15.FDI in Private Limited Companies — Compliance Checklist
Private Limited Companies are the most common vehicle for foreign direct investment in India. While the FDI regime is largely liberal, accepting foreign investment into a private company triggers a structured sequence of regulatory, valuation, reporting, and corporate compliance steps. Most FEMA violations in startups arise from failure to follow this sequence.
1. Introduction
FDI in a private limited company involves:
receipt of funds from a person resident outside India,
issuance of permitted capital instruments, and
mandatory reporting to RBI.
Compliance must begin before funds are received.
In FDI, compliance starts before capital hits the bank account.
2. Step 1 — Verify Sector Eligibility
Before accepting FDI:
confirm that the company’s business activity permits foreign investment,
determine whether it falls under automatic or government route,
verify sectoral caps.
Incorrect sector classification can invalidate the investment.
3. Step 2 — Determine Applicable Route
Confirm whether:
the investment falls under automatic route, or
prior government approval is required.
Funds must not be accepted under government route without approval.
4. Step 3 — Confirm Eligibility of Investor
Verify:
residency status of investor,
whether investor falls under restricted jurisdictions (e.g., neighbouring countries),
compliance with beneficial ownership norms.
Investor background affects route applicability.
5. Step 4 — Obtain Valuation Certificate
Shares must be issued at:
a price not lower than fair valuation,
determined as per applicable pricing guidelines.
Valuation must be certified by a qualified professional (as required under FEMA).
Undervaluation is a serious contravention.
Share price under FDI is a regulatory issue, not merely a commercial one.
6. Step 5 — Receive Funds Through Banking Channels
Funds must be received:
via normal banking channels,
credited to company’s bank account,
supported by remittance advice (FIRC / e-FIRC).
Cash or informal receipt is prohibited.
7. Step 6 — Allot Shares Within Prescribed Timeline
Shares must be allotted:
within prescribed period (commonly 60 days) from receipt of funds.
If shares are not allotted:
funds must be refunded.
Delay triggers FEMA contravention.
8. Step 7 — File FC-GPR
After allotment:
Form FC-GPR must be filed within prescribed timeline,
details of shareholding, valuation, and remittance must be uploaded.
Non-filing or delayed filing leads to compounding exposure.
9. Step 8 — Update Statutory Records
Corporate compliance includes:
updating Register of Members,
filing relevant ROC forms,
amending Articles (if required).
FEMA compliance and Companies Act compliance must align.