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Foreign Investment in India and its Regulatory Framework

Ashish M. Shaji

| Updated: May 14, 2020 | Category: FEMA, Foreign Investment

foreign investment in India

Overview

Foreign Investment in India has been the direct result of policies undertaken and implemented by successive governments and of the liberal trade. The liberalization program of the government leads to a harmonious integration with the global economy besides effecting a rapid and substantial growth of the country’s economy. In India, foreign investment comprises of investments made by foreign companies in India, the reverse, which means the outflow of foreign investment from India is also common in the Indian economy. Foreign investment in India has led to many positive impacts on the country in terms of employment generation and improving the basic infrastructure of the country.

Foreign investment has enormous potentials in India. There may be some uncertainties as well that the investors might face; however, India provides an excellent opportunity for global players to invest in the market. Most of them have already invested in India, and some companies are planning to invest in India.

Market potential for Foreign Investment in India

India is the world’s fifth-largest economy and is among one of the few markets in the world that offers a high prospect of growth and earning in all sectors of the economy. One factor that ensures a good return on the investments of foreign investors is the substantial skilled workforce. Foreign investors need to estimate and calculate the opportunities and the drawbacks that the Indian markets present in order to be successful.

Investors must formulate a proper plan, and they need to research extensively. If the foreign companies are thinking of short term benefits, then they may be disappointed to know that it may not be fruitful; however, long term returns can be expected for an investor who has understood the Indian market prior to investing his money. If these factors are kept in mind and considered seriously, then investors can reap the rewards of their investments.

Government policies over the years relating to foreign investment in India

The Indian government has taken numerous steps to attract foreign investments in the country. In India, foreign investments are principally governed by the Foreign Exchange Management Act 1999. With a view to regulate the foreign investments, the Reserve Bank of India had published the Foreign Exchange Management Regulations 2000 and then the Foreign Exchange Management (Transfer of Issue of Security by a person resident outside India) Regulations 2017 under FEMA. Moreover, the Department for Promotion of Industry and Internal Trade had put in place a framework that consolidated the sectoral requirements and conditions that are to be complied with by the foreign investors investing in Indian entities.

The principal legislation that governs and regulates acquisitions and foreign investment in India is the FEMA, as well as the notifications, circulars issued from time to time by the Central Government and RBI pertaining to foreign investments.

Forms of Foreign Investment in India

  • Foreign Direct Investment

This is the conventional method of making foreign investments in the country. The foreign institutional investors/NRIs and foreign partnerships may invest through this medium. It is the primary form of remittance to the country.

  • Foreign Portfolio Investment

It is a form of investment made by a person resident outside India in capital instruments wherein such investments is less than 10% of the post issue paid-up equity capital on a fully diluted terms of a listed company or less than 10% of the paid-up value of each series of capital instruments of a listed company.

  • Foreign Investment

Any investment made by a person resident outside India on a repatriable basis in capital instruments of the Indian Company or to the capital of a Limited Liability Partnership (LLP).

Routes for Foreign investment in India

The routes under which foreign investments can be made are as provided-

  • Automatic Route

Under the automatic route, foreign investment in India is allowed without prior approval from the Government of India or the Reserve Bank of India (RBI) in all activities or sectors, as mentioned in Regulation 16 of FEMA Regulations, 2017.

  • Government Route

Under the Government route, foreign investment in activities not covered under the automatic route needs prior approval from the government. An application seeking approval from the government can be made at the Foreign Investment Facilitation Portal. This portal is administered by the Department of Industrial Policy and Promotion, Ministry of Commerce.

What is Foreign Investment Facilitation Portal?

Foreign Investment Facilitation Portal is the online single-window interface of the Finance Ministry to facilitate foreign investment in India. The portal is administered by the Department of Industrial Policy and Promotion Board. Its functions are-

  • To impart transparency in the process of approval of foreign investment;
  • To improve the communication, to reduce paperwork, and to inform the investor through SMS/e-mail;
  • To upload the approval letters in a standard format on the portal for the benefit of the investors;
  • To transmit guidelines and press releases with respect to the FDI policy to the investors.

The FIFP replaced the erstwhile Foreign Investment Promotion Board (FIPB) in order to increase the transparency and to facilitate the clearance procedure of the FDI proposals so that the inflow of FDI could be increased in the country. Since the abolition of FIPB, the individual departments of the government have been empowered to clear the FDI proposals in consultation with DIPP, which shall also issue the Standard Operating Procedures for processing applications.

Sectoral caps in foreign investment in India

Foreign investment in the sectors or activities provided in the regulation 16 of the FEMA Regulations, 2017, is permitted up to the limit indicated against each sector or activity subject to laws and regulations applicable. The sectoral cap for the sectors or activities is the limit indicated against each sector. The total foreign investment should not exceed the sectoral cap. Up to 100% foreign investment is permitted on the automatic route subject to the applicable laws and regulations in sectors not listed in regulation 16 of the FEMA Regulations, 2017 and not prohibited under regulation 15 of the FEMA Regulations, 2017. However, this condition is not applicable to activities in financial services.

Sectors prohibited from foreign investment in India

With a view to protect the interest of the nation, some sectors are prohibited from foreign investment in India. These include Business of chit funds, Nidhi Company, Agricultural or plantation activities, Real estate business, trading in Transferable Development Rights, etc.

How can a person resident outside India make foreign investment?

Any investment by a person resident outside India will be subject to the entry routes, sectoral caps, or to the investment limits. A person residing outside India can make investment as provided under-

  • A person residing outside India can subscribe, purchase, or sell capital instruments of an Indian company subject to the term and conditions laid down in Schedule 1 of FDI regulation. However, it may be noted that a citizen of Bangladesh or Pakistan or is an entity incorporated in these countries cannot purchase capital instruments without the prior approval from the government. 
  • A foreign portfolio investor can purchase or sell capital instruments of a listed company on a recognized stock exchange in India subject to the term and conditions laid down in Schedule 2 of FDI regulation.
  • A Non-Resident Indian (NRI)/ an Overseas Citizen of India (OCI) may on repatriation basis sell or purchase capital instruments of a listed company on a recognized stock exchange in India subject to the term and conditions laid down in Schedule 3 of FDI regulation.
  • A Non-Resident Indian (NRI)/ an Overseas Citizen of India (OCI) may on non-repatriation basis sell or purchase capital instruments of an Indian Company or purchase or sell units or contribute to the capital of an LLP or a firm or proprietary concern subject to the term and conditions laid down in Schedule 4 of FDI regulation.
  • A person resident outside India, allowed for the purpose by the Reserve Bank in discussion with the Central Government, may sell or purchase securities other than capital instruments subject to the term and conditions laid down in Schedule 5 of FDI regulation.
  • A person residing outside India who is not a citizen of Pakistan or Bangladesh or not an entity incorporated in these countries may invest by capital contribution or by acquisition/transfer of profit shares of an LLP, subject to the term and conditions laid down in Schedule 6 of FDI regulation.
  • A Foreign Venture Capital Investor can make investment in the manner and subject to the term and conditions laid down in Schedule 7 of FDI regulation.
  • A person residing outside India who is not a citizen of Pakistan or Bangladesh or not an entity incorporated in these countries can invest in units of an investment vehicle subject to the term and conditions laid down in Schedule 8 of FDI regulation.
  • A person residing outside India can invest in the Depository receipts issued by foreign depositories against eligible securities subject to the term and conditions laid down in Schedule 9 of FDI regulation.
  • A foreign portfolio investor, NRI, or an OCI can purchase, hold or sell Indian Depository Receipts of companies’ outside India and issued in the Indian Capital Market, subject to the term and conditions laid down in Schedule 10 of FDI regulation.

Acquisition through rights issue or bonus issue

A person resident outside India having invested in an Indian Company is allowed to invest in the capital instruments issued by such company subject to the following conditions:

  1. The offer by the Indian company should be in compliance with the provisions of the Companies Act, 2013.
  2. The issue should not result in a breach of the sectoral cap applicable to the company.
  3. The shareholding upon which the rights issue or bonus issue has been made should have been acquired and held as per the provisions of FEMA Regulations, 2017.
  4. The capital instruments other than the share warrants acquired by the person resident outside India as a bonus issue or rights issue shall be subject to the same conditions as applicable to the original holding against which rights issue or bonus issue has been made.
  5. If it’s a listed Indian company, the rights issued to a person resident outside India will be at a price determined by the company.
  6. If it’s an unlisted Indian Company, the rights issued to a person resident outside India shall not be at a price less than the price offered to persons resident in India.
  7. Such an investment made through rights or bonus issue is subject to conditions as applicable at the time of such an issue.
  8. The consideration amount may be paid as inward remittance from abroad through banking channels or from funds held in NRE/FCNR (B) account maintained according to the Foreign Exchange Management (Deposit) Regulations, 2016.
  9. In case the original investment has been made on a non-repatriation basis, the consideration amount can also be paid by debit to the NRO account maintained according to the Foreign Exchange Management (Deposit) Regulations, 2016.

Conclusion

The government has, in recent times, relaxed certain existing laws and have enacted new laws in some instances to ensure better opportunities for foreign investment in India. Since the opening of the Indian economy for foreign investors in 1991, many changes have taken place with an aim to attract foreign investment in India. Since the liberalization, all governments started implementing the changes that made the Indian economy more attractive to foreign investors.

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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