

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About CA Prasad Chartered Accountant

CA Prasad Chartered Accountant
CA Prasad is a practicing Chartered Accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]