The Legal Aspects of Foreign Investment in India 1646141643

AWS ON FOREIGN
THE LEGAL ASPECTS

VESTMENT IN IND
of Foreign Investment
in India
WRITTEN BY:
Pri ka Kumar with assistance from Bambi Bhalla
Akshita Goel, Parmeet Batra, Vishesh Sharma and
Simran Nandwani
DATE: 30 April 2019

The contents of this E-book were last updated in April 2019.
There have been some minor amendments in law since then,
which are not reflec ng in this version of the E-book. However,
this E-book could s ll help you understand the legal aspects of
foreign investment in India. Before making any final investment
decision we would s ll encourage you to reach out to a counsel
of your choice. For any legal assistance or queries you could
also reach out to us at help@cornelliachambers.com. We will be
happy to assist you.
The informa on in this E-book was used to advise and guide

award winning global impact venture funds. It formed the basis
of their investment decisions and led to mul ple investments in
many high value, impact oriented and innova ve ventures in
India. These ventures while con nuing to be commi ed to
impact, are also profit making en es.
C O N T E N T S
01 02 03
LEGAL ENTITIES..(2) FOREIGN INVESTMENT THROUGH FOREIGN INVESTMENT THROUGH
EQUITY AND EQUITY EXTERNAL COMMERCIAL
LINKED INSTRUMENTS..(18) BORROWING ROUTE..(43)
04 05INVESTMENT VEHICLES FOREIGN CONTRIBUTION

..(61) THROUGH GRANTS..(99)
CHAPTER I: LEGAL ENTITIES
A. LEGAL ENTITIES IN WHICH FOREIGN INVESTMENT CAN BE MADE
A company, limited liability partnership and a private trust can receive foreign
investment in accordance with the Companies Act, 2013, Limited Liability Partnership
Act, 2008 (as the case may be) and the Indian Trust Act, 1882 read with the Foreign
Exchange Management Act, 1999 and Securities and Exchange Board of India Act, 1992.
We have briefly discussed the structure of a company, limited liability partnership and
trust in paragraphs I, II and III below:
I. COMPANY
1. Kinds of Companies under the Companies Act, 2013
A. The Companies Act, 2013 envisions three (3) kinds of companies:
(i) One Person Company: A one person company means a company which has only
one person as a member.
(ii) Private Company: A private company can be formed by ‘two (2) or more persons’
having the prescribed minimum paid-up share capital. Currently, no minimum paid
up share capital is prescribed.1
A private company, through its articles of association (constitution document) is
required to:
(a) restrict the transfer of its shares;
(b) limit the number of its members to two hundred (200); and
(c) prohibit any invitation to the public to subscribe to any securities2 of the
company.
The term “securities” here includes-
a. shares, scrips, stocks, bonds, debentures, debenture stock or other

marketable securities of a like nature in or of any incorporated company or
other body corporate;
1
Clause 2(i) of the Companies Amendment Act, 2015 has done away with the requirements to have a minimum
share capital.
2
Section 2(81) of the Companies Act, 2013 defines the term “securities”.
b. derivative;
c. units or any other instrument issued by any collective investment scheme to

the investors in such schemes;
d. security receipt 3 , which means a receipt or other security, issued by a

securitisation company or reconstruction company to any qualified
institutional buyer pursuant to a scheme, evidencing the purchase or
acquisition by the holder thereof, of an undivided right, title or interest in the
financial asset involved in securitisation;
e. units or any other such instrument issued to the investors under any mutual
fund scheme;
f. any certificate or instrument, issued to an investor by any issuer being a

special purpose distinct entity which possesses any debt or receivable,
including mortgage debt, assigned to such entity and acknowledging
beneficial interest of such investor in such debt or receivable, including
mortgage debt, as the case may be.
g. Government securities;
h. such other instruments as may be declared by the Central Government to be

securities; and
i. rights or interest in securities.
(iii) Public Company

A public company can be formed by ‘seven (7) or more persons’ and is required to
have the prescribed minimum paid-up share capital. Currently, no minimum paid
up share capital is prescribed. 4 Further, the restrictions that apply to a private
company (as discussed in paragraph I (1) (A) (ii) above) do not apply to a public
company.
B. Limited and Unlimited Companies

The companies may be limited (by shares or guarantee), or unlimited.
(i) A Company Limited By Shares: This is a company that limits the liability of its
members to their contribution to the share capital of the company (including
3
Section 2(h) of the Securities Contracts (Regulation) Act, 1956 read with section 2(zg) of the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
4
Clause 2(i) of the Companies Amendment Act, 2015 has done away with the requirements to have a minimum
share capital.
1.
any unpaid amount towards the share capital allotted to them). This is the
most popular form of a company.
(ii) A Company Limited By Guarantee: This is a company that limits the liability of
its members to such an amount as the members may respectively undertake
to contribute to the assets of the company in the event of it being wound up.
You may also note that a company limited by guarantee is the structure
generally preferred by most not for profit companies (Section 8 Company –
discussed in detail in paragraph III below). In such a company the profits are
not distributed to the members. Instead they are retained and reinvested in
the company and used for the objective of the non-profit organisation.
(iii) An Unlimited Company: This means a company not having any limit on the
liability of its members.
2. Means of Financing a Company
RAISING FINANCE
A company can raise finance in the
form of:
SHARE CAPITAL LOAN CAPITAL
Includes debentures
Equity Share capital Preference Share Capital or deposits or term
(equity shares) (preference shares) loan or overdraft
facility from banking
and financial
institutions.
A. Share Capital
Section 43 of the Indian Companies Act, 2013 envisions the share capital of a company
(limited by shares) to be of two kinds: (i) equity share capital, and (ii) preference share
capital.
2.
(i) Equity Share Capital
The Companies Act, 2013 envisions two (2) kinds of equity share capital, i.e. equity share
capital with (i) voting rights; or (ii) differential rights as to dividend, voting or as may be
prescribed otherwise by the Companies Act, 2013. Further, the Companies Act, 2013
defines equity share capital to mean “all share capital which is not preference share
capital.”5
(ii) Preference Share Capital

The Companies Act, 20136 defines the expression ‘preference share capital’ to mean:
“(ii)…that part of the issued share capital of the company which carries or would carry a
preferential right with respect to—
(a) payment of dividend, either as a fixed amount or an amount calculated at a
fixed rate, which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the
amount of the share capital paid-up or deemed to have been paid-up,
whether or not, there is a preferential right to the payment of any fixed
premium or premium on any fixed scale, specified in the memorandum or
articles of the company;
(iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to
either or both of the following rights, namely:—
(a) that in respect of dividends, in addition to the preferential rights to the
amounts specified in sub-clause (a) of clause (ii), it has a right to participate,
whether fully or to a limited extent, with capital not entitled to the
preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the
repayment, on a winding up, of the amounts specified in sub-clause (b) of
clause (ii), it has a right to participate, whether fully or to a limited extent,
with capital not entitled to that preferential right in any surplus which may
remain after the entire capital has been repaid.”
Exemption to Private Companies: It is pertinent to note that in case of private
companies, section 43 will not apply where the memorandum or articles of association
of the private company so provides.7 Therefore a private company may structure its
share capital differently.
5
Explanation (i) to section 43 of the Companies Act, 2013.
6
Explanation (ii) and (iii) to section 43(b) of the Companies Act, 2013.
7
Notification No GSR 464 E dated June 5, 2015. This means that that the classes of shares (equity and preference
shares may have their own rights as desired by the private company. These classes may have several distinctive
or differential rights. Examples for such arrangement are:
3.
Share Capital Instruments
Having dealt with the meaning of ‘equity share capital’ and ‘preference share capital’
under the Companies Act, 2013, we now move to instruments representing these
capitals vis. equity shares and preference shares. The expression “share” is defined in
section 2(84) of the Companies Act, 2013 as share in the share capital of the company
and includes stock. The shares in equity share capital are called equity shares and shares
in the preference share capital are called preference shares.
(i) Preference Shares

Preference share is a share with a preferential right over the equity share as regards
fixed dividends or distribution of assets on winding up. Only a company limited by
shares, authorized by its articles of association can issue preference shares. A
preference share could be issued at a premium, however, section 53 of the Companies
Act, 2013 prohibits issuance of preference shares at a discount.
Redeemable Preference Shares
Preference shares are required to be redeemable.8 No company will be allowed to issue
any preference share which is redeemable after the expiry of a period of twenty years
from the date of its issue9 except in case of infrastructure projects covered by Schedule
VI of the Companies Act, 2013.10
Rule 10 of the Companies (Share Capital and Debentures) Rules 2014, provides that "a
company engaged in the setting up of infrastructure projects may issue preference
shares for a period exceeding twenty (20) years but not exceeding thirty (30) years,
subject to the redemption of a minimum 10% of such preference shares per year from
the twenty first (21st) year onwards or earlier, on proportionate basis, at the option of
the preference shareholders."
You may note that Schedule VI of the Companies Act, 2013 defines infrastructure
projects to include:
a) Management shares and ordinary shares – where the management shares may have right of control
over management, whereas ordinary shares may not.
b) Differential rights as to dividend.
c) Differential rights as to profits or assets of particular business verticals.
d) Different levels of seniority when it comes to distribution of assets on winding up.
8
As per section 55 of the Companies Act, 2013, after the commencement of Companies Act, 2013, no company
can issue irredeemable preference shares.
9 Section 55 of the Companies Act, 2013.
10
After reaching the embedded webpage, follow this path: Schedules > Schedule VI.
4.
“(8) Housing, including the following:—
(a) urban and rural housing including public / mass housing, slum rehabilitation,
etc;
(b) other allied activities such as drainage, lighting, laying of roads, sanitation and
facilities...”
(ii) Equity-Shares
Equity shares consist of those with 'full rights including voting rights' and those with
'differential rights as to dividend, voting or otherwise'. "Equity share" is one which is not
a preference share i.e. it is a share which does not have any preferential right as to
dividends or distribution on liquidation. An equity share capital is sometime referred to
as the 'risk capital' or 'owner's capital'. The equity shareholder is the last person to
receive any money on liquidation of a company. At the same time during the existence
of a company the equity shareholder is the beneficiary of the reserves of the company
representing the profits of the company. Equity shares are generally offered at the
nominal value or at a premium per share, to persons agreeing to invest in the company
and take the risk of such investment while at the same time hoping to share in the
prosperity of the company, without being liable for any loss over and above the face
value of the equity shares agreed to be contributed by them.
An equity share can be issued at its nominal value or at a premium, but not at a discount
(unless it is issued as sweat equity). 11 The word "premium" and "discount" are with
reference to the nominal value of each share as per the memorandum and articles of
association of the company.
Sweat equity shares12
Section 2(88) of the Companies Act, 2013 defines 'sweat equity shares' as “such equity
shares as are issued by a company to its directors or employees at a discount or for
consideration, other than cash, for providing their know-how or making available rights
in the nature of intellectual property rights or value additions, by whatever name called”.
Issue of sweat equity shares could be at a discount.
B. Loan Capital
(i) Debentures
11
Section 52 and 54 of the Companies Act, 2013.
12
Section 54 of the Companies Act, 2013
5.
Section 2(30) of the Companies Act, 2013 defines the term "debenture" as "includes
debenture stock, bonds or any other instrument of a company evidencing a debt,
whether constituting a charge on the assets of the company or not".13
Section 71 of the Companies Act, 2013 deals with the provisions relating to issue of
debentures. It provides that a company may issue debentures with an option to convert,
either wholly or partly, such debentures into shares, if it is approved by a special
resolution passed at a general meeting. The conversion shall be done at the time of
redemption.
It is further provided that no company can issue any debentures carrying any voting
rights.
Debenture holders are creditors of a company and depending upon the terms of the
issue, they are entitled to payment in case of liquidation of a company. In any case they
have a prior claim than the shareholders. Hence, investment in debenture stock is less
risky than investment in share capital. To make it more attractive sometimes
debentures are issued with an option for acquiring shares (convertible debentures).
3. Voting Rights of a Shareholder
The term “voting rights” means the right of a shareholder of a company to vote in any
meeting of the company or by means of a postal ballot.14
(i) General Rule with respect to Voting Rights of an Equity Shareholder
As per section 47 of the Companies Act, 2013, the general rule15 with respect to voting
rights of an equity shareholder/ member is as follows:
(a) every member of a company limited by shares and holding equity share capital
therein, shall have a right to vote on every resolution placed before the company;
and
(b) his voting right on a poll will be in proportion to his share in the paid-up equity
share capital of the company.
(ii) Rule with respect to Voting Rights of a Preference Shareholder
13
Please note that the (a) instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; (b)
such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank
of India issued by a company shall not be treated as debenture.
14
Section 2(93) of the Companies Act, 2013.
15
Subject to provisions of section 43 (kinds of share capital) and section 50(2) of the Companies Act, 2013
(Company to Accept Unpaid Share Capital Although Not Called).
6.
As per section 47 of the Companies Act, 2013, a member holding any preference share
capital of a company limited by shares, will have a right to vote only on resolutions
placed before the company which directly affect the rights attached to his preference
shares and, any resolution for the winding up of the company or for the repayment or
reduction of its equity or preference share capital, and his voting right on a poll will be
in proportion to his share in the paid-up preference share capital of the company.
Further, the proportion of the voting rights of equity shareholders to the voting rights
of the preference shareholders will be in the same proportion as the paid-up capital in
respect of the equity shares bears to the paid-up capital in respect of the preference
shares.
Furthermore, where the dividend in respect of a class of preference shares has not been
paid for a period of two (2) years or more, such class of preference shareholders will
have a right to vote on all the resolutions placed before the company.
Exemption to Private Companies: It is pertinent to note that in case of private companies

where its memorandum or articles of association so provides, the company need not
comply with the general rule with respect to voting rights of shareholders as laid down
in section 47 of the Companies Act, 2013 as discussed above.
(iii) Variation of Shareholders’ Rights
Section 48 of the Companies Act, 2013 deals with variation of shareholders’ rights and
provides that where a share capital of the company is divided into different classes of
shares, the rights attached to the shares of any class may be varied with the ‘consent in
writing’ of the holders of not less than three-fourths of the issued shares of that class
or by means of a special resolution16 passed at a separate meeting of the holders of the
issued shares of that class—
16Section 114 of the Companies Act, 2013 defines ‘special resolution’. “A resolution shall be a special resolution
when -
(a) the intention to propose the resolution as a special resolution has been duly specified in the notice
calling the general meeting or other intimation given to the members of the resolution;
(b) the notice required under this Act has been duly given; and
(c) the votes cast in favour of the resolution, whether on a show of hands, or electronically or on a poll, as
the case may be, by members who, being entitled so to do, vote in person or by proxy or by postal
ballot, are required to be not less than three times the number of the votes, if any, cast against the
resolution by members so entitled and voting.”
7.
(a) if provision with respect to such variation is contained in the memorandum or
articles of the company; or
(b) in the absence of any such provision in the memorandum or articles, if such variation
is not prohibited by the terms of issue of the shares of that class.
However, if variation by one class of shareholders affects the rights of any other class
of shareholders, the consent of three-fourths of such other class of shareholders shall
also be obtained and the provisions of this section shall apply to such variation.
Where the holders of not less than ten per cent (10%) of the issued shares of a class did
not consent to such variation or vote in favour of the special resolution for the
variation, they may apply to the National Company Law Tribunal to have the variation
cancelled in the manner prescribed under section 48 of the Companies Act, 2013.
4. Further Issue of Share Capital

As per section 62 of the Companies Act, 2013, when a company is in need of additional
capital it can increase its subscribed capital by the issue of further shares to existing
equity shareholders through a rights issue, or to employees under a scheme of
employee stock option, or to any other person (including through a preferential offer
which is discussed in paragraph 5 below), for cash or consideration other than cash, if
the price of the shares is determined by the valuation report of a registered valuer. The
issue will have to be made in the manner prescribed under Chapter III (Prospectus and
Allotment of Securities) read with section 62 of the Companies Act, 2013 read with the
Companies (Share Capital and Debenture) Rules, 2014.
5. Preferential Offer
According to rule 13 of the Companies (Share Capital and Debenture) Rules, 2014, a
‘Preferential Offer’ means an issue of shares or other securities (i.e. equity shares, fully
convertible debentures, partly convertible debentures or any other securities, which
would be convertible into or exchanged with equity shares at a later date) 17 by a
company to any select person or group of persons on a preferential basis and does not
include shares or other securities offered through a public issue, rights issue, employee
stock option scheme, employee stock purchase scheme or an issue of sweat equity
shares or bonus shares or depository receipts issued in a country outside India or foreign
securities.18
17
The expression, "shares or other securities" means equity shares, fully convertible debentures, partly
convertible debentures or any other securities, which would be convertible into or exchanged with equity shares
at a later date.
18
Rule 13, Companies (Share Capital and Debentures) Rules, 2014.
8.
You may note that for making a Preferential Offer a company is required to comply with
section 42 of the Companies Act, 2013 which deals with issue of ‘shares and securities’
on a private placement basis and is discussed in paragraph 6 below.
6. Private Placement
Private placement means any offer of Securities (including equity shares, preference
shares or debentures) or invitation to subscribe Securities to a select group of persons
by a company (other than by way of public offer) through issue of a private placement
offer letter in the manner prescribed (hereinafter, “Private Placement”). It is clarified
that a company can also issue non-convertible debentures and non-convertible
preference shares through a Private Placement.
Section 42 of the Companies Act, 2013 provides for “offer or invitation for subscription
of Securities on Private Placement”. A company may make Private Placement of any of
its securities through issue of a private placement offer letter. The offer of Securities or
invitation to subscribe Securities, shall be made to such number of persons not
exceeding two hundred (200) in the aggregate in a financial year19, (excluding qualified
institutional buyers and employees of the company being offered securities under a
scheme of employees stock option as per provisions of section 62(1)(b) of the
Companies Act, 2013) in a financial year and on such conditions (including the form and
manner of Private Placement) as may be prescribed.
7. Board of Directors
Every company is required to have a board of directors consisting of individuals. Every
private company is required to have at least two (2) directors and a maximum of fifteen
(15) directors. Further, every company is required to have at least one director who
stays in India for a total period of not less than one hundred and eighty two (182) days
in a financial year. The board of directors is responsible for the management of the
company in accordance with the Companies Act, 2013.
II. LIMITED LIABILITY PARTNERSHIP
Limited Liability Partnerships (hereinafter, the “LLP(s)”) in India are formed and
regulated under the Limited Liability Partnership Act, 2008 (hereinafter, the “LLP Act”).
Every LLP is required to have at least two (2) partners. A ‘partner’ may be an individual
19
This rule is not applicable to non-banking financial companies registered with Reserve Bank of India (RBI) and
housing finance companies registered with the National Housing Bank (NHB), if they are complying with RBI and
NHB regulations in respect of private placement. Further, such companies will comply with this rule in case RBI
and NHB has not specified similar regulations.
9.
or ‘body corporate’ (hereinafter the “Partner(s)”). A ‘body corporate’ here includes a
company registered under the Companies Act, 1956 or 2013 or company incorporated
outside India, or an LLP registered under the LLP Act, or an LLP incorporated outside
India.
Further, an LLP is also required to have at least two (2) ‘designated partners’ that are
individuals (hereinafter the “Designated Partners”). At least one of the Designated
Partners is required to be a resident in India.20 A Designated Partner is responsible for
ensuring compliance with the provisions of the LLP Act.
1. Incorporation of an LLP
Two (2) or more persons interested in carrying on a lawful business with a view to profit
may function as an LLP. Such persons are required to obtain a certificate of
incorporation of an LLP from the Registrar (an officer having the duty of registering
companies under the Companies Act, 2013) in the manner prescribed in the LLP Act.
2. Eligibility and Relationship Between Partners
On the incorporation of an LLP, the persons who subscribe their names to the
‘incorporation document’ 21 will be its Partners. The mutual rights and duties of the
Partners of the LLP, and the mutual rights and duties of the LLP and its Partners, will be
governed by the LLP agreement entered into between the Partners or between the LLP
and its Partners (hereinafter, the “LLP Agreement”).
3. Form of Contribution by Partner
A contribution of a Partner may consist of tangible, movable or immovable or intangible

property or other benefit to the LLP, including money, promissory notes, other
agreements to contribute cash or property, and contracts for services performed or to
be performed.
4. Returns on Contribution
The return on the contribution made by a Partner will be governed by the LLP
Agreement.
III. TRUST
Difference between Private Trust and Public Trust
20
According to LLP Act, for the purposes of this compliance, the term ‘resident in India’ means a person who has
stayed in India for a period of not less than one hundred and eighty-two (182) days during the immediately
preceding one (1) year.
21
‘Incorporation document’ is a document required to be filed by the Partners with the Registrar for the
incorporation of an LLP in the manner prescribed under the LLP Act.
10.
There are two kinds of trusts in India - private trusts and public trusts. Indian Trusts Act,
1882 (hereinafter, the “Trusts Act”) governs private trusts. In a private trust, the
beneficiaries are definite and specific individuals. The private trust structure is
commonly used as a vehicle for investments such as venture capital funds.
On the other hand, public trust structure is typically used for religious and public
charitable causes and may be regulated through different legislations (such as the
Maharashtra Public Trust Act, 1950), basis the nature and purpose for which the public
trust has been formed. In a public trust, the interest is vested in an uncertain and
fluctuating body.
Formation of a Private Trust and its Components
Given the objective of this Memorandum, we are focussing on the private trust
structure. The Trusts Act which regulates private trusts, envisages creation of an
‘instrument of trust’ (hereinafter, the “Trust Deed”) for management of the property
(be it movable or immovable) which is the subject-matter of the private trust
(hereinafter the “Trust Property”). The Trust Deed records the rights and obligations of
the three (3) parties necessary for creation of the private trust:
(i) the first party being the ‘author of the trust’ which is a person who declares his
confidence in the ‘trustee’ for management of the Trust Property;
(ii) the second party being the ‘trustee’ which is a person who accepts the
confidence; and
(iii) the third party being a ‘beneficiary’ which will be a person for whose benefit the
confidence is accepted by the ‘trustee’. The author can also be a beneficiary.
The management of the private trust vests with the trustee or a board of trustees. The
Trust Act does not prohibit a person resident outside India (which includes a foreign
company) from becoming a trustee on the of board of the trust, subject to the provisions
of the Trust Deed.
B. LEGAL ENTITIES TO WHICH GRANTS CAN BE GIVEN AS FOREIGN CONTRIBUTION
Subject to the provisions of Foreign Contribution (Regulation) Act, 2010 (hereinafter,

the “FCRA”) (discussed in Chapter V of the Memorandum), in addition to the legal
entities discussed above in paragraphs I, II and III above, the following legal entities may
receive grants in the form of foreign contribution.
IV. COMPANY FORMED UNDER SECTION 8 OF THE COMPANIES ACT, 2013
11.
A person or an association of persons: (a) having as its objects the promotion of
commerce, art, science, sports, education, research, social welfare, religion, charity,
protection of environment or any such other object; (b) intends to apply its profits, if
any, or other income in promoting its objects; and (c) intends to prohibit the payment
of any dividend to its members, may apply for a license to function as a company under
section 8 of the Companies Act, 2013 (hereinafter, “Section 8 Company”).
The Section 8 Company is required to comply with all provisions applicable to a limited
company.
V. SOCIETY
A society may be formed by seven (7) or more persons associated for any literary,
scientific, or charitable purpose by subscribing their names to a memorandum of
association and getting such a society registered with the Registrar in accordance with
the Indian Societies Registration Act, 1860 (hereinafter, the “Societies Act”) read with
State-specific legislation, as the case may be.
The governing body of the society is entrusted with the management of the affairs of
the society. The appointment to the governing body is generally in accordance with the
rules and regulations of the society.
12.
GLOSSARY
TERM DEFINITION
Board of Directors
Board of Directors will have the meaning ascribed to it in para
A. I. 7.
Debentures
Debentures will have the meaning ascribed to it in para
A. I. 2. B.
Designated Partners
Designated Partners will have the meaning ascribed to it in
para A. II
Equity
Equity will have the meaning ascribed to it in para A. I. 2. A.
Equity share capital

Equity Share Capital will have the meaning ascribed to it in
para A. I. 2. A. (i)
Further Issue of Shares

Further Issue of Shares will have the meaning ascribed to it in
para A. I. 4.
Limited Company
Limited Company will have the meaning ascribed to it in para
A. I. B.
LLP LLP will have the meaning ascribed to it in para A. II.
LLP Agreement
LLP Agreement will have the meaning ascribed to it in para A.
II. 2.
One Person Company

One Person Company will have the meaning ascribed to it in
para A. I. 1. A. (i)
Partners Partners will have the meaning ascribed to it in para A. II
13.
Preference Shares
Preference Shares will have the meaning ascribed to it in para
A. I. 2. A.
Preference Share
Preference Share Capital will have the meaning ascribed to it in
Capital
para A. I,. 2. A. (ii)
Preferential Allotment
Preferential Allotment will have the meaning ascribed to it in
para A. I. 5.
Private Company
Private Company will have the meaning ascribed to it in para A.
I. 1. A (ii)
Private Placement
Private Placement will have the meaning ascribed to it in para
A. I. 6
Private Trust
Private Trust will have the meaning ascribed to it in para
A. III.
Public Company
Public Company will have the meaning ascribed to it in para A.
I. 1. A. (iii)
Public Trust
Public Trust will have the meaning ascribed to it in para
A. III.
Section 8 Company
Section 8 Company will have the meaning ascribed to it in para
B. IV
Securities
Securities will have the meaning ascribed to it in para A.
I. 1. A. (ii)
Share Capital
Share Capital will have the meaning ascribed to it in para
A. I. 2. A.
Shareholders’ Rights
Shareholders’ Rights will have the meaning ascribed to it in
para A. I. 3. (iii)
14.
Society Society will have the meaning ascribed to it in para B. V.
Sweat Equity Shares

Sweat Equity Shares will have the meaning ascribed to it in
para A. I. 2. A.
Trust Trust will have the meaning ascribed to it in para A. III.
Trust Deed
Trust Deed will have the meaning ascribed to it in para A.
III.
Trust Property
Trust Property will have the meaning ascribed to it in para A.
III.
Voting Right Voting Right means the right of a member of a company to

vote in any meeting of the company or by means of postal
ballot.
Unlimited Company
Unlimited Company will have the meaning ascribed to it in
para A. I. B.
15.
CHAPTER – II: FOREIGN INVESTMENT THROUGH EQUITY AND EQUITY LINKED
INSTRUMENTS
I. Regulatory Framework Governing Foreign Investment in an Indian Entity
Any investment made by a person resident outside India (be it an entity or an individual)
is regulated by section 6(b) and section 47 of the Foreign Exchange Management Act,
1999 (hereinafter, “FEMA”) read with the Foreign Exchange Management (Transfer or
Issue of a Security by a Person resident Outside India) Regulations, 2017 (as amended
from time to time)22 (hereinafter defined as “FEMA 20(R)”).
Reserve Bank of India has also issued a Master Direction – Foreign Direct Investment
(hereinafter, the “Master Direction”) for all Authorised Persons23 under its powers set
out in section 11 of FEMA. This Master Direction lays down the modalities for
conducting foreign exchange business by the Authorised Persons with their customers/
constituents with a view to implementing the FEMA, FEMA 20(R) and other relevant
regulations.
II. Principal Rules Applicable to Foreign Investment in India
A. First Principal Rule
The first principal rule is that unless provided in FEMA and FEMA 20(R), an Indian
company or Indian LLP or an investment vehicle,24 or a venture capital fund25 or a firm
or any other form of Indian legal entity cannot receive any ‘investment’ in India from a
‘person resident outside India’.
An “investment” here means “to subscribe, acquire, hold or transfer any security26 or
unit27 issued by a person resident in India.
22
Notification No. FEMA 20(R)/2017-RB of November 7, 2017.
23
“Authorised Persons” means a person who has been authorised by the RBI to deal in foreign exchange or in
foreign securities, as an authorised dealer, amongst others.
24
‘Investment Vehicle’ means an entity registered and regulated under relevant regulations framed by Securities
and Exchange Board of India or any other authority designated for the purpose and shall include Real Estate
Investment Trusts (REITs) governed by the Securities and Exchange Board of India (REITs) Regulations, 2014,
Infrastructure Investment Trusts (InvIts) governed by the Securities and Exchange Board of India (InvIts)
Regulations, 2014 and Alternative Investment Funds (AIFs) governed by the Securities and Exchange Board of
India (AIFs) Regulations, 2012.
25
'Venture Capital Fund' means a fund established in the form of a trust, a company including a body corporate
and registered under the Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996.
26
“Security” will mean as defined in paragraph I. 1. (ii) in Chapter I of this Memorandum.
27
The term “unit” here means beneficial interest of an investor in an investment vehicle. An “investment
vehicle” here means an entity registered and regulated under relevant regulations framed by Securities
16.
Explanation: (a) This will include to acquire, hold or transfer depository receipts issued
outside India, the underlying of which is a security issued by a person resident in India.
(b) For the purpose of LLP, investment shall mean capital contribution or acquisition/
transfer of profit shares.”
A ‘person resident outside India’ means a person who is not resident in India.
The term “person” includes “(a) an individual, (b) a Hindu undivided family, (c) a
company, (d) a firm, (e) an association of persons or a body of individuals, whether
incorporated or not, (f) every artificial juridical person, not falling within any of the
preceding sub-paragraphs (a) to (e), and (g) any agency, office or branch owned or
controlled by such person.”
B. Second Principal Rule
The second principal rule is that, unless otherwise specified in FEMA 20(R) (including the
Schedules contained in it and discussed below), any investment made by a person
resident outside India shall be subject to the entry routes, sectoral caps or the
investment limits, as the case may be, and the attendant conditionalities for such
investment as laid down in the FEMA 20(R) (hereinafter referred to as “General
Investment Conditions”). The relevant General Investment Conditions are discussed in
paragraph D below.
C. Third Principal Rule
In addition to the first and second principal rule, the third principal rule is that, a person
resident outside India can make investments in India in accordance with the following
schedules of FEMA 20(R) 28 . The specific investment conditions contained in the
schedules have been discussed in paragraph E below.:
Schedule 1: A person resident outside India may subscribe, purchase or sell capital
instruments of an Indian company in the manner and subject to the terms and
conditions specified in Schedule 1.29
Schedule 2: A Foreign Portfolio Investor (FPI) may purchase or sell capital instruments
of a listed Indian company on a recognised stock exchange in India in the manner and
subject to the terms and conditions specified in Schedule 2.30
Exchange Board of India or any other authority designated for the purpose and will include alternate investment
funds.
28
Regulation 5 of FEMA 20(R).
29
After reaching the embedded webpage, scroll down to Schedule 1.
30
17.
Schedule 3: A Non- Resident Indian or an Overseas Citizen of India may on repatriation
basis purchase or sell capital instruments of a listed Indian company on a recognised
stock exchange in India, in the manner and subject to the terms and conditions specified
in Schedule 3.31
Schedule 4: A Non-Resident Indian or an Overseas Citizen of India may, on
nonrepatriation basis, purchase or sell capital instruments of an Indian company or
purchase or sell units or contribute to the capital of a LLP or a firm or proprietary
concern, in the manner and subject to the terms and conditions specified in Schedule
4.32
Schedule 5: A person resident outside India, permitted for the purpose by the Reserve
Bank of India in consultation with Central Government, may purchase or sell securities
other than capital instruments in the manner and subject to the terms and conditions
specified in Schedule 5.33
Schedule 6: A person resident outside India (other than a citizen of Bangladesh or
Pakistan or an entity incorporated in Bangladesh or Pakistan) may invest, either by way
of capital contribution or by way of acquisition/ transfer of profit shares of an LLP, in
the manner and subject to the terms and conditions as specified in Schedule 6.34
Schedule 7: A Foreign Venture Capital Investor may make investment in the manner and
subject to the terms and conditions specified in Schedule 7.35
Schedule 8: A person resident outside India (other than a citizen of Bangladesh or
Pakistan or an entity incorporated in Bangladesh or Pakistan), may invest in units of an
Investment Vehicle, in the manner and subject to the terms and conditions specified in
Schedule 8.36
Schedule 9: A person resident outside India may invest in the Depository Receipts (DRs)
issued by foreign depositories against eligible securities in the manner and subject to
the terms and conditions as specified in Schedule 9.37
Schedule 10: A Foreign Portfolio Investor or Non- Resident Indian or an Overseas Citizen
of India may purchase, hold or sell Indian Depository Receipts (IDRs) of companies
resident outside India issued in the Indian capital market, in the manner and subject to
the terms and conditions specified in Schedule 10.38
We have discussed the conditions contained in Schedule 1 (Purchase/sale of capital

instruments of an Indian company) and Schedule 6 (Investment in an LLP) in this
31
32
33
34
35
36
37
38
18.
Chapter-II, which are set out in paragraph E of this Chapter. Further, the conditions
applicable to Foreign Portfolio Investors (Schedule 5), Foreign Venture Capital Investor
(Schedule 7), and an Investment Vehicle (Schedule 8) will be discussed in Chapter-IV of
the Memorandum.
D. General Investment Conditions
The General Investment Conditions which have been briefly discussed under the Second
Principal Rule in paragraph B above are discussed in detail below.
Any investment made by a person resident outside India is subject to the entry routes,
sectoral caps or investment limits (if any) and attendant conditionalities for such
investment as laid down in the FEMA 20(R). The relevant General Investment Conditions
are being discussed below.
1. Entry Route
(i) Automatic Route
Automatic route means the entry route through which investment by a person resident
outside India does not require prior RBI approval or Government approval.
Foreign Investment in an Indian Company that has not yet Commenced Operations: For
undertaking activities which are under automatic route and without FDI linked
performance conditions, an Indian company which does not have any operations and
also has not made any downstream investment, may receive investment in its Capital
Instruments (defined below) from persons resident outside India under automatic
route. However, approval of the Government will be required for such companies for
undertaking activities which are under Government route. As and when such a
company commences business or makes downstream investment, it will have to comply
with the relevant sectoral conditions on entry route, FDI linked performance
conditionalities and sectoral caps.
(ii) Government Route
Government route means the entry route through which investment by a person
resident outside India requires prior Government approval. Foreign investment
received under this route shall be in accordance with the conditions stipulated by the
Government in its approval.
19.
Foreign Investment in an Investing Company – Government Route: Foreign Investment
in investing companies not registered as Non-Banking Financial Companies with the RBI
and in core investment companies (CICs), both engaged in the activity of investing in the
capital of other Indian entities (meaning Indian company and Indian LLP), will require
prior Government approval.
The CICs should additionally comply with the regulatory framework prescribed for such
entities as NBFCs under the Reserve Bank of India Act, 1934 and regulations framed
thereunder.
Foreign investment in investing companies registered as Non-Banking Financial

Companies (NBFCs) with the RBI, will be under 100% automatic route.
2. Sectoral Cap
‘Sectoral cap’ is defined by FEMA 20(R) as the maximum investment including both - (i)
direct foreign investment on a repatriation basis by persons resident outside India in
Capital Instruments of a company or the capital of an LLP (as the case may be), and (ii)
indirect foreign investment, unless provided otherwise. Please note that the Sectoral
Cap will be treated as the composite limit for investment into the investee Indian
company or Indian LLP.39
Please note that in sectors not listed in regulation 16 of FEMA 20(R) (Permitted Sectors,
Entry Routes and Sectoral Caps for Total Foreign Investment) and not prohibited under
regulation 15 of FEMA 20(R) (Prohibited activities for investment by a person resident
outside India), foreign investment in such sectors is permitted up to hundred percent
(100 %) on the automatic route, subject to applicable laws and FDI linked performance
conditions.
3. Onus of Compliance under the Foreign Investment Law
The onus of compliance with the sectoral/ statutory caps on such foreign investment
and attendant conditions, if any, shall be on the company receiving foreign investment.
Where ever the person resident outside India who has made foreign investment
specifies a particular auditor/audit firm having international network for the audit of
the Indian investee company, then audit of such investee company shall be carried out
as joint audit wherein one of the auditors is not part of the same network.
39
Paragraph 2.21 of the Master Direction.
20.
4. General Investment Conditions for Investment in an Indian Company
An Indian company is permitted to receive investment from a person resident outside

India only against issuance of Capital Instruments. Please note that a citizen or an entity
of Bangladesh or Pakistan cannot purchase Capital Instruments of an Indian company
without prior Government approval. Further, a person or an entity from Pakistan can
invest only under the Government approval route in sectors or activities other than
defence, space, atomic energy and sectors/activities prohibited for foreign investment.
‘Capital Instruments’ is defined to mean:
(a) equity shares issued by an Indian company in accordance with the Companies
Act, 2013. This also includes equity shares that have been partly paid.
(b) fully, compulsorily and mandatorily convertible debentures issued by an Indian
company.
(c) fully, compulsorily and mandatorily convertible preference shares issued by an
Indian company.
(d) share warrants issued by an Indian company
*Please note that an Indian company recognised as a Start-Up Company is permitted

to issue Convertible Notes to a person resident outside India. However, a
Convertible Note has not been included in the definition of Capital Instruments but
the permission to invest in such an instrument has been notified independently in
the FEMA 20(R) and has been discussed below in paragraph D 4(vi) of this Chapter.
(i) Specific Conditions for Capital Instruments Issued by an Indian Company to a Person
Resident Outside India:
In the Master Direction on Foreign Direct Investment (hereinafter, referred to as the

“Master Directions”), Reserve Bank of India has laid down specific conditions relating to
issue of Capital Instruments by an Indian company to a person resident outside India.
These specific conditions are discussed below:
Capital Instrument Conditionality
21.
Fully paid equity Equity shares are those issued in accordance with the
shares provisions of the Companies Act, 2013 and will include
equity shares that have been partly paid.
Partly paid shares Partly paid shares that have been issued to a person resident
outside India are required to be fully called-up within twelve
(12) months of such issue.
Twenty five percent (25%) of the total consideration amount

(including share premium, if any), shall be received upfront
and the balance consideration towards fully-paid equity
shares should be received within a period of twelve (12)
months from the date of issue of partly-paid shares.
In case of non-payment of call money, the forfeiture of the

amount paid upfront will be in accordance with the
provisions of the Companies Act, 2013 and the Income Tax
provisions, as applicable.
Share Warrants40 In case of share warrants at least twenty five percent (25%)
of the consideration shall be received upfront and the
balance amount within eighteen (18) months of issuance of
share warrants.
In case of non-payment of balance consideration, the
forfeiture of the amount paid upfront will be in accordance
with the provisions of the Companies Act, 2013 and the
Income Tax provisions, as applicable.
Fully, Compulsorily and Debentures issued to a person resident outside India are
Mandatorily required to be fully, compulsorily and mandatorily
Convertible convertible debentures42.
Debentures41
40
The deferment of payment of consideration amount by the foreign investors or shortfall in receipt of
consideration amount as per applicable pricing guidelines will not be treated as subscription to partly paid shares
and warrants.
41
Optionally convertible/ partially convertible debentures issued up to June 7, 2007 or for which funds were
received for such issue prior to June 7, 2007 are deemed to have been issued in accordance with FEMA 20(R) till
their original maturity. Any extension of maturity prior to June 7, 2007 will be considered as original maturity.
42
CCDs are also known as “mandatory convertible debt” in US banking parlance. A CCD is a debt instrument
mandatorily and automatically convertible into equity at a specified time, or on happening of specified events
22.
Amendment of the tenure of compulsorily and mandatorily
convertible debentures shall be in accordance with the
Companies Act, 2013.
Fully, Compulsorily and Preference shares issued to a person resident outside India
Mandatorily are required to be fully, compulsorily and mandatorily
Convertible Preference convertible preference shares.
Shares43
Amendment of the tenure of fully, compulsorily and
mandatorily convertible preference shares will be in
accordance with the Companies Act, 2013.
Non-convertible/ optionally convertible/ partially

convertible preference shares, funds for which have been
received on or after May 1, 2007, shall be treated as debt
and will have to comply with the External Commercial
Borrowing (ECB) Regulatory Framework (discussed in
Chapter-III of this Memorandum).
(ii) Optionality Clause – Lock-In Period: Capital Instruments can contain an optionality
clause subject to a minimum lock-in period of one (1) year or as prescribed for the
specific sector, whichever is higher, but without any option or right to exit at an assured
price.
(iii) Minimum Capitalisation: Wherever there is a requirement of minimum capitalization, it

shall include premium received along with the face value of the capital instrument, only
when it is received by the company upon issue of such instruments to the person
resident outside India.44
Amount paid by the transferee during post-issue transfer beyond the issue price of the
Capital Instrument, cannot be taken into account while calculating minimum
capitalization requirement.45
43
Non-convertible/ optionally convertible/ partially convertible preference shares issued up to April 30, 2007
are deemed to have been issued in accordance with FEMA 20(R) till their original maturity. They, however, will
continue to be outside the sectoral caps till their original maturity. Any extension of maturity prior to April 30,
2007 will be considered as original maturity.
44
Reg 16 of FEMA 20(R).
45
Reg 16 of FEMA 20(R).
23.
(iv) Issuance of Capital Instrument: Capital instruments shall be issued to the person
resident outside India making such investment within sixty (60) days from the date of
receipt of the consideration. It is clarified that in case of partly paid equity shares, the
period of sixty (60) days shall be reckoned from the date of receipt of each call payment.
Where such capital instruments are not issued within sixty (60) days from the date of
receipt of the consideration, the consideration will be refunded to the concerned
person resident outside India by outward remittance through banking channels or by
credit to such person’s NRE/ FCNR(B) accounts, within fifteen (15) days from the date
of completion of sixty (60) days. Please note that for delay in refund of the amount so
received, prior approval of the RBI will be required to be taken by the Indian company,
for payment of interest on delay in refund of the amount.46
(v) Transfer of Capital Instruments of an Indian company by or to a Person Resident

Outside India
A person resident outside India or a person resident in India 47 , holding Capital

Instruments of an Indian company may transfer such Capital Instruments to a person
resident in India or a person resident outside India according to the following terms and
conditions48:
(a) A person resident outside India (not being a non-resident Indian (“NRI”) or an overseas
citizen of India (“OCI”) or an erstwhile overseas corporate body) may transfer by way of
46 Schedule 1 of FEMA 20(R).

47 "Person resident in India" means- (1) a person residing in India for more than one hundred and eighty-two
(182) days during the course of the preceding financial year but does not include:
(a) a person who has gone out of India or who stays outside India, in either case-
(i) for or on taking up employment outside India, or
(ii) for carrying on outside India a business or vocation outside India, or
(iii) for any other purpose, in such circumstances as would indicate his intention to stay outside India
for an uncertain period;
(b) a person who has come to or stays in India, in either case, otherwise than-
(i) for or on taking up employment in India, or
(ii) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an
uncertain period;
(2) any person or body corporate registered or incorporated in India
(3) an office, branch or agency in India owned or controlled by a person resident outside India,
(4) an office, branch or agency outside India owned or controlled by a person resident in India.
48 Regulation 10 of FEMA 20(R).
24.
sale or gift the Capital Instruments of an Indian company or units held by it to any person
resident outside India49;
It is clarified that prior Government approval will be obtained for any transfer in case
the Indian company is engaged in a sector which requires Government approval. 50
(b) An NRI or an OCI holding Capital Instruments of an Indian company or units on

repatriation basis may transfer the same by way of sale or gift to any person resident
outside India. It is clarified that prior Government approval shall be obtained for any
transfer in case the company is engaged in a sector which requires Government
approval.
(c) A person resident outside India, holding Capital Instruments of an Indian company or
units in accordance with FEMA 20(R) may transfer the same to a person resident in India
by way of sale/ gift. It is clarified that the transfer by way of sale on repatriable basis
will be in compliance with the pricing guidelines, documentation and reporting
requirements specified by RBI from time to time. Where the Capital Instruments are
held by the person resident outside India on a non-repatriable basis, conditions
applicable on transfer by sale (set out in the last line above) will not apply.
(d) A person resident in India holding Capital Instruments of an Indian company or units, or
an NRI or an OCI or a company, a trust and a partnership firm incorporated outside India
and owned and controlled by NRIs or OCIs holding Capital Instruments of an Indian
company or units on a non-repatriation basis, may transfer the capital instruments to a
person resident outside India by way of sale, subject to the adherence to entry routes,
sectoral caps, pricing guidelines and other FDI performance linked conditions as
applicable for investment by a person resident outside India. Documentation and
reporting requirements for such transfers will be as specified by RBI from time to time.
(e) A person resident outside India holding Capital Instruments of an Indian company
containing an optionality clause in accordance with FEMA 20(R) and exercising the
option/ right, may exit without any assured return, subject to the pricing guidelines
49
It shall also include transfer of Capital Instruments of an Indian company pursuant to liquidation, merger,
demerger and amalgamation of entities/ companies incorporated or registered outside India.
50 It is clarified that the person resident outside India is an FPI and the acquisition of Capital Instruments made
under Schedule 2 of these regulations has resulted in a breach of the applicable aggregate FPI limits or sectoral
limits, the FPI shall sell such Capital Instruments to a person resident in India eligible to hold such instruments
within the time stipulated by Reserve Bank in consultation with the Central Government. The breach of the said
aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale,
provided the sale is within the prescribed time limit, shall not be reckoned as a contravention under these
Regulations. The guidelines issued by Securities and Exchange Board of India in this regard shall be applicable.
25.
prescribed in FEMA 20(R) and a minimum lock-in period of one (1) year or a minimum
lock-in period prescribed (as a sector specific conditionality) under the FEMA 20(R),
whichever is higher.
(f) In case of transfer of Capital Instruments between a person resident in India and a
person resident outside India, an amount not exceeding twenty five percent (25%) of
the total consideration:
(a) can be paid by the buyer on a deferred basis, within eighteen (18) months
from the date of the transfer agreement; or
(b) can be settled through an escrow arrangement between the buyer and the
seller for a period not exceeding eighteen (18) months from the date of the
transfer agreement; or
(c) can be indemnified by the seller for a period not exceeding eighteen (18)
months from the date of the payment of the full consideration, if the total
consideration has been paid by the buyer to the seller.
The total consideration finally paid for the shares shall be compliant with the applicable
pricing guidelines.
(g) In case of transfer of Capital Instruments between a person resident in India and a
person resident outside India, a person resident outside India may open an escrow
account in accordance with the Foreign Exchange Management (Deposit) Regulations,
2016 (hereinafter the “FEMA Deposit Regulations”).
(h) In addition to the above-mentioned terms and conditions, for transfer of Capital
Instruments, a person resident outside India or a person resident in India holding Capital
Instruments of an Indian company will also be required to comply with terms and
conditions given in the Schedules of FEMA 20(R) (which are discussed in paragraph E
below).
(vi) Convertible Notes Issued by An Indian Start-Up Company
(a) Issuance of a Convertible Note: A person resident outside India 51 , may purchase
‘Convertible Notes’ issued by a ‘recognised’ Indian Start-Up Company for an amount of
twenty five lakh rupees (INR 25,00,000) or more in a single tranche.
51
Please note that an individual who is citizen of Pakistan or Bangladesh or an entity which is registered/
incorporated in Pakistan or Bangladesh cannot purchase convertible notes.
26.
A ‘Convertible Note’ means an instrument issued by a Start-Up Company evidencing
receipt of money initially as debt - which is (i) repayable at the option of the holder, or
(ii) which is convertible into such number of equity shares of such Start-Up Company -
within a period not exceeding five (5) years from the date of issue of the Convertible
Note, upon occurrence of specified events as per the other terms and conditions agreed
to and indicated in the instrument.52
‘Start-Up Company’ means a private company incorporated under the Companies Act,
2013 and recognised by Department for Promotion of Industry and Internal Trade
(hereinafter, “DPIIT”) in accordance with notification number G.S.R. 127(E)53 dated
February 19, 2019 (hereinafter, the “Start-Up Company Notification”).
(b) Recognition as a Start-Up Company under the Start-Up Company Notification: A Start-
Up Company means a private company incorporated under the Companies Act, 2013
and recognised by the DPIIT as a Start-Up Company in accordance with the Start-Up
Notification. The Start-Up Notification lays down the process for the recognition of an
Indian private company as a recognised Start-Up Company. DPIIT has been granted
discretion over recognising an Indian company as a Start-Up Company. The eligibility
criteria for being considered as a Start-Up Company by DPIIT is as follows:
As per the Start-Up Company Notification, an Indian private limited company (as defined
in the Companies Act, 2013) will be considered a Start-Up Company in the following
circumstances:
i. Up to a period of ten (10) years from the date of incorporation/registration,
ii. If its turnover for any of the financial years since incorporation has not
exceeded Rupees hundred crores (INR 100,00,00,000).
iii. If it is working towards innovation, development or improvement of products

or processes or services, or if it is a scalable business model with a high
potential of employment generation or wealth creation.
52
Regulation 2 (vi) of FEMA 20).
53
Although in its definition of ‘Start-Up Company’, FEMA 20 (R) refers to the notification no. GSR 180(E) dated
February 17, 2016 issued by DPIIT, Ministry of Commerce and Industry, Government of India. However, this
notification GSR 180(E) has been superseded by GSR 501(E) dated May 23, 2017, which was superseded by
Notification No. GSR 364(E) dated April 11, 2018 and which in turn has now been superseded by Notification No.
127(E) dated February 19, 2019.
27.
Please note that an entity formed by splitting up or reconstruction of an existing
business shall not be considered a ‘Start-Up Company’.
Further, please note that an entity will cease to be a Start-Up Company on completion
of ten (10) years from the date of its incorporation/ registration or if its turnover for any
previous year exceeds Rupees hundred crores.
Please note that only an Indian private company recognised by DPIIT as a Start-Up
Company is eligible to issue Convertible Notes to persons resident outside India.
(c) Government Approval: A Start-Up Company, engaged in a sector where investment by

a person resident outside India requires Government approval, may issue Convertible
Notes to a person resident outside India only with such Government approval.
(d) Conversion into Equity Shares: Issue of equity shares against such Convertible Notes will
be in compliance with the entry route, sectoral caps, pricing guidelines and other
attendant conditions for foreign investment.
(e) Receipt of Consideration: A Start-Up Company issuing Convertible Notes to a person

resident outside India will receive the amount of consideration by inward remittance
through banking channels or by debit to the NRE/ FCNR (B)/ escrow account in
accordance with the FEMA Deposit Regulations.
(f) Remittance of Repayment or Sale Proceeds: Repayment or sale proceeds may be

remitted outside India or credited to NRE/ FCNR (B) account maintained by the person
resident outside India in accordance with the FEMA Deposit Regulations.
(g) Transfer of Convertible Notes: A person resident outside India may acquire or transfer
by way of sale, Convertible Notes, from or to, a person resident in or outside India,
provided the transfer takes place in accordance with the entry routes (discussed above
at paragraph II (1) of this Chapter) and pricing guidelines (discussed below at para 4.
(viii) of this Chapter) as prescribed for Capital Instruments.
(vii) Transfer by Way of Pledge
The transfer of Capital Instruments of an Indian company by way of pledge is subject to

the following terms and conditions:
(a) Any person being a promoter of a company registered in India (borrowing company),
which has raised external commercial borrowing (ECB) in compliance with the ECB
28.
regulatory framework, may pledge the shares of the borrowing company or that of its
associate resident companies for the purpose of securing the external commercial
borrowing raised by the borrowing company, subject to the following conditions:
i. the period of such pledge shall be co-terminus with the maturity of the
underlying external commercial borrowing;
ii. in case of invocation of pledge, transfer will be in accordance with FEMA
20(R) and directions issued by the RBI (also discussed in paragraph II 6 of
this
Chapter);
iii. the statutory auditor has certified that the borrowing company will utilise/
has utilised the proceeds of the external commercial borrowing for the
permitted end uses(s) only;
iv. no person shall pledge any such share unless a no-objection has been
obtained from an Authorised Dealer bank that the above conditions have
been complied with.
(b) Any person resident outside India holding Capital Instruments in an Indian company
may pledge the Capital Instruments, as the case may be:
i. in favour of a bank in India to secure the credit facilities being extended to

such Indian company for bona fide purposes,
ii. in favour of an overseas bank to secure the credit facilities being extended
to such person or a person resident outside India who is the promoter of
such Indian company or the overseas group company of such Indian
company,
iii. in favour of a Non-Banking Financial Company registered with the RBI to
secure the credit facilities being extended to such Indian company for bona
fide purposes,
iv. subject to the Authorised Dealer bank satisfying itself of the compliance of
the conditions stipulated by the RBI in this regard.
(c) In case of invocation of pledge, transfer of Capital Instruments of an Indian company

shall be in accordance with entry routes, sectoral caps/ investment limits, pricing
guidelines and other attendant conditions at the time of creation of pledge.
29.
(viii) Pricing Guidelines54
The price of Capital Instruments of an Indian company in the following scenarios will be
governed by FEMA 20(R) and its Schedules.
(i) Price of Capital Instruments of an Indian company issued by such company to a person
resident outside India will not be less than55:
the valuation of Capital Instruments done as per any internationally accepted pricing
methodology for valuation on an arm’s length basis, duly certified by a Chartered
Accountant or a Securities and Exchange Board of India registered Merchant Banker or
a practicing Cost Accountant, where the Capital Instrument is of an unlisted Indian
company.
Please note that in case of convertible Capital Instruments, the price/ conversion
formula of the Capital Instrument should be determined upfront at the time of issue of
the instrument. The price at the time of conversion should not in any case be lower than
the fair value worked out (as per FEMA 20(R)) at the time of issuance of such Capital
Instrument.
(ii) Price of Capital Instrument of an Indian company transferred from a person resident in
India to a person resident outside India will not be less than56:
the valuation of capital instruments done as per any internationally accepted pricing
methodology for valuation on an arm’s length basis duly certified by a Chartered
a practicing Cost Accountant, where the Capital Instruments are of an unlisted Indian
company.
54
Please note that these pricing guidelines will not be applicable for investment in capital instruments by a
person resident outside India on non-repatriation basis.
55
In the case of Capital Instruments of a listed Indian company, the price will be worked out in accordance with
the relevant Securities and Exchange Board of India guidelines or in case of an Indian company going through a
delisting process as per the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009.
56
In case of a listed company, the price will be worked out in accordance with the relevant Securities and
Exchange Board of India guidelines. Further, the transfer of Capital Instruments of a (i) listed Indian company
will be at a price at which a preferential allotment of shares can be made under the Securities and Exchange
Board of India Guidelines (where applicable) or (ii) company going through a delisting process, will be as per the
Securities and Exchange Board of India (Delisting of Equity Shares) regulations, 2009. Please note that the price
is determined for such duration as specified in the Securities and Exchange Board of India Guidelines, preceding
the relevant date, which shall be the date of purchase or sale of shares.
30.
(iii) Price of Capital Instruments of an Indian company transferred by a person resident
outside India to a person resident in India will not exceed:
the valuation of Capital Instruments done as per any internationally accepted pricing
methodology for valuation on an arm’s length basis duly certified by a Chartered
a practicing Cost Accountant, in case of an unlisted Indian Company.
Please note that the guiding principle would be that the person resident outside India is
not guaranteed any assured exit price at the time of making such investment (even
through an agreement) and will exit at the price prevailing at the time of exit.
(iv) Price of Capital Instruments of an Indian company in case of Swap of Capital

Instruments:
In case of swap of Capital Instruments (irrespective of the amount), valuation involved

in the swap arrangement will have to be made by a Merchant Banker registered with
Securities and Exchange Board of India or an Investment Banker outside India registered
with the appropriate regulatory authority in the host country.
(v) Price of Capital Instruments where shares in an Indian company are issued to a person
resident outside India in compliance with the provisions of the Companies Act, 2013, by
way of subscription to its memorandum of association: Such an investment in the
Capital Instrument of the Indian company will be made at face value subject to entry
route and sectoral caps.
(vi) Price in case of issuance of share warrants of an Indian company: The pricing and the
price/ conversion formula for the share warrants will be determined upfront.
Please note that these pricing guidelines are applicable to Convertible Notes as well.
These pricing guidelines will not be applicable to investments in Capital Instruments by

a person resident outside India on non-repatriation basis.
5. Downstream Investment
Indian entity which is receiving foreign direct investment or ‘Indirect Foreign

Investment’ will comply with the entry route, sectoral caps, pricing guidelines and other
FDI linked performance conditions prescribed under FEMA 20(R) as applicable for
foreign investment.
31.
‘Indirect Foreign Investment’ means ‘downstream investment’ received by an Indian
entity from:
(i) another Indian entity which has received foreign investment, and (a) the Indian
entity is not owned and not controlled by resident Indian citizens, or (b) is owned
or controlled by persons resident outside India; or
(ii) an investment vehicle whose sponsor or manager or investment manager (a) is
not owned and not controlled by resident Indian citizens or (b) is owned or
controlled by persons resident outside India.
Only an Indian company or an LLP can receive Indirect Foreign Investment.
Total Foreign Investment
You may also note that ‘Total Foreign Investment’ in an Indian company or an LLP will
comprise of the total of Foreign Investment and Indirect Foreign Investment and the
same will be reckoned on a fully diluted basis.
Please note that if a declaration is made by persons as per the provisions of the
Companies Act, 2013 about a beneficial interest being held by a person resident outside
India, then even though the investment may be made by a resident Indian citizen, the
same shall be counted as Foreign Investment.
6. Taxes and Remittance of Sale proceeds
Taxes
All transactions under FEMA 20(R) will be undertaken through banking channels in India
and will be subject to payment of applicable taxes/duties/ levies in India.
Remittance of Sale Proceeds
No remittance of sale proceeds of an Indian Security held by a person resident outside

India will be made otherwise than in accordance with FEMA 20(R).
An Authorised Dealer may allow the remittance of sale proceeds of a Security (net of
applicable taxes) to the seller of shares resident outside India. Such remittance of sale
proceeds will be allowed where:
(i) the Security was held by the seller on repatriation basis; and
32.
(ii) the Security has either - been sold in compliance with the pricing guidelines
or the RBI’s approval has been obtained for sale of the Security and
remittance of the sale proceeds.
7. Reporting Guidelines
There are reporting requirements for investments in India.
E. Specific Investment Conditions contained in Schedules of FEMA 20(R)
1. Schedule 1 Investment Terms and Conditions: Purchase/sale of capital instruments of

an Indian company by a person resident outside India
The relevant terms and conditions of Schedule 1 have been set out below for ease of
reference:
(i) An Indian company can issue ‘Capital Instruments’ (that have been discussed above in
paragraph D. 4) to a person resident outside India subject to entry routes, sectoral caps
or investment limits (if any) and attendant conditionalities specified in regulation 16 of
FEMA 20(R).57
(ii) Issuing Capital Instruments against Pre-Incorporation/Pre-Operative Expenses:
(a) Issuing Capital Instruments against Pre-Incorporation/Pre-Operative Expenses

of an Indian wholly owned Subsidiary of a Non-Resident Entity: A wholly owned
subsidiary set up in India by a non-resident entity, operating in a sector where
hundred percent (100 %) foreign investment is allowed in the automatic route
and there are no FDI linked performance conditions, may issue Capital
Instruments to the said non-resident entity against pre-incorporation/
preoperative expenses incurred by the said non-resident entity, up to a limit of
five percent (5%) of its authorised capital or USD 500,000 whichever is less,
subject to prescribed conditions58.
(b) Issuing Capital Instruments against Pre-Incorporation/Pre-Operative Expenses
of an Indian company: An Indian company (which is not a wholly owned
57
After reaching the embedded webpage, scroll down to Regulation 16.
58
Please note that necessary compliances: (a) Within thirty days from the date of issue of Capital Instruments
but not later than one year from the date of incorporation or such time as Reserve Bank or Central Government
permits, the Indian company will report the transaction in the Form FC-GPR to the Reserve Bank; (b) A certificate
issued by the statutory auditor of the Indian company that the amount of pre-incorporation/ preoperative
expenses against which Capital Instruments have been issued has been utilized for the purpose for which it was
received, should be submitted with the Form FC-GPR. (Para 3 of Schedule 1 of FEMA (20)).
33.
subsidiary of a non-resident entity) may issue Capital Instruments to a person
resident outside India against pre-operative or pre-incorporation expenses
(including payment of rent etc.), if the Indian investee company is engaged in an
automatic route sector. It is clarified that Government approval should be
obtained if the Indian investee company is engaged in a sector under
Government route.
Please note that ‘pre-incorporation/ pre-operative expenses’ will include amounts

remitted to Indian investee company’s account, and/or to the investor’s account in
India if it exists, and/or to any consultant, attorney and/or to any other material/
service provider, for expenditure relating to incorporation or necessary for
commencement of operations.
(iii) Indian Company issuing Capital Instruments against Swap of Capital and Import of
Capital Goods: An Indian company may issue Capital Instruments to a person resident
outside India against (a) swap of Capital Instruments; or (b) import of capital goods/
machinery/ equipment (excluding second hand machinery), provided the Indian
investee company is engaged in an automatic route sector. It is clarified that the
Government approval will
need to be obtained if the Indian investee company is engaged in a sector under
Government route.
Please note that (i) issue of equity shares by an Indian company against any funds
payable by it to the investor, and (ii) swap of Capital Instruments, will be treated as
consideration amount received by Indian company for issue of its Capital Instruments.
(iv) Issue of Equity Shares against Funds Payable to a Person Resident Outside India: An
Indian company may issue equity shares against any funds payable by it to a person
resident outside India. However, the remittance of such funds should be (i) permitted
under FEMA (which includes rules, regulations and directions under FEMA); and (ii) does
not require prior permission of the Central Government or the Reserve Bank under
FEMA, or such remittance has been permitted by the RBI under FEMA.
(v) Mode of payment: The amount of consideration shall be paid as inward remittance
from abroad through banking channels or out of funds held in Non-Resident External
(NRE)/ Foreign Currency Non-Resident (Bank) (FCNR(B)/ escrow account maintained in
accordance with the FEMA Deposit Regulations.
(vi) Remittance of sale proceeds from Capital Instruments: The sale proceeds (net of taxes)
of the Capital Instruments may be remitted outside India or may be credited to the NRE/
FCNR(B) of the person concerned.
34.
2. Schedule 6 Investment Terms and Conditions: Foreign Investment in an LLP
(i) Conditions specific to investments in an LLP
(a) Eligible Investor: A person resident outside India (other than a citizen of Pakistan
or Bangladesh) or an entity incorporated outside India (other than an entity
incorporated in Pakistan or Bangladesh), not being a Foreign Portfolio Investor
(“FPI”) or a Foreign Venture Capital Investor (“FVCI”), may contribute to the capital
of an LLP operating in sectors/ activities where foreign investment up to 100
percent is permitted under automatic route and there are no FDI linked
performance conditions.
(b) Compliance with LLP Act: Investment in an LLP is subject to the compliance of the
conditions of Limited Liability Partnership Act, 2008.
(c) Transfer of capital contribution or by way of acquisition/ transfer of profit

shares:
In case of transfer of Investment in an LLP either by way of capital contribution or
by way of acquisition/ transfer of profit shares, such transfer should not be less
than the fair price worked out as per any valuation norm which is internationally
accepted/ adopted as per market practice (hereinafter referred to as "fair price of
capital contribution/ profit share of an LLP") and a valuation certificate to that
effect shall be issued by the Chartered Accountant or by a practicing Cost
Accountant or by an approved valuer from the panel maintained by the Central
Government.
In case of transfer of capital contribution/ profit share from a person resident in
India to a person resident outside India, the transfer will be for a consideration
not less than the ‘fair price of capital contribution/ profit share of an LLP’. Further,
in case of transfer of capital contribution/ profit share from a person resident
outside India to a person resident in India, the transfer shall be for a consideration
which is not more than the fair price of the capital contribution/ profit share of an
LLP.
(ii) Mode of Payment

Payment by an investor towards capital contribution of an LLP shall be made by way of
an inward remittance through banking channels or out of funds held in NRE or FCNR(B)
account maintained in accordance with the FEMA Deposit Regulations.
(iii) Remittance of Disinvestment Proceeds

The disinvestment proceeds may be remitted outside India or may be credited to NRE
or FCNR(B) account of the person concerned.
35.
GLOSSARY
TERM MEANING
Authorised Persons Authorised Persons will have the meaning ascribed to it in
para I.
Automatic Route Automatic Route will have the meaning ascribed to it in para
II. D. 1 (i).
Capital Instruments Capital Instruments will have the meaning ascribed to it in
para II. D. 1. (i).
Convertible Notes Convertible Notes will have the meaning ascribed to it in para
II. D. 4. (vi) (a).
Foreign Direct Investment ‘Foreign Direct Investment’ (FDI) means investment through
capital instruments by a person resident outside India in an
unlisted Indian company; or in 10 percent or more of the post
issue paid-up equity capital on a fully diluted basis of a listed
Indian company;
Note: In case an existing investment by a person resident

outside India in capital instruments of a listed Indian company
falls to a level below 10 percent of the post issue paid-up
equity capital on a fully diluted basis, the investment shall
continue to be treated as FDI.
Explanation: Fully diluted basis means the total number of

shares that would be outstanding if all possible sources of
conversion are exercised.
Foreign investment ‘Foreign Investment’ means any investment made by a person
resident outside India on a repatriable basis in capital
instruments of an Indian company or to the capital of an LLP;
Explanation: If a declaration is made by persons as per the

provisions of the Companies Act, 2013 about a beneficial
interest being held by a person resident outside India, then
even though the investment may be made by a resident
Indian citizen, the same shall be counted as foreign
investment.
Note: A person resident outside India may hold foreign

investment either as Foreign Direct Investment or as Foreign
Portfolio Investment in any particular Indian company.
Foreign Venture Capital Foreign Venture Capital Investment will have the meaning
Investment ascribed to it in Chapter IV.
36.
Foreign Portfolio Foreign Portfolio Investment will have the meaning ascribed
Investment to it in Chapter IV.
Government Route Government Route will have the meaning ascribed to it in
para II. D. 1 (ii).
Indirect Foreign Indirect Foreign Investment will have the meaning ascribed
Investment to it in para II. D. 5.
Investing Company Investment company means an Indian company holding only
investments in other Indian company/ies directly or
indirectly, other than for trading of such holdings/ securities.
Investment Investment will have the meaning ascribed to it in para II. A.
Investment Vehicle Investment Vehicle will have the meaning ascribed to it in II.
A.
Minimum Capitalisation Minimum Capitalisation will have the meaning ascribed to it
in para II. D. 4. (iii).
Optionality Clause Optionality Clause will have the meaning ascribed to it in
para
II. D. 4. (ii).
Person resident in India Person resident in India will have the meaning ascribed to it
in para II. D. 4. (v).
Person resident outside Person resident outside India means a person who is not
India resident in India.
Pre Incorporation/ Pre Pre Incorporation/ Pre Operation Expenses will have the
Operation Expenses meaning ascribed to it in para II. E. (ii).
Sectoral Cap Sectoral Cap will have the meaning ascribed to it in para II. D.
2.
Start Up Company Start Up Company will have the meaning ascribed to it in
para
II. D. 4 (vi) (b).
Total Foreign investment Total foreign investment will have the meaning ascribed to it
in para II. D. 5.
Unit Unit will have the meaning ascribed to it in para II. A.
Venture Capital Fund Venture Capital Fund will have the meaning ascribed to it in
para II. A.
37.
CHAPTER III: FOREIGN INVESTMENT THROUGH EXTERNAL COMMERCIAL BORROWING
ROUTE
A person resident in India (includes an Indian legal entity) can borrow, in foreign exchange or
in rupees, from a person outside India only in accordance with section 6(3)(d) and (e) of the
Foreign Exchange Management Act, 1999 (hereinafter, referred to as “FEMA”) and the rules,
regulations, directions made thereunder (hereinafter, collectively referred to as the “ECB
Regulatory Framework”). Such borrowings may be made in forms that are recognised by the
ECB Regulatory Framework and have been discussed in this Chapter.
I. ECB Regulatory Framework
1. Components of the ECB Regulatory Framework
The ECB Regulatory Framework comprises of:
(i) Foreign Exchange Management Act, 1999 (hereinafter, referred to as “FEMA”)
(ii) Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 59

(hereinafter, referred to as the “ECB Regulations”) – The ECB Regulations are notified
by the Reserve Bank of India (hereinafter, referred to as “RBI”) under sections 6(3)(d)
and (e) read with section 47(2) of FEMA. As per section 6(3) of FEMA, the RBI has been
given the power to make regulations, prohibit, restrict or regulate, amongst other
things, “…(a) transfer or issue of any foreign security by a person resident in India, (d)
any borrowing or lending in foreign exchange in whatever form or by whatever name
called; (e) any borrowing or lending in rupees in whatever form or by whatever name
called between a person resident in India and a person resident outside India…”.
The term “person resident in India” includes a company, an LLP and every artificial
judicial person; registered or incorporated in India.60
The term ‘person resident outside India’ means a person who is not resident in India.61
The term “person” includes “(a) an individual, (b) a Hindu undivided family, (c) a
company, (d) a firm, (e) an association of persons or a body of individuals, whether
incorporated or not, (f) every artificial juridical person, not falling within any of the
59
Notification No. FEMA.3(R)/2018-RB dated December 17, 2018.
60
Section 2(v) of FEMA.
61
Section 2(w) of FEMA.
38.
preceding sub-paragraphs (a) to (e), and (g) any agency, office or branch owned or
controlled by such person.”62
“Foreign Security” means any ‘security’ in the form of shares, stocks, bonds,
debentures or any other instrument denominated or expressed in foreign currency
and includes ‘securities’ expressed in foreign currency, but where redemption or any
form of return such as interest or dividends is payable in Indian currency. 63
"Security" here means, amongst other things, shares, stocks, bonds and debentures
but does not include bills of exchange or promissory notes other than Government
promissory notes or any other instruments which may be notified by the RBI as
security for the purposes of FEMA.64
(iii) Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations,
2004 65 (hereinafter, referred to as “Foreign Security Regulations”) – The Foreign
Security Regulations are notified by RBI under section 6(3)(a) read with section 47 of
FEMA. As per section 6(3)(a) of FEMA, the RBI has been given the power to make
regulations, prohibit, restrict or regulate transfer or issue of any Foreign Security by a
person resident in India.
(iv) Master Direction - External Commercial Borrowings, Trade Credits and Structured
Obligations 66 (hereinafter, referred to as the “ECB Directions”) – ECB Directions are
directions issued by the RBI to Authorised Persons67 under section 11 of FEMA. These
ECB Directions lay down the modalities as to how the foreign exchange business has to
be conducted by Authorised Persons with their customers/constituents with a view to
implementing the ECB Regulatory Framework.
2. What are External Commercial Borrowings
External Commercial Borrowings (hereinafter, referred to as “ECB(s)”) are commercial

loans raised by ‘eligible resident entities’ from ‘recognised non-resident entities’ in
accordance with the ECB Regulatory Framework.
62
Section 2(u) of FEMA.
63
Section 2 (o) of FEMA.
64
Section 2 (za) of FEMA.
65
FED Master Direction No.5/2018-19 dated March 26, 2019.
66
FED Master Direction No.5/2018-19 dated March 26, 2019.
67
“Authorised Persons” means a person who has been authorised by the RBI to deal in foreign exchange or in
foreign securities, as an ‘authorised dealer’, amongst others. (section 10 of FEMA). “Authorised Dealer” means
an authorised dealer, money changer, offshore banking unit or any other person for the time being authorised
under section 10(1) of FEMA to deal in foreign exchange or foreign securities.
39.
ECBs can be raised either under the ‘automatic route’ or the ‘approval route’. All eligible
borrowers can raise ECB up to USD 750 million or equivalent every financial year under
the automatic route if they conform to the parameters prescribed under the ECB
Regulatory Framework (discussed in paragraph 4 below) and comply with the prescribed
reporting requirement. All other cases will be considered by the Reserve Bank of India
(hereinafter, referred to as the “RBI”) under the ‘approval route’.
Procedure of raising ECB under the automatic route: Entities desirous to raise ECB under
the automatic route may approach an AD Category I bank with their proposal along with
duly filled in Form ECB.
Procedure of raising ECB under the approval route: For approval route cases, the borrowers
may approach the RBI with an application in prescribed format (Form ECB) for examination
through their AD Category I bank. Such cases shall be considered keeping in view the overall
guidelines, macroeconomic situation and merits of the specific proposals. ECB proposals
received in the RBI above certain threshold limit (refixed from time to time) would be placed
before the Empowered Committee set up by the RBI. The Empowered Committee will have
external as well as internal members and the RBI will take a final decision in the cases taking
into account recommendation of the Empowered Committee.
All entities (such as a company including start-ups, LLP and investment vehicle) that are
eligible to receive investment from persons resident outside India as per Foreign
Exchange Management (Transfer or Issue of a Security by a Person resident Outside
India) Regulations, 2017 (as amended from time to time) (hereinafter, referred to as
“FEMA 20(R)”)68 are eligible to raise ‘foreign currency denominated ECBs’ (hereinafter
referred to as “FCY denominated ECBs”) and ‘Rupee denominated ECBs’ (hereinafter
referred to as “INR denominated ECBs”). Further, RBI in consultation with the
Government of India may also specify any other entity/sector eligible to raise ECBs or
amend the existing eligibility norms.
ECB raised by Financial Institutions for Onward Lending
Financial institutions, set up under an Act of the Indian Parliament, may raise foreign
exchange borrowings from outside India (in foreign currency or in Rupees) with the prior
approval of the Government of India, for the purpose of onward lending, in accordance
with the ECB Regulatory Framework.
68
In addition, the following entities are also eligible to receive ‘foreign currency denominated ECBs’ and ‘Rupee
denominated ECBs’: Port Trusts; Units in Special Economic Zones (SEZs); (iii) Small Industries Development Bank
of India (SIDBI); and (iv) Export Import Bank of India (EXIM Bank).
40.
“Financial Institutions” 69 mean any non-banking institution which carries on as its
business or part of its business any of the following activities, namely:
a. the financing, whether by way of making loans or advances or otherwise, of any

activity other than its own;
b. the acquisition of shares, stock, bonds, debentures or securities issued by a
Government or local authority or other marketable securities of a like nature;
c. letting or delivering of any goods to a hirer under a hire-purchase agreement as
defined in clause (c) of section 2 of the Hire-Purchase Act, 1972:
d. the carrying on of any class of insurance business;
e. managing, conducting or supervising, as foreman, agent or in any other capacity,
of chits or kuries as defined in any law which is for the time being in force in any
State, or any business, which is similar thereto;
f. collecting, for any purpose or under any scheme or arrangement by whatever
name called, monies in lumpsum or otherwise, by way of subscriptions or by sale
of units, or other instruments or in any other manner and awarding prizes or gifts,
whether in cash or kind, or disbursing monies in any other way, to persons from
whom monies are collected or to any other person, but does not include any
institution, which carries on as its principal business,– i. agricultural operations;
or
ii. industrial activity; or
iii. the purchase or sale of any goods (other than securities) or the providing of
any services; or
iv. the purchase, construction or sale of immovable property, so however, that
no portion of the income of the institution is derived from the financing of
purchases, constructions or sales of immovable property by other persons.
3. Parameters for raising ECB under Automatic Route
ECBs raised under the ‘automatic route’ are required to conform to parameters laid
down in ECB Regulatory Framework, such as recognised forms, prescribed currency,
minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost
ceiling, etc. The parameters are discussed in the table below and apply in totality and
not on a standalone basis.
*The parameters for raising ECB under the automatic route by start-ups recognised
under the Start-Up Notification have been discussed separately in para A. 9. below, for
ease of the reader.
69
Financial Institutions as defined under Section 45I (c) of Reserve Bank of India Act, 1934.
41.
S. No. Parameters Foreign currency Rupee denominated ECB (INR
denominated ECB denominated ECB)
(FCY denominated
ECB)
(i) Currency of Borrowing Any freely convertible Indian Rupee (INR)

foreign currency
(ii) Forms of ECB (i) Loans including (i) Loans including bank
bank loans; loans;
(ii) Floating/ fixed rate (ii) Floating/ fixed rate
notes/ Bonds/ notes/bonds/debentures/
debentures (other preference shares (other
than fully and than fully and compulsorily
compulsorily
convertible instruments);
convertible
(iii) Trade credits beyond
instruments);
three (3) years;
(iii) Trade credits
beyond three (3) (iv) Financial Lease; and
years; (v) Plain vanilla Rupee
(iv) Foreign Currency denominated bonds issued
Convertible Bonds overseas, which can be
(“FCCBs”)70; either placed privately or
(v) Foreign Currency listed on exchanges as per
Exchangeable Bonds host country regulations.
(“FCEBs”)71; and
(vi) Financial Lease.
(iii) Eligible Borrowers The following entities are The following entities are eligible
eligible to raise FCY to raise INR denominated ECBs:
denominated ECBs:
(a) All entities eligible to
(a) All entities eligible receive foreign direct
to receive foreign investment as per FEMA
direct investment 20(R).
as per FEMA 20(R).
70
‘Foreign Currency Convertible Bonds (FCCBs)’ refers to “foreign currency denominated instruments which are
issued in accordance with the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depositary Receipt Mechanism) Scheme, 1993 as amended from time to time. Issuance of FCCBs is required to
also conform to other applicable regulations. Further, FCCBs should be issued without any warrants attached.”
71
“Foreign Currency Exchangeable Bonds (FCEBs)” _refers to foreign currency denominated instruments which
are issued in accordance with the Issue of Foreign Currency Exchangeable Bonds Scheme, 2008 as amended from
time to time. FCEBs are exchangeable into equity share of another company, to be called the Offered Company,
in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments.
Issuance of FCEBs shall also conform to other applicable regulations.
42.
(b) The following entities:
(b) The following i. Port Trusts;
entities: ii. Units in SEZ;
i. Port Trusts; ii. iii. SIDBI; and
Units in SEZ; iii. iv. EXIM Bank of
SIDBI; and iv. EXIM India.
Bank of India.
(c) Registered entities
engaged in micro- finance
activities, viz., registered
not for profit companies,
registered
societies/trusts/
cooperatives and non-
government
organisations.
(iv) Recognised Lenders The lender should be resident of Financial Action Task Force
(FATF) or International Organisation of Securities Commission
(IOSCO) compliant country, including on transfer of ECBs.
However, please note that:

a) Multilateral and Regional Financial Institutions where
India is a member country will also be considered as
‘recognised lenders’;
b) Individuals as lenders can only be permitted if they are
foreign equity holders or for subscription to
bonds/debentures listed abroad; and
Foreign branches / subsidiaries of Indian banks72 are permitted
as recognised lenders only for FCY denominated ECB (except
FCCBs and FCEBs).
(v) Minimum average Minimum average maturity period will be three (3) years.
maturity period
(“MAMP”)73 Further, if the ECB is raised from foreign equity holder and
utilised for working capital purposes, general corporate
purposes or repayment of Rupee loans, MAMP will be five (5)
years.
72
Foreign branches / subsidiaries of Indian banks, subject to applicable prudential norms, can participate as
arrangers/underwriters/market-makers/traders for Rupee denominated Bonds issued overseas. However,
underwriting by foreign branches/subsidiaries of Indian banks for issuances by Indian banks will not be allowed.
73
Please note that the manufacturing sector companies may raise ECBs with MAMP of one (1) year for ECB up to
USD 50 million or its equivalent per financial year.
43.
Please note that the call and put option, if any, shall not be
exercisable prior to completion of minimum average maturity.
(vi) All-in-cost ceiling per Benchmark rate75 plus 450 bps spread.
annum74
“All-in-Cost” includes
rate of interest, other
fees, expenses, charges,
guarantee fees, whether
paid in foreign currency
or INR but will not
include commitment
fees and withholding tax
payable in INR. Various
components of all-incost
have to be paid by the
borrower without taking
recourse to the
drawdown of ECB, i.e.,
ECB proceeds cannot be
used for payment of
interest/charges.
(vii) Other costs Prepayment charge/ penal interest, if any, for default or breach
of covenants should not be more than two per cent (2%) over
and above the contracted rate of interest on the outstanding
principal amount and will be outside the all-in cost ceiling.
(viii) End-uses (Negative list) The negative list, for which the ECB proceeds cannot be utilised,
would include the following: a) Real estate activities76.
74
Please note that in the case of fixed rate loans, the swap cost plus spread should not be more than the floating
rate plus the applicable spread. Additionally, for FCCBs the issue related expenses should not exceed 4 per cent of
issue size and in case of private placement, these expenses should not exceed 2 per cent of the issue size, etc. Under
TC Framework, all-in-cost shall include rate of interest, other fees, expenses, charges, guarantee fees whether paid
in foreign currency or INR.
75
‘Benchmark rate’ in case of FCY denominated ECB refers to 6-months LIBOR rate of different currencies or any
other 6-month interbank interest rate applicable to the currency of borrowing, for eg., EURIBOR. Benchmark rate
in case of Rupee (INR) denominated ECB will be prevailing yield of the Government of India securities of
corresponding maturity.
76
‘Real Estate Activities’ is defined as “any real estate activity involving own or leased property for buying, selling
and renting of commercial and residential properties or land and also includes activities either on a fee or contract
basis assigning real estate agents for intermediating in buying, selling, letting or managing real estate. However, this
would not include construction/development of industrial parks/integrated township/SEZ, purchase/long term
leasing of industrial land as part of new project/modernisation of expansion of existing units or any activity under
‘Infrastructure Sector’ definition.”
44.
b) Investment in capital market.
c) Equity investment.
d) Working capital purposes except from foreign equity
holder.
e) General corporate purposes except from foreign equity
holder.
f) Repayment of Rupee loans except from foreign equity
holder.
g) On-lending to entities for the above activities.
(ix) Exchange rate Change of currency of FCY For conversion to Rupee,

denominated ECB into INR exchange rate shall be the rate
denominated ECB can be at prevailing on the date of
the exchange rate: (i) settlement.
prevailing on the date of the
agreement between the
parties concerned for such
change or (ii) at an exchange
rate, which is less than the
rate prevailing on the date of
agreement, if consented to by
the ECB lender.
(x) Hedging provision The entities raising ECB are

The overseas investors are
required to follow the eligible to hedge their exposure
guidelines for hedging issued
in Rupee through permitted
by the concerned sectoral or
derivative products with
prudential regulator (if any) in
Authorised Dealer category-I
respect of foreign currencybanks in India.
exposure. The investors can also access
the domestic market through
Infrastructure Space branches/ subsidiaries of Indian
Companies 77 shall have a banks abroad or branches of
board approved risk foreign banks with Indian
management policy. Further,
77
‘Infrastructure Space Companies’ are defined as “companies in ‘Infrastructure Sector’, Non-Banking Finance
Companies undertaking infrastructure financing, Holding Companies/ Core Investment Companies undertaking
infrastructure financing, Housing Finance Companies regulated by National Housing Bank and Port Trusts
(constituted under the Major Port Trusts Act, 1963 or Indian Ports Act, 1908).”
Further, the term ‘Infrastructure Sector’ has the same meaning as given in the Harmonised Master List of
Infrastructure sub-sectors approved by Government of India vide Notification F. No. 13/06/2009-INF as amended /
updated from time to time. Please note that “Affordable Housing” is included in the list of ‘Social and Commercial
Infrastructure’ mentioned in the Harmonised Master List of Infrastructure sub-sectors as per notification issued by
Department of Economic Affairs, Ministry of Finance dated November 17, 2017.
45.
such companies are required presence on a back to back
to mandatorily hedge seventy basis.
per cent (70%) of their ECB
exposure in case average
maturity of ECB is less than five
(5) years. The designated
Authorise Dealer category-I
bank shall verify that seventy
per cent (70%) hedging
requirement is complied with
during the currency of ECB and
report the position to RBI
through prescribed form.
The following operational

aspects with respect to
hedging should be ensured:
a. Coverage: The ECB

borrower will be required to
cover principal as well as
coupon through financial
hedges. The financial hedge for
all exposures on account of
ECB should start from the time
of each such exposure
(i.e. the day liability is created
in the books of the borrower).
b. Tenor and rollover: A

minimum tenor of one (1)
year of financial hedge would
be required with periodic
rollover duly ensuring that
the exposure on account of
ECB is not unhedged at any
point during the currency of
ECB.
c. Natural Hedge: Natural

hedge, in lieu of financial
hedge, will be considered
only to the extent of
offsetting projected cash
flows/ revenues in matching
46.
currency, net of all other
projected outflows. For this
purpose, an ECB may be
considered naturally hedged
if the offsetting exposure has
the maturity/cash flow within
the same accounting year.
Any other arrangements/
structures, where revenues
are indexed to foreign
currency will not be
considered as natural hedge.
(xi) Change of currency of Change of currency of ECB Change of currency from INR to
borrowing from one freely convertible any freely convertible foreign
foreign currency to any other currency is not permitted.
freely convertible foreign
currency as well as to INR is
freely permitted.
Additional conditions for raising ECB from Direct Equity Holders under the Automatic
Route
In case foreign currency denominated ECB (FCY denominated ECB) is raised from a ‘direct
foreign equity holder’, for such ECB to fall under the automatic route, the ECB will not
only have to satisfy the currency limit stated in the paragraph above (i.e., USD 750
million or equivalent) for raising ECB, but will also be required to satisfy the ‘ECB liability:
equity ratio requirement’ (which cannot exceed 7:1 ratio). A ‘direct foreign equity
holder’ here means an eligible ‘foreign equity holder’ with minimum 25% direct equity
holding in the eligible borrowing entity. ‘Foreign Equity Holder’ here means (a) ‘direct
foreign equity holder’ with minimum 25% direct equity holding by the lender in the
borrowing entity, (b) indirect equity holder with minimum indirect equity holding of
51%, and (c) group company with common overseas parent.
The ‘ECB liability: equity ratio requirement’ is that the total ECB liability of the borrower
towards the ‘direct foreign equity holder’ who is proposing to lend should not be more
than seven (7) times of the equity contributed by such ‘direct foreign equity holder’.
Please note that ‘ECB liability: equity ratio requirement’ ratio will not be applicable if
total of all ECBs raised by the borrower from the ‘direct foreign equity holder’ is up to
USD 5 million or equivalent.
47.
For satisfying the ‘ECB liability: equity ratio requirement’, the total ‘ECB liability’ of the
borrower towards the ‘direct foreign equity holder’ here will include (i) all outstanding
ECBs (other than INR denominated ECBs) raised by the borrower from such ‘direct
foreign equity holder’; and (ii) the ECB proposed to be raised by the borrower from such
‘direct foreign equity holder’78.
For the purpose of calculating the ‘Equity’ of the ‘direct foreign equity holder’ under the
‘ECB liability: equity ratio requirement’ the following will be taken into consideration –
(i) the paid-up capital and (ii) free reserves (including the share premium received in
foreign currency from the concerned ‘direct foreign equity holder’) as per the latest
audited balance sheet of the borrower.
Where there are more than one ‘direct foreign equity holders’ in the borrowing
company, the portion of the share premium in foreign currency brought in by the
concerned direct foreign equity holder shall only be considered for calculating the ‘ECB
liability: equity ratio requirement’.
Please note that the RBI, in consultation with Government of India may prescribe higher
limits for ECBs raised by entities in certain sectors or for certain end uses. The said
‘individual limits’ may be subject to review by the RBI in consultation with the
Government of India.
ECB can be raised by Start-Ups under the ‘automatic route’

Authorised Dealers are permitted to allow start-ups to raise ECB under the automatic
route as per the specific conditions discussed in detail in paragraph 9 of this Chapter
below.
Points to Note:
(i) Other Debt Instruments: Any investment by a recognised non-resident entity in the
nature of debt arising out of transfer or issue of security, not covered under the ECB
Regulations should be in compliance with FEMA 20(R), as amended from time to time.
FEMA 20(R) has been discussed in Chapter II of this Memorandum.
(ii) Other Forms of ECB: ECB can also be raised in any other form as may be prescribed by
RBI in consultation with the Government of India, from time to time.
78
Only outstanding ECB amounts will be included in case of ‘refinancing’.
48.
(iii) Hybrid Instruments: Certain hybrid instruments, such as optionally convertible
debentures, presently covered under ECB, would be governed by specific hybrid
instruments’ regulations as and when notified by the Government of India.
(iv) Exemption to RFPIs: Please note that the ECB Regulatory Framework is not applicable
to the investment in non-convertible debentures (NCDs) in India made by registered
Foreign Portfolio Investors (hereinafter, referred to as “Registered Foreign Portfolio
Investors” or “RFPI(s)”).
4. Security
Authorised Dealer category I banks are permitted to allow creation of charge on

immovable assets, movable assets, financial securities and issue of corporate and/ or
personal guarantees in favour of overseas lender / security trustee, to secure the ECB
to be raised / raised by the borrower, subject to satisfying themselves that: (i) the
underlying ECB is in compliance with the ECB Regulatory Framework, (ii) there exists a
security clause in the loan agreement requiring the ECB borrower to create charge, in
favour of overseas lender / security trustee, on immovable assets / movable assets /
financial securities / issuance of corporate and/or personal guarantee, and (iii) No
objection certificate (as applicable) from the existing lenders by the borrower in India
has been obtained.
Additional conditions for creation of Security:
Authorised Dealer category I bank, upon satisfaction of these pre-conditions of security

set out in the paragraph above, may permit creation of charge on – (i) immovable assets,
(ii) movable assets (iii) financial securities and (iv) issue of corporate and/or personal
guarantees, with the security being co-terminus with the underlying ECB, subject to the
following conditions:
(i) Creation of Charge on Immovable Assets:
The arrangement will be subject to the following:
(a) Such security shall be subject to provisions contained in the Foreign Exchange
Management (Acquisition and Transfer of Immovable Property in India)
Regulations, 2017 (as amended from time to time).
(b) The permission should not be construed as a permission to acquire immovable
asset (property) in India, by the overseas lender/ security trustee.
49.
(c) In the event of enforcement/invocation of the charge, the immovable asset/
property will have to be sold only to a person resident in India and the sale
proceeds shall be repatriated to liquidate the outstanding ECB.
(ii) Creation of Charge on Movable Assets:
In the event of enforcement/ invocation of the charge, the claim of the lender, whether
the lender takes over the movable asset or otherwise, will be restricted to the
outstanding claim against the ECB. Encumbered movable assets may also be taken out
of the country subject to getting ‘No Objection Certificate’ from domestic lender/s, if
any.
(iii) Creation of Charge over Financial Securities:
The arrangements may be permitted subject to the following:
(a) Pledge of shares of the borrowing company held by the promoters as well as
in domestic associate companies of the borrower is permitted. Pledge on other
financial securities, viz. bonds and debentures, Government Securities,
Government Savings Certificates, deposit receipts of securities and units of the
Unit Trust of India or of any mutual funds, standing in the name of ECB
borrower/promoter, is also permitted.
(b) In addition, security interest over all current and future loan assets and all
current assets including cash and cash equivalents, including Rupee accounts
of the borrower with Authorised Dealers in India, standing in the name of the
borrower/promoter, can be used as security for ECB. The Rupee accounts of
the borrower/promoter can also be in the form of escrow arrangement or debt
service reserve account.
(c) In case of invocation of pledge, transfer of financial securities shall be in
accordance with FEMA 20(R) including provisions relating to sectoral cap and
pricing.
(iv) Issue of Corporate or Personal Guarantee:
The arrangement shall be subject to the following:
(a) A copy of board resolution for the issue of corporate guarantee for the company
issuing such guarantee, specifying name of the officials authorised to execute
such guarantees on behalf of the company or in individual capacity should be
obtained.
50.
(b) Specific requests from individuals to issue personal guarantee indicating details
of the ECB should be obtained.
(c) Such security shall be subject to provisions contained in the Foreign Exchange
Management (Guarantees) Regulations, 2000 (amended from time to time).
(d) ECB can be credit enhanced / guaranteed / insured by overseas party/ parties
only if it/ they fulfil(s) the criteria of recognised lender under the ECB Regulatory
Framework.
5. Debt Equity Ratio
The borrowing entities will also be governed by the guidelines on debt equity ratio
issued, if any, by the concerned sectoral or prudential regulator.
6. Reporting
The borrower will have reporting obligations as specified by the RBI (from time to time).
7. Conversion of ECB into equity
Conversion of ECBs, including those which are matured but unpaid, into equity is
permitted subject to the following conditions:
(a) The activity of the borrowing company is covered under the automatic route or
approval (wherever applicable) for foreign equity participation has been
obtained as per FEMA 20(R);
(b) The conversion, which should be with the lender’s consent and without any
additional cost, will not result in breach of applicable sector cap on the foreign
equity holding as per FEMA 20(R);
(c) Applicable pricing guidelines (prescribed under FEMA 20(R)) for shares are
complied with;
(d) Reporting requirements relating to conversion of ECB into equity (prescribed

under ECB Regulatory Framework) are fulfilled;
(e) If the borrower concerned has availed of other credit facilities from the Indian
banking system, including foreign branches/subsidiaries of Indian banks, the
applicable prudential guidelines issued by the Department of Banking
Regulation of RBI, including guidelines on restructuring are complied with; and
51.
(f) Consent of other lenders, if any, to the same borrower is available or at least
information regarding conversions is exchanged with other lenders of the
borrower.
(g) Exchange rate for conversion of ECB dues into equity: For conversion of ECB
dues into equity, the exchange rate prevailing on the date of the agreement
between the parties concerned for such conversion or any lesser rate can be
applied with a mutual agreement with the ECB lender. It may be noted that the
fair value of the equity shares to be issued shall be worked out with reference
to the date of conversion only.
8. ECB facility for Start-ups:
Authorised Dealer category-I banks are permitted to allow recognised ‘start-ups’ to raise
ECB under the automatic route as per the following framework:
(i) Eligibility: An entity recognised as a start-up by the Central Government as on date of

raising ECB will be eligible under the facility. Please refer to the Start-Up Notification for
the eligibility criteria (discussed in Chapter II of this Memorandum).
(ii) Maturity: Minimum average maturity period will be three (3) years.
(iii) Recognised lender: Lender/ investor shall be a resident of a Financial Action Task Force
(FATF) compliant country. However, foreign branches/subsidiaries of Indian banks and
overseas entity in which Indian entity has made overseas direct investment as per the
extant Overseas Direct Investment Policy will not be considered as recognized lenders
under this framework.
(iv) Forms: The borrowing can be in form of loans or non-convertible, optionally convertible
or partially convertible preference shares.
(v) Currency: The borrowing should be denominated in any freely convertible currency or
in Indian Rupees (INR) or a combination thereof. In case of borrowing in INR, the
nonresident lender, should mobilise INR through swaps/outright sale undertaken
through an Authorised Dealer category-I bank in India.
(vi) Amount: The borrowing per start-up will be limited to USD 3 million or equivalent per
financial year either in INR or any convertible foreign currency or a combination of both.
(vii) All-in-cost: Shall be mutually agreed between the borrower and the lender.
52.
(viii) End uses: For any expenditure in connection with the business of the borrower.
(ix) Conversion into equity: Conversion of ECB into equity is freely permitted subject to
FEMA 20(R) applicable for foreign investment in start-ups.
(x) Security: The choice of security to be provided to the lender is left to the borrowing
entity. Security can be in the nature of movable, immovable, intangible assets (including
patents, intellectual property rights), financial securities, etc. and shall comply with
foreign direct investment / foreign portfolio investment / or any other norms applicable
for foreign lenders / entities holding such securities. Further, issuance of corporate or
personal guarantee is allowed. Guarantee issued by a non-resident(s) is allowed only if
such party(ies) qualify as lender under this ECB facility for start-ups. However, issuance
of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian
banks, all India Financial Institutions and non-banking financial companies (NBFCs) is
not permitted.
(xi) Hedging: The overseas lender, in case of ‘INR denominated ECB’, will be eligible to
hedge its INR exposure through permitted derivative products with Authorised Dealer
category – I banks in India. The lender can also access the domestic market through
branches/ subsidiaries of Indian banks abroad or branches of foreign bank with Indian
presence on a back to back basis.
Note:
(xii) Conversion rate: In case of borrowing in INR, the foreign currency - INR conversion will
be at the market rate as on the date of agreement.
(xiii) Other Provisions: Other provisions like parking of ECB proceeds, reporting
arrangements, powers delegated to Authorised Dealer banks, borrowing by entities
under investigation, conversion of ECB into equity will be in accordance with the ECB
Regulatory Framework. However, provisions on leverage ratio and ‘ECB liability: equity
ratio’ will not be applicable.
However, please note that the (i) recognised ‘start-ups’ eligible for this ECB facility for
start-ups, as well as (ii) other start-ups which are not eligible for the ECB facility for
startups but are eligible to receive foreign investment as per FEMA 20(R), can also raise
ECBs under the general ECB regulatory framework.
9. Onus of Compliance with ECB Regulatory Framework is of the Borrower
53.
The primary responsibility for ensuring that the borrowing is in compliance with the
applicable ECB Regulatory Framework is that of the ‘borrower’ concerned. Any
contravention of the applicable provisions of the ECB Regulatory Framework will invite
penal action under FEMA.
54.
GLOSSARY
TERM DEFINITION
All in cost All in cost will have the meaning ascribed to it in para A.3.
(vi).
Direct Foreign Equity Holder Direct Foreign Equity Holder will have the meaning ascribed
to it in para A. 3.
External Commercial External Commercial Borrowings will have the meaning
Borrowings ascribed to it in para A. 2.
ECB liability: equity ratio ECB liability: equity ratio will have the meaning ascribed to
it in para A. 3.
Financial Institutions Financial Institutions will have the meaning ascribed to it in
para A. 2.
Foreign Currency Foreign Currency Convertible Bonds will have the meaning
Convertible Bonds ascribed to it in para A. 3.
Foreign Currency Foreign Currency Exchangeable Bonds will have the meaning
Exchangeable Bonds ascribed to it in para A. 3.
Foreign Equity Holder Foreign Equity Holder will have the meaning ascribed to it in
para A. 3.
Foreign Security Foreign Security will have the meaning ascribed to it in para
A. 1.
Indirect Foreign Equity Indirect Foreign Equity Holder will have the meaning
Holder ascribed to it in para A. 3.
Infrastructure Sector Infrastructure Sector will have the meaning ascribed to it in
footnote 19.
Infrastructure Space Infrastructure Space Companies will have the meaning
Companies ascribed to it in para A. 3. (x).
Person Person will have the meaning ascribed to it in para A. 1.
Person Resident in India Person resident in India will have the meaning ascribed to it
in para A. 1.
Person resident outside Person resident outside India means a person who is not
India resident in India.
Real Estate Activities Real Estate Activities will have the meaning ascribed to it in
para A. 3. (viii).
Security Security will have the meaning ascribed to it in para A. 1.
55.
Start Up Start Up means an entity if it fulfils following:
i. Upto a period of ten years from the date of incorporation/
registration, if it is incorporated as a private limited company
(as defined in the Companies Act, 2013) or registered as a
partnership firm (registered under section 59 of the
Partnership Act, 1932) or a limited liability partnership
(under the Limited Liability Partnership Act, 2008) in India.
ii. Turnover of the entity for any of the financial years since
incorporation/ registration has not exceeded one hundred
crore rupees. iii. Entity is working towards innovation,
development or improvement of products or processes or
services, or if it is a scalable business model with a high
potential of employment generation or wealth creation.
Provided that an entity formed by splitting up or
reconstruction of an existing business shall not be
considered a ‘Startup’.
56.
CHAPTER IV: INVESTMENT VEHICLES
‘Investment Vehicle’ means an entity registered and regulated under relevant
regulations framed by Securities and Exchange Board of India or any other authority
designated for the purpose and shall include Real Estate Investment Trusts (REITs)
governed by the Securities and Exchange Board of India (REITs) Regulations, 2014,
Infrastructure Investment Trusts (InvIts) governed by the Securities and Exchange Board
of India (InvIts) Regulations, 2014 and Alternative Investment Funds (AIFs) governed by
the Securities and Exchange Board of India (Alternative Investment Funds) Regulations,
2012.79 Given the scope of this memorandum we are only going to discuss Alternative
Investment Funds (AIFs).
I. ALTERNATIVE INVESTMENT FUNDS
A. Legal Regulatory Framework for Setting Up an Investment Fund in India
The Securities and Exchange Board of India Act, 1992 (hereinafter, referred to as “SEBI
Act”) is an act that provides for the establishment of the Securities and Exchange Board
of India (hereinafter, referred to as “SEBI”) so as to protect the interests of investors in
securities, and to promote the development of and to regulate the securities market.
Section 12(1B) of the SEBI Act prohibits any person from sponsoring or causing to be
sponsored, or carrying on or causing to be carried on any venture capital funds or
collective investment schemes including mutual funds, unless such a person obtains
a certificate of registration from the SEBI in accordance with the relevant regulations
made by SEBI. Under section 11 of the SEBI Act, SEBI has the power and the function to
register and regulate the working of venture capital funds.
On May 21, 2012, SEBI repealed the SEBI (Venture Capital Funds) Regulations, 1996
(hereinafter, referred to as the “VCF Regulations”)80 and instead notified the Securities
and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 in
exercise of powers conferred to it by the SEBI Act.
B. Definition of Alternative Investment Funds
The Securities and Exchange Board of India (Alternative Investment Funds) Regulations,
2012 (hereinafter, referred to as the “AIF Regulations”) regulate ‘alternative investment
funds’ (hereinafter, referred to as “AIF”).
79
Regulation 2 (xxix), FEMA 20 (R).
80
However, existing VCFs will continue to be regulated by the VCF Regulations till the existing fund or scheme
managed by the fund is wound up. This Memorandum does not discuss the provisions of the VCF Regulations.
57.
AIF has been defined to mean: “Any fund established or incorporated in India in the form
of a trust or a company or a limited liability partnership (LLP) or a “body corporate”
which- (i) is a privately pooled investment vehicle which collects funds from investors,
whether Indian or foreign, for investing it in accordance with a defined investment policy
for the benefit of its investors; and
(ii) is not covered under the Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996, Securities and Exchange Board of India (Collective Investment
Schemes) Regulations, 1999 or any other regulations of SEBI which regulate fund
management activities.”81
Please note that the term "body corporate" is defined in the Companies Act, 2013 and
“includes a company incorporated outside India, but does not include (i) a co-operative
society registered under any law relating to co-operative societies; and (ii) any other
body corporate (not being a company under the Companies Act, 2013), which the Central
Government may by notification prescribe.”
It is clarified that the following activities will not be considered as an AIF for the purpose
of the AIF Regulations:
i. family trusts set up for the benefit of ‘relatives’82 as defined under Companies
Act, 2013;
ii. ESOP83 Trusts set up under the Securities and Exchange Board of India (Share
Based Employee Benefits) Regulations, 2014 or as permitted under Companies
Act, 2013;
iii. employee welfare trusts or gratuity trusts set up for the benefit of employees;
iv. ’holding companies’84 as defined under Companies Act, 2013;
81
Regulation 2(1) (b) of AIF Regulations.
82 ‘Relatives’ with reference to any person, means any one who is related to another, if — (i) they are
members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed.
83
Employees Stock Option Plan
84
‘Holding company’, in relation to one or more other companies, means a company of which such companies
are subsidiary companies.
58.
v. other special purpose vehicles85 not established by fund managers, including
securitization trusts, regulated under a specific regulatory framework;
vi. funds managed by securitisation company or reconstruction company which is

registered with the Reserve Bank of India (hereinafter, referred to as “RBI”) under
section 3 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002;
vii. any such pool of funds which is directly regulated by any other regulator in
India.
C. Registration of Alternative Investment Funds86
The AIF Regulations prohibit a person or an entity from acting as an AIF unless it has
obtained a certificate of registration from SEBI in accordance with the AIF Regulations.
AIF Regulations provide for registration of an AIF under three different categories which
are discussed in paragraph D below.87
D. Categories of AIF
An AIF is required to seek registration under one of the categories discussed below:88
1. Category I Alternative Investment Fund: Such funds invest in start-ups or early stage
ventures or ‘social ventures’ or small and medium enterprises (hereinafter, referred to
as “SME(s)”) or infrastructure or other sectors or areas which the government or
regulators consider as socially or economically desirable and shall include (following
sub categories) ‘venture capital funds’, ‘SME funds’, ‘social venture funds’,
‘infrastructure funds’ and such other Alternative Investment Funds as may be
specified.89
Explanation. ─ For the purpose of this clause, Alternative Investment Funds which are
generally perceived to have ‘positive spill over effects’ on economy and for which the
85 ‘SPV’ or ‘special purpose vehicle’ means any company or LLP:

(i)in which either the Infrastructure Investment Trusts or the holdco holds or proposes to hold controlling
interest and not less than fifty one per cent (51%) of the equity share capital or interest;
(ii) which holds not less than ninety per cent (90%) of its assets directly in infrastructure projects and
does not invest in other SPVs; and
(iii) which is not engaged in any other activity other than activities pertaining to and incidental to
the underlying infrastructure project.
86
Regulation 3 of AIF Regulations.
87
First Schedule, AIF Regulations (Form A)
88
Regulation 3(4) of AIF Regulations.
89
Each sub category has been explained later in the Chapter.
59.
SEBI or Government of India or other regulators in India might consider providing
incentives or concessions shall be included.90
“Social Venture” means a trust, society or company or venture capital undertaking or

limited liability partnership formed with the purpose of promoting social welfare or
solving social problems or providing social benefits and includes:
(i) registered public charitable trusts;

(ii) societies registered for charitable purposes or for promotion of science, literature,
or fine arts;
(iii) company registered under section 8 of the Companies Act, 2013;
(iv) micro finance institutions.
“Social Venture Fund” means an AIF which invests primarily in securities or units
of social ventures and which satisfies social performance norms laid down by the
fund and whose investors may agree to receive restricted or muted returns.
“Infrastructure Fund” means an AIF which invests primarily in unlisted securities or

partnership interest or listed debt or securitized debt instruments of investee
companies or special purpose vehicles engaged in or formed for the purpose of
operating, developing or holding infrastructure projects.
“SME” means small and medium enterprise 91 and shall have the same meaning as
assigned to it under the Micro, Small and Medium Enterprises Development Act, 2006
as amended from time to time.
“SME Fund” means an AIF which invests primarily in unlisted securities of investee
companies which are SMEs or securities of those SMEs which are listed or proposed
to be listed on a SME exchange or SME segment of an exchange.
“Venture Capital Fund” means an AIF which invests primarily in unlisted securities of
start-ups, emerging or early-stage venture capital undertakings mainly involved in
90
Such funds which are formed as trusts or companies shall be construed as “venture capital company” or
“venture capital fund” as specified under sub-section (23FB) of Section 10 of the Income Tax Act, 1961.
91
’Small enterprise’ means an enterprise, where the investment in plant and machinery is more than twenty-
five lakh rupees but does not exceed five crore rupees; or, a small enterprise, where the investment in
equipment is more than ten lakh rupees but does not exceed two crore rupees.
‘Medium enterprise’ means an enterprise, where the investment in plant and machinery is more than five crore
rupees but does not exceed ten crore rupees; or a medium enterprise, where the investment in equipment is
more than two crore rupees but does not exceed five crore rupees.
60.
new products, new services, technology or intellectual property right based activities
or a new business model and shall include an ‘Angel Fund’ (as defined below).
“Venture Capital Undertaking” means a domestic company:

(i) which is not listed on a recognised stock exchange in India at the time of making
investment; and
(ii) which is engaged in the business for providing services, production or
manufacture of article or things and does not include following activities or
sectors:
(a) non-banking financial companies;
(b) gold financing;
(c) activities not permitted under industrial policy of Government of India;
(d) any other activity which may be specified by SEBI in consultation
with Government of India from time to time.
“Angel Fund” means a sub-category of Venture Capital Fund under Category I -

Alternative Investment Fund that raises funds from angel investors and invests in
accordance with the AIF Regulations.
"Angel Investor" means any person who proposes to invest in an Angel Fund and
satisfies one of the following conditions, namely,
(i) an individual investor who has net tangible assets of at least Rupees two crore
(approx. USD 281, 650) excluding value of his principal residence, and who:
(a) has early stage investment experience, or
(b) has experience as a serial entrepreneur, or
(c) is a senior management professional with at least ten years of experience.
Explanation: For the purpose of this clause, 'early stage investment experience' shall
mean prior experience of investing in start-up or emerging or early-stage ventures and
'serial entrepreneur' shall mean a person who has promoted or co-promoted more than
one start-up venture.
(ii) a body corporate with a net worth of at least Rupees ten crore (approx. USD
1,408,252); or
(iii) an AIF registered under AIF Regulations or a Venture Capital Fund registered under
the SEBI (Venture Capital Funds) Regulations, 1996.
61.
2. Category II Alternative Investment Fund: Such funds which do not fall in Category I and
III and which do not undertake leverage or borrowing other than to meet day-to-day
operational requirements and as permitted in these AIF Regulations.
Explanation─ AIF such as a private equity fund or debt fund for which no specific
incentives or concessions are given by the government or any other regulator shall be
included.
“Debt Fund” an AIF which invests primarily in debt or debt securities of listed or unlisted
investee companies according to the stated objectives of the fund.
“Investee Company” means any company, special purpose vehicle or limited liability
partnership or body corporate or real estate investment trust or infrastructure
investment trust in which an AIF makes an investment.
“Private Equity Fund” an AIF which invests primarily in equity or equity linked
instruments or partnership interests of investee companies according to the stated
objective of the fund.
“Equity Linked Instruments” includes instruments convertible into equity shares or

share warrants, preference shares, debentures compulsorily or optionally convertible
into equity.
3. Category III Alternative Investment Fund: Funds which employ diverse or complex
trading strategies and may employ leverage including through investment in listed or
unlisted derivatives.
Explanation─ AIFs such as hedge funds or funds which trade with a view to make short
term returns or such other funds which are open ended and for which no specific
incentives or concessions are given by the government or any other regulator shall be
included.
“Hedge Fund” means an AIF which employs diverse or complex trading strategies and
invests and trades in securities having diverse risks or complex products including listed
and unlisted derivatives.
E. Eligibility Criteria for the Applicant Seeking Registration as AIF92
For the purpose of the grant of certificate to an applicant, SEBI will consider the
following conditions for eligibility:
92
62.
(i) the memorandum of association in case of a company; or the trust deed in case
of a trust; or the partnership deed in case of a limited liability partnership, permits
the applicant entity to carry on the activity of an AIF;
(ii) the constitution documents of applicant entity prohibits it from making an

invitation to the public to subscribe to its securities;
(iii) in case the applicant is a trust, the instrument of trust is in the form of a deed and
has been duly registered under the provisions of the Registration Act, 1908;
(iv) in case the applicant is a limited liability partnership, the partnership is duly
incorporated and the partnership deed has been duly filed with the registrar under
the provisions of the Limited Liability Partnership Act, 2008;
(v) in case the applicant is a body corporate, it is set up or established under the laws
of the central or state legislature and is permitted to carry on the activities of an
AIF;
(vi) the applicant, ‘Sponsor’ and ‘Manager’ are fit and proper persons based on the
criteria specified in Schedule II of the Securities and Exchange Board of India
(Intermediaries) Regulations, 2008;
The term “Sponsor” means any person or persons who set up the AIF and includes
promoter in case of a company and designated partner in case of a limited
liability partnership.
The term “Manager” means any person or entity who is appointed by the AIF
to manage its investments by whatever name called and may also be same as the
Sponsor of the fund.
(vii) the key investment team of the Manager of AIF has adequate experience, with at
least one key personnel having not less than five (5) years experience in advising
or managing pools of capital or in fund or asset or wealth or portfolio management
or in the business of buying, selling and dealing of securities or other financial
assets and has relevant professional qualification;
(viii) the Manager or Sponsor has the necessary infrastructure and manpower to
effectively discharge its activities;
(ix) the applicant has clearly described at the time of registration the investment
objective, the targeted investors, proposed corpus, investment style or strategy
and proposed tenure of the fund or scheme;
63.
(x) whether the applicant or any entity established by the Sponsor or Manager has
earlier been refused registration by SEBI.
F. Process of Registration
An application for grant of certificate will be made for either of the three categories of
AIFs as specified in paragraph D above, in Form A93 prescribed in the AIF Regulations.
The application should be accompanied by a non-refundable application fee as
discussed below.
Amount to be Paid as Fees
₹1,00,000
Application fee
Registration fee for Category I Alternative ₹5,00,000

Investment Funds other than Angel Funds
Registration fee for Category II Alternative ₹10,00,000

Investment Funds
Registration fee for Category III Alternative ₹15,00,000

Investment Funds
Scheme Fee for Alternative Investment ₹1,00,000

Funds
₹1,00,000
Re-registration Fee
₹2,00,000
Registration Fee for Angel Funds
93
After you reach the webpage, scroll to page 42 of the Regulations for Form A.
64.
Ordinarily, the certificate of registration shall be valid till the AIF is wound up.
Grant of Certificate of Registration94
SEBI may grant certificate under any specific category of AIF, if it is satisfied that the
applicant fulfils the requirements and requisite fees is paid 95 as specified in the AIF
Regulations.
After considering an application, if SEBI is of the opinion that a certificate should not
be granted, it may reject the application after giving the applicant a reasonable
opportunity of being heard. The decision of SEBI to reject the application shall be
communicated to the applicant within thirty (30) days.
In our view, there is no prescribed timeline for the grant or refusal of application for
registration of an AIF and has been left to the discretion of SEBI. However, the AIF
Regulations require SEBI to communicate its decision to reject an application within
thirty (30) days, but it is not clear from when will these thirty (30) days be counted.
Therefore, a clarification may be sought from SEBI in this regard.
G. Conditions for Investment into an AIF
1. Route
Please note that as per regulation 16(5) of FEMA 20(R) (discussed in Chapter II of this
Memorandum), investment in (i) investing companies not registered as Non-Banking
Financial Companies with the RBI and (ii) core investment companies (CICs), both
engaged in the activity of investing in the capital of other Indian entities (meaning Indian
company and Indian LLP), requires prior Government approval. However as per serial
number F. 10.1. (Other Financial Services) of regulation 16 of FEMA 20(R), hundred
percent (100%) investment is permitted under the automatic route into
companies/limited liability partnerships engaged in financial services activities
regulated by financial sector regulators, viz., Reserve Bank, National Housing Bank,
Securities and Exchange Board of India (SEBI) or any other financial sector regulator as
may be notified by the Government of India. In our view, an AIF is also an ‘investing
company’ which is regulated by SEBI but not registered with RBI, therefore there appear
to be contradictory provisions in FEMA about applicable route for investing into an AIF.
Given the contradictory provisions, we suggest that a specific clarification should be
sought with regard to the ‘route’ required to be taken, when necessary.
94
95
Second Schedule of AIF Regulations.
65.
2. General Conditions for Investment in Alternative Investment Fund96
Investment in all categories of AIF will be subject to the following general conditions.
These conditions do not apply to Angel Funds. The conditions specific to Angel Funds
are discussed in paragraph 1A (Conditions specific for Investment in Angel Funds) below.
(i) the AIF may raise funds from any investor whether Indian, foreign or non-resident
Indians by way of issue of units;
“Unit” has been defined as beneficial interest of the investors in the AIF or a scheme of
the AIF and will include shares or partnership interests.
(ii) each scheme of the AIF shall have a corpus97 of atleast Rupees twenty crore;
“Corpus” is defined to mean the total amount of funds committed by investors to the
AIF by way of a written contract or any such document as on a particular date.
(iii) the AIF shall not accept from an investor, an investment of value less than Rupees one
crore;
Provided that in case of investors who are employees or directors of the AIF or
employees or directors of the Manager, the minimum value of investment shall be
Rupees twenty five lakh.
(iv) the Manager or Sponsor shall have a continuing interest in the AIF of not less than two
and half percent (2½%) of the corpus or Rupees five crore, whichever is lower, in the
form of investment in the AIF and such interest shall not be through the waiver of
management fees.
Please note that in the case of a Category III Alternative Investment Fund, the continuing
interest will be not less than five percent (5%) of the corpus or Rupees ten crore,
whichever is lower.
(v) the Manager or Sponsor will disclose their investment in the AIF to the investors of the
AIF. Please note that this requirement also applies to Angel Funds.;
(vi) no scheme of the AIF shall have more than one thousand (1000) investors. Provided that
the provisions of the Companies Act, 2013 shall apply to the AIF, if it is formed as a
company.
96
97
Regulation 2 (1) (h) of AIF Regulations
66.
(vii) AIF will not solicit or collect funds except by way of private placement. Please note that
this requirement also applies to Angel Funds.
3. General Conditions for Investment in Angel Funds98
(i) Angel Funds shall only raise funds by way of issue of units to Angel Investors.
(ii) An Angel Fund shall have a corpus of at least Rupees five crore.
(iii) Angel Funds shall accept, up to a maximum period of five (5) years, an investment of
not less than Rupees twenty five lakh from an Angel Investor.
(iv) Angel Fund shall raise funds through private placement by issue of information
memorandum or placement memorandum, by whatever name called.
(v) the Manager or Sponsor of an Angel Fund will disclose their investment in the Angel
Fund to the investors of the Angel Fund;
(vi) The Manager or Sponsor shall have a continuing interest in the Angel Fund of not less
than two and half percent (2½%) of the corpus or Rupees fifty lakh, whichever is lesser,
and such interest shall not be through the waiver of management fees.99
(vii) The Manager of the Angel Fund will obtain an undertaking from every Angel Investor
proposing to make investment in a Venture Capital Undertaking, confirming his
approval for such an investment, prior to making such an investment.100
Please note that the provisions of the Companies Act, 2013 will apply to the Angel Funds,
if it is formed as a company.
3. Placement Memorandum101
An AIF shall raise funds through private placement by issue of information

memorandum or placement memorandum in the manner prescribed under the AIF
Regulations.
4. Schemes102
98
Regulation 19 D of AIF Regulations
99
Regulation 19 G of AIF Regulations
100
Regulation 19 G of AIF Regulations
101
Regulation 11 of AIF Regulations
102
67.
The AIF may launch schemes subject to filing of placement memorandum or term sheet
(in case of an Angel Fund) with SEBI for comments in the manner prescribed in the AIF
Regulations.
It is clarified that no scheme of an Angel Fund will have more than two hundred (200)
Angel Investors. Please note that the provisions of the Companies Act, 2013 shall apply
to the Angel Fund, if it is formed as a company. 103
5. Tenure104
(i) Category I Alternative Investment Fund and Category II Alternative Investment Fund will
be close ended and the tenure of the AIF or scheme will be determined at the time of
application. Category I and II Alternative Investment Funds or schemes shall have a
minimum tenure of three (3) years. Extension of the tenure of the close ended
Alternative Investment Fund may be permitted up to two (2) years subject to approval
of two-thirds of the unit holders by value of their investment in the AIF.
(ii) In the absence of consent of unit holders, the AIF shall fully liquidate within one (1) year
following expiration of AIF tenure or extended tenure.
(iii) Category III Alternative Investment Fund may be open ended or close ended.
H. Investment Conditions for Investment by all Categories of AIF
1. General Investment Conditions for Investment by all Categories of AIF105
Investments by all categories of AIF shall be subject to the following conditions:
(i) AIF may invest in securities of companies incorporated outside India subject to
such conditions or guidelines that may be stipulated or issued by the RBI and the
SEBI from time to time.
(ii) Co-investment in an investee company106 by a Manager or Sponsor shall not be on

terms more favourable than those offered to the AIF.
103
Regulation 19 E of AIF Regulations.
104
105
106
Regulation 2 (1) (o) of AIF Regulations defines “investee company” as any company, special purpose vehicle
or limited liability partnership or body corporate or real estate investment trust or infrastructure investment
trust in which an Alternative Investment Fund makes an investment.
68.
(iii) Category I and II Alternative Investment Funds shall invest not more than twenty
five percent (25%) of the investable funds in one investee company. Please note
that this provision does not apply to Angel Funds.
(iv) Category III Alternative Investment Fund shall invest not more than ten percent
(10%) of the investable funds in one investee company.
(v) AIF shall not invest in ‘Associates’ except with the approval of seventy five percent
(75%) of investors by value of their investment in the AIF. Please note that this
provision does not apply to Angel Funds.
“Associates” here means a company or a limited liability partnership or a body

corporate in which a director or trustee or partner or Sponsor or Manager of the
AIF or a director or partner of the Manager or Sponsor holds, either individually
or collectively, more than fifteen percent (15%) of its paid-up equity share
capital or partnership interest, as the case may be.
(vi) Un-invested portion of the investable funds may be invested in liquid mutual
funds or bank deposits or other liquid assets of higher quality such as treasury
bills, CBLOs (collateralized borrowing and lending obligation), commercial papers,
certificates of deposits, etc. till deployment of funds as per the investment
objective.
(vii) Alternative Investment Fund may act as Nominated Investor107.
(viii) Investment by Category I and Category II Alternative Investment Funds in the

shares of entities listed on institutional trading platform, after the
commencement of Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) (Fourth Amendment) Regulations, 2015 will be deemed
to be investment in ‘unlisted securities’ for the purpose of these AIF Regulations.
2. Specific Conditions for Investment by Category I Alternative Investment Funds108
107
As per regulation 106N (1) (b) of the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009, “Nominated Investor” means a qualified institutional buyer or private
equity fund, who enters into an agreement with the lead manager(s) to subscribe to an issue, made in
accordance with Chapter IX, in case of under subscription or to receive or deliver the specified securities
in the market making process in such an issue. Explanation- ‘private equity fund’ means a fund registered with
any regulatory authority or a fund established by any person registered with any regulatory authority.
108
69.
a. Category I Alternative Investment Fund shall invest in investee companies 109 or
Venture Capital Undertaking or in special purpose vehicles or in limited liability
partnerships or in units of other AIFs as specified in these AIF Regulations.
b. A fund of Category I Alternative Investment Funds may invest in units of Category

I Alternative Investment Funds of same sub-category. It is clarified that they shall
only invest in such units and will not invest in units of other Fund of Funds 110.
Further the investment conditions as specified in paragraphs 2 (i) (Venture Capital
Funds), (ii) (SME Funds), (iii) (Social Venture Capital Funds) or (iv) (Infrastructure
Funds) below shall not be applicable to investments such as these. Please note
that this condition will not apply to Angel Funds. Therefore, an Angel Fund can
invest in the units of any other sub-category of Category I Alternative Investment
Funds.
c. Category I Alternative Investment Funds shall not borrow funds directly or

indirectly or engage in any leverage except for meeting temporary funding
requirements for not more than thirty (30) days, on not more than four (4)
occasions in a year and not more than ten percent (10%) of the investable funds.
(i) Additional Specific Conditions for Investment by Venture Capital Funds
In addition to the conditions discussed in paragraph 2 above (Specific Conditions for

Investment by Category I Alternative Investment Funds), following additional specific
conditions for investment will apply to Venture Capital Funds.
(a) at least two-thirds of the investable funds shall be invested in unlisted equity
shares or equity linked instruments of a Venture Capital Undertaking or in
companies listed or proposed to be listed on a SME exchange or SME segment of
an exchange;
(b) not more than one-third of the investable funds shall be invested in:
i. subscription to initial public offer of a Venture Capital Undertaking whose

shares are proposed to be listed;
109
Regulation 2 (1) (o) defines “investee company” as any company, special purpose vehicle or limited liability
partnership or body corporate or real estate investment trust or infrastructure investment trust in which an
Alternative Investment Fund makes an investment
110
As per FAQs on AIF Regulations issued by SEBI, Fund of Funds is an AIF which invests in another AIF.
70.
ii. debt or debt instrument of a Venture Capital Undertaking in which the fund
has already made an investment by way of equity or contribution towards
partnership interest;
iii. preferential allotment, including through qualified institutional placement,

of equity shares or equity linked instruments of a listed company subject to
lock in period of one (1) year;
iv. the equity shares or equity linked instruments of a financially weak

company or a sick industrial company whose shares are listed.
“A financially weak company” here means a company, which has at the end
of the previous financial year accumulated losses, which has resulted in
erosion of more than fifty percent (50%) but less than hundred percent
(100%) of its net worth as at the beginning of the previous financial year.
v. special purpose vehicles which are created by the fund for the purpose of
facilitating or promoting investment in accordance with these AIF
Regulations.
Please note that these additional specific conditions and restrictions for
investment stipulated for Venture Capital Funds in this paragraph will be
achieved by the fund by the end of its life cycle.
(c) such funds may enter into an agreement with merchant banker to subscribe to
the unsubscribed portion of the issue or to receive or deliver securities in the
process of market making under the Securities and Exchange Board of India (Issue
of Capital and Disclosure Requirements) Regulations, 2009 and paragraph 2 (i) (a)
and (b) (Additional Specific Conditions for Investment by Venture Capital Funds)
will not apply in case of acquisition or sale of securities pursuant to such
subscription or market making.
(d) such funds shall be exempt from regulation 3 and 3A of Securities and Exchange
Board of India (Prohibition of Insider Trading) Regulations, 1992 in respect of
investment in companies listed on SME exchange or SME segment of an exchange
pursuant to due diligence of such companies subject to the following conditions:
i. the fund shall disclose any acquisition or dealing in securities pursuant to

such due-diligence, within two (2) working days of such acquisition or
dealing, to the stock exchanges where the investee company is listed;
ii. such investment shall be locked in for a period of one (1) year from the date
of investment.
71.
(ii) Additional Specific Conditions for Investment by SME Funds

conditions for investment will apply to SME Funds.
(a) atleast seventy five percent (75%) of the investable funds shall be invested in
unlisted securities or partnership interest of Venture Capital Undertakings or
investee companies which are SMEs or in companies listed or proposed to be
listed on SME exchange or SME segment of an exchange;
(b) such funds may enter into an agreement with merchant banker to subscribe to
the unsubscribed portion of the issue or to receive or deliver securities in the
process of market making under Chapter XB of the Securities and Exchange Board
of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
(c) such funds shall be exempt from regulation 3 and 3A of Securities and Exchange
Board of India (Prohibition of Insider Trading) Regulations, 1992 in respect of
investment in companies listed on SME Exchange or SME segment of an exchange
pursuant to due diligence of such companies subject to the following conditions:
i. the fund shall disclose any acquisition or dealing in securities pursuant to

ii. such investment shall be locked in for a period of one year (1) from the date
of investment.
(iii) Additional Specific Conditions for Investment by Social Venture Funds

conditions for investment will apply to Social Venture Funds.
(a) atleast seventy five percent (75%) of the investable funds shall be invested in
unlisted securities or partnership interest of Social Ventures.
(b) such funds may accept grants, provided that utilization of such grants shall be
restricted to paragraph 2 (iii) (a) above (Additional Specific Conditions for
Investment by Social Venture Funds).
72.
Further the amount of grant that may be accepted by the fund from any person
should not be less than Rupees twenty-five lakh (approx. USD 35,206) and no
profits or gains should accrue to the provider of such grants.
(c) such funds may give grants to social ventures, provided that appropriate
disclosure is made in the placement memorandum.
(d) such funds may accept muted returns for their investors i.e. they may accept
returns on their investments which may be lower than prevailing returns for
similar investments.
(iv) Additional Specific Conditions for Investment by Infrastructure Funds

conditions for investment will apply to Infrastructure Funds.
Atleast seventy five percent (75%) of the investable funds shall be invested in unlisted
securities or units or partnership interest of Venture Capital Undertaking or investee
companies or special purpose vehicles, which are engaged in or formed for the purpose
of operating, developing or holding infrastructure projects. However, such funds may
also invest in listed securitized debt instruments or listed debt securities of investee
companies or special purpose vehicles, which are engaged in or formed for the purpose
of operating, developing or holding infrastructure projects.
(v) Investment by Angel Funds111
(a) Angel funds shall invest in Venture Capital Undertakings which:
i. comply with the criteria regarding the age of the Venture Capital
Undertaking/ Startup set out in the Start-Up Notification or such other
policy made in this regard which may be in force. Currently, the age criteria
in the Start-Up Notification is 10 years from the date of incorporation;
ii. have a turnover of less than Rupees twenty five crore;
111
Regulation 19F of AIF Regulations
73.
iii. are not promoted or sponsored by or related to an industrial group 112
whose group turnover113 exceeds Rupees three hundred crore; and
iv. are not ‘companies with family connection’ 114 with any of the Angel
Investors who are investing in the company.
(b) Investment by an Angel Fund in any Venture Capital Undertaking shall not be less
than Rupees twenty five lakh rupees and shall not exceed Rupees ten crores.
(c) Investment by an Angel Fund in the Venture Capital Undertaking shall be locked-
in for a period of one (1) year.
(d) Angel Funds shall not invest in Associates.
(e) Angel Funds shall not invest more than twenty-five per cent (25%) of the total
investments under all its schemes in one Venture Capital Undertaking.
112
"Industrial group" shall include a group of body corporates with the same promoter(s)/promoter group, a
parent company and its subsidiaries, a group of body corporates in which the same person/ group of persons
exercise control, and a group of body corporates comprised of associates/subsidiaries/holding companies.
113 "Group turnover" shall mean combined total revenue of the industrial group.
114 "Company with family connection" means:

a. if the angel investor is an individual,
i. any company which is promoted by such an individual or his relative; or
ii. any company where the individual or his relative is a director; or
iii. any company where the person or his relative has control, or shares or voting rights which entitle them
to fifteen percent or more of the shares or voting rights in the company.
Explanation I: For the purpose of this clause, "relative" means a person as defined under sub-section 77
of section 2 of the Companies Act, 2013.
Explanation II: For the purpose of this clause, "control" shall have the same meaning as assigned to it
under sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011.
b. if the angel investor is a body corporate,
i. any company which is a subsidiary or a holding company of the investor; or
ii. any company which is part of the same group or under the same management of the investor; or
Explanation: For the purpose of this clause, "part of the same group" and "under the same management"
shall have the same meaning as assigned to it under regulation 23 of the Securities and Exchange Board of
India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
iii. any company where the body corporate or its directors/partners have control, or shares or voting
rights which entitle them to fifteen percent or more of the shares or voting rights in the company.
Explanation: For the purpose of this clause, "control" shall have the same meaning as assigned to it under
sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011.
74.
This compliance is required to be ensured by the Angel Fund at the end of its
tenure.
(f) An Angel Fund may also invest in the securities of companies incorporated outside
India subject to such conditions or guidelines that may be stipulated or issued by
the RBI and SEBI from time to time.
2. Specific Conditions for Investment by Category II Alternative Investment Funds115
The following investment conditions shall apply to Category II Alternative Investment

Funds:
i. Category II Alternative Investment Funds shall invest primarily in unlisted

investee companies or in units of other AIFs as may be specified in the placement
memorandum;
ii. Fund of Category II Alternative Investment Funds may invest in units of Category
I or Category II Alternative Investment Funds.
Provided that they shall only invest in such units and shall not invest in units of
other Fund of Funds.
iii. Category II Alternative Investment Funds may not borrow funds directly or
indirectly and shall not engage in leverage except for meeting temporary funding
requirements for: (a) not more than thirty (30) days, (b) not more than four (4)
occasions in a year, and (c) not more than ten percent (10%) of the investable
funds;
iv. Notwithstanding paragraph 2 (iii) above (Specific Conditions for Investment by
Category II Alternative Investment Funds), Category II Alternative Investment
Funds may engage in hedging, subject to guidelines as specified by SEBI from time
to time;
v. Category II Alternative Investment Funds may enter into an agreement with

merchant banker to subscribe to the unsubscribed portion of the issue or to
receive or deliver securities in the process of market making under Chapter XB of
the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009.
vi. Category II Alternative Investment Funds shall be exempt from regulation 3 and
3A of Securities and Exchange Board of India (Prohibition of Insider Trading)
115
75.
Regulations, 1992 in respect of investment in companies listed on SME Exchange
or SME segment of an exchange pursuant to due diligence of such companies
subject to the following conditions:
(a) the fund shall disclose any acquisition or dealing in securities pursuant to
(b) such investment shall be locked in for a period of one (1) year from the date
of investment.
3. Specific Conditions for Investment by Category III Alternative Investment Funds 116
The following investment conditions shall apply to Category III Alternative Investment
Funds:
i. Category III Alternative Investment Funds may invest in securities of listed or

unlisted investee companies or derivatives or complex or structured products.
ii. Fund of Category III Alternative Investment Funds may invest in units of Category
I or Category II Alternative Investment Fund. However, they can invest solely in
such units and will not invest in units of other Fund of Funds.
iii. Category III Alternative Investment Funds may engage in leverage or borrow,
subject to consent from the investors in the fund, and subject to a maximum
limit, as may be specified by SEBI.
However, such funds are required to disclose information regarding the overall
level of leverage employed, the level of leverage arising from borrowing of cash,
the level of leverage arising from position held in derivatives or in any complex
product and the main source of leverage in their fund to the investors and to the
SEBI periodically, as may be specified by the SEBI.
iv. Category III Alternative Investment Funds shall be regulated through issuance of
directions regarding areas such as operational standards, conduct of business
rules, prudential requirements, restrictions on redemption and conflict of
interest as may be specified by SEBI.
116
76.
Other general obligations, responsibilities and conditions relating to AIFs can be found
in the AIF Regulations.
I. Additional Conditions for Investment In and By Alternative Investment Funds as per Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations, 2017 (hereinafter, referred to as “FEMA 20(R)”)
(i) A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an
entity incorporated outside India (other than an entity incorporated in Pakistan or
Bangladesh) may invest in units of AIFs.
(ii) A person resident outside India who has acquired or purchased units in an AIF in
accordance with FEMA20(R) may sell or transfer in any manner or redeem the units as
per regulations framed by SEBI or directions issued by the Reserve Bank of India.
(iii) An AIF may issue its units to a person resident outside India against swap of capital
instruments of a special purpose vehicle proposed to be acquired by such AIF.
(iv) Investment made by an AIF into an Indian entity (company or LLP) shall be reckoned as
indirect foreign investment for the investee Indian entity if the Sponsor or the Manager
or the investment manager (a) is not owned and not controlled by resident Indian
citizens or (b) is owned or controlled by persons resident outside India.
Provided that for Sponsors or Managers or investment managers organized in a form
other than companies or LLPs, Securities and Exchange Board of India shall determine
whether the Sponsor or Manager or investment manager is foreign owned and
controlled.
Explanation: ‘Control’ of the AIF should be in the hands of ‘Sponsors’ and ‘Managers/
investment managers’, with the general exclusion to others. In case the ‘Sponsors and
‘Managers/ investment managers’ of the AIF are individuals, for the treatment of
downstream investment by such AIF as domestic, ‘Sponsors’ and ‘Managers/
investment managers’ should be resident Indian citizens.
(v) An Alternative Investment Fund Category III which has received any foreign investment
shall make portfolio investment in only those securities or instruments in which a
Foreign Portfolio Investor is allowed to invest under the SEBI Act, rules or regulations
made thereunder.
(vi) The transfer of units of an Investment Vehicle by way of pledge is subject to the same
terms and conditions as applicable to transfer of capital instruments of a company as
discussed in Chapter II.
Mode of payment
77.
The amount of consideration shall be paid as inward remittance from abroad through banking
channels or by way of swap of shares of a special purpose vehicle or out of funds held in Non-
Resident External (hereinafter, “NRE”) or Foreign Currency Non-Resident (Bank) (hereinafter,
“FCNR(B)”) account maintained in accordance with the Foreign Exchange Management
(Deposit) Regulations, 2016.
Remittance of sale/ maturity proceeds

The sale/ maturity proceeds (net of taxes) of the units may be remitted outside India or may
be credited to the NRE or FCNR(B) account of the person concerned.
78.
II. FOREIGN VENTURE CAPITAL INVESTORS
A. Legal Regulatory Framework applicable to a Foreign Venture Capital Investor
Act”) provides for the establishment of the Securities and Exchange Board of India
(hereinafter, referred to as the “SEBI”) so as to protect the interests of investors in
Section 12(1B) of the SEBI Act prohibits any person from sponsoring or causing to be
sponsored, or carrying on or causing to be carried on any venture capital funds or
collective investment schemes including mutual funds, unless such a person obtains
a certificate of registration from the SEBI in accordance with the relevant regulations
made by SEBI. Under section 11 of the SEBI Act, SEBI has the power and the function to
register and regulate the working of venture capital funds.
Under Section 11 of SEBI Act, SEBI has the power and the function to register and
regulate the working of venture capital funds. In exercise of its powers under Section 30
(1) of the SEBI Act, the SEBI has notified the Securities and Exchange Board of India
(Foreign Venture Capital Investors) Regulations, 2000 (hereinafter the “FVCI
Regulations”) which requires an investor incorporated or established outside India that
is interested in investing in accordance with Schedule 7117 of the FEMA 20 R and the
FVCI Regulations , to obtain a registration from SEBI in accordance with the FVCI
Regulations.
B. Definition of Foreign Venture Capital Investor
Foreign Venture Capital Investor (“FVCI”) means an investor incorporated and

established outside India, that is registered under the FVCI Regulations and proposes to
make investments in accordance with these FVCI Regulations.118
C. Registration of FVCI with SEBI

1. Eligibility Criteria for the Applicant119
SEBI will consider the following conditions for checking eligibility of applicant for FVCI
registration:
117
Schedule 7 in FEMA 20 (R) provides investment conditions specifically for a Foreign Venture
Capital Investors (FVCIs) in addition to the investment conditions provided in the FVCI Regulations.
118
Regulation 2 (1) (g) of FVCI Regulations
119
Regulation 4 of FVCI Regulations
79.
i. the applicant’s track record, professional competence, financial soundness,
experience, general reputation of fairness and integrity;
ii. whether the applicant has been granted necessary approval by the RBI for making
investments in India;
iii. whether the applicant is an investment company, investment trust, investment

partnership, pension fund, mutual fund, endowment fund, university fund, charitable
institution or any other entity incorporated outside India;
iv. whether the applicant is an asset management company, investment manager or

investment management company or any other investment vehicle incorporated
outside India;
v. whether the applicant is authorised to invest in venture capital fund or Alternate

Investment Fund or carry on activity as a foreign venture capital investor;
vi. whether the applicant is regulated by an appropriate foreign regulatory authority or

is an income tax payer; or submits a certificate from its banker of its or its promoter’s
track record where the applicant is neither a regulated entity nor an income tax payer;
vii. the applicant has not been refused a certificate by SEBI;
viii. whether the applicant is a ‘fit and proper person’120.
ix. The applicant desirous of getting registered as FVCI with SEBI has to obtain firm
commitment from their investors for contribution of an amount of at least USD 1
million at the time of submission of application seeking registration as FVCI.121 The
application form requires that firm commitment letter/(s) from the investors for
120 The criteria for determining whether an applicant or the foreign venture capital investor is a ‘fit and proper
person’, the SEBI may take into account the criteria specified in Schedule II of the Securities and Exchange Board
of India (Intermediaries) Regulations, 2008. The said Schedule provides:
“For the purpose of determining as to whether an applicant or the intermediary is a ‘fit and
proper person’ the Board [SEBI] may take account of any consideration as it deems fit,
including but not limited to the following criteria in relation to the applicant or the
intermediary, the principal officer, the director, the promoter and the key management
persons by whatever name called:
(a) integrity, reputation and character;
(b) absence of convictions and restraint orders;
(c) competence including financial solvency and networth; (d) absence of categorization as a wilful
defaulter”.
121
Circular No. IMD/DOF-1/FVCI/CIR. No. 1/2009 dated 3-7-2009, SEBI. Available at
https://www.sebi.gov.in/legal/circulars/jul-2009/firm-commitment-requirement-for-registration-as-
foreignventure-capital-investors_4365.html
80.
contribution of an amount aggregating to at least US$ 1 million be furnished. 122
Further the application form requires copies of the financial statements of such
investors for the preceding financial year to be furnished, along with the application.
2. Procedure for Grant of Certificate of Registration123
If SEBI is satisfied that the applicant is eligible for the grant of certificate, it shall send an
intimation to the applicant. On receipt of intimation, the applicant shall pay to SEBI the
registration fee as discussed below. SEBI shall on receipt of the registration fee, grant a
certificate of registration in Form B.124
Amount to be Paid as Fees125

Application fee US $ 2,500
Registration fee US $ 10,000
D. Investment Conditions and Restrictions for a Foreign Venture Capital Investor 126
All investments to be made by a FVCI will be subject to the following conditions:
1. FVCI shall disclose to SEBI its investment strategy;
2. FVCI can invest its total funds committed in one venture capital fund or AIF;
3. FVCI shall make investments as enumerated below:
(i) at least 66.67% of the Investible Funds shall be invested in unlisted equity shares or
equity linked instruments of Venture Capital Undertaking127 or investee company.
122
Form A, First Schedule of FVCI Regulations
123
Regulation 7 of FVCI Regulations.
124
Form B, Second Schedule of FVCI Regulations.
125
Part A of the Second Schedule of FVCI Regulations.
126
Regulation 11 of FVCI Regulations.
127
As per Regulation 2(m) of FVCI Regulations, “Venture Capital undertaking” means a domestic company:
i) Which is not listed on a recognised stock exchange in India at the time of making investment; and
(ii) Which is engaged in the business for providing services, production or manufacture of article or things and
does not include following activities or sectors:
(1) non-banking financial companies, other than Core Investment Companies (CICs) in the infrastructure
sector, Asset Finance Companies (AFCs), and Infrastructure Finance Companies (IFCs) registered with
Reserve Bank of India;
(2) gold financing;
(3) activities not permitted under industrial policy of Government of India;
81.
“Investible Funds” is defined as the fund committed for investments in India net of
expenditure for administration and management of the fund.128
(ii) not more than 33.33% of the Investible Funds may be invested by way of:
(a) subscription to initial public offer of a Venture Capital Undertaking or investee

company whose shares are proposed to be listed.
(b) debt or debt instrument of a Venture Capital Undertaking or investee company in

which the FVCI has already made an investment by way of equity;
(c) preferential allotment of equity shares of a listed company subject to lock in

period of one (1) year;
(d) it shall disclose the duration of life cycle of the fund;
(e) special purpose vehicles which are created for the purpose of facilitating or
promoting investment in accordance with these FVCI Regulations.
The investment conditions and restrictions contained in this paragraph 3 are

required to be achieved by the FVCI by the end of its life cycle.
4. According to Schedule 7 of the Foreign Exchange Management (Transfer or Issue of

Security by a Person Resident Outside India) Regulations, 2017129 (hereinafter referred
to as “FEMA 20(R)”), an FVCI is permitted to invest in the following manner:
(i) Subject to the terms and conditions as may be laid down by the Reserve Bank of India
(hereinafter, referred to as the “RBI”), a FVCI may purchase:
(a) securities issued by an Indian company not listed on a recognised stock
exchange at the time of their issue. Further, such an investment can be
made only in the following sectors:
i. Biotechnology
ii. IT related to hardware and software development
iii. Nanotechnology
(4) any other activity which may be specified by the Board/SEBI in consultation with Government of
India from time to time.
128
Regulation 2 (1) (i) of FVCI Regulations
129 When you reach the embedded webpage, please scroll to Schedule 7.
82.
iv. Seed research and development
v. Research and development of new chemical entities in pharmaceutical

sector
vi. Dairy industry
vii. Poultry industry
viii. Production of bio-fuels ix. Hotel-cum-convention centres with seating

capacity of more than three thousand.
x. Infrastructure sector. The term ‘Infrastructure Sector’ has the same

meaning as given in the Harmonised Master List of Infrastructure
subsectors approved by Government of India vide Notification F. No.
13/06/2009-INF dated March 27, 2012 as amended or updated. This
includes the affordable housing sector.
(b) securities issued by a startup;
(c) units of a venture capital fund or of a Category I Alternative Investment Fund

or units of a scheme or of a fund set up by a venture capital fund or a
Category I Alternative Investment Fund.
It is pertinent to note that if the investment is in Capital Instruments (as discussed in
Chapter II of this Memorandum), then the sectoral caps, entry routes and attendant
conditions shall apply.
(ii) An FVCI may purchase the securities/ instruments mentioned above either from the
issuer of these securities/ instruments or from any person holding these securities/
instruments.
The FVCI may invest in securities on a recognized stock exchange subject to the
provisions of the FVCI Regulations which have been discussed in paragraph D. 3 above.
(iii) The FVCI may acquire, by purchase or otherwise, from, or transfer, by sale or otherwise,
to, any person resident in or outside India, any security/ instrument it is allowed to
invest in, at a price that is mutually acceptable to the buyer and the seller/ issuer. The
FVCI may also receive the proceeds of the liquidation of venture capital fund or a
Category I Alternative Investment Fund or of schemes/ funds set up by the venture
capital fund or a Category I Alternative Investment Fund.
(iv) An FVCI is not permitted to contribute to the capital of an LLP operating in sectors/
activities where foreign investment up to hundred percent (100%) is permitted under
automatic route and there are no FDI linked performance conditions.
83.
(v) Mode of payment
(a) The amount of consideration shall be paid as inward remittance from abroad
through banking channels or out of funds held in a foreign currency account and/
or a Special Non-Resident Rupee account maintained in accordance with the
Foreign Exchange Management (Deposit) Regulations, 2016.
(b) The foreign currency account and Special Non-resident Rupee Account shall be
used only and exclusively for transactions discussed in this paragraph 4.
(vi) Remittance of sale/ maturity proceeds

The sale/ maturity proceeds (net of taxes) of the securities may be remitted outside
India or may be credited to the foreign currency account or a Special Non-resident
Rupee Account of the FVCI.
84.
III. FOREIGN PORTFOLIO INVESTOR
A. Legal Regulatory Framework applicable to a Foreign Venture Capital Investor
Act”) provides for the establishment of the Securities and Exchange Board of India
(hereinafter referred to as the “SEBI”) so as to protect the interests of investors in
Sections 12(1) and (1A) of the SEBI Act prohibits an intermediary associated with the
securities market from buying or selling or dealing in securities except under and in
accordance with the conditions of a certificate of registration obtained from SEBI
in accordance with the regulations made under SEBI Act. A Foreign Portfolio Investor
(hereinafter referred to as “FPI”) is treated as an intermediary and under section 11 of
SEBI Act, SEBI has the power and the function to register and regulate the working of a
FPI. In exercise of its powers under section 30 (1) of the SEBI Act, SEBI has notified the
Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014
(hereinafter, referred to as “FPI Regulations”) which regulate the functions of FPIs.
B. Investment Conditions and Restrictions Applicable to an FPI130
1. An FPI can invest only in the following securities:
(i) Perpetual debt instruments and debt capital instruments, as specified by the RBI from
time to time;
(ii) Listed and unlisted non-convertible debentures/bonds issued by an Indian company in

the infrastructure sector, where ‘infrastructure’ is defined in terms of the ECB
Regulatory Framework (as discussed in Chapter III);
(iii) Non-convertible debentures or bonds issued by Non-Banking Financial Companies

(hereinafter, referred to as “NBFCs”) categorized as ‘Infrastructure Finance
Companies’(IFCs) by the RBI;
(iv) Rupee denominated bonds or units issued by infrastructure debt funds;
(v) Indian depository receipts;
130
Regulation 21 of FPI Regulations.
85.
(vi) Unlisted non-convertible debentures/bonds issued by an Indian company subject to the
guidelines issued by the Ministry of Corporate Affairs, Government of India from time
to time;
(vii) Securitized debt instruments, including
(a) any certificate or instrument issued by a special purpose vehicle set up for
securitization of asset/s with banks, financial institutions or non-banking financial
institutions as originators; and
(b) any certificate or instrument issued and listed in terms of the Securities and
Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments)
Regulations, 2008;
(viii) Shares, debentures and warrants of companies, listed or to be listed on a recognized

stock exchange in India through primary and secondary markets;
(ix) Units of schemes floated by domestic mutual funds, whether listed on a recognized
stock exchange or not;
(x) Units of schemes floated by a collective investment scheme;
(xi) Derivatives traded on a recognized stock exchange;
(xii) Treasury bills and dated government securities;131
(xiii) Commercial papers issued by an Indian company;132
(xiv) Rupee denominated credit enhanced bonds;
(xv) Security receipts issued by asset reconstruction companies; and
(xvi) Such other instruments specified by SEBI from time to time.
131
Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the
Government of India and are presently issued in three tenors, namely, 91 days, 182 days and 364 days. Treasury
bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face
value at maturity. Please see https://m.rbi.org.in/Scripts/FAQView.aspx?Id=79
132
‘Commercial Paper’ (CP) is an unsecured money market instrument issued in the form of a promissory note.
The original tenor of a CP shall be between seven (7) days to one (1) year. The exact end use shall be disclosed
in the offer document at the time of issue of a CP. Please see more at
https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11089&Mode=0
86.
The FPI Regulations also provide for specific conditions for investment in the secondary
markets by an FPI.133
An FPI shall hold, deliver or cause to be delivered securities only in dematerialized form.
2. In respect of investments in the debt securities134, the FPIs shall also comply with terms,
conditions or directions, specified or issued by SEBI and Reserve Bank of India
(hereinafter, referred to as “RBI”), from time to time, in addition to other conditions
specified in these FPI Regulations (for example, ECB Regulations as discussed in Chapter
III).
3. Unless otherwise approved by SEBI, securities shall be registered in the name of the FPI
as a beneficial owner as defined in section 2(1) (a) of the Depositories Act, 1996.
“Beneficial owner” means a person whose name is recorded as such with a depository.
4. The purchase of equity shares of each company by a single FPI or an investor group shall
be below ten percent (10%) of the total issued capital of the company.
Please note that the FPI Regulations also provide for specific conditions for subscription
of offshore derivatives by FPI.
B2. Additional Conditions for Investment By FPIs as per Schedule 5 of Foreign Exchange
Management (Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2017 (hereinafter referred to as “FEMA 20(R)”)
1. An FPI may purchase the following instruments on repatriation basis subject to the
terms and conditions specified by the SEBI (such as the FPI Regulations) and the RBI
(such as the ECB Regulatory Framework):
(a) dated Government securities/ treasury bills;
(b) non-convertible debentures/ bonds issued by an Indian company;
(c) commercial papers issued by an Indian company;
(d) units of domestic mutual funds;
133
In case you would like to know about conditions for investment in the secondary markets, please let us know
and we will be happy to include them.
134
The expression “debt securities” shall include dated Government securities, commercial paper, treasury bills,
listed or to be listed corporate debt, units of debt oriented mutual funds, unlisted non-convertible
debentures/bonds in the infrastructure sector, security receipts issued by asset reconstruction companies or
any other security, as specified by the Board from time to time.
87.
(e) Security Receipts (hereinafter, referred to as “SRs”) issued by Asset
Reconstruction Companies up to hundred percent (100%) of each tranche, subject
to directions/ guidelines of the Reserve Bank;
(f) Perpetual debt instruments eligible for inclusion as Tier I capital and debt capital
instruments as upper Tier II capital issued by banks in India to augment their
capital (Tier I capital and Tier II capital as defined by RBI) provided that the
investment by all eligible investors in perpetual debt instruments (Tier I) shall not
exceed an aggregate ceiling of forty nine percent (49%) of each issue and
investment by a single FPI shall not exceed the limit of ten percent (10%) of each
issue;
(g) non-convertible debentures/ bonds issued by Non-Banking Financial Companies

categorized as ‘Infrastructure Finance Companies’(IFCs) by the RBI. This will
include such instruments issued on or after November 3, 2011 and held by
deemed FPIs;
(h) Rupee denominated bonds/ units issued by Infrastructure Debt Funds. This will
include such instruments issued on or after November 22, 2011 and held by
deemed FPIs;
(i) Credit enhanced bonds;
(j) Listed non-convertible/ redeemable preference shares or debentures issued in

terms of regulation 9 of FEMA 20(R);
(k) Security receipts issued by securitization companies subject to conditions as

specified by the RBI and/ or SEBI;
(l) Securitised debt instruments, including (i) any certificate or instrument issued by
a special purpose vehicle set up for securitisation of asset/s with banks, financial
institutions or NBFCs as originators; and/ or (ii) any certificate or instrument issued
and listed in terms of the Securities and Exchange Board of India (Regulations on
Public Offer and Listing of Securitised Debt Instruments), 2008; and (m) Municipal
bonds135.
Cap for Automatic Route: Aggregate Foreign Portfolio Investment 136 up to forty nine
percent (49%) of the paid-up capital on a fully diluted basis or the sectoral/ statutory
135
‘Municipal bonds’ mean debt instruments issued by municipalities constituted under Article 243Q of the
Constitution of India. FPI investment in municipal bonds will be reckoned within the limits set for FPI investment
in State Development Loans (SDLs). All other existing conditions for investment by FPIs in the debt market will
apply.
136
As per section 2(xix) of FEMA 20(R), ‘Foreign Portfolio Investment’ means “any investment made by a person
resident outside India through capital instruments where such investment is less than ten percent (10%) of the
88.
cap, whichever is lower, will not require Government approval or compliance of sectoral
conditions as the case may be, if such investment does not result in transfer of
ownership and control of the resident Indian company from resident Indian citizens or
transfer of ownership or control to persons resident outside India.
2. Mode of Payment
The amount of consideration for purchase of instruments by FPIs shall be paid out of
inward remittance from abroad through banking channels or out of funds held in a
foreign currency account and/ or Special Non-Resident Rupee (hereinafter, referred to
as the “SNRR”) account maintained in accordance with the Foreign Exchange
Management (Deposit) Regulations, 2016.
3. Permission for Sale of instruments
An FPI that has purchased instruments in accordance with FEMA 20(R) may sell/ redeem
the instruments subject to such terms and conditions as may be specified by RBI (such
as in FEMA 20(R) and ECB Regulatory Framework) and SEBI (such as FPI Regulations).
4. Remittance/ credit of sale/ maturity proceeds

The sale/ maturity proceeds (net of taxes) of instruments held by FPIs may be remitted
outside India or may be credited to the foreign currency account or SNRR account of the
FPI.
C. Categories of Foreign Portfolio Investors137
A person can seek registration as an FPI in one of the following categories prescribed by
SEBI:
1. Category I FPI: This shall include Government and Government related investors such
as central banks, Governmental agencies, sovereign wealth funds and international or
multilateral organizations or agencies;
A “Governmental agency” shall mean an entity in which more than seventy five percent
(75%) of ownership or control is held by the Government of a foreign country.
2. Category II FPI: This will include:
post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than ten percent (10%)
of the paid up value of each series of capital instruments of a listed Indian company;
Explanation: The ten percent (10%) limit for foreign portfolio investors shall be applicable to each foreign
portfolio investor or an investor group as referred in Securities and Exchange Board of India (Foreign Portfolio
Investors) Regulations, 2014.”
137
89.
i. appropriately regulated ‘broad based funds’ (defined below) such as mutual
funds, investment trusts, insurance/reinsurance companies;
ii. appropriately regulated persons such as banks, asset management companies,
investment managers/ advisors, portfolio managers, broker dealers and swap
dealers;
iii. ‘broad based funds’ (defined below) that are not ‘appropriately regulated’ but
whose investment manager is appropriately regulated.
An applicant seeking registration as an FPI shall be considered to be "appropriately

regulated" if it is regulated or supervised by the securities market regulator or the
banking regulator of the concerned foreign jurisdiction, in the same capacity in
which it proposes to make investments in India.
(a) "Broad based fund" shall mean a fund, established or incorporated outside India,
which has at least twenty (20) investors, with no investor holding more than
fortynine per cent (49%) of the shares or units of the fund.
If the broad based fund has an institutional investor who holds more than forty
nine per cent (49%) of the shares or units in the fund, then such institutional
investor must itself be a broad based fund.
Further if an FPI has a bank, sovereign wealth fund, insurance/ reinsurance

company or a pension fund as its institutional investor, then such an applicant
shall be deemed to be broad based subject to the condition that such institutional
investor(s) shall, jointly or separately, hold more than fifty percent (50%) of the
shares or units of the fund in the applicant fund at all times.
Also in cases where broad based status is achieved on the basis of investor(s) of
an underlying fund, then such underlying fund shall also be required to fulfil the
extant eligibility requirements as specified for FPI from time to time by SEBI.
(b) For the purpose of paragraph (a) above, for ascertaining the number of investors
in a fund, direct investors as well as underlying investors shall be considered.
(c) For the purpose of paragraph (b) above, only investors of entities which have been
set up for the sole purpose of pooling funds and making investments, shall be
considered for the purpose of determining underlying investors.
(d) Exit of some investors from a ‘broad based fund’ will not result in immediate loss
of Category II status of such fund. Such fund may regain broad based status within
90.
a period of ninety (90) days, failing which, the fund will be appropriately
recategorized
Please note that the investment manager of such ‘broad based fund’ should itself
be registered as Category II FPI. Please note that the investment manager is also
required to undertake that it shall be responsible and liable for all acts of
commission and omission of all its underlying ‘broad based funds’ and other deeds
and things done by such ‘broad based funds’ under these FPI Regulations.
iv. university funds and pension funds; and
v. university related endowments already registered with SEBI as foreign institutional investors
or sub-accounts.
3. Category III Foreign Portfolio Investor: This will include all others not eligible under
Category I and II FPIs such as endowments, charitable societies, charitable trusts,
foundations, corporate bodies, trusts, individuals and family offices.
D. Eligibility Criteria for Obtaining FPI Registration138
The eligibility criteria for obtaining a registration as an FPI under the FPI Regulations is
as follows:
i. the applicant should be a person not resident in India (includes a company);
ii. the applicant should be resident of a country whose securities market regulator is a
signatory to International Organization of Securities Commission’s Multilateral
Memorandum of Understanding or a signatory to ‘Bilateral Memorandum of
Understanding with the Board’139
iii. It may be noted that an applicant falling under Category I FPI, as discussed in paragraph
C. 1., shall be considered as eligible for registration, if the applicant is a resident in a
country as may be approved by the Government of India.
iv. the applicant is not resident in a country identified in the public statement of Financial
Action Task Force (FATF) as:
(a) a jurisdiction having a strategic Anti-Money Laundering or Combating the
Financing of Terrorism (AML/CFT) deficiencies to which counter measures
apply; or
138
139
“Bilateral Memorandum of Understanding with the Board” shall mean a bilateral memorandum of
understanding between SEBI and the overseas regulator that, inter alia, provides for information sharing
arrangements under clause (ib) of sub section (2) of Section 11 of the SEBI Act
91.
(b) a jurisdiction that has not made sufficient progress in addressing the
deficiencies or has not committed to an action plan developed with the
Financial Action Task Force to address the deficiencies;
v. the applicant is not a non-resident Indian;
vi. the applicant is legally permitted to invest in securities outside the country of its
incorporation or establishment or place of business. This condition does not apply to
Category I FPI or Category II FPI;
vii. the applicant is authorized by its memorandum of association and articles of

association or equivalent document(s) or the agreement to invest on its own behalf or
on behalf of its clients. This condition does not apply to Category I FPI or Category II
FPI;
viii. the applicant has sufficient experience, good track record, is professionally competent,
financially sound and has a generally good reputation of fairness and integrity. This
condition does not apply to Category I FPI or Category II FPI;
ix. the grant of certificate to the applicant is in the interest of the development of the
securities market. This condition does not apply to Category I FPI or Category II FPI;
x. the applicant is a fit and proper person based on the criteria specified in Schedule II of
the Securities and Exchange Board of India (Intermediaries) Regulations, 2008; and xi.
any other criteria specified by SEBI from time to time.
E. Registration of Foreign Portfolio Investors140
An application for the grant of certificate as FPI shall be made to the ‘Designated
Depository Participant’ in one of the categories mentioned above. Broadly speaking, a
Designated Depository Participant is an Authorised Dealer category – I bank authorised
by the RBI and may also be a global bank registered with SEBI as a participant which
shall have tied up with an Authorised Dealer category – I bank. The application has to
be made in the format prescribed in the FPI Regulations and should be accompanied
with fees141 as set out below.
FEES SCHEDULE
140
141
Part A, Second Schedule of FPI Regulations.
92.
Foreign portfolio investor belonging to Category I No fees to paid
Foreign portfolio investor belonging to Category II US $ 3000
Foreign portfolio investor belonging to Category III US $300
Other Conditions for Payment of Fee
i. Where many FPIs have direct/indirect common ownership or control, only one FPI
shall be exempt from payment of registration fee under Category I and the other
FPI shall pay registration fees as applicable to Category II, except where common
ownership or control is of an international/multilateral agency such as World Bank
and other institutions, established outside India for providing aid, which have
been granted privileges and immunities from payment of tax and duties by the
Central Government.
ii. FPI belonging to Category II and III shall pay registration fees, before
commencement of its activity.
iii. FPI belonging to Category II and III shall pay registration for every block of three
(3) years, till the validity of its registration, by way of electronic transfer in the
designated bank account of SEBI.
Grant of certificate142
i. The Designated Depository Participant may grant certificate of registration as

prescribed143 to an applicant if it is satisfied that the applicant is eligible and fulfils
the requirements as specified in these FPI Regulations.
ii. The Designated Depository Participant shall endeavour to dispose of the

application for grant of certificate of registration as soon as possible but not later
than thirty (30) days after receipt of application by the Designated Depository
Participant or, after the information called for has been furnished by the
applicant, whichever is later.
F. OTHER REQUIREMENTS
The FPI Regulations also contain other general obligations and responsibilities of the FPIs.
142
Regulation 7 of FPI Regulation.
143
The format is provided in Form B of First Schedule of FPI Regulations.
93.
GLOSSARY
TERM DEFINITION
Alternative Investment Alternative Investment Funds will have the meaning
Funds ascribed to it in para I. B.
Angel Funds Angel Funds will have the meaning ascribed to it in para I. D.
1.
Angel Investors Angel Investors will have the meaning ascribed to it in para
I. D. 1.
Associates Associates will have the meaning ascribed to it in para I. H.
1
(v).
Beneficial Owner Beneficial Owner will have the meaning ascribed to it in
para III. B. 3.
Body Corporate Body corporate will have the meaning ascribed to it in para
I. B.
Broad based funds Broad based funds will have the meaning ascribed to it in
para III. C. 2. (iii) (a).
Category I AIF Category I AIF will have the meaning ascribed to it in para I.
D. 1.
Category II AIF Category II AIF will have the meaning ascribed to it in para I.
D. 2.
Category III AIF Category III AIF will have the meaning ascribed to it in para I.
D. 3.
Category I FPI Category I FPI will have the meaning ascribed to it in para III.
C. 1.
Category II FPI Category II FPI will have the meaning ascribed to it in para
III. C. 2.
Category III FPI Category III FPI will have the meaning ascribed to it in para
III. C. 3.
Corpus Corpus will have the meaning ascribed to it in para I. G. 2.
(ii).
Debt Fund Debt Fund will have the meaning ascribed to it in para I. D.
2.
Equity linked Instruments Equity linked Instruments will have the meaning ascribed to
it in para I. D. 2.
94.
Foreign Portfolio Foreign portfolio Investment will have the meaning ascribed
Investment to it in para III. B2. 1.
Foreign Venture Capital Foreign venture Capital Investor will have the meaning
Investor ascribed to it in para II. B.
Government Agency Government Agency will have the meaning ascribed to it in
para III. C. 1.
Hedge Fund Hedge Fund will have the meaning ascribed to it in para I. D.
3.
Infrastructure Fund Infrastructure Fund will have the meaning ascribed to it in
para I. D. 1.
Investee Company Investee Company will have the meaning ascribed to it in
para I. D. 2.
Investible Funds Investible Funds will have the meaning ascribed to it in para
II. D. 3. (i).
Manager Manager will have the meaning ascribed to it in para I. E.
Placement Memorandum Placement Memorandum will have the meaning ascribed to
it in para I. G. 3.
Private Equity Fund Private Equity Fund will have the meaning ascribed to it in
para I. D. 2.
SME SME will have the meaning ascribed to it in para I. D. 1.
SME Fund SME Fund will have the meaning ascribed to it in para I. D.
1.
Schemes Schemes will have the meaning ascribed to it in para I. G. 4.
Social Venture Social Venture will have the meaning ascribed to it in para I.
D. 1.
Social Venture Fund Social Venture Fund will have the meaning ascribed to it in
para I. D. 1.
Sponsor Sponsor will have the meaning ascribed to it in para I. E.
Tenure Tenure will have the meaning ascribed to it in para I. G. 5.
Unit Unit will have the meaning ascribed to it in para I. G. 2. (i).
Venture Capital Fund Venture Capital Fund will have the meaning ascribed to it in
para I. D. 1.
Venture Capital Undertaking Venture Capital Undertaking will have the meaning ascribed
to it in para I. D. 1.
95.
CHAPTER V: FOREIGN CONTRIBUTION THROUGH GRANTS
Foreign Contribution (Regulation) Act, 2010 (hereinafter, referred to as “FCRA”) regulates the
acceptance and utilization of foreign contribution by companies (including not-for-profit
company established under section 8 of the Companies Act, 2013/ section 25 of the
Companies Act, 1956), limited liability partnerships, trusts, societies, associations or
individuals, but prohibits acceptance and utilization of foreign contribution for any activities
detrimental to national interest and for matters connected to it.
1. What is Foreign Contribution
Broadly speaking, FCRA defines “Foreign Contribution” to mean donation, delivery or

transfer made by any ‘foreign source’ of any (a) article, (b) currency (Indian or foreign
currency) or (c) security (equity or debt instruments).144
2. Who Can Make A Foreign Contribution
A foreign contribution can be made by a ‘Foreign Source’ which includes:145
(i) the Government of any foreign country or territory and any agency of such
Government;
(ii) a foreign company;146
(iii) a corporation, not being a foreign company, incorporated in a foreign country or
territory;
(iv) a multi-national corporation;
(v) a foreign trust or a foreign foundation, by whatever name called, or such trust or
foundation mainly financed by a foreign country or territory;
(vi) a society, club or other association or individuals formed or registered outside
India;
(vii) a citizen of a foreign country etc.
3. Who Can Accept Foreign Contribution In India
144
Section 2 (1) (h) of FCRA.
145
Section 2 (1) (j) of FCRA.
146
Section 2 (1) (g) of FCRA defines ‘foreign company’ as any company or association or body of individuals
incorporated outside India and includes - (i) a foreign company within the meaning of the Companies Act, 2013;
(ii) a company which is a subsidiary of a foreign company; (iii) the registered office or principal place of business
of a foreign company referred to in sub-clause (i) or company referred to in sub-clause (ii); (iv) a multi-national
corporation. For the purposes of this definition, a corporation incorporated in a foreign country or territory shall
be deemed to be a multi-national corporation if such corporation, - (a) has a subsidiary or a branch or a place of
business in two or more countries or territories; or (b) carries on business, or otherwise operates, in two or more
countries or territories.
96.
Any person which includes companies (including not-for-profit company established
under section 8 of the Companies Act, 2013/ section 25 of the Companies Act, 1956),
limited liability partnerships, trusts, societies, Hindu undivided family, associations147 or
individuals, having a definite cultural, economic, educational, religious or social
programme, can receive foreign contribution subject to following:
(i) It must not be prohibited under section 3 of FCRA (discussed in paragraph 4

below).
(ii) It has:
(a) obtained the registration certificate prescribed under FCRA, or
(b) obtained prior permission from the Central Government for
receiving foreign contribution for a specific purpose and from a
specific source in the manner prescribed under FCRA.
4. Persons Restricted From Receiving Foreign Contribution
Section 3(1) of FCRA prohibits the following from receiving foreign contribution:
(i) a candidate for election;

(ii) correspondent, columnist, cartoonist, editor, owner, printer or publisher of
a registered newspaper;
(iii) Judge, government servant or employee of any Corporation or any other
body controlled or owned by the Government;
(iv) member of any legislature;
(v) political party or office bearer thereof;
(vi) organization of a political nature;
(vii) association or company engaged in the production or broadcast of audio
news or audio-visual news or current affairs programmes through any
electronic mode, or any other electronic form of the Information
Technology Act, 2000 or any other mode of mass communication; Further,
correspondent or columnist, cartoonist, editor, owner of such association or
company are also prohibited.
There are some exceptions to above mentioned restrictions.148
147
Section 2(1) (a) of FCRA defines “association” as an association of individuals, whether incorporated or not,
having an office in India and includes a society, whether registered under the Societies Registration Act, 1860 or
not, and any other organisation, by whatever name called.
148
Section 4 of FCRA
97.
GLOSSARY
TERM DEFINITION
Foreign Contribution Foreign Contribution will have the meaning ascribed to it in
para 1.
98.
The contents of this E-book were last updated in April 2019.
There have been some minor amendments in law since then,
which are not reflec ng in this version of the E-book. However,
this E-book could s ll help you understand the legal aspects of
foreign investment in India. Before making any final investment
decision we would s ll encourage you to reach out to a counsel
of your choice. For any legal assistance or queries you could
also reach out to us at help@cornelliachambers.com. We will be
happy to assist you.
The informa on in this E-book was used to advise and guide

award winning global impact venture funds. It formed the basis
of their investment decisions and led to mul ple investments in
many high value, impact oriented and innova ve ventures in
India. These ventures while con nuing to be commi ed to
impact, are also profit making en es.

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AWS ON FOREIGN

THE LEGAL ASPECTS

DATE: 30 April 2019

The informa on in this E-book was used to advise and guide

04 05INVESTMENT VEHICLES FOREIGN CONTRIBUTION

A. LEGAL ENTITIES IN WHICH FOREIGN INVESTMENT CAN BE MADE

1. Kinds of Companies under the Companies Act, 2013

A. The Companies Act, 2013 envisions three (3) kinds of companies:

a. shares, scrips, stocks, bonds, debentures, debenture stock or other

c. units or any other instrument issued by any collective investment scheme to

d. security receipt 3 , which means a receipt or other security, issued by a

f. any certificate or instrument, issued to an investor by any issuer being a

h. such other instruments as may be declared by the Central Government to be

i. rights or interest in securities.

(iii) Public Company

B. Limited and Unlimited Companies

2. Means of Financing a Company

SHARE CAPITAL LOAN CAPITAL

(ii) Preference Share Capital

(i) Preference Shares

3. Voting Rights of a Shareholder

(i) General Rule with respect to Voting Rights of an Equity Shareholder

(ii) Rule with respect to Voting Rights of a Preference Shareholder

Exemption to Private Companies: It is pertinent to note that in case of private companies

(iii) Variation of Shareholders’ Rights

4. Further Issue of Share Capital

II. LIMITED LIABILITY PARTNERSHIP

2. Eligibility and Relationship Between Partners

3. Form of Contribution by Partner

A contribution of a Partner may consist of tangible, movable or immovable or intangible

Difference between Private Trust and Public Trust

Formation of a Private Trust and its Components

B. LEGAL ENTITIES TO WHICH GRANTS CAN BE GIVEN AS FOREIGN CONTRIBUTION

Subject to the provisions of Foreign Contribution (Regulation) Act, 2010 (hereinafter,

IV. COMPANY FORMED UNDER SECTION 8 OF THE COMPANIES ACT, 2013

Equity share capital

Further Issue of Shares

LLP LLP will have the meaning ascribed to it in para A. II.

One Person Company

Partners Partners will have the meaning ascribed to it in para A. II

Sweat Equity Shares

Trust Trust will have the meaning ascribed to it in para A. III.

Voting Right Voting Right means the right of a member of a company to

I. Regulatory Framework Governing Foreign Investment in an Indian Entity

II. Principal Rules Applicable to Foreign Investment in India

A. First Principal Rule

B. Second Principal Rule

C. Third Principal Rule

We have discussed the conditions contained in Schedule 1 (Purchase/sale of capital

D. General Investment Conditions

(i) Automatic Route

(ii) Government Route

Foreign investment in investing companies registered as Non-Banking Financial

3. Onus of Compliance under the Foreign Investment Law

An Indian company is permitted to receive investment from a person resident outside

‘Capital Instruments’ is defined to mean:

*Please note that an Indian company recognised as a Start-Up Company is permitted

In the Master Direction on Foreign Direct Investment (hereinafter, referred to as the

Capital Instrument Conditionality

Twenty five percent (25%) of the total consideration amount

In case of non-payment of call money, the forfeiture of the

Non-convertible/ optionally convertible/ partially