What is meant by FDI Automatic Route in India?

Swetha Dhinesh

10 Jul, 2023

One of the key factors in India’s economic progress has been FDI. The government has also noted this and has ensured minimal compliance to liberalise the FDI policy. FDI is an investment made by a party outside the nation. India has grown to be a desirable location for global investors. They profit from the lower wages and lenient investment standards and regulations.

The economy was liberalised after the 1991 financial crisis. As a result, FDI has periodically increased over the years. It has long been one of the main sources in the nation. The FDI routes determine the country’s FDI influx. We shall have a brief overview of the FDI automatic route.

Foreign Direct Investment Routes

There are two ways that foreign direct investment by an individual or a foreign company is regulated: 

• Automatic Route 
• Approval Route, also known as the Government Route.

Certain sectors under the FDI Automatic route do not constrain investments. The overseas investor or the Indian company doesn’t need any prior approval from the government or the RBI, whereas, under the FDI Approval route, prior approval from the government is required. One might request such approval by applying through the Foreign Investment Facilitation Portal¹. The application can be authorised because of the single-window clearing procedure used by the Portal.

The task of overseeing the entire process was handed to the Foreign Investment Promotion Board. However, in May 2017, the Central Government abolished the organisation. The appropriate ministries and departments have been processing FDI applications since 2017. According to the FDI policy, the Ministry of Commerce has established a uniform method for handling FDI applications.

What Is The Difference Between FDI Automatic Route And FDI Approval Route?

Automatic Route: An Indian Company may offer capital instruments to persons residing outside India without obtaining the Government of India’s prior approval for the investment, subject to the FDI caps, sectoral regulations, and licencing requirements that apply to certain sectors. The above list can refer to the sectors where the automatic route is permitted. 

Approval Route: The prior authorisation for the investment must be obtained from the Government of India using the approval route, often known as the government route. The relevant Ministry or Department considers proposals for foreign investments through the approval route. The business where the foreign investment is envisaged must apply on the Foreign Investment Facilitation Portal to request permission. Depending on the circumstances, the administrative ministry or department may decide to issue the approval. When assessing an investment request, it often considers factors, including the inflow and outflow of foreign currency, export potential, benefits to the Indian economy, etc.

List of sectors under FDI Automatic Route

In the table provided below, the list of sectors permitted under FDI Automatic Route is specified.

Sector where FDI automatic route is permitted up to Certain Limits

Apart from the sectors mentioned in the table above, there are sectors under FDI automatic route in India where up to 100% FDI is permitted. These are as follows:

• Insurance- up to 49% Automatic Route
• Pension- 49% Automatic Route
• Medical Devices- up to 100% Automatic Route
• Petroleum Refining- 49% Automatic Route
• Power Exchanges- 49% Automatic Route

Some sectors come under the Automatic Route and Government Route of FDI, where up to 100% FDI is permitted.

• Air Transport Services (scheduled and regional air transport services) – Up to 49% Automatic Route and above 49% Government Route.
• Banking Private Sector- up to 49% Automatic Route and above 49% Government Route.
• Biotechnology (Brownfield) – up to 74% Automatic Route and above 74% Government Route.
• Defence- up to 49% Automatic Route and above 49% Government Route.
• Healthcare (Brownfield) – up to 74% Automatic Route and above 74% Government Route.
• Pharmaceutical (Brownfield) – up to 74% Automatic Route and above 74% Government Route.
• Private Security Agencies- up to 74% Automatic Route and above 74% Government Route.
• Telecom Services- up to 49% Automatic Route and above 49% Government Route.

Checklist for Foreign Direct Investment Automatic Route

Before pursuing Foreign Direct Investment, start-ups and established businesses should bear the following in mind as part of India’s Foreign Direct Investment Automatic Route:

• Check the eligibility of the FDI individual investor.
• Verify that the total FDI is not in any restricted sectors or above the sectoral cap.
• Verify if any rights or bonus issues have prevented FDI from staying under the sectoral cap.
• Check to see if the company has issued any shares to cover any pre-operational or pre-incorporation costs.
• Check if the rules are adhered to while determining total foreign investment.
• Verify that annual returns on foreign liabilities and assets (FLA) are submitted within the required period each year. Even if there are no taxes due, the return must be submitted.

Prohibited Sectors

The following sectors are prohibited in foreign direct investment under the current policy:

• Betting and Gambling
• Lottery Business (covering public and private lotteries, internet lotteries, etc.)
• Activities or Industries (like atomic energy or railroads) prohibited from private sector investment.
• Trading in retail (assume the sale of single-brand products).
• Business of chit fund
• Nidhi company
• Real estate business or construction on farmhouses
• Transferable Development Rights (TDS) trading
• Manufacturing cigars, tobacco, cheroots, cigarillos, cigarettes and other substitutes.

Collaboration with foreign technology is prohibited in the lottery business, gambling industry, or betting operations. It includes licencing for franchises, trademarks, brand names, and management contracts.

Conclusion

FDI plays a key role in boosting a nation’s economy. It has a good effect on the nation’s technological advancements, employment system, and competitive environment. These variables are influenced by the nation’s foreign direct investment policy, which covers things like the FDI routes (FDI Automatic Route in India and Government Route), the sectors covered by these routes, the sectors that fall under the prohibited category, the FDI permitted limit, etc.

FAQ

1. https://fifp.gov.in/