Investment Route for Chinese Companies in India and supporting compliances.

1. Statutory framework governing Foreign Direct Investment in India (“FDI”)

- Foreign Exchange Management (Non-debt Instruments) Rules, 2019 1 read with Foreign Exchange
Management (Non-debt Instruments) Amendment Rules, 2020. 2
- Foreign Exchange Management Act, 19993
- Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations,
20194 read with Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt
Instruments) (Amendment) Regulations, 2020.5
- Consolidated Foreign Direct Investment Policy, 20206
- Foreign Exchange Management (Deposit) Regulations, 2016 7
2. Definitions

Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019

Rule 2 (e) ‘convertible note’ means an instrument issued by a startup company acknowledging receipt of money
initially as debt, repayable at the option of the holder, or which is convertible into such number of equity shares of
that company, within a period not exceeding five years from the date of issue of the convertible note, upon
occurrence of specified events as per other terms and conditions agreed and indicated in the instrument.

Rule 2 (k) “equity instruments” means equity shares, convertible debentures, preference shares and
share warrants issued by an Indian company.
Rule 2 (ai) “non-debt instruments” means the following instruments; namely :-

(i) all investments in equity instruments in incorporated entities: public, private, listed and unlisted;
(ii) capital participation in LLP;
(iii) all instruments of investment recognized in the FDI policy notified from time to time;
(iv) investment in units of Alternative Investment Funds (AIFs), Real Estate Investment Trust (REITs) and
Infrastructure Investment Trusts (InvIts);
(v) investment in units of mutual funds or Exchange-Traded Fund (ETFs) which invest more than fifty per cent
in equity;
(vi) junior-most layer (i.e. equity tranche) of securitization structure;
(vii) acquisition, sale or dealing directly in immovable property;
(viii) contribution to trusts; and
(ix) depository receipts issued against equity instruments.

Rule 2 (r) “Foreign Direct Investment” means investment through equity instruments by a person
resident outside India in an unlisted Indian company; or in ten per cent or more of the post issue paid-up
equity capital on a fully diluted basis of a listed Indian company.

Rule 2 (k) “equity instruments” means equity shares, convertible debentures, preference shares and
share warrants issued by an Indian company.

1
Microsoft Word - 5398gi (enforcementdirectorate.gov.in)
2
219107.pdf (egazette.nic.in)
3
63-the-foreign-exchange-management-act-199917092020075653.pdf (ifsca.gov.in)
4
Reserve Bank of India - Notifications (rbi.org.in)
5
Reserve Bank of India - Notifications (rbi.org.in)
6
Press Note No (investindia.gov.in)
7
Foreign Exchange Management (Deposit) Regulations, 2016_0.PDF (enforcementdirectorate.gov.in)
Rule 2 (s) “foreign investment” means any investment made by a person resident outside India on a
repatriable basis in equity instruments of an Indian company or to the capital of a LLP.

3. Who are eligible investors?

As per 3.1.1 of Consolidated FDI Policy, 2020 (“FDI Policy”) and amendment in the FDI Policy 8 Eligible
Investors are;

(a) 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 defense, space, atomic energy and sectors/activities prohibited for
foreign investment.
(b) In the event of the transfer of ownership of any existing or future FDI in an entity in India,
directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview
of the para 3.1.1(a), such subsequent change in beneficial ownership will also require
Government approval.

(a) 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 defense, space, atomic energy
and sectors/activities prohibited for foreign investment.

(b) In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or
indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1(a),
such subsequent change in beneficial ownership will also require Government approval.

8
pn3_2020.pdf (dpiit.gov.in)