Foreign Direct Investment – Company Registration in Madurai

Company Registration in Madurai Foreign Direct Investment what we are going to discussed in this article.

Foreign Direct Investment

Government wishes to facilitate Foreign Direct Investment (FDI) and investment from Non-resident Indians (NRIs) including overseas corporate bodies (OCBs) that are predominantly owned by them, to complement and supplement domestic investment. Investment and returns are freely repatriable, except where the approval is subject to specific conditions such as lock in period on original investment, dividend cap, foreign exchange neutrality, etc., as per the notified sectorial policy. The statement of dividend balancing that was available to FDI in 22 describes consumer goods and services  industries stands withdrawn for dividends declared after 14th July, 2000, the date on which Press Note. No. 7 of 2000 Series was issued. Foreign direct investment was freely allowed in all sectors including the services sector, except where the existing and notified sectorial policy does not permit FDI beyond a ceiling. FDI for virtually all items and activities can be brought in through the automatic routes under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through government approval. Government Approvals are accorded on the recommendations of the Foreign Investment Promotion Board (FIPB), chaired by the Secretary, Department of Industrial policy and Promotion (Ministry of Commerce and industry) with the Union Finance Secretary, commerce secretary, and other key secretaries of the Government as its members.

New Ventures

All items/services for FDI/NRI/OCB investment up to 100% fall under the automatic route except those covered under following. Whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route. Investment In public sector units as also for EOU/EPZ/SEZ/EHTP/STP units would also quality for sectorial policy and equity caps and RBI will ensure compliance of the same. The National Industrial Classification (NIC) 1987 shall remain applicable for description of activities and classification for all matters relating to FDI/NRI/OCB investment. Areas or sectors or activities hither to not open to FDI/NRI/OCB investment shall continue to be so unless otherwise decided and notified by Government. Henceforth any change in sectorial policy or sectorial equity cap shall be notified by the Secretariat for industrial assistance.

Existing Companies


  • Besides new companies, automatic route for FDI/NRI/OCB investment is also available to the existing companies to induct foreign equity. For existing companies with an expansion program, the additional requirement are that the increase in equity level must result from the expansion for the equity base of the existing company without acquisition of existing shares by FDI/NRI/OCB and the money to be remitted should be in the sectors under the automatic route. Otherwise the proposal would need Government approval through the FIPB. For this, the proposal must be supported by a Board Resolution of the existing Indian Company.
  • For existing companies without any expansion program, the additional requirements for eligibility for automatic route are that they are engaged in the industries under automatic route regardless of whether the original activities were undertaken with government approval or by accessing the automatic route), the increase in equity level must be from expansion of the equity base, and the foreign equity must be in foreign currency.
  • The earlier SEBI requirement, applicable to public limited companies, that shares allotted on preferential basis shall not be transferable in any manner for a period of 5 years from the date of their allotment has now been modified to the extent that not more than 20 percent of the entire contribution brought it by promoter cumulatively in public or preferential issue shall be locked in.
  • The automatic route for FDI and/or technology collaboration would not be available to those who have or had any previous joint venture or technology transfer or trademark agreement in the same or allied field in India.
  • Equity participation by international financial institutions such as ADB, IFC,CDC,DEG, in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and sector specific caps on FDI.
  • In a major drive to simplify procedures for foreign direct investment under the automatic route, RBI has given permission to Indian companies to accept investment under this route without obtaining prior approval from RBI. Investors are required to notify regional office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to foreign investors. This facility is available to NRI/OCB investment also.

Government Approval

For the following categories, Government approval for FDI/NRI/OCB through the FIPB shall be necessary:

  • All proposals that require an Industrial license which includes the item requiring an Industrial License under the Industries (Development and Regulation) Act, 1951, and the foreign investment being more than 24% in the equity of units manufacturing items reserved for small scale industries and all items which require an industrial license in terms of the location policy notify by government under the new Industrial policy of 1991.
  • The proposals in which the foreign collaborator has a previous venture / tip-up in India. The modalities prescribed in Press note No.18 dated 14-12-1998 of 1998 series, shall apply in such cases. However, this shall not apply to investment made by, multilateral financial institution such as ADB, IFC, CDC, DEG, etc., as also investment made in IT sector.
  • All proposals relating to acquisition of shares in existing Indian company in favor of FDI/NRI/OCB investors.
  • All proposals falling outside notified sectorial policy or caps or under sectors in which FDI is not permitted.
  • Whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route, he or she may do so.

Areas or sectors or activities hitherto not open to FDI/NRI/OCB investment shall continue to be so unless otherwise decided and notified by the secretariat for Industrial assistance in the Department of Industrial policy and promotion. RBI has granted permission under Foreign Exchange Management Act (FEMA) in respect of proposals approved by the Government. Indian Companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors. Such companies are, however, required to notify the Regional Office concerned of the RBI of receipt of inward remittance within 30 days of such receipt and to file the required document with the concerned regional offices of the RBI within 30 days after issue of shares to the foreign investors. For greater transparency in the approval process, Government has announced guidelines for consideration of FDI proposals by the FIPB. The guidelines are stated in Annexure 3. The Sector specific guidelines for `FDI and Foreign Technology collaborations are stated in Annexure 4.

Issue and valuation of shares in case of existing companies


Allotment of shares on preferential basis shall be as per the requirements of the Companies Act, 1956, which will require special resolution in case of a public limited company. In case of listed companies, valuation shall be as per the RBI/SEBI guidelines as follows: The issue price shall be either at:

  • The average of the weekly high and low of the closing prices of the related shares quoted on the Stock Exchange during the six month proceeding the relevant date; or
  • The average of the weekly high and low of the closing prices of the related shapes quoted on the Stock Exchange during the two weeks preceding the relevant date.

The stock exchange referred to is the one at which the highest trading volume in respect of the shares of the company has been recorded during the preceding six months prior to the relevant date. The relevant date is the date thirty days prior to the date on which the meeting of the general body of the shareholder is convened. In all other cases a company may issue shares as per the RBI regulation in accordance with the guidelines issued by the controller of capital issues. Other relevant guidelines of Securities and Exchange Board of India (SEBI/RBI) including the SEBI Regulations, 1997, wherever applicable, would need to be followed.

Foreign investment in small scale sector

Under the small scale policy, equity holding by other units including foreign equity in a small scale undertaking is permissible up to 24 percent. However there is no bar on higher equity holding for foreign investment, if the unit is willing to give up its small scale status. In case of foreign investment beyond 24 percent in a small scale unit which manufactures small scale reserved items, an industrial license carrying a mandatory export obligation of 50 percent would need to be obtained.

Foreign Investment policy for Trading Activities


Foreign investment for trading can be approved through the automatic route up to 51% foreign equity, and beyond it’s by the government through the FIPB. For approval through the automatic route, the requirement would be that it is primarily export activities and the undertaking concerned is an expert house or trading house or super trading house and star trading house registered under the provisions of the Export and Import policy in force. The sectorial policy of trading activities is elaborated at series no. 8 in Trading Annexure 4 of this manual. Both in case of automatic and government approvals, the valuation and pricing of shares would be governed by the provisions. Closely held companies would also be governed, by the same guidelines.

Other modes of foreign direct investments

Global depository receipts (GDR)/ American deposit receipts (ADR) / foreign currency convertible bonds (FCCB): Foreign investment through GDRs/ADRs, Foreign currency convertible bonds (FCCBs) is treated as foreign direct investment. Indian companies are allowed to raise the equity capital in the international market through the issue of GDRs/ADRs/FCCBs. There are not subject to any ceilings on investment. An applicant company seeking Government approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of three years. This condition can be relaxed for infrastructure projects such as power generation, telecommunication, and petroleum exploration and refining, ports airports and roads. There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. A company engaged in the manufacture of items covered under Automatic Route is likely to exceed the percentage  limits under the automatic route, whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed 50 percent or 51 percent or 74 percent as the case may be , or which is implementing a project not contained in project falling under government approval route, would need to obtain prior government clearance through FIPB before seeking final approval from the ministry of finance. There is no restriction on the number of GDRs/ADRs/FCCBs issue proceeds, except for an express ban on investment in real estate and stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements; in addition, 25 percent of the FCCB proceeds can be used for general corporate restructuring.

Preference shares


Foreign investment through preference shares is treated as foreign direct investment. Proposals are processed through automatic route or FIPB as the case may be. The following guidelines apply to issue of such shares.

  • Foreign investment in preference shares are considered as part of the share capital and fall outside the external commercial borrowing (ECB) guidelines or Cap.
  • Preference shares to be treated as foreign direct equity for purpose of sectorial caps or foreign equity, where such caps are prescribed, provided they carry a conversion option. If the preference shares or structured without such conversion option, they would fall outside the foreign direct equity cap.
  • Duration conversion shall be as per the maximum limit prescribed under the Companies Act or what has been agreed to in the shareholders’ agreement whichever is less.
  • The dividend rate would not exceed the limit prescribed by the Ministry of Finance.
  • Issue of preference shares should conform to guidelines prescribed by the SEBI and Reserve Bank of India (RBI) and other statutory requirements.

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