FDI Route

A foreign investor putting money into India has to come through a door the law recognises. The workbook describes three routes apart from investing through an AIF: FDI, FPI and FVCI.

The FDI route is for non-resident investment that is strategic in nature — "for a business or long term investment purpose". Size is the dividing line. To be classified as foreign direct investment, the investment "shall not be less than 10% of the post-investment fully diluted paid-up capital of the investee company". Below that line, in a listed company, the investor is in FPI territory.

The FDI policy is issued from time to time by the DPIIT, Ministry of Commerce and Industry, and operationalised by the RBI under FEMA through the Foreign Exchange Management (Non-Debt Instrument) Rules ("NDI Rules") and the FEMA Master Directions.

What the FDI policy, NDI Rules and Master Directions cover:

• prohibited sectors for FDI;
• permitted sectors with sectoral caps (the maximum FDI approved in an investee company's paid-up capital in a given sector);
• the types of securities that can be issued;
• investments under the automatic route without prior permission, and those needing prior Government and RBI approval;
• minimum capitalisation norms in select cases;
• pricing regulations for issue of securities to non-residents, and for subsequent sale or transfer.

The three routes compared:

How it touches AIFs.

• NRIs, PIOs and OCIs may invest in SEBI-registered AIFs under the FDI policy.
• A pure offshore fund can invest either after SEBI registration under the FVCI Regulations or directly under the FDI policy without SEBI registration — the FDI route then subjects it to sectoral caps and pricing regulations.
• An AIF's downstream investment is treated as indirect foreign investment if its sponsor, manager or investment manager is not Indian owned or controlled. Such downstream investment must conform to the sectoral caps and conditions under the FDI policy and NDI Rules, and Form DI must be filed with the RBI within 30 days of allotment.

Illustrative figures. Three foreign investors look at Indian companies.

The Singapore family office must check that food processing is a permitted sector, whether it falls under the automatic route or the approval route, that 15% is within any sectoral cap, and that the share price complies with the pricing regulations.

Separately, Dakshin Capital, a Category II AIF whose investment manager is foreign controlled, invests Rs 60 crore in an Indian insurance-broking company. Because the manager is not Indian owned or controlled, the downstream investment counts as indirect foreign investment. It must respect the sectoral cap for that sector, and the investee files Form DI with the RBI within 30 days of allotment — even though most of the AIF's own investors are Indian.

Chapter 4 (Regulatory Framework — Indian Context) sets out the FDI, FPI and FVCI routes at 4.2.6 and foreign investment in AIFs, including downstream investment, at 4.2.7; 4.2.5 covers investment by NRIs and PIOs. Chapter 5 (Alternative Investment Fund Structuring) shows how a pure offshore fund can use the FDI route instead of FVCI registration. Expect questions on the 10% threshold, on who issues and who operationalises the FDI policy, and on when an AIF's downstream investment is foreign.

• FDI: not less than 10%. FPI: not more than 10% of a listed company. Both are measured on post-investment fully diluted paid-up capital.
• DPIIT issues the FDI policy; RBI operationalises it under FEMA through the NDI Rules and Master Directions.
• FDI into a company does not need SEBI registration; FPI and FVCI investors must register with SEBI first.
• The workbook states the downstream-investment test two ways on the same page. One bullet describes downstream investment as investment by an Indian investment vehicle "where more than 51 percent investors" are foreign, ordinarily treated as indirect foreign investment. The following bullets say it is indirect foreign investment if the sponsor, manager or investment manager is not Indian owned or controlled, and that "the extent of foreign investment in the corpus" is not a factor. For a question on when an AIF's downstream investment counts as foreign, the sponsor/manager ownership-and-control test is the operative one; recognise the 51% wording if it appears as a definition.
• The automatic route needs no prior approval; the approval route does. The automatic route is unavailable in some sectors and above thresholds in others.
• Form DI within 30 days of allotment for downstream investment treated as indirect foreign investment.