Foreign Funding - Institutions: formula sheet

Key formulas

Current account transaction

Transaction that does NOT alter assets or liabilities outside India (of a resident) or inside India (of a non-resident)

Includes trade payments, services, small remittances, interest and loan instalments. Freely permitted, subject to Central Government restrictions.

Capital account transaction

Transaction that alters assets or liabilities outside India (of a resident) or inside India (of a non-resident), including contingent liabilities

Examples: FDI, ECB, overseas investment. Permitted only as per rules and regulations made under FEMA.

General rule on permission

Current account: free unless restricted | Capital account: restricted unless permitted

This is the key contrast to state in every answer.

Who makes what

Central Government → rules | RBI → regulations, directions, authorisation of dealers

Do not credit RBI with rule-making that belongs to the Central Government.

Person resident in India

Residence is a status under FEMA, not citizenship

Test residence under the Act's definition, usually based on stay in India and purpose, not on nationality.

Meaning of FDI

FDI = investment by a non-resident in equity instruments of an Indian company

Equity instruments cover equity shares, compulsorily convertible preference shares, compulsorily convertible debentures and share warrants. Optionally convertible or redeemable instruments are treated as debt (ECB), not FDI.

Routes

Automatic route = no prior approval; Government route = prior approval of the Administrative Ministry or Department

Check the sector entry in the FDI Policy. Many sectors have automatic up to a limit and government route above it.

Pricing for unlisted shares (issue to non-residents)

Issue price ≥ fair value determined by a registered valuer or a SEBI-registered merchant banker using any internationally accepted pricing methodology on an arm's length basis

Applies to issue of shares by an unlisted Indian company. The price is a floor for issue to non-residents.

Pricing for listed shares (preferential issue)

Issue price ≥ price worked out under SEBI (ICDR) Regulations

For listed companies the SEBI pricing formula applies on preferential allotment.

Transfer pricing guideline (FEMA)

Resident to non-resident: price ≥ fair value; Non-resident to resident: price ≤ fair value

Protects the Indian side. Pricing guidelines do not apply to transfers by way of gift or between non-residents.

Reporting timelines

Allotment within 60 days of receipt of consideration; Form FC-GPR within 30 days of allotment; Form FC-TRS within 60 days of transfer or receipt of funds

Reporting is through the RBI FIRMS portal. Late submission is regularised on payment of late submission fee (LSF).

Foreign inward remittance

Consideration received through banking channels; Indian company reports through its AD bank

Shares must be issued within 60 days of receipt of the money, failing which the amount is refunded within the next 15 days, subject to RBI rules.

Single FPI limit

Holding of one FPI + its investor group < 10% of total paid-up equity capital (fully diluted); a holding of 10% or more breaches the limit

On a breach, the FPI must divest the excess or reclassify the holding as FDI within the time prescribed (commonly stated as five trading days). Reclassification as FDI is possible only if the FDI policy, sectoral conditions and FEMA/NDI Rules, including approvals and reporting, are complied with.

Holding percentage

FPI holding % = (Shares held by FPI and investor group ÷ Fully diluted paid-up equity shares) × 100

Always include shares held by entities in the same investor group, those under common ownership or control.

Aggregate FPI limit

Total FPI holding in a company ≤ sectoral cap or statutory ceiling applicable to that sector

A company may reduce its aggregate FPI limit to a lower threshold by a board resolution followed by a special resolution of shareholders, as per the prescribed procedure. Check the sector's own cap.

FDI versus FPI test

Below 10% and no control = FPI; 10% or more = breach of the FPI limit, so divest the excess or, if the FDI conditions are met, reclassify as FDI

Use 10% as the dividing line in exam answers. FDI is governed by FEMA Schedule I of the NDI Rules, 2019 and FPI by Schedule II.

Registration route

Application → Designated Depository Participant → registration as Category I or Category II

The DDP grants registration on behalf of SEBI. Registration is not for a fixed term, but it can be suspended or cancelled.

All-in-cost test

All-in-cost = interest + fees + other charges payable (annualised) ≤ benchmark + prescribed spread

Compare on an annual basis. Use the benchmark and spread the question gives, or the current RBI figures. Costs excluded by the Master Direction are not counted.

Track structure (older framework)

Track I: medium-term foreign currency ECB | Track II: long-term foreign currency ECB (longer MAM) | Track III: rupee-denominated ECB

Know what each track stands for and that a longer MAM goes with long-term and special end uses. Check the current Master Direction for exact MAM figures.

Core conditions checklist

Borrower + Lender + MAM + All-in-cost + End use + Route + LRN + ECB-2

Use this as your answer skeleton for any ECB question.

Foreign equity holder rule

Foreign equity holder lender → wider end use allowed, usually with a longer MAM

The relaxation for working capital, general corporate purposes and rupee loan repayment mainly applies when the lender is a direct or indirect foreign equity holder.

DR structure

Underlying shares → Custodian → Depository bank → Depository receipts → Foreign investors

The route for ADR and GDR. For IDR, the foreign company's shares sit with an overseas custodian and the domestic depository issues IDRs in India.

DR ratio

Price of one DR = Price of one underlying share × Number of shares represented by one DR

Adjust for exchange rate if prices are in different currencies. This gives the theoretical parity price. Actual DR prices trade at a premium or discount to it, so add any premium or discount if the question gives it.

Rupee price of DR

Price in ₹ = Price in foreign currency × Exchange rate (₹ per unit)

Use the rate given in the question. Convert before comparing with the share price.

Key distinction

ADR: the US-specific DR, issued in the US | GDR: a DR issued outside the home country, usually to investors in multiple markets and typically outside the US | IDR: foreign company issuing in India

This is the core comparison for exam answers.

Governing norms

Indian issuer of ADR/GDR: Depository Receipts Scheme, 2014 and FEMA | IDR: Companies Act, 2013 and SEBI norms

Name the regime first, then the conditions.

Conversion ratio

Conversion ratio = Face value of bond ÷ Conversion price

Gives the number of shares per bond. Use the same currency for both, converting at the agreed rate.

Conversion premium

Conversion premium (%) = (Conversion price − Current market price) ÷ Current market price × 100

Shows how much above the market price the conversion price is fixed at issue.

Conversion value

Conversion value = Conversion ratio × Current market price per share

Compare with the bond's value as a straight bond. If conversion value is lower, holders usually prefer redemption.

Rupee cost of redemption

Rupee outflow = Foreign currency amount (principal + premium) × Exchange rate at redemption

Shows currency risk. A weaker rupee raises the rupee outflow.

Nature of instrument

FCCB = Foreign currency bond + Option to convert into ordinary shares

A hybrid: debt until conversion, equity after conversion.

World Bank

Purpose = development finance; Client = mainly governments or government-backed borrowers

Lends for projects and reforms. IBRD serves middle-income countries and IDA serves poorer ones on concessional terms.

IMF

Purpose = balance of payments support and monetary stability; Client = member countries

Does not finance specific projects. Support usually comes with policy conditions.

IFC

Purpose = private sector development; Instruments = loans, equity, quasi-equity, advisory

Part of the World Bank Group. Invests in private companies without a government guarantee.

ADB

Purpose = development in Asia and the Pacific; Client = member governments and private sector

Regional multilateral bank. Common sectors are infrastructure, energy and transport.

EXIM Bank of India

Purpose = promote foreign trade; Client = Indian exporters, importers, overseas ventures, foreign buyers

National institution. Offers export credit, overseas investment finance and lines of credit abroad.

Classification rule

Multilateral = owned by many countries (World Bank, IMF, IFC, ADB); National = one country (EXIM Bank)

Use this to open any comparison answer.

ODI test

ODI = any unlisted foreign equity, OR ≥ 10% of listed foreign equity, OR control

If none of these is met, the investment is OPI. Control applies even below 10%.

OPI ceiling

OPI ≤ 50% × net worth (last audited balance sheet), only if the Indian company is listed

Only a listed Indian company may make OPI under the Rules. An unlisted Indian entity cannot make OPI at all. So check whether the investor is listed before you compute any ceiling.

ODI financial commitment ceiling

Total financial commitment in all foreign entities taken together ≤ 400% × net worth (last audited balance sheet)

Under the automatic route. The ceiling covers the aggregate across all foreign entities, not each entity separately. Financial commitment includes equity, debt and guarantees to the foreign entities. Above the ceiling, prior approval is needed. Some funding sources and special cases are treated differently under the Rules, so check the exact conditions.

Headroom

Headroom = ceiling - existing financial commitment (across all foreign entities)

Use this to test whether a proposed investment fits within the automatic route.

Quick revision

• FEMA is about managing foreign exchange, unlike its predecessor, which was about regulating it.
• RBI is the main regulator for foreign exchange transactions under FEMA.
• Capital account transactions are those that change assets or liabilities outside India, and they are more tightly regulated.
• FDI has two routes: automatic and government approval.
• Sectoral caps and conditions decide which FDI route applies.
• FPI is generally portfolio investment in listed securities and does not seek control.
• ECB is borrowing from recognised non-resident lenders, and eligibility, end-use and reporting rules apply.
• FCCBs are foreign currency bonds that can be converted into shares, and they come under the ECB framework.
• ADR and GDR are issued abroad against Indian shares, while IDR is issued in India by a foreign company.
• International financial institutions such as the World Bank group and the Asian Development Bank lend for development.
• Overseas investment by Indian entities follows FEMA rules on eligibility, limits and reporting.
• In answers, always name the rule, apply the facts and state a conclusion.

Common mistakes

• Classifying a transaction by the amount or by whether money is paid in foreign currency. Fix: Classify only by the effect on assets or liabilities across the border. A large import payment is still current account.
• Saying FEMA is a restrictive law like FERA. Fix: Write that FERA was regulatory and penal in approach, while FEMA is facilitative and management-oriented, with civil consequences for contraventions.
• Saying the automatic route means no compliance at all. Fix: Write that approval is not needed but pricing, entry conditions and post-investment reporting (FC-GPR) still apply.
• Treating all sectors as having one fixed route. Fix: Remember that routes are sector-specific and can be split, for example automatic up to a limit and government route beyond it. Say that you are checking the current FDI Policy.
• Writing that FPI has three categories (I, II and III). Fix: For the June 2027 session, write that the SEBI (FPI) Regulations, 2019 have two categories, I and II. Mention Category III only if the question asks about the change from 2014.
• Calling any foreign investment of 10% or more 'FPI with a penalty'. Fix: Say that reaching 10% or more breaches the limit. The FPI must divest the excess or reclassify the holding as FDI within the prescribed time (commonly stated as five trading days). Reclassification as FDI is possible only if the FDI policy, sectoral conditions and FEMA/NDI Rules, including approvals and reporting, are complied with.
• Treating all ECB as one block with one MAM and one cost ceiling. Fix: Always say which type of ECB you mean (foreign currency or rupee, medium or long term) and link the MAM and cost to it.
• Leaving fees out of the all-in-cost. Fix: Add upfront fees, guarantee fees and other charges, annualised, to the interest before comparing with the ceiling.
• Treating IDR as a way for Indian companies to raise money abroad. Fix: Remember the direction: IDR is issued in India by a foreign company. ADR and GDR are issued abroad by an Indian company.
• Saying the DR holder is the legal owner of the shares with full voting rights. Fix: The custodian holds the shares on behalf of the depository. Voting rights of DR holders are exercised according to the deposit agreement, and the depository exercises them on the holder's instructions where the agreement provides.

Exam tips

• Begin every case answer by classifying the transaction as current or capital account; examiners reward this first step.
• Use the structure: provision, facts, conclusion. Add one compliance point such as routing through an authorised dealer.
• For FEMA vs FERA, give two or three crisp points on objective, approach and consequence rather than a long history.
• Do not quote section numbers or limits unless you are certain; state the rule in plain words.
• Link FEMA to the foreign funding routes you study next, like FDI, ECB and depository receipts, to show application.
• Structure every case answer as route, cap, conditions, pricing, reporting, conclusion. Markers look for each step.
• Say that caps and routes are as per the current Consolidated FDI Policy. Do not quote percentages you are unsure of, and mention the sector example only when certain.
• Always add the land-border point if the investor's country is given, and link it to the government route.