100% Online & Our Expert team will make it easy
Things to know
An Overview
Foreign Direct Investments have been one of the most effective ways, especially in the corporate finance world. However, as the stake in Indian entities is dissolved with power and influence passing onto the foreign entities, the government, through various rules and regulations keeps a watch on these transactions. Most of these FDI compliances and related regulations are laid down by the Foreign Exchange Management Act, 1999. Apart from that, for certain sectors, foreign direct investments are allowed only after the approval of RBI. So, it is important to note that what exactly Foreign Direct Investment is? And how does it operate?
Foreign Exchange Management Act, 1999 was enacted to replace and repeal the erstwhile Foreign Exchange Regulation Act, 1973 (FERA). Considering the scenario of the foreign exchange reserves in India and the limitations of FERA, especially in the post-liberalization regime, the implementation of a new law to streamline the legal and procedural aspects relating to foreign exchange reserves was the need of the hour. This led to the implementation of FEMA, 1999 which liberalized the regulations and controls relating to foreign exchange reserves and opened the doors of the economy to the international market.
Meaning of Foreign Direct Investments
Foreign Direct Investments are the investments done by a foreign investor in an Indian entity. Usually, the investor in foreign land purchases interest in the company by getting an equity stake in the investee.
FDIs are regulated dealings and therefore, the Government has prescribed two routes to attract FDIs viz., Automatic route and Approval route.
Automatic Route
Overview: Under this route, the foreign investor or the Indian entity is not required to take prior approval of the RBI or the Government before receiving foreign investments. However, the Regional Office of RBI shall be notified of the receipt of investments within 30 days along with required documents as to the issue of equity to the investors.
Sectors where Automatic Route is allowed: The sectors covered under the automatic route are divided into the following categories:
‘100% Automatic Route’ Category of Sectors
Agriculture and Animal Husbandry |
Asset Reconstruction Companies |
Air Transport Services |
Airports (Greenfield + Brownfield) |
Auto Components |
Broadcast Content Services (Uplinking/ Downlinking of TV Channels) |
Biotechnology (Greenfield) |
Automobiles |
Broadcasting Carriage Services |
Chemicals |
Cash & Carry Wholesale Trading |
Capital Goods |
Coal and Lignite |
Credit Information Companies |
Construction of Hospitals |
Construction Development |
Duty-Free Shops |
Food Processing |
Electronic Systems |
E-commerce Activities |
Jewellery and Gems |
IT & BPM |
Industrial Parks |
Healthcare |
Leather |
Other Financial Services |
Mining & Exploration of metals & non-metal ores |
Manufacturing |
Civil Aviation Services such as Maintenance and Repair Organizations |
Plantation sector |
Pharmaceuticals |
Petroleum & Natural gas |
Ports & Shipping |
Roads & Highways |
Renewable Energy |
Railway Infrastructure |
Single Brand Retail Trading |
Tourism & Hospitality |
Thermal Power |
Textiles & Garments |
White Label ATM Operations |
|
|
|
‘Up to 100% Automatic Route’ Category of Sectors
Infrastructure Companies in the Securities Markets: 49%
Petroleum Refining (By PSUs): 49%
Insurance: 49%
Medical Devices: 100%
Power Exchanges: 49%
Pension: 49%
Approval Route
Overview: Under the approval route, prior approval of the government is mandatory before undertaking FDIs. The application shall be filed which is then forwarded for approval to the respective ministries.
Sectors where Approval Route is allowed: Following are the sectors where prior approval of the Government shall be required:
Banking & Public Sector: 20%
Print Media (publishing of periodicals, newspaper as well as Indian editions of foreign magazines dealing with news & current affairs): 26%
Satellite (Establishment and operations): 100%
Food Products Retail Trading: 100%
Mining & Minerals separations of titanium bearing minerals and ores: 100%
Core Investment Company: 100%
Print Media (publications/ printing of scientific and technical magazines/ specialty journals/ periodicals and facsimile edition of foreign newspapers): 100%
Multi-Brand Retail Trading: 51%
Broadcasting Content Services: 49%
Prohibited Sectors
While the government has decided on two routes for FDI investments, certain sectors are strictly prohibited from receiving foreign direct investments. These include:
Atomic Energy Generation and railway operations
Investment in Chit Funds
Lotteries (private, online, government, etc)
Housing and Real Estate (except commercial projects, townships, etc)
Trading in TDR’s
Agricultural or Plantation Activities (excluding exceptions like horticulture, tea plantations, fisheries, animal husbandry, Pisciculture, etc)
Any Betting or Gambling businesses
Cigarettes, Cigars, or any tobacco industry
Nidhi Company
FEMA Compliance Checklist – Major FDI Compliances
In order to keep a regulatory check and promote transparency in Foreign direct investments transactions, the government has put in place certain FDI compliance requirements. Following are the major FEMA compliances for FDI:
Form |
Meaning |
Purpose |
Procedure |
Form FC-GPR |
Foreign Currency Gross Provisional Return |
When a company is in receipt of foreign investment by allotting shares to the foreign investor. |
Furnishing of details to RBI within 30 days. |
From FC-TRS |
Foreign Currency Transfer |
When a share transfer takes place by shareholders residing outside India whether they are being Indian Residents or otherwise. |
Submission of Form to AD bank which is then further submitted to the RBI within 60 days of such transfer. |
ECB |
External Commercial Borrowing |
Reporting of external commercial borrowing transactions. |
AD Category-I bank shall report such transaction to the RBI. |
FLA |
Annual Return on Foreign Liabilities and Assets |
Reporting of outstanding foreign liabilities and assets. It shall be reported by the companies who have received foreign investments (including ECB) or have made any overseas investment. |
The return shall be filed with RBI on or before 15th July for respective year, reporting outstanding assets and liabilities detail. |
Above was the quick snapshot of what FDI is, the transactions that fall under FDI and major FDI compliances. On a closing note, FEMA was implemented with an aim to transform the way India dealt with foreign exchange. To do so, FEMA, 1999 encompassed the following features and guidelines:
The objective of the enactment of FEMA was to encourage foreign trade and payments.
It assists in the development of the foreign exchange market in India.
It streamlined the provisions and regulations with respect to the foreign exchange markets in line with the requirements of liberalization and globalization.
FEMA transactions have been divided into two major categories viz. current account transactions and capital account transactions. To summarize their allowability, a golden rule can be referred to: All current account transactions are permitted unless prohibited otherwise and all capital account transactions are prohibited unless permitted otherwise.
The Government has provided relaxations with respect to certain transactions by introducing Liberalised Remittance Scheme whereby no approval of the RBI is required for remittance of up to $2,50,000 in a Financial Year. This is applicable for specified current and capital account transactions.
While the FEMA act lays down the basic law and addresses the important and fundamental aspects, most of the transactions are addressed in-depth by the various regulations enacted under the FEMA law.
Why Wellcorp Office?
Cost Efficient
registration process
100+ Registrations
done every month
Speedy Delivery
of services
Professional Services
offered
Get In Touch