Foreign direct investment, often referred to as FDI, comes into play when one company decides to invest in another company situated in a different country. These foreign firms, once they invest, get actively engaged in running the daily affairs of the recipient company. The whole notion behind FDI revolves around an investor getting into overseas business activities or procuring assets from foreign businesses. This might entail gaining ownership or taking charge of a corporate entity in another nation. There are a number of forms in which FDI generally flows, like equity inflows, equity capital for unincorporated bodies, reinvested earnings and other types of capital. It should be noted that FDI is not allowed in an OPC.
Shares in OPC are held by a single individual that is a natural person, rather than by any legal body. As a result, FDI in an OPC is not allowed. Non-resident Indians who are citizens of India, on the other hand, may incorporate an entity.
What is a One Person Company (OPC)?
A One Person Company (OPC) constitutes a business entity owned by a single individual. Before the enactment of the Companies Act in 2013, the formation of a company necessitated the involvement of a minimum of two individuals. This restriction confined aspiring entrepreneurs to opt for sole proprietorships, as company establishment mandated at least two directors and members.
Incorporation and Compliance
A business can now be established under Section 2(62) of the Companies Act 2013 with a sole Director and a single Member. This category of company carries lighter compliance burdens compared to private corporations, simplifying operational formalities.
Hybrid Benefits
In essence, a one-person company harmonises the features of a corporation and the advantages of a Sole Proprietorship. It permits the incorporation of a business by an individual, who can either be a resident or a Non-Resident Indian (NRI). This framework offers a flexible and simplified approach for single owners to establish and manage their ventures.
What is Foreign Direct Investment in an OPC?
FDI in an OPC refers to a company providing financial resources to an OPC in a different country. In the context of FDI, foreign firms who engage in this practise have a direct responsibility in managing the foreign business entity’s daily operational activities. This commitment goes beyond monetary support and includes the incorporation of technology, skills and competences.
At its core, FDI is made either by establishing business endeavours overseas or procuring assets of foreign corporations, leading to the acquisition of ownership or control within the foreign jurisdiction. FDI inflows come in diverse forms, encompassing equity inflows, unincorporated body equity capital, reinvested earnings and various other forms of capital infusion.
The influx of FDI is a product of calculated commercial decisions, shaped by a multifaceted variety of determinants. The availability of natural resources, dimensions of the target market, quality of infrastructure, the prevailing political environment for investment, macroeconomic stability and the strategic preferences of foreign investors collectively influence the magnitude of FDI inflow. The interplay of these elements shows the important role of strategic evaluation before making FDI in an OPC.
Is Foreign Direct Investment Allowed in an OPC?
In order to understand foreign direct investment in OPC, the following must be first factored in:
FDI Restrictions in OPC
Foreign Direct Investment (FDI) is not allowed in a One Person Company (OPC). This restriction is due to the fundamental nature of OPCs as single-owner entities, which does not align with the traditional concept of foreign investment involving multiple stakeholders.
Alternative FDI Options
Nonetheless, non-resident entities seeking to invest in Indian businesses have an avenue through Private Limited Companies. Private Limited Companies offer the possibility of foreign investment, subject to adherence to the FDI Policy and sector-specific limitations.
Automatic and Approval Routes for FDI
Even though FDI is not allowed in an OPC, foreign investment in a Private Limited Company can be pursued via two routes: the automatic route or the approval route. The automatic route allows foreign investors to invest up to 100% equity in most industries without requiring specific permission from regulatory authorities. However, certain industries that are regulated or restricted might demand prior approval for foreign investment.
OPC Conversion Regulations
The Companies (Incorporation) Rules of 2014 lay down thresholds that facilitate the conversion of an One Person Company (OPC) into a Private Limited Company or a Public Limited Company. When the OPC’s paid-up capital reaches Rs. 50 lakh or its average annual turnover surpasses Rs. 2 crore over the preceding three financial years, conversion becomes mandatory and thereafter FDI is allowed under the routes mentioned above.
Conversion Reporting and Timeline
In the event that either of these financial thresholds is crossed, the OPC is legally obligated to inform the relevant Registrar of Companies (ROC) within a stipulated period of 60 days. This reporting requirement ensures that regulatory authorities are kept informed about changes in the company’s financial status and structure, promoting transparency and adherence to regulatory norms.
Limitation on OPC Transformation
It’s noteworthy that an OPC is restricted from freely transforming itself into a different type of business within the initial two years of its establishment, unless it fulfils either of the two specified criteria for conversion. This safeguard is in place to prevent misuse or premature changes in the OPC structure, reinforcing the regulatory intent behind the creation of the OPC framework.
Investment by NRIs in an OPC
Investment by NRIs in a PC can be done by two methods: non-repatriation basis and repatriation basis:
Non-Repatriation Basis Investment
Non-Repatriation basis investment in an One Person Company (OPC) is treated on par with domestic investment. This means that Foreign Exchange Management Act (FEMA) pricing guidelines and reporting requirements are not applicable during the investment process. The disinvestment or sales proceeds must be channelled exclusively into the Non-Resident Ordinary (NRO) account of the concerned individual, regardless of the account type used for the initial payment.
Prohibited Investment Sectors
Certain sectors are off-limits for investment on the non-repatriation basis. These include Nidhi companies, businesses engaged in agricultural or plantation activities, real estate enterprises, construction of farmhouses and dealings involving the transfer of development rights.
Fund Source and Remittance
For this type of investment, the consideration amount must be received as an inward remittance from abroad through authorised banking channels. Alternatively, it can be sourced from funds held in Non-Resident External (NRE), Foreign Currency Non-Resident (FCNR-B) or NRO accounts, as per the regulations outlined in the Foreign Exchange Management (Deposit) Regulations, 2016.
Repatriation Basis Investment
Investment in an OPC on a repatriation basis necessitates adherence to sectoral caps, conditions, FEMA pricing guidelines and reporting compliances such as Foreign Collaboration General Permission Route (FCGPR), Foreign Currency Transferable Receipts (FCTRS), Foreign Liabilities and Assets (FLA) reporting and more.
Disinvestment and Proceeds
The sales proceeds resulting from repatriation basis investment can be directed either to the Non-Resident External (NRE) account or transferred to a foreign bank account, subject to the deduction of applicable taxes.
Sectors Not Open for Investment
Certain sectors are barred from investment under the repatriation basis. These include lottery businesses, gambling and betting establishments, chit funds, Nidhi companies, trading in Transferable Development Rights (TDR), real estate activities, manufacturing of tobacco-related products and sectors that aren’t open to private sector investment such as atomic energy and certain railway operations.
Source of Funds and Remittance
Similar to non-repatriation basis investment, the consideration amount for repatriation basis investment must be received as inward remittance from abroad through authorised banking channels. Alternatively, it can originate from funds held in Non-Resident External (NRE), Foreign Currency Non-Resident (FCNR-B) or Escrow accounts, in accordance with the guidelines stipulated in the Foreign Exchange Management (Deposit) Regulations, 2016.
Final Thoughts
Understanding the connection between Foreign Direct Investment (FDI) and One Person Companies (OPCs) reveals a complex situation. FDI involves investing money from one country into another and this meets OPCs, which are businesses with a single owner. However, FDI is not allowed in OPCs because of their sole ownership setup. Yet, non-resident Indians (NRIs) can invest in Private Limited Companies, following FDI rules and certain limits.
For NRIs, knowing about investments without moving money out of the country and with it and the businesses they can’t invest in, is important. Finding the right balance between FDI aspirations and OPC rules shapes a steady way forward in business, respecting regulations. In the changing Indian economy, FDI and OPCs play important roles in global business expansion.
