FDI in Private Limited Company

India is popularly becoming an attractive destination for inbound investments with one of the fastest growing economies in the world. It is ranked among the top 3 destinations for investments.

In terms of FDI (Foreign Direct Investment) the regulatory environment has been made consistently hassle-free and more investor friendly with greater connectivity. The effect of globalization has encouraged the free flow of capital across the country.

Whether a business is big or small they are crossing the borders in an effort to gain greater market shares and maximising their profits.

Foreign companies and foreign nationals are showing great interest in setting up a business in India making FDI a popular route for the same.

The article below entails some noteworthy points about setting up a FDI in Private Limited Company in India.
A Quick Overview of Foreign Direct Investment in India

Various policy decisions have been taken by the Indian Government to increase the interest in foreign direct investment in India.

Department of Industrial Policy and Promotions (DIPP), Ministry of Commerce and Industry regulates the FDI Policy in India.

On 17 April, 2014, a consolidated circular was issued by the department as an important policy note on FDI.

As per these regulations, FDI is meant as an investment by non-resident entity/person resident outside India. This includes all types of foreign investment in trademark-in-india">India including investment by FIIs, investment by NRI, investment by foreigners or foreign entities, etc.

FDI in Private Limited Company

Non-resident entities are allowed FDI in Private Limited Company which is subject to the FDI Policy and sectoral caps.

FDI in a Private Limited Company comes under two categories: -

  1. Automatic route
  2. Approval route

100% FDI's are permitted in most sectors other than those sectors which are capped or restricted. Sectors which don't have automatic approval, prior approval from the Foreign Investment Promotion Board (FIPB) of the Government of India must be obtained before making an investment.

In addition the citizens or entities of Bangladesh or Pakistan are allowed to invest in India but under the approval route.

There are various equity instruments under which non-resident entities are allowed FDI in Private Limited Company which is subject to the FDI Policy and sectoral caps.

Subject to the norms and guidelines Indian companies can issue equity shares, preference shares and convertible debentures.

The shares can be issued at face value in case of a newly incorporated entity or subscription to the Memorandum of Association during Company Incorporation by a NRI or Foreigner.

FDI Prohibited Sectors

FDI in the following sectors is completely prohibited:-

  • 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

Under the automatic route FDI in Private Limited Company is not permitted for the following sectors. They require prior approval of the FIPB.

  • 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 Made Under the Automatic Route

The proposed FDI is permissible by the foreign or non-resident entity in India that doesn’t come under the prohibited or approval category.

Hence, under the automatic route if an investment is within the limits of FDI cap, an application for FDI in the Private Limited Company is not required for the same.

No prior permission of the FIPB or RBI is required for FDI in a Private Limited Company falling under the automatic route.

A Private Limited Company just needs to file certain filings relating to the FDI with the Reserve Bank of India once there is an issuance of receipt of the share subscription money from the foreign or non-resident investor.

Furthermore, under the automatic route an investment cannot be made for any company requiring an industrial license under the Industries Act, 1951 or for acquisition of another Indian company existing shares or for financing an expansion.

Under the automatic route majority of the sectors in India are eligible for 100% FDI wherein a FDI report has to be filed only after issuance of shares for the foreign or non-resident entity.

Therefore it is a smooth ride with relaxed norms to start a business in India for Foreign Nationals and Non-Resident Indians.

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