Process of FDI Approval for Investment in India from countries sharing land borders with India

Process of FDI Approval for Investment in India from countries sharing land borders with India . As globalization continues to shape the economic landscape, India with its high growth rate and recently called by the IMF “the fastest growing economy of the world” continues to be a favored destination for investors. In this article, we delve into the process of in-bound FDI to India from its border-sharing countries, exploring the opportunities, the regulatory frameworks that govern this process.  
What the data on FDI reveals - 1 lac crores worth of investment received from countries sharing land border with India 
In an official reply by the government in December 2023, it was revealed that India received 1 lac crore worth of investment from countries that share land border with India. It was also disclosed that about 50% proposals received from these countries have been cleared. 
Between April 2020 and April 2022 - India received 423 such FDI proposals worth over 75,000 crores from countries sharing land border with India. 
The Indian government takes a calculated view on a case by case basis on factors such as the scope of value addition to the Indian economy, the risk perception of allowing such investments as well as its overall effect on India’s security and economy. 
Sectors receiving the most FDI proposals in India
Top 5 sectors that received the highest FDI Equity Inflow during FY 2022-23 were:

Service Sector (Finance, Banking, Insurance, Non Fin/ Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis, Other) (16%)

Computer Software & Hardware (15%)

Trading (6%)

Telecommunications (6%)

Automobile Industry (5%)

The manufacturing of heavy machinery, automobile, auto components; computer software and hardware; trading, e-commerce, and manufacturing of light engineering and electrical are areas where India offers specific and distinct advantages of growth and innovation.  
Additional Regulations for Countries Sharing Land Border with India - Press Note Notification dated 17 April, 2020 
In April 2020, at the peak of Covid pandemic, the government issued a press release stipulating that the Center would require prior approval for foreign investments from nations sharing a land border with India. This measure aimed to prevent opportunistic takeovers of domestic companies that were facing financial difficulties in the wake of the Covid-19 pandemic.
Restricted Investors requiring Prior Approval 
With India positioned strategically among several neighboring nations, the dynamics of cross-border investment are multifaceted and significant. The countries which share a land border with India are Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan ( called “Bordering Countries“).
Enforcement of stringent approval norms for FDI from Bordering Countries  
Press Note 3 (2020) is enforced through Foreign Exchange Management (Non-Debt Instruments) Amendment Rules 2020 dated 22.4.2020. It mandates that where an investing entity is situated in a country sharing 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, FDI shall be permitted only with prior Government approval.  
Who requires approval from the government before investing in India? 
The following are covered within the scope of the notification requiring prior approval from the Government of India:

All foreign direct investments made by investors of Neighboring Countries. This includes natural persons who possess citizenship of such countries.

Transactions where the owner is either domiciled in or is a citizen of a Neighboring Country.

Transactions where the entity investing in India is incorporated, established, or registered in such a country.

Transactions where a subsidiary of an entity incorporated, established or registered in such a country.

An entity whose “beneficial owner” is situated in such countries.

Criteria for Beneficial Ownership 
The Indian government in its FDI policy has not clarified the threshold of ownership that satisfies the criteria of “beneficial ownership”. The Companies Act, 2013 that applies to corporate entities in India, places a single investor holding more than 10% in the status of “Significant Beneficial Owner”. 
A clarification note issued by the DPIIT on bidders from a country sharing land border with India, defines beneficial owner as the following:

In case of a Company and Limited Liability Partnership - the beneficial ownership (whether alone, or through one or more persons) means controlling ownership interest of more than 25% of shares or capital of profits of the company.

Additional rules for citizens of Pakistan or entity incorporated in Pakistan 
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.
Process of obtaining Government Approval for FDI in India from neighboring countries 
Foreign Investment Facilitation Portal - The entities from countries that share land borders with India and desirous of making investment in India have to make a proposal to the Foreign Investment Facilitation Portal. This portal is a part of the Ministry of Finance and is the new online single point interface of the Government of India.  
India has also created a National Single Window System for centralized access to state-level and central-level approvals. 
FDI application requirements

Letter of authorization with a summary of the FDI proposal that has details on :

Background of the investor

existing and proposed business activity/business model of the Investee(s) and Investors);

details of beneficial ownership;

particulars of transaction for which approval is sought;

reasons for seeking approval along with relevant provisions of FDI Policy and FEMA Rules/Regulations;

benefits arising from the proposal;

details of projected investments; and

Ownership and control of Investee (s) and Investor (s);

address of correspondence for the purpose of all communication with the department.

Shareholding patterns, both pre and post transaction shareholding

Diagrammatic representations of the flow of funds from investor to investee, group structure indicating inter-se shareholding percentage

Details of beneficial ownership : Entity-wise details of the existing shareholders, investors, directors, general partners, limited partners, key managerial personnel of all upstream entities along with their respective degree and percentage of shareholding and control.

Investee documents - In case of a yet to be incorporated entity,  a declaration on the Applicant’s letterhead, of a draft Memorandum of Association, draft Articles of internal laws and bylaws, and a letter of consent by the proposed shareholders and directors in support of the application.

Investor documents -

A certificate of incorporation of the Investor from their home country is required. In case the laws of their country do not have a certificate of incorporation, a document equivalent to the same along with necessary regulation/circular/order is to be provided.

A Memorandum of Association and Articles of Association of the Investor from their home country is required. In case the laws of their country do not have such a Memorandum and Articles, a document equivalent to the same along with necessary regulation/circular/order is to be provided.

Audited financial statement of the last financial year of the investor

Copies of reporting compliances in respect of Downstream Investments, through a copy of Form-DI on the FIRMS Portal and downstream information given to DPIIT.

Copies of Past Approvals, if any - such as Government, FIPB or RBI approvals in respect of FDI brought in previously. Also, reporting documents in support of the past or existing FDI already received by the investee company in India.

What the data on FDI reveals - 1 lac crores worth of investment received from countries sharing land border with India

In an official reply by the government in December 2023, it was revealed that India received 1 lac crore worth of investment from countries that share land border with India. It was also disclosed that about 50% proposals received from these countries have been cleared.

Between April 2020 and April 2022 - India received 423 such FDI proposals worth over 75,000 crores from countries sharing land border with India.

The Indian government takes a calculated view on a case by case basis on factors such as the scope of value addition to the Indian economy, the risk perception of allowing such investments as well as its overall effect on India’s security and economy.

Sectors receiving the most FDI proposals in India

Top 5 sectors that received the highest FDI Equity Inflow during FY 2022-23 were:

Service Sector (Finance, Banking, Insurance, Non Fin/ Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis, Other) (16%)
Computer Software & Hardware (15%)
Trading (6%)
Telecommunications (6%)
Automobile Industry (5%)

Additional Regulations for Countries Sharing Land Border with India - Press Note Notification dated 17 April, 2020

In April 2020, at the peak of Covid pandemic, the government issued a press release stipulating that the Center would require prior approval for foreign investments from nations sharing a land border with India. This measure aimed to prevent opportunistic takeovers of domestic companies that were facing financial difficulties in the wake of the Covid-19 pandemic.

Restricted Investors requiring Prior Approval

With India positioned strategically among several neighboring nations, the dynamics of cross-border investment are multifaceted and significant. The countries which share a land border with India are Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan ( called “Bordering Countries“).

Enforcement of stringent approval norms for FDI from Bordering Countries

Press Note 3 (2020) is enforced through Foreign Exchange Management (Non-Debt Instruments) Amendment Rules 2020 dated 22.4.2020. It mandates that where an investing entity is situated in a country sharing 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, FDI shall be permitted only with prior Government approval.

Who requires approval from the government before investing in India?

The following are covered within the scope of the notification requiring prior approval from the Government of India:

All foreign direct investments made by investors of Neighboring Countries. This includes natural persons who possess citizenship of such countries.
Transactions where the owner is either domiciled in or is a citizen of a Neighboring Country.
Transactions where the entity investing in India is incorporated, established, or registered in such a country.
Transactions where a subsidiary of an entity incorporated, established or registered in such a country.
An entity whose “beneficial owner” is situated in such countries.

Criteria for Beneficial Ownership

The Indian government in its FDI policy has not clarified the threshold of ownership that satisfies the criteria of “beneficial ownership”. The Companies Act, 2013 that applies to corporate entities in India, places a single investor holding more than 10% in the status of “Significant Beneficial Owner”.

A clarification note issued by the DPIIT on bidders from a country sharing land border with India, defines beneficial owner as the following:

In case of a Company and Limited Liability Partnership - the beneficial ownership (whether alone, or through one or more persons) means controlling ownership interest of more than 25% of shares or capital of profits of the company.

Additional rules for citizens of Pakistan or entity incorporated in Pakistan

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.

Process of obtaining Government Approval for FDI in India from neighboring countries

Foreign Investment Facilitation Portal - The entities from countries that share land borders with India and desirous of making investment in India have to make a proposal to the Foreign Investment Facilitation Portal. This portal is a part of the Ministry of Finance and is the new online single point interface of the Government of India.

India has also created a National Single Window System for centralized access to state-level and central-level approvals.

FDI application requirements

Letter of authorization with a summary of the FDI proposal that has details on :

Background of the investor
existing and proposed business activity/business model of the Investee(s) and Investors);
details of beneficial ownership;
particulars of transaction for which approval is sought;
reasons for seeking approval along with relevant provisions of FDI Policy and FEMA Rules/Regulations;
benefits arising from the proposal;
details of projected investments; and
Ownership and control of Investee (s) and Investor (s);
address of correspondence for the purpose of all communication with the department.

Shareholding patterns, both pre and post transaction shareholding
Diagrammatic representations of the flow of funds from investor to investee, group structure indicating inter-se shareholding percentage
Details of beneficial ownership : Entity-wise details of the existing shareholders, investors, directors, general partners, limited partners, key managerial personnel of all upstream entities along with their respective degree and percentage of shareholding and control.
Investee documents - In case of a yet to be incorporated entity, a declaration on the Applicant’s letterhead, of a draft Memorandum of Association, draft Articles of internal laws and bylaws, and a letter of consent by the proposed shareholders and directors in support of the application.

Investor documents -

A certificate of incorporation of the Investor from their home country is required. In case the laws of their country do not have a certificate of incorporation, a document equivalent to the same along with necessary regulation/circular/order is to be provided.
A Memorandum of Association and Articles of Association of the Investor from their home country is required. In case the laws of their country do not have such a Memorandum and Articles, a document equivalent to the same along with necessary regulation/circular/order is to be provided.
Audited financial statement of the last financial year of the investor
Copies of reporting compliances in respect of Downstream Investments, through a copy of Form-DI on the FIRMS Portal and downstream information given to DPIIT.
Copies of Past Approvals, if any - such as Government, FIPB or RBI approvals in respect of FDI brought in previously. Also, reporting documents in support of the past or existing FDI already received by the investee company in India.

Other documents:

Agreements - Signed copies of Investment agreement or Joint Venture agreement, shareholders agreement, share transfer agreement, technology transfer agreement, brand assignment agreement etc. which must be authenticated as per Foreign Exchange (Authentication of Documents) Rules, 2000.
Valuation certificate - Valuation certificate on arm's length basis, if the shares issued by Indian company, or transferred from resident to non-resident under pricing guidelines notified under FEMA
Undertaking for directors and others - An undertaking that the promoters, directors, shareholders, key managerial personnel are not subject matter of any negative, caution or debarred sanctions list by national government, international organizations or statutory/regulatory/investigative authorities.

Security clearance by Ministry of Home Affairs

Details of the investee company : These include

Name of the company
Registration number with date, if incorporated
Registered office address
Previous names of company, if any
Details of earlier approvals, if any
Complete details about the proposed activities.

Details of investor company
Name of the company
Registration number with date
Registered office address and correspondence
Previous name of the company
Ultimate beneficial ownership of the company, along with a chart, depicting link between the investor company and ultimate beneficial owners with details such as address, parentage, passport, details of individuals and company registration details.

Details of directors of the investing company, including their date of birth, parents details, permanent address, nationality, passport number, and contact details.

Details of shareholders of investing company with more than 10% shares

Self declaration by the foreign investor or investor company regarding presence or operation in China and Pakistan

Criminal cases details - The details of criminal cases against the company or its directors, including whether any directors have been subject to criminal investigation under Public Safety Act or National Security Act.

DPIIT, Ministerial and RBI level approval - The Department for Promotion of Industry and Internal Trade (DPIIT) identifies the ministry or department that aligns with the purpose of the investment and e-transfers the proposal to the ministry. A report is also sought from India’s central bank - The Reserve Bank of India, for compliance with foreign exchange rules.

The concerned ministries shall provide their comments within four weeks of the receipt of the online application. The Ministry of Home Affairs gives approval within 6 weeks.

Non-compliance with mandatory provisions of the FDI Policy for countries sharing land borders with India

As per Para 5.2(i) of the FDI Policy, the onus of compliance of provisions of the FDI Policy are on the investee company. Further, as regards to violation of FDI regulations, the FDI Policy provides that since FDI is a capital account transaction and any violation of FDI regulations are covered by the penal provisions of the FEMA.

Reserve Bank of India administers the FEMA and Directorate of Enforcement under the Ministry of Finance is the authority for the enforcement of FEMA that takes up investigation in cases of contravention of FEMA.

In conclusion, compliance with FDI norms in India is the foundational element of investing in a business in India. Having assisted niche corporate clientele in drafting shareholders-agreements, incorporating a foreign subsidiary company in India, and securing government approval for foreign investment, Compliance Calendar’s bouquet of services can make doing business in India hassle-free for foreign investors.