Provisions of FDI in Private Limited Company

Provisions of FDI in Private Limited Company

Lawdef- Provisions of FDI in Private Limited Company

In the earlier time the foreign direct investments were completely prohibited in India. Thus even if the foreign company desired so, it could not make investment in the Indian Company. However, with the changes in the policies the concept of globalisation is gaining a lot of popularity. India being is one of the biggest economies and market that makes it a favourable destination for the investors from all over the world. Foreign Direct Investment is one of the most popular and easiest routes for the foreign investors to start business in India.  With this article we will be taking a look at the various provisions of Foreign Direct Investment in relation to the private limited companies.

 What is FDI status in India?

FDI is the abbreviated form of the Foreign Direct Investment.  In order to boost the economy and the Indian government is very keen to increase the foreign investment in the Indian market.  Various policies are being designed by the government to make the routes for foreign investment simpler. The Department of Industrial Policy and Promotions (DIPP), Ministry of Commerce and Industry in India is the one who regulates and designs the policies regarding FDI.

Foreign Direct Investment is the investment made by the non-resident entity/person resident outside India in the Indian company. The FDI includes all types of foreign investment in India including investment by FIIs, investment by NRI, investment by foreigners or foreign entities, etc.

What are the provisions of FDI in private limited company?

Under the new FDI policy the 100% FDI is allowed subject to the sectoral caps. There are number of routes for raising the funds like the automatic route, prohibited route and the prior approval route. In India some sections of the society comes under the prohibited route wherein no FDI is allowed at all. The sections are prohibited keeping in mind the national security and integrity.  The FDI can be made by the investor through various modes like equity shares, preference shares and convertible debentures. However the issue of securities to foreign investors is subjected to certain restrictions and guidelines that need to be considered by the company.

FDI under Automatic Route

FDI under the automatic route is the situation wherein the foreign investor is not required to obtain any prior permission from FIPB or RBI. The proposed company is just required to do some filing with reserve bank of India after receiving the subscription money. However, one thing to be noted here is that the investment cannot be made in the company that requires the industrial license or for the purpose of acquisition.

In India most of the sector are eligible for the 100% FDI  and only a few sector are restricted.  If the proposed activity to be undertaken does not fall in the FDI prohibited or approval category then FDI can be done under the automatic route.  This makes the procedure of starting the business for foreigners in India easy.

FDI Prohibited Sectors

The below mentioned are the prohibited sectors for the purpose of Foreign direct Investment

  • Atomic Energy
  • Lottery business including government lottery and online lottery (even foreign collaboration, franchise, trademark, brand name, management contract is prohibited)
  • Gambling and betting including casino (even foreign collaboration, franchise, trademark, brand name, management contract is prohibited)
  • Business of chit funds
  • Nidhi Company
  • Trading in transferable development rights
  • Real estate business or construction of farm house (except development of townships, roads or bridges, city and regional infrastructure, etc.,)
  • Manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or of tobacco substitutes
  • Activity / sector not opened to private sector investment [e.g. Atomic energy and Railway Transport (other than Mass Rapid Transport Systems)].

FDI under Approval Route

For the below mentioned sector the FDI is subject to the prior approval by the FIPB –

  • Petroleum sector (except for private sector oil refining), Natural gas/LNG Pipelines
  • Investing companies in Infrastructure & Service Sector
  • Defense and strategic industries
  • Atomic minerals
  • Print media
  • Broadcasting
  • Postal services
  • Courier services
  • Establishment or operation of satellite
  • Development of integrated township
  • Tea sector
  • Asset Reconstruction Company

One important thing to be noted here is that the investment by the investor of Bangladesh and Pakistan is always subject to the prior approval.