Significance of Foreign Direct Investment under the Approval Route

Sonal Pruthi

13 Sep, 2022

Foreign Direct Investment means an investment which has been by a foreign company or individual into the business of another country. FDI comes into the picture when the investor invests in the foreign business operations or acquires the assets of that foreign company, or does merger and acquisition with that company. This article describes the Significance of Foreign Direct Investment under the Approval Route.

• FDI is preferred for open market operations rather than for the closed market operations.

There are three types of foreign direct investment such as horizontal, vertical, conglomerate etc.

• A horizontal type of business is the establishment of the same business, whereas vertical means establishing a different type of business and conglomerate investing in the unrelated business.
• The reason for working of foreign direct investment in open market due to cheap availability of labor force in that country, and above-average growth prospects.

The FDI can be opened various ways like, opening of associate company, subsidiary company in the foreign country, acquiring interest in the company or by merger and acquisition in that company.

Example of Foreign Direct Investment

An investment by the APPLE Company in China for the year 2017 for $507 million investment, to boost research and development work for Apple.

India has relaxed its FDI rule where it has permitted of 100percent FDI in specific sectors.

Foreign Direct Investment Approval Route

Since 1999, the government has been making efforts to ease the process of investing in India.  They have since 1999, various amendments and introduced changes in the foreign direct investment approval route. In 2016, India has been ranked 9^th in terms of FDI inflows by UNCTAD as the top attractive destinations for inbound investment in the world.

The legislators in India, in order to promote foreign direct investment, have changed the FDI approval route and the framework, which is much more transparent, clear, and flexible.

What is Foreign Direct Investment Approval Route?

The Foreign direct investment approval route has been amended in India, which was earlier an inter-ministerial body. It has been replaced with the DIPP (Department of Industry Policy and Promotion).

Types of Foreign Direct Investment Approval Route

• Sectors in which 100% FDI is permitted- under automated route
• 100 % FDI is allowed – under Government route
• FDI permitted beyond specific limit with government
• With government and automate ways- FDI is allowed –subject to laws/regulations/ securities/conditions

Read our article:What is meant by FDI Approval Route in India?

Foreign Direct Investment under Approval Route

The Investments can be made by non-residents in the form of equity shares/entirely, or compulsorily and mandatorily convertible debentures/fully, or compulsorily and mandatorily convertible preference shares of an Indian company, either through the Automatic Route other Government Route.

But in the Government Route, previous approval of the Government of India is required. The Proposals for foreign investments in the Government Route by respective Administrative Ministry/Department.

Where the investment is under the approval route:

• By way of contribution to the capital.
• A Subscription to the memorandum of a foreign entity
• By purchase of existing shares, of a foreign company through market purchase or by private placement or via the stock market

FDI approval route

The Indian company requires approval of the Authorised Dealer, Category-I bank, with the application in the form –ODI and the prescribed documents affecting the remittances towards such investments.

Sectors in which Government approval is required:

1. Banking & Public sector: 20%
2. Broadcasting Content Services: 49%
3. Core Investment Company: 100%
4. Food Products Retail Trading: 100%
5. The Mining & Minerals separations of titanium bearing minerals and ores: 100%
6. Multi-Brand Retail Trading: 51%
7. A Print Media (publications/ printing of scientific and technical magazines/ specialty journals/ periodicals and facsimile edition of foreign newspapers): 100%
8. The Print Media (publishing of newspaper, periodicals and Indian editions of foreign magazines dealing with news & current affairs): 26%
9. A Satellite (Establishment and operations): 100%

Procedure for filing for government approval route

• File an Application through Foreign Investment Facilitation Portal
• It is a single window clearance
• The application is then submitted to the respective ministry
• The concerned will approve or reject the application in consultation with the Department of Promotion of Industry and Internal Trade (DPIIT)^[1], Ministry of Commerce.
• DPIIT will issue standard Operating Procedure for processing of applications under the existing FDI Policy.
• Then physical copy is to be submitted within 5 days to the competent authority
• Then DIPP will clarify the proposal to the concerned authority within 2 days of filing of e-application.
• Initial scrutiny by the competent authority and seeking relevant information within 1 week
• Application to provide relevant clarification  to the Competent Authority is 1 week
• Submission of documents to the consulted administrative ministry is 4 weeks
• Grant of approval by the competent authority for proposal not seeking clearance is 6 weeks.
• Submission of comments by MHA on proposal requiring security clearance in strategic sectors is 6 weeks.
• Grant of approval by the competent authority for proposal requiring security clearance is 2 weeks.

Recent Amendment inFDI Government Approval Route

RBI Notification As Per 17^th April 2020

As per the Press Note 3, it has amended the FDI Policy which clarified that the investments from Pakistan and Bangladesh, a non- resident was permitted to invest in India as per the terms of the FDI policy without the prior approval under automated route, except for the limited purposes. Before this notification of the government, the investment from the border nations could be done or where the investment of the beneficial owner is situated or he is a citizen of a border country, were only allowed via Approval route.

This has been shift from the approval to an automated route.

Press note 3 has been a direct for all the border countries, which means that, for any direct or indirect investment or transfer of ownership of existing or future FDI in any Indian Entity, resulting in change of beneficial ownership, requires previous approval/ government approval but falling in the category of geographic restrictions.

Aim of government approval in the notification

The idea has destroyed India’s relation with the other border countries such as Nepal, Bhutan, with whom the government enjoys excellent trade relations, strong bilateral trade. Such trade relations will be under now, government approval route for the FDI.

Conclusion

Read our article:Government Approval under Foreign Direct Investment (FDI) In India