Guide to FDI in Space Startups

The rapidly evolving Indian space sector fuelled by global competitiveness, decreased regulatory inhibitors, and increased private participation has finally opened its doors to foreign investment. The Indian government has allowed 100% Foreign Direct Investment (FDI) in Indian space startups which is bound to attract significant attention including from international investors. However, receiving FDI has never been an easy process as it requires approvals and compliances under several Central laws. Understanding these requirements is crucial for space startups aiming to navigate the complex landscape of India’s FDI norms. This article discusses in brief, the overall regulatory framework that will govern the FDI norms for Indian space startups.

Latest FDI Policy for Space Startups

The Indian government first allowed 100% FDI in space startups in February 2024. Through a review of the FDI Policy in March, 2024, the consolidated guidelines are as under:

Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. Under the Government Route, prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required.

What is Foreign Direct Investment?

Foreign Direct Investment means investment through equity instruments by a person resident outside India in an unlisted Indian company or in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. Fully diluted basis means the total number of shares that would be outstanding if all possible sources of conversion are exercised.

Approval Process

A space startup wanting to take FDI investments is required to obtain necessary clearances through the following steps:

1. Submission of Proposal: Every startup must submit an application through the Foreign Investment Facilitation Portal (FIFP) which is a single point interface launched by the Government of India to facilitate foreign investment in the country. The application process requires submission of details about the proposed investment, business model, and compliance with existing laws.
2. Evaluation by Relevant Authorities: The proposals are reviewed by concerned ministries, including the Department of Space (DoS), Ministry of Home Affairs, and Department for Promotion of Industry and Internal Trade (DPIIT). Space activities often have national security implications which is why business proposals undergo rigorous security evaluations as well
3. Final Approval: On government’s satisfaction regarding the startup’s compliance with existing laws, the Centre grants approval to receive foreign investment.

Regulatory Compliance Framework

While considering the application for approval to receive FDI, the main consideration is compliance with applicable laws. There are a lot of regulations that startups have to adhere to avoid rejection of FDI application which can be broadly classified as below:

1. Companies Act, 2013: Since most space startups want to be registered as private companies, it is important to ensure compliance with Companies Act, 1956 (as far as not repealed), Companies Act, 2013 and rules formed thereunder. Companies Act provides norms for incorporation, governance, filings, procedures etc.
2. FEMA Regulations: The Foreign Exchange Management Act (FEMA) Regulations are released by RBI from time to time to control foreign currency entering the Indian subcontinent. There are several FEMA Regulations and different ones apply on different kinds of companies depending on their business and operations. Generally, these regulations require companies to report the receipt of funds and issuance of shares to the Reserve Bank of India (RBI) within specified timelines.
3. SEBI Guidelines: The Securities and Exchange Board of India (SEBI) is the premier institute that governs laws regarding issuance of shares and other securities to investors of the Company. Any startup aiming to issue shares in relation to FDI investment also needs to comply with applicable SEBI regulations.
4. IN-SPACe Guidelines: The Indian National Space Promotion and Authorization Center (IN-SPACe) has been given the regulatory and supervisory power over registration and working of private participants in the space sector. As per the Indian Space Policy 2023, startups are required to obtain necessary permissions for activities such as satellite launches, ground station operations, and satellite communications.
5. Licensing from DoS: Since space sector comes under direct control of the Prime Minister Office and is governed by the Department of Space (DoS), it is important to secure licenses for space-based activities. Startups should ensure compliance with spectrum allocation rules and orbital slot assignments as regulated by the DoS.
6. National Security and Strategic Compliance: Given the strategic importance of space, startups must ensure adherence to data protection and cybersecurity norms. Startups are advised to refrain from entering agreements that could compromise national security or violate India’s obligations under international treaties, such as the Outer Space Treaty or the Liability Convention.
7. Taxation Compliance: Space startups must also comply with India’s taxation norms under Income Tax Act, 1961. Further, startups can also aim to avoid double taxation by leveraging Double Taxation Avoidance Agreements (DTAA), where applicable.
8. Post-Investment Compliance: It is important to regularly file records and returns as mandated by different applicable laws, maintain transparent financial records, disclose necessary information to all stakeholders to ensure long-term capability to receive FDI.

Conclusion

The potential for foreign investment in India’s space sector is immense but startups must navigate a complex web of regulations and approvals. Adhering to compliance requirements not only ensures smooth operations but also builds investor confidence. With the government’s support and increased push towards streamlining of policies, the Indian space ecosystem is poised to create lot of opportunities, unlocking new opportunities for national and international collaborators alike.