Foreign Direct Investments vs. Indirect Foreign Investments in India: Lawyers Advice for Foreign Investors for their Investments in India | FDI Attorney in Delhi NCR | FDI Attorney in India | India Business Entry
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In order to calculate the total Foreign Investment in an Indian company, all types of foreign investments must be included; Foreign Direct Investment (FDI) and Indirect Foreign Investment.
1) Foreign Direct Investment (FDI):
a) Investments made by a non-resident Indian entity or individual directly into an Indian company is called Foreign Direct Investment (FDI). This entire amount is counted as FDI when calculating the total foreign investment in an Indian company.
b) In India 100% FDI is permitted under the automatic route, that is where no prior permission from the Government is required for foreign investment. With this 100% permission, the investor can invest in any sector he wishes to invest in.
c) However, FDI may also be permitted, but under the Government route, where prior approval of the Government is mandatory to invest in India.
d) FDI is considered as a long-term investment and is predictable and has the ability to stabilize any impact on the production.
e) Examples, US based companies like, Amazon, Walmart and Sketchers investing in Indian Companies by entering the Indian marketplace with their business.
f) There are two types of Foreign Direct Investment:
i. Horizontal FDI- Horizontal FDI is when a foreign company duplicates its business activities in the host country.
i. Vertical FDI– Vertical FDI is when the foreign company establishes manufacturing sectors in different countries where each contributes to the supply chain production process.
g) Foreign Direct Investment by foreign investors in an Indian company, must be compliant with the relevant conditions on the entry route, guidelines and restrictions with regards to different sectors in which the company is investing.
2) Indirect Foreign Investment
a) Any Indian entity having foreign investment, owned or controlled by a foreign entity, making investment in another Indian entity is called Indirect Foreign Investment. The entire investment would be included under Indirect Foreign Investment in order to calculate total Foreign Investment of the Indian entity.
b) If an Indian entity which is owned and controlled by Indian residents or Indian entities (that is having more than 50% equity benefit) then such investment in another Indian company would not be counted as Indirect Foreign Investment.
c) However, an exception to this rule is that, if Indirect Foreign Investment is made by a Wholly Owned Subsidiary (WOS) of an investing company, then such investment shall be limited to be the amount of foreign investment in the investing company. This exception is limited to cases where the entire capital of the subsidiary is owned by the holding company.
d) Sometimes Indirect Foreign Investment is also called Foreign Portfolio Investment. Here the foreign investor invests in financial assets like stocks or debt instruments like bonds, of companies located in another country.
e) An example of such Indirect Foreign Investment is of the US based company Walmart, and its investment in Flipkart India. Walmart a US company, invested in Flipkart India thus, taking ownership in this E-Commerce entity as it owned more than 50% equity benefit. This Indian company having foreign investment further invested in another Indian company called Myntra. This investment is called Indirect Foreign Investment.
f) Indirect Foreign Investment by an Indian entity owned or controlled by foreign investors, must be compliant with the relevant conditions on the entry route, guidelines and restrictions with regards to different sectors in which the company is investing.
g) According to the Reserve Bank of India (RBI) Notification, Foreign investment in India is permitted upto 100% under the automatic route. However, it is subject to the applicable laws and regulations, securities and other conditions.
h) Sectors or activities which are not prohibited under the Reserve Bank of India Notification No. FEMA 20(R), Regulation 15 shall be permitted 100% Foreign Investment under the automatic route, subject the relevant laws and regulation, securities and other conditions.
Therefore, Foreign Direct Investment and Indirect Foreign Investment are two different types of investments a company may indulge in and both investments must be taken into consideration while calculating the total Foreign Investment in the entity. Companies must abide by all the regulations and notifications issued by the authorities to be compliant with the policies. Thus, both investments are different as Foreign Direct Investment acts as the first level of investment while Indirect Foreign Investment as the second level.
Important links:
1) Reserve Bank of India Notification No. FEMA 20(R),
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11161&Mode=0
2) Foreign Direct Investment Policy
https://dipp.gov.in/sites/default/files/CFPC_2017_FINAL_RELEASED_28.8.17.pdf
3) Reserve Bank of India (RBI) Notification 2018,
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MD11_04012018B4D0DB4E6DA04CC4B7AF62AA03D902BE.PDF
Authored By: Adv. Anant Sharma & Sameera Singal