P0006 Purpose Code
According to the RBI, it is for transactions related to “Foreign direct investment in India in equity.”
Purpose Code P0006 is used when money is sent from another country to invest in an Indian company by buying its shares. This is called Foreign Direct Investment (FDI). It means the person or company sending the money becomes a part-owner of the Indian company. The Indian company gets the money to grow its business, and the investor gets shares in return.
For example, an investor living in the U.S. sends Rs. 1 crore to buy a 10% ownership stake in an Indian tech startup. The money is received by the company in India through proper banking channels and is reported under Purpose Code P0006. Since this is an equity investment, the investor becomes a part-owner of the company and may receive dividends or sell the shares later for a profit.
Important Rules for Repatriation
- Who Are The Investors and What Can They Purchase? – The investors can be foreign individuals, companies, institutions, or non-resident entities who want to invest in Indian businesses by purchasing: Equity shares (ordinary shares), Compulsorily Convertible Preference Shares (CCPS), Compulsorily Convertible Debentures (CCDs), and Share warrants (in certain cases).
- Who Reports the Transactions? – Purpose Code P0006 is utilised by both the foreign investor and the Indian company receiving the investment. The foreign investor uses this code at the time of remitting funds to India, ensuring that the remittance is correctly classified as foreign direct investment (FDI) in equity. This is done through the bank handling the transfer, usually the remitting bank abroad and the Authorised Dealer (AD) bank in India. However, the primary responsibility for reporting the FDI to the Reserve Bank of India (RBI) lies with the Indian company receiving the funds for investment.
- Time Limit – The foreign investor has no timeline to report to the RBI directly, but must act in a timely and accurate manner when sending funds to ensure the Indian company can meet its deadlines under FEMA. However, the company receiving the funds from abroad must report to the RBI within 30 days of receiving the funds and submit Form FC-GPR within 30 days of share allotment. Delayed filing may result in penalties under FEMA, including compounding proceedings.
- Use of Proper Banking Channels – The money must be invested by a non-resident investor in India through normal and legal banking channels, like transferring through a bank, and not by cash. Such banks are referred to as Authorised Dealer (AD) Banks by the RBI.
- Rules of Investing in India by a Company – There are several norms laid down under FEMA by the RBI for investment by a company in India. Some of the important rules are:-
– Entry Routes for FDI – Under the Automatic Route, no prior government approval is needed for FDI in most sectors like manufacturing, IT, and services. Under the Government Route, approval from the relevant ministry is required for sensitive sectors such as defence, telecom, and media.
– FDI Limit/Sectoral Cap – India has set limits on how much foreign investment is allowed in different business sectors. These limits, called sectoral caps, are given as a percentage. For example, up to 100% foreign investment is allowed in manufacturing without needing government approval. In some parts of the telecom sector, up to 74% is allowed, and anything above that needs approval. These rules help make sure foreign investment follows government policies.
– Restrictions for Investment – FDI is subject to certain restrictions in India, and is prohibited in specific sectors regardless of the route of investment. These include the lottery business, gambling and betting, real estate business (excluding activities related to townships, construction of residential or commercial premises, roads, and infrastructure), and chit funds. Investors and Indian companies must ensure that no FDI is accepted in these prohibited sectors, as any violation can lead to serious regulatory consequences under FEMA and RBI guidelines.
How to Report the Purpose of The Transaction to The RBI by Giving the Purpose Code:
Investors investing money in India must file several forms before starting the process. Usually, the transactions are via bank transfers, and your bank will ask you to provide a purpose code by giving a form to fill out. If you have any doubts or questions, feel free to reach out to us via email- support@bankerpanda.com, and we will try our best to help you out.
Tax or No Tax?
There is no tax in India on the capital amount sent by a foreign company or individual investor for investment in an Indian company under Purpose Code P0006 (FDI in equity shares). This is because the remitted amount is treated as capital, not income, and is therefore not taxable under Indian income tax laws at the time of investment. While the Indian company receiving the funds must comply with FEMA and RBI regulations, such as reporting the transaction and issuing shares within prescribed timelines, no tax is levied on the capital amount received through FDI. Important exemption laws under DTAA and Liberalised Remittance Scheme (LRS) are also not applicable in this case.
Note: An investor (including a foreign investor or foreign company) who invests in an Indian company does not receive any profit directly from the Indian government but only from the company in which the investment was made.
P0006 Purpose Code Use Case Examples:
Here are some real-life examples where the RBI’s Purpose Code P0006 would be used to report transactions in India:-
- Foreign Tech Company Invests in Indian Startup:-
A U.S.-based tech company invests Rs. 10 crore in an Indian AI startup by purchasing equity shares. The funds are sent through an Authorised Dealer (AD) bank using Purpose Code P0006 to classify it as FDI in equity. The Indian startup reports the remittance to the RBI within 30 days and, after allotting shares, files Form FC-GPR through the FIRMS portal with documents like FIRC, KYC, and a valuation certificate. Since the Rs. 10 crore is capital, not income, it is not taxed in India. However, the Indian company must comply with all FEMA and RBI regulations related to FDI.
- NRI Invests in Private Indian Company:-
An NRI in the UAE invests Rs. 50 lakhs in a private Indian company by buying shares. The funds are sent to India using the Purpose Code P0006 to indicate FDI in equity. The Indian company reports the receipt to the RBI within 30 days through the FIRMS portal (Advance Reporting) and files Form FC-GPR within 30 days of share allotment. The investment is treated as capital, not income, so no tax is levied in India, though the company must comply with FEMA and RBI rules.
- Pension Fund Invests in Listed Indian Infra Company:-
A Canadian pension fund invests ₹100 crore in an Indian infrastructure company by purchasing equity shares under the FDI route. The fund uses Purpose Code P0006 while remitting the amount. The Indian company receives the funds through its AD bank and reports the inward remittance to the RBI within 30 days via the FIRMS portal. After allotting shares, it files Form FC-GPR within the next 30 days along with documents like FIRC, KYC, and a valuation certificate.
- Business Expansion by a Foreign Company:-
A German tech company invests Rs. 10 crore in its Indian subsidiary to expand operations. The funds are sent under Purpose Code P0006 as FDI in equity shares. The Indian company uses the money for offices, hiring, and development, and issues fresh equity shares to the foreign investor. The company has to file an Advance Reporting Form within 30 days of receiving funds and Form FC-GPR within 30 days of share allotment. As the remittance is capital, not income, no tax is levied in India on the foreign investor at the time of investment.
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