外国投資（FI） | 外国直接投資（FDI）

With growth of the economy and issuance of various other policies related to globalisation and liberalisation, Cross border investment has become very usual.  Cross country investment can be made through various channels such as sale or purchase of Immovable property, investment in securities issued by various corporate entities, Borrowing or lending of money, mergers etc.

All transactions which increase/decrease assets or liabilities in India of a person resident outside India is considered as “Capital Account transactions” under Foreign Exchange Management Act (“FEMA”). All capital account transactions are prohibited unless specifically approved. Therefore, all cross border investments are prohibited unless specifically permitted.

Among various other routes, Investment through securities (Equity Shares, Preference shares, Debentures, share warrant etc.) of any company or capital contribution in a Limited Liability partnership firm is one of the commonly adopted models of investment. Investments through securities or capital contribution are denominated as “Foreign Investment”/Foreign Direct Investment “FDI”/Foreign Portfolio Investment (FPI) under FEMA with technical differentiations.

Other forms of investment such as sales or purchase of Immovable Property, Merger and Acquisition, Lending or borrowing money etc. are technically not covered under “Foreign Investment”/FDI/FPI.

1. Regulatory Framework for Foreign Investment in India

For all capital Account transactions, the Reserve Bank of India (“RBI”) was regulatory authority, i.e., RBI was having the right to prepare and prescribe rules, regulations, restrictions and prohibitions in relation to capital account transactions. However, with effect from 17.10.2019, the Central Government became the regulatory authority of Capital Account Transactions except for debt instruments.

Therefore, few regulations issued by RBI got superseded and the Central Government prescribed new Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (“FEM (Not Debt) Rules”) w.e.f. 17th October, 2019 for regulations of Foreign Investment. However, regulations issued by RBI and still not repelled by the Central Government continue to remain valid.

Though, for foreign investment in India, the Central Government is a regulatory authority. However, RBI is still empowered to determine policy and procedures for mode of payment, remittance of sales proceeds and reporting documents. Accordingly, RBI has issued FEM (Mode of Payment and reporting of Non-Debt Instrument) Regulations, 2019.

Apart from above mentioned regulations, while making Investment In India, following regulations are to be keep in India:

1. Companies Act 2013
2. Securities and Exchange Board of India Act, 1992 and SEBI Regulations
3. Income Tax Act, 1961

For other capital account transactions, different regulations are prescribed such as:

1. FEM (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015;
2. FEM (Borrowing and Lending in Foreign Exchange) Regulations, 2000;
3. FEM (Borrowing or lending in Rupee) Regulations, 2000;
4. FEM (Cross Border Merger) Regulations, 2018.
5. FEM (Export and Import of currency) Regulation, 2015

2. Foreign Investment (FI)/Foreign Direct Investment (FDI)/Foreign Portfolio Investment (FPI”)

FEM (Non-Debt) regulations has defined three following forms of investment:

1. “Investment” means to subscribe, acquire, hold or transfer any security or unit issued by a person resident in India.
2. “Foreign Investment” means any investment made by a person resident outside India on a repatriable basis in equity instruments of an Indian company or to the capital of a LLP.  “Investment on repatriation basis” means an investment, sale or maturity proceeds of which are eligible to be repatriated out of India.
3. “FDI” or “Foreign Direct Investment” means investment through equity instruments by a person resident outside India in an unlisted Indian company; or in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company;
4. “Foreign portfolio investment” means any investment made by a person resident outside India through equity instruments where such investment is less than 10% of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10% of the paid-up value of each series of equity instrument of a listed Indian company.

*“equity instruments” means equity shares, convertible debentures, preference shares and share warrants issued by an Indian company.

3. Advantages of Foreign Investment in India

1. Economic Development Stimulation: Foreign direct investment can stimulate the target country’s economic development, creating a more conducive environment for you as the investor and benefits for the local industry.

2. Easy International Trade: A country has its own import tariff, and this is one of the reasons why trading with it is quite difficult. Also, there are industries that usually require their presence in the international markets to ensure their sales and goals will be completely met.

3. Employment and Economic Boost: When money is invested in another country, it creates jobs, new companies, and new factories/buildings. This brings about new opportunities for local residents and can stimulate further growth.

4. 人的資本の育成：対内直接投資（FDI）がもたらす大きな利点の一つに、人的資本の育成があります。これは即座に目に見えるものではないため、過小評価されがちです。人的資本とは、労働に従事できる人々の能力や知識のことであり、一般的には労働力として知られています。

5. 税制優遇措置：法人税率の引き下げは、大企業に毎年数十億ドルもの節約をもたらす可能性があります。これが、Appleのような大企業が国際的な子会社に資金を移すために巧妙な手法を用いる理由です。

6. リソースの移転：対内直接投資は、リソースの移転やその他の知識交流を可能にし、各国が新しい技術やスキルにアクセスできるようになります。

7. 収益とコストの格差の縮小：対内直接投資は、収益とコストの格差を縮小させることができます。これにより、各国は生産コストを一定に保ち、製品を容易に販売できるようになります。

8. 生産性の向上：外国投資家が提供する施設や設備は、対象国の労働力の生産性を向上させることができます。

4. インド国外居住者によるインドへの投資制限

FEM（非債務）規則の第3条に基づき、インド国外居住者はインドへの投資を禁止されています。ただし、インド準備銀行（RBI）は、十分な理由が示された場合に限り、インド国外居住者による投資を許可することができ、その際、RBIは中央政府と協議の上で許可を与えるものとします。

ただし、2019年10月17日時点で既に行われている投資で、かつ以前の規則に従って行われたものについては、FEM（非債務）規則の下でも引き続き有効とされます。

同様に、FEM（非債務）規則の第4条に基づき、インドの企業、投資ビークル、その他の事業体は、RBIによる許可または特別の承認がない限り、インド国外居住者による投資を記録してはなりません。

5. インドへの対内直接投資の許可

インド国外居住者によるいかなる投資も、本規則に定められたエントリールート、セクター別上限、投資制限、およびその他の条件に従うものとします。

6. FDIが禁止されているセクター

いかなるルートにおいてもFDIが厳格に禁止されている産業がいくつか存在します。それらの産業は以下の通りです。

1. 原子力発電、鉄道事業など、民間投資に開放されていない活動またはセクター
2. カジノを含むあらゆるギャンブルまたは賭博事業
3. 宝くじ（オンライン、民間、政府など）
4. チットファンドへの投資
5. ニディ・カンパニー（Nidhi Company）
6. 不動産事業または農家（ファームハウス）の建設。なお、不動産事業には、タウンシップの開発、住宅または商業施設の建設などは含まれません。
7. 譲渡可能開発権（TDR）の取引
8. 葉巻、紙巻たばこ、または関連するたばこ産業の製造

7. インド企業への対内直接投資におけるエントリールート

FEM（非債務）規則のスケジュールIに基づき、インドへの外国投資には以下のエントリールートがあります。非居住者による対内直接投資は、「自動承認ルート」と「政府承認ルート」の2つのルートを通じて規制されています。自動承認ルートは、制限が少ないセクターや投資レベルを対象としています。一方、承認ルートの場合は、政府機関が外国投資を規制・審査した上で承認を行います。

7.1 インドへの対内直接投資における自動承認ルート

自動承認ルートとは、規制が緩やか、あるいはより自由化された仕組みを指します。このルートの下では、インド国外居住者はインドへの投資を行うにあたり、インド準備銀行や中央政府からの承認を必要としません。自動承認ルートによるFDIは、統合FDI政策で指定されたすべてのセクターおよび活動において認められています。

7.2 インドへの対内直接投資における承認ルート／政府承認ルート

承認ルート（政府承認ルート）の下では、外国投資家またはインド企業は、インド中央政府から事前の承認を得る必要があります。このルートを通じて行われる投資は、政府が承認を与える際に指定する条件に従うものとします。

In case where all of the following conditions are satisfied, there will be no requirement of government approval or compliance of sectoral conditions:

1. Where aggregate foreign investment is made upto 49% of paid-up capital on a fully diluted basis or the sectoral or statutory cap, whichever is lower, and
2. Investment does not result in transfer of ownership and control from resident Indian to person resident outside India.

8. Conditions for Foreign Investment in equity instruments

Following are the conditions need to be fulfilled for making foreign investment in equity instruments:

1. Sectoral Cap for total foreign investment: for some sectors, FEM (Non-Debt) instrument specifies maximum limit of foreign investment in equity instruments.
2. Foreign investment is subject to applicable laws in India as provided in Schedule I of FEM (Non-Debt) Rules.
3. 100% FDI is permitted through an automatic route where in those sectors where no sectoral caps are given, government approval is not required and which are not covered under prohibited sectors.
4. Foreign investment in Financial services requires prior approval of the central Government. However, as per S. No. F of Schedule I, following investments are automatically approved in financial services:
   1. 100% FDI in ARCs
   2. 49% in Private Banks under automatic route
   3. 20% in public sector banks with government approval,
5. Foreign investment in investing companies, other than NBFC or CIC (“Core Investment Company”) requires specific approval.
6. 100% FDI is permitted in NBFC through automatic route.
7. Foreign investment can be made in existing companies where an automatic route is available and the Indian entity has not made any downstream investment.
8. Burden of compliance such as sectoral or statutory caps shall lie on the company receiving the investment.
9. 100% foreign investment in NBFC under automatic route allowed.
10. Burder of compliances with respect to Sectorial or statutory cap is on the company receiving such foreign investment.

9. Different types of FDI

Foreign direct investment or FDI is an investment made by a foreign entity (an individual or a company) into a business based in another country. FDI is characterized by a notion of direct control and is not simply the transfer of monetary funds. A lasting interest differentiates foreign direct investment from foreign portfolio investment.

There are mainly two types of FDI- Horizontal and Vertical:

1. Horizontal Investment: Under this type of Investment, a business expands its inland operations to another country. The business undertakes the same activities but in a foreign country.
2. Vertical Investment: in this case, a business expands into another country by moving to a different level of the supply chain. Thus, business undertakes different activities overseas, but these activities are related to the main business.

10. Reporting requirements specified by RBI for FDI

1. Foreign currency -Gross Provisional Returns (FC-GPR)
2. Annual Return on Foreign Liabilities and Assets (FLA Return)
3. Form Foreign currency – Transfer of shares (FC-TRS)
4. Form Employees stock options (ESOP)
5. Reporting for issue of capital instruments
6. Reporting on conversion of ECB into equity
7. Reporting of ADR/GDR Issues
8. Reporting of investment in LLP
9. Reporting on issue or transfer of convertible notes by startups
10. Reporting of foreign portfolio investments by NRI/OCI and others
11. Downstream Investments
12. Investment by foreign venture capital investor