FEMA Foreign Investment

What is meant by FDI Approval Route in India?

The investment by foreign entities has significantly improved in the last few years in India. This improvement could be attributed to the ease in FDI norms in the different sectors of the economy. On the one hand, India has taken giant strides in reaching the top 100 clubs on the ease of doing business, and on the other hand, India received a record FDI of 61.96 billion dollars in 2017-18, which rose to 6% in the subsequent year period. The investment climate has seen considerable improvement since 1991, the opening up of the Indian economy. This article describes the FDI Approval Route.

In such a scenario, every other foreign entity wants to enter into India. These foreign entities might have a lot of queries with respect to the regulatory approvals or ways and strategies of entering into India. Investments made in India are categorized under two routes- a) Automatic route b) Government/Approval route. This article attempts to throw light on the FDI approval route in India, but before that, let’s have a brief overview of FDI.

What is FDI?

When a company develops a controlling ownership in a business entity in another country, it’s called the Foreign Direct Investment. The foreign companies, with FDI, have a direct involvement in the daily business of another country. Generally, FDI takes place when an investor either acquires foreign business assets in a foreign company or establishes foreign business operations. FDI is a vital aspect of the economy of a country. A lot depends on the host country’s government policies and a robust business environment, which, if properly implemented, can facilitate the economy of the country. There are many other positive impacts of FDI.

Routes for FDI in India

Foreign Direct Investment (FDI) can be made in India through basically two routes-

• Automatic Route
• Government/Approval route

FDI under the Automatic route is where the foreign investor or the Indian company does not need to take any approval from the Government of India before making an investment, whereas under the FDI approval route, also called the Government route, a prior permission must be taken from the Government. Until the year 2017, the Foreign Investment Promotion Board was a nodal agency for processing FDI applications for the FDI approval route. In May 2017, however, an office memorandum was issued, and that abolished Foreign Investment Promotion Board, thereby giving authority to the concerned departments. The relevant Department is required to make a decision in consonance with the DIPP.

There are sectors where FDI is prohibited through both Automatic Route and Government Route. These sectors have been preserved in order to protect the interests of the economy. The prohibited sectors include Lottery business, gambling and betting, Nidhi Company, Chit funds, Real estate businesses, Trading in Transferable Development Rights, Manufacture of cigars, cigarettes, or tobacco products, activities that are not open to private sector investment like atomic energy, etc.

List of Competent authorities for various sectors for receiving FDI approval route

The name of the sector and the Department or the competent authority from whom the approval must be taken under the FDI approval route is mentioned in the table provided below.

Sector	Competent Authority/Department/Ministry
Mining	Approval required from Ministry of Mines
Defense	Approval required from the Department of Defence Production and Ministry of Home affairs
Small arms and ammunition	Approval required from the Ministry of Home Affairs
Broadcasting and Print Media	Approval required from the Ministry of Information and Broadcasting
Civil Aviation	Approval required from the Ministry of Civil Aviation
Satellites	Approval required from the Department of Space
Telecommunications	Approval required from the Department of Telecommunications
Private security agencies	Approval required from the Ministry of Home Affairs
FDI from countries of concern	Approval required from the Ministry of Home Affairs
Single, Multi-brand or Food retail Trading	Approval required from the Department of Industrial Policy and Promotion (DIPP)
FDI proposals from NRIs or from Export Oriented Units	Approval required from the Department of Industrial Policy and Promotion (DIPP)
Issue of equity shares under the FDI approval route for import of Capital goods, machinery, equipment, and for preoperative or pre-incorporation expenses.	Approval required from the Department of Industrial Policy and Promotion (DIPP)
Unregulated Financial services	Approval required from the Department of Industrial Policy and Promotion (DIPP)
FDI in Investment company or Indian company engaged inactivity of investing in the capital of other Indian companies	Approval required from the Department of Economic Affairs
Public Sector or Private sector Banking	Approval required from the Department of Financial Services
Pharmaceuticals	Approval required from the Department of Pharmaceuticals

List of sector-wise FDI limits under approval/government route in India

The FDI policy has gone through numerous changes. In certain sectors, it requires prior approval of the Government, and some don’t, whereas some sectors are prohibited from FDI. In the table made beneath, we discuss the sectors and their FDI limit under the FDI Approval route.

Sector	FDI Limit by Government/Approval Route
Banking- Public Sector	20% under Government route
Broadcasting Content Services	49% under Government route
Core Investment Company	100% under Government route
Digital Media	26% under Government route
Food Products Retail trading	100% under Government route
Mining or separation of mineral of titanium bearing minerals and ores, value addition and integrated activities	100% under Government route
Multi Brand Retail Trading	51% under Government route
Print Media (Newspaper publishing, periodicals and Indian edition of foreign magazines)	26% under Government route
Print Media (Publication/specialty journals, periodicals and facsimile edition of foreign newspapers)	100% under Government route
Satellites – establishments and operations	100% under Government route

Procedure followed for FDI Government Approval under FDI Approval route

The Government has tried to make the procedure for government approval less complicated and expeditious by providing an online facility for filing such applications and by fixing the time period for processing of the proposal.

The standard procedure is as follows:

• All proposals for foreign investment that requires government approval must be filed on the FDI portal- Foreign Investment Facilitation.
• The information in a prescribed form along with the documents, must be uploaded on it. The list of essential documents to be attached with the proposal are as follows-
  • Investee and investor companies or entities certificate of incorporation;
  • Memorandum of Association of the Investee and investor companies or entities;
  • Board resolution of the Investee and investor companies or entities;
  • Last financial year’s audited financial statement of the Investee and investor companies or entities;
  • Article of association of the Investee and investor companies or entities;
  • Essential documents of foreign collaborators, including the list of names and their addresses along with the Passport copy or the Identity proof of the Investor Company or entity;
  •  Pre and post shareholding pattern of the Investee Company and diagrammatic representation of the flow of funds from the original investor to the investee company;
  • An affidavit mentioning the authenticity of the information so provided.
• Once the application is filed, DIPP shall identify the prescribed competent authority (for reference check the table provided under the list of competent authority) and subsequently e-transfer the proposal.
• In case the application is digitally signed, then no action is required further; however, if the proposal is not signed digitally, physical copies of all the documents should be provided to the concerned ministry, authority, or Department as specified by DIPP.
• The application should be disposed of within the prescribed time limit from the date of filing such application.
• DIPP shall identify and transfer the proposal to the concerned Ministry or the Department within the next two days. Such a proposal shall also be sent to the Reserve Bank of India for comments on FEMA compliances within two days of receipt of such application. In the following cases, security clearance from the Home Ministry shall be required-
  • Investments in Broadcasting, Telecommunication, satellites-establishment and operations;
  • Investments in Defence, Civil Aviation, Private Security Agencies;
  • Investments in Mining and separation of mineral of titanium bearing minerals, value addition and integrated activities;
  • And investments from countries of concern like Pakistan and Bangladesh.
• In case the competent authority or the Department needs some clarification with respect to the FDI policy, then they can ask for comments from DIPP. DIPP must reply within 15 days from the date of clarification sought from it, and for any other information, the Ministry or the Department must respond within four weeks. Where security clearance is requested from the Ministry of Home Affairs, it shall provide such clearance within six weeks from the receipt of proposals.
• In respect of any additional information or clarifications asked from the applicant shall be provided within one week by the applicant.
• The proposals involving investments exceeding 50 billion Rs., the competent authority or the Department shall send it before the Cabinet Committee of Economic Affairs (CCEA) for its consideration.
• The total time taken for the whole process ranges between 8 to 10 weeks if security clearance is required.
• In case of rejection of the proposal, DIPP must be consulted; this may add to another two weeks time.

Checklist for FDI Approval Route/Government Route

The following is a checklist under FDI Approval route / Government Route that start-ups and established companies must keep in mind before proceeding for Foreign Direct Investment-

1. One should keep a check on whether there is any transfer of shares from resident to a non-resident that needs a government approval;
2. And check whether the prior approval of the Foreign Investment Promotion Board (FIPB) is obtained for foreign investments that are in excess of the sectoral cap.

Difference between the FDI Automatic route and the FDI Approval route or Government route

Automatic Route

An Indian company subject to the prescribed FDI caps, sectoral regulations, and licensing requirements applicable to different sectors or activities may issue capital instruments to persons residing outside India without taking any prior approval from the Indian Government for the investment. Sector-wise list wherein automatic entry is allowed can be referred to. Some of these include the Plantation sector, thermal power, Roads and Highways, Tourism and Hospitality, Gems and Jewellery, Electronic systems.  

Government Approval Route

Under the FDI Approval route, prior approval is required from the Government of India before making an investment. Proposals for foreign investments through the approval route or the Government route are considered by the respective Administrative Ministry or Department. The company in which the foreign investment is proposed shall make an application on the Foreign Investment Facilitation Portal^[1] for approval. The approval may be granted at the discretion of the concerned ministry or department as the case may be. Ordinarily, the concerned ministry or the Department in approving an investment proposal considers the following matters:

1. Inflow and outflow of foreign exchange,
2. General benefit to the Indian Economy,
3. Export potential,
4. Induction of technology,
5. Potential for large scale employment etc.

Read our article:FEMA/ RBI Compliances Checklist: Foreign Direct Investment

Conclusion

FDI brings a lot of benefits to a country’s economy. It brings in new technologies and skills. It generates more employment and creates a more competitive business environment. However, it all depends on a country’s FDI policy as to how it would shape up in the future. It also relies on the fact that what shall be the FDI routes (FDI Automatic Route or FDI Approval Route) for foreign investments and which sectors are prohibited. The regulatory framework also plays a vital role in this regard. To sum it up, the policies formulated by the Government is a critical driver for the overall growth of its economy.

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