In India, foreign Investment is governed by the FDI Policy 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 –
- Joint Venture
- Wholly owned
It refers to an
investment made by the non-resident entity or a person resident outside India
in Capital of Indian Company.
Note – An investment of 10% or above from overseas is considered as FDI. FDI (Foreign direct investment) policy is regulated under the Foreign Exchange Management Act, 2000 governed by the Reserve Bank of India.
In India, investment through FDI can be done either
- Automatic Route – Automatic Route which does not require approval from RBI, only intimation is required or
- Approval Route – Approval route is also termed as Government route which requires prior approval from the concerned Ministries/Departments via a single window. Approval route is required when the proposed foreign investment is beyond the sectoral limits or where the automatic route is not permitted.
Note – In FDI, Foreign Investment Facilitation Portal (FIFB) is administered by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry, Government of India.
Who can make Foreign Direct Investment?
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.
- A person who is PROI can make FDI.
- If the PROI is a citizen of Pakistan or entity incorporated in Pakistan can make FDI only under approval sector other than Defense, atomic energy and space.
- In Nepal and Bhutan, NRI resident, as well as citizens of Nepal and Bhutan, are permitted to invest in the capital of Indian.
- With the prior approval of Central Government, PROI who is a citizen of Bangladesh and entity of Bangladesh can make FDI,
- In terms of Schedule 2 and 2A of FEMA (Transfer or Issue of Security by Person Resident Outside India)Regulation, FII (Foreign Institutional Investor) and FPI (Foreign Portfolio Investor, as the case may be invested in the Indian Company under the Portfolio Investment Scheme.
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.
Which sectors are prohibited for investment in
India under FDI?
Prohibited Sector for Investment in India
are mentioned below-
- Lottery Business including Government/Private
Lottery, online lotteries etc,
- Chit Funds,
- Nidhi Company,
- Gambling and betting which includes Casinos,
- TDRs-Transferable Development Rights,
- Real Estate Business, where Real estate business
shall not include the development of townships, constructions of
residential/commercial premises, roads or bridges or Construction of Farmhouses.
- Manufacturing of cigars, cheroots, cigarillos and
cigarettes, tobacco and its substitutes.
- Sectors do not open to private sector investment
other than permitted sector.
What are the various conditions
required for FDI in case of a sole proprietorship, Partnership, Private Limited
Company, trusts and in other Entities?
The eligibility of FDI in resident
- FDI in an Indian Company-Micro and Small Indian companies can issue capital against FDI.
- FDI In Partnership Firm/Sole Proprietary Concern – Without prior approval, NRIs or Person of Indian Origin (PIO) resident outside India are allowed to contribute to the capital of a partnership firm or sole proprietary concern provided:
- The Contribution is on non-repatriation basis,
- Investment is done as an inward remittance, or out of NRE/FCNR (B)/NRO account maintained with AD Category-1 Bank.
- It should not be engaged in agricultural, plantation, print media or real estate business.
- Amount vested shall not be eligible for repatriation outside India.
Note – The investors may apply for prior permission of RBI and Government of India, the decision for the same will be taken by RBI and Government of India on a case-by-case basis, provided the last two conditions mentioned above are adhered to:
- Investment is preferred to be repatriable by
- For investors other than NRIs/PIO.
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.
What are the steps and documents required for the approval process under the FDI proposal?
- Proposal submission and uploading documents on Foreign Investment Facilitation Portal.
- After submission of documents and proposal, Department of Industrial Policy and Promotion (DIPP) assigns the case to the concerned Ministry within 2 working days.
- In the case of digitally signed documents, submission of physical copies to the concerned department is not required.
- In case, if the proposal and application are not digitally signed, online communication to the applicant will be made to submit one signed physical copy of the proposal.
- From FEMA perspective, the proposal is circulated online within 2 days to Reserve Bank of India for review. Further, all proposals are shared with the Ministry of External Affairs and Department of Revenue for the record. Any changes including (advice/comments) are directly shared with concerned Administrative Ministry/Department assigned to decide on the proposal.
- Proposals are scrutinized within 1week and if required, additional information/clarifications are asked from the respective party.
- The Competent Authority is required to give out its decision in the next two weeks after getting all the required information. Further, approval/rejection letters are sent online to the applicant, consulted Ministries/Departments and DIPP.
- The Competent Authority is required to place the same to Cabinet Committee, in case, where total foreign equity inflow is more than Rs 5000 crore, on Economic Affairs for consideration within timelines.
Various documents are also required for the
FDI Proposal –
- Certificate of Incorporation along with Memorandum of Association (MOA) and Article of Association.
- Board Resolution.
- Audited Financial Statement of the Last Financial Year
- Details of all foreign collaborators (Names, addresses and identification proof) of the Investor Company/Entity.
- Shareholding pattern of the Investee Company.
- A Declaration stating that all information provision provided in hard copy and online is the same and correct.
- Along with the current proposal, Copy of relevant past FIPB/SIA/RBI approvals.
- In case investment has already flowed in, Foreign Inward Remittance Certificate (FIRC) is required.
- In case of a scheme of arrangement the High Court order is required.
Indirect types of
Foreign Investment –
There are additional types of indirect foreign investments to be
- Commercial Loans-Commercial loans are
typically in the form of bank loans that are issued by a domestic bank to
businesses in foreign countries or the governments of those countries.
- Official Flows-Official flows refer to
different forms of developmental assistance that developed or developing
nations are given by a domestic country.