Inbound Investment Under FEMA

Introduction

Inbound Investment under the FEMA (Foreign Exchange Management Act) has a major contribution in India's economic growth. India’s market has attracted several investors/ foreign capital from the liberalization of FDI policies due to its diverse market opportunities. According to the DPIIT (Department for promotion of industry and Internal Trade), India has received $83.57 billion of FDI inflow in FY 2022, where 27% comes from Singapore alone. From rank 142nd in 2014 to rank 63rd in world ranking for ease of doing business, India has moved very strategically due to the protective government policies, including sectoral relaxations and ease of doing business reform. In this article we will get the complete understanding over this topic including its meaning, eligibility criteria, requirements, process and regulatory compliance.

What is Inbound Investment?

Inbound Investment under FEMA refers to foreign investment which is made in an Indian business/entity by another country’s investor. In a simple context, Foreign Direct Investment (FDI) occurs when a foreign investor makes an investment in the Indian company, or Foreign Portfolio Investment (FPI) occurs when foreign investors buy financial assets. This inbound foreign investment can be done in many ways such as by a joint venture, through setting up a branch office or subsidiary or by acquiring interest in a local entity.

There are several benefits of Inbound investment under FEMA, such as enhancement of employment opportunity, technology transfer, economic development and foreign capital inflow. Before entering a market, foreign investors must consider the laws, regulations, and compliances of each country concerning inbound foreign direct investment. In India, compliances and regulations of Foreign Investment tracks and regulates under the FEMA Act, 1999 via RBI.

Permitted Route for inbound investment

There are two main routes for Inbound Investment. These are -

• Automatic Route: The Automatic route in inbound investment permits the foreign investors to invest in Indian Companies without any prior approval from the RBI (Reserve Bank of India). NRI does not require any approval from the Indian Government.
• Approval/ Government Route: In the Approval/Government Route in Inbound investment required permission from the Indian Government for foreign investment. There are some specified compliances that must be followed that are prescribed by the RBI.

There are four main categories in which the investment is permitted these listed below:

Which Sectors require approval for inbound investment

Below mentioned sectors require approval for inbound investment under FEMA:-

1. Telecom
2. Print media
3. Broadcasting
4. Private Security Agencies
5. Civil Aviation
6. Trading
7. Satellite
8. Financial Services

Eligibility criteria for Inbound Investment under FEMA

Not every individual or entity can make inbound investment, there are some eligibility criteria that are mentioned below:

1. Any foreign individual or entity can make their investment in India. But if the entities or individuals from countries who share a land with India or with beneficial ownership in these countries, may only invest by the government approval route.
2. Nepalese and Bhutanese citizens, as well as NRIs, are also eligible under specific schedules (Schedules III and IV of the NDI Rules).
3. Any SEBI registered FVCIs can also invest in particular sectors which are listed in Schedule VII of the NDI Rules, which basically pertain to the sectors like biotechnology, IT, startups and many more.
4. In Indian companies, LLPs operating in sectors with 100% FDI are eligible for foreign investments, as are startups by means of equity, debt, or convertible instruments.

Forms and Required Documentation for Inbound Investment Under FEMA

According to regulation 13 of the Foreign Exchange Management (Non-Debt Instruments) Rule, 2019, it is mandatory to submit the Form FC-GPR to the RBI for reporting Inbound Investment under FEMA. This form must be submitted within 30 days of the issuance of shares. Filing Form FC-GPR is vital for the Indian entity who receives Foreign Direct Investment and it is regulated under the FEMA act, 1999’s Section 6 which controls the capital account transactions.

Process of Inbound Investment under FEMA

Any foreign entity who wishes to invest in India, may follow a procedure. The stepwise process of inbound investment under FEMA is as follow:

Process of Inbound Investment under FEMA

• Step 1: Determine the Investment Route

  Identify whether the investment falls under the Automatic Route (no prior approval needed) or the Government Route (approval required for sectors such as defense, telecom, etc.).

• Step 2: Remittance of Funds

  After identifying the investment route, the foreign investor should remit funds by normal banking channels into the Indian Company’s bank account via an FCNR/NRE account.

• Step 3: Issue of Shares

  A foreign investor receives equity instruments such as equity shares, convertible notes, debentures, or other approved instruments after the Indian company receives funds.

• Step 4: File Form FC-GPR

  Within 30 days from the issue of share, submitting the Form FC-GPR through an AD bank to the RBI for reporting the foreign transactions.

• Step 5: Comply with Pricing Norms and Sectoral Caps

  Assure that the investment follows the sectoral pricing and limits guidelines according to the Reserve Bank of India (RBI)’s guidelines.

• Step 6: Government Approval

  Obtain approval from a relevant ministry (such as DPIIT for certain sectors) before investing in sectors covered under the Government Route.

Regulatory and Compliance Requirements

Here are the compliances and regulations mentioned below:

1. Make sure that the compliance with FDI sectoral caps should be in accordance with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
2. It is also needed to ensure, if the investment adheres to the Automatic route, must require approval under the Government Route.
3. It is mandatory to follow RBI-approved pricing norms with a valuation certificate from a Chartered Accountant or Merchant Banker before sharing shares is issued or transferred.
4. Make complete the KYC checks for the foreign investors by the AD bank.
5. It is required to file some forms such as Form FC-GPR, FC-TRS and Firm FLA before the due dates for the reporting of foreign transactions by the authority.
6. To confirm receipt of foreign funds get the FIRC (Foreign Inward Remittance Certificate) from the bank.
7. For the sectors under the government route get the government approval prior to investing.

Why Bizfoc

Bizfoc provides a comprehensive professional guidance over inbound investment that guarantees compliance with FEMA guidelines. Our service includes:

• Expert Guidance: Our professional team will provide expert and detailed advice over different form filing that is required to file for inbound investment that helps to monitor the foreign investments via RBI.
• Document Preparation: Our expert team helps you to collect and prepare all the necessary documents that make your procedure more fluent.
• Form Submission: We have a number of experienced team members who ensure timely and accurate filing that also avoids hefty penalties.

Connect with us and make your Inbound investment under the FEMA easier and penalty free.

Conclusion

Inbound Investment under the FEMA has a unique role in India’s economic growth by facilitating Foreign Direct Investment (FDI). These foreign transactions can be used illegally, where the regulatory framework ensures the transparency and safeguard the national interests. Businesses and investors need to comply with sectoral caps, pricing norms, and timely filing of FC-GPR and FC-TRS forms. By maintaining these compliances and regulations with RBI and government authority, the entitles can get several opportunities to enhance their operations and can contribute in the nation’s growth.

Frequently Asked Questions