How Can Companies Ensure Smooth Foreign Investment Compliance in India?

Foreign investment can help Indian companies scale up faster, access global expertise, improve technology and open up new opportunities. However, accepting capital from a foreign investor is not just a business decision. It also imposes regulatory obligations on the company.

Whether it is a startup receiving funding from a foreign VC, an Indian company entering into a joint venture with a foreign company or a listed company issuing shares to a foreign investor, there are several compliance issues that need to be considered prior to and following the investment.

While valuation, funding conditions and business growth are top of mind for many companies, compliance requirements often take a backseat. However, problems with delayed reporting, inaccurate paperwork, sector restrictions or entity type further down the line can create roadblocks.

Foreign Investment Compliance involves adhering to the legal and regulatory requirements stipulated by Indian companies and foreign investors when making, receiving, reporting or managing foreign investments. The regulations are outlined in the Foreign Exchange Management Act, 1999 (FEMA), Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and the RBI notification.

It is important that a company considering foreign investment is aware of the applicable process, paperwork and reporting obligations required of them before they enter into a transaction. Most regulatory hurdles can be addressed if the company checks for compliance at the outset.

Why Does Foreign Investment Compliance Matter for Indian Companies?

FDI is not only about getting money from outside the country. It also encompasses making sure that the structure of your investment is compliant with all applicable laws, sector specific conditions and reporting requirements.

There can be serious consequences to non-compliance on even small issues. It could impact your ability to raise future funds; mergers and acquisitions; banking relations and relations with investors.

A tech startup may have received FDI into their company only to realize later that they did not fully comply with the reporting requirements when issuing shares. A manufacturing company could find itself answering questions on whether or not the conditions specific to their sector were met with their investment structure. Joint ventures can be jeopardized if foreign ownership is not clearly established through proper documentation.

India regulates foreign direct investment through a combination of government policy and regulations established by FEMA. The Department for Promotion of Industry and Internal Trade handles India’s FDI policy. The RBI have rulemaking authority for a number of foreign investment related compliance issues.

As India based businesses located in Delhi NCR, Mumbai, Bengaluru, Hyderabad, Chennai and other business hubs face increasingly more cross-border transactions, compliance should be planned for accordingly.

Quick Facts About Foreign Investment Compliance in India

• Foreign investment is subject to FEMA and rules made there under.
• Some Investments are subject to sectoral caps and conditions based on the activity being carried out.
• Some Investments are permitted under automatic route. Others require Government approval.
• Foreign investments may trigger a reporting requirement with RBI.
• Documentation substantiating share issue, transfer and ownership should be maintained.
• Non-compliance with the above points can lead to regulatory issues and possible scrutiny in future dealings.

What Compliance Checks Should Companies Complete Before Accepting Foreign Investment?

Structure is one of the primary things that a company should consider before jumping into any foreign investment opportunity.

Few things to cross check are :

• Does sector allow foreign investment ?
• Automatic route / Approval route ?
• Permissible foreign ownership %
• Shareholding pattern
• Name of the investor & beneficial owner
• Price & valuation compliance
• Shareholders’ agreement or not

Foreign investment deal needs to be aligned with your business goals and statutory requirements.

Few businesses fall into a trap of sorting out commercial terms and then trying to sort out regulatory requirements. By then documents are signed and unnecessary stress is created.

Advocate BK Singh says – Look at the structure of investment, transaction documents and compliances before making any major foreign investment decisions.

How Can Companies Prepare for Future Foreign Investment Opportunities?

Prepare today if your business is looking at future investment.

This may include:

• Updating your corporate records
• Reviewing old agreements
• Keeping financial records
• Confirming ownership documents

Know sector specific limitations.

Investors like to see businesses that are disciplined about compliance and being transparent.

Foreign investment can open many doors for growth. However, you want the foundation of your business to be legally compliant.

BK Singh Advocate will help you review your corporate records, any foreign investment issues your business may have and what your business will need to complete a transaction based on your unique situation.

How Do Foreign Investment Agreements Protect Business Interests?

Accepting foreign investment isn't just about receiving money. Agreements between the Indian company and foreign investor are typically comprehensive.

Here are a few examples:

• Share Subscription Agreement
• Shareholders’ Agreement
• Joint Venture Agreement
• Investment Agreement
• Confidentiality Agreement

These agreements tend to cover topics like ownership, control of the company, investor protections, exit strategies, and obligations of all parties involved.

Unclear agreements can lead to confusion between entrepreneurs and investors. This could be about who has control of the company, transfer of shares, or future investment.

Entrepreneurs should make sure their commercial expectations and legal obligations are aligned before signing on the dotted line.

Having a corporate lawyer review your contracts can help you understand if the terms of your agreements will help you meet your business goals while staying compliant.

What Documents Are Required for Foreign Investment Compliance?

Requirements for foreign investment are transaction specific, however generally speaking a company will want to have kept adequate records of the transaction including at least the following:

• Certificate of incorporation and company information
• Memorandum and Articles of Association
• Board resolutions
• Shareholders’ agreements
• Investment agreement
• Subscription agreement for the issuance of shares
• Valuation reports
• Information of the foreign investor
• Share issue/purchase records
• RBI filing records
• Any government approvals, if necessary

The aforementioned documents aren’t just for when the investment occurs. The company will likely need these documents in the future if it decides to raise more capital or is asked to produce them during a due diligence process.

How Can Companies Avoid Common Foreign Investment Compliance Problems?

Nine times out of ten foreign investment problems are caused by poor planning not willful misconduct.

Issues that we commonly see:

• Misstructured investments
• Late filings
• Orphaned agreements
• Uncertainty around investor rights
• Neglect to update stat regs
• Siloes between business & legal

A foreign-funded entity should have a compliance calendar and conduct periodic reviews of obligations.

For forward-thinking companies, foreign investment compliance should be a routine part of corporate governance, not a standalone project.

BK Singh Advocate can guide you through the documentation and structuring requirements and compliance implications of foreign investments.

When Should a Company Consult a Corporate Lawyer for Foreign Investment?

You should seek legal counsel when:

• You are negotiating with foreign investors.
• You are issuing shares to a non-resident investor.
• You are entering into a joint venture.
• You are restructuring ownership.
• You are looking to expand your business with foreign involvement.
• You have concerns with past compliance.

The need for a legal review increases if more parties become involved.

A qualified corporate lawyer will spot regulatory risks before they turn into disputes or hold ups.

How Can Corporate Law Firm Assist With Foreign Investment Matters?

Foreign investment should be viewed as both an opportunity and responsibility.

At Corporate Law Firm, we help businesses review investment documents, compliance obligations and understand the legal requirements associated with international deals.

BK Singh Advocate and his team can help you with foreign investment documents, company compliance reviews and understanding regulatory requirements.

It is our goal to not over-regulate, but to ensure you deal with your transactions in a way that meets legal requirements.

Keep in mind that every transaction will involve different facts, investors and regulations. What may work for one business won't always work for another.

Frequently Asked Questions

Final Thoughts

Foreign investments can offer lucrative deals for Indian companies. Compliance need not be an afterthought, however. Planning your investment structure accordingly, preparing accurate documentation and filing timely with regulators can lead to companies building a better business.

Think twice before accepting foreign investments, instead of treating compliance as the final step.

BK Singh Advocate can help you better understand your foreign investment obligations, corporate documentation requirements and reporting responsibilities.

At Corporate Law Firm, we help you manage your corporate legal issues, investment compliance and transaction related requirements from a practical, business minded perspective.