In recent years direct has given a significant boost to the Indian economy. India has become a major contributor to Silicon Valley together with the rising number of startups. Indian enterprises are likely to get more support from foreign investors. However factors like the unique legal regime and economic characteristic brings certain considerations into the picture. A lot of foreign investors are attracted to the extensive market size, cheap labor, and natural resources available in India. These investors are looking for ways to leverage the resources as a result significant development is taking place across sectors in the country. But for most foreign businesses the investment path is quite complex. The following section of this article talks about some of the essential points of foreign investment.
Before a foreign investor makes any kind of investment in the country they must be aware of the guidelines and policies declared by the government. Besides these policies keep on changing from time to time because of the amendments made to them. Typically there are two ways via which foreign investors can directly participate in Indian projects namely the government route and the automatic route.
There are specific sectors over which the government has imposed restrictions regarding Foreign Investment in Indian Company. Hence government approval is necessary before receiving any investment from outside. On the other hand, the automatic route has no restriction over outside investment.
Typically there are foreign portfolio investments that outside investors can make. It involves the Portfolio Investment Scheme where an eligible foreign organization can invest in debentures or shares of Indian companies, buy units of domestic mutual funds, or participate in Indian stock exchanges.
Foreign Entities that are Permitted to Invest in India
Below is a list of eligible foreign institutions Non-resident Indians (NRIs), Foreign Institutional Investors (FIIs), Qualified Foreign Investors (QFIs), and Persons of Indian Origin (PIOs).
Non-resident Indians can make investments in Indian companies diverging or selling convertible debentures, and shares through a registered stock exchange or broker. However, it is mandatory to comply with the guidelines of the stock market and engage in all transactions through a registered broker. NRI also qualifies for an alliance offered by the Indian government for selling or purchasing mutual funds in the country. FIIs and NRIs also invest in treasury bills, Government security, bonds, commercial papers of Indian companies, and domestic bonds. However, everything comes under the restrictions and guidelines declared by RBI.
Foreign Institutional Investors referred to organizations that are based and operating outside the country. However, they are actively willing to take part in securities in the country. Therefore for such kinds of investors, the RBI has certain rules. These entities required valid registration from SEBI before making investments in the Indian market via the PIS route.
Foreign Venture Capital Investors
Foreign Venture Capital Investors are eligible to invest in domestic venture capital funds or similar undertakings. Foreign venture capital investors must have a separate registration from SEBI. Also, the investment amount must be 66.67% of invested funds in the unlisted shares or other linked instruments of an Indian firm.
QFI refers to organizations and individuals that are active participants of the Financial Action Task Force(FATF). They are allowed to invest in domestic mutual funds, corporate and government bonds, and equity shares.
India is based on an economy that is exchange-controlled which means that every transaction that involves a foreign investment or outbound investment goes through certain regulatory measures.
In the year 2020, RBI imposed notable restrictions on Foreign Investment in Indian Company from countries that share a border with India. Hence the beneficial owner of an investment or citizen of any such country requires approval from the government before making any investment. When it comes to investment there is always some amount of uncertainty so investors must always be aware of the latest rules and regulations that are in practice. It is always a wise decision to seek necessary clearance from the government before making any investment.
Factors to consider before investing in India
Guidelines for Pricing
Pricing guidelines are a critical aspect of the exchange control mechanism in India. When it comes to secondary transactions involving domestic counterparties and foreign investors there are specific rules applicable. Also, there are fear value requirements that are in favor of the Indian counterpart. When a foreign investor makes a purchase of shares from a domestic company the price must not go over the statutory fair value. Again the fair value needs to be evaluated and certified by a recognized accountant or merchant banker. Besides they are restrictions in terms of deferred consideration, indemnification, and earn-outs.
Liability of Director
To become a director of a company a person need not be a resident of India. However, all the residents are required to have a director identification number (DIN) authorized by the Ministry of corporate affairs. The number serves the purpose of fiduary duties whether the individual is a citizen of India or not. Every director serving in Indian companies is subject to a duty of loyalty and duty of care (it is similar to that of Delaware corporations) and there are regional liabilities associated with the conduct that come with harsh penalties if the director is responsible for such kind of conduct.
Who is the owner of the IP?
It is critical to make certain that IP is validly assigned and owned by a company. It is a critical factor for protecting the value of an enterprise specifically for a business whose value is determined by intangible assets like patents. In India, the default rule is that one cannot become the owner of a patent unless it is assigned validly. The assignment must be done through a deed with payment of stamp duty and registration with the patent registry. However, the assignments of IP may not stand valid for future inventions under the law of the country. Therefore there is always a need for periodic assignment of IP.
Understanding Tax Structure
It is recommended that foreign investors must always get tax advice from foreign direct investment consulting at an early stage. There are different fundamental aspects of tax laws in the country that change with time. Investments in the Indian market typically include routing the investment through Mauritius or other jurisdictions with a more efficient tax system. Also, some people try double tax avoidance agreements that help cut down taxes on capital gain. However, the tax benefit of the structure has been closed recently. Without the tax benefits, there are certain dispute resolution and protection benefits of routing equity investment through specific restrictions that use a bilateral investment technique in India. Besides one needs to be aware that indirect transport tax can apply to transactions taking place outside the country. Again foreign holding firm shares of a domestic company transferring to another foreign enterprise can attract capital gain taxes in the country. However, it is applicable if the substantial value of shares is obtained from Indian shares.
Expectations and Timings
Foreign investors should clearly understand that there are specific factors of investment in India that take a lot of time. It is particularly the case with inbound investments in the country that require the routine filing of compliance with RBI, even if there is no need for exchange control approval for a transaction. As a consequence the main document required in negotiation and approval. There are formalities for closing like getting a share certificate, getting an appointment on the board of directors, becoming the recorded owner of shares, or getting tax identification information can take a significant amount of time.
Documents Necessary for Equity Investment in India
Agreement with Shareholders
This document is a necessity for a post-closing relationship with shareholders as well as the right of the invested. All the terms address rights and liquidation preference, board rights, voting rights, and more. Shareholder agreement also gives provisions that are included in the investor rights agreement. Also specific parts of the certificate of incorporation and come to venture capital investment in the US style.
Share Subscription Agreement
It is the most critical document when a foreign company purchases shares of an Indian entity. The document is very much similar to a stock purchase agreement in a US-style venture investment.
Register Of Members
It is a statutory register that is mandatory by Indian law and records the name of the shareholder and the number of shares. Besides the share certificate, the register of the member also serves under the law of share ownership and is a part of the register of members that take part in the closing process.
It is the most important statutory document similar to that offers a delivery certificate of incorporation. It usually contains all the provisions declared in the shareholder agreement for preserving the rights of the shareholders by law.
The business environment in India is evolving constantly which is creating more opportunities for foreign investors. In recent years the domestic market has seen significant Foreign Investment in Indian Company globally. An increasing number of investors came to be eager to invest in various sectors. The Indian government has also tried its best to make the country a perfect place for foreign investors by initiating reforms and making amendments to FDI policies. India is now the fastest-growing economy and the capital market is also booming.