A United States company investing in India: entry under the foreign exchange rules, no investment treaty, and dividend tax under the 1989 convention

A United States company may subscribe to shares of an Indian company under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 without prior approval where the sector is on the automatic route and the sectoral cap is not crossed, at a price not below the fair value of the shares, and the Indian company must report the issue to the Reserve Bank of India in Form FC-GPR (Foreign Currency-Gross Provisional Return) not later than thirty days from the date of issue. No bilateral investment treaty with the United States appears on the Department of Economic Affairs register, so protection rests on Indian law and on contract. Dividends paid back are taxed at up to 15 per cent under Article 10 of the India-United States tax convention if the company holds at least 10 per cent of the voting stock, and otherwise at 20 per cent, the domestic rate, because the treaty ceiling of 25 per cent is higher.

What does the law require before a United States company invests?

The governing text is the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, notified as S.O. 3732(E) on 17 October 2019 under the Foreign Exchange Management Act, 1999. The Reserve Bank of India (RBI) publishes them as updated up to 2 September 2026. Rules 3 and 4 bar a person resident outside India from investing, and an Indian entity from receiving the investment, except as the law allows, and rule 5 makes every investment subject to the entry route, sectoral cap and conditions in the Rules.

Nothing in the Rules turns on the investor being American. The test is residence outside India. The one condition tied to nationality, in rule 6(a), looks to the border: an entity or citizen of a country that shares a land border with India, or an investment whose beneficial ownership is vested in such a country, may invest only on the government route. A United States parent with a shareholder from such a country, above the thresholds that the proviso borrows from the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, or whose shareholder can exercise control over the parent, falls within it. A smaller land-border holding that does not need approval still carries the reporting the Reserve Bank of India specifies (second proviso to rule 6(a)).

Which route applies, and what is a sectoral cap?

Paragraph 3(a) of Schedule I defines two entry routes. On the automatic route the investment needs no prior approval of the RBI or the Central Government. On the government route it needs prior Government approval and follows the conditions stated in that approval. A sectoral cap, under paragraph 3(b), is the ceiling on total foreign investment in a sector, and it is a composite limit: the Rules define it to count direct foreign investment and indirect foreign investment together.

The table in the Schedule gives each listed sector a cap and a route. Defence industry subject to an industrial licence, for example, is capped at 100 per cent, on the automatic route up to 74 per cent and on the government route beyond that, while multi brand retail trading is capped at 51 per cent, on the government route. A sector that the table does not list and paragraph 2 does not prohibit is open up to 100 per cent on the automatic route, except that foreign investment in financial services outside the activities the table lists needs prior approval. Paragraph 2 closes some sectors to foreign investment altogether, among them lotteries, gambling and betting, chit funds, Nidhi companies, real estate business and atomic energy.

Under paragraph 3(b)(vii) the onus of compliance with the cap and its conditions lies on the Indian company that receives the investment.

At what price may shares be issued?

Rule 21(2)(a) sets a floor for an issue to a person resident outside India. For a listed company the floor is the price worked out under the guidelines of the Securities and Exchange Board of India. For an unlisted company it is a valuation under an internationally accepted pricing methodology, on an arm's length basis, certified by a chartered accountant, a Merchant Banker registered with the Securities and Exchange Board of India, or a practising cost accountant. For convertible instruments the price or conversion formula must be fixed at the time of issue, and the price at conversion may not be lower than the fair value worked out at issue. Shares subscribed to a company's memorandum of association are issued at face value, within the entry route and cap.

The rule works in the other direction on exit: a transfer by the non-resident to a resident may not be at more than the corresponding valuation price, and the guiding principle is that the non-resident is not guaranteed an assured exit price.

What is paid, by when, and what is reported?

On payment, the RBI Master Direction on Foreign Investment in India (updated up to 15 June 2026) requires the consideration to come as inward remittance through banking channels, or from a repatriable foreign currency or rupee account. If the shares are not issued within sixty days of receipt of the money, it must be refunded within fifteen days of the end of those sixty days.

On reporting, regulation 4(1) of the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 requires the Indian company to report, in Form FC-GPR, an issue of equity instruments to a person resident outside India that counts as foreign direct investment, "not later than thirty days from the date of issue". The same regulation requires the Annual Return on Foreign Liabilities and Assets by 15 July each year. The RBI amended the Regulations on 13 June 2026 (Notification No. FEMA 395(4)/2026-RB); that amendment does not touch Form FC-GPR.

The Regulations name the forms and the time limits, and not the portal. The Master Direction refers, in a note on alternative investment funds, to reporting through the Foreign Investment Reporting and Management System (FIRMS) portal.

Is there an investment treaty to fall back on?

The Department of Economic Affairs of the Ministry of Finance keeps a register of India's bilateral investment treaties. We read every page of it on 28 October 2026 and found no entry for the United States. The nearest item is the India-USDFC investment incentive agreement, dated 23 May 2022, with 15 June 2022 shown as the date of enforcement. On the register as it stands, a United States investor has no treaty claim against India of the kind the register records for other States.

What protects the investment instead is ordinary law. Article 300A of the Constitution of India says that no person shall be deprived of property save by authority of law, and Article 14 forbids the State to deny any person equality before the law. The subscription or joint venture agreement and its dispute resolution clause carry the commercial protection.

What is withheld on dividends sent back?

Three provisions of the Income-tax Act, 2025, in force from 1 April 2026, work together. Section 207(1) taxes dividend received by a non-resident who is not a company, or by a foreign company, at 20 per cent (Table, serial number 1). Section 393(2) requires the payer to deduct tax on sums payable to such a payee at the rates in force, and the residual entry for sums chargeable under the Act is serial number 17. Section 159(4) provides that, where a double taxation agreement applies to the assessee, the provisions of the Act apply to the extent they are more beneficial. Under section 159(8) relief needs a certificate of residence from the government of the investor's country and the other documents and information prescribed.

Article 10 of the Convention between the United States of America and India, signed at New Delhi on 12 September 1989, lets India tax a dividend paid by an Indian company to a resident of the United States. The tax may not exceed 15 per cent of the gross dividend if the beneficial owner is a company that owns at least 10 per cent of the voting stock of the payer, and may not exceed 25 per cent of the gross amount in all other cases. Paragraph 4 takes a dividend attributable to a permanent establishment in India out of the cap.

The arithmetic runs in one direction. For a corporate holder of 10 per cent or more, the treaty rate of 15 per cent is below the domestic 20 per cent, so it governs. For any other holder, the treaty ceiling of 25 per cent is above the domestic 20 per cent, and section 159(4) leaves the domestic rate in place.

What do the dates and figures look like?

An illustration. The investor, the Indian company, the share price and the dividend below are hypothetical. The tax figures are the rates stated above; on the domestic-rate leg, surcharge and cess add to the 20 per cent.

Subscription by a United States parent to an unlisted Indian company
  Valuation certified by a Merchant Banker               INR 400 a share
  Issue at INR 380                                       below the floor
  Issue at INR 400 or more                               not below the floor
  Money received                                         2 November 2026
  Last day to issue shares (sixty days)                  1 January 2027
  Refund due if shares are not issued                    16 January 2027
  Shares issued                                          15 December 2026
  Form FC-GPR due (thirty days from issue)               14 January 2027

Dividend of INR 10 crore, tax withheld by the payer
  The parent holds all the voting stock
    Domestic rate, 20 per cent                           INR 2 crore
    Treaty rate, 15 per cent (lower, so it governs)      INR 1.5 crore
  A United States individual holds 8 per cent, receiving INR 0.8 crore
    Domestic rate, 20 per cent (lower, so it governs)    INR 0.16 crore
    Treaty ceiling, 25 per cent                          INR 0.2 crore

The sixty-day and thirty-day limits run from different events, the receipt of money and the issue of shares. The 15 per cent limb is for a company holding voting stock, so an individual, or a company below a tenth of the votes, falls in the 25 per cent limb and gains nothing from it.

What remains unsettled?

Two points.

First, the India-USDFC item. The register lists an India-USDFC investment incentive agreement dated 23 May 2022, enforced from 15 June 2022.

Second, surcharge and cess. Article 2 of the convention covers Indian income-tax "including any surcharge thereon", so the 15 per cent ceiling includes surcharge. Whether the health and education cess may be added to a treaty rate is not answered by the text.