Most Common Mistakes People Make When Investing in India

Gaurav Shanker    |   

Most Common Mistakes People Make When Investing in India

India has emerged as one the most preferred destination for investment in recent years, with its Foreign Direct Investments (FDI) doubling to around USD 42 billion over the last decade. The Indian market has been slated to grow at consistently higher rates for the next few years, earning significant returns for foreign investors from all over the globe. Moreover, the launch of the ‘Make in India’ initiative in September 2014 has made it easier to invest directly in Indian companies and has increased the FDI inflows up to forty percent.

However, like any other FDI, there is a list of requirements and laws that have to be followed while investing in India. Misinterpreting or misunderstanding these requirements and regulations could be the difference between a successful investment and a costly mistake.

At Business Law Chamber, we value your money which is why to help you avoid investment errors, here’s a list common mistakes people make when investing in India.

Transferring money to an Indian company or person without any legal advice or documentation. It is essential for both the Indian party and foreign party making a transaction in business concerning money, to provide a guarantee or shares to ensure that they do have proper documentation in place and comply with the regulatory framework in India. If found to be improper, the penalty can be as high as three times the amount involved.

Ignorance of Indian laws. This can be quite tricky for both parties - the Indian companies or foreign companies. The new Companies Act 2013 has strict penalties for the violations of the provisions of the Act. The Act among others includes provisions such as no loans to directors or persons related to directors, dealing with the related party transactions, a manner of issue or transfer of shares, etc. The penalty can be up to an amount of INR 20 million, with an imprisonment for a term up to two years.

Being unaware of the new tax regime in India. With the Goods and Services Tax (GST) replacing the existing tax laws, the dynamics of transacting with vendors and customers have changed drastically. Now there is now an unavoidable, unpardonable requirement to ensure that the proper contracts are in place and are specifically addressing the concerned provisions of the Act. Failing which the financial implications can be catastrophic.

Misunderstanding Indian foreign exchange laws. Misunderstanding Indian foreign exchange laws can make you liable to pay a penalty.

  1. Foreign companies or persons cannot grant loans or repay the loans to, for and on behalf of the Indian companies. The Indian foreign exchange laws are clear and specific to this effect. Any such transaction must be subject to proper structuring and statutory requirements in India. This will not only make the deal null and void, but also the penalty will be up to three times the amount.
  2. The services provided or received from an Indian company by a non-resident of India (or a foreign national) must comply with the foreign exchange laws of India. Unlike some of the other countries, there are restrictions or manner in which the fee is to be paid or received by an Indian company.

Not following the procedure set by Reserve Bank of India. Foreigners are free to invest in India (in most of the sectors) without any restriction; however, this has to be done in a particular manner and is subject to compliance and regular filing with the Reserve Bank of India. Further, India has tax treaties with many countries to avoid double taxation on investors, and therefore, it is recommended to take proper advice on the structure of investment, to negate any tax leakages.

To rule out these and many other investment mistakes, get in touch with us at Business Law Chamber. We consist of professionals including lawyers, chartered accountants and company secretaries, together holding more than fifty years of experience. We consider each mandate to be on priority and being responsive 24x7 is our pledge. Our professionals and partners are accessible anytime they are desired, through email, handheld phone or video chats. If you have any questions about financial investment, contact us here.