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This article is written by Pranali, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.


Foreign investment in India has to be regulated by the laws of India. Owing to the political ties between India and other nations such as Pakistan, China, United States and European Union, India has aligned its Foreign Direct Investment Policy to meet the current demands.  It is an understood principle that the likelihood of foreign investment increases the credibility of the company and also gains the trust of the shareholders. Furthermore, it increases the share value and uplifts the economic scenario of the country.   

The Indian government has always put its laws to the test. Take for example, when the COVID-19 pandemic shook the world, India announced a nationwide lockdown. Several Companies faced hardship and to survive had to take up measures such as labour attrition, less production, increase borrowings to meet the demands etc. However, there were many companies who were hit hard and had to shut shop due to huge losses incurred by the Companies. Hence, the Indian government announced its Consolidated Foreign Investment Policy, 2020. To curb opportunistic takeovers of firms who due to lock down and COVID- 19 pandemic impact had suffered in terms of their operations and finances the Consolidated Foreign Investment Policy, 2020 had imposed restrictions (on the earlier notified FDI Policy) on FDI coming in from foreign entities and/or citizens from neighbouring nations that shared a land border with India. 

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It was mainly to prevent China from invading the Indian market and hence any further investment by the neighbouring countries or citizens belonging to these neighbouring countries required government approval. The Consolidated Foreign Investment Policy, 2020 also stated that any transfer of ownership from existing or future FDI in an Indian entity that results in the beneficial ownership which falls within the ambit of the above restrictions would require prior approval from the government. 

Having said that, the investment is not prohibited but is subject to government approval because the ultimate purpose is to encourage Foreign Investments in India so that the economy can be revived and the GDP of the country can gradually increase. 

The discussion below explains the analysis of cross border funding and investments in India. 

What is a cross border investment in India?

In layman’s terms, it means the investment or funding made in an Indian entity by a company registered under the laws of another country either by itself by buying securities or by way of mergers and acquisitions and/or forming a new entity or by taking over an existing company.

What are the types of cross border investment?

Now that we have understood the meaning of Cross Border Investment in India let us understand its types. 

There are basically two types: 

1. Inward investment

It literally means an incoming investment. However, to state it in legal terms, when a foreign entity registered in another jurisdiction invests in a domestic entity. 

2. Outward investment

It literally means outgoing investment. However, to state it in legal terms, when a domestic entity invests in entities that are incorporated in the foreign jurisdiction. 

To elaborate, Inward Investment is commonly known as Foreign Direct Investment. This opportunity opens borders for international integration. Outward investment is commonly known as an Outward direct investment. The domestic entity takes this opportunity to expand its business overseas. 

In this aritcle, we will focus mainly on Foreign Direct Investment in India. So the next question is;

How can the investment be made? 

  1. Incorporation of a foreign subsidiary in India. 
  2. Investing in  an  existing company by purchasing its shares or debentures
  3. Through inorganic methods such as mergers, acquisitions, takeovers etc. 
  4. By forming a joint venture with another entity to carry on operations in India      

Amongst the list stated above, the choice of method to invest in India will be also based on factors such as market conditions, economic and labour reforms, political scenarios, geographical and infrastructural situation, legal system and structure, support from the central and state government and technical knowhow.

The optimal choice is to incorporate a company or to invest in a company. The Indian Company and the foreign entity can easily establish a transparent relationship. This kind of setup will put all the legal doubts of foreign funding and transactions to rest. The other structures such as a sole proprietorship firm, a partnership firm, trust or society, a limited liability partnership do not provide this comfort whereas per the protocol, it is mandatory to take prior approval from the Reserve Bank of India along with approvals from the concerned ministry/government departments.  

In the case of a company, apart from foreign finance, foreign investment can be also made in the form of importing technological know-how (services), capital goods, managerial skills. To fasten the process of investment and to avoid the tedious scrutiny by the regulators it is advisable to choose a company as the most desirable legal entity to invest funds.   

What are the ways in which funding can be received?

The Indian FDI policy is investor-friendly. Except for a few, most sectors can now avail of 100% FDI under the automatic approval route. 

There are two entry routes for FDI.

Automatic entry route

Under the automatic route, government approval is not required for the investments made by foreign investors.  The remittance to India should be made through a normal banking channel.

Government approval route

Under the government route, the prior approval of the government is required. The respective ministry or department considers the proposals for foreign investment under the government route. 

How can the funding be infused into the Indian entity?

1. Capital instruments

Capital instruments mean equity shares which include partly paid-up equity shares, debentures which include fully, compulsorily and mandatorily convertible, preference shares which include fully, compulsorily and mandatorily convertible and share warrants issued by an Indian company.

A foreign investor can invest in a domestic company in the form of equity shares. For instance, the initiative of the Government of India, under the Startup India scheme where the Department of Industrial Policy and Promotion under the guidance of the Ministry of Commerce and Industry allows Foreign Direct Investors to subsidize up to 100% of the capital of startups regardless of the sector in which it is involved, under the automatic route.

The investment can be made either in equities or in equity-linked instruments or debt instruments such as debentures issued by the start-ups. If a startup is formed as a partnership firm or a limited liability partnership firm, the investment can be in the form of capital or through any profit-sharing agreement which is decided mutually by the partners.

These capital instruments can be issued subject to the prescribed FEMA Regulations pertaining to the pricing guidelines or valuation norms. At the time of issue of the instruments, the pricing or conversion formula should be determined upfront. In accordance with the FEMA Regulations, at the time of conversion, the price should not be lower than the fair value as determined, at the time of issuance of such instruments. For an unlisted company, the accepted pricing methodology is on an arm’s length basis. For the listed company, the pricing is as per the valuation in terms of SEBI (ICDR) Regulations.

The minimum lock-in period is one year which is effective from the date of allotment of such capital instruments. As per pricing or valuation guidelines issued from time to time by RBI and the provisions of the FDI Policy, after the lock-in period, the foreign investor shall be eligible to exit without any assured return while exercising the right option. 

Funds received on or after 1 May 2007 are considered as debt for which preference shares or Debentures i.e. non-convertible, optionally convertible or partially convertible are issued. 

2. Issuance of convertible notes

Convertible note is an instrument issued by a ‘start-up company’ to acknowledge the receipt of the fund initially as debt, repayable at the option of the holder, convertible into such number of equity shares of such start-up company, within a period not exceeding five years from the date of issue of the convertible note, upon the occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.

Companies can issue convertible notes to a person resident outside India. However, this is subject to certain conditions such as, non-resident Indian,

  1. Except for individuals who are citizens of Pakistan or Bangladesh; or
  2. An entity that is registered in Pakistan or Bangladesh.

May purchase convertible notes allotted by an Indian startup company for an amount of Rs. 25 lakhs or more in a single tranche.

Sectors that require government approval for foreign investment will have to obtain prior approval from the Government of India.  

3. Issue of share warrants and partly paid shares 

An Indian entity may be subject to the following terms and conditions issue share warrants and partly paid shares to a non-resident Indian:

For partly paid shares, from the date of issue of partly – paid shares, twenty-five per cent of the total consideration amount (including share premium, if any), has to be received upfront. The balance consideration should be received within a period of twelve months. 

Where the size of the issue is more than Rs. 500 Crore and Regulation 17 of the SEBI (Issue of Capital and Disclosure Requirements) (ICDR) Regulations, 2009, is complied with then the period of 12 months for receipt of the balance consideration need not be insisted upon. An unlisted Indian company can also exempt itself, where a monitoring agency is appointed under the SEBI (ICDR) Regulations on the same lines as in the case of an Indian listed company. Such a monitoring agency (AD Category -1 bank) should report to the Indian company as prescribed by the SEBI regulations as in the case of an Indian listed company. 

For share warrants, from the date of issue, a minimum of twenty-five per cent of the total consideration has to be received upfront. The balance consideration should be received within eighteen months of the issue of share warrants. 

The amount paid upfront will be forfeited in accordance with the applicable provisions of the Companies Act, 2013 and the Income Tax provisions, in case of non-payment of call money on partly paid shares or balance consideration towards share warrants. 

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 a subscription to partly paid shares and warrants.


The current Central Government has taken several measures for ease of doing business in India. The amendment to the FDI Policy has led to a revival of the investment system in India.  Along with this, the prevailing system of the GST (Good and Services Tax), aims to boost tax revenues and make the economy more competitive in the long run. India is moving towards a liberalised economy. However, a lot of glitches in the system such as poor infrastructure, lack of sanitation, and awareness amongst the people have to be fixed at this very hour. 

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