ACQUISITION OF SHARES/STAKE IN AN INDIAN COMPANY BY A FOREIGN COMPANY

Foreign Direct Investment (FDI) in India’s Financial Services and E-Commerce Sectors: Legal and Regulatory Framework

Introduction

India’s financial services and e-commerce sectors are significant drivers of economic growth, and foreign direct investment (FDI) plays a crucial role in shaping their development. The Indian government has established specific regulatory frameworks to govern FDI in these sectors, ensuring that foreign investments align with national interests while fostering growth and innovation. However, FDI in financial services, in particular, involves several legal considerations and procedural requirements.

FDI in Financial Services: Regulatory Overview

The financial services sector in India is an exception to the general FDI policy that allows 100% foreign investment under the automatic route. In this case, FDI requires prior government approval for acquisitions of shares in existing companies. These applications are reviewed by the Foreign Investment Promotion Board (FIPB) in the Ministry of Finance. Proposals involving the acquisition of shares in financial services companies are subject to the regulations of the Securities and Exchange Board of India (SEBI) and the Foreign Exchange Management Act (FEMA).

Once the government’s approval is obtained, there are specific steps that Indian companies must follow to report foreign investments, ensuring compliance with all regulatory requirements. These include reporting the receipt of funds to the Reserve Bank of India (RBI) and providing necessary documentation upon the issue of shares to foreign investors.

Investment Process: Detailed Steps

1. Receipt of Investment Funds:

   • Within 30 days of receiving foreign investment, the Indian company must report the receipt of funds to the regional office of the RBI, providing details such as the foreign investor’s name, address, and the amount of funds received.

2. Issuance of Shares to Foreign Investors:

   • Within 30 days of issuing shares to foreign investors, the company must submit a report to the RBI in Form FC-GPR. This report must include a certificate from the Company Secretary confirming compliance with the Companies Act, 1956, and the terms of government approval, if applicable. Additionally, the company must submit a certificate from a statutory auditor or chartered accountant regarding the share pricing methodology.

Methods of Payment for Foreign Investment

Foreign investors must remit the payment for shares through authorized banking channels, such as the NRE (Non-Resident External) or FCNR (Foreign Currency Non-Resident) accounts. Alternatively, payments can be made through an escrow account in India, or out of dividends payable by the Indian company.

Valuation of Shares: Guidelines for Existing Companies

For investments in existing companies, share valuation must be conducted based on the following guidelines:

• Listed Shares: Shares should be priced at no less than the preferential allotment price as per SEBI guidelines.
• Unlisted Shares: The price should be determined according to internationally accepted pricing methods, as certified by a SEBI-registered Merchant Banker or Chartered Accountant.

Types of Foreign Investment in Indian Companies

1. Preference Shares:

   • Foreign investors are permitted to invest in preference shares that are fully and mandatorily convertible into equity shares within a specified period. These are treated as part of the share capital under FDI regulations.

2. Debentures:

   • Fully and mandatorily convertible debentures are considered part of share capital under FDI regulations, provided they convert into equity within a specified time frame.

3. Rights Shares:

   • FDI in rights shares is allowed without restrictions, as long as the same offer is made to both resident and non-resident investors. The pricing of rights shares should be consistent with the terms provided to resident shareholders.

Foreign Investment in E-Commerce: Key Considerations

According to Press Note No. 3 (2016 Series), 100% FDI is permitted under the automatic route for the marketplace model of e-commerce. The marketplace model is defined as a platform that facilitates transactions between buyers and sellers without owning the inventory. However, FDI is not permitted in the inventory-based model, where e-commerce entities own the inventory and sell directly to consumers.

FDI in India’s financial services and e-commerce sectors offers substantial growth opportunities, but it is crucial for foreign investors to adhere to the country’s regulatory framework. By following the appropriate approval procedures, reporting requirements, and share valuation guidelines, foreign investors can contribute to the development of these sectors while ensuring compliance with Indian laws.