Given India’s rapidly growing market, the country’s investment potential has enticed a slew of foreign companies to establish their presence in India. Over the last few years, initiatives have been taken to ensure that establishing a business in India is more straightforward and foreign companies are encouraged to invest in the country.
Foreign investment in India is governed by the Foreign Direct Investment (FDI) policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (RBI) has issued a notification which contains the relevant regulations. Foreign investment is freely permitted in almost all sectors. Foreign Direct Investments (FDI) can be made under two routes—the Automatic Route and the Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the RBI or the Government of India for the investment. Under the Government Route, approval by the Foreign Investment Promotion Board (FIPB), the inter-ministerial body responsible for processing FDI proposals and making recommendations for Government approval, is required
India has long been regarded as one of the major economies of the world. The Indian government is actively implementing a number of efforts to increase business sector efficiency, whether it is through trade liberalization, lowered tax rates, or a more welcoming attitude toward foreign investment. Additionally, a lot of reforms and advancements have been made in India recently to enhance the business environment for small and medium-sized firms, making it the country with the best business climate.
Mode of Investment
Indian companies can freely issue equity shares / convertible debentures and preference shares subject to valuation norms prescribed under FEMA regulations. Issue of other types of preference shares such as non-convertible, optionally convertible or partially convertible are considered debt. As such, the guidelines applicable for External Commercial Borrowing (ECB), viz. eligible borrowers, recognised lenders, amount and maturity, end use stipulations and so on, will apply to such issues. Since these instruments are denominated in rupees, the rupee interest rate will be based on the swap equivalent of the London Inter-Bank Offered Rate (LIBOR) plus the spread permissible for ECBs of corresponding maturity. As far as debentures are concerned, only those which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy.
Various factors are to be considered before choosing the best strategy for establishing a business in India including, but not limited to, the due diligence of the Indian partners, exit strategies, Indian laws and regulations, and operational issues such as connectivity, employment and state-wise regulations. Additionally, the preferred path for a foreign company to establish a presence in the Indian market will also depend on the company’s specific requirements, such as the size of its operations, expansion and commercial goals.
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