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India Investment Guide - Who can invest?

As per the Indian Foreign Investment policy, following persons can invest in India:

• Person resident outside India except citizen belonging to Bangladesh and Pakistan, provide the Foreign Investment Promotion Board may on application subject to necessary terms and conditions allow citizen of Bangladesh to invest in India.
  
  
• Entities incorporated outside India except entities incorporated in Bangladesh and Pakistan, provide the Foreign Investment Promotion Board may on application subject to necessary terms and conditions allow entities incorporated in Bangladesh to invest in India.
• Non Resident Indian resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis subject to the condition that the amount of consideration for such investment shall be paid by way of inward remittances in free foreign exchange through normal banking channels.

The entities incorporated outside India shall include the following :

• Foreign Venture Capitalist
• Foreign Institutional Investors

Foreign Venture Capitalist

An investor incorporated or established outside India, which proposes to make investments in India under the venture capital route is required to register with the SEBI as a Foreign Venture Capital Investor in accordance with the Foreign Venture Capital Investor Regulations.

Procedure for Registration

Registration of an entity as a Foreign Venture Capital Investor with SEBI in accordance with the FVCI Regulations involves the filing of a prescribed application form A in duplicate with SEBI, along with the prescribed application fee. SEBI simultaneously forwards one copy of the application to the Reserve Bank of India for its approval. SEBI acts as the nodal agency for providing registration and such registration constitutes approval in terms of the FVCI Regulations.

In examining the application for registration, SEBI would generally examine entity to be registered as a FVCI, under the following factors:

• The applicant’s track record, professional competence, financial soundness, experience, general reputation of fairness and integrity;
• whether the applicant has been granted necessary approval by the Reserve Bank of India for making investments in India;
• whether the applicant is an investment company, investment trust, investment partnership, pension fund, mutual fund, endowment fund, university fund, charitable institution or any other entity incorporated outside India;
• whether the applicant is an asset management company, investment manager or investment management company or any other investment vehicle incorporated outside India;
• whether the applicant is authorised to invest in venture capital fund or carry on activity as a foreign venture capital investors
• whether the applicant is regulated by an appropriate foreign regulatory authority or is an income-taxpayer; or submits a certificate from its banker of its or its promoter’s track record where the applicant is neither a regulated entity nor an income-taxpayer;

Conditions for Investment

• A registered Foreign Venture Capital Investor must invest 66.67% of its investible funds in unlisted equity shares or equity linked instruments of venture capital undertakings (i.e. Indian companies whose shares are not listed on any recognized stock exchange in India and is engaged in business of providing services, production or manufacture of article & things but does not include activities which are specified in the negative list of Securities and Exchange Board of India )
  
  
• And remaining 33.33% of its investible funds may be invested, amongst others, by way of subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed or through preferential allotment of equity shares of a listed company subject to lock in period of one year and debt/debt instrument of venture capital undertaking in which the foreign venture capital investor has already made the investment.

Investible funds means the funds committed for investments in India net of expenditure for administration and management of the fund.

A Foreign Venture Capital Investor may, however, not invest in securities of most categories of Non Banking Financial Companies (NBFC) excluding NBFC registered with Reserve Bank of India as Equipment Leasing or Hire Purchase Companies , companies in the print media sector or companies engaged in gold financing or any other activity in which foreign investment is not permitted under the Industrial Policy of the Government of India.

Benefits of Registration:

• A onetime approval from the Reserve Bank for investments in Indian companies and the ability to purchase or sell securities at a price that is mutually acceptable to the buyer and seller (with no limit on returns unlike other foreign investors);
  
  
• The restrictions contained in the SEBI (Substantial Acquisitions of shares and Takeover Code )Regulation 1997 are not applicable to a transfer of shares from a Foreign Venture Capital Investor to promoters of a venture capital undertaking or venture capital undertaking pursuant to an agreement between the Foreign Venture Capital Investor with such promoters or venture capital undertaking

Foreign Institutional Investor (FII)

Foreign Institutional Investor means an institution established or incorporated outside India which proposes to make investment in India in securities and includes Asset Management Company, Pension Funds, Mutual Funds, Investment Trust as Nominee Companies, Incorporated institutional portfolio’s managers or their power of attorney holders, endowment foundation, University funds, charitable organizations.

Foreign Institutional Investor which are registered with Securities and Exchange Board of India (SEBI) are authorized to purchase shares and debentures of Indian companies under the Portfolio Scheme. The FII must apply to designated Authorized Dealer for opening an foreign currency account or Non Resident Rupee Account. For registration FII are required to apply to the Securities and Exchange Board of India (SEBI) in a common application form in duplicate.

Procedure for registration

• An application for the grant of certificate shall be made to the SEBI in Form A.
• SEBI will consider the following bore granting the certificate of registration:
  
  • The applicant’s track record, professional competence, financial soundness, experience, general reputation of fairness and integrity;
  • whether the applicant is regulated by an appropriate foreign regulatory authority;
  • whether the applicant has been granted permission under the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for making investments in India as a Foreign Institutional Investor;
  • whether the applicant is—
    
    1. an institution established or incorporated outside India as a pension fund, mutual fund, investment trust, insurance company or reinsurance company; (ia) an International or Multilateral Organisation or an agency thereof or a Foreign Governmental Agency Sovereign Wealth Fund or a Foreign Central Bank
    2. an asset management company, investment manager or advisor, bank or institutional portfolio manager, established or incorporated outside India and proposing to make investments in India on behalf of broad-based funds and its proprietary funds, if any;
    3. a trustee of a trust established outside India and proposing to make investments in India on behalf of broad based funds and its proprietary funds, if any;
  • University fund, endowments, foundations or charitable trusts or charitable societies :

  Provided that while considering the application from applicants under above the Board may take into account the following, namely :—

  1. whether the applicant has been in existence for a period of at least 5 years;
  2. whether it is legally permissible for the applicant to invest in securities outside the country of its incorporation or establishment;
  3. whether the applicant has been registered with any statutory authority in the country of their incorporation or establishment;
  4. whether any legal proceeding has been initiated by any statutory authority against the applicant.]
  5. whether the applicant has been serving public interest.

  Explanation : For the purposes of this regulation, “broad based fund” means a fund, established or incorporated outside India, which has at least twenty investors, with no single individual investor holding more than forty-nine per cent of the shares or units of the fund :

  Provided that if the broad based fund has institutional investor(s), it shall not be necessary for the fund to have 1[twenty] investors Provided further that if the broad based fund has an institutional investor who holds more than forty-nine per cent of the shares or units in the fund, then the institutional investor must itself be a broad based fund;

  • whether the grant of certificate to the applicant is in the interest of the development of the securities market;
  • whether the applicant is a fit and proper person
• SEBI shall, as soon as possible but not later than three months after information called for by it is furnished, if satisfied that the application is complete in all respects, all particulars sought have been furnished and the applicant is found to be eligible for the grant of certificate, grant a certificate in Form B, subject to the payment of necessary fees

Conditions for Investment

• FII’s can buy or sell securities at stock exchange, they can also invest in listed or unlisted securities outside Stock exchange where the prices are approved by the Reserve Bank Of India.
• FII’s can also invest units of scheme floated by domestic mutual fund including Unit Trust of India, whether listed on a recognized stock exchange or not and units of scheme floated by Collective investment Scheme.
• FII’s can also invest in dated government securities, commercial papers and security receipts.
• No individual FII/sub account can hold more than 10 & of the paid-up capital of any Indian Company.
• All FII and their sub account taken together cannot hold more than 24% of the paid-up capital of any Indian company except when the said ceiling has been raised by the Indian company by passing a board resolution and special resolution in their general meeting.

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