Foreign Direct Investment (FDI) in India

Investment by a foreign owner in an Indian company is generally referred as Foreign Direct Investment (FDI). FDI in India is governed by the FDI Policy announced by the Government and the provisions of the Foreign Exchange Management Act (FEMA), 1999

While formulation of FDI policies fall under the ambit of the Central Government; FEMA regulations prescribe the mode of investments, i.e. the manner of receiving funds, issue of shares/convertible debentures and preference shares, and reporting investments to the Reserve Bank of India (RBI).

A foreign company planning to set up business operations in India shall have the below options:

Limited Company

A corporate entity registered anywhere in the world, except few countries, can invest in India by registering as a Limited Company. A Limited Company can be registered in India as a 100% subsidiary or as a joint venture with other investors, including Indian investors.

FDI up to 100% in shares of Limited Companies is freely permitted under automatic route, subject to sectoral caps as stipulated in the Consolidated FDI Policy of India.

FDI in sectors/activities to the extent permitted under the automatic route does not require any prior approval of either the Government or the RBI. FDI in activities not covered under the automatic route or beyond the sectoral cap as stipulated under the FDI Policy requires prior approval of the FIPB.

Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP) is a body corporate with all the features of a limited company. This is a new business organization in India with all the features of LLC in the US and an LLP in the UK. This is an ideal organization for business as compared to a company. The law governing LLPs in India is contained in the Limited Liability Partnership Act, 2008.

An LLP combines the advantages of both—'Company' and 'Partnership'—in a single business entity. In an LLP, a partner is not responsible or liable for another partner's misconduct or negligence. Instead, all partners have limited liability, limited to their own acts of commission or omission, similar to shareholders' liabilities in a limited company.

FDI is permitted in LLPs operating in business activities where 100% FDI is allowed through the automatic route like company. FDI in LLPs will not be allowed in sectors such as agricultural/plantation activity, print media or real estate business.

Branch Office

Business entities registered outside India (foreign company) can establish their business operations in India without creating and registering a subsidiary company. Subject to the RBI guidelines, a foreign company can open a branch office in India. The scope of operations of such offices is typically limited to activities and functions such as country representative office, sourcing, technical and/or marketing support, import and export, etc. Branch office can undertake the business activities that of parent company subject to RBI Approval.

Liaison Office

A foreign company can open a Liaison Office (LO) in India Subject to the Reserve Bank of India (RBI) guidelines. The scope of operations of a Liaison office is limited to representing the parent company in India, promoting export/import from/to India and technical/financial collaborations and acting as a communication channel between the parent company and Indian customers. LOs are not allowed to undertake any business activity in India and cannot earn any income in India.

FDI in Limited Company

Foreign Direct Investment (FDI) is freely permitted in Limited Companies subject to the FDI Policy in almost all sectors except certain strategic areas

Under the FDI Scheme, non-residents can make investments in shares/convertible debentures/preference shares issued by an Indian company through Automatic Route or Approval Route.

Automatic Route

Under the automatic route, 100% FDI is permitted subject to sector-specific caps as stipulated by the FDI policy. FDI to the permitted extent under the automatic route in specific sectors/activities does not require any prior approval from the RBI or Government of India.

Government Route

FDI in activities not covered under the automatic route requires prior approval of the Foreign Investment Promotion Board (FIPB). Any Indian company with FIPB approval for FDI does not require additional clearances from the RBI to receive inward remittances and issue shares to non-resident investors.

FDI Compliances by Company

Indian companies receiving FDI through the Automatic Route must fulfill the following compliance requirements under FDI regulations:

  • Intimation of inward remittance to the RBI: Indian companies receiving FDI should submit an intimation of amount received to the RBI within 30 days of receiving the inward remittance through the Authorized Dealer Bank (preferably the FDI recipient bank) along with: (a)Copy of the Foreign Inward Remittance Certificates (FIRC) for each remittance and (b)Know Your Customer (KYC) report by the bank. The foreign remitter bank (bank from which the inward remittance originates) has to submit the KYC information to the recipient bank to enable the submission of KYC to the RBI.
  • Issuance of Shares: Companies should issue shares within 180 days from the date of receipt of inward remittances and file Return of Share Allotment with Regist
  • Post - Issue Requirements: Upon issue of shares, the Indian company should file Form FC-GPR to the RBI through the Authorized Dealer Bank (preferably the FDI recipient bank) within 30 days of date of issue of shares along with: (a) Share Valuation report certified by a Chartered Accountant (b) Certificate by a Company Secretary in the prescribed format

FDI in Limited Liability Partnership (LLP)

FDI in an LLP is allowed subject to the following conditions:

  • LLPs operating in sectors/activities where 100% FDI is allowed through the automatic route. LLPs that have secured FDI cannot operate in the agricultural/plantation, print media or real estate sectors.
  • An Indian company with FDI secured can make downstream investments in an LLP. However, both the company and LLP should operate in commercial/industrial sectors where 100% FDI is allowed through the automatic route.
  • The participation/use of foreign capital in the LLP's capital structure is permitted only through cash transactions, received as inward remittances via regular banking channels.
  • Foreign Institutional Investors (FII) and Foreign Venture Capital Investors (FVCIs) cannot invest in Indian LLPs.
  • LLPs cannot receive External Commercial Borrowings (ECBs).
  • LLPs with FDI cannot undertake downstream investments.