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What is the Provision for Foreigners as Shareholders in a Company ?

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What is the Provision for Foreigners as Shareholders in a Company ?

Foreign Direct Investment (FDI) is the method by which foreigners can become share holders in an Indian Company. The investment can be made via two routes, viz. Automatic route and Approved route. Through automatic route investment can be made directly without seeking prior permission of Government whereas investment through Approved route requires prior permission. Reserve Bank of India (RBI) has restricted foreign investments in certain sectors and services, and if investment in those sectors have to be made, it is to be done through  Approved route.

When it comes to FDI, India is gaining its momentum and becoming one of the most lucrative economic destinations. Companies Act, 2013 and the RBI does not put any limitation as to the shareholding in a private limited company by foreign investors. Foreign shareholders can hold 100% in a private limited company but that is subject to the FDI guidelines as prescribed by RBI from time to time. However, it must have at least one Director who is of Indian national and an Indian resident.

Registration of Private limited company is the simplest and does not impose any restriction in shareholding pattern. Thats why it is the most preferred choice and the first thing done by foreign investors. Foreign investment can be made by individuals, body-representatives or companies, making the Indian company its subsidiary.

FDI guidelines for various sectors:

  • In Insurance sector and sub-activities, FDI up to 49% is allowed which previously was 26%.
  • In courier services, travel and tourism industry and telecom sector 100% FDI is permitted.

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  • For foreign nationals and companies 49% investment is allowed in stock exchanges.
  • Presently 49% foreign investment can be made in defense sector.
  • In private sector banks FDI can be made up to 74% whereas in public sector banks only a maximum of 20% is allowed.
  • In retail sector, foreign investment can be made up to 51%.
  • In Civil Aviation, Power and pension FDI can be made up to 49%.

So for instance, if its a retail company which requires FDI, then foreign investment can be made only up to 51% even though 100% is allowed.

This is how FDI works.

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