Eligibility Criteria for UK Companies Investing in India via FDI

A UK company can invest in India under the Foreign Direct Investment (FDI) policy provided it is a legal entity incorporated outside India and the investment is made in an Indian entity. The basic eligibility hinges on the nature of the proposed investment and the sector in which the Indian entity operates. The investment must comply with the Foreign Exchange Management Act (FEMA), 1999, and the Consolidated FDI Policy issued by the Department for Promotion of Industry and Internal Trade (DPIIT).

The UK company must ensure that the investee Indian company is not engaged in a sector where FDI is prohibited. Prohibited sectors include lottery business, gambling and betting, chit funds, Nidhi companies, trading in transferable development rights (TDRs), and real estate business or construction of farmhouses. Additionally, the UK company must not be from a country sharing a land border with India unless prior government approval is obtained, though this condition does not apply to UK entities.

The investment can be made through the automatic route (no prior approval required) or the government route (prior approval from the relevant ministry). For most sectors, UK companies can invest up to 100% under the automatic route, but sectoral caps and conditions apply.

Sectoral caps determine the maximum percentage of equity a UK company can hold in an Indian entity without government approval. For example, in the defence sector, FDI up to 74% is permitted under the automatic route, and beyond that up to 100% requires government approval. In insurance, FDI up to 74% is allowed under the automatic route. In media (print, news broadcasting), FDI up to 26% requires government approval.

For UK companies investing in sectors like e-commerce (marketplace model), FDI up to 100% is allowed under the automatic route, but the entity must not exercise ownership or control over inventory. In single-brand retail, FDI up to 100% is permitted, with 30% local sourcing requirement if FDI exceeds 51%. In multi-brand retail, FDI is prohibited.

The UK company must also comply with sector-specific conditions, such as minimum capitalisation norms, lock-in periods, and local sourcing requirements. For instance, in the pharmaceutical sector (greenfield), FDI up to 100% is automatic, but for brownfield investments, government approval is required.

The pricing of shares issued to a UK company must comply with FEMA regulations. If the UK company invests in an Indian listed company, the price must not be less than the price determined under the Securities and Exchange Board of India (SEBI) guidelines. For unlisted Indian companies, the price must be determined by a Chartered Accountant or a Merchant Banker using a Discounted Cash Flow (DCF) method or any other internationally accepted valuation methodology.

The UK company must ensure that the consideration for the shares is received through normal banking channels. The Indian company must issue shares within 60 days from the date of receipt of the consideration. If the shares are not issued within 60 days, the amount must be refunded to the UK company.

For downstream investments (where the Indian investee company further invests in another Indian entity), the same pricing and valuation rules apply. The UK company must also ensure that the investment is not structured to circumvent sectoral caps or conditions.

After making the FDI, the UK company and the Indian investee company must comply with reporting requirements under FEMA. The Indian company must file Form FC-GPR (Foreign Currency-Gross Provisional Return) with the Reserve Bank of India (RBI) within 30 days of issuing shares to the UK company. The form must be accompanied by a certificate from a Chartered Accountant confirming compliance with pricing and valuation rules.

If the UK company invests in an Indian company that is a start-up, the reporting requirements are simplified. The Indian company must also file an Annual Return on Foreign Liabilities and Assets (FLA) with the RBI by July 15 of every year.

The UK company must ensure that the Indian investee company maintains proper records of the FDI, including the source of funds, the purpose of investment, and the end-use of funds. The Indian company must not use the FDI for activities prohibited under FEMA, such as real estate business or trading in TDRs.

UK companies investing in India are subject to Indian tax laws, including the Income Tax Act, 1961, and the Double Taxation Avoidance Agreement (DTAA) between India and the UK. The DTAA provides relief from double taxation and may reduce the withholding tax rate on dividends, interest, and royalties.

Dividends paid by an Indian company to a UK company are subject to a dividend distribution tax (DDT) at the Indian company level, but the UK company may be exempt from further tax in India if the DTAA applies. Capital gains arising from the sale of shares by a UK company are taxed in India, but the DTAA may provide for a lower rate or exemption.

The UK company must also comply with transfer pricing regulations if the transaction is with an associated enterprise. The Indian company must maintain arm's length pricing for all transactions with the UK company. Non-compliance can lead to penalties and disallowance of deductions.

If you are a UK company planning to invest in India, you should first identify the sector and the applicable route (automatic or government). Then, engage a qualified professional to conduct due diligence on the Indian entity, prepare the necessary documentation, and ensure compliance with FEMA, pricing, and reporting norms. For complex structures or government route applications, consult a legal professional with experience in cross-border investments.

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This page provides preliminary information. It is not legal advice. For your matter, consult a qualified professional.