Foreign Direct Investment (FDI) | Approval Process | Detailed Analysis | Procedure and Requirements | Must Read

After liberalization occurred, the government has enacted the Foreign Exchange Management Act, 1999 (FEMA). This act deals with the requirement of foreign exchange in the country. After bringing out the foreign exchange management act, the government of India has considered many changes in the amount of foreign investment that is brought into India.

Foreign Direct Investment (FDI) is beneficial to the Indian economy. It would not affect the development of the economy but also improve technology and digitization in the country. Therefore having sufficient flow of funds into India would contribute to the overall development of the country. The government has brought out many relaxations regarding the inflow of foreign direct investment in India

Modes of FDI

• Automatic Route-In the Automatic Route, the investment is made by a foreign entity in a share or capital instrument which does not require any form of prior approval or consent from the government. The investment which is made through this route can be up to 100% investment. However, there are specific investment-related caps which would apply to the investment under these routes.
• Approval Route/ Government Route-The Approval Route is also called the Government Route. Under this route, prior permission or approval is required for the investment to flow into India. Different authorities approve based on the area of investment made. The Government of India considers that this form of approval is required for sensitive areas where the amount of foreign direct investment has to be monitored regularly. Therefore such sectors are brought in the approval route.

Prohibited Sectors

These are few areas of business where FDI is prohibited:

1. Lottery Business including Government/private lottery, online lotteries, etc.
2. Gambling and Betting including casinos etc.

[Note: Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities]

3. Chit funds

(As per Chit Fund Act, 1982, Chit means a transaction whether called chit, chit fund, chitty, kuree or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount.”)

4. Nidhi Company

(These companies belong to the non-banking Indian Finance sector and their main business is borrowing and lending money only between their members. They are also known as Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual Benefit Company. {To read more about Nidhi Companies please click on the link https://yesgst.com/procedure-for-incorporation-of-nidhi-company/})

5. Trading in Transferable Development Rights (TDRs)
6. Real Estate Business or Construction of Farm Houses

[Note: Real estate businesses shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014.]

7. Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
8. Activities/sectors not open to private sector investment- Atomic Energy and Railway operations (other than permitted activities mentioned under the Consolidated FDI policy)

Process / Procedure of Foreign Direct Investment under the Approval Route

The approval process for foreign direct investments in India is based on a standards and plan developed by Department of Industrial Policy and Promotion (DIPP).

1. Proposal for foreign investment, along with supporting documents to be filed online, on the Foreign Investment Facilitation Portal, at the following https://www.fifp.gov.in/
2. Department of Industrial Policy and Promotion (DIPP) assigns the case to the concerned Ministry within 2 working days.
3. Submission of physical copies to concerned department is not required in case of digitally signed documents.
4. For applications not digitally signed, online communication to applicant will be made to submit one signed physical copy of the proposal to the Competent Authority. Applicants are required to submit required documents within 5 days of such intimation.
5. The proposal is circulated online within 2 days to Reserve Bank of India for review from FEMA perspective. All proposals are shared with Ministry of External Affairs (MEA) and Department of Revenue (DoR) for record. Any advice/comments from above mentioned departments are directly shared with concerned Administrative Ministry/Department assigned to decide on the proposal.
6. Proposals are scrutinized within 1 week and additional information/clarifications, if required, are asked for.

   The following applications/ proposals require security clearances-

   • Investment in broadcasting, defense, private security, civil aviation, and mining activities.
   • Investments from Pakistan and Bangladesh.
7. On getting all required information, the Competent Authority is required to give out its decision in next two weeks. Approval/rejection letters are sent online to the applicant, consulted Ministries/Departments and DIPP.
8. Where total foreign equity inflow is more than Rs 5000 crore, the Competent Authority is required to place the same to Cabinet Committee on Economic Affairs for consideration within timelines.
9. Once the proposal is complete in all respects, the same gets approved within 8-10 weeks.

Competent Authorities for Approval of Foreign Investment

Note: – The government has made amendments to the existing FDI policy to block the looming threat of an “opportunistic” Chinese takeover of Indian firms.

• Now, investments by entities from countries that share a border with India will now require a clearance from the Centre.

“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 investment into India is situated in or is a citizen of any such country, can invest only under the Government route.”

• The new policy blocks the indirect acquisition of investments by entities based in China. With this, change in ownership of the investment will also have to be cleared by the Union government.

“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.”

Documents required at the time of filing the proposal

1. Certificate of Incorporation of the Investee & Investor Companies/Entities
2. Memorandum of Association (MOA) & Article of Association (AOA) of the Investee & Investor
3. Board Resolution of the Investee & Investor Companies/Entities
4. Audited Financial Statement of Last Financial Year of the Investee & Investor Companies/Entities
5. List of Names and addresses of all foreign collaborators along with Passport Copy/ Identification Proof of the Investor Company/Entity
6. Diagrammatic representation of the flow and funds from the original investor to the investee company and Pre and Post shareholding pattern of the Investee Company
7. Affidavit stating that all information provided in hard copy and online are the same and correct
8. A signed copy of the JV agreement/shareholders agreement/ technology transfer/trademark/brand assignment agreement (as applicable), in case there are existing ventures.
9. Board resolution of any joint venture company
10. Certificates of Incorporation and charter documents of any joint venture/company which is a party to the proposed transaction
11. Copy of Downstream Intimation
12. Copy of relevant past FIPB/SIA/RBI approvals, connected with the current proposal (in case of amendment proposal)
13. Foreign Inward Remittance Certificate (FIRC) in case investment has already come in and in case of post-facto approval
14. In the cases of investments by entities which themselves are pooled investment funds, the details such as names and addresses of promoters, investment managers as Standard Operating Procedure for Processing FDI Proposals well as all the contributors to the investment fund
15. List of the downstream companies of the Indian company and the details of the equity held by the Indian Company along with the details of the activities of the companies
16. High Court order in case of a scheme of arrangement
17. Valuation certificate as approved by a Chartered Accountant
18. Non-compete clause certificate of the investor and investee company in case of investment in pharmaceutical sector (As per Annexure 10 of Consolidated FDI Policy Circular of 2016), and as amended from time to time
19. Certificate of statutory auditors as mandated in the FDI policy, as applicable

FDI Reporting Requirements

To know more about how to file Form FC-GPR please click on the link https://yesgst.com/procedure-for-filing-of-form-fc-gpr/

(Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided. Neither Author nor Yes GST (collectively referred as we)  assume no responsibility thereof. The user of the information agrees that the information is not a professional advice and is subject to change without notice. In no event, we shall be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.)

CS Shaffy Mehta

Practicing Company Secretary, M.Com and Commerce Graduate and founder at Shaffy Mehta & Co. She is having an overall 4 years experience of Company Law and other Corporate Laws.