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Foreign Direct Investment (FDI) in India and Compliances
03 Mar 2016

The objective of government of India is to attract and promote foreign direct investment in order to supplement domestic capital, technology and skill for accelerated economic growth. FDI means investment by non-resident entity / person resident outside India in the capital of an Indian Company. The government has put in place a policy framework on Foreign Direct Investment which is transparent, predictable and easily comprehensible. A foreign company planning to set up business operation in India may incorporate a company under the Companies Act 2013 as a Joint Venture or a wholly owned subsidiary or set up a Liaison office / Representative office or a Branch office of the foreign company which can undertake activities under Foreign Exchange Management Regulations, 2000.

While foreign investment in India comprises of investments made by overseas companies in India, the reverse i.e. outflow of foreign investment from India is also prevalent in the Indian economy. India is among one of the few markets in the world that offers such high prospects of growth and earning in virtually all sectors of the economy.

Entry Routes for Investment

Automatic Route:Foreign Direct Investment in sectors /activities permitted under automatic route does not require prior approval of Government or RBI. The automatic route allows Indian companies engaged in various industries to issue shares to foreign investors up to 100% of their paid up capital in Indian companies.

FDI up to 100% is allowed under the automatic route in all activities / sectors except the following which require prior approval of the Government:

  • Activities that require an Industrial License;
  • Proposals in which the foreign collaborator has an existing financial / technical collaboration in India in the 'same' field,
  • Proposals for acquisition of shares in an existing Indian company in: Financial services sector and where Securities & Exchange Board of India (Substantial Acquisition of Shares and Takeovers ) Regulations, 2011 is attracted;
  • All proposals falling outside notified sectoral policy / caps or under sectors in which FDI is not permitted.


The investors are only required to intimate the Regional office concerned of RBI within 30 days of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.

Following are documents that are required to be filed with the RBI:

·        Name of collaborators / Promoters / Shareholders

·        Details of allotment

·        Copy of foreign collaboration agreement

·    The original foreign inward remittance certificate from the authorized dealer

Government Route: Foreign Direct investment in activities not covered under automatic route requires prior Government approval and such proposals are considered by Foreign Investment Promotion Board (FIPB), a government body that offers single window clearance for proposals on foreign investment in the country that are not allowed access through automatic route.

Applications can be made in Form FC-IL which can be downloaded from ( paper applications with all relevant details are also accepted. No fees is payable. Decision of FIPB is usually conveyed in 4-6 weeks. There after filings have to be made by the Indian Company with the RBI.

Applications for all FDI cases except NRI investments, 100% EOUs, should be submitted to FIPB unit, Department of Economic Affairs (DEA) Ministry of Finance.

However application for NRI investment and 100% EOUs cases should be presented to Secretariat for Industrial Assistance (SIA) in Department of Industrial Policy& Promotion. (DIPP)

General permission of RBI under FEMA:

Indian Companies having approval of foreign investment through FIPB route do not require any further clearances form the Reserve bank of India for receiving inward remittance and issue of shares to non-resident investors. The companies are required to notify the concerned regional office of the Reserve Bank of India of receipt of inward remittances within 30 days of such receipt and submit Form FC-GPR within 30 days of issue of shares to non-resident investors.

Government approval is required in the following cases:

Sectors with caps includes Tea sector including plantation, Defence production, Air transport services, Ground handling services, Asset reconstruction Company,Private sector banking, Broadcasting content services, Commodity exchange,Credit information companies, Insurance, Print media, Telecommunications and Satellites establishments & operations, Government approval / FIPB approval would be required in all cases where:

·      An Indian company is being established with foreign investment and is owned or controlled by a non-resident entity or

·     The control or ownership of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, is being transferred to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares.

·       These guidelines do not apply for sectors / activities where there are no foreign investment caps, that is, 100% foreign investment is permitted under the automatic route.

·     The Foreign investment shall include all types foreign investments i.e. FDI,investment by FIIs, FPIs, QFIs, NRIs, ADRs, GDRs, FCCBs and fully convertible preference shares / debentures regardless of whether the said investments have been made under  Schedule 1, 2, 2A, 3, 6 and 8 of FEMA(Transfer or Issue of Security by Persons Resident Outside India) Regulations.

Investment in India can be done by:

·    A non-resident entity can invest subject to FDI Policy except in those sectors which are prohibited. A citizen of Bangladesh, Pakistan or an entity incorporated in such places can invest under government route only in sectors other than defence, space and atomic energy and sectors/activities prohibited for foreign investment.

·     NRIs resident and citizen of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis subject to condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channel.

·      An FII / FPI may invest in the capital of an Indian Company under the portfolio investment Scheme which limits the individual holding of an FII / FPI below 10% of the capital of the company and the aggregate limit for FII/ FPI /QFI investment to 24% of the capital of the company.

·        An Indian company which has issued shares to FIIs / FPIs under the FDI Policy for which the payment has been received directly into company’s account should report these figures separately under item no. 5 of Form FC-GPR.

·        A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute upto 100% of the capital of Indian Venture Capital Undertaking (IVCU) and may also set up a domestic asset management to manage the fund. FVCIs are allowed to invest under the FDI scheme as non-resident entities, in other companies, subject to FDI policy and FEMA regulations.  

·        Only registered FIIs / FPIs and NRIs as per schedule 2, 2A,and 3 respectively of Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations, 2000, can invest or trade through a registered broker in the capital of Indian Companies on recognized India Stock Exchanges.

FDI can be made in following Entities:

·        FDI in an Indian Company.

·        FDI in Partnership Firm / Proprietary Concern.

·        FDI in Venture Capital Fund (VCF).

·        FDI in Trusts other than VCF is not permitted.

·        FDI in Limited Liability Partnerships.(LLPs)

·        FDI in resident entities other than those mentioned above is not permitted.

Modes of Payment allowed for receiving FDI:

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.

·  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 NRE / FCNR account of a person concerned maintained with 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.

·              Debit to non-interest bearing Escrow account in Indian rupees in India which is opened with the approval of from AD category-I bank and is maintained with AD category-I bank on behalf of residents and non-residents towards payment of share purchase consideration.


1. 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 / ESCROW account, the amount shall be refunded.

2.Further, RBI 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.

FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

Investments can be made by non-residents in the capital of a resident entity only to the extent of the percentage of the total capital as specified in the FDI policy. The caps in various sectors are detailed in chapter 6 of FDI circular which is effective from 12th May, 2015.

·        Atomic Energy.

·      Lottery business including Government / Private lottery, online lotteries etc.

·        Chit Funds business.

·        Nidhi companies.

·        Gambling and Betting including Casinos.

·        Trading in Transferable Development Rights (TDRs)

·        Housing and Real Estate business.

·     Manufacturing of cigars, cheroots, cigarillos and cigarettes,of tobacco or of tobacco substitutes.

·    Agricultural (excluding Floriculture, horticulture,development of seeds, Pisciculture, Animal Husbandry and cultivation of vegetables, Mushrooms etc under controlled conditions and services related to agro and allied sectors) and Plantation activities (other than Tea Plantations)

Foreign Investment Promotion Board

FIPB which is established under the Department of Industrial Policy and Promotion,is the only agency in India which deals with all matters relating to Foreign Direct Investment (FDI) and promotion of foreign Investment in India.

FIPB comprises of following Secretaries to the Government of India:

·  Secretary to Government, Department of Economic Affairs, Ministry of Finance – Chairperson

·   Secretary to Government,Department of Industrial Policy and Promotion, Ministry of Commerce and Industry

·        Secretary to Government,Department of Commerce, Ministry of Commerce and Industry

·   Secretary to Government,Economic Relations, Ministry of External Affairs

·        Secretary to Government,Ministry of Overseas Indian Affairs

The primary functions of FIPB are mentioned below:

·        Doing investment promotion activities consisting of establishing contacts and inviting overseas companies to do business in India.

·        To ensure quick clearing of proposals for foreign investment.

·        Periodically review the implementation of the cleared proposals.

·      Regular review of the policies pertaining to FDI with concerned agencies including government bodies and private bodies in various sectors.

·    Identifying sectors while keeping the national internet in mind where investments from aboard can besought.

·        Taking up activities for the promotion and facilitation of foreign direct investment as and when required.

Filing of applications for approval:

Guidelines for e-filing of applications, filing of amendment applications and instructions to applicants are available at FIPBs website ( and (

Reporting of Issue of Shares (Form FC-GPR)

After the issue of shares including Rights shares, Bonus shares and shares issued under ESOP, mandatorily & compulsorily convertible debentures and Preference Shares, the Indian company has to file Form FC-GPR (as per Annexure I of FEMA Notification No.20 dated May 3, 2000) not later than 30 days from the date of issue of shares.

The electronic Form FC-GPR can be downloaded from e-Biz website ( can be uploaded on to eBiz portal using “upload and Submit Form” link on the e-Biz website.

Form FC-GPR has to be duly filled up and signed by Managing Director / Director / Secretary of the company and submitted to the authorised dealer of the company, who will forward it to the Reserve Bank.

Documents that are required to be submitted along with the Form are as follows:

a)    A certificate from the Company Secretary of the company  certifying that:

·    The company is eligible to issue shares under these Regulations;

·      All the requirements of Companies Act, as applicable have been complied with;

·     Terms and conditions of Government’s approval have been complied with; and

·   The company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration.

Note:  1. The above mentioned certificate can be given by a practicing Company Secretary for companies having paid up capital less than 5 crore.

2.An Indian company issuing partly paid equity shares shall file a report in formFC-GPR to the extent they become paid up.

b)A Certificate from SEBI registered Merchant banker or Chartered Accountant indicating the manner of arriving at the price at the price of the shares issued to the person resident outside India.

c)The report of receipt of consideration as well as Form FC-GPR have to be submitted by the AD Category-I bank to the Regional Office concerned of the Reserve Bank under whose jurisdiction the registered office of the company is situated.

‘AD Category-I Bank’ means a bank (Scheduled Commercial, State or Urban Cooperative) which is authorized under Section 10(1) of FEMA to undertake all current and capital account transactions according to the directions issued by the RBI from time to time.

d) Annual return on Foreign Liabilities and Assets should be filed on an annual basis by the Indian company, directly with the Reserve Bank. This return has to be submitted by 15th of July every year pertaining to all the investments made in the previous year up to March 31.

e) Issue of bonus / rights shares or stock options to person resident outside India directly or on amalgamation / merger / demerger with an existing Indian company, as well as issue of shares on conversion of ECB / royalty / lump sum technical know-how fee / import of capital goods by units in SEZs, has to be reported in Form FC-GPR.


FDI is a capital account transaction and thus any violation of FDI regulations are covered by the penal provisions of the FEMA. Reserve Bank of India administers the FEMA and Directorate of Enforcement under the Ministry of Finance is the authority for the enforcement of FEMA. The Directorate takes up investigation in any contravention of FEMA.

If a person contravenes any regulations of FDI by way of non-compliance of any rule, regulation, notification, direction or order issued in exercise of the powers under FEMA or contravenes any conditions subject to which an authorization is issued by the government of India / FIPB / Reserve Bank of India, he shall,upon adjudication be liable to a penalty up to thrice the sum involved in such contraventions where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contraventions is a continuing one,further penalty which may extend to five thousand rupees for every day after the first day during which the contraventions continues.

When a person committing a contravention of any provisions of this act or of any rule, direction or order made there under is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.

Proceedings of Compounding:

Under the Foreign Exchange (Compounding Proceedings) Rules 2000, the Central Government may appoint ‘Compounding Authority’ an officer either from Enforcement Directorate or Reserve Bank of India for any person contravening any provisions of FEMA. No contravention shall be compounded unless the amount involved in such contravention is quantifiable. The Compounding Authorities are authorized to compound the amount involved in contravention to Act made by the person. Any subsequent contravention committed after the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention.

The Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings. The Compounding authority shall pass an order of compounding after giving an opportunity of being heard, not later than 180 days from the date of application made to the Compounding Authority.

Compounding Authority shall issue order specifying the provisions of the act or of the rules,direction or order made there under in respect of which contravention has taken place along with details of the alleged contraventions.

Mentioned below is the link to Compounding process of defaults under FEMA, 1999


For Foreign Inward Remittances (FDI) and for any clarification and consultation please email to Mr. Hemant Paliwal, Practicing Company Secretary at:



Kumar Vineet