1. Foreign Direct Investments
Malay Damania
M.V. Damania & Co
Chartered Accountants
M. V. Damania & Co
Chartered Accountants 1

2. Foreign Investment in India
(Schematic Representation)
M. V. Damania & Co
Chartered Accountants 2

3. Chartered Accountants
FDI inflows in India
31.5%
M. V. Damania & Co
Chartered Accountants 3

4. Country-wise FDI Inflows in India
Ranks
Country
% of total inflows 1
Mauritius
36% 2
Singapore 9% 3
Japan 8% 4
U.S. 6% 5
Netherlands 6
Others
35%
Total FDI Inflows
100%
M. V. Damania & Co
Chartered Accountants 4

5. Chartered Accountants
Sector-wise FDI
Ranks
Sectors
% of total inflows 1
Services
18% 2
Automobiles 8% 3
Telecommunication 7% 4
Power 6% 5
Housing & Real Estate 6
Others
55%
Total FDI Inflows
100%
M. V. Damania & Co
Chartered Accountants 5

6. Chartered Accountants
Definitions of FDI
Some key definitions:
‘Capital’ – equity shares; fully, compulsory & mandatory convertible preference shares & debentures. Instruments like warrants, partly paid shares cannot be issued to person resident outside India.
‘Current Account Transactions’ – Other than Capital Account transactions. Does not mean “Revenue”.
‘Capital Account Transaction’ – alters assets or liabilities, including contingent liabilities. Also refer Sec. 6(3).
- Foreign Trade
- Short Term banking facility
- Income on Investments
M. V. Damania & Co
Chartered Accountants 6

7. Chartered Accountants
Definitions of FDI
‘FDI’ – Investment by non-resident entity/person resident outside India in the capital of the Indian Company.
‘NRI’ – Individual resident outside India who is a citizen of India or person of Indian origin.
‘PIO’ – citizen of any country other than Pakistan and Bangladesh, if
he at any time held Indian Passport
He or either of his parents or any of his grand parents was citizen of India or
Is a spouse of Indian citizen or person referred to in above.
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Chartered Accountants 7

8. Definitions of FDI Rules for Person Coming to India:
Person Resident in India –
Rules for Person Coming to India:
More than 182 days in India
in preceding year?
Yes
NRI if purpose is other than
Employment, Business,
Vocation or intention to stay
for uncertain period. No
NRI
M. V. Damania & Co
Chartered Accountants 8

9. Chartered Accountants
Definitions of FDI
Rules for person leaving India:
More than 182 days in India
in preceding year?
Yes No
Still NRI, if purpose is Employment, Business,
Vocation or intention to stay outside India for
uncertain period.
NRI
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10. Chartered Accountants
Origin of Investment
A non-resident entity other than citizen of Pakistan or an entity incorporated in Pakistan.
A citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under Government route.
NRIs resident in Nepal/Bhutan can invest on repatriable basis only if the inward remittance is in free foreign exchange.
FII may invest in capital of Indian company. 10% is individual limit and 24% aggregate limit for FII investment.
No person other than registered FII/NRI can invest or trade in Indian Stock Exchange ie. through brokers
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Chartered Accountants 10

11. Chartered Accountants
Types of Securities
Equity shares
Fully, compulsory, mandatory convertible preference shares and debentures.
Other types of preference shares/debentures are considered as debt.
Inward remittance on issue of Depository Receipts (DRs) and Foreign Currency Convertible Bonds (FCCBs) are treated as FDI.
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12. Eligibility – Indian Companies
Indian Companies – Can issue capital against FDI.
Partnership Firms/Proprietor –
NRI or PIO
Non-repatriable basis if;
Amount is invested by inward remittance or out of NRE/FCNR/NRO account.
Not engaged in agriculture, plantation, real estate business or print media.
Repatriable basis only with prior permission of RBI.
Other than NRI/PIO only with prior permission of RBI.
Trusts – FDI in Trust other than Venture Capital Funds is not permitted.
Any other entity – Not permitted.
M. V. Damania & Co
Chartered Accountants 12

13. Chartered Accountants
Routes of Investment
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14. Chartered Accountants
Prohibited Sectors
Retail Trading (except single brand product retailing)
Atomic Energy
Lottery
Gambling and Betting
Chit fund
Nidhi Company
Trading in Transferable Development Right (TDR)
Real Estate Business or Construction of Farm House
Activities/Sectors not opened to private sector investment
Agriculture and plantations (excepts selected activities)
Manufacture of Cigars, cheroots, tobacco products etc.
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15. Chartered Accountants
Sectoral Cap
Manufacturing:
Industrial Undertaking not a micro or small scale enterprise (MSEs) manufactures items reserved for MSE sector would require Government approval if the foreign Investment is more than 24% in equity capital.
Service Sector:
Advertising – 100% FDI allowed under automatic route.
Films – 100% FDI allowed in Film industry including film financing, production, distribution, exhibition, marketing and associated activities.
Cable Network: ermitted up to 49% under Government route.
Business Service:
100% FDI under automatic route for Data processing, software development, computer consultancy, business management services, Market research, testing and analysis.
M. V. Damania & Co
Chartered Accountants

16. Development of Township:
Minimum Area
Service housing plots –10 hectares
Construction-development projects – built-up area of 50,000 sq. mtrs.
Investments:
For WOS – US$ 10 million.
For JV with Indian Company – US$ 5 million.
Funds have to be brought in within 6 months of commencement of business
Original investment cannot be repatriated before 3 years from completion of minimum capitalisation.
Above terms do not apply for investment by NRI. They also do not apply for development of SEZ.
M. V. Damania & Co
Chartered Accountants

17. Development of Township:
Other Terms:
At least 50% of the project must be completed within 5 years from obtaining all statutory compliances.
Company is not permitted to sell undeveloped plots.
Company must obtain all necessary approvals, plans, licenses under applicable rules/bye-laws/regulations.
FDI is not allowed in Real Estate Business.
M. V. Damania & Co
Chartered Accountants

18. Chartered Accountants
Sectoral Cap
Health and Medical Services – 100% FDI allowed under automatic route.
Hotel and Tourism Industry – 100% FDI allowed under automatic route.
Hotel includes restaurants and beach resorts.
Tourism Industry includes:
Travel agencies, Tour operators, tourist transporters
Convention/seminar units and organisations.
Investment Advisory services, Financial Consultancy, Credit Rating agencies – 100% FDI allowed under automatic route.
M. V. Damania & Co
Chartered Accountants

19. Cash & Carry Wholesale Trading
WT is permitted amongst same group companies. However such trade should not exceed 25% of total turnover. Such purchase by the group companies should be for their internal use only.
WT can be undertaken as per normal business practice, including extending normal credit facilities.
WT cannot open retail shops to sell to consumers directly.
Trading for Exports – 100% FDI allowed under automatic route.
M. V. Damania & Co
Chartered Accountants

20. Single Brand Product Retailing
FDI up to 51% in retail trade of ‘single brand’ products is allowed subject to:
Product should be of ‘Single Brand’ only.
Product should be sold under the same brand internationally.
Will cover only those products which are branded during manufacturing.
M. V. Damania & Co
Chartered Accountants

21. Chartered Accountants
RBI Approvals
Transactions where RBI prior approval is required.
Indian Company engaged in Financial sector
Attracts SEBI takeover code.
Activity is outside automatic route
Transaction price falls outside the pricing guidelines.
When non resident buyer proposes deferment of payment.
Companies engaged in sectors falling under Govt. route.
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22. Chartered Accountants
Entities
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23. Chartered Accountants
Liaison Office (L.O.)
A representative office of the foreign entity.
To explore and understand business and investment climate.
Communication channel between parent Company and Indian entities.
Parent Company with track record of 3 years and Networth of USD 50,000
Permitted activities -
- Represent parent/group Company in India.
- Promote export/import
- Promote technical/financial collaboration.
- Acts a communication channel
Not permitted to carry out any activity which is capable of generating income in India.
Cannot buy immovable property
All the expenses to be borne by parent company.
A representative based in India.
RBI permission is necessary.
Annual Accounts to be filed with the Tax Authorities.
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Chartered Accountants 23

24. Chartered Accountants
Project Office (P.O.)
Foreign company has secured a contract from Indian Company to execute project in India
Conditions under automatic route:
Project is funded by inward remittance
Project is funded by bilateral or multilateral International Financing Agency
Project is approved by appropriate authority
Indian entity awarding the contract is granted by public financial institution or a bank in India.
Corporate Tax at rate applicable to foreign LOS.
M. V. Damania & Co
Chartered Accountants

25. Chartered Accountants
Branch Office (B.O.)
To carry on same or substantially same activity as that of the parent Company.
Parent Company with track record of 5 years and Networth of USD 100,000.
Permitted activities -
Export/Import of goods
Professional/Consultancy services
Research work
Promote technical/financial collaboration
Act as buying/selling agent for parent Company
Services in IT or software development
Render technical support to products supplied by parent Company.
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26. Chartered Accountants
Branch Office (B.O.)
Prohibited activities -
Retail trading
Accepting deposit
Any activity other than expressly approved by RBI.
A representative based in India.
RBI permission is necessary.
Can acquire immovable property if it is necessary to carry out business activity from there.
Profits are fully repatriable, after payment of tax.
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Chartered Accountants 26

27. Wholly Owned Subsidiary (WOS) or Joint Venture (JV)
A foreign Company is permitted to set up a WOS or a JV in India
“Automatic Route” or “Approval Route” - Based on some conditions and criteria.
Automatic Route: No permission required from Reserve Bank of India or Government Authority
Approval Route: Specific permission from Reserve Bank of India or Government Authority.
A Company can be formed with The Registrar of Companies (ROC)
Minimum of 2 shareholders and 2 directors.
Shareholders and directors need not be Indians.
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Chartered Accountants 27

28. Wholly Owned Subsidiary (WOS) or Joint Venture (JV)
Minimum Paid up share capital - INR 100,000.
Valuation of shares under Discounted Free Cash Flow (DCF) method by Chartered Accountant.
Financial Projections and Forecast needs to be shared.
Can acquire immovable property if necessary to carry out business from there.
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29. Chartered Accountants
ECB
Bonus – Rights – ESOP
Indian Companies are granted general permission to convert ECB/Lumpsum fee/Royalty into Equity subject to the regulations on activity of the Company, sectoral cap and pricing guideline.
Indian Companies can also issue bonus/rights shares to existing non-resident share holders subject to adherence of sectoral cap.
The price of the rights shares offered to non-resident shall not be lower than that issued to resident shareholders.
Issue of shares under ESOP:
Listed Companies are allowed to issue shares under ESOP to its employees or employees of its Joint Venture or WOS abroad who are resident outside India.
The ESOP scheme should be in accordance with SEBI regulations.
The Face value of shares so issued shall not exceed 5% of paid-up capital of the Company.
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30. Reporting Requirement
Reporting of Inflow:
Within 30 days of date of receipt in Ann – 5
Foreign Inward Remittance Certificate – FIRC
KYC report on overseas investor in Ann – 6
Reporting of issue of Shares:
Form FC-GPR within 30 days of allotment of shares
Part A of the form be submitted by the Company Management
Annual Return to be submitted by 31st July every year.
The form includes all foreign investments made into the company.
Details of bonus/right shares of stock options to persons resident outside India.
Issue of shares on conversion of ECB/Royalty/Lump sum fees etc.
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31. Reporting Requirement
Reporting of transfer of shares:
Form FC-TRS within 60 days of date of receipt of consideration.
Reporting on non-cash:
Full or Partial conversion of ECB into Equity share capital is allowed.
Form FC-GPR and Form ECB-2 has to be filed within 7 working days from the close of the month.
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32. Chartered Accountants
Repatriation
Repatriation of Dividend:
Current Account Transaction
Freely repatriable Net of Taxes or Dividend Distribution Tax
Repatriation of Interest:
Freely repatriable Net of Taxes
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33. Chartered Accountants
Violation
FDI – a Capital Account Transaction
RBI administers FEMA
Enforcement Director under Ministry of Finance takes up investigation in case of contravention.
For any violation/contravention of any of the rules, regulations, notification, press note, press release, circular, direction or order, the person is liable for a penalty up to thrice the amount involved where the amount is quantifiable and Rs. 2 Lakhs where the amount is not quantifiable.
Where the violation is continuing one, further penalty up to Rs. 5,000/- per day
In case of Company, every person who is in charge of the Company shall be deemed to be guilty of contravention.
Any adjudicating authority, in addition to penalty, may also confiscate any currency/security or property in respect of such contravention.
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34. Compounding Proceedings
Compounding Officer can either be from RBI or ED.
No contravention can be compounded unless the amount involved is quantifiable.
Order shall be passed within 180 days from the date of receipt of application.
Speaking order
Compounding is generally accepted once in three years
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35. Chartered Accountants
Question s
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36. For any issue/ clarification, please mail to consult@mvdco.com
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Chartered Accountants 36