Since the economic liberalization of 1991, India has witnessed very significant growth in inbound foreign investment from across the globe in almost all sectors of the economy. In 2018-19 alone, it is estimated that foreign investment of $62 billion was pumped by global investors in various Indian businesses.
What are the options available for raising investment from overseas?
On a broad view, there are two options for businesses that are looking to raise funds from overseas. The first option is raising investments through shares and convertible instruments, which is generally termed as Foreign Direct Investment (FDI) and the second option is to raise funds as borrowings from abroad, i.e. External Commercial Borrowings (ECB)
Foreign Direct Investment
Foreign direct investment simply means the investment in the shares of an Indian entity, by a foreign person or entity. This investment may be done through equity shares or any other instruments like convertible preference shares, which are compulsorily convertible to equity shares after a certain period or on the happening of some events.
Eligible investors for FDI
All the foreign nationals, foreign entities, and NRIs are eligible for investing in an Indian entity as FDI.
Can all business sectors accept Foreign Direct Investment?
Except for the prohibited sectors, all business sectors are allowed to accept FDI, subject to the maximum prescribed limits of foreign investment set by the government. These maximum limits are called sectoral caps. Following are the prohibited sectors for FDI:
- Real Estate Business or Construction of farmhouses
- Nidhi Company
- Chit Funds
- Lottery Business including Government lottery, private lottery, online lotteries, etc
- Gambling and Betting including casinos
- Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or tobacco substitutes
- Activities/business sectors not open to private sector investment e.g. Railways, Atomic Energy etc.
Even though FDI is allowed in all sectors other than the prohibited sectors, there are certain sectoral caps set by the government for accepting FDI. For example, for a company operating in multi-brand retail business (supermarkets etc), maximum permissible foreign investment is 51% of the total capital of the company. i.e., if the total capital of the company is Rs 1 Crore, out of that maximum 51 Lakhs can be from FDI.
So, when you are planning for an FDI, it is advisable to check the sectoral caps before initiating your discussion with a potential investor.
FDI entry routes
Generally, there are three routes available for a company that is aiming to raise foreign capital
- Government route – For government route, prior approval from the central government is required before raising foreign capital. Eg: In the food product retail trading sector, 100% FDI is permitted, but with prior approval of the government. Also, prior government approval is mandatory for foreign direct investments from countries that share a land border with India.
- Automatic route – Under the automatic route, prior approval from the government is not required for raising investment. But, post-investment reporting is required. Eg: 100% FDI is allowed in the Information Technology (IT) and Business Process Management (BPM) sector, single brand product retail sector etc. through automatic route.
- Partial automatic and partial government route – Under this route, a part of the investment can be brought in without any prior approval and the balance part needs prior approval from the government. Eg: In private sector banking foreign investment even though 100% foreign investment is allowed, only up to 49% percent of the capital can be brought in without prior approval, and balance 51% need prior government approval.
Eligible entities for accepting FDI
Companies formed under Companies Act, 2013 (or any previous companies act) and LLPs can accept FDI in India subject to the FDI policy of the Government of India (updated from time to time). Indian companies can raise foreign direct investment by issuing equity shares or compulsorily convertible preference shares, subject to the sectoral cap and prohibitions in respective business sectors.
However, LLPs are allowed for FDI only where 100% FDI is allowed. In other terms LLPs are not allowed to raise FDI in prohibited sectors, sectors with sectoral caps and sectors require partial or full prior approval from the government.
External Commercial Borrowings
As the name indicates, External Commercial Borrowings is a debt mode of overseas funding. As per the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations, dated 26 March 2019 (updated on 08 August 2019), all entities eligible to receive FDI, are also eligible for raising external commercial borrowing from overseas. As per the notification, ECB can be raised as loans including bank loans; floating fixed-rate notes, bonds, debentures etc. ECB can be raised from NRIs, foreign nationals and entities, subject to the conditions notified by the Reserve Bank of India.
Author – CA. Arun Chacko FCA