Indian Private Limited Company with Foreign Shareholding

Before Anything Else: Three Questions That Decide Your Timeline

1. Is your sector on the automatic route?

Most sectors permit foreign investment without prior government approval. You issue shares, receive funds, and report to the RBI afterwards.

But some sectors are capped — insurance, defence, print media, multi-brand retail, and others carry percentage ceilings above which government approval is required. Some carry conditions attached to the automatic route. And a handful are prohibited entirely, including lottery and gambling, chit funds, Nidhi companies, real estate trading as distinct from construction and development, and tobacco manufacturing.

Where government approval is required, the application goes through the Foreign Investment Facilitation Portal and typically takes 8 to 12 weeks. Shares cannot be issued to the non-resident before approval.

2. Does Press Note 3 apply to your investor?

This is the question that catches people out, and it catches Indian founders as often as foreign investors.

Any investment where the investor — or the beneficial owner behind the investor — is from a country sharing a land border with India requires prior government approval, regardless of sector and regardless of percentage. That covers China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan.

It also catches structures people assume are safe. A Singapore holding company with Chinese ultimate beneficial ownership is covered. A Hong Kong entity is covered. A Mauritius fund with a border-country LP above a threshold may be covered.

Beneficial ownership is what is tested, not the entity on the share certificate. If Press Note 3 applies, nothing about the standard timeline holds, and issuing shares without approval is a contravention requiring compounding.

We run this check on every investor before shares are issued — including in rounds where the lead investor is unambiguously clean but a smaller participant is not.

3. Is your investor resident or non-resident under FEMA?

FEMA residency is not citizenship and not tax residency. An Indian citizen who has moved abroad for employment or business of indefinite duration is a non-resident under FEMA from the day they leave, regardless of how many days they have spent in India that year.

This matters because founders frequently treat an NRI investor as “basically domestic” and issue shares as they would to any Indian shareholder — no valuation, no FC-GPR, no reporting. The investment is then unreported, discovered during due diligence two years later, and requires compounding before the round can close.

We run all three checks before any share is issued.

The Two Routes, and What Each Requires

	Automatic Route	Government Route
Prior approval needed	No	Yes, before shares are issued
Where it applies	Most sectors, up to the sectoral cap	Capped sectors above the cap; prohibited-to-automatic sectors; all Press Note 3 cases
Application	None	Foreign Investment Facilitation Portal
Timeline	Issue shares, report afterwards	8–12 weeks before you can issue
Reporting	FC-GPR within 30 days of allotment	FC-GPR within 30 days, after approval
Risk if skipped	Late Submission Fee	Contravention requiring compounding

The practical consequence: on the automatic route, incorporation and funding move at commercial speed and the compliance is retrospective. On the government route, the approval sits ahead of everything and your timeline is set by the ministry, not by you.

Foreign Shareholding at Different Levels

Founders negotiate the percentage. What the percentage actually determines under Indian law is often not what they assumed.

Foreign holding	What it means
100%	A wholly-owned subsidiary in substance. Two shareholders are still required, so the parent typically holds 99.99% and an affiliate or nominee holds 0.01%
Above 75%	Can pass special resolutions unilaterally — alter the MoA and AoA, approve buyback, wind up
Above 50%	Control. The company becomes a subsidiary of the foreign entity under Section 2(87), triggering consolidation in the parent’s accounts and downstream investment rules if the Indian company invests in other Indian entities
26% or more	Blocks special resolutions. The negotiated floor in many investment agreements
10% or more	Classified as Foreign Direct Investment rather than portfolio investment. Below 10% in a listed company it is FPI; in an unlisted company all foreign equity is FDI regardless of size
Above 10%	Can requisition an EGM; can petition for oppression and mismanagement under Section 244

The downstream investment trap. Where foreign shareholding exceeds 50%, or where the foreign shareholder controls the board, the Indian company becomes a foreign-owned or controlled company (FOCC). Any investment that company then makes into another Indian company is treated as indirect foreign investment and must itself comply with the sectoral caps, pricing guidelines and reporting requirements — with Form DI filed within 30 days.

Indian groups restructuring after a foreign round routinely miss this. The parent company is compliant, and the subsidiary it capitalises six months later is not.

Share Pricing — The Rule That Cannot Be Negotiated

This is where commercial negotiation collides with regulation, and the regulation wins.

When issuing shares to a non-resident, the price must be at or above fair value, determined by a valuation report from a SEBI-registered Category-I Merchant Banker or a Chartered Accountant, using an internationally accepted pricing methodology on an arm’s-length basis. Shares cannot be issued to a non-resident at a discount to fair value.

When a non-resident transfers shares to a resident, the price must be at or below fair value. The regulation protects the foreign exchange position in both directions — a foreign investor cannot be seen to extract value on entry or exit beyond what the valuation supports.

Where a resident transfers to a non-resident, the floor applies again — at or above fair value.

Practical consequences founders run into:

You cannot issue shares to a foreign investor at par simply because that is what you agreed. If fair value is ₹340 and you issue at ₹10, the issue is non-compliant regardless of the shareholders’ agreement.
Sweat equity and ESOPs to non-residents are subject to their own rules and reporting, not the ordinary pricing rules.
Convertible instruments — CCPS and CCDs are treated as equity under FEMA provided they are compulsorily convertible, with the conversion formula fixed upfront. Optionally convertible instruments are treated as external commercial borrowing, which is a completely different and far more restrictive regime.
Assured returns are prohibited. An option or exit arrangement guaranteeing a foreign investor a fixed IRR risks recharacterisation as debt, which brings ECB minimum maturity, cost ceiling and end-use restrictions into play retrospectively.

The valuation report is a filing requirement for FC-GPR. It cannot be produced after the fact to match a price already agreed.

Structure Comparison

	Pvt Ltd with foreign shareholding	Wholly-Owned Subsidiary	Joint Venture	Liaison Office	Branch Office
Foreign holding	Any, subject to sectoral cap	100%	Shared, per agreement	N/A — not an equity structure	N/A
Legal status	Separate Indian company	Separate Indian company	Separate Indian company	Extension of parent	Extension of parent
Liability	Limited to shareholding	Limited to capital	Limited to shareholding	Unlimited	Unlimited
Can earn revenue	Yes	Yes	Yes	No	Yes
Corporate tax	~25.17% effective	~25.17% effective	~25.17% effective	Nil, if no PE	~35% + surcharge
Prior approval	No, on automatic route	No, on automatic route	No, on automatic route	RBI or Government route	RBI or Government route
Key FEMA filing	FC-GPR, FC-TRS, FLA	FC-GPR, FLA	FC-GPR, FC-TRS, FLA	AAC	AAC
Setup time	15–25 working days	15–25 working days	3–6 months realistically	6–10 weeks	8–12 weeks
Exit	Share sale, buyback, IPO	Share sale, merger, IPO	Per JV agreement	Closure only	Closure only

Choose this structure where foreign capital is coming into an Indian company that will trade, employ and grow — whether that is an Indian startup raising abroad or a foreign investor taking a minority or majority stake.

Choose a Wholly-Owned Subsidiary where a single foreign parent wants full control and the sector permits 100% FDI. Mechanically it is the same structure with the shareholding at one end of the range.

Choose a Joint Venture where the sector caps foreign ownership, or where an Indian partner brings licences, distribution or capability that must be locked in through shared ownership and a negotiated governance framework.

Choose a Liaison Office where you want to research the market for two to three years with no Indian revenue at all.

What You Need Before You Can Incorporate or Issue

Two shareholders minimum, two hundred maximum. Both can be non-resident. Where a foreign parent wants 100%, an affiliate or nominee holds the second share.

Two directors minimum, fifteen maximum. At least one must be a resident director — someone who has stayed in India for 182 days or more in the preceding financial year (Section 149(3), Companies Act 2013). Citizenship is irrelevant; residence is what is tested. Where no shareholder has anyone eligible, this blocks everything on day one — see our resident director services.

A registered office address in India from the date of incorporation, with ownership or lease documentation, a No Objection Certificate from the owner, and a utility bill not older than two months. We offer a registered office address in Connaught Place if premises are not ready.

Class 3 Digital Signature Certificates for every director and subscriber, issued by an Indian licensed Certifying Authority. Certificates from foreign certifying authorities are not accepted on the MCA portal — this surprises almost every first-time applicant.

A valuation report from a SEBI-registered Category-I Merchant Banker or a Chartered Accountant, where shares are being issued to a non-resident at any price other than at incorporation subscription value.

An AD Category-I bank relationship. All inward remittance, the FIRC, and every FEMA filing routes through your authorised dealer bank. Some banks are materially faster than others with foreign-owned entities, and we will tell you which.

Documents Required

From a foreign corporate shareholder — all apostilled or consularised

Certificate of Incorporation
Memorandum and Articles of Association, or equivalent constitutional documents
Board resolution authorising the India investment, subscription to shares, and director nominations
Latest audited financial statements
Power of Attorney in favour of an authorised representative in India
Beneficial ownership declaration and UBO details — required for the Press Note 3 assessment

From each foreign individual shareholder or director — apostilled or consularised

Passport, notarised and apostilled — all pages
Address proof from the country of residence, not older than two months
Passport-size photograph, white background
Class 3 DSC from an Indian Certifying Authority
Form DIR-2, consent to act as director

From NRI and OCI shareholders

Passport and OCI card where applicable
Overseas address proof
PAN, which is required for share allotment and for tax purposes on exit
Note that NRI investment on a non-repatriation basis under Schedule IV is treated as domestic investment and is outside the FDI reporting framework — but investment on a repatriation basis is FDI and requires full FC-GPR reporting

From the Indian resident director and shareholders

PAN card — mandatory, no substitute accepted
Aadhaar card
Address proof, photograph, DSC, Form DIR-2

For the registered office

Lease deed or ownership proof
No Objection Certificate from the property owner
Utility bill not older than two months

The apostille bottleneck

This is the single largest cause of delay and it is consistently underestimated.

If the shareholder’s country is a signatory to the Hague Apostille Convention, documents need notarisation followed by an apostille from the designated competent authority — budget two to four weeks, longer in some jurisdictions. If it is not a signatory, documents must be attested by the Indian Embassy or Consulate instead, which typically takes longer still. Documents not in English need certified English translations. Documents notarised but not apostilled will be rejected by the ROC, and the whole cycle repeats.

The Process, Step by Step

Step 1 — Sector, route and investor screening (2–3 days) Sectoral FDI position and applicable cap, Press Note 3 screening on every investor including beneficial ownership, FEMA residency status of each proposed shareholder, and confirmation of the entry route. You receive a written note suitable for your board or your investment committee.

Step 2 — Document checklist and apostille coordination (1–4 weeks — the variable) We issue a document list specific to each shareholder’s jurisdiction and review every document’s format before you apostille it.

Step 3 — Digital Signature Certificates (1–3 working days) Class 3 DSCs for all directors and subscribers through an Indian Certifying Authority.

Step 4 — Name reservation (1–3 working days) Two proposed names through SPICe+ Part A, screened in advance against existing companies, LLPs and registered trademarks. Approved names are reserved for 20 days.

Step 5 — Incorporation filing (3–7 working days for ROC approval) SPICe+ Part B with e-MoA, e-AoA, AGILE-PRO-S and INC-9 filed as a single integrated application covering PAN, TAN, GST, EPFO and ESIC. Where investment is coming into an existing company rather than at incorporation, this step is replaced by board and shareholder approvals for the issue.

Step 6 — Certificate of Incorporation CIN, PAN and TAN issued together. The company legally exists.

Step 7 — Bank account (3–7 working days) Current account with an AD Category-I bank. Expect enhanced KYC on entities with foreign shareholding.

Step 8 — Valuation (1–2 weeks, in parallel) Valuation report from a SEBI-registered Merchant Banker or Chartered Accountant, establishing the floor price for the issue to the non-resident.

Step 9 — Capital inflow and FIRC The foreign shareholder remits subscription money through banking channels. The AD bank issues the Foreign Inward Remittance Certificate and the KYC report on the remitter. Funds must be received before allotment — allotment must occur within 60 days of receipt, failing which the money must be refunded within 15 days.

Step 10 — Share allotment and FC-GPR (within 30 days of allotment — hard deadline) The board allots shares, share certificates issue, Form PAS-3 is filed with the ROC, and FC-GPR is filed on the RBI FIRMS portal through the Single Master Form. Requires the FIRC, remitter KYC, the valuation certificate, the board resolution and a company secretary’s certificate.

Step 11 — INC-20A, commencement of business (within 180 days) Declaration that subscription money has been received. Without it, the company cannot legally commence business or borrow.

Realistic total: 15–25 working days where documents are already apostilled and the sector is on the automatic route. 4–8 weeks from a standing start. Add 8–12 weeks where government approval or Press Note 3 clearance is required.

The Compliance Calendar Foreign Shareholding Adds

Your company’s ordinary Companies Act calendar is unchanged — annual ROC filings, audit, board meetings, the AGM. What foreign shareholding adds is a parallel FEMA and transfer pricing layer, and this is the part that gets missed.

Event-driven — hard deadlines

Filing	Trigger	Deadline
FC-GPR	Issue of shares to a non-resident	30 days from allotment
FC-TRS	Transfer of shares between a resident and a non-resident, either direction	60 days from transfer or receipt of consideration, whichever is earlier
Form DI	Downstream investment by a foreign-owned or controlled company	30 days from allotment
Form ESOP	Issue of ESOPs to non-resident employees	30 days from issue
Form CN	Issue of convertible notes to a non-resident	30 days from issue
PAS-3	Any share allotment	30 days from allotment

Annual — every year, permanently

FLA return to the RBI by 15 July each year, reporting foreign liabilities and assets as at 31 March. This is due every year for as long as any foreign shareholding exists, whether or not any new investment came in that year — the single most commonly missed recurring FEMA filing
Form 3CEB — transfer pricing certification on every international transaction with the foreign shareholder or its affiliates: management fees, IT and support recharges, IP licensing, intercompany loans, secondment of staff
Annual ROC filings — AOC-4 and MGT-7
Statutory audit from year one, irrespective of turnover
Income tax return (ITR-6), plus quarterly advance tax
DIR-3 KYC annually for every director, DPT-3 annually
GST returns monthly or quarterly, TDS returns quarterly

On the FC-GPR deadline specifically

Late FC-GPR filing attracts a Late Submission Fee, calculated on the amount and the delay. Delays beyond three years require a formal compounding application to the RBI — a process that is expensive, slow, and requires disclosing the contravention in writing.

This is the most commonly missed deadline in Indian FDI compliance, and the pattern is always the same: incorporation goes smoothly, the money arrives, everyone is busy opening bank accounts and hiring, and the 30-day window closes while nobody is watching it.

On transfer pricing specifically

If your company receives any service from a foreign shareholder that is also a related party — engineering support, shared software, management time, brand usage, seconded staff — that is an international related-party transaction requiring arm’s-length pricing and contemporaneous documentation.

Companies that ignore this in year one because the amounts look small face retroactive adjustments and penalties later. Set the intercompany agreements up at the time of investment. It costs a fraction of fixing it during an assessment.

Getting Money Out

A company that cannot repatriate is a trap for its foreign shareholder. The routes, and what each requires:

Dividends. No Dividend Distribution Tax since 2020. Withholding at 20% under domestic law, frequently reduced to 10–15% under the applicable Double Taxation Avoidance Agreement. To claim treaty rates the shareholder needs a Tax Residency Certificate from its home jurisdiction and must file Form 10F. Every outward remittance requires Forms 15CA and 15CB. India has DTAAs with over 90 countries.

Sale of shares. Capital gains taxable in India, with rates depending on holding period and instrument. Where the buyer is a resident, the price must be at or below fair value, and FC-TRS must be filed within 60 days. Treaty relief may be available depending on the shareholder’s jurisdiction.

Buyback. Subject to Section 68 conditions and, since the 2024 amendment, taxed in the shareholder’s hands as deemed dividend rather than in the company’s hands. This changed the economics of buyback as a repatriation route materially, and structures designed before the amendment should be reviewed.

Management fees, royalties and technical service fees. Deductible for the Indian company, subject to withholding, and must survive transfer pricing scrutiny. Documentation matters more than the rate.

Interest and principal on shareholder loans, under the External Commercial Borrowing framework, with its own minimum average maturity, all-in-cost ceiling and end-use restrictions. Note that shareholder funding structured as debt rather than equity is a substantively different regulatory regime, not a drafting preference.

The treaty position should inform how the investment is structured at the outset — not be discovered when the shareholder first wants to move money.

Six Mistakes We See Repeatedly

Issuing shares to an NRI as though they were a domestic shareholder. FEMA residency is not citizenship. No valuation, no FC-GPR, unreported investment — discovered during due diligence two years later, requiring compounding before the round closes.
Missing the 30-day FC-GPR window. The money arrives, everyone is busy, and the clock runs out. Late Submission Fee, and compounding if it runs past three years.
Agreeing a share price before obtaining the valuation. Shares cannot be issued to a non-resident below fair value, whatever the term sheet says. The valuation is a filing requirement, not a formality to be back-fitted.
Forgetting the FLA return. It is due every 15 July for as long as foreign shareholding exists, whether or not anything happened that year. Companies file it in year one and forget it in year three.
Missing downstream investment rules. Once foreign holding exceeds 50% or the foreign shareholder controls the board, the company is an FOCC and its own investments into other Indian companies carry sectoral caps, pricing rules and Form DI reporting.
Assuming Press Note 3 does not apply because the immediate investor is not from a border country. Beneficial ownership is what counts. Singapore, Hong Kong and Mauritius structures are routinely caught.

Why Delhi Legal Company

Corporate law, FEMA and tax under one roof. The most common failure in foreign-invested Indian companies is the coordination gap — a law firm doing the incorporation, a CA doing the tax, and a third party doing FEMA, with nobody owning the FC-GPR deadline. We do.

We screen every investor for Press Note 3, not just the lead. Rounds are caught by a small participant with beneficial ownership traced to a border country far more often than by the headline investor.

We stay after the money arrives. FLA, Form 3CEB, FC-TRS on secondary transfers, bookkeeping, payroll and monthly MIS reporting for shareholders who need visibility from another time zone.

Resident director and registered office available in-house — the two requirements that most often block foreign shareholders on day one.

Delhi-based, working across time zones. Connaught Place, central New Delhi, serving Indian founders raising abroad and foreign investors from the US, UK, EU, Japan, Singapore and the Gulf.

Related Services

Wholly-Owned Subsidiary for Foreign Companies — this structure at 100% foreign holding
Joint Venture (JV) Companies — shared ownership with a negotiated governance framework
Liaison (Representative) Office in India — market entry with no Indian revenue
Private Limited Company Registration — the underlying incorporation process
Public Limited Company Registration — where a listing is contemplated
LLP Registration — restricted for foreign investment to automatic-route sectors with no conditions
Annual ROC Compliance Services — AOC-4, MGT-7, FLA, Form 3CEB
Resident Director Services — where no shareholder has anyone meeting the 182-day test
Registered Office Address in Delhi — Connaught Place address with NOC and utility documentation
Company Conversion Services — restructuring an existing entity to receive foreign investment

Start With a Conversation, Not a Quote

Tell us your sector, where the money is coming from, who ultimately owns the investing entity, and what percentage is contemplated. In thirty minutes we will tell you whether your sector is on the automatic route, whether Press Note 3 applies to any participant, what the pricing constraints are, and what your realistic timeline looks like.

No charge, and no obligation to proceed.

[Book a Free Consultation] [WhatsApp Us] [Call +91 95993 32456]

4th Floor, E Block, Innov8 Workspaces, Harsha Bhawan, 13/29, Connaught Place, New Delhi – 110001 info@delhilegalcompany.com

Frequently Asked Questions

1. Can a foreign national or foreign company hold shares in an Indian private limited company?

Yes. Foreign individuals, foreign companies, NRIs and OCIs can all hold equity in an Indian private limited company, subject to the sectoral FDI policy. Most sectors permit 100% foreign holding under the automatic route with no prior approval. A minimum of two shareholders is required, and both can be non-resident. At least one director must be an Indian resident.

2. How much foreign shareholding is permitted?

It depends entirely on the sector. Most sectors permit up to 100% under the automatic route. Some carry caps — insurance, defence, print media and multi-brand retail among them — above which government approval is required. A small number of sectors are prohibited to foreign investment altogether, including lottery and gambling, chit funds, Nidhi companies, real estate trading and tobacco manufacturing. We check the sectoral position before any share is issued.

3. What is the difference between the automatic route and the government route?

On the automatic route you issue shares, receive funds and report to the RBI afterwards through FC-GPR — no prior permission is needed. On the government route, prior approval must be obtained through the Foreign Investment Facilitation Portal before shares are issued, typically taking 8 to 12 weeks. The government route applies where the sector requires it, where a cap is being exceeded, and in all Press Note 3 cases.

4. What is Press Note 3 and does it apply to me?

Press Note 3 requires prior government approval for any investment where the investor, or the beneficial owner behind the investor, is from a country sharing a land border with India — China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan or Afghanistan. It applies regardless of sector and regardless of percentage. Intermediate holding companies in Singapore, Hong Kong or Mauritius do not avoid it, because beneficial ownership is what is tested rather than the entity on the share certificate.

5. Can I issue shares to a foreign investor at any price we agree?

No. Shares issued to a non-resident must be priced at or above fair value, determined by a valuation report from a SEBI-registered Category-I Merchant Banker or a Chartered Accountant using an internationally accepted methodology. If fair value is ₹340 and you issue at ₹10, the issue is non-compliant whatever the shareholders’ agreement says. The valuation report is a filing requirement for FC-GPR and cannot be produced afterwards to match a price already agreed.

6. What is FC-GPR and when must it be filed?

FC-GPR reports the issue of shares to a non-resident to the Reserve Bank of India, filed through the Single Master Form on the FIRMS portal within 30 days of share allotment. It requires the FIRC from your AD bank, remitter KYC, the valuation certificate, the board resolution and a company secretary’s certificate. Late filing attracts a Late Submission Fee, and delays beyond three years require a compounding application to the RBI. It is the most commonly missed deadline in Indian FDI compliance.

7. What is FC-TRS and when is it required?

FC-TRS reports the transfer of shares between a resident and a non-resident, in either direction, and must be filed within 60 days of the transfer or receipt of consideration, whichever is earlier. It applies to secondary transfers — a foreign investor selling to an Indian buyer, or an Indian shareholder selling to a foreign buyer. Pricing rules apply in both directions: a non-resident buying pays at or above fair value, a non-resident selling receives at or below fair value.

8. What is the FLA return and who has to file it?

The Foreign Liabilities and Assets return is filed with the RBI by 15 July each year, reporting the company’s foreign liabilities and assets as at 31 March. Every company with any foreign shareholding must file it every year for as long as that shareholding exists — whether or not any new investment came in during the year. It is the most commonly missed recurring FEMA filing, because companies file it in year one and forget it by year three.

9. Does an NRI investment count as foreign investment?

It depends on the basis. NRI investment on a repatriation basis is FDI and requires full FC-GPR reporting and pricing compliance. NRI investment on a non-repatriation basis under Schedule IV is treated as domestic investment and sits outside the FDI framework. Note also that FEMA residency is not citizenship — an Indian citizen who has moved abroad for employment or business of indefinite duration is a non-resident under FEMA from the day they leave.

10. What is the corporate tax rate for a company with foreign shareholding?

The same as any Indian domestic company — foreign shareholding does not change the company’s tax status. It can opt for the concessional rate under Section 115BAA at 22%, approximately 25.17% effective after surcharge and cess. This is materially better than the roughly 35% plus surcharge that applies to a branch office of a foreign company, which is a primary reason foreign investors use an Indian company rather than a branch.

11. Do I need a resident director?

Yes. Section 149(3) of the Companies Act, 2013 requires at least one director who has stayed in India for 182 days or more in the preceding financial year. Citizenship is irrelevant — a foreign national resident in India qualifies. Where no shareholder has anyone eligible, this becomes a blocking issue on day one, and we provide resident director services for exactly this situation.

12. How long does it take to set up a company with foreign shareholding?

15 to 25 working days where all documents are already apostilled and the sector is on the automatic route. From a standing start, 4 to 8 weeks — the apostille process in the shareholder’s home country is the variable, and in some jurisdictions it alone takes three to four weeks. Where government approval or Press Note 3 clearance is required, add 8 to 12 weeks before shares can be issued.

13. Which documents need to be apostilled?

For a foreign corporate shareholder: the Certificate of Incorporation, MoA and AoA, the board resolution authorising the investment, and audited financials. For each foreign individual director or shareholder: passport and address proof. Countries outside the Hague Convention require consularisation by the Indian Embassy instead. Documents not in English need certified translations, and documents notarised but not apostilled will be rejected by the ROC.

14. Can the Indian company invest in other Indian companies?

Yes, but where foreign shareholding exceeds 50% or the foreign shareholder controls the board, the company becomes a foreign-owned or controlled company. Any investment it then makes into another Indian company is treated as indirect foreign investment, must comply with sectoral caps and pricing guidelines, and requires Form DI filed within 30 days. Indian groups restructuring after a foreign round routinely miss this.

15. How can a foreign shareholder take money out of India?

Through dividends, sale of shares, buyback, or fees for management, royalty or technical services. Dividends attract 20% withholding under domestic law, frequently reduced to 10 to 15% under the applicable DTAA where the shareholder provides a Tax Residency Certificate and files Form 10F. Every outward remittance requires Forms 15CA and 15CB. Share sales attract capital gains tax and require FC-TRS within 60 days.

16. Can we give ESOPs to employees based outside India?

Yes. Issue of ESOPs to non-resident employees is permitted subject to the sectoral cap and the applicable pricing rules, and must be reported to the RBI in Form ESOP within 30 days of issue. The rules differ from ordinary share issue, and ESOP schemes drafted for a purely domestic employee base usually need amendment before they can be extended abroad.

17. Do transfer pricing rules apply?

Yes, wherever the foreign shareholder is also a related party transacting with the company. Management fees, IT and support recharges, IP licensing, intercompany loans and seconded staff are all international related-party transactions requiring arm’s-length pricing, contemporaneous documentation and Form 3CEB filed alongside the tax return. Retroactive compliance costs materially more than setting the intercompany agreements up at the time of investment.

18. Can convertible instruments be issued to a foreign investor?

Compulsorily convertible preference shares and compulsorily convertible debentures are treated as equity under FEMA, provided the conversion formula is fixed upfront at issue. Optionally convertible instruments are treated as external commercial borrowing instead, which brings minimum average maturity, all-in-cost ceilings and end-use restrictions — a far more restrictive regime. Convertible notes are permitted for eligible startups, with Form CN reporting within 30 days.

19. What happens if we miss a FEMA filing deadline?

A missed FC-GPR or FC-TRS attracts a Late Submission Fee calculated on the amount and the delay, which can be paid to regularise the filing. Delays beyond three years, or substantive contraventions such as issuing shares below fair value or without required approval, require a formal compounding application to the RBI — a process that is expensive, slow and requires written disclosure of the contravention. Unreported foreign investment is also the issue most likely to surface and stall a subsequent funding round during due diligence.

20. Is this the same as a wholly-owned subsidiary?

Mechanically yes, at the extreme. A wholly-owned subsidiary is this structure with foreign shareholding at 100% — the same incorporation process, the same FEMA regime, the same FC-GPR and FLA obligations. The distinction matters commercially rather than legally: a WOS has one decision-maker, while a company with partial foreign shareholding has a governance relationship between Indian and foreign shareholders that needs to be documented in a shareholders’ agreement and mirrored into the Articles.

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