Q. 1. What are the forms in which business can be conducted by a foreign company in India?
Ans. A foreign company planning to set up business operations in India may:
Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.
Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.
Q.2. What is the procedure for receiving Foreign Direct Investment in an Indian company?
Ans. An Indian company may receive Foreign Direct Investment under the two routes as given under :
Automatic Route FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.
The Indian company having received FDI either under the Automatic route or the Government route is required to comply with provisions of the FDI policy including reporting the FDI to the Reserve Bank. as stated in Q 4.
Q.3. What are the instruments for receiving Foreign Direct Investment in an Indian company? Ans. Foreign investment is reckoned as FDI only if the investment is made in equity shares , fully and mandatorily convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront. Any foreign investment into an instrument issued by an Indian company which :
Gives an option to the investor to convert or not to convert it into equity or
Does not involve upfront pricing of the instrument as a date would be reckoned as ECB and would have to comply with the ECB guidelines.
The FDI policy provides that the price/ conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [the DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies].
Q.4.What are the modes of payment allowed for receiving Foreign Direct Investment in an Indian company? Ans. An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures by:
Inward remittance through normal banking channels.
Debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.
Conversion of royalty / lump sum / technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.
Conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category. I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.
If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B) / Escrow account, the amount shall be refunded. Further, Reserve Bank may on an application made to it and for sufficient reasons permit an Indian Company to refund / allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.
Q.5.Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route? Ans. FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:
Gambling and Betting.
Business of Chit Fund.
Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations).
Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges).
Trading in Transferable Development Rights (TDRs).
Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.