New Guidelines for Foreign Direct Investment in India
Written by Himanshu Gupta, Deepak Joshi, Prabhat Dubey & Pragya Kedia Dt. April 25th, 2020
A notification has been released by the government in context of Foreign Direct Investment Policy for curbing opportunistic takeovers/acquisitions of Indian Company due to current COVID-19 pandemic.
The notification is: Posted on: 18th April, 2020 at 03:58PM
A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.
In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.
Now, let’s get a brief understanding about this notification:
Earlier any entity from country except Pakistan and Bangladesh can invest in Indian Companies (except for those sectors/activities prohibited for Foreign Investment) through automatic route (discussed in previous blog ‘Foreign Direct Investment’) but after this notification any entity belonging to any country which shares land border with India (China, Bangladesh, Nepal, Pakistan, Afghanistan, Bhutan and Myanmar) will now have to take prior approval of Government (Government route, also discussed in previous blog) before investing in India. Also, Pakistan will be facing same restrictions, as earlier, of not investing in sectors/activities of defense, space, atomic energy and sectors prohibited for Foreign Investment
Also, if any transfer of ownership arises out of FDI from any such countries stated above then it will also require government approval.
This notification will help the government to make sure that no country or company is taking any undue advantage of this situation and acquiring Indian companies.
But what was the need for bringing this change?
As per the previous circumstances of COVID-19, China based entities are making huge investments at lower prices and acquiring the stakes of Indian companies which could further lead to transfer of ownership of Indian company in the hands of China based entities. So, on 18th April, 2020 Government brought this notification so that no Chinese company can take advantage of this unforeseen pandemic.
As discussed above, there are few sectors/activities prohibited for FDI. Mentioned below are the prohibited sectors of FDI in India:
- Lottery business including Government/Private Lottery, Online Lottery etc.
- Gambling and Betting including Casinos
- Chit Funds
- Nidhi companies
- Trading in Transferable Development Rights (TDR)
- Real estate business or Construction of Farm houses
- Manufacturing of Cigar Cheroots, Cigarettes, of Tobacco and Tobacco substitutes
- Sector not open to Private Sector investment -Atomic Energy, Railways operation (other than permitted activities mentioned under the consolidated FDI policy)
Whenever any Indian Company receives FDI it is required to notify RBI following the step and in forms as prescribed by RBI. Below mentioned steps and forms are required for reporting of foreign investment to RBI :-
1. Creation of Entity User
The Company receiving FDI has to create an Entity Master if they are receiving foreign investment for the first time.
Entity User is short form required to be filed by authorized representative of Company with the following details:
His / Her Full name, Address, Email Id, PAN, Mobile No; User Name for the Company; Name of Company/LLP, Address and its CIN/LLPIN; Jurisdictional Regional office of RBI; Authority Letter in a specified format.
Once Entity Master form is approved, you will get user id and password in your provided e-mail id. After that you will be required to login on the RBI website in the firms section using these credentials and fill entity master details.
2. Creation of Business User
After successful filing of entity master details, the Company has to create a business user.
Business User is short form required to be filed by authorized representative of the Company with the following details:
His / Her Full name, Address, Email Id, PAN, Mobile No; User Name for the Company; Details of Authorized Dealer Bank to whom reporting is made; Name of Company, PAN and CIN; Authority Letter in a specified format.
Once Business User is created, you will get user id and password in your provided e-mail id. Login on RBI website in Firms section and after login you can find Single Master Form (SMF), there you can select FC-GPR form for reporting of FDI.
3. Filing of form FC-GPR for issue of shares
Form FC-GPR needs to be filled within 30 days from the date of issue of shares with the following documents:
Copy of Foreign Inward Remittance Certificate received from AD Bank (AD Bank refers to Authorised Category I Bank) Copy of KYC of Foreign Investor received from AD Bank Certificate from the Company Secretary of the Company accepting investment from persons resident outside India certifying that
- All the requirements of the Companies Act, 2013 have been complied with,
- Terms and conditions of the Government approval, if any, have been complied with,
- The Company is eligible to issue shares under these Regulations and
- The Company has all original certificates issued by authorised dealers in India
Evidencing receipt of amount of consideration. Certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India. Declaration from Director/Authorized Representative of Company in a specified format. Any other supporting documents like MOA in case of allotment towards subscription, Board / General Meeting Resolution in case of subsequent allotment etc.
Himanshu Gupta, Deepak Joshi, Prabhat Dubey & Pragya Kedia
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