Coupon Accepted Successfully!

Methods of capital contribution by foreign investors
In what ways can a foreign entity bring in its investment into India? Is it necessary to bring in foreign exchange through banking channels? Are any other modes of capital contribution possible or permitted?

It is not necessary to bring in liquid currency (through banking channels), other modes of investment are also permitted. Foreign investors can bring in their contribution through exchange of shares, technical know-how or even convert any loans that have not been repaid – the process for bringing in investment through these methods is discussed in more detail below.

The above chart explains the ways in which a foreigner can contribute capital
  • Cash or cash equivalents (transferred through banking channels)
This is the most common way that foreign investment is brought in, and has minimum approval requirements.
  • Exchange of shares
This is common in the case of strategic investments. Say Microsoft wants to acquire Way2SMS, so that it can integrate the offerings with Skype, which is already owned by it. Microsoft can acquire shares of Way2SMS in exchange for the shares of Skype that it holds, which will enable it to exercise control over both companies. These are known as share-swap arrangements, and are relatively less frequent in India.

Note: Investment by swap of shares requires approval of the Foreign Investment Promotion Board (FIPB). 
  • Technology, know-how or other useful skillsets
This can be undertaken for strategic investments.
Imagine that Burger King wants to invest in an Indian partner. It may require the Indian partner to invest INR 90 lakhs. It can itself invest INR 10 lakhs. If it invested only in cash, it should own only 10 percent of the company. However, in another situation, it could claim a 50 percent stake (by valuing its investment at 90 lakhs), on the ground that it has contributed unique recipes and knowhow, manufacturing processes and license of its trademarks and logos to the Indian business.
Such transactions, of course, require compliance with additional procedures to ensure that valuation has been fairly conducted.
  • Conversion of loans into shares
This is undertaken during restructuring processes. Imagine that an Indian company engaged in the construction of roads has taken a loan of 1 crore each from Bank of America, New York, and World Bank. Assume that these loans are converted into shares of INR 10 each (at a premium of INR 90. Hence, 1 share costs INR 100. Post conversion, Bank of America and World Bank will each receive 100,000 shares.

How does one locate the latest applicable regulations for FDI?

Prior to 2010, the FDI policy comprised a series of instruments called Press Notes (aggregating to about 178), which have now been combined in to the Consolidated Policy. Since 2010 the Department for Industrial Policy and Promotion (DIPP) issues a Consolidated FDI Policy on a yearly basis. Any modifications to the policy that are issued during the year are contained in Press Notes. Since a consolidated policy is issued on a yearly basis, the volume of instruments has reduced drastically. The latest FDI Policy can be accessed here.


Test Your Skills Now!
Take a Quiz now
Reviewer Name