[ESTABLISHING A BUSINESS ENTITY IN INDIA]
255
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 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. • FDI in LLPs is permitted, subject to certain conditions e.g., the FDI is allowed, under the automatic route, in LLPs operating in sectors/activities where 100% (hundred percent) FDI is permitted and there are no FDI linked performance conditions. Investment in LLPs either by Foreign Portfolio Investors (“ FPIs ”) or Foreign Venture Capital Investors (“ FVCI ”) is not permitted. • A foreign investor can, without prior government approval, invest in unlisted securities of an existing Indian company in Unregulated Sectors, in accordance with the pricing guidelines, and subject to overall compliance with the FDI policy, and accordingly such securities can also be issued/ transferred to it by Indian or foreign shareholders. • Earlier, aggregate investments by FPIs under the automatic route (i.e., without prior regulatory approval) was permitted up to 49% of the shareholding of the Indian company, or the sectoral cap, whichever was lower, provided that there was no transfer of ownership and control of the Indian company from an Indian resident to the FPI. However, now the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 have
ILN Corporate Group – Establishing a Business Entity Series
Made with FlippingBook Ebook Creator