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Author - Associate Runa Jasia

A foreign direct investment (FDI) is a form of investment by way of controlling ownership in a business in one nation by an entity based in another. It is thus different from a foreign portfolio investment by the notion of direct control.

The origin of the investment does not impact the definition. As an FDI, the investment may be made either ‘inorganically’ by buying a company in the target country or ‘organically’ by expanding the operations of a business already existing in that country. The Foreign Exchange Regulation Act (FERA) was passed in India in 1973 that imposed stringent regulations on 

• certain kinds of payments, 
• dealings in foreign exchange and securities
• transactions which have an indirect impact on foreign exchange and 
• the import and export of currency.

 For conducting a transaction across countries, the Foreign Exchange Management Act, 1999 (FEMA) needs to be followed. FDI is regulated under this act only, and it is governed by RBI (Reserve Bank of India). This FDI policy has reviewed from time to time by the Government of India. Recent amendments in this act were made that are effective from August 28, 2017. The parliament of India first enacted it in the year 1999. This contains law relating to foreign exchange in regards to payment and development of foreign investment in India. FDI and FPI (Foreign Portfolio Investment) are agnostic for the schedule under which investment has been made. It is the percentage which defines whether it is direct or portfolio investment.

Foreign Investment implies any investment made by a person resident outside India on a basis in capital instruments of an Indian company or the capital of an LLP.

Foreign Direct Investment (FDI) is a form of investment through capital instruments by a person residing outside India:

(a) in an unlisted Indian company

(b) in 10 percent or more of the post-issue paid-up equity capital on a fully diluted basis of a listed company.

Foreign Portfolio Investment is an investment made by a person resident outside India in capital instruments where such investment is:

(a) less than 10 percent of the post-issue paid-up equity capital on a fully diluted basis of a listed company or

(b) less than 10 percent of the paid-up value of each set of capital instruments of a listed Indian company.

How can this foreign direct investment be received from an Indian company?

There are two ways through which this foreign direct investment can be done:

1.    Automatic Route – This is known as an automatic route because it’s done automatically without the need for any permission. Under this route, while investing in India, one does not need approval from RBI or the Government of India. There are some sectors which do not need any approval, as mentioned in the FEMA act.

Single brand product retail trading is a type of activity that can be done through an automatic route.

What is Single Brand product retail trading?

Foreign investment in this sector deals with branding, marketing, and advertising goods for the customers. It gives access to global designs, technologies, and management practices. Under this condition, products should be sold as a “Single Brand” only, and the brand name must remain the same internationally Etc. 

2.    Government Route - Foreign investment in activities not covered under the automatic route requires prior approval of the Government. Procedure for applying for Government approval is given at http://fifp.gov.in/Forms/SOP.pdf. Activities/sectors like mining, defense, broadcasting, etc., come under the government route.

Other factors:

1.    The Government will seek approval to pricing as appropriate tax clearance provided by the pricing guidelines of RBI. 

2.    Issue of equity shares against import various goods and equipment can be reported to RBI as per mentioned in the FDI policy. 

There is certain Standard Operating Procedure (SOP) for Processing FDI Proposals:

• Online Application 

The applicant is supposed to submit the foreign investment proposal in the format as given on the portal and upload documents as required.

In case applications are digitally signed, the applicant is not required to submit any physical copy with the competent authority.

• Approval 

On the receiving the proposal, same shall be circulated online by DIPP to Reserve Bank of India for comments from FEMA perspective within two days. Further, all proposals are to be forwarded to the Ministry of External Affairs (MEA) and Department of Revenue (DoR) for further information. DIPP may provide clarification within 15 days on specific issues of FDI policy as may be referred by the Competent Authority.

Approval/rejection letters are to be sent online by the Competent Authority to the applicant, consulted Ministries/Departments, and DIPP within two weeks.

The agreement between the foreign investor and the investee entity shall be subject to compliance of Indian Laws.

Competent Authorities have to hold a regular monthly review on the proposals of foreign investment pending with them.

An additional period of 2 weeks will be given to DIPP for consideration of those proposals which are proposed for approval or rejection or where additional conditions that are not provided in the FDI policy are to be imposed by the Competent Authority.