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What is meant by FDI Automatic Route in India?

Ashish M. Shaji

| Updated: May 13, 2020 | Category: FEMA, Foreign Investment

FDI Automatic Route

FDI has been among one of the essential contributors to India’s economic growth. The Government has also taken note of this and has taken measures to liberalize the FDI regime by ensuring minimal compliances. Simply speaking, FDI is an investment by an entity outside the country. India has become an attractive place for foreign investors. They take advantage of the cheaper wages and liberal investment norms and policies.

Since the economic crisis in the year 1991, the economy has been liberalized. This has led to a periodic rise in FDI throughout the years. It has been one of the essential sources of employment in the country. The FDI routes determine the inflow of FDI in the country. In this article, we shall have a brief overview of the FDI automatic route.

FDI Routes

Foreign Direct Investment by an individual or by a foreign company is regulated through two routes namely-

  • Automatic Route
  • Approval Route also called the Government Route

Under the FDI Automatic route , investments are not restricted under different sectors. 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, a prior approval from the Government is required. Such approval can be sought by filing an application through the Foreign Investment Facilitation Portal. The Portal works on a single-window clearance system and thus allows the application to be approved.

The Foreign Investment Promotion Board was given the responsibility of taking care of the entire procedure, but in May, 2017 this agency was abolished, and this move to scrap the agency was decided by the Central Government. Since 2017 the concerned ministries and departments have been handling the processing of the FDI applications. The Ministry of Commerce has formed a standard procedure for processing of FDI applications as per the FDI policy.

For investing in India, an investor should know that there are three types of Foreign Direct Investment:

  • Vertical Investment

Under vertical investment, a business expands into some other country by moving to a different level of the supply chain. The business takes on different activities overseas, but such activities are related to the main business.

  • Horizontal Investment

Under the horizontal investment, the business expands its inland operation to another country. Here the business undertakes the same activities, but it does that in a foreign country.

  • Conglomerate Investment

Under the Conglomerate Investment, the business is carrying out unrelated business activities in a foreign land. Such an investment is uncommon as it involves penetrating a new country and a wholly new market.

List of sectors under FDI Automatic Route

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

SectorPermitted Limit under Automatic Route
Agriculture and Animal husbandry It includes- Floriculture, Horticulture, and cultivation of fruits and vegetables.Production of seeds and planting material.Animal husbandry, pisciculture, aquaculture, apiculture. Agro services.100% FDI permitted under Automatic Route
  Air Transport Services Non-scheduled air transport services Services under Aviation sector  100% FDI permitted under Automatic Route
Airports (Greenfield and Brownfield)100% FDI permitted under Automatic Route
Asset Reconstruction Companies It means a company registered with the Reserve Bank of India (Section 3, Securitisation  and Reconstruction of Financial Assets  and Enforcement of Security Interest Act, 2002)100% FDI permitted under Automatic Route
Auto components Subject to the provisions of FDI policy, investment in the manufacturing sector is under FDI automatic route.100% FDI permitted under Automatic Route
Automobiles Subject to the provisions of FDI policy, investment in the manufacturing sector is under FDI automatic route.100% FDI permitted under Automatic Route
Biotechnology (Greenfield)  100% FDI permitted under Automatic Route
Broadcasting Services (up-linking of Non-news and current affairs TV channels and Down linking of TV channels)100% FDI permitted under Automatic Route
Broadcasting Carriage Services Teleports,DTH,Cable Networks (MSOs operating at National, State or district level),Mobile TV,Headend in the sky Broadcasting Service,Cable Networks (other MSOs that do not undertake up-gradation of networks).100% FDI permitted under Automatic Route
Capital Goods Subject to the provisions of FDI policy, investment in the manufacturing sector is under FDI automatic route.100% FDI permitted under Automatic Route
Wholesale Trading including sourcing from MSEs Cash and Carry wholesale Trading100% FDI permitted under Automatic Route
Chemicals Subject to the provisions of FDI policy, investment in the manufacturing sector is under FDI automatic route.  100% FDI permitted under Automatic Route
Coal and Lignite Mining of coal and lignite for captive consumption by power projects, iron and steel and cement units;Other eligible activities under the provisions of the Coal Mines (Nationalization) Act, 1973.Setting up of coal processing plants such as washeries provided that the company shall not do coal mining, not sell washed coal or sized coal from the coal processing plants in the open market and shall supply the same to those who are supplying raw coal to coal processing plants for washing or sizing.100% FDI permitted under Automatic Route
Construction Development- Townships, Housing, Built-up Infrastructure100% FDI permitted under Automatic Route
Construction of Hospitals100% FDI permitted under Automatic Route
Credit Information Companies100% FDI permitted under Automatic Route
Duty-Free Shops It means shops set up in the custom bonded area at International Airports, Seaports, and Land Custom Stations, where there is International Passenger Transit.Foreign investment in such shops is subject to compliance of conditions under the Customs Act, 1962, and other rules and regulations.Duty-Free Shop entity shall not involve in any retail trading in the domestic tariff area of the country.100% FDI permitted under Automatic Route
E-Commerce Activities Subject to FDI policy, e-commerce entities shall not engage in Business to Consumer e-commerce but would engage only in Business to Business e-commerce.100% FDI permitted under Automatic Route
Electronic Systems Subject to the provisions of FDI policy, investment in the manufacturing sector is under automatic route.100% FDI permitted under Automatic Route
Food Processing Subject to the provisions of FDI policy, investment in the manufacturing sector is under FDI automatic route in India.100% FDI permitted under Automatic Route
Gems and Jewellery Subject to the provisions of FDI policy, investment in the manufacturing sector is under FDI automatic route in India.100% FDI permitted under Automatic Route
HealthCare (Greenfield)  100% FDI permitted under Automatic Route
Industrial Parks (New and Existing)100% FDI permitted under Automatic Route
IT and BPM  100% FDI permitted under Automatic Route
Leather Subject to the provisions of FDI policy, investment in the manufacturing sector is under automatic route.100% FDI permitted under Automatic Route
Manufacturing Subject to the provisions of FDI policy, investment in the manufacturing sector is under FDI automatic route in India.100% FDI permitted under Automatic Route
Mining and Exploration  of metal and nonmetal ores Including gold, diamond, silver, and precious ores but not including titanium bearing minerals and its ores,Subject to the Mines and Minerals Act, 1957.100% FDI permitted under Automatic Route
Other Financial Services Financial Services Activities regulated by the regulators of financial sectors such as RBI, SEBI, IRDA, NHB, or any other regulator of the financial sector as may be notified by the Government of India.100% FDI permitted under Automatic Route
Services under the Civil Aviation sector such as Maintenance and Repair Organisations Including flying training institutes and technical training institutes.100% FDI permitted under Automatic Route
Petroleum and Natural Gas Exploration activities of oil and natural gas fields;Infrastructure related to marketing of petroleum products and natural gas;Marketing of natural gas and petroleum products;Petroleum product pipelines, market study and formulation, and petroleum refining in the private sector.100% FDI permitted under Automatic Route
Pharmaceuticals (Greenfield)100% FDI permitted under Automatic Route
Plantation sector FDI is allowed in the Tea sector;Coffee Plantations;Rubber plantations;Cardamom Plantations;Palm oil tree plantation and olive oil tree plantation.Besides it, FDI is not allowed in any other plantation sector.100% FDI permitted under Automatic Route
Ports and Shipping100% FDI permitted under Automatic Route
Railway Infrastructure100% FDI permitted under Automatic Route
Renewable Energy100% FDI permitted under Automatic Route
Roads and Highways100% FDI permitted under Automatic Route
Single Brand Product Retail Trading100% FDI permitted under Automatic Route
Textile and Garments Subject to the provisions of FDI policy, investment in the manufacturing sector is under FDI automatic route in India.100% FDI permitted under Automatic Route
Thermal Power  100% FDI permitted under Automatic Route
Tourism and Hospitality100% FDI permitted under Automatic Route
White Label ATM Operations100% FDI permitted under Automatic Route

Apart from the sectors mentioned in the table provided 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

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

  • Air Transport Services (scheduled air transport services, 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.
  • Defense- 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 FDI Automatic Route

The following is a checklist under FDI Automatic Route in India that start-ups and established companies must keep in mind before proceeding for Foreign Direct Investment-

  • Check the FDI investing individual’s eligibility.
  • Check whether or not the total FDI is within the sectoral cap and is not under any of the prohibited sectors.
  • Check that if any rights or bonus issue has not resulted in FDI exceeding sectoral cap.
  • Check if the company has complied with the issue of shares, if any, against pre-operative or pre-incorporation expenses.
  • Check if, while calculating total foreign investment, the guidelines are followed.
  • Check whether annual returns on foreign liabilities and assets are filed every year in the prescribed time. The return is required to be filed even if there is no inflow or outflow of funds in the particular year.

What is the Difference between FDI Automatic Route and FDI Approval Route?

Automatic Route-

Subject to the prescribed FDI caps, sectoral regulations, licensing requirements applicable to different sectors, an Indian Company may issue capital instruments to persons living outside India without taking the prior approval of the Government of India for the investment. Sector-wise list where automatic entry is allowed may be referred to by the table made above. 

Approval Route-

Under the Approval route or the government route, prior approval must be taken from the Government of India for the investment. Proposals for foreign investments through the approval route are considered by the concerned Ministry or Department. For seeking approval, the company in which the foreign investment is intended must make an application on the Foreign Investment Facilitation Portal. The approval may be granted at the prudence of the concerned Administrative Ministry or department, as the case may be. Usually, it considers the matters like inflow and outflow of foreign exchange, Export potential, benefit to the Indian economy, etc. for approving an investment proposal.

Conclusion

FDI is instrumental in improving a country’s economy. It positively impacts the employment system, technological aspect and creates a competitive environment in the country. These factors depend upon the FDI policy of the country, which includes the FDI routes (FDI Automatic Route in India and Government Route), the sectors under these routes, which sectors are under the prohibited category, the FDI permissible limit, etc.

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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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