EXERCISE 1

1. No, Edwina’s Artillery Limited [‘Edwina’] cannot directly subscribe to the

MoA of Jawahar Revolvers Limited [‘Jawahar’] through automatic route of FDI
but has an opportunity through government route of FDI Edwina has plans to
subscribe Jawahar’s MoA to the tune of 1.5 crores . however the initial paid up
share capital of Jawahar’s MoA is 2 crore and if the competent foreign party
wants 1.5 Crore of paid up share capital then it will cross the defence sector
limit mentioned below

The Government vide Press Note No. 4(2020 Series) dated 17.09.2020, has
liberalised and allowed FDI under automatic route up to 74% and up to 100%
through Government route wherever it is likely to result in access to modern
technology. Since the notification of revised FDI policyi

Edwina wants 1.5 crores of initial share capital of Jawahar Revolver’s

memorandum which is 75% of share capital which is not authorized under the
defence cap of FDI under automatic route but Edwina can go for government
route to acquire 1.5 crores of initial share capital. The Government Route
procedure for FDI in defence sector can be done through

Government Approval for FDI

I. Filing of application with the DIPP.

II. Drafting of documents for making application.
III. Valuation of shares.
IV. Advising on matters relating to FDI.
V. RBI Compliances post government approval.
VI. Filing of reply with the DIPP and other competent Authorities.
VII. Advising on certain other issues in relation to FDI.

Through following the Government route procedure Edwina can invest in

additional 1% stake of Jawahar’s MoA or it can just opt for 74% automatic
route which will reduce all the procedural requirements for this transaction.
2. The following are the various formalities and compliances which need to be
followed to invest in Jawahar Revolvers Limited [‘Jawahar’]

A. after having received FDI either under the Automatic route or the
Government route is required to report in the Form FC-GPR, Annexure II,
the details of the receipt of the amount of consideration for issue of equity
instrument viz. shares / fully and mandatorily convertible debentures / fully
and mandatorily convertible preference shares through an AD Category –I
Bank, together with copy/( ies) of the FIRC evidencing the receipt of inward
remittances along with the Know Your Customer (KYC) report on the non-
resident investors from the overseas bank remitting the amount, to the
Regional Office concerned of the Reserve Bank of India within 30 days
from the date of receipt of inward remittances. Further, the Indian company
is required to issue the equity instrument within 180 days, from the date of
receipt of inward remittance or debit to NRE/FCNR (B) account in case of
NRI/ PIO.

B. A non-resident entity can invest in India, subject to the FDI Policy except in
those sectors/activities which are prohibited. However, an entity of a
country, which shares land border with India or where the beneficial owner
of an investment into India is situated in or is a citizen of any such country,
can invest only under the Government route. Further, a citizen of Pakistan or
an entity incorporated in Pakistan can invest, only under the Government
route, in sectors/activities other than defence, space, atomic energy and
sectors/activities prohibited for foreign investment.

C. Infusion of fresh foreign investment up to 49%, in a company not seeking

industrial license or which already has Government approval for FDI in
Defence, shall require mandatory submission of a declaration with the
Ministry of Defence in case change in equity /shareholding pattern or
transfer of stake by existing investor to new foreign investor for FDI up to
49%, within 30 days of such change. Proposal for raising FDI beyond 49%
from such companies will require Government approval.
D. Licence applications will be considered by the Department for Promotion of
Industry and Internal Trade, Ministry of Commerce & Industry, in
consultation with Ministry of Defence and Ministry of External Affairs.
Foreign investment in the sector is subject to security clearance by the
Ministry of Home Affairs and as per guidelines of the Ministry of Defence.

E. Investee company should be structured to be self-sufficient in the areas of

product design and development. The investee/joint venture company along
with the manufacturing facility, should also have maintenance and life cycle
support facility of the product being manufactured in India.

F. Foreign Investments in the Defence Sector shall be subject to scrutiny on

grounds of National Security and Government reserves the right to review
any foreign investment in the Defence Sector that affects or may affect
national security.

EXERCISE 2

1. Yes, Instead of shares, if Savdhaan were looking to invest in

non-convertible debentures of Bourne, In that case savdhaan will not
retain ownership in bourne and the indirect foreign Investment will not
be completed through the non-convertible debdentures.

2. The responsibility for compliance of IFI rules is on the investee

company at all levels. Thus even small start-up companies which
receive investment from a Venture fund, will need to consider
whether the VCF is domestic investment or foreign investor The first
level Indian company which has received Direct Foreign Investment,
is required to get a certificate from the auditor annually that
downstream investment rules have been complied with (including its
subsidiaries). IFI can be undertaken by an Indian company, Limited
Liability Partnership or an Investment Vehicle (VCF / AIF).
Investment includes equity shares and fully convertible instruments If
an Indian company or LLP is owned to the extent of 50% or more by
non-residents or foreign citizens; or is controlled by non-residents or
foreign citizens, it will be considered as indirect foreign investor.
FEMA rules have to be complied with.. The manner in which rules are
made, it is possible that the financial interest in the downstream
company may be more than 50% but still it will be considered as
domestic investor. It should also be noted that residence and
citizenship, both have to be considered. In case of investment by
Investment Vehicle, if the fund’s sponsor or manager is foreign
owned or controlled, then the investment by Investment vehicle will
not be considered as domestic investment. Foreign investment in units
of IV will not be considered to determine whether IV is domestic or
foreign. If Indian entity is considered as indirect foreign investor,
the entire investment will be considered as IFI. There is no
proportionality. Thus if there is foreign investment of 60% in Indian
company, investment by Indian company in downstream company
will be entirely considered as IFI. IFI will not be restricted to 60%.
This method has to be considered for every downstream company at
every level.
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