Foreign Direct Investment (FDI) has become a very attractive means of investment lately. A type of investment wherein an individual or a firm located in country A invests in the business located in country B, there have been numerous questions related to it including a very important one being how to get funds under FDI. Some common types of FDI undertaken over the years include Horizontal, Vertical and Conglomerate Foreign Direct investments.
Let us try to understand and grasp this concept with the help of an example wherein a UK firm wants to fund its Indian venture. The following channels can be used to achieve the same:
- Equity Capital being a very traditional means of funding, allows the company to issue the amount of equity capital which is limited to the authorised capital which is mentioned in the Memorandum of Association that applies to it. In case an entity which is a non-resident of the country it wants to invest in, being the Indian LLP in this case, it can be done provided the funds are infused by means of a contribution whilst adhering to the conditions laid down by the FDI.
- Preference Share Capital is the medium through which the investors in UK can invest in an Indian company via convertible preference shares that can be converted into equity shares and are further treated as a foreign direct investment. External commercial borrowings (ECB) are another means of investment which are not converted into equity shares but need to adhere to the ECB guidelines.
- External Commercial Borrowings (ECB) are the debts which an Indian company raises in a foreign country. The Ministry of Finance and Reserve Bank of India regulate these ECBs. Two routes are available to access the ECBs comprising of an automatic route which requires post facto intimation filings (as mentioned in the FEMA regulations) need to be made and approval route as part of which a formal permission needs to be obtained from the RBI to be able to raise the external commercial borrowings (ECBs).
- Debentures and Borrowings are means by which companies are able to raise funds, bonds, and other debt-related securities. Further, deposits from the public can also be collected in order to raise these funds. Foreign investments done in the form of convertible debentures which can be further converted into equity shares are considered as foreign direct investment.