FDI is the Buzzword in the Indian business. FDI means Foreign Direct Investments made by a non-resident into a business in India.
India has seen a FDI inflow of Rs 85,180 crores in the Q1 of 2018-19 which is a 27% growth in comparison with the Q1 of 2017-18 as per the Quarterly fact sheet on Foreign Direct Investments released by DIPP.
This shows that India is a favorite destination for investment. As per the sectoral breakup given by RBI, 18% of total investment is in Financial, Banking, Insurance, Non-Financial / Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis. Mumbai and Delhi attracting highest volumes of FDIs in the nation.
Most widely used form of legal entity for business entry is through an incorporation of a Private Limited Company which would act as a subsidiary or a wholly owned subsidiary.
Wholly Owned Foreign Subsidiary
Wholly-owned subsidiary is the result of the parent company owning all (100%) of the subsidiary’s shares. Since the parent company owns all of the subsidiary’s shares, it has the right to appoint the subsidiary’s board of directors, which controls the subsidiary. Wholly owned subsidiaries may be part of the same industry as the parent company or part of an entirely different industry. A company operating in more than one country may choose to operate a business through a wholly owned subsidiary. The Investment is subject to compliance of FDI Policy.
Key features of WOS
- Wholly owned Subsidiary is regulated by Indian Law, Companies Act, 2013.
- Where 100% FDI is permitted no prior approval of Reserve Bank of India (RBI) is needed.
- It is treated as the domestic company under Income Tax Law and is eligible for all exemptions, deductions, benefit applicable to any other Indian Company,
- Funding can be made in the form of Share Capital and loan.
- The business activities that can be carried out are specifically defined and restricted as per the FDI policy.
A foreign company can open up a subsidiary company in India. This can be done either by acquiring the majority of shares (more than 50%) of the company or by controlling the composition of board of directors of the company. Holding and subsidiary companies are separate legal entities and they are related to each other by virtue of subsidiary – holding company relationship. The Investment is subject to compliance of FDI Policy.
One can invest in India – either under Automatic route which does not require approval from RBI or under Government route, which requires prior approval from the concerned Ministries/ Departments via a single window – Foreign Investment Facilitation Portal (FIFP) administered by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry, Government of India.
Every non-resident entity is allowed to invest in India either under Automatic or Government Approval route, except in prohibited sectors. However, individuals or entities of Bangladesh and Pakistan can invest only under Government route. Check out list of sectors which require prior approval as well as sectors under automatic route.
FDI is prohibited under Government as well as Automatic route for the following sectors:
- Retail Trading
- Atomic Energy
- Lottery Business
- Gambling and Betting
- Housing and Real Estate business
- Agriculture (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).
- Plantations (Other than Tea plantations).
- A) Automatic route
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/items 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, 1997 is attracted;
- All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.
FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within prescribed period of receipt of inward remittances and file the required documents with that office and issue of shares to foreign investors.
- B) Approval route
FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Application can be made in Form FC-IL; Plain paper applications carrying all relevant details are also accepted. No fee is payable.
General permission of RBI under FEMA
Indian companies having foreign investment approval through FIFP route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within prescribed period of such receipt and within issue of shares to the foreign investors or NRIs.
Compliance with RBI on receipt of funds
Within prescribed time of receipt of capital and issue of the shares to the foreign investor, the Indian company will have to report the Regional Office of RBI in Single Master Form.
On issue of shares to foreign investor
Within prescribed time from the date of issue of shares, a report in Single Master Form together with requisite documents should be filed with the Regional Office of RBI.
A wholly owned Subsidiary is treated like any other company that is incorporated in India under the Companies Act 2013 and all the statutory registrations and provision would be applicable.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice or after a thorough examination of the particular situation. Please consult relevant professional before taking any actions based on the information present in the document.
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