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In India, foreign Investment is governed by the FDI Policy[1] which is announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA) Act 1999. Foreign Direct Investment (FDI) has been an important source of funds for those countries where capital is not readily available. Read the FEMA/RBI Compliances Checklist
Generally, FDI is allowed in two forms –
It refers to an investment made by the non-resident entity or a person resident outside India in Capital of Indian Company.
In India, investment through FDI can be done either under –
Table of Contents
In FDI, every non-resident entity is allowed to invest in India either under Automatic or Government Approval Route, except in prohibited sectors*. However, Individuals or entities of Bangladesh and Pakistan can invest only under Government Route.
However, it limits the individual holding of an FII/FPI below 10% of the capital of the company and the aggregate limit of investment to 24% of the capital of the company.
Prohibited Sector for Investment in India are mentioned below-
Read, Also: Foreign Investments Criteria for NBFCs: An Overview.
The eligibility of FDI in resident entities are-
Restrictions – An NRI or PIO is not allowed to invest in a firm or proprietorship concerned engaged in any agricultural/plantation activities or real estate business (i.e. dealing in land and immovable property to earn a profit or earning income therefrom) or engaged in the Print Media.
FDI in Trusts-FDI in Trusts other than VCF is not permitted.
FDI in Small sector Industries – The foreign investors except for the prohibited sectors, are allowed to invest in small-scale industrial unit operating in various sectors. Provided, the investment is limited to 24% of the paid-up capital of an SSI unit.
SSI units have to comply with the following conditions to issue more than 24% to foreign investors,
As per Micro, Small and Medium Enterprises Development Act, 2006, The Small-Scale Industries has to give up its status as SSI, i.e. exceeding prescribed limits of investment in plant and machinery.
Various documents are also required for the FDI Proposal –
Indirect types of Foreign Investment –
There are additional types of indirect foreign investments to be considered:
Recommended Post: Protection of Exit Clauses for Foreign Investors under FEMA.
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