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An “FDI” or “Foreign Direct Investment” refers to an investment through equity instruments by 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.

A “Foreign Portfolio Investment” refers to an investment made by a resident outside India through equity instruments where such an investment is less than ten percent of the post issue paid-up share capital on a fully diluted basis of a listed Indian company, or less than ten percent of the paid-up value of each series of the equity instrument of a listed Indian company.

How does an FDI work in India:

Example: A US based technology company XYZ INC invests and acquires a majority stake in an Indian company - ABC Pvt. Ltd., to boost its research and development. Some of the benefits that encourage foreign investors to get involved in an FDI include the market diversification, local expertise, lower labour costs, tax incentives, etc. 

Overseas Investors can invest in India under two routes as mentioned below:

Automatic Route: An entry route for FDI, wherein investments made by a resident outside India does not require a prior Reserve Bank or Government approval.

Government Route: An entry route for FDI, wherein investments made by a resident outside India requires prior Government approval. The foreign investment received under this route shall comply with the conditions stipulated by the Government in the approval form. An application can be made on the Foreign Investment Facilitation Portal (FIFP), which is a new online portal to facilitate FDI approvals for investors. This portal is administered by the Department of Industrial Policy and Promotion and the Ministry of Commerce and Industry. 

Reporting Requirements under FDI: 

Post receipt of Foreign Investment, there are certain reporting requirements which need to be completed by the Indian companies such as FCGPR, FC_TRS, LLP1, LLP 2 filing, etc.. on Foreign Investment Reporting and Management System (FIRMS) Portal of RBI.

Pre - vetting Portal:

ICICI Bank’s first of its kind online portal for pre-verification will enable you to upload the screenshots of FDI Reporting Forms, namely FCGPR, FCTRS, InVI, DI, LLP-1/2, DRR, ESOP, CN, along with the supporting documents. Post our feedback on the documents, filing can be initiated on FIRMS Portal to minimize the chances of rejection

Investment in unlisted foreign entity by way of acquisition of equity capital or subscription as a part of the Memorandum of Association of the foreign entity (irrespective of % stake), or  Investment in listed foreign entity where the stake if 10% or more of the paid-up equity capital, or  Investment with control* where investment is less than 10% of the paid-up equity capital of a listed foreign entity

*Control: The right to appoint a majority of the directors or control management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreement or voting agreements that entitle them to 10% or more of voting rights or in any other manner in the entity.

Permissible investors under automatic route

An Indian entity which is defined as a ‘Company defined under the Companies Act, 2013 or a body corporate incorporated by any law for the time being in force or a Limited Liability Partnership (LLP) formed under the Limited Liability Partnership Act, 2008 or a partnership firm registered under the Indian Partnership Act, 1932’ and Resident Individuals. 

Step-wise process of executing an ODI transaction

• Submit the documents at Authorized Dealer (AD) Bank
• AD Bank scrutinizes the documents for automatic route eligibility
• Unique Identification Number (UIN) will be generated at the time of the first financial commitment in the foreign entity.
• For subsequent financial commitment, reporting will be done against the same UIN
• Submission of share certificate and Annual Performance Report (APR) within due time.

External Commercial Borrowings (ECB) are commercial loans widely used by eligible resident entities who raise ECBs from recognised non-resident entities. ECBs should adhere to the criteria like minimum maturity period, maximum all-in-cost ceiling, permitted and non-permitted end-uses, etc. 

Eligible borrowers:

All entities eligible to receive FDI. Further, the following entities are also eligible to raise ECB:

i. Port Trusts; 

ii. Units in SEZ;

iii. SIDBI; and

iv. EXIM Bank of India.

Note: In addition to above, below entities are eligible to INR ECB:

Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/ cooperatives and Non-Government Organisations.

Permissible lenders:

The lender should be resident of FATF or IOSCO compliant country, including on transfer of ECB. However, 

a) Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognised lenders;

b) Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and

c) Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for FCY ECB (except FCCBs and FCEBs). Foreign branches / subsidiaries of Indian banks, subject to applicable prudential norms, can participate as arrangers/underwriters/market-makers/traders for Rupee denominated Bonds issued overseas. However, underwriting by foreign branches/subsidiaries of Indian banks for issuances by Indian banks will not be allowed.

Step wise process of LRN generation: 

• Execution of loan agreement between borrower and lender
• Submission of ECB application along with supporting documents at AD Bank
• AD Bank forwards Form ECB to RBI for Loan Registration Number (LRN) generation post their scrutiny
• RBI allots LRN
• Drawdown and repayment to be executed as per the schedule

Foreign entities who wish to establish their presence in India for limited activities such as sourcing, technical and/or marketing support, etc may open a Branch Office (BO) or Liaison Office (LO) or Project Office (PO) in India subject to compliance of guidelines of Reserve Bank of India.

'Branch Office' in relation to a company, means any establishment described as such by the company. A person resident outside India can establish a branch office in India provided it has a profit-making track record during the immediately preceding five financial years in the home country and net worth of not less than USD 100,000 or its equivalent. 

'Liaison Office' means a place of business to act as a channel of communication between the principal place of business or Head Office or by whatever name called and entities in India but which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel. 

A person resident outside India can establish a liaison office in India provided it has a profit making track record during the immediately preceding three financial years in the home country and net worth of not less than USD 50,000 or its equivalent.  

'Project Office' means a place of business in India to represent the interests of the foreign company executing a project in India but excludes a Liaison Office. The validity period of the project office is for the tenure of the project. 

There is a general permission to non-resident companies to establish POs in India, provided they have secured a contract from an Indian company to execute a project in India. Also, the project must have secured the necessary regulatory clearances; and is funded directly by inward remittance from abroad; or the project is funded by a bilateral or multilateral International Financing Agency, or a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the Project.

• Registered Name of the Remitter/ Investor (Name, if the investor is an Individual) Registration Number (Unique Identification Number* in case remitter is an Individual) Registered Address (Permanent Address if remitter is an Individual)
• Name of the Remitter’s Bank
• Remitter’s Bank Account No.
• Period of banking relationship with the remitter

* Passport No., Social Security No., or any Unique No. certifying the bonafides of the remitter as prevalent in the remitter’s country.

SMF is the master form on which the reporting for the Foreign Investment, Forms (Foreign Currency – Gross Provisional Return (FC-GPR), Foreign Currency – Transfer of Shares (FC-TRS), Limited Liability Partnership – I (LLP-I), Limited Liability Partnership – II (LLP-II), Convertible Notes (CN), Employee Stock Option Plan (ESOP), Depository Receipts (DRR), Downstream Investment (DI), Investment Vehicle (InVi)) can be done whereas Entity Master is the form where the details of the company and foreign shareholding pattern are recorded.

Entity User is the user representing an entity which has received foreign investment and is required to provide details of foreign investment, including indirect foreign investment, in the Entity Master.

Business User (BU) is the applicant who reports transaction on behalf of the company in the SMF through Foreign Investment Reporting and Management System (FIRMS) portal. BU can file forms for multiple entities. However, separate registration and login credentials must be obtained for each entity.

Authorised Dealer (AD) Banks would have only chosen branches which handle the registrations and the forms reported on FIRMS portal. So, while selecting the IFSC, it is needed to ensure that the reporting is made to the concerned branch of the AD Bank. The IFSC to be entered by the users who choose ICICI Bank as their AD Bank is ICIC0000393.

Foreign Direct Investment to Indirect Foreign Investment: FC-TRS form has to be filed first for the reduction in FDI, and subsequently DI reporting has to be done for the increase in Indirect Foreign Investment.

Indirect Foreign Investment to Foreign Direct Investment: Firstly, the entity master has to be updated with the changes in investment pattern and then FC-TRS form has to be filed.

(a) Form FCTRS shall be filed for transfer of equity instruments as per the rules, between:

i. person resident outside India holding equity instruments in an Indian company on a repatriable basis and person resident outside India holding equity instruments on a non-repatriable basis; and

ii. person resident outside India holding equity instruments in an Indian company on a repatriable basis and a person resident in India.

Transfer of equity instruments in accordance with the rules by way of sale between a person resident outside India holding equity instruments on a non-repatriable basis and person resident in India is not required to be reported in Form FC-TRS. 

(b) Transfer of equity instruments on a recognised stock exchange by a person resident outside India shall be reported by such person in Form FC-TRS.

(c) Transfer of equity instruments prescribed in Rule 9(6) of the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019, shall be reported in Form FC-TRS on receipt of every tranche of payment. The onus of reporting shall be on the resident transferor/transferee.

(d) Transfer of 'participating interest/rights' in oil fields shall be reported in Form FC-TRS.

(e) Form FC-TRS is required to be filed by the Indian company buying back shares in a scheme of merger/ de-merger/ amalgamation of Indian companies approved by National Company Law Tribunal (NCLT)/ competent authority. 

The form FC-TRS shall be filed within sixty days of transfer of equity instruments or receipt/ remittance of funds whichever is earlier.

Source: https://www.rbi.org.in/

Form LLP II: The transfer/disinvestment of capital contribution or profit share between a resident and non-resident or vice versa shall be filed in Form LLP (II) within sixty days from the date of receipt/remittance of funds. The responsibility of reporting shall be on the resident transferor/transferee.

The onus of reporting shall be on the resident transferor/transferee or the person resident outside India holding equity instruments on a non-repatriable basis, as the case may be.

Source: https://www.rbi.org.in/

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

Source: https://www.rbi.org.in/

Downstream Investment is an indirect foreign investment, whereby an Indian company having FDI which is owned or controlled by foreign person/entities invests in the equity instruments of another Indian company.

Indian entity making DI shall submit Form DI within 30 days from the date of allotment of the equity instruments. For cases where the original investment made in the investee entity was made as a resident but later the investor entity becomes owned and/or controlled by persons resident outside, the same shall be reckoned as downstream investment from the date on which the investor entity is owned and/or controlled by persons resident outside India. Such downstream investment shall be in compliance with the applicable entry route and sectoral cap and shall require to be reported by the investor entity within 30 days from the date of such reclassification in form DI

Equity Capital means equity shares, perpetual capital or instruments that are irredeemable or contribution to non-debt capital of a foreign entity, which are fully and compulsorily convertible instruments. Accordingly, any instrument, which is redeemable, non-convertible or optionally convertible, will be treated as debt for the purpose of OI Rules/Regulations/Directions. 

Financial Commitment is the total value of investments made by a resident individual or entity in:

• Equity capital under Overseas Direct Investment (ODI)
• Debt (excluding OPI) in foreign entities
• Non-fund-based facilities (e.g., guarantees) extended to or on behalf of the foreign entity/entities or Step Down Subsidiary (SDS)

Indian Entity (IE)/Resident Individual (RI) through its designated AD Bank shall obtain UIN for the foreign entity in which the ODI is intended to be made at the time of subscription to MOA or sending the outward remittance, whichever is earlier. In case IE/RI approaches AD after signing MOA, then late submission fee (LSF) is applicable for difference between the MOA signing date and submission of Form FC with designated AD Bank.

• The total financial commitment by an Indian entity in all foreign entities combined must not exceed 400% of its net worth as per the last audited balance sheet, or USD 1 billion per financial year, whichever is lower.
• Net Worth Definition
  • As per Section 2(57) of the Companies Act, 2013
  • For partnerships/LLPs: Sum of partners' contributions + undistributed profits – accumulated losses and deferred/misc. expenditure 

Yes. Resident Individuals can invest in overseas entities under the Liberalised Remittance Scheme (LRS) within the prescribed limit of USD 250,000 per financial year.

• SDS is an entity in which the foreign entity has made equity capital investment and holds control.
• Entities where the foreign entity has no control are not treated as SDS and need not be reported.

Only after UIN is transferred from the original AD bank to the new AD bank. 

No. ODI transactions cannot proceed if any reporting (APR, Share Certificate, FLA Return, LSF Payment) is pending.

No. Resident Individuals cannot invest in foreign entities that have or plan to set up SDSs.

The LSF for delay in reporting of overseas investment related transactions will be calculated as per the following matrix: 

• The option of LSF will be available up to three years from the due date of reporting/submission under OI Regulations. The option of LSF will also be available for delayed reporting/submissions under Notification No. FEMA 120/2004-RB and earlier corresponding regulations, up to three years from the date of notification of OI Regulations
• A person residing in India who has made a financial commitment in a Foreign Entity according to the Act or Rules & Regulations made thereunder, will not make any further financial commitment towards such Foreign Entity or transfer such investment, until any delay in reporting is regularised.