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How FDI helps Private Limited Companies

Monisha Chaudhary

| Updated: Mar 25, 2019 | Category: Private Limited Company

FDI, known as the Foreign Direct Investment, helps Private Limited Companies in raising or obtaining funds, setting up the business, and with various other projects which aren’t easily available in India. There are various sources through which FDI can be obtained. But before we discuss how FDI can help private limited companies, it’s worthwhile to understand the exact meaning of FDI.

What is FDI?

Foreign direct investment (FDI) is a form of investment that controls business from one country to another. Typically, foreign direct investment consists of mergers and acquisitions which again include profits from the establishment of new facilities, reinvestment in overseas operations, and intra-company loans.

In short, foreign direct investment refers to the establishment of a new facility that has a lasting management interest in companies operating in economies other than investors. FDI is the sum of equity, other long-term capital and short-term capital, as displayed in the balance of payments.

Who controls FDI in India?

According to the Organization for Economic Co-operation and Development (OECD), investments of 10% or more from abroad are considered as FDI. In India, foreign direct investment policies are regulated by the Foreign Exchange Control Act of 2000, which is administered by the Reserve Bank of India.

Who started FDI in India?

Economic liberalization in India is the result of ongoing economic reforms in India which started on July 24, 1991. After independence in 1947, India followed socialist policies. Efforts were made to liberate the economy in 1966 and 1985.

Foreign direct investment (FDI) in Private limited companies

Foreign direct investment (FDI) in Private limited companies allows non-resident entities to be subject to foreign direct investment policies and departmental caps. FDI in Private limited companies is divided into two categories, namely automatic routes or approved routes. With the exception of restricted sectors, most departments allow foreign direct investment up to 100%. If automatic approval is not allowed, prior approval must be obtained from the Government of Foreign Investment Promotion (FIPB) of the Government of India. In addition, citizens or entities in Bangladesh or Pakistan can only invest in India under the approval route.

Foreign direct investment in Private limited companies can be passed through various equity instruments. Indian companies can issue stocks, preferred stocks and convertible bonds, subject to specifications and guidelines. The equity of Private limited companies issued under foreign direct investment must be calculated at fair value. However, if a newly formed entity or an NRI or foreigner subscribes to the memorandum of association (MOA) during company registration, the stock may be issued at face value.

Which departments are under the approval routes of foreign direct investment?

The following industries do not allow foreign direct investment from Private limited companies under the automated route. Therefore, the FIPB needs to be approved in advance.

  • Oil sector (except private sector refining), natural gas / liquefied natural gas pipeline
  • Investment company in infrastructure and services
  • Defence and strategic industries
  • Atomic mineral
  • Print media
  • broadcast
  • Postal service
  • Delivery Service
  • Establishment or operation of a satellite
  • Develop integrated townships
  • Tea industry
  • Asset reconstruction company

Which departments are prohibited by the Foreign Direct Investment?

Foreign direct investment in the following sectors is completely banned:

  • Gambling and betting including casinos (prohibition of foreign cooperation, franchising, trademarks, brand names, management contracts)
  • Fund business
  • Transactional transferable development rights
  • Atomic energy
  • Lottery business
  • Real estate business or farm construction (except for the development of towns, roads or bridges, urban and regional infrastructure, etc.)
  • Cigarettes that make cigars, cigars, cigarillos and tobacco or tobacco substitutes
  • Activities/departments are not open to private sector investment [example atomic energy and rail transport (except for large-scale rapid transit systems)].

 Learn about the impact of FDI on e-commerce retailers and business.

Are the investments and profits earned in India reputable?

All foreign investments are independent repatriation except for those cases, where NRIs choose to invest exclusively under non-reversible schemes. The dividend declared on foreign investments can be freely transmitted through an authorized dealer.

FDI under automatic route

Foreign direct investment under the automatic route is also permitted if the proposed activity is undertaken by a foreign or non-resident entity in India and is not a prohibited foreign direct investment or approved category. According to the automatic route, if the investment is within the foreign direct investment ceiling, there is no need to apply for foreign direct investment in a private limited company.

Under the automatic route, foreign direct investment registered by a private limited company does not require prior authorization from FIPB or RBI. After receiving stock subscriptions and issuing shares of foreign or non-resident investors, the company can only submit certain statements relating to foreign direct investment to the Reserve Bank of India. In addition, under the automatic route, investment cannot be made by companies that require industrial licenses under the Industrial Law of 1951, nor can they be used to acquire existing shares of other Indian companies or for financing and expansion.

Therefore, it is worth noting that most sectors of the Indian economy are opening 100% of foreign direct investment under the automatic route, and foreign direct investment reports need to be submitted only after the issuance of foreign or non-resident shares. entity. Therefore, the process of starting a business for foreigners and non-resident Indians in India is very smooth and smooth.

What is the current FDI rate in India?

Currently, for single-brand retail, foreign direct investment is allowed up to 49% under the automated route. Similarly, foreign airlines can now invest up to 49% on routes approved by Indian Airlines.

Which state has the highest FDI in India?

Studies say that India’s top six states, namely Maharashtra, Delhi, Karnataka, Tamil Nadu, Gujarat, and Andhra Pradesh have more than 70% of foreign direct investment assets flowing into India which clearly indicates the concentration of foreign direct investment.

Which department has attracted the largest foreign direct investment in India?

The statistics show the distribution of foreign direct investment (FDI) equity inflows in India in FY 2018, based on the industry. The telecommunications industry accounts for the largest share of Indian foreign direct investment inflows, with a total value of $6.14 billion in the fiscal year 2018.

 

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Monisha Chaudhary

Experienced Legal and Advisory professional with 5+ years of workings in the field of compliance, statutory governance and licensing, RBI, IRDAI matters etc.

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