Greater connectivity and the relaxation of the license raj has encouraged globalization and the free flow of capital across countries. Businesses, both big and small, are going international in an effort to win the market share and to maximize profits. In this context, India has become a key market for most businesses and there is tremendous interest among the foreign companies and the foreign nationals to set up a business in India. Foreign Direct Investment (FDI) is one of the most popular routes for the foreigners to startup business in India and in this article we will get to know more about FDI in a Private Limited Company.
The Indian Government has been keen on increasing the flow of foreign investment in India and has taken various policy decisions in order to encourage FDI. The FDI Policy in India is however regulated by the Department of Industrial Policy and Promotions (DIPP), Ministry of Commerce and Industry. A consolidated circular is issued by the DIPP services as an important policy note on FDI and the latest such FDI Circular was issued on 17th April 2014.
As per its regulations, FDI means investment by a non-resident entity/person resident outside India and it includes all the different types of foreign investment in India including the investment by (Foreign Institutional Investor) FIIs, investment by NRI, investment by foreigners or the foreign entities, etc.,
FDI in a Private Limited Company
FDI in a Private Limited Company is allowed only for non-resident entities, that are subject to the FDI Policy and its sectoral caps. FDI in a Private Limited Company falls under two categories, which is an automatic route or the approval route. FDI is permitted up to 100% in most of the sectors other than those sectors which are capped or are restricted. In the cases where an automatic approval is not allowed, the prior approval from the Foreign Investment Promotion Board (FIPB) of the Government of India is required to be obtained which is prior to the investment. Further, the citizens or the entities of Bangladesh or Pakistan can invest in India, only under the approval route.
FDI in a Private Limited company can either be through various equity instruments. Indian companies can also issue equity shares, preference shares, and convertible debentures, but subject to the norms and guidelines. The equity shares of a private limited company that is issued under FDI must be issued at a fair value. But, there is a relaxation in the rules in the case of a newly incorporated entity or subscription to the Memorandum of Association while incorporating a company by an NRI or Foreigner, the shares can also be issued at face value.
Furthermore, FDI in the following sectors is absolutely prohibited:
- Atomic Energy
- Lottery business which includes government lottery and the online lottery (even the foreign collaboration, franchise, trademark, brand name, management contract is prohibited)
- In Gambling and in betting including the casinos (even foreign collaboration, franchise, trademark, brand name, management contract is prohibited)
- In the Business of chit funds
- In Nidhi Company
- In the business of Trading in transferable development rights
- In Real estate business or the construction of farmhouse (except development of roads or bridges, city, and regional infrastructure, townships, etc.)
- In Manufacturing of cigars, cheroots, cigarillos, and cigarettes of tobacco or of tobacco substitutes
- In Activity/sector which is not opened to private sector investment [e.g. Atomic energy and Railway Transport (other than Mass Rapid Transport Systems)].
FDI under the Approval Route
FDI in Private Limited Company under the automatic route is however not permitted for the following sectors. Hence for investment in these sectors, prior approval of the FIPB is required.
- For Petroleum sector (except for the private sector oil refining), Natural gas/LNG Pipelines
- Investing companies in Infrastructure & Service Sector
- For Defense and strategic industries
- For Atomic minerals
- For Print media
- For Broadcasting
- For Postal services
- For Courier services
- For Establishment or operation of a satellite
- For Development of integrated township
- For the Tea sector
FDI under Automatic Route
In case an activity that is proposed is to be undertaken by the foreign or a non-resident entity in India, not falling under the FDI prohibited or the approval category, FDI under the automatic route is also permissible. Under the automatic route, an application for FDI in a Private Limited Company, however, is not required, if the investment is within the FDI cap.
Under the automatic route, no prior permission of the FIPB or the RBI is required for an FDI in a Private Limited Company registration. The Company must only file certain declarations that are related to the FDI with the Reserve Bank of India after the receipt of the share subscription money from the foreign or a non-resident investor and the issuance of shares. Further, under the automatic route, the investment cannot be made in a company which requires an industrial license under the Industries Act, 1951 or for the acquisition of other Indian companies existing shares or for the financing and expansion.
It is thus important to note that, most of the sectors of the economy in India are open for 100% FDI under the automatic route, wherein an FDI report is required to be filed only after issuance of the shares for the foreign or non-resident entity. Therefore, the process for starting a business in India for the Foreign Nationals and the Non-Resident Indians is very smooth and easy.