FDI-FEMA Act

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Sravan kumar (Querist)
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23 January 2021 We Established a software company with two resident indian shareholders ( 99% and 1% each one respectively). This software company has a 100% wholly owned subsidiary engaged in fdi not allowed agricultural and construction of farm house business. Now One Shareholder who had 1% willing to sell shares to Foregn Residents through FDI.In these circumstances,Is FDI allowed in a software company which has an FDI prohibited subsidiary company?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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07 July 2024 In India, the regulations regarding foreign direct investment (FDI) are quite specific and vary based on the sector and activities of the companies involved. Here’s how the situation you described typically works under Indian FDI regulations:

1. **FDI in Software Company:** Typically, software development and IT services companies are eligible for 100% FDI under the automatic route, meaning prior government approval is not required. However, certain activities within the software sector may have specific guidelines or restrictions, such as data processing, call centers, etc.

2. **Subsidiary Engaged in FDI Prohibited Activities:** If your subsidiary company is engaged in agricultural or construction activities where FDI is prohibited or restricted, this could potentially affect the FDI policy applicability to your parent software company.

3. **Impact on FDI in Software Company:** The FDI policy for the parent company (the software company) is primarily determined by its own activities and sector norms. The activities of the subsidiary may influence the perception of the parent company's business profile, but it does not necessarily restrict FDI in the software company itself unless there are specific regulatory constraints or implications due to the subsidiary’s activities.

4. **Compliance and Regulatory Considerations:** It is crucial to ensure compliance with all relevant laws and regulations regarding FDI, corporate governance, and sector-specific guidelines. This includes accurately representing the nature of activities of both the parent and subsidiary companies in any FDI proposal.

5. **Consultation with Legal Experts:** Given the complexity of FDI regulations and the potential impact of subsidiary activities, it would be prudent to consult with legal experts specializing in corporate and FDI laws in India. They can provide specific advice based on the exact nature of your business activities and the proposed FDI transaction.

In summary, while the presence of a subsidiary engaged in prohibited FDI activities can influence the overall corporate structure and perception, it does not automatically restrict FDI in the software company itself. However, ensuring compliance and seeking expert advice is crucial to navigate these complexities effectively.