Compliances for Foreign Direct Investment in India
- January 22, 2016
- Posted by: admin
Compliance is required in every field of work as it ensures that there is proper governance being followed and that the company is actively complying with all the governance practices. Further, legal compliance ensures that the organization is complying with all external statutory regulations and laws, by complying with laws and regulations, as organization can ensure that there is no risk of fines, penalties, lawsuits, any legal sanctions, etc.
Foreign Direct Investment has been defined under Rule 2(r) of Foreign Exchange Management (Non-debt Instruments) Rules, 2019, as per which, FDI is an “investment made through equity instruments by a person who is a resident outside India in an unlisted Indian company, or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company”. Further, foreign investment has been defined as “any investment made by a person resident outside India on a repatriable basis in equity instruments of an Indian company or to the capital of a Limited Liability Partnership”.
Foreign investment in India is regulated by Foreign Exchange Management Act, 1999 and the regulations framed thereunder, further, in order to regulate foreign investment, the Reserve Bank of India has published, the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations 2017, as well as the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018, which was superseded by Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 , under FEMA.
Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry, Government of India made policy pronouncements on FDI through Consolidated FDI Policy Circular/Press Notes/Press Releases which are thereby notified by the Department of Economic Affairs (DEA), Ministry of Finance, Government of India as amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 under the FEMA.
FDI in India is allowed through two routes, automatic and approval route, as specified in the Regulation 16 of FEMA 20 (R). No prior Government approval is required for investments in sectors falling under the automatic route, whereas, under the approval route, prior approval of the Government is required. Proposals for foreign investment under the approval route, are considered by the respective administrative ministry/department. Foreign investment by a person or company has to comply with certain requirements, such as, Issuance of Transfer of Equity instrument has to comply with pricing guidelines, the issuance shall be at a fair value. In the case of listed companies, pricing guidelines which are specified under SEBI Regulation needs to be complied with.
The Indian company which has received FDI is required to report in the Form FC-GPR which is issued by RBI, further, the details of the receipt of the amount of consideration for issue of equity instrument through an AD Category – I Bank, together with copy of the FIRC showing the receipt of inward remittances along with the KYC report for issuing equity instruments to an overseas investor. Once the documents are filed, the bank will send the documents along with the FC-GPR Form to the Regional office of RBI. Further, the Indian company is required to issue the equity instrument within 180 days, from the date of receipt of inward remittance or debit to NRE/FCNR (B) account in case of NRI/ PIO.
Further, an annual return for foreign assets and liabilities must be filed by all Indian resident companies, which has received FDI. The borrowers need to report all the external commercial borrowings to the RBI through AD Category – I bank, under form EC B2 Return. Form Foreign Currency- Gross Provisional Return (FC-GPR), LLP-I, LLP-II, Foreign Currency – Transfer of Shares (FC-TRS), CN, ESOP, Downstream Investment (DI) , DRR, InVi needs to be filed and submitted under the head Single Master form. An Advance Reporting Form needs to be submitted. These are some main compliances which are required under FEMA.
There were certain changes made in the existing FDI Policy, 2017 by the Indian Government. An amendment was introduced by the Department for Promotion of Industry and Internal Trade in their Press Note No. 3, which will have a statutory effect on amendment of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. As per the amendment, any entity of a country, who shared their land border, such as, Bangladesh, China (including Hong Kong and Macau), Pakistan, Nepal, Myanmar, Bhutan and Afghanistan with India or where any beneficial owner of an investment into India is situated in, or who might be a citizen of any such particular country, has the right to invest only when he receives prior approval of the Government if India.