Foreign Direct Investment refers to an investment by a foreign company in India directly either by setting up a wholly owned subsidiary or indulging into a joint venture, and carry on their business in India. FII is when foreign investors invest in the shares of Indian listed company or in bonds offered by an Indian company. Foreign investment has become a striking measure of economic development in both developed and developing countries. Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA). Now the developing countries, like India, are evidencing changes in the composition of capital flows in Indian economies because of the growth and integration of the world equity market. The flow of foreign capital is boosting the Indian stock markets. Since Indian capital market is vast and hence attract investors as their investment destination. FDI and FII are regarded as instruments of international economic integration and stimulation. The flow of FDI and FII is increasingly seen as an important cause of stock market volatility.
FDI in the majority of the sectors is under the automatic route, i.e., allowed without any requirement of seeking regulatory approval prior to such investment. Thus, the process to get FDI in most sectors doesn’t require prior approval from the GOI. Eligible investors can invest in most of the sectors of Indian Economy on an automatic basis.
- Any Non-resident individual (NRI)/Entity can invest subject to FDI policy (except in prohibited sectors). NRI resident in and Citizens of Nepal & Bhutan are permitted to invest on repatriation basis (amount of consideration for such investment shall be paid only by way of inward remittances through normal banking channels).
- Company, trust or partnership firm incorporated outside India and owned and controlled by NRIs
- Foreign Institutional Investors (FII) and Foreign Portfolio Investors (FPI)
- Registered FIIs/ FPIs/ NRIs as per Schedules 2, 2A and 3 respectively of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 can invest or trade through a registered broker of Indian Companies on recognized stock exchanges.
- SEBI registered Foreign Venture Capital Investor (FVCI) can invest in any activity mentioned in Schedule 6 of Notification No. FEMA 20/2000.
Why Invest in India?
India is gradually becoming an investor’s paradise for the following reasons:-
- A Successful Economy:- India is the third largest economy in the world and is projected to grow at a high rate. The growth rate has been largely stable throughout the decade and is expected to grow consistently in the coming decades.
- High Domestic Demand:- India, with a population of 1.3 billion offers a fertile ground for the demand and supply of goods and services. The per capita of India is remarkable which stands at 5,350 PPP dollars as per World Bank reports.
- Governance:- India has a stable political environment and the current government is taking proactive measures to encourage investment. An independent Indian judiciary upholds the rights of investors to a great extent.
- Location Advantage:- India due to its geographical location offers easy access to other South Asian, Middle east and European countries.
- Cheap Labour:- Due to a burgeoning population, there is abundance of unskilled and semi skilled labour which is easily available at comparatively cheap rates.
- Less procedural requirements:- The government in recent years has made strenuous efforts to reduce red tapism in the country and has been focusing on ease of doing business thereby simplifying the procedures to procure a license.
- Easy availability of Financial Support:- India is a homeland to a large number of financial institutions with over 130 different banks, 50,000 bank branches ensuring diversified financial support and easy availability of funds.
FDI Investment Routes
Foreign Direct Investment (FDI) can be made through two routes that are:
Automatic Route: Indian companies engaged in various industries can issue shares to foreign investors up to 100% of their paid up capital in Indian companies
Government Approval Route: Certain activities that are not covered under the automatic route require prior Government approval for FDIs.
*Investors are advised to check for government approval and other related sector condition in latest FDI Circular Section 5.
- Category 1- Sectors in which FDI is permitted up to 100% under automatic route
- Category 2- Sectors in which FDI is permitted up to 100% under Government Route
- Category 3- Sectors in which FDI is permitted beyond certain limit with Government
- Category 4- Sectors wherein FDI is permitted up to certain limit under both Government and Automatic routes subject to applicable laws/ regulations security and other conditionalities
Procedure for Government Approval
In order to facilitate Foreign Direct Investment, Government of India started a new online single point interface named Foreign Investment Facilitation Portal (FIFP). This portal is designed to provide a single window clearance of applications which are through approval route. Upon receipt of the FDI application, the concerned Administrative Ministry / Department shall process / review the same as per the Standard Operation Procedure (SOP).
Post-abolition of the Foreign Investment Promotion Board (FIPB) by the Government, the burden of providing government approval for foreign investment under the extant FDI Policy and FEMA Regulations has been entrusted to the concerned Administrative Ministries/Departments.
These eleven notified sectors/activities requiring government approval:
- Mining, Defense/cases relating to FDI in small arms
- Broadcasting
- Print media
- Civil Aviation
- Satellites
- Telecom
- Private Security Agencies
- Trading (Single, Multi brand and Food Products)
- Financial services not regulated or regulated by more than one regulator/ Banking Public and Private (as per FDI Policy)
- Pharmaceuticals.
FDI prohibition
- Atomic Energy Generation
- Any Gambling or Betting businesses
- Lotteries (online, private, government, etc.)
- Investment in Chit Funds
- Nidhi Company
- Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, Agri-sciences, etc.)
- Housing and Real Estate (except townships, commercial projects, etc)
- Trading in TDR’s
- Cigars, Cigarettes, or any related tobacco industry
Current Status:
The government has made amendments to the existing FDI policy to block the looming threat of an “opportunistic” Chinese takeover of Indian firms.
- Now, investments by entities from countries that share a border with India will now require a clearance from the Centre.
A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares a land border with India or where the beneficial owner of investment into India is situated in or is a
citizen of any such country, can invest only under the Government route.”
- The new policy blocks the indirect acquisition of investments by entities based in China. With this, change in ownership of the investment will also have to be cleared by the Union government.
“In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.”
By Mr. T.S.Ahuja
Managing Partner, M/S Ahuja Law Offices
A – 219 , Defence Colony, New Delhi – 110024
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