Foreign Funding - Instruments, Laws and Procedures: formula sheet

Key formulas

Regulator map

FEMA + RBI = foreign exchange and capital account; SEBI = securities and listing; Companies Act, 2013 = corporate approvals and filings

Use this as the base of any overview answer. Name all three layers.

Main foreign funding instruments

FDI, FPI, ECB, Depository Receipts (ADR/GDR/IDR), FCCB, Masala bonds, funding from international financial institutions

Equity-type: FDI, FPI, depository receipts. Debt-type: ECB, Masala bonds. Hybrid: FCCB.

Foreign company: filing time (section 380(1))

Documents to Registrar within 30 days of establishing a place of business in India

Includes charter or memorandum and articles, address of registered office, list of directors and secretary, and the name and address of a person resident in India authorised to accept service of process.

Foreign company: alteration (section 380(3))

Return of alteration within 30 days of the alteration

Applies to any change in the documents already delivered.

Indian-owned foreign company (section 379(2))

Paid-up share capital held by Indian citizens or Indian bodies corporate ≥ 50% → comply as if an Indian company

Applies to equity, preference or both together, held singly or in aggregate.

Automatic route

No prior approval needed; only post-investment compliance

Applies where the sector is open and the investment is within the cap and conditions.

Government route

Prior government approval first; money comes in after approval

Applies to sectors or stakes beyond the automatic limit, and to investors covered by land-border restrictions.

Pricing: issue of shares by unlisted Indian company to non-resident

Issue price ≥ fair value (valuation by a SEBI-registered merchant banker, chartered accountant or cost accountant, on an internationally accepted pricing methodology)

For listed companies, the SEBI pricing formulas apply instead.

Pricing: transfer of shares between resident and non-resident

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

Price for the foreign party works as a floor when buying and a ceiling when selling.

Time to allot shares

Allotment within 60 days of receiving the inflow; otherwise refund within the next 15 days

Beyond that, refund needs RBI permission. Money is not parked with the company.

FC-GPR

Report issue of equity instruments to RBI within 30 days of allotment

Filed by the Indian company through RBI's reporting portal with its authorised dealer bank's support.

FC-TRS

Report transfer of equity instruments between resident and non-resident within 60 days of transfer or receipt/remittance of funds, whichever is earlier

Filed for secondary transfers, not fresh issue.

FLA return

Annual return on Foreign Liabilities and Assets by 15 July each year

Filed by Indian companies that have received FDI or made overseas investment.

All-in-cost (AIC) test

AIC = interest margin over benchmark + benchmark rate + fees + other charges (excluding commitment and withholding tax items as RBI specifies) ≤ benchmark + ceiling spread. Equivalent spread test: margin + fees + other charges ≤ ceiling spread

The ceiling is a spread over the benchmark, so the cleanest check is margin plus fees against the spread. Do not count the benchmark on one side and add it again on the other. In the 2019 framework the spread for foreign currency ECB was 550 bps over the benchmark. Rupee ECB used the G-sec yield plus a spread. Confirm the current spread.

Rupee ECB benchmark

Ceiling = prevailing yield of GoI securities of corresponding maturity + spread

Used for rupee-denominated ECB. Foreign currency ECB uses a floating reference rate benchmark.

Minimum average maturity period (MAMP)

Average maturity = Σ(repayment amount × years to repayment) ÷ total loan amount

Must be at least the MAMP for the borrowing purpose. The default is 3 years, and working capital, general corporate purposes and rupee loan repayment need a longer MAMP (up to 10 years). Confirm the current table.

Foreign equity holder test

Direct equity holding in borrower ≥ minimum holding stated in the current Master Direction (25% in the 2019 framework)

A direct equity holder must meet the minimum holding. Indirect equity holders and group companies with a common overseas parent qualify on separate conditions. Confirm the current conditions.

Leverage limit

ECB liability from the foreign equity holder ÷ equity of that foreign equity holder in the borrower ≤ 7 : 1

Applies to ECB from a foreign equity holder, with a small-amount exemption. Confirm the current figure.

Reporting

Form ECB → LRN before drawdown; ECB-2 return every month

The ECB-2 return is filed through the AD bank within the prescribed day of the following month.

Section 41: authority to issue

Special resolution in general meeting + issue in a foreign country + prescribed manner and conditions

A company may issue depository receipts in any foreign country after passing a special resolution, subject to the prescribed conditions.

Structure of a DR

Underlying shares → domestic custodian → foreign depository → DRs to foreign investors

One DR represents a fixed number of underlying shares, called the DR ratio.

Value of one DR

Value of one DR = Share price in ₹ × Shares per DR ÷ Exchange rate (₹ per unit of foreign currency)

Use it to compare the DR price with the local share price. Ignore costs and taxes unless the question gives them.

ADR versus GDR

ADR = issued in the USA; GDR = issued in one or more foreign markets

Both are negotiable instruments denominated in foreign currency against Indian shares.

Section 390 (contrast)

Indian Depository Receipt (IDR) = receipt issued in India by a company incorporated outside India

Rules are made by the Central Government. Do not confuse with ADR or GDR.

Section 234(2) link

Foreign company merging with an Indian company or vice versa: prior RBI approval; consideration may be cash, DRs or both

Shows DRs can also be used as merger consideration.

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 rate fixed in the terms.

Conversion value

Conversion value = Conversion ratio × Current market price per share

The value of the shares the holder would receive. Compare with the bond's market price to judge whether conversion pays.

Conversion premium

Conversion premium = (Conversion price − Market price at issue) ÷ Market price at issue × 100

Shows how far above the market price the conversion price is set. Conversion is attractive only once the share price exceeds the conversion price.

Redemption amount if not converted

Amount = Face value × (1 + redemption premium %)

Use only if the terms give a redemption premium. Do not assume one.

FCCB versus FCEB

FCCB → shares of the issuer. FCEB → shares of another company.

This single test separates the two instruments in any question.

Foreign company accounts (section 381)

Balance sheet and profit and loss account every calendar year, copy delivered to the Registrar

Also a list of all places of business in India, as at the balance sheet date.

Single FPI limit

One FPI (with its investor group) holding < 10% of the total paid-up equity capital of an Indian company, on a fully diluted basis

Divest the excess within five trading days. Otherwise the whole holding is reclassified as FDI, which is allowed only if the sector permits and FDI conditions are met. Check the current rule before writing the figure.

Aggregate FPI limit

Total FPI holding ≤ sectoral cap (or a lower limit set by the company)

The cap depends on the sector. Name the rule, then apply the sector cap given in the question.

FPI categories

Category I (lowest risk) → Category II → Category III (highest risk)

Classification is by risk and regulation status of the investor.

Masala bond currency risk

Currency risk = borne by the investor, not the Indian issuer

Issued overseas, denominated in ₹, and governed by the ECB framework.

FDI vs FPI test

Lasting interest and control → FDI; passive listed holding → FPI

Use this to classify any fact pattern.

Section 380(1): documents on establishing a place of business

Deliver to the Registrar within 30 days of establishing a place of business in India

Includes certified charter or memorandum and articles (with English translation if needed), address of registered or principal office, list of directors and secretary, name and address of one or more India-resident persons authorised to accept service, address of principal place of business in India, particulars of earlier opening and closing of a place of business in India, and a declaration on no conviction or debarment of directors or the authorised representative.

Section 380(3): alterations

Return of alteration within 30 days of the alteration, in the prescribed form

Applies to any change in the documents already delivered.

Section 381(1): annual accounts

In every calendar year: prepare balance sheet and profit and loss account in the prescribed form, and deliver a copy to the Registrar

The Central Government may by notification exempt or modify the requirement under clause (a) for a company or class of companies.

Section 381(2) and (3): translation and list of places

Non-English documents need a certified English translation; send a list of all places of business in India as at the balance sheet date

The list goes with the documents under sub-section (1) and is in the prescribed form.

Section 383: service

Service is deemed sufficient if addressed to a person named under section 380 and left at, or posted or electronically sent to, the address delivered to the Registrar

Protects the Indian claimant.

Section 376: winding up

A body corporate incorporated outside India that has carried on business in India and ceases to do so may be wound up as an unregistered company, even if dissolved abroad

Wound up under Part of the Act dealing with unregistered companies.

Section 228 and section 391

Section 228: inspection, inquiry and investigation provisions apply mutatis mutandis. Section 391: sections 34 to 36 apply to a foreign company's prospectus and to IDRs

Section 391(2) also applies Chapter XX for closure of a place of business where securities money raised is unpaid, subject to section 376.

Further issue to any persons (section 62(1)(c))

Special resolution + price fixed by registered valuer's report, subject to Chapter III and prescribed conditions (cash or non-cash consideration)

This is the usual route for allotting shares to a non-resident investor. A board resolution alone is not enough.

Rights offer notice period (section 62(1)(a)(i))

Offer open for at least 15 days (or such lesser number as prescribed) and not more than 30 days

If the offer is not accepted within the time, it is deemed declined. The notice must also state the right to renounce unless the articles provide otherwise.

Dispatch of rights notice (section 62(2))

Send the notice to all existing shareholders at least 3 days before the issue opens, by a mode with proof of delivery

The modes are registered post, speed post, electronic mode, courier or any other mode having proof of delivery.

Securities premium (section 52(1))

Securities premium account = total premium received on shares issued

Applies whether the issue is for cash or otherwise. Use is limited to the purposes in section 52(2).

Redemption of preference shares (section 55)

Articles must authorise; redeem only if fully paid, within 20 years, out of profits available for dividend or fresh issue proceeds; CRR = nominal value redeemed out of profits

Irredeemable preference shares cannot be issued. Infrastructure projects may exceed 20 years, subject to annual redemption of a prescribed percentage at the holders' option. Premium on redemption must be provided for before redemption: out of profits for prescribed companies complying with section 133 standards, otherwise out of profits or the securities premium account.

Foreign company filing (section 380)

Documents to Registrar within 30 days of setting up place of business in India; alterations within 30 days

Includes charter or memorandum and articles, address of principal office, list of directors and secretary, and an authorised person in India for service of process.

Quick revision

• Foreign funding covers equity, debt and hybrid instruments raised from outside India.
• Always name the instrument, the route and the governing law in your answer.
• Section 41: a company may issue depository receipts abroad after a special resolution in general meeting, as prescribed.
• Section 234: a foreign company may merge into an Indian company or vice versa with prior RBI approval.
• Section 234 allows consideration in cash, in Depository Receipts, or partly in each.
• Section 390 lets the Central Government make rules on Indian Depository Receipts issued by a foreign company, whether or not it has a place of business in India.
• Section 391 applies sections 34 to 36 to IDRs and to prospectuses of foreign companies.
• FDI brings ownership and control; ECB is borrowing and must be repaid.
• FCCBs are bonds that can be converted into shares, so they mix debt and equity features.
• Masala bonds are rupee-denominated, so the investor carries the currency risk.
• Foreign portfolio investment is usually financial and not for control, unlike FDI.
• Verify limits, caps and thresholds from the current rules before quoting them.

Common mistakes

• Saying FEMA alone regulates all foreign funding. Fix: Always add the RBI as rule maker, SEBI for securities, and the Companies Act for corporate steps.
• Confusing a foreign company with a company raising foreign funds. Fix: A foreign company is incorporated outside India but has a place of business in India. Sections 379 to 380 apply to it. An Indian company raising money abroad is governed by FEMA and related rules.
• Treating the automatic route as 'no compliance'. Fix: Say that approval is not needed but pricing, allotment time and reporting (FC-GPR) still apply.
• Applying the same price rule to every transaction. Fix: Resident to non-resident: not below fair value. Non-resident to resident: not above fair value.
• Counting only the interest rate as the cost of the ECB. Fix: Add all fees and charges to the interest. The ceiling applies to the all-in-cost, not to the coupon alone.
• Allowing ECB proceeds to be invested in shares or property. Fix: Read the end-use first. Real estate, land purchase, capital market and equity investment are on the negative list.
• Saying ADR and GDR are issued in India. Fix: ADRs and GDRs are issued abroad against Indian shares. IDRs are issued in India by a foreign company under Section 390.
• Saying a board resolution is enough to issue a GDR. Fix: Section 41 requires a special resolution passed in a general meeting.
• Saying an FCEB converts into the issuer's own shares. Fix: Remember that exchange means shares of another company, so the issuer's capital does not increase.
• Treating an FCCB as pure equity from the day of issue. Fix: It is debt until conversion. Interest is payable and redemption is due if the holder does not convert.

Exam tips

• Open with a one-line definition, then a table-style list in sentences: instrument, regulator, compliance. Examiners reward structure.
• Keep sections 379 and 380 ready for foreign company questions. Quote the 30-day periods and the fifty per cent threshold exactly.
• In case questions, apply the facts to the rule before concluding. Do not just recite the law.
• Name FEMA, RBI, SEBI and the Companies Act together in any regulatory framework answer.
• Do not cite section numbers of other Acts or FEMA rules unless you are certain of them. State the rule in plain words instead.
• Always name the route, the pricing floor or ceiling, and the form with its day limit. Examiners look for these three points.
• In case questions, check the investor's country before the sector. Land-border links are an easy-to-miss fact built into the question.
• Show day counts in a line or two. A correct date with working earns marks even if the form name slips.