[ESTABLISHING A BUSINESS ENTITY IN INDIA]
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3.6
Mandatory
Dematerialization
of
depending upon the sector in which the operations of the target entity falls. 4.1.1 Financial Collaboration: In terms of the current Foreign Direct Investment (“ FDI ”) policy, foreign investment up to 100% (hundred percent) of the securities (including shares and fully and mandatorily convertible preference shares and debentures) of Indian companies is freely permitted in most sectors (“ Unregulated Sectors ”). However: • Foreign investment beyond prescribed percentages is not permitted without prior government approval in a few sectors/activities, such as insurance, scheduled/regional air transport services, banking, telecom, defense, and multi- brand retail trading etc. (“ Regulated Sectors ”). A financial collaboration in the Regulated Sectors ordinarily requires the presence of an Indian equity partner to hold the remaining equity and compliance with the relevant sectoral conditions on entry route, conditionalities and caps. • Foreign investment is prohibited in certain sectors including atomic energy, lottery, gambling, trading in transferable development rights, manufacturing of tobacco products or substitutes, railway operations (except for permitted operations), etc. • Government of India in April 2020, introduced certain changes to the FDI policy. These changes mandate that investments from entities or
Securities : The Ministry of Corporate Affairs on October 27, 2023, notified Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (“ Prospectus Amendment Rules ”) vide notification no. G.S.R. 802(E) mandating private companies, other than small companies, to issue the securities only in dematerialized form and facilitate the dematerialization of all its existing securities. While dematerialization of securities is being mandated under the Prospectus Amendment Rules, it does not bar the security holder from continuing to hold his/her existing securities in a physical form. However, after June 30, 2025 (as extended by the Ministry of Corporate Affairs vide notification dated February 12, 2025), when the security holder decides to transfer these securities, dematerialization would be mandatory prior to initiating the transaction. Further, the shareholders will be able to subscribe to any further issue only after dematerializing the securities. 4. Foreign Investment, Thin Capitalisation, Residency and Material Visa Restrictions 4.1 Any significant barriers to entry for an offshore party: The Foreign Exchange Management Act, 1999 and the rules and regulations framed thereunder provide the basic legal framework for foreign investments in India. The RBI together with the Department for Promotion of Industry & Internal Trade, Ministry of Commerce and Industry and various other ministries and departments of the Central Government contribute to framing and modifying sector specific regulatory framework and are involved in granting of approvals for foreign investments in India
individuals from countries sharing land borders with India (being China, Hong Kong, Macau, Afghanistan, Bangladesh, Pakistan, Bhutan, Myanmar and Nepal) require prior government approval. This includes investments where the beneficial
ILN Corporate Group – Establishing a Business Entity Series
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