Advisory Note Issued to Mr.

Kartar Singh for Bringing Foreign Investment in

Agriculture and Related Activities:

Facts:
Kartar Singh a person resident in India engaged in farming. He is willing to get
foreign funding of 200 million US Dollars from his brother (Mr. X) based in Canada
(person resident outside India) for cultivation of land, development of mechanical
farming, installation of tube wells, development of seeds and other incidental
activities.

Issues:
1. Whether foreign investment in Agricultural activities is allowed. If yes, then
how?
2. Whether an individual is eligible to receive FDI for such agricultural
activities. If yes, then under what conditionality’s?
3. In what ways fund can be brought from Canada for investment in this sector?

Advisory:

The following advisory note is prepared based on the facts stated by the client and the
legal issues arising out of the proposed transactions between client and MR. X.

The client here a person resident in India is getting foreign investment of 200 million
United States Dollars. Foreign Investment is involved thus provision, rules and
regulations of Foreign Exchange Management Act, 1999 (‘FEMA’) is looked into:

Section 3 of FEMA:

Other than provided in act, or with general or special permission of RBI no person
shall:-

1) deal in or transfer any foreign exchange or foreign security to any person not
being an authorised person;

2) make any payment to or for the credit of any person resident outside India in
any manner;
 3) receive otherwise (than) through an authorised person, any payment by order
or on behalf of any person resident outside India in any manner;

4) enter into any financial transaction in India as consideration for or in

association with acquisition or creation or transfer of a right to acquire, any
asset outside India by any person.

For how much foreign investment in each sector is allowed we look into Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations, 2017 provided by RBI which provides sector-specific policy for
foreign investments.
By press note of 28th August, 2017 Government of India has updated FDI policy and
under there100% automatic route in agriculture sector but only in

(a) Floriculture, Horticulture and Cultivation of vegetables & mushrooms under

controlled conditions;
(b) Development and production of seeds and planting material;
(c) Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture and
Apiculture; and
(d) Services related to agro and allied sectors.

And foreign investment is not allowed in any other agricultural sector/ activity.

The foreign funds could be deployed for certain incidental services like packaging,
seeds, electricity etc. and possible cultivation which can be done by Client would be
of commercial crops like sugarcane, cotton and food crops like rice and wheat.

The eligible investees who may only receive foreign investment in India are listed
under the FDI policy by DIPP. It nowhere mentions individual as an eligible investee.
Thus, an individual is not permitted to receive foreign investment directly from
abroad.

Thus to receive the foreign investment the Client needs to become an eligible investee
entity for receiving the investment from his brother; Mr. X.
In conformity with Section 456 of the Companies Act, 2013, the client may
incorporate a producer’s company (farmer’s company). The Act has allowed primary
producers to incorporate themselves to gain a maximum profit from the market-
oriented economy. It has the elements of cooperative business with a regulatory
framework similar to that of a private limited company. Thus, the control and
management of producer company shall remain with resident individual only i.e. the
Client.

The client and his brother may enter into an agreement where the client would
subscribe to 51% of the shares of the company and his brother would subscribe to rest
i.e. 49%.

Client’s brother could be issued equity shares of equivalent value as subscriber. Since
huge amount is proposed to be invested the share it is advised to issue shares at
premium price to Mr. X and at face value to Client and remaining 8 individual
members.

As per External Commercial Borrowing receiving foreign funds in the form of loan:

RBI has framed master directions on external commercial borrowings under the
Foreign Exchange Management (Borrowing or lending in foreign exchange)
Regulations, 2000 which regulate foreign loans. In terms of the said master directions,
eligible investees may receive loan for specified purposes (end-uses) from eligible
investors outside India.

Mr. X is neither eligible to lend nor the Client is eligible to borrow any external
commercial borrowing according to External Commercial Borrowing requirements.
Thus this route is not advisable.