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Equity Inflow in FDI

Foreign Direct Investment is a significant source of funding for companies that fail to amass capital that is readily available. FDI is an investment made by an individual or a firm that is placed outside the country where the investment is being made.

As per the Organization for Economic Corporation and Development (OECD), an investment crossing the threshold of 10 per cent is considered as an overseas investment. The Foreign Exchange Management Act, 2000, which is governed by the Reserve Bank of India (RBI) regulates the foreign direct investment policy in India.

There are two routes under which a foreign entity can invest in India

  1. Automatic Route: Under the automatic route, the borrower can get a loan from a foreign entity without a prior approval from the Reserve Bank of India. However, here the loan agreement has to be registered with the RBI.

  2. Government Route: Under the Government route, in order to get a loan from a foreign entity, the borrower is required to submit an application with the RBI in the prescribed form through authorized dealer as specified by the RBI.

Apart from the outlined 11 sectors or activities where Government approval is obligatory, applications in the “grey area” where there is a doubt over which Ministry should the application fall under, the Department of Industrial Policy and Promotion (DIPP) is responsible for identifying who would be the concerned authority.

To eliminate problems and for a smooth functioning of cases, monthly reviews by the responsible Ministries or Authorities and quarterly review meetings that are co-chaired by the Secretary, Department of Economic Affairs and Secretary, DIPP are also proposed to be carried out to discuss pendency of proposals with the Government.

Various categories of overseas investors holding stakes in Indian business entities (company, partnership firms, proprietary concerns, LLPs), are subject to rules and sectoral caps on ownerships. The categories of foreign investors includes Foreign Portfolio Investors, Foreign Institutional Investors, Foreign Venture Capital Investor, and Non-Resident Indians.

Foreign Portfolio Investors (FPI’s) and Foreign Institutional Investors (FII’s) are permitted to invest and trade in equity securities with a maximum total investment of 24 percent of the issued and paid up capital of a company. This limit can be raised up to the prescribed sectoral cap of that particular industry by passing a special resolution to the effect.

Every non-resident entity is permitted to invest in India under the two approval routes: Automatic route and Government approval route, except in prohibited sectors. However, entities belonging to Bangladesh and Pakistan can only invest via the government route of approval.


NRIs or Person of Indian Origin (PIO) resident outside India are allowed to contribute to the capital of a partnership firm or sole proprietary concern without prior approval, provided:

  1. The contribution is on non-repatriation basis
  2. Investment is done as an inward remittance, or out of NRE/FCNR (B)/NRO account maintained with AD Category-1 Bank.
  3. The Indian firm or proprietary concern should not be engaged in agricultural, print media or real estate business.

In the following cases, investors may apply for prior permission of RBI and Government of India, provided the last two conditions mentioned above are adhered to:

  1. Where investment is preferred to be repatriable by NRIs/PIO.
  2. For investors other than NRIs/PIO.

The decision for the same will be taken by RBI and Government of India on case-by-case basis.


FDI in LLPs was liberalized significantly in 2015 with the objective to promote foreign investment inflows in the country. Up to 100% FDI is allowed in LLPs, provided you are adhering to the specific sectoral limits. In that case, the investment will not require any prior approval by FIPB.

  1. There are no conditions relating to FDI-linked performance.
  2. Foreign companies or individuals can be appointed as Designated Partner as required under Section 7 of Limited Liability Partnership Act, 2008.
  3. LLPs can make further downstream investment in another company or LLP. Earlier they were not permitted to make any downstream investments.
  4. Repatriation of capital is permissible with adherence of appropriate pricing guidelines and reporting requirements.
  5. All investments should comply with relevant provisions of LLP Act, 2008.
  6. LLPs can avail External Commercial Borrowings (ECBs).
  7. FPIs/FVCIs can contribute to the capital of LLPs in India.
  8. In case of companies with FDI, converting into LLP can be done under the automatic route if the investment in sector concerned is within corresponding sectoral limit for automatic investment route.


A Foreign business entity can enter India via a number of alternatives, subject to general conditions mentioned in FDI Policy:

  1. As an Indian Company
    1. By setting up a wholly owned subsidiary
    2. Joint Venture with an Indian entity/person
  2. Operate as a foreign company and be registered with the Registrar of Companies, MCA.
    1. Opening up Liaison office - This type of office is only allowed to collect market information and liaison with the foreign company. They are not allowed to earn income from any activities.
    2. Branch Offices - The scope of activities of BOs is much larger as compared to Liaison Offices. BOs are allowed to generate revenue by various alternatives, such as
      1. Providing professional services
      2. Providing technical support for products imported/assembled/manufactured by the parent/holding company.
    3. Project Offices - Set up to execute specific projects, project offices are allowed in India if :
      1. The foreign entity has secured a contract in India, which will be funded via inward remittance by either a bilateral or multilateral financing agency.
      2. Loan has been sanctioned by a public financial institution or bank to the Indian company contracting the project. If the above conditions are not met, the foreign investor/entity will have to make an application with RBI via its AD bank.

Partnership firms and sole proprietary concerns set up abroad are not allowed to establish Branch or liaison offices in India. Branch/Liaison/Project Offices have to open non-interest bearing current accounts in RBI through AD Banks. Application for setting up offices in India has to be made in Form FNC-1 to RBI along with :

  1. Certificate of Incorporation or Memorandum & Articles of Association attested by Indian Embassy or Notary Public in their home country.
  2. Latest Audited Balance Sheet This form has to be submitted to the designated AD bank for further submission to the relevant department of Reserve Bank of India (Foreign Investment Division), Mumbai.

NRIs are also allowed to contribute to capital of Indian companies by investing in shares on Recognized Stock Exchanges under Portfolio Investment Route. The investment can be repatriable or non- repatriable, but the maximum limit of investment is 10% of paid-up capital of the relevant company. This limit can be raised up to the 24% by passing a special resolution to the effect. Investment is done as an inward remittance, or out of NRE/FCNR (B)/NRO account maintained with AD Category-1 Bank. A report of such investments has to be filed with RBI by AD Bank. 


Except for the prohibited sectors, foreign investors are allowed to invest in small-scale industrial unit operating in various sectors. The investment is limited to 24% of paid-up capital of an SSI unit. To issue more 

than 24% to foreign investors, SSI units have to comply with the following conditions:

  1. Give up its status as SSI, i.e. exceeding prescribed limits of investment in plant and machinery according to Micro, Small and Medium Enterprises Development Act, 2006.
  2. Not engage in manufacture of reserved items.
  3. Comply with relevant sectoral caps.


FDI proposals are processed following a standard operating plan devised by DIPP. The process includes:

  1. Submission of proposal and uploading documents (mentioned below) on Foreign Investment Facilitation Portal.
  2. Department of Industrial Policy and Promotion (DIPP) assigns the case to the concerned Ministry within 2 working days.
    1. Submission of physical copies to concerned department is not required in case of digitally signed documents.
    2. For applications not digitally signed, online communication to applicant will be made to submit one signed physical copy of the proposal to the Competent Authority. Applicants are required to submit required   documents within 5 days of such intimation.
  3. The proposal is circulated online within 2 days to Reserve Bank of India for review from FEMA perspective. All proposals are shared with Ministry of External Affairs (MEA) and Department of Revenue (DoR)for record. Any advice/comments from above mentioned departments are directly shared with concerned Administrative Ministry/Department assigned to decide on the proposal.
  4. Proposals are scrutinized within 1 week and additional information/clarifications, if required, are asked for.
    5. On getting all required information, the Competent Authority is required to give out its decision in next two weeks. Approval/rejection letters are sent online to the applicant, consulted Ministries/Departments and DIPP.
    a. Where total foreign equity inflow is more than Rs 5000 crore, the Competent Authority is required to place the same to Cabinet Committee on Economic Affairs for consideration within timelines.

Following documents are required to be uploaded along with the proposal. Please note, this list is not an exhaustive list - other documents may be required based for specific cases.

  1. From both Investee & Investor Companies/Entities:
    1. Certificate of Incorporation
    2. Memorandum of Association (MOA)
    3. Board Resolution
    4. Audited Financial Statement of Last Financial Year
    5. Article of Association
  2. List of Names, addresses and identification proof of all foreign collaborators of the Investor Company/Entity.
  3. Pre-and Post-investment shareholding pattern of the Investee Company.
  4. An Affidavit stating that all information provided in hard copy and online is the same and correct.
  5. In case of existing ventures, copy of joint venture agreement/shareholders' agreement/ technology transfer/trademark/brand assignment agreement (as applicable).
  6. Copy of Downstream Intimation.
  7. Copy of relevant past FIPB/SIA/RBI approvals, connected with the current proposal.
  8. Relevant Foreign Inward Remittance Certificate (FIRC) in case investment has already flowed in.
  9. High Court order in case of scheme of arrangement.
  10. Valuation certificate as approved by a certified Chartered Accountant.