Foreign Direct Investments - Regulations and Policy: formula sheet

Key formulas

Capital account transaction

Transaction that alters assets or liabilities outside India of residents, or in India of non-residents (FEMA s 2(e))

FDI falls here, not under current account transactions.

Current account transaction

Any transaction other than a capital account transaction (FEMA s 2(j))

Includes trade payments, interest on loans, net income from investments, living and travel expenses abroad.

Person resident outside India

A person who is not resident in India (FEMA s 2(w))

The investor in FDI must be in this category.

Automatic route

No prior Government approval; post-investment reporting to the RBI

Still subject to sectoral caps and entry conditions.

Government route

Prior Government approval required before investment

Applies to sectors or activities so specified in the policy.

Power to regulate capital account transactions

s 6(2): RBI (debt instruments); s 6(2A): Central Government (non-debt instruments)

Both act in consultation with each other.

Rule-making power: non-debt capital account transactions

Section 6(2A) + Section 46(2)(ab): Central Government prescribes, in consultation with the RBI

Classes, limits and conditions for transactions not involving debt instruments. The Non-Debt Instruments Rules, 2019 come from here.

Power over debt instruments

Section 6(2) + Section 47(2)(a): RBI specifies or regulates, in consultation with the Central Government

Applies to permissible classes of capital account transactions involving debt instruments.

Meaning of debt instruments

Section 6(7): instruments determined by the Central Government in consultation with the RBI

Section 46(2)(aa) also lets the Central Government make rules on which instruments are debt instruments.

General regulation power of RBI

Section 47(1): RBI may, by notification, make regulations to carry out the Act and the rules

Section 47(2) lists examples. It is without prejudice to the general power.

Saving of earlier regulations

Section 47(3): earlier RBI regulations on capital account transactions remain valid until amended or rescinded by the Central Government

Applies to transactions whose regulation-making power now vests with the Central Government.

Equity instruments test

Equity shares + fully, compulsorily and mandatorily convertible preference shares and debentures + share warrants, as defined in the Rules

Optionally convertible or partly convertible instruments are treated as debt.

Basic prohibition

Section 3: no dealing in foreign exchange, or payment to a person resident outside India, except as the Act, rules, regulations or RBI permission allow

The Rules and regulations are the permission for foreign investment.

Legal base for conditions

Section 6(2A) FEMA: Central Government may prescribe permissible non-debt capital account transactions, limits and conditions

Use this to open any answer on why caps and conditions bind the investor.

Prohibited sectors (FDI not allowed)

Lottery (including government, private and online lotteries); gambling and betting including casinos; chit funds; Nidhi companies; trading in Transferable Development Rights; real estate business and construction of farmhouses; manufacture of cigars, cheroots, cigarillos and cigarettes of tobacco or tobacco substitutes; activities not open to private sector investment such as atomic energy and railway operations

Real estate business does not include development of townships, housing and construction-development projects, which are permitted under conditions.

Retail trading

Single-brand: 100% automatic route (with sourcing conditions). Multi-brand: 51% government route. E-commerce marketplace: 100% automatic; inventory-based model not allowed

Multi-brand carries conditions such as a minimum investment, back-end infrastructure spend and sourcing from small industries, plus State-level acceptance.

Defence manufacturing

Up to 74%: automatic route. Above 74%: government route where it gives access to modern technology

Industrial licence is also required for defence manufacture.

Insurance

Limit raised in stages from 26% to 49% to 74%; recent amendments have raised it further

Quote the current limit from your study material. Foreign investment in insurance is also subject to IRDAI conditions.

Routes

Automatic route: no prior approval. Government route: prior approval needed

Always state the route with the cap.

Pricing floor on issue to non-resident

Issue price ≥ fair value (arm's length, as per internationally accepted pricing methodology)

For listed companies, follow the SEBI price norms. For unlisted companies, a valuation certificate is needed.

Transfer from resident to non-resident

Transfer price ≥ fair value

The buyer is a non-resident, so the price cannot be below the floor.

Transfer from non-resident to resident

Transfer price ≤ fair value

The seller is a non-resident, so the price cannot exceed the ceiling. This stops excess outflow of foreign exchange.

Reporting forms

Issue of shares: FC-GPR. Transfer of shares: FC-TRS. Both on the FIRMS portal.

Filed through the authorised dealer bank within the timeline in the rules.

Downstream investment

Indirect foreign investment = investment by an Indian entity that is owned or controlled by non-residents

Conditions, caps and pricing of the sector apply as if it were direct FDI.

Valuation by

SEBI-registered merchant banker or chartered accountant (as the rules specify)

Certificate supports the price for unlisted shares.

Source of power

Section 6(2): RBI specifies debt-instrument transactions; Section 6(2A): Central Government prescribes non-debt-instrument transactions

Both are made in consultation with each other. Limits and conditions come from these rules.

FDI vs FPI threshold

FDI: unlisted company, or 10% or more of post-issue paid-up equity of a listed company (fully diluted). FPI: below 10% per investor

Crossing 10% as an FPI means the holding must be brought within the FDI framework or sold down.

NRI investment bases

Repatriation basis: proceeds can be sent abroad. Non-repatriation basis: proceeds stay in India

Non-repatriation investment is treated as a domestic investment.

LLP condition

Foreign investment in LLP: only in sectors with 100% automatic route and no FDI-linked performance conditions

Downstream investment by such an LLP is subject to the same condition.

Resident holding of foreign assets

Section 4: no resident in India shall acquire, hold, own, possess or transfer foreign exchange, foreign security or immovable property outside India, save as otherwise provided

Section 6(4) protects assets acquired or inherited when the person was resident outside India.

General penalty, quantifiable sum (Section 13(1))

Penalty ≤ 3 × sum involved in the contravention

Imposed upon adjudication. It is a ceiling, not a fixed amount.

General penalty, sum not quantifiable (Section 13(1))

Penalty ≤ ₹2,00,000

Applies where the amount involved cannot be quantified.

Continuing contravention (Section 13(1))

Further penalty ≤ ₹5,000 for every day after the first day

Runs for each day the contravention continues after the first day.

Confiscation and repatriation (Section 13(2))

Adjudicating Authority may confiscate the currency, security or property involved, and direct foreign exchange holdings to be brought back to India or retained outside

Is in addition to the penalty, and only if the authority thinks fit.

Undisclosed foreign assets (Sections 13(1A), 13(1C))

Penalty ≤ 3 × sum involved + confiscation of equivalent value in India; imprisonment up to 5 years and fine

Only where aggregate value exceeds the threshold prescribed under the proviso to Section 37A(1). Court takes cognizance only on a written complaint by an officer not below Assistant Director (Section 13(1D)).

Authorised person (Section 11(3))

Penalty ≤ ₹10,000 + ≤ ₹2,000 per day for continuing contravention

For an authorised person (such as a bank) who breaks an RBI direction or fails to file a return. Reasonable opportunity of hearing is needed.

Quick revision

• FDI means investment by a person resident outside India in an Indian company's equity, under FEMA and the FDI policy.
• There are two routes: the automatic route needs no prior government approval; the government route needs it.
• Section 6(2) lets the Reserve Bank, in consultation with the Central Government, specify permissible capital account transactions involving debt instruments.
• Section 6(2A) lets the Central Government, in consultation with the Reserve Bank, prescribe those not involving debt instruments.
• Section 46 gives rule-making power to the Central Government; section 47 gives regulation-making power to the Reserve Bank.
• Section 10 lets the Reserve Bank authorise dealers and revoke authorisation in public interest or for breach, after a reasonable opportunity of representation.
• Section 11(3) allows a penalty on an authorised person up to ₹10,000, plus up to ₹2,000 per day for a continuing contravention.
• Section 12 lets the Reserve Bank inspect an authorised person's business and requires production of books and information.
• Section 3 bars dealing in foreign exchange except through an authorised person, unless the Act, rules or RBI permit it.
• Check sector, cap and conditions first; a sector may allow FDI only up to a cap or only with conditions.
• Pricing and reporting are separate compliance steps; missing either is a contravention.
• Always end your answer with a clear conclusion on whether the investment is permitted.

Common mistakes

• Treating FDI as a current account transaction Fix: Remember the test in section 2(j): anything not a capital account transaction is current. FDI changes assets in India of a non-resident, so it is capital account.
• Saying the automatic route means no compliance Fix: Say no prior approval is needed, but caps, conditions and post-investment reporting to the RBI still apply.
• Saying the RBI makes the Non-Debt Instruments Rules. Fix: Remember that the Rules are made by the Central Government. The RBI makes regulations under Section 47, and for debt instruments the RBI specifies the classes under Section 6(2).
• Treating optionally convertible debentures as equity instruments. Fix: Only fully, compulsorily and mandatorily convertible instruments count as equity. Others are debt.
• Saying real estate is wholly prohibited. Fix: Remember that townships, housing and construction-development projects are permitted under conditions. Only real estate business (buying and selling land for profit) is prohibited.
• Giving the cap but not the route. Fix: Write the percentage and the route together, such as 'multi-brand retail: 51%, government route'.
• Applying the same price floor to every transfer. Fix: Reverse the rule when the non-resident is the seller. The price then cannot exceed fair value.
• Using FC-GPR for a transfer of existing shares. Fix: GPR is General Permission Route issue of shares. TRS is transfer of shares. Match the form to the nature of the deal.
• Treating any foreign shareholding in a listed company as FPI Fix: Apply the 10% test on a fully diluted basis. At or above 10% it is FDI territory.
• Saying NRI non-repatriation investment is FDI-regulated like foreign investment Fix: State that investment on a non-repatriation basis is treated as a domestic investment.

Exam tips

• Begin every answer with the definition and the section 2(e) link. It earns marks quickly.
• For difference questions, write a short two-column style list with route, approval, reporting and example points.
• Always state that caps and conditions apply even under the automatic route.
• Cite section 6(2) and 6(2A) only with the right split: RBI for debt instruments, Central Government for non-debt instruments.
• End with a one-line conclusion naming the route and the compliance step.
• Learn the Section 6(2) versus 6(2A) split, since it explains who makes which rules. Write it in one line at the start of the answer.
• Cite Section 47 for RBI regulations and Section 46 for Central Government rules. Do not mix them up.
• In classification questions, always test whether a convertible instrument is compulsorily convertible. That decides equity or debt.