FDI in Private Limited Company

FDI in Private Limited Company

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FDI in Private Limited Company

Greater connectivity and relaxation of regulatory regimes has encouraged globalization and the free flow of capital across countries. Businesses, both big an small, are going international in an effort to win market share and maximize profits. In this context, India has become a key market for most businesses and there there tremendous interest among foreign companies and foreign nationals to setup a business in India. Foreign Direct Investment (FDI) is one of the most popular route for foreigners to start a business in India and in this article we visit FDI in Private Limited Company.

Foreign Direct Investment Overview

The Indian Government is keen on increasing foreign investment in India and has taken various policy decisions to encourage FDI. The FDI Policy in India is regulated by the Department of Industrial Policy and Promotions (DIPP), Ministry of Commerce and Industry. A consolidated circular issued by the DIPP services as an important policy note on FDI and the latest FDI Circular was issued 17-4-2014.

As per regulations, FDI means investment by non-resident entity/person resident outside India and includes all types of foreign investment in India including investment by FIIs, investment by NRI, investment by foreigners or foreign entities, etc.,

FDI in Private Limited Company

FDI in Private Limited Company is allowed for non-resident entities, subject to the FDI Policy and sectoral caps. FDI in a Private Limited Company falls under two categories, automatic route or approval route. FDI is permitted upto 100% in most of the sectors other than those sectors which are capped or restricted. In cases where automatic approval is not allowed, prior approval from the Foreign Investment Promotion Board (FIPB) of the Government of India must be obtained prior to the investment. Further, citizens or entities of Bangladesh or Pakistan can invest in India, only under the approval route.

FDI in a Private Limited company can be through various equity instruments. Indian companies can issue equity shares, preference shares and convertible debentures, subject to the norms and guidelines. The equity shares of a private limited company issued under FDI must as at fair value. However, in case of a newly incorporated entity or subscription to the Memorandum of Association during Company Incorporation by a NRI or Foreigner, the shares can be issued at face value.

Illustration of FDI in Private Limited Company
Illustration of FDI in Private Limited Company

FDI Prohibited Sectors

FDI in the following sectors is prohibited completely:

  • 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

FDI in Private Limited Company under the automatic route is not permitted for the following sectors. Hence, prior approval of the FIPB is required.

  • 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

FDI under Automatic Route

In case the activity proposed to be undertaken by the foreign or non-resident entity in India, doesn’t fall under the FDI prohibited or approval category, FDI under the automatic route is permissible. Under automatic route, an application for FDI in the Private Limited Company is not required, if the investment is within the FDI cap. Download sector wise FDI cap in India.

Under the automatic route, no prior permission of the FIPB or RBI is required for FDI in a Private Limited Company. The Company must only file certain filings relating to the FDI with the Reserve Bank of India after receipt of the share subscription money from the foreign or non-resident investor and issuance of shares. Further, under the automatic route, the investment cannot be made in a company which required an industrial license under the Industries Act, 1951 or for acquisition of another Indian companies existing shares or for financing an expansion.

It is important to note that, majority of the sectors in India are eligible for 100% FDI under the automatic route, wherein a FDI report has to be filed only after issuance of shares for the foreign or non-resident entity. Therefore, the process for starting a business in India for Foreign Nationals and Non-Resident Indians is very smooth and easy.

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Comments (3)

eswar vandanapu

Oct 15, 2015 at 4:20 AM

We are trying to start a new venture with 100% FDI for a software company. How do we go about starting the company during the incorporation period. I was advised to start a company with Indian promoters, and then require the US company to buy in. In this process, Indian directors are left with a small percent share however small it is.

Is there a way to start a company where initial investors are US companies. Does it require any special approvals etc?

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