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All that You Want to Know about Foreign Direct Investment in India

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Foreign Direct Investment in India

Despite the fact that you are a foreigner, you should not find it very difficult to launch a business venture, or even conduct business dealings in India. There is no law that places restrictions on your ‘business dreams’. However, there are restrictions placed on foreign stake holding in Indian commercial enterprises. You will have to comply with these regulations.

In case, you are keen to go for a foreign joint venture or subsidiary in India, you will have to pay the same taxes and duties as domestic establishments do. You are not eligible for any concessions or restrictions. This way, the nation does not incur losses on duties or taxes, due to your multinational bonding.

Which business sectors in India are open to you in the role of a foreign direct investor?

In general, the Indian Government is quite liberal with its FDI policy. Therefore, you are welcome to invest in all sectors, barring agriculture, lotteries, retail trading, tobacco, betting and gambling, and atomic energy.

What routes can you opt for, while investing in a business in India?

You have just two options open to you.

One requires government approval prior to the setting up of your commercial venture. This route comes into play in these scenarios –

  • You propose to acquire a specific number of shares from a well-running Indian establishment. This organization could belong to the sector dealing with financial services. Alternatively, it could be a company, wherein Securities & Exchange Board of India (Substantial Acquisition of Share and Takeovers) Regulations of 1997, apply.
  • You deal with items or activities, wherein an Industrial License plays an important role.
  • You put in a proposal, wherein you (as a foreign collaborator) already possess a technical/financial collaboration in India. Both collaborations share a common field.
  • Your proposal is not acceptable to sectors refusing FDI, or it does not fall in the jurisdiction of notified sectoral caps/policy.

The second route is automatic in nature. Here, you do not need to approach the Reserve Bank of India (RBI) or the Indian Government at all. You will just have to comply with a few regulations after your investment goes through. Finally, RBI will offer you a registration number, which makes your FDI official in nature.

What are the options you have for foreign direct investment in India?

Back-to-Back Trading

RBI places B2B under the automatic route, you are welcome to sell your goods to a retailer or to someone involved with operations (hoteliers, restaurant owners, etc, for example) that are separate from retail trading. Both constitute wholesale business, rather than retail trading.

Returns on Capital Investment and Gains

The correct term for this is repatriation, which is returning to the country of origin. For instance, you have chosen to follow the policy and accompanying compliances suggested by the RBI, you have the choice to remit foreign exchange to India. Similarly, you may also make remittances from India to your country of origin. Towards this end, you will have to deal with income taxes and compliances with particular procedures first. Then, you may take away the remaining capital gains and dividends.

What are the important aspects of foreign exchange?

To begin with, the RBI does not give permission to convert foreign currency into Indian currency and vice versa in some cases. For example, the Indian Rupee is not convertible with regard to capital transactions, such as loans and investments. These transactions relate to foreign direct investments in Indian establishments, the debts incurred by foreign entities and overseas investments undertaken by commercial enterprises in India. In short, the Indian economy does not believe in capital account convertibility.

You may engage in conversion only for revenue transactions, wherein you bring foreign currency into play for making and receiving payments. You do not have to pay any fees on revenue transactions. Towards this end, your establishment in your native country is welcome to export and import a majority of items freely. You could be a subsidiary of a foreign organization or part of a joint venture involving foreign companies. It does not matter. This convertibility proves particularly useful while travelling abroad for business.

Are there any limits on the inflows and outflows of foreign exchange?

In general, there are no limits with regard to FDIs and the buying/selling of service/goods. However, capital transactions carry certain restrictions, wherein you will have to provide the requisite documentation/compliances as demanded.

  • Inflows – The limitation is for banned sectors or where the limit of the sector does not reach 100%.
  • Importing services, proceeds related to exports, remittance of profits within the specified FDI, and technical services & fees – No limits.
  • Importing goods – Only specific banned products face limits.
  • Foreign loans – They have to be in alignment with the RBI policy, and do not come free of charge.

What are the other rules and regulations linked to FDI?

Regardless of whether the foreign investments take place from Taiwan, China, Hong Kong, Europe and the USA, the laws remain the same.

The RBI has brought in particular valuation norms with regard to FDIs in India. To illustrate, a Chartered Accountant or a Company Auditor will examine and fix the value of an Indian establishment. This examiner must have an experience crossing ten years, for he/she will award a certificate of valuation to the concerned establishment. Alternatively, a Merchant Banker may enter the picture. Thus, the inward investment should be on par with this valuation, or beyond it.

Then again, when the Indian organization decides to sell its shares, it must ensure that the selling rate is in alignment with the value affixed by the Merchant Banker, Chartered Accountant or Company Auditor. Of course, the company will then remit the funds obtained from the sale, to your foreign company.

Finally, after you receive your registration number from the RBI, you will just have to pay the Dividend Tax (16.995% for a 100% subsidiary in India) prior to freely repatriating the dividends. The Indian Joint Venture or Company is responsible for declaring these dividends.

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