Acquisition of Shares by Overseas Entity in India

The investment by the overseas entity in India is known as Foreign Direct Investment (FDI). An investment made by the person resident outside India is governed by the provisions of the Foreign Exchange Management Act, 1999 (FEMA). FEMA empowers the Reserve Bank of India (RBI) to issue regulations and guidelines to prohibit, restrict and regulate foreign investments in India.

Foreign Direct Investment (FDI)-  FDI is the investment by the person resident outside India through the capital instrument-

• In an unlisted Indian Company, or
• In 10% or more of the post-issue paid-up capital on the fully diluted basis of a listed Indian Company.

Capital Instruments are the equity shares, preference shares, share warrants, and the debentures issued by the Indian Company and Indian Company is allowed to receive investment from foreign by issuing capital instruments to the investor.

Overseas Entity can invest in India by two modes:-

1. Automatic Route
2. Approval Route

Automatic Route: in which investment is done by the person who is residing outside India and does not require approval from the Reserve Bank of India (RBI) or the Government.

Approval Route or Government Route: in which the investment is done by the person who is a resident outside India and requires approval from the Government. Prior government approval is mandatory regardless of sector, in case any investment is made by the citizen of Pakistan or Bangladesh or any entity incorporated in these countries.

Sector Cap for each sector is the limit which is indicated against each sector. The total foreign investment should not exceed the statutory cap which is stated. Subject to applicable laws, regulations, security, and other conditions, investment by a person resident outside India in the activities/ sectors given in Regulation 16 of FEMA 20(R) is permitted up to the limit indicated against each activity/ sector.

Prohibited sectors/ persons

1. Investment by a person who is a resident outside India is debarred in the following sectors:

• Lottery Business which includes Government/ private lottery, online lotteries.
• Gambling and betting including casinos.
• Chit funds (except for investment made by NRIs and OCIs on a non-repatriation basis).
• Nidhi Company.
• Trading in Transferable Development Rights (TDRs).
• Real Estate Business/ even Construction of Farm Houses.
• Manufacturing of various items like Cigars, cheroots, cigarillos and cigarettes, of tobacco or any kind of tobacco substitutes.
• Activities or sectors which are not open to private sector investment i.e. (i) Atomic energy  (ii) Railway operations
• Foreign technology collaboration in any form whatsoever including license of franchise, trademark, brand name, management contract is also stated prohibited for Lottery Business and Gambling and Betting activities

2. Any investment by a person who is a citizen of Bangladesh or Pakistan or is an entity incorporated in Bangladesh or Pakistan requires prior Government approval.
3. A person, citizen of Pakistan or any entity which is incorporated in Pakistan can, only with the prior Government permission, invest in activities other than defence, space, atomic energy, and sectors debarred for foreign investment.

The onus of compliance with the statutory/ sectoral caps on foreign investment and existing conditions if any, will be on the company receiving foreign investment.

Any investment made by a person resident outside India shall be subject to the investment limits, sectoral caps, or the entry routes, as the case may be, and the existing conditions for making such investment. As per Master Direction No.11/2017-18- Foreign Investment in India issued by RBI and Foreign Exchange Management (Transfer or Issue of Security by a Person resident Outside India) Regulations, 2017, a person resident outside India may invest as stated hereinafter:-

1. PURCHASE or SALE OF CAPITAL INSTRUMENTS OF AN INDIAN COMPANY BY A PERSON WHO IS RESIDENT FROM OUTSIDE INDIA

• Issue by an Indian company- An Indian Company may, subject to the sectoral cap, entry routes, and attendant conditionalities prescribed in the FDI Scheme, issue equity instruments to persons resident outside India.
• Issue by a listed Indian company- purchase on the stock exchange- A person resident outside India may purchase equity instruments of a listed Indian company on a stock exchange in India, provided that
• the person investing has already acquired control of such company in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 and continues to hold such control
• the amount of consideration may be paid as per the mode prescribed by RBI or out of the dividend payable by the Indian investee company; provided further that such dividend credited to specially designated non-interest bearing rupee account for the acquisition of shares on the recognized stock exchange.
• Issue by a wholly-owned subsidiary- A wholly-owned subsidiary of a person resident outside India engaged in the sector where 100% foreign investment is permitted under automatic route and there are no FDI linked performance conditions, may issue capital instruments against pre-incorporation/ preoperative expenses incurred by the said non-resident entity up to a limit of five percent of its authorized capital (as defined in the Companies Act, 2013) or USD 500,000 whichever is less, subject to the conditions prescribed by the RBI.
• Issue of shares by other modes- An Indian company may issue capital instruments to a person resident outside India under an automatic route or Government approval route, as the case may be, if the Indian investee company is engaged in such sectors against:
• Swap of capital instruments, or
• Import of capital goods which excludes second-hand machinery
• Pre-operative or pre-incorporation expenses which includes payments of rent etc.

2. PURCHASE/ SALE OF CAPITAL INSTRUMENTS OF A LISTED INDIAN COMPANY ON A RECOGNISED STOCK EXCHANGE IN INDIA BY FOREIGN PORTFOLIO INVESTORS

‘Foreign Portfolio Investor (FPI)’ is a person registered in accordance with the provisions of SEBI (Foreign Portfolio Investors) Regulations, 2014. FPI may buy or sell capital instruments of an Indian Entity on a recognized stock exchange in India subject to the prescribed conditions.

• As per SEBI (FPI) Regulations, 2014, total holding by each FPI or an investor group should be-

• Individual limit, less than 10% of the total paid-up equity capital on a fully diluted basis or less than 10% of the paid-up value of each series of preference shares or debentures or warrants issued by an Indian company and
• Aggregate limit, should not exceed 24% of paid-up equity capital on a fully diluted basis or paid-up value of each series of debentures or preference shares or warrants

The aggregate limit may be increased up to the sectoral cap by passing the Special resolution, but once it is increased, it cannot be reduced.

• An FPI is allowed to purchase through the public offer/ private placement the capital instruments of an Indian company, subject to the individual and aggregate limits as specified above.
• FPI might accept short selling in addition to lending and borrowing of securities subject to such conditions as may be stipulated by the RBI and SEBI from time to time.

3. PURCHASE/ SALE OF CAPITAL INSTRUMENTS OF A LISTED INDIAN COMPANY ON A RECOGNISED STOCK EXCHANGE IN INDIA BY NON-RESIDENT INDIAN (NRI) OR OVERSEAS CITIZEN OF INDIA (OCI) ON REPATRIATION BASIS

An OCI or NRI is allowed to purchase or sell capital instruments on a stock exchange of a listed company on a repatriation basis subject to the following conditions-

• The transaction is done through a designated Authorized Dealer (AD) bank
• The total holding of OCI or NRI shall not exceed the following-

• Individual limit of 5% of the total paid-up equity capital on a fully diluted basis or less than 5% of the paid-up value of each series of preference shares or debentures or warrants issued by an Indian company and
• Aggregate limit of 10% of the total paid-up equity capital on a fully diluted basis or paid-up value of each series of debentures or preference shares or warrants
  • By passing the special resolution by the Indian Company, the aggregate limit can be increased to 24%.

4. PURCHASE/ SALE OF CAPITAL INSTRUMENTS OF A LISTED INDIAN COMPANY ON A RECOGNISED STOCK EXCHANGE IN INDIA BY NON-RESIDENT INDIAN (NRI) OR OVERSEAS CITIZEN OF INDIA (OCI) ON A NON-REPATRIATION BASIS

• A Non-resident Indian (NRI) or an Overseas Citizen of India (OCI), including a company, a trust, and a partnership firm incorporated outside India and owned and controlled by OCIs or NRIs, is permitted to contribute/ purchase on a non-repatriation basis to the following:
• Capital instrument issued by a company without any limit either on the stock exchange or outside it, or
• Units allotted by an investment vehicle with no limit, either on the stock exchange or on outside, or
• capital of a Limited Liability Partnership without any limit, or
• Convertible notes allotted by any start-up company in agreement with FEMA 20(R).
• The investment, as stated above, shall be deemed to be domestic investment at equivalence with the investment made by residents.
• An NRI or an OCI is permitted to invest by way of contribution to the capital of a firm or a proprietary concern in India, on a non-repatriation basis. The investee firm or proprietary concern should not be engaged in any print media or agricultural/ plantation activity or real estate business i.e., dealing in land and immovable property to earn profit or income therefrom.

5. INVESTMENT IN A LIMITED LIABILITY PARTNERSHIP (LLP)

• With effect from May 20, 2011, foreign investors are allowed to invest in the contribution of LLP
• A person resident outside India (other than a citizen of Pakistan or Bangladesh or an entity incorporated in Pakistan or Bangladesh), not being an FPI or an FVCI, is allowed to contribute to the capital of an LLP operating in sectors/ activities where foreign investment up to 100% is allowed under automatic route and there are no FDI linked performance conditions.

6. INVESTMENT BY A FOREIGN VENTURE CAPITAL INVESTOR (FVCI)

• With effect from December 26, 2000, investment by FVCI is allowed.
• An FVCI is permitted to invest in-

• unlisted securities of an Indian company engaged in the following sectors:
• Biotechnology
• IT in relation to hardware and software development
• Nanotechnology
• Seed research and development
• R&D of new chemical units in the pharmaceutical sector
• Dairy industry
• Poultry industry
• Production of bio-fuels
• Hotel-cum-convention centers with a seating capacity of more than three thousand.
• Infrastructure sector
• Startups, irrespective of the sector
• Units of VCF or Cat-I AIF or units of any scheme or any fund set up.

7. INVESTMENT BY A PERSON RESIDENT OUTSIDE INDIA IN AN INVESTMENT VEHICLE

• Investment in Investment vehicles by the person resident outside India is permitted with effect from November 26, 2016.
• It can issue its units to the person resident outside India against swap of capital instruments of an SPV proposed to be acquired by such Investment Vehicle.
• If the Sponsor or the Manager or the Investment Manager

• is not owned or controlled by resident Indian citizens or
• is owned or controlled by a person who is a resident outside India,

then the Investment made by an Investment Vehicle into an Indian entity shall be reckoned as indirect foreign investment for the investee Indian entity.

8. ISSUE OF INDIAN DEPOSITORY RECEIPTS (IDRS)

• A person resident outside India and in India can subscribe to the IDRs issued through a domestic depository by the Company incorporated outside India. The issue of IDR shall comply with the Companies Act and SEBI Regulations.
• Prior approval of sectoral regulators is required before any issue of IDRs by the financial or banking companies having a presence in India, either through subsidiaries or branches.
• IDRs shall be denominated in Indian Rupees and the proceeds of the IDRs shall be immediately repatriated outside India by the issuing companies.

9. ACQUISITION THROUGH RIGHTS ISSUE OR BONUS ISSUE

A person resident outside India can invest in the Indian Company through a right issue or bonus issue subject to the following conditions-

• the issue shall be made as per the provisions of Companies Act, 2013 and FEMA 20(R);
• the issue shall be within the sectoral cap applicable to the company
• The capital instruments (other than share warrants) acquired by the person resident outside India as a bonus or rights issue will be subject to the same conditions as applicable to the original holding against which rights or bonus issue has been made, including restrictions regarding repatriability.

10. ISSUE OF EMPLOYEES’ STOCK OPTIONS SCHEME (ESOP) AND SWEAT EQUITY SHARES

ESOP or sweat equity shares are allowed to be issued by the Indian Companies to its employees or directors or employees or directors of its holding company or wholly owned overseas subsidiary/ subsidiaries or joint venture, who are resident outside India, subject to the following conditions:

• ESOP is as per the provisions of SEBI and Companies Act, 2013,
• ESOP/ sweat equity shares shall be within the sectoral cap applicable to the company,
• Under the approval route, prior approval is required for the issue of ESOP/ sweat equity shares.
• Issue of ESOP/ sweat equity shares to a citizen of Bangladesh/ Pakistan requires prior Government approval.
• It was permitted w.e.f. June 11, 2015

CONCLUSION 

A person resident can invest in the Indian Companies subject to the entry routes, sectoral cap, and attendant conditionalities prescribed under the FDI scheme. Indian Companies can issue the capital instruments as per the provisions of the Companies Act, SEBI (in the case of listed companies), and RBI Regulations.

We, at Ab Initio, guide you and advises you to choose the right path by following the right method of investing in the Indian Entity and setting up your business in India by complying with the law of land. We aim to simplify the processes and make them faster and efficient.

Disclaimer: The whole contents of this document have been prepared on basis of relevant provisions and as per the information present at the time of its preparation. Though care has been taken to ensure the accuracy and reliability of the information provided. Users of this information are expected to refer to the relevant existing provisions of applicable Laws as on a particular date. I assume no responsibility for the consequences of the use of the contents of this Article.