FDI ceiling in the sensitive defence sector has been hiked to 49 percent from current 26 percent,

with the condition that of the control in joint venture manufacturing defence equipment will remain
Indian hands.
The move is aimed at boosting domestic industry of a country which imports up to 70 percent of its
military hardware.
100 per cent foreign investment in railway infrastructure projects will be allowed while in the case of
defence the limit has been raised to 49 per cent from the current 26 per cent, subject to the Indian owners
exercising management control.
The FDI hike in defence is intended to cut imports by indigenising defence production as India is one of
the world's largest arms importers.
"Good development, but not great. Round one has gone to protectionist forces. 49 per cent is the same
as 26 per cent technically and hence may not open the investment floodgates," said Amber Dubey,
Partner and India Head of Aerospace and Defense at global consultancy KPMG.
"We hope better judgment prevails and we have the FDI limit enhanced to 74 per cent later this year," he
added. Official notifications giving effect to changes will be issued soon, after the minutes of the cabinet
meeting are finalised.

Further, portfolio investment by FPIs, FIIs, NRIs, QFIs and investments by FVCIs together will not
exceed 24 per cent of the total equity of the investee or joint venture company.

Most foreign equipment manufacturers didn't want to part with their proprietary technology
with such low equity participation.

Despite such a large ready-made market, Indias local

industry has been a poor supplier. It has been unable to
keep pace with state-of-the-art technologies and modern
manufacturing processes of its foreign competitors.
The country has been the worlds biggest military
equipment purchaser for the last three years and last
year alone spent $6 billion on buying equipment. But
many of the countrys arms deals have been marred by
allegations of kickbacks to the tune of hundreds of
millions of dollars.
India manufactures almost no weapons or equipment
other than some ballistic missiles but now intends to

shore up its domestic defense manufacturing capabilities

to counter the build up of arms in the neighboring China
and Pakistan.
While the FDI levels in defense manufacturing will go to
49 percent, ownership control will stay with Indian
partners, said Jaitley who holds both the finance and
defense portfolios.
Meanwhile, Western arms makers and governments are
making a beeline to India in the hope of sign multibillion dollar arms purchase deals. Prominent officials
from governments in the United States, France and
Britain are leading delegations to the country in the
coming days to aggressively lobby on behalf of companies
such as Dassault Aviation and Boeing.
Q. 1. What are the forms in which business can be conducted by a foreign company in India?
Ans. A foreign company planning to set up business operations in India may:

Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned
Subsidiary.

Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign
company which can undertake activities permitted under the Foreign Exchange Management
(Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

Q.2. What is the procedure for receiving Foreign Direct Investment in an Indian company?
Ans. An Indian company may receive Foreign Direct Investment under the two routes as given under:
i. Automatic Route
FDI is allowed under the automatic route without prior approval either of the Government or the Reserve
Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the
Government of India from time to time.
ii. Government Route
FDI in activities not covered under the automatic route requires prior approval of the Government which
are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs,

Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded
from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No
fee is payable.
The Indian company having received FDI either under the Automatic route or the Government route is
required to comply with provisions of the FDI policy including reporting the FDI to the Reserve Bank as
stated in Q 4.
Q.3. What are the instruments for receiving Foreign Direct Investment in an Indian company?
Ans. Foreign investment is reckoned as FDI only if the investment is made in equity shares, fully and
mandatorily convertible preference shares and fully and mandatorily convertible debentures with the
pricing being decided upfront as a figure or based on the formula that is decided upfront. Partly paid
equity shares and warrants issued by an Indian company in accordance with the provision of the
Companies Act, 2013 and the SEBI guidelines, as applicable, shall be treated as eligible FDI instruments
w.e.f. July 8, 2014 subject to compliance with FDI scheme. The pricing and receipt of balance
consideration shall be as stipulated in terms of A.P.(DIR Series) Circular No.3 dated July 14, 2014 as
modified from time to time.
Any foreign investment into an instrument issued by an Indian company which:

gives an option to the investor to convert or not to convert it into equity or

does not involve upfront pricing of the instrument as a date would be reckoned as ECB and would
have to comply with the ECB guidelines.

The FDI policy provides that the price/ conversion formula of convertible capital instruments should be
determined upfront at the time of issue of the instruments. The price at the time of conversion should not
in any case be lower than the fair value worked out, at the time of issuance of such instruments, in
accordance with the extant FEMA regulations [valuation as per any internationally accepted pricing
methodology on arms length basis for the unlisted companies and valuation in terms of SEBI (ICDR)
Regulations, for the listed companies] without any assured return.
Q.4. What are the modes of payment allowed for receiving Foreign Direct Investment in an Indian
company?
Ans. 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:
(i) inward remittance through normal banking channels.
(ii) debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.
(iii) 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.

(iv) conversion of import payables / pre incorporation expenses / share swap can be treated as
consideration for issue of shares with the approval of FIPB.
(v) debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the
approval from AD Category I bank and is maintained with the AD Category I bank on behalf of residents
and non-residents towards payment of share purchase consideration.
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 (B) / Escrow account, the amount shall be refunded.
Further, Reserve Bank 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.
Q.6. What is the procedure to be followed after investment is made under the Automatic Route or
with Government approval?
Ans. A two-stage reporting procedure has to be followed :
On receipt of share application money:
Within 30 days of receipt of share application money/amount of consideration from the non-resident
investor, the Indian company is required to report to the Foreign Exchange Department, Regional Office
concerned of the Reserve Bank of India, under whose jurisdiction its Registered Office is located, the
Advance Reporting Form, containing the following details :
Name and address of the foreign investor/s;
Date of receipt of funds and the Rupee equivalent;
Name and address of the authorised dealer through whom the funds have been received;
Details of the Government approval, if any; and
KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.
The Indian company has to ensure that the shares are issued within 180 days from the date of inward
remittance which otherwise would result in the contravention / violation of the FEMA regulations.
Upon issue of shares to non-resident investors:
Within 30 days from the date of issue of shares, a report in Form FC-GPR- PART A together with the
following documents should be filed with the Foreign Exchange Department, Regional Office concerned
of the Reserve Bank of India.
Certificate from the Company Secretary of the company accepting investment from persons resident
outside India certifying that:

The company has complied with the procedure for issue of shares as laid down under the FDI scheme as
indicated in the Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.
The investment is within the sectoral cap / statutory ceiling permissible under the Automatic Route of the
Reserve Bank and it fulfills all the conditions laid down for investments under the Automatic Route,
OR
Shares have been issued in terms of SIA/FIPB approval No. --------------------- dated -------------------(enclosing the FIPB approval copy)
Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant indicating
the manner of arriving at the price of the shares issued to the persons resident outside India.

Q. 12. Are the investments and profits earned in India repatriable?

Ans. All foreign investments are freely repatriable (net of applicable taxes) except in cases where:
i) the foreign investment is in a sector like Construction and Development Projects and Defence wherein
the foreign investment is subject to a lock-in-period; and
ii) NRIs choose to invest specifically under non-repatriable schemes.
Further, dividends (net of applicable taxes) declared on foreign investments can be remitted freely
Q.14. What are the regulations pertaining to issue of ADRs/ GDRs by Indian companies?
Ans. Indian companies can raise foreign currency resources abroad through the issue of ADRs/ GDRs, in
accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares
(Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of
India thereunder from time to time.
A company can issue ADRs / GDRs, if it is eligible to issue shares to persons resident outside India under
the FDI Scheme. However, an Indian listed company, which is not eligible to raise funds from the Indian
Capital Market including a company which has been restrained from accessing the securities market by
the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs.
After the issue of ADRs/GDRs, the company has to file a return in Form DR as indicated in the
RBI Notification No. FEMA.20/ 2000-RB dated May 3, 2000, as amended from time to time. The company
is also required to file a quarterly return in Form DR- Quarterly as indicated in the RBI Notification ibid.
Unlisted companies incorporated in India to raise capital abroad, without the requirement of prior or
subsequent listing in India, initially for a period of two years, subject to conditions mentioned below. This
scheme will be implemented from the date of the Government Notification of the scheme, subject to
review after a period of two years. The investment shall be subject to the following conditions:

(a) Unlisted Indian companies shall list abroad only on exchanges in IOSCO/FATF compliant jurisdictions
or those jurisdictions with which SEBI has signed bilateral agreements;
(b) The ADRs/ GDRs shall be issued subject to sectoral cap, entry route, minimum capitalisation norms,
pricing norms, etc. as applicable as per FDI regulations notified by the Reserve Bank from time to time;
(c) The pricing of such ADRs/GDRs to be issued to a person resident outside India shall be determined in
accordance with the captioned scheme as prescribed under paragraph 6 of Schedule 1 of Notification No.
FEMA. 20 dated May 3, 2000, as amended from time to time;
(d) The number of underlying equity shares offered for issuance of ADRs/GDRs to be kept with the local
custodian shall be determined upfront and ratio of ADRs/GDRs to equity shares shall be decided upfront
based on applicable FDI pricing norms of equity shares of unlisted company;
(e) The unlisted Indian company shall comply with the instructions on downstream investment as notified
by the Reserve Bank from time to time;
(f) The criteria of eligibility of unlisted company raising funds through ADRs/GDRs shall be as prescribed
by Government of India;
(g) The capital raised abroad may be utilised for retiring outstanding overseas debt or for bona fide
operations abroad including for acquisitions;
(h) In case the funds raised are not utilised abroad as stipulated above, the company shall repatriate the
funds to India within 15 days and such money shall be parked only with AD Category-1 banks recognised
by RBI and shall be used for eligible purposes;
(i) The unlisted company shall report to the Reserve Bank as prescribed under sub-paragraphs (2) and
(3) of Paragraph 4 of Schedule 1 to FEMA Notification No. 20.
Erstwhile OCBs which are not eligible to invest in India and entities prohibited to buy, sell or deal in
securities by SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian companies.
The pricing of ADR / GDR issues including sponsored ADRs / GDRs should be made at a price
determined under the provisions of the Scheme of issue of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the
Government of India and directions issued by the Reserve Bank, from time to time.
Q.16. Can Indian companies issue Foreign Currency Convertible Bonds (FCCBs)?
Ans. FCCBs can be issued by Indian companies in the overseas market in accordance with the Scheme
for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt
Mechanism) Scheme, 1993.
The FCCB being a debt security, the issue needs to conform to the External Commercial Borrowing
guidelines, issued by RBI vide Notification No. FEMA 3/2000-RB dated May 3, 2000, as amended from
time to time.

Q.17. Can a foreign investor invest in Preference Shares? What are the regulations applicable in
case of such investments?
Ans. Yes. Foreign investment through preference shares is treated as foreign direct investment. However,
the preference shares should be fully and mandatorily convertible into equity shares within a specified
time to be reckoned as part of share capital under FDI. Investment in other forms of preference shares
requires to comply with the ECB norms.
Q.18. Can a company issue debentures as part of FDI?
Ans. Yes. Debentures which are fully and mandatorily convertible into equity within a specified time would
be reckoned as part of share capital under the FDI Policy.
Q.19. Can shares be issued against Lumpsum Fee, Royalty, ECB , Import of capital goods/
machineries / equipments (excluding second-hand machine) and Pre-operative/pre-incorporation
expenses (including payments of rent)?
Ans. An Indian company eligible to issue shares under the FDI policy and subject to pricing guidelines as
specified by the Reserve Bank from time to time, may issue shares to a person resident outside India :
a. being a provider of technology / technical know-how, against Royalty / Lumpsum fees due for
payment;
b. against External Commercial Borrowing (ECB) (other than import dues deemed as ECB or Trade
Credit as per RBI Guidelines).
c.

With prior approval from FIPB for against import of capital goods/ machineries / equipments and
Pre-operative/pre-incorporation expenses subject to the compliance with the extant FEMA
regulations and AP Dir Series 74 dated June 30, 2011.

Provided, that the foreign equity in the company, after such conversion, is within the sectoral cap.
Further, on a review in September 2014, it has been decided that an Indian investee company may issue
equity shares against any other funds payable by them, remittance of which does not require prior
permission of the Government of India or Reserve Bank of India under FEMA, 1999 or any rules/
regulations framed or directions issued thereunder, provided that:
i.

The equity shares shall be issued in accordance with the extant FDI guidelines on sectoral caps,
pricing guidelines etc. as amended by Reserve bank of India, from time to time;
Explanation: Issue of shares/convertible debentures that require Government approval in terms
of paragraph 3 of Schedule 1 of FEMA 20 or import dues deemed as ECB or trade credit or
payable against import of second hand machinery shall continue to be dealt in accordance with
extant guidelines;

ii.

The issue of equity shares under this provision shall be subject to tax laws as applicable to the
funds payable and the conversion to equity should be net of applicable taxes.

Q.20. What are the other modes of issues of shares for which general permission is available
under RBI Notification No. FEMA 20 dated May 3, 2000?
Ans.

Issue of shares under ESOP by Indian companies to its employees or employees of its joint
venture or wholly owned subsidiary abroad who are resident outside India directly or through a
Trust up to 5% of the paid up capital of the company.

Issue and acquisition of shares by non-residents after merger or de-merger or amalgamation of

Indian companies.

Issue shares or preference shares or convertible debentures on rights basis by an Indian

company to a person resident outside India.

Q.21. Can a foreign investor invest in shares issued by an unlisted company in India?
Ans. Yes. As per the regulations/guidelines issued by the Reserve Bank of India/Government of India,
investment can be made in shares issued by an unlisted Indian company subject to compliance with
FEMA provisions such as pricing, reporting, etc.
Q.22. Can a foreigner set up a partnership/ proprietorship concern in India?
Ans. No. Only NRIs/PIOs are allowed to set up partnership/proprietorship concerns in India on nonrepatriation basis.
Q.23. Can a foreign investor invest in Rights shares issued by an Indian company at a discount?
Ans. There are no restrictions under FEMA for investment in Rights shares issued at a discount by an
Indian company, provided the rights shares so issued are being offered at the same price to residents and
non-residents. The offer on right basis to the persons resident outside India shall be:
(a) in the case of shares of a company listed on a recognized stock exchange in India, at a price as
determined by the company; and
(b) in the case of shares of a company not listed on a recognized stock exchange in India, at a price
which is not less than the price at which the offer on right basis is made to resident shareholders.
Q.25. What declaration/certificate needs to be obtained by the AD in respect of utilization of loan
proceeds for the declared purpose, consequent to pledge of shares, to comply with para. 2 (i) (b)
of the A. P. (DIR Series) Circular No. 57 dated May 2, 2011?
Ans. The AD may obtain a board resolution ex ante passed by the Board of Directors of the investee
company, that the loan proceeds received consequent to pledge of shares, will be utilised by the investee
company for the declared purpose.

The AD may also obtain a certificate from the statutory auditor ex post of the investee company, that the
loan proceeds received consequent to pledge of shares, have been utilised by the investee company for
the declared purpose.
Q.26. Is a non-resident permitted to acquire share on stock exchange under FDI scheme?
Ans: Prior to issuance of A.P (DIR Series) Circular No. 38, dated September 6, 2013, no person resident
outside India except a portfolio investor was allowed to acquire shares on stock exchange.
Portfolio Investors registered with SEBI namely FII and QFI were eligible to acquire shares on stock
exchange in accordance with the requirements. Further, NRIs were also permitted to acquire shares on
stock exchange, on repatriation and non-repatriation basis, in accordance with portfolio investment
scheme for them.
With effect from August 5, 2013 (date of publication of relevant notification), a non-resident, other than
portfolio investor, is eligible to acquire shares on stock exchange through a registered broker subject to
the condition that the non-resident investor has already acquired and continues to hold the control in
accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations i.e. he has complied
with the minimum stake requirement under SEBI Regulations.
Q.27. What will be the pricing norms for a non-resident permitted to acquire share on stock
exchange under FDI scheme?
Ans: He shall acquire shares at the ruling market price.
Q.28. Whether the non-resident, permitted to acquire shares on stock exchange under FDI
scheme, can sell those shares?
Ans: Non-Residents were already permitted to sell the shares on the recognised stock exchange in
accordance with Regulation 9(2)(iii(b) of Notification FEMA No. 20 dated May 3, 2000.
Yes, the non-resident shall be at liberty to sell those shares as applicable under FDI guidelines. The
shares acquired under the present scheme shall be treated as acquisition under FDI scheme and as such
all requirement namely, sectoral cap, entry route, pricing, reporting, documentation etc. would have to be
complied with.
Thus, non-resident having acquired shares under the scheme can subsequently transfer shares under
FDI scheme.
Q29. What will be mode of payment for the non-resident permitted to acquire share on stock
exchange under FDI scheme?
Ans: The Non-Resident permitted to acquire shares under the scheme can use following mode for
payment of shares:

by way of inward remittance through normal banking channels, or

by way of debit to the NRE/FCNR account of the person concerned maintained with an
authorised dealer/bank;

by debit to non-interest bearing Escrow account (in Indian Rupees) maintained in India with the
AD bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2000;

the consideration amount may also be paid out of the dividend payable by Indian investee
company, in which the said non-resident holds control, provided the right to receive dividend is
established and the dividend amount has been credited to specially designated non-interest
bearing rupee account for acquisition of shares on the floor of stock exchange.

Q.33. What will be the composition of direct foreign investment?

Ans: The concept direct foreign investment means foreign investment in any Indian company made
directly in form of Foreign Direct Investment (FDI), Portfolio investment from Foreign Institutional
Investment (FII), Non-Resident Indian, Qualified Foreign Investor (QFI), Registered Foreign Portfolio
Investor and Foreign Venture Capital Investor i.e. under Schedule 1, 2, 2A, 3, 6 and 8 of the Notification
No. FEMA.20/2000-RB dated May 3, 2000, as amended from time to time. Thus, the investment in the
above manner will be aggregated in first level Indian Company. Such first level Indian Company obviously
cannot have indirect foreign investment.
Q.34. What about foreign investment in second level Indian Company?
Ans: The second level Indian Company can have direct foreign investment as explained above and also
have investment from another Indian company which is not resident owned and controlled i.e. indirect
foreign investment.
Further, the methodology for calculation of total foreign investment i.e. direct as well as indirect foreign
investment would apply at every stage of investment in Indian companies and thus in each and every
Indian company.
Q.38. Are there any exception on application of downstream investment?
Ans: The downstream rule may not be applied in following cases:
Where the first level Indian company is owned and controlled by resident Indian citizens;
where for investment in sectors it is specified in a statute or a rule there under. The above methodology of
determining direct and indirect foreign investment therefore does not apply to the insurance sector which
will continue to be governed by the relevant Regulation;
Downstream investment/s made by a banking company, as defined in clause (c) of Section 5 of the
Banking Regulation Act, 1949, incorporated in India, which is owned and/or controlled by non-residents/ a
non-resident entity/non-resident entities, under Corporate Debt Restructuring (CDR), or other loan
restructuring mechanism, or in trading books, or for acquisition of shares due to defaults in loans, shall
not count towards indirect foreign investment.
Q.39. What are implications of applicability of downstream rule:

Ans: While the norms of foreign investment for first level Indian company were already in place, the
downstream investment in second level Indian companies would now have to be in accordance/
compliance with the relevant sectoral conditions on entry route, conditionalities and caps.
Such a company has to notify Secretariat for Industrial Assistance, DIPP and FIPB of its downstream
investment in the form available at http://www.fipbindia.comwithin 30 days of such investment, even if
capital instruments have not been allotted along with the modality of investment in new/existing ventures
(with/without expansion programme).
The downstream investment by way of induction of foreign equity in an existing Indian Company to be
duly supported by a resolution of its Board of Directors as also a Shareholders Agreement, if any;
The issue/transfer/pricing/valuation of shares shall continue to be in accordance with extant SEBI/RBI
guidelines;
For the purpose of downstream investment, the Indian companies making the downstream investments
would have to bring in requisite funds from abroad and not use funds borrowed in the domestic market.
This would, however, not preclude downstream operating companies, from raising debt in the domestic
market. Downstream investments through internal accruals are permissible.
Q.40. As portfolio investment may undergo change quite frequently, it will be difficult to monitor
downstream investment?
Ans: To facilitate such computation, for the purpose portfolio investments either by FIIs, NRIs or QFIs
holding as on March 31 of the previous year would be taken into account. e.g. for monitoring foreign
investment for the financial year 2011-12, portfolio investment as on March 31, 2011 would be taken into
account.
Q.41. What is the procedure to ensure compliance with the downstream investment guidelines?
Ans: The FDI recipient Indian company at the first level which is responsible for ensuring compliance with
the FDI conditionalities like no indirect foreign investment in prohibited sector, entry route, sectoral
cap/conditionalities, etc. for the downstream investment made by in the subsidiary companies at second
level and so on and so forth would obtain a certificate to this effect from its statutory auditor on an annual
basis as regards status of compliance with the instructions on downstream investment and compliance
with FEMA provisions. The fact that statutory auditor has certified that the company is in compliance with
the regulations as regards downstream investment and other FEMA prescriptions will be duly mentioned
in the Directors report in the Annual Report of the Indian company. In case statutory auditor has given a
qualified report, the same shall be immediately brought to the notice of the Reserve Bank of India,
Foreign Exchange Department (FED), Regional Office (RO) of the Reserve Bank in whose jurisdiction the
Registered Office of the company is located.
Q.45. What are the extant pricing guidelines for FDI instruments?
Ans: In terms of extant FEMA regulations, foreign investment in an Indian investee company should be
subject to pricing guidelines as stipulated by RBI/SEBI from time to time. Earlier, the pricing guidelines for
FDI instruments with optionality clauses was decided in terms of A.P.(DIR Series) Circular No. 86 dated
January 9, 2014.

The extant pricing guidelines for FDI investment has since been reviewed vide A. P. (DIR Series) Circular
No. 4 dated July 15, 2014 as under:
(i) In case of listed companies the issue and transfer of shares including compulsorily convertible
preference shares and compulsorily convertible debentures shall be as per the SEBI guidelines and for
FDI instruments with optionality clauses shall continue to be in accordance with A.P. (DIR Series) Circular
No. 86 dated January 9, 2014, i.e., the non-resident investor shall be eligible to exit at the market price
prevailing on the recognised stock exchanges subject to lock-in period as stipulated, without any assured
return.
(ii) In case of unlisted companies, the issue and transfer of shares including compulsorily convertible
preference shares and compulsorily convertible debentures with or without optionality clauses shall be at
a price worked out as per any internationally accepted pricing methodology on arms length basis.
Q.46. The instructions prescribe that in case of a listed company, the non-resident investor shall
be eligible to exit at the market price obtaining on recognised stock exchanges. Does it mean that
all exit from investment in case of a listed company having FDI with optionality are to happen on
the floor of stock exchange?
Ans: The optionality clause creates an obligation for the investee to buy the shares from the investor at
the price prevailing on the stock market at the relevant time.