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What are the forms in which business can be conducted by a foreign company in India?

A foreign company planning to set up business operations in India has the following options.

As an incorporated entity by incorporating a company under the Companies Act, 1956 through Joint Ventures; or Wholly Owned Subsidiaries.

As an unincorporated entity through :

1) Liaison Office/Representative Office, or

2) Project Office, or

3) Branch Office

Such offices can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office of other place of business) Regulations, 2000.

How does a foreign company invest in India? What are the regulations pertaining to issue of shares by Indian companies to foreign collaborators/investors ?

A) Automatic Route

FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require prior approval of the Government:

Activities/items that require an Industrial License;

Proposals in which the foreign collaborator has an existing financial / technical collaboration in India in the 'same' field,

Proposals for acquisition of shares in an existing Indian company in: Financial services sector and where Securities & Exchange Board of India (Substantial Acquisition of Shares and Takeovers ) Regulations, 1997 is attracted;

All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.

B) Government Route

FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Application can be made in Form FC-IL; Plain paper applications carrying all relevant details are also accepted. No fee is payable.

General permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.

On receipt of money for investment :

Within 30 days of receipt of money from the foreign investor, the Indian company will report to the Regional Office of RBI under whose jurisdiction its Registered Office is located, a report containing details such as :

Within 30 days of receipt of money from the foreign investor, the Indian company will report to the Regional Office of RBI under whose jurisdiction its Registered Office is located, a report containing details such as:

Name and address of the foreign investors

Date of receipt of funds and their rupee equivalent

Name and address of the authorized dealer through whom the funds have been received, and

Details of the Government approval, if any;


On issue of shares to foreign investor :

Within 30 days from the date of issue of shares, a report in Form FC-GPR together with the following documents should be filed with the Regional Office of RBI :

Certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that :

  • All the requirements of the Companies Act, 1956 have been complied with;
  • Terms and conditions of the Government approval, if any, have been complied with;
  • The company is eligible to issue shares under these Regulations;
  • and The company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration;

Certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.


Which are the sectors where FDI is not allowed in India, under the Automatic Route as well as Government Route ?

FDI is prohibited under Government as well as Automatic Route for the following sectors :

Retail Trading    Atomic Energy    Lottery Business    Gambling and Betting    Housing and Real Estate business    Plantations (Other than Tea plantations).    Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors).


FDI can supplement and complement the Indian industry and make it globally competitive, open up export markets and provide access to international quality goods and services. It can raise resources through technological up gradation, optimal utilization of human and natural resources, and backward and forward linkages.


There are promising fields like the food processing sector in the country. Foreign retail giants are willing to buy processed food from the country. Foreign direct investment (FDI) in retail space, specialized goods retailing like sports goods, electronics and stationery is also being contemplated. The government has to walk a tightrope to ensure a `level playing field' for everyone.


Is there any restriction on pricing of the loan/interest recoverable on such loans?

The interest rates charged by an NBFC-MFI to its borrowers will be the lower of the following :

Cost of funds, plus margin

Cost of funds means interest cost and margin is a mark up of a maximum of 10 per cent for large NBFCs-MFI and 12 per cent for others. Large NBFCs-MFI are those with asset sizes above ` 100 crore

he average base rate of the five largest commercial banks by assets multiplied by 2.75

The average of the base rates of the five largest commercial banks shall be advised by the Reserve Bank on the last working day of the previous quarter, which shall determine interest rates for the ensuing quarter. The Bank will announce the applicable average base rate on March 31, 2014 and every quarter end thereafter.

What happens to the existing NBFCs who intend to convert to NBFC-MFI but do not fulfill the minimum net owned funds criteria of Rs. 5 crore at present?

Existing NBFCs seeking conversion to NBFC-MFI category, were required to maintain Net Owned Funds (NOF) at Rs.3 crore by March 31, 2013 and at Rs 5 crore by March 31, 2014, failing which they must ensure that lending to the Microfinance sector i.e. individuals, SHGs or JLGs which qualify for loans from MFIs, is restricted to 10 per cent of the total assets. For NBFCs operating in North Eastern Region, the minimum NOF to be maintained is Rs. 2 Crore


NRI investments in real estate have been simplified to encourage the inflow of funds. The Government of India has put in place a liberal and transparent policy for investment from overseas Indians. Most of the sectors are open to Foreign Direct Investment (FDI) under the automatic route.

Several measures have been taken by the RBI. NRIs can invest, transfer, give and inherit immovable property. NRIs holding Indian passports and persons of Indian origin (PIOs) enjoy parity of status. The RBI has granted general permission to person resident outside India holding Indian passports and PIOs to buy residential and commercial properties in India.

Sale proceeds of immovable property, acquired even out of rupee funds, can now be repatriated if the property has been held for a minimum of 10 years. There is no lock-in period with regard to immovable property that is inherited. The repatriation in the case of residential properties is restricted to a maximum of two properties.

Housing finance companies and banks have been permitted to offer NRI home loans and also to PIOs. For repatriation, NRIs do not have to go through a circuitous route. They can approach authorized dealers of foreign exchange without going through the RBI. The rental income obtained from investment in Indian real estate can also be repatriated every year. Both NRIs and PIOs can invest in limited companies engaged in real estate development. The paid-up value of shares/ convertible debentures purchased by an NRI, on both repatriation and non-repatriation basis have a limit of five per cent of the paid-up capital/paid-up value of each series of debentures. The aggregate paid-up value of shares/convertible debentures purchased by all NRIs can be raised to 24% of the paid-up capital of the company/paid-up value of series of debentures.

NRIs can get home loans and repay it through inward remittance using normal banking channels or by debit to his NRE/FCNR(B)/NRO account or out of rental income derived from renting out such property. Repayment of loan in foreign exchange is treated as equivalent to foreign exchange received for purchase of residential property.

NRIs are allowed to transfer as gift any residential/commercial property in India to a person resident in India or to an NRI or PIO. The sale proceeds of the property received as gift will be credited only to the NRO account. NRIs who acquired immovable property while they were resident in India can continue to hold or transfer such immovable property. There is no lock-in period for sale of residential/commercial property. NRIs can remit abroad up to $1 million per year from the sale of immovable property in India.

Foreign Direct Investment is encouraged and permitted, subject to certain conditions, in the following real estate sectors in India. It includes hotel development, tourism, hospitality, hospitals, and resorts township development, development of commercial real estate, built-up infrastructure, housing and construction projects, housing and construction projects, building educational institutes, building recreational facilities, infrastructure projects at both regional and local level and Special Economic Zones.


The Foreign Exchange Management Act 2000 defines the Portfolio Investment Scheme, permitting non-resident Indians and foreign institutional investors to buy and sell shares and convertible debentures of Indian companies, and units of domestic mutual funds at any of the Indian stock exchanges. Purchase of shares of any company from the secondary market is subject to a ceiling of 5% of the paid-up share capital and 5% of the paid-up value of each series of debentures.

Application for the PIS

Banks designated by the RBI can accept applications at branches located close to the nearest stock exchange. A NRI can operate the PIS through only one selected branch. To operate from more than one branch, special permission from the RBI is required. The following documents are generally required by designated banks to apply for the PIS :

PIS application form

RPI or NRI Form, with details of shares bought from the primary market

Tariff Sheet of the PIS

Demat Account opening form

Sale of shares

The PIS allows for sale of shares, bonds and debentures by NRIs to residents through private arrangements with the approval of the RBI. General authorization from the RBI is also available for transfer of shares, bonds and debentures by way of gifts to resident close relatives.

For sale or transfer of shares and debentures of Indian companies to other NRIs, no permission is required from RBI. The transferee NRI, however, would require permission for purchase of the shares. Short-selling or selling the shares bought by NRI investors before delivery is prohibited.

Tax Obligations

Investors under the Portfolio Investment Scheme are liable to pay Capital Gains Tax on their investments which depends on the tenure of their stocks. Prevailing rates are deducted at source by the designated bank.

Repatriablity of PIS

Proceeds of sale of stocks purchased under the PIS from NRE or FCNR accounts or from foreign remittances are repatriable. Investments made in the PIS from NRO accounts are not eligible for repatriation. A combination of repatriable and non-repatriable investments under the PIS is permitted, though these would have to be operated through NRE and NRO accounts respectively. Exclusive NRE and NRO accounts have to be maintained for PIS, which can be held by joint account holders.

Portfolio Investments from Foreign Institutional Investors

Portfolio investment from Foreign Institutional Investors (FIIs) has been in operation since 1992. FIIs including institutions such as Pension Funds, Mutual Funds, Investment Trusts, Asset Management Companies, Nominee Companies and Institutional Portfolio Managers or their power of attorney holders can invest in all the shares, debentures and warrants issued by listed companies on the primary and secondary markets.

The RBI issues a “watch list” which informs NRIs and FIIs of the companies that have reached their maximum ceiling on investments under PIS. A “caution list” sends an alert on the investment ceiling nearer to 2% of the upper limit.

What are the regulations regarding Portfolio Investments by Foreign Institutional Investors (FIIs)?

FIIs include Asset Management Companies, Pension Funds, Mutual Funds, and Investment Trusts as Nominee Companies, Incorporated / Institutional Portfolio Managers or their Power of Attorney holders, University Funds, Endowment Foundations, Charitable Trusts and Charitable Societies.

SEBI acts as the nodal point in the registration of FIIS. RBI has granted General Permission to SEBI Registered FIIs invest in India under the Portfolio Investment Scheme.

All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body.


What are the regulations for Foreign Venture Capital Investment?

A Foreign Venture Capital Investor registered with SEBI may make investment in a Venture Capital Fund for an Indian Venture Capital Undertaking, in the manner and subject to the terms and conditions specified by the RBI

What are the regulations regarding Portfolio Investments by NRIs/PIOs?

Non Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply to a designated branch of a Bank which deals in Portfolio Investment. All sale/purchase transaction is to be routed through the designated branch.


An NRI or a PIO can purchase shares up to 5% of the paid up capital of an Indian company. All NRIs/PIOs taken together cannot purchase more than 10% of the paid up value of the company. (This limit can be increased by the Indian company to 24% by passing a General Body resolution).

The sale proceeds of the repatriable investments can be credited to the NRE/NRO etc. accounts of the NRI/PIO whereas the sale proceeds of non-repatriable investment can be credited only to NRO accounts. The sale of shares will be subject to payment of applicable taxes.


Equities, Property and Mutual Funds are the three most sustaining ways for an NRI to invest.

For an NRI, no specific approval for investing or redeeming from mutual fund is required. Only OCBs and FIIs require approvals for it.

Can the upper limit of the investments be raised under any special cases for FII, NRI or PIO?

Yes, the upper limit of 24% for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. And the maximum limit of 10 % can be raised to 24% subject to the approval of the general body of the company passing a resolution, to that effect.

Can OCBs (Overseas Corporate Bodies) make similar investments in mutual funds on non-repatriation basis?

Overseas Corporate Bodies can make such investments only in domestic public/ private sector Mutual Funds. They can also make investments in Money Market Mutual Funds.

Who monitors the maximum limits on FII, NRI or PIO investment in Indian companies on a daily basis?

The Reserve Bank of India (RBI).

Is permission of RBI required if an NRI intends to invest in new issues of Indian companies on non-repatriable basis?

No. Indian companies have been granted general permission to accept investments on non-repatriation basis, in shares/convertible debentures by way of new/rights/bonus issue provided the investee company has not undertaken agricultural/plantation activity and/or real estate business excluding real estate development i.e. development of property and construction of houses.

What repatriation benefits are available to NRIs if they invest in Priority Industries?

NRIs are allowed 100% repatriation if they invest in Indian companies engaged in priority industries and those involved in export and trading activity. No prior approval of the RBI is required, but Form ISD is to be submitted along with other documents to the bank’s regional office.

Are NRIs permitted investment in the aviation sector?

Yes, 100% equity participation is allowed in accordance with the RBI’s guidelines, though repatriation is permitted after 5 years of the operations, and only from the accumulated forex earnings, after due taxes are paid.

For Non-convertible debentures of Indian companies, can NRIs investments still be made?

Yes, an NRI can make investment in non-convertible debentures but they need to require necessary permission (submit application) from Reserve Bank (Central Office) by the concerned Indian Company in Form ISD.

Is the ceiling for FIIs dependent of the ceiling of 10/24 per cent for NRIs/PIOs?


Does it require permission from the Reserve Bank required by NRIs for sale/transfer of shares/debentures of Indian companies to other NRIs?

No. Transfer of shares/debentures of Indian companies by NRIs to other non-residents does not require permission of Reserve Bank. However, the transferee NRI would need permission for purchase of such shares for which an application is required to be made to Reserve Bank in form FNC.

What is the procedure to be followed for repatriating income from non-repatriable assets in India?

An application to a designated branch of an authorised dealer in Form RCI has to be submitted along with a certificate from a Chartered Accountant. The dealer would then credit the amount repatriable, after due deduction of tax, to the applicant’s NRE/FCNR account.

Are NRIs allowed to invest in companies dealing in real estate?

Yes, upto 100% of the new issue of Indian companies engaged in construction, real estate development and funding of housing development.

Are bonds issued by PSUs and purchase of shares of public sector undertakings open to investment by NRIs?

Yes, with repatriation benefits. In the case of public sector undertakings, NRI holding should not exceed 1% of the paid-up capital. The investment must come from inward remittance through the authorized dealer or through the NRE/FCNR account. Applications are made through the designated SBI branch.

Are deposits with companies allowed to NRIs?

Yes, funds in Fixed Deposits are permitted with full repatriation benefits after 3 years.

Sector Specific Foreign Direct Investment in India

Hotel & Tourism : FDI in Hotel & Tourism sector in India

100% FDI is permissible in the sector on the automatic route.

The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and organisations.

For foreign technology agreements, automatic approval is granted if

Up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects, design, supervision, etc.

Up to 3% of net turnover is payable for franchising and marketing/publicity support fee, and up to 10% of gross operating profit is payable for management fee, including incentive fee.

Private Sector Banking:

Non-Banking Financial Companies (NBFC) : 49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time.

(a) FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below :

Merchant banking


Portfolio Management Services

Investment Advisory Services

Financial Consultancy

Stock Broking

Asset Management

Venture Capital

Custodial Services


Credit Reference Agencies

Credit rating Agencies

Leasing & Finance

Housing Finance

Foreign Exchange Brokering

Credit card business

Money changing Business

Micro Credit

Rural Credit


(b) Minimum Capitalization Norms for fund based NBFCs :

For FDI up to 51% - US$ 0.5 million to be brought upfront

For FDI above 51% and up to 75% - US $ 5 million to be brought upfront

For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be brought upfront and the balance in 24 months

(c) Minimum capitalization norms for non-fund based activities :

Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment.


(d) Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital)

(e) Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above.

(f) FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.

Insurance Sector : FDI in Insurance sector in India

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining licence from Insurance Regulatory & Development Authority (IRDA).

Telecommunication: FDI in Telecommunication sector

In basic, cellular, value added services and global mobile personal communications by satellite, FDI is limited to 49% subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which investment is being made) to the license conditions for foreign equity cap and lock- in period for transfer and addition of equity and other license provisions.

ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval. These services would be subject to licensing and security requirements. No equity cap is applicable to manufacturing activities.

FDI up to 100% is allowed for the following activities in the telecom sector :

ISPs not providing gateways (both for satellite and submarine cables);

Infrastructure Providers providing dark fiber (IP Category 1);

Electronic Mail; and

Voice Mail

The above would be subject to the following conditions :

FDI up to 100% is allowed subject to the condition that such companies would divest 26% of their equity in favor of Indian public in 5 years, if these companies are listed in other parts of the world.

The above services would be subject to licensing and security requirements, wherever required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

Trading : FDI in Trading Companies in India

Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house. However, under the FIPB route.

Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment.

FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted formulations.

FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology, and specific cell / tissue targeted formulations will require prior Government approval.

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