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FIMPACT Newsletter No. 22 (dated 24th February 2014). Contact us at contact.investments@ifmr.co.


With todays newsletter, we will be staring a new series titled Regulatory Framework for Foreign Investments in
India, in which, we will give an overview on the entire range of foreign investments regulations in India.

Foreign investments in India are governed under the Foreign Exchange Management Act, as notified by Reserve
Bank of India from time to time. The below schematic representation gives the different routes for foreign
investments in India,

Schematic Representation of Foreign Investments in India


Foreign Portfolio
Foreign Direct Foreign Venture
Investors and Other External Commercial
Investments Capital Investments
Investors Borrowings (ECBs) &
Foreign Currency
Convertible Bonds
SEBI registered (FCCBs)
FPIs (erstwhile FIIs,
Automatic Route Government Route sub-accounts and Foreign Venture
QFIs) Capital Investors

Eligible Investors
Non Resident Indians
Venture Capital
(NRIs) and People of
Funds (VCFs), which
Indian Origin (PIOs)
will now shift to the
new regime of
Investment Funds

Given below is a brief description of each of the different routes for foreign investments,

1. Foreign Direct Investments Equity and Convertible Instruments

Foreign Direct Investment (FDI) in India is undertaken as per the FDI Policy formulated by the Department of
Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India. The latest
consolidated FDI policy circular is available here.

Under FDI, investments can be made in equity shares, mandatorily and fully convertible debentures and
mandatorily and fully convertible preference shares of an Indian company by non-residents through two routes:

Automatic Route: Under the Automatic Route, the foreign investor or the Indian company does not require any
approval from the Reserve Bank or Government of India for the investment.

Government Route: Under the Government Route, the foreign investor or the Indian company should obtain
prior approval of the Government of India through the Foreign Investment Promotion Board (FIPB), Department
of Economic Affairs (DEA), Ministry of Finance or Department of Industrial Policy & Promotion, as the case may
FIMPACT Newsletter No. 22 (dated 24th February 2014). Contact us at contact.investments@ifmr.co.in

2. Foreign Portfolio Investors and Other Investors

a) Equity and Convertible Instruments

Foreign Institutional Investors - FIIs, sub accounts of FIIs, Qualified Foreign Investors QFIs (these three
categories has now been merged into a single category of FPIs), Non-Resident Indians (NRIs) and People of
Indian Origin (PIOs) are eligible to purchase shares and convertible debentures issued by Indian companies
through stock exchanges in India, either in the primary or secondary market.

FIIs, sub accounts, NRIs and PIOs can invest in equity and convertible instruments under the Portfolio
Investment Scheme (PIS). Under PIS, the limits for investment are as follows,

The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per
cent for NRIs/PIOs.

The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the
approval of the board and the general body of the company passing a special resolution to that effect. Similarly,
the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per cent subject to the approval of the general body
of the company passing a resolution to that effect.

b) Debt Instruments

FPIs, NRIs, PIOs and Long Term Investors (comprising Sovereign Wealth Finds-SWFs, Multilateral Agencies,
Pension/Insurance/Endowment Funds and Foreign Central Banks) can buy a host of debt instruments like dated
Government securities/treasury bills, listed or to be listed non-convertible debentures/bonds , commercial
papers issued by Indian companies, units of domestic mutual funds, security receipts issued by Asset
Reconstruction Companies, perpetual debt instruments eligible for inclusion as Tier I capital and debt capital
instruments as upper Tier II Capital.

The current limits for such debt instruments are as follows,

Instrument/s Limit Eligible Investor Remarks

FIIs, QFIs (now clubbed as
FPIs) and Long terms Eligible Investors
investors registered with SEBI may invest in
Government securities including USD 25 Sovereign Wealth Funds Treasury Bills only
Treasury Bills billion (SWFs), Multilateral Agencies, up to USD 5.5 billion
Pension/ Insurance/ within the limit of
Endowment Funds, Foreign USD 25 billion.
Central Banks
FIIs, QFIs (now clubbed as Eligible Investors
FPIs) and Long terms may invest in
investors registered with SEBI Commercial Papers
Corporate Debt including USD 51
- SWFs, Multilateral Agencies, only up to USD 2.0
Commercial Papers billion
Pension/ Insurance/ billion* within the
Endowment Funds, Foreign limit of USD 51
Central Banks billion.
* The limit for Commercial Papers was recently reduced from USD 3.5 billion to USD 2.0 billion (vide RBI circular dated
February 14, 2014) as the previous limit was being used only to the extent of 58%. The balance USD 1.5 billion released will
continue to be part of the total Corporate debt limit of USD 51 billion and will be available to eligible foreign investors for
investment in Corporate debt.
FIMPACT Newsletter No. 22 (dated 24th February 2014). Contact us at contact.investments@ifmr.co.in

3. Foreign Venture Capital Investments Equity and Debt Instruments

A SEBI registered Foreign Venture Capital Investor (FVCI) with specific approval from the Reserve Bank of India
can invest in Indian Venture Capital Undertaking (IVCU) or a Venture Capital Fund (VCF) registered with SEBI.

An IVCU is defined as a company incorporated in India whose shares are not listed on a recognized stock
exchange in India and which is not engaged in an activity under the negative list specified by SEBI. A VCF is
defined as a fund and registered under the Securities and Exchange Board of India (Venture Capital Fund)
Regulations, 1996. Such funds will now move to the new regime of Alternative Investment Funds in India.

FVCIs can purchase equity /equity linked instruments/debt/debt instruments of an IVCU or units of a VCF
through initial public offer, private placement, private arrangement or purchase from third party.

4. External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds (FCCBs) Debt

ECBs refer to commercial loans in the form of bank loans, securitized instruments (e.g. floating rate notes, fixed
rate bonds, non-convertible, optionally convertible or partially convertible preference shares) with a minimum
average maturity of 3 years. FCCBs mean a bond issued by an Indian company expressed in foreign currency,
and the principal and interest in respect of which is payable in foreign currency.

Eligible borrowers can raise ECB/FCCB from internationally recognized sources, such as (a) international banks,
(b) international capital markets, (c) multilateral financial institutions/regional financial institutions and
Government owned development financial institutions, (d) export credit agencies, (e) suppliers of equipments,
(f) foreign collaborators and (g) foreign equity holders

Through the above routes, foreign investors can invest in a wide range of equity and debt instruments in India.
In subsequent newsletters, we will focus further on particular aspects of the above regulatory framework.
FIMPACT Newsletter No. 22 (dated 24th February 2014). Contact us at contact.investments@ifmr.co.in