Complying with international trade and investment laws when doing business in India involves understanding and adhering to various regulations, treaties, and agreements. Here are the key steps to ensure compliance: Research and Understand Trade Laws: Familiarize yourself with Indian trade laws, including the Customs Act, Foreign Trade (Development and Regulation) Act, and other relevant regulations. Seek legal advice to interpret and apply these laws correctly. Register Your Business: Register your business entity and obtain any necessary licenses or permits, such as an Importer-Exporter Code (IEC), to engage in international trade. Understand Tariffs and Duties: Be aware of customs duties, tariffs, and trade regulations applicable to your products or services. India follows a complex tariff structure, so classify your goods correctly for accurate duty assessment. Export Control Regulations: Comply with export control regulations, including restrictions on the export of certain goods, technologies, and services. Obtain the required licenses or authorizations for controlled items. International Trade Agreements: India is a signatory to various international trade agreements, such as the World Trade Organization (WTO), Comprehensive Economic Partnership Agreement (CEPA), and bilateral Free Trade Agreements (FTAs). Understand how these agreements affect your business and take advantage of any trade benefits they offer. Investment Laws: If you plan to make foreign investments in India, understand the Foreign Exchange Management Act (FEMA) and other investment-related laws and regulations. Comply with reporting requirements and obtain necessary approvals from regulatory authorities. Transfer Pricing: If your business involves international transactions with related parties, adhere to transfer pricing regulations to ensure that transactions are at arm's length and in compliance with tax laws. Intellectual Property Rights (IPR): Protect your intellectual property (e.g., trademarks, patents, copyrights) by registering them in India and understanding Indian IPR laws. Enforce your rights against infringement. Customs Compliance: Ensure proper documentation, valuation, and compliance with customs procedures when importing or exporting goods. Keep records of all customs-related documents. Trade Remedies: Be aware of trade remedies, such as anti-dumping and countervailing duties, and their potential impact on your business. Take necessary precautions to avoid being subject to such measures. Regulatory Compliance: Comply with industry-specific regulations, such as those related to food safety, pharmaceuticals, chemicals, and electronics, which may apply to your products. Taxation: Understand the tax implications of international trade and investment, including income tax, customs duties, and indirect taxes. Seek advice from tax professionals to optimize your tax structure. Dispute Resolution Mechanisms: Familiarize yourself with dispute resolution mechanisms available under international trade agreements and investment treaties. These mechanisms can provide recourse in case of trade disputes or investment disputes. Due Diligence: Conduct thorough due diligence before entering into international contracts or partnerships. Verify the reputation, financial stability, and legal compliance of your trade partners and investors. Stay Informed: Stay updated on changes in international trade and investment laws and regulations, as they can evolve over time. Consider joining industry associations and trade bodies for updates and advocacy. Compliance with international trade and investment laws in India requires ongoing diligence and a commitment to ethical and legal business practices. Consulting with legal and trade experts who specialize in international trade and investment can provide invaluable guidance to navigate the complexities of this field.

Dear client, Introduction Over the years, India has become one of the preferred destinations for foreign investments owing to favourable demographics as well as noticeable and consistent growth trajectory. During the financial year 2022-2023, India witnessed foreign direct investment (FDI) inflow of approximately US$71 billion. This chapter lays down an overview of the regulations governing FDI in India, along with a brief description of the modalities and rules associated with making foreign investments in India. Modes of foreign investment Foreign investment in India can be made through the following three modes: FDI, FVCI, and FPI, which are detailed below. FDI FDI, which is the focus of this chapter, is the most prevalent and preferred mode of investment in India. The attendant conditionalities, rules and restrictions in relation to investments under the FDI mode are discussed below. The FEMA Regime defines FDI as ‘investment through equity instruments by a person resident outside India in an unlisted Indian company; or 10 per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed company’. Routes of FDI The FEMA Regime contemplates FDI into India via two routes: the automatic route and the government (approval) route. The available route of investment is dependent on the sector in which the business of the Indian investee entity falls and the quantum of the investment being made. Under the automatic route, FDI is permitted without any approval from the government or the RBI, up to 100 per cent or such other limit as may be prescribed for a sector. Some sectors that fall under the 100 per cent automatic route include manufacturing, telecom services, and other financial services. Further, sectors or activities that are neither specifically listed under the FEMA Regime, nor provided under the prohibited sectors as listed below, fall under the 100 per cent automatic route and are not subject to any sectoral cap. Nevertheless, FDI in such sectors remains subject to the applicable regulations and rules. Investments in sectors falling under the government route require the prior approval of the government or the RBI, or both, and any investment made under this route is subject to the conditions that may be stipulated by the government or RBI, or both, in its approval. Sectors that fall under the 100 per cent government route (i.e., where foreign investment is permitted up to 100 per cent with approval) include satellites (establishment and operation), mining and mineral separation of titanium bearing minerals and ores, and financial services (where any part of the financial services is not regulated by a financial services regulator). Further, investments that are considered to have an impact on the national security of India also fall under the government route, and the same are discussed in further detail below. It is pertinent to note that in certain sectors FDI is permitted under the automatic route up to a specified threshold, and government approval is required for any investment beyond such threshold. For instance, sectors such as defence and brownfield pharmaceuticals both fall under the automatic route up to 74 per cent, and require government approval for any foreign investment beyond 74 per cent. Sectoral caps As indicated above, while over the years foreign investment has been liberalised considerably by the Indian government whereby 100 per cent FDI in the majority of sectors has been made permissible, for a few sectors that are considered imperative from a national security perspective, the FEMA Regime prescribes thresholds beyond which investments by non-residents are not permitted, either under the automatic route or the government route. For instance, an entity engaged in private sector banking can receive foreign investment only up to 74 per cent of its share capital, of which 49 per cent falls under the automatic route, and any investment beyond 49 per cent and up to 74 per cent requires government approval; and in the sector of print media, an entity engaged in the business of publishing of newspapers and periodicals dealing with news and current affairs is allowed to receive foreign investment only up to 26 per cent of its share capital, and such foreign investment can only be made under the government route. Prohibited sectors FDI is prohibited in entities engaged in following sectors: a. lottery business; b. gambling and betting including casinos, etc.; c. chit funds; d. nidhi companies; e. trading in transferable development rights; f. real estate business or construction of farm houses; g. manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or tobacco substitutes; h. activities or sectors not open to private sector investment, for example, atomic energy, railway operations (other than as specifically permitted under the FEMA Regime); and i. foreign technology collaborations in any form including licensing for franchise, trademark, brand name and management contract are also prohibited for lottery business and gambling and betting activities. Entities eligible to receive FDI In the context of eligible investees, the FEMA Regime originally defined an Indian entity to mean an Indian company or a limited liability partnership (LLP). FDI is permitted in LLPs engaged in sectors where 100 per cent FDI is allowed under the automatic route and there are no foreign investment-linked performance conditions. Last year, the DPIIT issued Press Note No. 1 of 2022 Series, dated 14 March 2022 to widen the ambit of an Indian company to include ‘a body corporate established or constituted by or under a central or state act, which is incorporated in India.’ The intent of this change was to introduce the ‘corporation’ as an Indian entity to pave the way for foreign investment in the Life Insurance Corporation (LIC) of India, the largest public sector insurance company in India, which was established as a ‘corporation’ under the Life Insurance Corporation Act, 1956. With effect from April 2022, FDI in LIC has been permitted up to 20 per cent under the automatic route. It is pertinent to note that the FEMA Regime explicitly clarifies that societies, trusts and any other excluded entities do not fall under the ambit of an Indian company and, consequently, are not eligible investee entities under the FEMA Regime. Types of securities Under the FEMA Regime, with respect to the FDI mode, a non-resident can invest in the following equity instruments of an Indian company: a. equity shares, including partly paid shares; b. fully paid and mandatorily convertible preference shares; c. fully paid and mandatorily convertible debentures; and d. share warrants. The FEMA Regime also permits optionality clauses in equity instruments, which are subject to a minimum lock-in period of one year or as prescribed in the conditionalities for the specific sector. Upon expiry of the lock-in period, the non-resident is eligible to exit without any assured return. Further, non-residents can invest in capital contribution of LLPs. Convertible notes In addition to the equity instruments as set out above, the FEMA Regime permits foreign investment by way of convertible notes. The key features of convertible notes are as follows: 1. they can be issued only by start-up companies for an amount of 2.5 million rupees or more in a single tranche; 2. they are a hybrid instrument with the features of both debt and equity. The instrument is initially acknowledged as a debt, which at the option of the holder of the convertible note is either repayable or convertible into equity of the start-up company within 10 years from the issuance of the convertible note; and 3. issuance and transfer of convertible notes to non-residents are subject to adherence to the pricing guidelines, entry routes and sectoral conditions as prescribed under the FEMA Regime. Pricing guidelines For acquisition and transfer of equity instruments under the FDI mode, the FEMA Regime prescribes certain pricing guidelines, which are as follows. a. Issuance and transfer of equity instruments from residents to non-residents Pricing of equity instruments of a listed Indian company to be issued or transferred to a non-resident is not to be less than the price as determined in accordance with the relevant guidelines issued by the Securities Exchange Board of India (SEBI). For issuance or transfer of equity instruments of an unlisted Indian company, the pricing of equity instruments is not to be less than the fair value as determined by a SEBI registered merchant banker, chartered accountant or practising cost accountant, in accordance with an internationally accepted pricing methodology, on an arm’s-length basis (‘fair value’). b. Transfer of equity instruments from non-residents to residents Transfer of equity instruments of a listed Indian company from a non-resident to a resident cannot be undertaken at a price that is higher than the prevailing market price. In the case of equity instruments in an unlisted Indian company, the pricing cannot exceed the fair value. The guiding principle for pricing guidelines is to ensure that a non-resident investor takes the equity risk and is not guaranteed any assured exit price at the time of its investment. This also assists in keeping a check on the outflow of foreign exchange from India. c. Transfer of equity instruments from non-residents to non-residents Transfers of equity instruments among non-residents do not attract pricing guidelines. Reporting obligations Foreign investments in equity instruments or capital of eligible investee entities are required to be reported to the RBI within prescribed time periods. The regulatory filings for the purpose of reporting of foreign investments are to be made on a unified online RBI portal referred to as the Foreign Investment Reporting and Management System (FIRMS). Transactions among non-residents are exempt from these reporting obligations. Additionally, every Indian company that has received FDI is required to file an annual return with the RBI by 15 July each year. Downstream investment Indirect foreign investment in an Indian investee entity is known as downstream investment, which is an investment (primary or secondary) made by a foreign owned and controlled Indian entity into another Indian investee entity. Downstream investment for the investee entity is subject to: (1) prior approval of the board of directors of the investee entity; and (2) the entity making the downstream investment bringing in requisite funds from abroad or making the downstream investment out of its internal accruals. It is important to note that funds borrowed from the domestic markets cannot be utilised for making the downstream investments. Further, depending on the nature of the transaction, the rules and regulations in relation to FDI such as the pricing guidelines and reporting requirements are applicable in the case of a downstream investment, as well. Downstream investment by a foreign owned and controlled LLP in an Indian company is permitted if the investee company is operating in sectors where foreign investment is permitted under the 100 per cent automatic route and there are no additional conditions applicable. FVCI An FVCI is a foreign venture capital investor incorporated and established outside India, which is required to be registered with SEBI. An FVCI is permitted to invest in unlisted securities of Indian companies engaged in the following sectors: a. biotechnology; b. IT related to hardware and software development; c. nanotechnology; d. seed research and development; e. research and development of new chemical entities in the pharmaceutical sector; f. the dairy industry; g. the poultry industry; h. production of biofuels; i. hotels and convention centres with a seating capacity of more than 3,000; and j. the infrastructure sector. FVCIs can also invest in securities of listed Indian companies, subject to compliance with the applicable SEBI regulations. Opting for the FVCI mode of investment provides an investor the following benefits: (1) FVCIs are exempt from pricing restrictions as applicable to FDI investments; and (2) shares held by an FVCI are not subject to the statutory post-initial public offering lock-in period of one year provided that the FVCI has held the concerned shares for at least six months from the date of acquisition. Separately, FVCIs registered with SEBI can also opt to invest under the FDI mode. However, the investment would be subject to the conditions and rules in relation to FDI as discussed above. FPI A foreign portfolio investor (FPI) is a person registered under the relevant SEBI regulations. FPIs are classified into two categories – Category I and Category II, where Category I includes government and government-related investors such as sovereign wealth funds and central banks, while Category II includes corporate bodies, charitable organisations and unregulated funds. FPIs can make investments in listed Indian companies or companies to be listed. The FEMA Regime defines foreign portfolio investment as follows: Any investment made by an FPI through equity instruments where such investment is less than 10% of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10% of the paid-up value of each series of equity instrument of a listed Indian company. If the investment made by an FPI or its investor group breaches the prescribed 10 per cent threshold, the FPI has the option to divest such holding within five trading days. Alternatively, the investment is (1) classified as FDI and the FPI or its investor group would be prohibited from making any further portfolio investment in such investee company; and (2) required to comply with all conditions and rules associated with FDI, such as the pricing guidelines and reporting obligations. In addition to the above, the cap for aggregate holdings of all FPIs collectively in a particular Indian investee company has been recently increased up to the sectoral caps applicable to the Indian investee company. However, for sectors where FDI is prohibited the aggregate cap for FPI stands at 24 per cent. The pricing of equity instruments for foreign portfolio investments is determined as follows: (1) in the case of a public offer, the price of the equity instruments is required to be not less than the price offered to the residents of India; and (2) in the case of private placement, the pricing either has to be in accordance with the guidelines prescribed by SEBI or the fair value. Where an FPI holds equity shares in an unlisted company and continues to hold such shares after such company lists its shares, the FPI’s holdings are subject to lock-in for the same period as is applicable to shares held by an FDI investor placed in a similar position according to the extant applicable laws. Impact of covid-19 The most significant impact of the pandemic on Indian foreign investment has been the changes introduced under Press Note 3 (2020 Series) (PN#3) issued by the DPIIT on 17 April 2020. Introduced with the intent of ‘curbing opportunist takeovers/ acquisitions of Indian companies due to the current covid-19 pandemic,’[10] the PN#3 was issued promptly after the announcement of the People’s Bank of China raising its stake in HDFC Bank Limited, one of the largest private Indian banks, from 0.8 per cent to 1.01 per cent, between January 2020 and March 2020, at a time when the value of these shares was sliding on account of the covid-19 pandemic. Pursuant to the PN#3, any investment by an entity of a country sharing its land border with India (i.e., Afghanistan, Bangladesh, Bhutan, China (including Hong Kong), Myanmar, Nepal and Pakistan) (‘neighbour countries’) or where the beneficial owner of an investment into India is situated in or is a citizen of any neighbour country may be made only with prior approval of the Indian government. The requirement to obtain prior government approval is regardless of the sector or activity of the Indian investee company. Further, the term ‘beneficial owner’ has not been defined under the PN#3 and as such, at present there is no formal guidance on the quantum of shareholding that would qualify as beneficial ownership under the PN#3. The approval process is extensive and entails a security clearance of the investor entity by the Indian government. Consequently, the approval process has been time-consuming and as such, as on 31 May 2023, between 40 to 50 FDI proposals from countries sharing land borders with India were pending with the Government of India. Conditions To enable the RBI to effectively administer foreign investment in India, the elaborate legislative framework curated under the FEMA Regime, at the outset, prescribes several obligations and requirements on all parties involved such as the investor or transferee, transferor and the issuer or investee company. These include: a. Reporting obligations: as explained above, every FDI related transaction is required to be reported to the RBI within the prescribed timelines, and every Indian company that has received FDI is required to file an annual return with the RBI. b. Pricing guidelines: as indicated above, the pricing guidelines ensure that a non-resident does not acquire equity instruments at a price that is lower than their fair value; or sell or transfer equity instruments to a resident at a price above the fair value. c. Geographical restrictions: in addition to the PN#3 foreign nationals from neighbour countries are required to obtain security clearance for being appointed as a director of an Indian company; Indian company law also requires at least one director of an Indian company to be an Indian resident. Appointment of key designations such as managing director, manager or full-time director needs to be approved by the Indian government if the position is not being held by an Indian resident. d. Attendant conditions: the FEMA Regime prescribes certain set conditions required to be fulfilled for FDI in identified sectors. Examples of such sectors and the associated conditions are provided below. Penalties and rectification measures For any contravention under the FEMA Regime or approvals granted by the RBI, the contravener may, upon adjudication, be liable to a penalty of up to three times the amount involved in the contravention. Where the amount involved is not quantifiable, the penalty may extend up to 200,000 rupees. Separately, for any contravention that continues beyond the first day, an additional penalty of 5,000 rupees for each day of delay may also be payable by the contravener. However, in order to mitigate transaction costs, and rectify contraventions in a time-effective manner, a contravener could opt for a process known as compounding in lieu of the aforementioned adjudication process. Compounding is a voluntary process in which an individual or a corporate seeks remediation of an admitted contravention by payment of the requisite penalty as determined by the Director of Enforcement, RBI. A compounding process can be undertaken only after all the necessary administrative action has been completed, by way of obtaining post facto approvals or unwinding the transactions, where such transactions are not permissible. The FEMA Regime requires the compounding process to be completed within 180 days from the date of receipt of the compounding application by the authority. A contravention that has been compounded cannot be the subject matter of any separate or future adjudication by the RBI. In relation to contraventions associated with a delay in adhering to the reporting obligations, the contravener has the option to make the relevant filings by payment of a late submission fee computed on the basis of the calculation matrix set out under the FEMA Regime. All other contraventions under the FEMA Regime would have to be compounded or adjudicated, as set out above. Should you have any queries, please feel free to contact us!