What is foreign investment? Guidelines provided under FEMA? What are the penal provisions?

Foreign investment

Foreign investment involves capital flows from one country to another, granting large ownership interests in national companies and assets. Foreign investment indicates that foreigners have an active role in management as part of their investment. A modern trend leans towards globalization, where multinational companies have investments in a variety of countries. Foreign investment is largely considered a catalyst for future economic growth.[1]

Foreign investment can be made by individuals, but it is used mainly by companies and corporations with substantial assets to expand their reach. More and more companies have branches in countries around the world, as globalization increases. For some companies, opening new manufacturing and production facilities in another country is attractive due to cheaper production opportunities, lower labor and lower taxes.[2]

Types of Foreign Investment

  • Foreign direct investments (FDIs) They are the physical investments and purchases made by a company in a foreign country, usually opening factories and buying buildings, machinery, factories and other equipment in the foreign country. These types of investments find much greater favour, as they are generally considered long-term investments and help to strengthen the economy of the foreign country.[3]
  • Foreign indirect investments – involve companies, financial institutions and private investors who buy shares or positions in foreign companies trading on a foreign stock exchange. In general sense, this form of foreign investment is less favourable, as the domestic company can easily sell its investment very quickly, sometimes a few days after purchase.This type of investment is also called a foreign portfolio investment (FPI). Indirect investments include not only equity instruments, like stocks, but also debt instruments, like bonds.[4]

Guidelines under FEMA

Foreign investment in India is governed by the clause (b) of subsection 3 of section 6 and section 47 of the Foreign Exchange Management Act, 1999 (FEMA) read with Foreign Exchange Management (transfer or issue of a security by a person resident Outside India), 2017 issued notification no. FEMA 20 (R) / 2017-RB of 7 November 2017. These regulations are amended from time to time to incorporate the changes to the regulatory framework and published by means of modification notifications.[5]

Within the framework of the Regulations, the Reserve Bank of India also issues guidance to persons authorized under Section 11 of the Foreign Exchange Management Act (FEMA), 1999. This Directorate-General establishes the modalities on how foreign exchange activities should be conducted by Authorized Persons with their customers / components in order to implement the envisaged regulations. The instructions issued for foreign investment in India and its related aspects under FEMA have been compiled in this general direction. The list of underlying circulars / notifications which form the basis of this main management is given in the appendix.[6]

The instructions for reporting are available in the Directorate-General for Relations (Main Directorate n.18 of 1 January 2016). The person / entity responsible for submitting these reports is responsible for paying the late submission fee for any delays in reporting. It may be noted that, where necessary, Reserve Bank will issue indications to authorized persons through AP circulars (DIR series) regarding any modification of the regulation or the way in which authorized persons must carry out the related transactions with their customers / components and / or modify the General Management issued herein. This Master Direction was issued pursuant to sections 10 (4) and 11 (1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and does not affect any authorizations / approvals required by other laws.[7]

Punishment under FEMA

Penalties and sanctions are set out in chapter four of the FEMA. Pursuant to section 13 of this Act, it establishes provisions for sanctions. If a person violates any provision of this law or violates any rule, regulation, notification, direction or order issued in the exercise of powers under this law or violates any condition subject to an authorization issued by the Reserve Bank, he must, subject to sentence, be subject to a sanction of up to three times the sum involved in this violation which has a quantifiable amount or up to ₹ 2 lakh which includes an unquantifiable amount and where this violation is continuous, a further penalty that may reach five thousand rupees for every day after the first day during which the violation continues.

If a person violates any provision of this law or violates any rule, regulation, notification, direction or order issued in the exercise of powers under this law, or violates any condition subject to an authorization issued by the Reserve Bank of India, he on the basis of a judgment, a penalty of up to three times the sum involved in this offense is required where this amount is quantifiable or up to two lakh rupees in which the amount is not quantifiable and where that offense is continuous, a further sanction that can extend to five thousand rupees for each day following the first day during which the violation continues. “

Any contracting authority which judges any infringement under subsection (1) may, if it deems it appropriate in addition to any sanction it may impose for such infringement, that any money, security or any other money or property for which the infringement has took place must be confiscated from the central government and also indicate that the foreign currency holdings, if any, of the persons who commit the offenses or part of them, must be brought back to India or be held outside of India in accordance with the instructions made in this sense.[8]

The explanation of this subsection, “property” against which a violation has occurred, must include-

1. deposits in a bank, in which the aforementioned property is converted into such deposits;

2. Indian currency, in which said property is converted into that currency; is

3. Any other property resulting from the conversion of that property.

Edited by Pushpamrita Roy

Approved & Published – Sakshi Raje










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Ayush Pandia
My name is Ayush Pandia and I am pursuing B.A. LL.B. (Hons.) at the National University of Study and Research in Law, Ranchi. I am a keen learner and my interests in law are drawn towards Sports Law, Arbitration (International and Commercial), Intellectual Property Rights and Philosophy of law. I love to learn new aspects of different fields as well especially science. Apart from that, I love to research new laws and amendments & to read online articles. I love to watch movies of real events and read about conspiracy theories. I like to spend my time watching football matches. I am a football and volleyball player at my university and have hobby of doing mobile photography