The Government of India over a period time has already brought a lot of categories of Foreign Direct Investment (FDI) under the Automatic route; however, there still remain a lot of areas and investment types which requires approval from the government and falls under the FDI Approval Route.
To start with, a Foreign Investor can commence business in India under three different models, namely;
a) Indian Company set up as a Joint Venture or Wholly Owned Subsidiary,
b) Foreign Company as a Liaison Office or Branch Office, or Project Office, and
c) Limited Liability Partnership (LLP)
The special focus would be on the first model that is an Indian Company set up as a Joint Venture (JV) or Wholly Owned Subsidiary (WOS). The entity can be set up either directly as a JV or WOS during the incorporation or later by way of share transfer or fresh share issuance. This structure may fall under the Automatic Route or may also be subject to sectoral caps or approval under the FDI Approval Route.
The scenario or requirement of ‘FDI Approval Route’ depends on the nature of transaction. To put this more practically, a case study has been highlighted below.
Facts of the Case:
1) X1 is a Pvt. Ltd. Company registered in India under the Companies Act 2013 having two shareholders, ABC Pvt. Ltd. and DEF Pvt. Ltd. holding 50% each and both being Indian registered companies under the companies act 2013.
2) H1 is a company registered in USA having three shareholders; ABC Pvt. Ltd., DEF (UK) Pvt. Ltd., and Mr. Z, a US resident individual.
(i) DEF Pvt. Ltd. and DEF (UK) Pvt. Ltd. are related parties with DEF Pvt. Ltd. holding majority shares in DEF (UK) Pvt. Ltd. , a company registered in United Kingdom (UK).
(ii) The Directors in X1 and ABC Pvt. Ltd. are same and related parties.
The promoters of H1 have agreed to make X1 as the wholly owned subsidiary of H1 which would hold 99% shares in X1.
With the above problem statement, and considering the regulations by the Reserve Bank of India, an Indian Party cannot make an Indian Subsidiary through its Foreign JV or Wholly Owned Subsidiary (WOS) and thus to address the above problem statement, prior approval has to be sought.
FDI Approval Route Decoded
The brief process for application under FDI Approval Route is as follows:
1) The approval shall be sought from the DPIIT (Department for Promotion of Industry and Internal Trade) under the Ministry of Commerce.
2) An application shall be made to the DPIIT which shall forward the same to the concerned Ministry responsible, who may allow or disallow the matter depending on the merit of the case.
3) The concerned Ministry shall further forward the case to the RBI for their opinion on the matters and also for their comments on the perspective of FEMA (Foreign Exchange Management Act).
4) The entire proposal shall be scrutinized by the relevant departments and other regulatory bodies including Ministry of Corporate Affairs.
5) On successful satisfaction of all the regulatory bodies and approval of the relevant Ministry involved in the case, the approval shall be granted by DPIIT and an Approval Letter shall be issued.
6) On receiving the approval, the remittance shall be made and then the Form FCGPR shall be filed under the approval route with necessary documents and the approval letter.
Documents required for seeking approval from the DPIIT:
a) Details of the proposed shareholders
b) Statement of existing and proposed shareholding pattern of the company
c) Annual audited accounts with the Board Report and Auditors Report
d) Annual audited accounts of foreign entity
e) Annual Performance Report (APR) submitted to the RBI
f) Detailed Shareholding structure of all the entities involved
g) A detailed write-up about the proposed holding company
h) A detailed write-up about the reason behind making Indian entity as a WOS
i) Net Worth certificate of holding company certified by the Auditor
j) Certificate of Incorporation, Memorandum of Association and Articles of Association
k) Certificate of Incorporation and other Charter documents holding company
l) Income Tax Returns and acknowledgment
m) List of Names, addresses and identification proof of all individuals and who shall be representing the entities and also details of every Director
n) Copy of any existing Shareholders’ Agreement or JV Agreement, Technology Transfer or Trademark or brand assignment agreement or any other agreement, if any
o) Copy of relevant past FIPB/SIA/RBI approval, if any
p) Valuation Report
q) List of Names, addresses and identification proof of all foreign collaborators of the holding Company/Entity
r) Affidavit stating that all information provided is correct
s) Board Resolution from all the entities involved in the transaction
The compliance surrounding FDI with respect to a company involves filing of various forms and reporting the transaction to the RBI under the FEMA. Although, the transactions and FDI under ‘Automatic Route’ have to be reported after the money is received; the transactions falling under the ‘Approval Route’ would require prior approval and hence the determination of nature of transaction is of prime importance in understanding the route which would ascertain the compliance procedure.
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