What Makes Foreign Investment Compliance Important for Indian Companies?
Foreign investment helps Indian companies grow faster. It helps companies reach global expertise and markets; improves processes and technology; and helps in opening new doors. However, if a company decides to receive capital from an overseas investor, there are set of regulations apart from business implications that the company is subjected to follow.
It can be a startup raising investment from a foreign VC, an Indian company entering a JV with a foreign company or a listed company issuing shares to a foreign shareholder. There are several compliances that need to be factored in before and after the investment happens.
While valuation, funding terms and business expansion are taking centre stage for most companies today, compliance often takes a sideline. Last minute hurdles like late reporting penalties, wrong documentation, sector restrictions or PCD limits based on type of entity can derail plans months later.
Foreign Investment Compliance involves compliance with all legal and regulatory requirements imposed on Indian companies and foreign investors when receiving, making, reporting or managing foreign investments. Regulations are in accordance to Foreign Exchange Management Act, 1999(FEMA), Foreign Exchange Management (Non- Debt Instruments) Rules, 2019 and RBI notification issued under this topic.
Ensuring your company raising/dealing with foreign investment is aware of the process, documentation and reporting requirements required of them prior to entering a transaction will save you time and most regulatory hurdles can be avoided by ensuring compliance upfront.
Why Does Foreign Investment Compliance Matter for Indian Companies?
FDI also includes taking precautions to ensure your investment is structured properly to comply with all applicable laws, sector specific conditions and reporting requirements. You donât want smaller issues derailing your business due to non-compliance. Large fines can impact future fundraising; mergers/acquisitions; banking relationships and investor relations.
An entrepreneur raised FDI for their tech startup. However, they didnât realize they were following the reporting requirements that came with issuing shares. A manufacturer wondered why they were being questioned by authorities on if they met sector specific conditions with their investment. Joint Ventures were put on hold because the foreign ownership wasnât documented correctly.
India regulates FDI through government policy along with rules set forth by FEMA. Department for Promotion of Industry and Internal Trade oversees Indiaâ foreign direct investment policy. RBI has rulemaking authority over various foreign investment related compliance issues.
As FDI continues to flow into India or India based businesses operating in Delhi NCR, Mumbai, Bengaluru, Hyderabad, Chennai and other major cities for business. There will start to see an increase in transactions that touch international borders. Plan for compliance.
Quick Facts About Foreign Investment Compliance in India
Foreign investment is regulated under FEMA and rules made there under.
It is subject to sectoral caps & conditions as applicable to that particular business/activity.
Investments permitted under automatic route. Some require Government Approval.
May be subject to reporting requirement with RBI.
Requirement to maintain documents relating to share issue,transfer and ownership.
Non-compliance of the above could invite regulatory concerns and examinations in future transactions.
What Compliance Checks Should Companies Complete Before Accepting Foreign Investment?
Always plan the Structure of your business, before jumping on to a foreign investment deal.
- Does sector allow foreign investment? Automatic route / Approval route
- Permissible foreign %
- Shareholding pattern
- Name of the investor & beneficial owner
- Price/valuation compliance
- Is shareholdersâ agreement signed or not
While you align your foreign investment deal with your business goals, make sure you are aware of statutory requirements.
Most Businesses agree on commercial terms first and then begin to think about the regulatory aspect. By the time they are ready to sign the documents, they have panicked themselves unnecessarily.
How Can Companies Prepare for Future Foreign Investment Opportunities?
Ensuring your legal house is in order and organizing your corporate records can allow your business to be ready for that investment opportunity when it presents itself.
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This could include:
- Maintaining your corporate records
- Reviewing outdated agreements
- Maintaining financial records
- Verify ownership documents
Understand FDI Restrictions.
There are certain industries where foreign investment is restricted. We know you want investors to invest in your business, but you donât want any legal issues down the line.
Investors love when a business is disciplined enough to stay compliant and holds transparency as a value. Foreign investments can allow your business to expand in many different ways. Just make sure the foundation your business is built on is legally sound.
BK Singh Advocate can assist you in reviewing your corporate records, any concerns your business has with foreign investment and what you will need to know to complete your transaction based on your needs.
How Do Foreign Investment Agreements Protect Business Interests?
Accepting foreign investment can involve many different documents and contracts. It is not just simply accepting money. Transactions between the Indian based company and the foreign investor may consist of the following:
- Share Subscription Agreement
- Shareholdersâ Agreement
- Joint Venture Agreement
- Investment Agreement
- Confidentiality Agreement
Common topics that can be included in these agreements are: who owns and controls the company, protection of investors, exit rights, and obligations.
Unclear agreements can lead to disputes between the entrepreneur and the investor. Whether it be control of the company, transfer of shares, or future capital injections.
Entrepreneurs should make sure their business goals and legal obligations align before signing any agreements.
Having a corporate lawyer review your contracts can help you see if your agreements allow you to reach your business objectives and follow laws.
What Documents Are Required for Foreign Investment Compliance?
Minimum Documentation Requirement For Foreign Investment is transaction specific. However, in a broad sense when investing in a company you would want to ensure you have the following documents around that detail the transaction. You would want these documents from the beginning of the investment:
- Certificate of incorporation & company information.
- Memorandum and Article of Association.
- Board resolutions.
- Shareholdersâ agreements.
- Investment agreement.
- Subscription agreement for issuance of shares.
- Valuation reports.
- Information of foreign investor.
- Share issue/ purchase records.
- RBI filing records.
- Any government approvals(if any).
As mentioned previously, these documents can be used for purposes outside of investing in the company. If a company would like to raise more capital in the future it will probably need many of these documents. A company will most likely have to provide these to someone during a due diligence process.
How Can Companies Avoid Common Foreign Investment Compliance Problems?
9 times out of 10 issues with foreign investment stem from poor planning, rather than deliberate malfeasance.
Here are a few issues we commonly come across:
Incorrectly Structured Investments
Missed Filings
Orphaned Agreements
Ambiguous Investor Rights
Forgotten Statutory Registers
Commercial/Legal Silos
Your foreign funded vehicle should have a calendar with reminders of key compliance tasks. You should also schedule periodic check-ins to ensure you are meeting your obligations.
For the forward thinking organisation, foreign investment compliance shouldnât require a team stand-up. It should be part of your regular corporate governance meetings.
Let BK Singh Advocate help you understand the documentation / structuring requirements and compliance considerations for foreign investments.
When Should a Company Consult a Corporate Lawyer for Foreign Investment?
Speak with a lawyer if:
talking to foreign investors.
selling shares to an offshore investor.
entering into a joint venture.
restructuring ownership.
wanting to expand your company with foreign investors.
have had previous compliance problems.
The more people you add, the greater the risk you should have it reviewed.
If your corporate lawyer knows what they are doing, they will weed out regulatory risks before they turn into litigation or hold ups.
How Can Corporate Law Firm Assist With Foreign Investment Matters?
Think of foreign investment as an opportunity, as well as a responsibility.
Reviewing investment paperwork? Need help understanding compliance obligations? Want to learn more about the legal requirements surrounding international business transactions? Corporate Law Firm can help guide your business every step of the way.
From foreign investment documentation to compliance reviews for your company, BK Singh Advocate and team can help.
We don't want to overload you with regulations, we just want you to do your business in a way that best suits your needs and complies with legal requirements.
Remember every deal is different. Every set of facts is different. Every investor is different. Every Regulation is different. What works for one may not work for you.
Frequently Asked Questions
1What is foreign investment compliance?
Foreign investment compliance involves complying with FEMA, RBI regulations, requirements and reporting that are laid out under the Foreign Direct Investment Policy for receiving investment from foreign investors or holding investment from foreign investors.
2What legislation regulates foreign investment in India?
Foreign investment is regulated by FEMA, Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (âFDI Rulesâ) and the FDI Policy.
3Do I need approval for all foreign investments?
Certain foreign investments do not require approval under the automatic route if they are eligible. For some investments, government approval is needed under specified conditions.
4What documents are associated with foreign investment compliance?
Companies will typically need to comply with documents related to their incorporation, investment agreement, valuation, shareholders and transactions between shareholders.
5Will non-compliance of foreign investment hurt my ability to have foreign investment in the future?
Yes. Future investors will be concerned when you try to raise money from investors, merge with another company, get acquired, or go through due diligence if your company is non-compliant with foreign investment regulations.
6Why should a startup care about analyzing their FDI compliance now before fundraising?
Startups should analyze their FDI compliance because how a startup structures foreign investment, what type of ownership rights are given to investors, and what reporting requirements your company will have can impact your business down the line.
7Can I reach out to BK Singh Advocate about foreign investment?
Yes, please feel free to contact BK Singh Advocate if you have any questions about foreign investment, documents required for foreign investments or any corporate compliance related inquiries.
8What involvement does RBI have with foreign investment?
RBI regulates the foreign exchange portion of foreign investments. RBI sets forth reporting requirements under FEMA.
9Should I get a lawyer to review contracts before investing in India?
Yes, it is recommended you have a legal consultation when investing in India. International investors should make sure there are no restrictions on foreign investment for the industry they are entering, how the transaction should be structured, and what you should comply with.
10When should I speak with a corporate lawyer?
You should speak with a corporate lawyer before signing any investment agreements, issuing shares, transferring shares, restructuring who owns your company, and operating your business with foreign parties.
11Can a company accept foreign investment into the company then retrospectively look at FEMA compliance?
12What are the repercussions if Foreign Investment is not reported to the RBI?
13Does my company need to comply with foreign investment regulations at the time the foreign investment comes into the company?
14Can foreign investment cause my business to be valued at less?
If there are foreign investment compliance issues. It could hinder your ability to get investments from others or sell your company. If youâre unable to do those things, it could cause your company to be valued lower.
15How can a corporate lawyer help my business with foreign investment?
Corporate lawyers can review any documents related to transactions your business enters and notify you if there are any concerns with foreign investment.
Final Thoughts
While foreign investments can come with enticing opportunities for Indian companies looking for a great deal, compliance doesnât have to be an afterthought. With proper planning for your investment structure, accurate paperwork and preparation and filing ahead of time with the necessary regulatory agencies, your business can be sure to succeed.
Donât Accept Foreign Investments Without Considering Compliance.
If you are considering accepting foreign investments in your business, BK Singh Advocate can help you understand your responsibilities regarding investing foreign funds, corporate paperwork needs and reporting requirements. Let our Corporate Law Firm help you with all your corporate legal services, investment compliance and transactional needs from a practical, business forward perspective.
Author Bio
Corporate Lawyer Advocate BK Singh understands your business requirement at BK Singh & Associates. He helps you with advising the companies,startups and business men regarding their corporate legal issues,foreign investment related compliances,contract law and various other businesses related laws. Advocate BK Singh makes sure to understand your business goals and needs before suggesting you the legal paperwork and compliances that are required to be followed. BK Singh guides you at his Corporate Law Firm with respect to your corporate dealings, foreign investments and assists you with deal structuring by understanding the intricacies.
