Foreign investment allows Indian companies to scale operations at a quicker rate, gain access to international knowledge and markets; improve technology and processes; and explore new opportunities. However, when a company chooses to accept capital from a foreign investor, besides the business implications, there are regulations that the company needs to adhere to.

It could be a startup raising money from a foreign VC, an Indian company entering into a JV with an overseas company, or a listed entity issuing shares to a foreign investor. There are multiple compliance parameters that need to be considered before and after the investment is made.

While considerations around valuation, funding conditions and business growth are driving most companies today, compliance requirements take a backseat. But last-minute hurdles around delayed reporting, incorrect paperwork, sector restrictions or entity type can impact plans several months down the line.

Foreign Investment Compliance refers to complying with all legal and regulatory requirements that are set forth by Indian companies and foreign investors during the making, receiving, reporting, or managing of foreign investments. Regulations adhere to the Foreign Exchange Management Act, 1999(FEMA), Foreign Exchange Management (Non- Debt Instruments) Rules, 2019 and RBI notification issued in this matter.

Ensuring that a company raising or dealing with foreign investment understands the process, paperwork and reporting requirements applicable to them in advance of entering into a transaction can save time and most regulatory obstacles can be overcome by checking for compliance upfront.

Why Does Foreign Investment Compliance Matter for Indian Companies?

FDI also involves ensuring your investment structure adheres to all relevant laws, sector specific conditions and reporting requirements. Non-compliance, even for small issues, can have large consequences. Future fundraising; mergers/acquisitions; banking relationships and investor relations can be affected.

An entrepreneur may have had FDI invested into their tech startup, but later realized they didn’t adhere to reporting requirements associated with issuing shares. A manufacturer could be left explaining to authorities whether or not they met sector specific conditions with their investment. Joint Ventures could be at risk if foreign ownership was not appropriately documented.

India manages FDI through government policy as well as rules established by FEMA. Department for Promotion of Industry and Internal Trade is responsible for India’s FDI policy. The RBI also has rulemaking authority over several foreign investment related compliance issues.

FDI coming into India or India based businesses operating in Delhi NCR, Mumbai, Bengaluru, Hyderabad, Chennai and other major business cities will continue to see more transactions that cross international borders. Be sure to plan for compliance.

Quick Facts About Foreign Investment Compliance in India

What Compliance Checks Should Companies Complete Before Accepting Foreign Investment?

One of the first things to plan is the Structure of the company, before taking any foreign investment opportunity.

While making foreign investment deal align it with your business goals and statutory requirements.

Most businesses get into the trouble of agreeing on commercial terms and then start thinking about regulations. By the time they sign the documents, they have created unnecessary panic.

Says Advocate BK Singh – Always Look at the Structure first, of investment, transaction documents and compliances.

How Can Companies Prepare for Future Foreign Investment Opportunities?

Plan for Tomorrow: If you want your business to be open to future investment, prepare today.

Don’t Get Caught Off Guard:

By making sure your legal house is in order and keeping your corporate records organized, you can help your business be ready for an investment opportunity when it comes along.

This can mean:

• Maintenance of your corporate records
• Reviewing outdated agreements
• Maintaining financial records
• Verifying ownership documents

Understand industry limitations.

Certain sectors have limitations on foreign investment. While we understand investors want to invest in your business, you don’t want to run into any legal issues down the road.

Investors appreciate when a business is disciplined about staying compliant and upholds transparency. Foreign investment can allow your business to grow in many ways. You want to make sure however that the foundation your business is built on is legally compliant.

BK Singh Advocate can review your corporate records, any potential foreign investment concerns your business has and what your business will need to know in order to complete a transaction depending on your specific needs.

How Do Foreign Investment Agreements Protect Business Interests?

Accepting foreign investment is much more than just accepting money. Deals between the Indian based company and the foreign investor can include many documents. Here are some common examples:

Agreements often include topics such as ownership and control of the company, investor protections, exit rights, and obligations of all parties.

Ambiguity in agreements can cause conflicts between entrepreneurs and investors. Whether that be who controls the company, transfer of shares, or future investment.

Entrepreneurs should ensure their commercial aspirations and legal duties line up before agreeing to anything.

Having a corporate lawyer look at your contracts can allow you to see if the terms of your agreements allow you to meet your business goals and comply with regulations.

What Documents Are Required for Foreign Investment Compliance?

Minimum documentation requirement for foreign investment is transaction specific. But broadly speaking, at the time of foreign investment, a company would want to ensure that adequate records are kept of the transaction. These records would typically include:

Certificate of incorporation & company information.

• Memorandum and Article of Association.
• Board resolutions.
• Shareholders’ agreements.
• Investment agreement.
• Subscription agreement for issuance of shares.
• Valuation reports.
• Information of foreign investor.
• Share issue/purchase records.
• RBI filing records.
• Any government approvals(if required).

As noted earlier, these documents are not only for the time of investment. If a company ever wishes to raise more capital in the future, it will likely need many of these documents. A company will also likely have to produce these during a due diligence process.

How Can Companies Avoid Common Foreign Investment Compliance Problems?

Nine out of ten problems with foreign investment are due to inadequate planning, not intentional wrongdoing.

Common problems we see:

• Incorrectly structured investments
• Missed filings
• Orphan agreements
• Unclear investor rights
• Failure to update statutory registers
• Silos between commercial and legal teams

Your foreign-funded entity should have a calendar reminding you of key compliance tasks and you should conduct periodic reviews of your obligations.

For the proactive organisation, foreign investment compliance shouldn’t be a project, it should be part of your regular corporate governance meetings.

BK Singh Advocate can help you navigate the documentation/structuring requirements and compliance considerations for foreign investments.

When Should a Company Consult a Corporate Lawyer for Foreign Investment?

You need to talk to a lawyer if:

• you are in discussion with foreign investors.
• you are issuing shares to an offshore investor.
• you are entering into a joint venture.
• you are restructuring ownership.
• you want to grow your business with foreign investors.
• you have issues with previous compliance.

The more parties involved, the higher the risk you need a legal review.

A competent corporate lawyer will identify regulatory risks before they become disputes or delays.

How Can Corporate Law Firm Assist With Foreign Investment Matters?

Think of foreign investment as both an opportunity and responsibility.

Whether it's reviewing investment documents, assessing compliance obligations or learning about legal requirements for international business deals, Corporate Law Firm is here to help your business every step of the way.

BK Singh Advocate and associates can assist you with foreign investment documentation, compliance reviews for your company and more.

We don't want to over regulate you, we simply want you to handle your transactions in a way that complies with legal requirements.

Remember each transaction will be different, involving different facts, investors and regulations. Just because something works for one business doesn't mean it will work for another.

Frequently Asked Questions