Consolidated FDI Policy Circular of 2020

Paragraph 3.2 Eligible Investee Entities

Chapter: 3 · General Conditions on FDI
Text as on: As issued 15 October 2020; Press Notes since are not applied

3.2 ELIGIBLE INVESTEE ENTITIES

3.2.1 Indian Company Indian companies can issue capital against FDI.

3.2.2 Partnership Firm/Proprietary Concern

(i) A Non-Resident Indian (NRI) can invest in the capital of a firm or a proprietary concern in India on non-repatriation basis provided;

(a) Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers/Authorized banks.

(b) The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business or print media sector.

(ii) Investments with repatriation option: NRIs may seek prior permission of Reserve Bank for investment in sole proprietorship concerns/partnership firms with repatriation option. The application will be decided in consultation with the Government of India.

(iii) Investment by non-residents other than NRIs: A person resident outside India other than NRIs may make an application and seek prior approval of Reserve Bank for making investment in the capital of a firm or a proprietorship concern

or any association of persons in India. The application will be decided in consultation with the Government of India.

(iv) Restrictions: An NRI is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business or print media.

3.2.3 Trusts

Investment by a person resident outside India is not permitted in Trusts other than in ‘VCF’ registered and regulated by SEBI and ‘Investment vehicle’.

3.2.4 Limited Liability Partnerships (LLPs)

Foreign Investment in LLPs is permitted subject to the following conditions:

(i) Foreign Investment is permitted under the automatic route in Limited Liability Partnership (LLPs) operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions.

(ii) An Indian company or an LLP, having foreign investment, is also permitted to make downstream investment in another company or LLP in sectors in which 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions.

(iii) Conversion of an LLP having foreign investment and operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions, into a company is permitted under automatic route. Similarly, conversion of a company having foreign investment and operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions, into an LLP is permitted under automatic route.

(iv) Foreign Investment in LLP is subject to the compliance of the conditions of LLP Act, 2008.

3.2.5 Investment Vehicle

An entity being ‘investment vehicle’ registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose

including Real Estate Investment Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014, Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012 is permitted to receive foreign investment from a person resident outside India (other than an individual who is citizen of or any other entity which is registered / incorporated in Pakistan or Bangladesh) in the manner and subject to the terms and conditions specified under Schedule VIII of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

3.2.6 Startup Companies

Start-ups can issue equity or equity linked instruments or debt instruments to FVCI against receipt of foreign remittance, as per the Schedule VII of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. In addition, start-ups can issue convertible notes to person resident outside India subject to the following conditions:

(i) A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered/incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian startup company for an amount of twenty-five lakh rupees or more in a single tranche.

Explanation: For the purpose of this Regulation, a ‘startup company’ means a private company incorporated under the Companies Act, 2013 or Companies Act,1956 and recognised as such in accordance with notification number G.S.R. 127(E) dated 19th February, 2019 issued by the DPIIT, Ministry of Commerce and Industry, and as amended from time to time.

(ii) A startup company engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with approval of the Government.

Explanation: For the purpose of this regulation, the issue of shares against such convertible notes shall have to be in accordance with the Schedule I of the. Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

(iii) A startup company issuing convertible notes to a person resident outside India shall receive the amount of consideration by inward remittance through banking channels or by debit to the NRE / FCNR (B) / Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.

Provided that an escrow account for the above purpose shall be closed immediately after the requirements are completed or within a period of six

months, whichever is earlier. However, in no case continuance of such escrow account shall be permitted beyond a period of six months.

(iv) NRIs may acquire convertible notes on non-repatriation basis in accordance with Schedule IV of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

(v) A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance applicable pricing guidelines under FEMA. Prior approval from the Government shall be obtained for such acquisitions or transfers in case the startup company is engaged in a sector which requires Government approval.

(vi) The startup company issuing convertible notes shall be required to furnish reports as prescribed by the RBI.

3.2.7 Other Entities

FDI in resident entities other than those mentioned above is not permitted.

3.2 ELIGIBLE INVESTEE ENTITIES

3.2.1 Indian Company
       Indian companies can issue capital against FDI.

3.2.2 Partnership Firm/Proprietary Concern

(i) A Non-Resident Indian (NRI) can invest in the capital of a firm or a proprietary
             concern in India on non-repatriation basis provided;

(a) Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO
              account maintained with Authorized Dealers/Authorized banks.

(b) The firm or proprietary concern is not engaged in any
              agricultural/plantation or real estate business or print media sector.

(ii) Investments with repatriation option: NRIs may seek prior permission of
             Reserve Bank for investment in sole proprietorship concerns/partnership firms
             with repatriation option. The application will be decided in consultation with
             the Government of India.

(iii) Investment by non-residents other than NRIs: A person resident outside India
             other than NRIs may make an application and seek prior approval of Reserve
             Bank for making investment in the capital of a firm or a proprietorship concern

or any association of persons in India. The application will be decided in
                consultation with the Government of India.

(iv) Restrictions: An NRI is not allowed to invest in a firm or proprietorship
                concern engaged in any agricultural/plantation activity or real estate business
                or print media.

3.2.3 Trusts

Investment by a person resident outside India is not permitted in Trusts other than
         in ‘VCF’ registered and regulated by SEBI and ‘Investment vehicle’.

3.2.4 Limited Liability Partnerships (LLPs)

Foreign Investment in LLPs is permitted subject to the following conditions:

(i) Foreign Investment is permitted under the automatic route in Limited Liability
                Partnership (LLPs) operating in sectors/activities where 100% FDI is allowed
                through the automatic route and there are no FDI-linked performance
                conditions.

(ii) An Indian company or an LLP, having foreign investment, is also permitted to
                make downstream investment in another company or LLP in sectors in which
                100% FDI is allowed under the automatic route and there are no FDI-linked
                performance conditions.

(iii) Conversion of an LLP having foreign investment and operating in
                sectors/activities where 100% FDI is allowed through the automatic route and
                there are no FDI-linked performance conditions, into a company is permitted
                under automatic route. Similarly, conversion of a company having foreign
                investment and operating in sectors/activities where 100% FDI is allowed
                through the automatic route and there are no FDI-linked performance
                conditions, into an LLP is permitted under automatic route.

(iv) Foreign Investment in LLP is subject to the compliance of the conditions of LLP
             Act, 2008.

3.2.5 Investment Vehicle

An entity being ‘investment vehicle’ registered and regulated under relevant
         regulations framed by SEBI or any other authority designated for the purpose

including Real Estate Investment Trusts (REITs) governed by the SEBI (REITs)
         Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI
         (InvIts) Regulations, 2014, Alternative Investment Funds (AIFs) governed by the
         SEBI (AIFs) Regulations, 2012 is permitted to receive foreign investment from a
         person resident outside India (other than an individual who is citizen of or any
         other entity which is registered / incorporated in Pakistan or Bangladesh) in the
         manner and subject to the terms and conditions specified under Schedule VIII of the
         Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

3.2.6 Startup Companies

Start-ups can issue equity or equity linked instruments or debt instruments to FVCI
         against receipt of foreign remittance, as per the Schedule VII of Foreign Exchange
         Management (Non-Debt Instruments) Rules, 2019. In addition, start-ups can issue
         convertible notes to person resident outside India subject to the following
         conditions:

(i) A person resident outside India (other than an individual who is citizen of
             Pakistan or Bangladesh or an entity which is registered/incorporated in Pakistan
             or Bangladesh), may purchase convertible notes issued by an Indian startup
             company for an amount of twenty-five lakh rupees or more in a single tranche.

Explanation: For the purpose of this Regulation, a ‘startup company’ means a
             private company incorporated under the Companies Act, 2013 or Companies
             Act,1956 and recognised as such in accordance with notification number G.S.R.
             127(E) dated 19th February, 2019 issued by the DPIIT, Ministry of Commerce and
             Industry, and as amended from time to time.

(ii) A startup company engaged in a sector where foreign investment requires
             Government approval may issue convertible notes to a non-resident only with
             approval of the Government.

Explanation: For the purpose of this regulation, the issue of shares against such
             convertible notes shall have to be in accordance with the Schedule I of the.
             Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

(iii) A startup company issuing convertible notes to a person resident outside India
             shall receive the amount of consideration by inward remittance through banking
             channels or by debit to the NRE / FCNR (B) / Escrow account maintained by the
             person concerned in accordance with the Foreign Exchange Management
             (Deposit) Regulations, 2016, as amended from time to time.

Provided that an escrow account for the above purpose shall be closed
             immediately after the requirements are completed or within a period of six

months, whichever is earlier. However, in no case continuance of such escrow
           account shall be permitted beyond a period of six months.

(iv) NRIs may acquire convertible notes on non-repatriation basis in accordance with
           Schedule IV of the Foreign Exchange Management (Non-Debt Instruments)
           Rules, 2019.

(v) A person resident outside India may acquire or transfer, by way of sale,
           convertible notes, from or to, a person resident in or outside India, provided the
           transfer takes place in accordance applicable pricing guidelines under FEMA.
           Prior approval from the Government shall be obtained for such acquisitions or
           transfers in case the startup company is engaged in a sector which requires
           Government approval.

(vi) The startup company issuing convertible notes shall be required to furnish
           reports as prescribed by the RBI.

3.2.7 Other Entities

FDI in resident entities other than those mentioned above is not permitted.