Foreign Direct Investment (FDI)
Written by Himanshu Gupta, Deepak Joshi, Prabhat Dubey & Pragya Kedia Dt. April 23rd, 2020
Over the years, FDI has served to be a critical driver of economic growth. It not only serves as a cheap source of finance (as these do not create any debt on the Companies and their returns depend on the performance of the Companies) for the investees but simultaneously helps the Government to increase Foreign Capital reserves. Thus, FDI is favoured by both the Companies & Government because of it’s dual benefit.Investment by citizens or entities of one country in another foreign country for the purpose of controlling and taking more than 10% of ownership in the affairs of such Company shall be treated as foreign direct investment. In this blog we will be discussing the recent FDI changes on geographical border, different routes for making FDI in India and all procedural requirements.
Naturally, more and more Indian Companies , LLP’s and eligible entities are looking beyond country border lines for investments and funding. Due to the recent pandemic that shook the whole global economy there is a need of the hour for our country to grab the opportunities that come our way. As our honorable prime minister said “jaan bhi, jahan bhi” for our fight against the covid-19 issue, This clearly directs our vision towards re-structuring of our economy .To understand thoroughly here is a look at various types of FDI that may be observed in the economies
There are mainly two types of FDI but over the time two more types have emerged:
- Horizontal : Horizontal FDI are the most populous type of FDI observed in day-to-day business operations. As more and more businesses aim to expand their business operations to International Companies engaged in the same operations as that of the entity.borders, they make investments in This in turn not only encourages exchange of know-how, technologies but too helps entities enjoy enlarged benefits of Economies of scale at the micro level and help economies undergo technological development at the macro level. (For example, Investment in Indian smartphone co. by Chinese smartphone co.)
- Vertical : Vertical FDI involves scenarios wherein businesses expand its activities to another country by moving to a different level of the supply chain. Thus, business undertakes ancillary activities or Investment in entities providing ancillary services/goods to the main business of the entity. (For example, Investment in raw material Company)
- Conglomerate : Under this type of FDI, a business undertakes unrelated business activities in a foreign country. This type is uncommon as it involves the difficulty of penetrating a new country and an entirely new market (For example, Investment in smart phone company by a company which manufactures Cars).
- Platform: A business expands into another country but the output from the business is then exported to a third country. Here, FDI is made from a source country into a destination country for the purpose of exporting to a third country.
With increasing Globalisation and the whole world turning into a global village, Businesses too aim to grasp business opportunities around the globe via merging/amalgamating with different entities in various nations. Merging is the most common method of making FDI. Here is an insight to other methods of making FDI.
There are various ways through which FDI can be done in India, few of them are listed:
- Mergers and acquisitions
- Buying stocks of the Company
- Joint ventures
- Starting a subsidiary Company, etc.
All of the above methods necessitate flow of investments among economies. But, in order to tackle issues such as money laundering and funding of illegal activities such as terrorism, Government lays certain requirements for flow of investments such that the Indian Company receiving FDI should receive the payment for the shares or other securities through one of the following routes:
- Inward remittance through normal banking channels.
- Debit to NRE/FCNR account of the person concerned through an account maintained with an authorized dealer or bank in India.
After obtaining detailed understanding of FDI its methods and its types, here is an insight on the two possible routes through which FDI can be done in India, these are:
- Automatic route : Under this route the foreign entity can make investment in India without prior approval of Government of India or Reserve Bank of India (RBI). In this route foreign direct investment (FDI) norms are less restricted or more liberalized.
- Government Route : Under this route foreign entities can make investment in India only through prior approval of Government of India or Reserve Bank of India. Herein, foreign direct investment (FDI) norms are more restricted.
Without prior approval it should not be misunderstood as non-intimation of the same to RBI. RBI is needed to be informed about each FDI in prescribed form as provided in upcoming paragraphs.
PROCEDURE FOR INVESTMENT UNDER GOVERNMENT ROUTE :-
Different steps involved in Foreign Direct Investment through Government routes are :
1. Filling online application on FIFP
- Proposal for foreign investment, along with supporting document to be filed online, on the foreign investment facilitation portal.( In Registration module of FIFP official webpage .i.e. https://fifp.gov.in/Default.aspx ;wherein, basic details of applicant entity and other necessary details are to be provided for registration and then with provided login id and password further proceedings can be complied.)
2. Internal Procedure for Approvals
- Once the application form is submitted, the Department for Promotion of Industry and Internal Trade (DPIIT) shall identify the concerned Ministry/Department and thereafter, circulate the proposal within 2 days.Proposal of the same would be circulated to RBI online within 2 days from receiving comment from FEMA respectively.
- If investment is from a country which has Land border with India, same would require clearance from the Ministry of Home Affairs (As notified by DPIIT via Notification dated 18 th April,2020 – Discussed in blog -“Prior clearance from MHA for land sharing countries for making FDI in India”)
- DPIIT would be required to give comment within a period of 4 Weeks from receipt of online application, and Ministry of Home Affairs (if applicable) to provide comment within 6 Weeks
- On the basis of above information, the Ministry of Home Affairs may ask applicants for further information and clarification.
- Proposal involving FDI exceeding INR 50bn (approx. $775m) shall be placed before the cabinet Committee of Home Affairs.
3. Final approval
Once the proposal is complete in all respects, the same gets approved within 8-10 Weeks.
As soon as the FDI Application gets approved, Entities shall proceed with allotment of shares/securities to respective Investees resulting in inflow of foreign currency in the Economy. But, in order to avoid misuse and simultaneously ensure proper utilisation of foreign funds, RBI lays compliances of following reporting requirements.
RBI Compliances After Allotment :- Earlier, there was 2 stage reporting requirements as
- First reporting was to be done after receipt of money in Advance Reporting Form (ARF) and
- Second after allotment in form FC-GPR.
- Now, reporting requirement has been reduced, and entities shall be required to provide details after allotment in form FC-GPR.
- After receiving the amount, the Indian Company receiving FDI is bound to hold a board meeting as per the provisions of Companies Act, 2013.
- And the Company has to file e-form PAS-3 with the ROC within 30 days of Allotment.
Thus, all the Indian Companies receiving FDI have to file form FC-GPR with the RBI in firms portal of RBI (Detailed steps discussed in blog titled – “Prior clearance from MHA for land sharing countries for making FDI in India”).
We are G.K. Kedia & Co., counted amongst one of the top C.A. firms in Delhi, providing various services including all the services related to FDI i.e. from formation of Company to procurement of land and building, plant, manpower and all legal permissions to MNC.
To recapitulate, with ease of doing business, growing Business Opportunities and easy reporting requirements, Foreign Direct Investment is bound to increase in India, as expected by the Government and Economists in the Country.
Himanshu Gupta, Deepak Joshi, Prabhat Dubey & Pragya Kedia