13 July 2010
A foreign company wants to open chain of Retail outlet of beverages (Juices). The juices they will sell , will be of specific formulation. They intend to register a company in India under Companies Act 1956, in which shareholdings consists Indian Promoters also. How much Equity Participation of Foreign Entity is allowed ? Can Indain Company also raise ECB(External Commercial Borrowings from the foreighn shareholders ) apart from Equity particiaption?? Please give feedback on it .
13 July 2010
Dear Mr. Bansal Its very good question for discussion.
So far as Equity participation is concerned I dont think there is any limit prescribed by RBI, FEMA or Companies Act in this regard.
it depends on the nature of Company they 'd like to register e.g,
Foreign Holding Co with Indian Subsidiary Co. Indian Company with Foreign Branch office or Vice versa Or a Foreign Co with Indian joint venture. ///////////////
I think instead of registering a new Co. if you can go for a JV with an existing Company for marketing and Distribution would be a better plan.
however it depends on your / promoters decision with other facts and circumstances. //////////////////
Now ECB related issues: yes, A company can go for ECB apart from Eqity participation from foreign Shareholders. The detailed procedure in this regard I can confirm you after few inquiry from my end. ///////////////// Let this discussion be open so that we can get more better suggestions.
thank you once again for bringing this discussion.
Isn't the Foreign equity particaption sector based and the sectorial cap will decide the percentage of equity participation. Will the equity participation allowed under automatic route or we need to take the approval route ??????? Same is the question for ECB. ?
25 July 2024
Yes, you're correct that foreign equity participation and External Commercial Borrowings (ECB) in India are sector-specific and subject to sectoral caps, which determine the maximum percentage of foreign equity that can be held in different sectors. Here's how it typically works:
### Foreign Equity Participation:
1. **Automatic Route vs Approval Route:** - **Automatic Route:** For sectors where foreign investment is within the prescribed limits (sectoral caps), approval from the Reserve Bank of India (RBI) or the Government of India is not required. The foreign investor can invest up to the specified percentage without prior approval. - **Approval Route:** For sectors where foreign investment exceeds the sectoral caps or requires government scrutiny due to strategic, security, or other reasons, prior approval from the Government of India (often through the Foreign Investment Promotion Board - FIPB) is necessary.
2. **Sectoral Caps:** - Each sector in India has a specific limit on foreign equity participation, which can range from 49% to 100% depending on the sector and conditions set by the government. - For example, sectors like defense, telecom, broadcasting, and multi-brand retail typically have caps on foreign equity participation and may require approval beyond certain limits.
3. **Procedure:** - Determine the sectoral cap applicable to your industry or business activity. - If the proposed foreign equity participation falls within the automatic route limits, no prior approval is required. The investment can proceed after compliance with reporting and other post-investment formalities. - If the investment exceeds the sectoral cap or falls under restricted sectors, seek guidance from legal advisors to initiate the approval process and navigate through the necessary regulatory channels.
### External Commercial Borrowings (ECB):
1. **Automatic Route vs Approval Route:** - **Automatic Route:** ECBs up to a certain limit are allowed under the automatic route without prior approval from the RBI. The permissible limit varies depending on the type of borrower (e.g., corporate entities, infrastructure companies, etc.) and the end-use of funds. - **Approval Route:** ECBs exceeding the automatic route limits or involving special conditions (e.g., maturity period, interest rates, etc.) require prior approval from the RBI.
2. **Sectoral Guidelines:** - ECBs are subject to sectoral guidelines, which specify conditions related to the borrowing limits, maturity periods, interest rates, and end-use restrictions. - Compliance with sectoral guidelines ensures that ECBs are utilized for productive purposes and align with the overall economic policy objectives.
3. **Procedure:** - Evaluate the applicable ECB guidelines based on the borrower type and intended end-use of funds. - Determine whether the proposed ECB falls under the automatic or approval route. - Prepare and submit the application to the RBI or authorized banks with the required documentation, demonstrating compliance with ECB guidelines.
### Conclusion:
Understanding sectoral caps and guidelines is crucial for foreign entities looking to invest in India or raise funds through ECBs. Whether under the automatic route or approval route, adherence to regulatory requirements ensures smooth compliance and legal operation in India. Seeking expert advice from legal and financial advisors familiar with Indian regulations can help navigate these complexities effectively, whether for foreign equity participation or External Commercial Borrowings.
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