• How-to

Foreign direct investment has become the major economic driver and how profound is its effect can be seen in developing countries. As we discuss further about this pivotal factor that determines the growth of an economy, here are other things that you should know as you seek it.

Sectoral caps with reference to foreign investment
The government of India has, for ensuring maximum economic growth and at the same time maintaining national interest, divided the business activities into three sectors. Each of the sectors has specified industries and procedures under its purview and specifies conditions to be followed with a view to infuse foreign investment in specific industry of the sector. Such sectors include:
i. Prohibited sectors– Sectors wherein foreign investment is strictly prohibited i.e. in no application for approval can be made.
ii. Restricted sector– Sectors wherein foreign investment is permitted up to a certain percentage. For any increase beyond this, government approval is required. Per se, there are certain sectors wherein foreign investment is allowed only pursuant to approvals.
iii. 100 percent automatic sectors– Sectors under automatic route are the ones wherein 100 percent investment is allowed. No government approval is specifically required.

Implications overview
As and when the question regarding infusion of foreign funds arises, the first criterion to be verified is under which sector the industry falls. In case of automatic route sector, the non-resident investor or the Indian company does not require any approval from any governmental authority. However, prior approval of the government through Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA) and Ministry of Finance may be required in case the industry falls under restricted sector.

With specific reference to certain sectors, foreign equity should be infused after seeking approval and abiding by the policies and regulations of concerned authority.

Cases where approval is required
For proposals involving FDI under the government route, certain approval levels operate within the FIPB. An application to the FIPB
will be cleared after following a certain procedure. While granting approval to any application filed with the FIPB, the board takes into consideration and scrutinizes various aspects.

The FIPB is instructed not to change or impose additional conditions in any specific letter of approval, pursuant to grant of letter of approval to any non-resident investor. Guidelines for e-filing of applications, filing of amendment applications and instructions to applicants are available at FIPB’s website http://finmin.nic.in/ and http://www.fipbindia.com.

Procedural implications
While seeking foreign investment under automatic route or approval route after acquiring requisite approval, the following issues must be taken care of:
i. The Indian company receiving foreign investment should report the details of the amount under consideration to the regional office of RBI through its category 1 authorized dealer not later than 30 days from the date of receipt. Such report should be accompanied by a copy of Foreign Inward Remittance Certificate(s), evidencing the receipt of the remittance and the KYC report of the non-resident investor from the overseas bank remitting the amount.
Upon submission, a unique identification number (UIN) for the amount reported would be allotted to the entity.
ii. The capital instrument must be issued within 180 days of the date of receipt of the inward remittance or by debit to the NRE/FCNR (B) account of the non-resident investor. In case the same is not done within the specified time frame, the amount should be refunded to the non-resident shareholder.
iii. The capital instrument must be priced in accordance with the valuation methodology provided.
iv. After issue of shares (including shares issued on rights basis and under ESOP)/fully, mandatorily and compulsorily convertible debentures/ fully, mandatorily and compulsorily convertible preference shares, the Indian company has to file Form FC-GPR, to the regional office of RBI through its Category 1 authorized dealer not later than 30 days from the date of issue of shares along with requisite annexure.
v. Separate forms are prescribed for reporting non-cash issuance and foreign currency convertible bonds/ADR/GDR issue.

Conclusion
The increase in the inflow of foreign investment has served as a booster dose for the Indian economy. The government has been simplifying procedural aspects and making guidelines user friendly for investors and for those seeking approval. A steady flow of policies is, however, maintained so that foreign investment continues to increase in future.

Deepali A. Mendiratta is Manager, Corporate Professionals. She can be reached at Deepali@indiacp.com.

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Deepali A. Mendiratta, FDI, foreign investment, sector