FEMA Foreign Investment

What is meant by FDI Automatic Route in India?

FDI Automatic Route

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. 

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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.

SectorPermitted Limit under Automatic Route
Agriculture and Animal Husbandry It includes- Floriculture, Horticulture, and cultivating 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 under Aviation sector100% 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 Customs Stations, where there is International Passenger Transit. Foreign investment in such shops is subject to compliance with conditions under the Customs Act, of 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 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 plantations and olive oil tree plantations. 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

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
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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.
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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

What is Foreign Direct Investment?

An ownership stake in a foreign company or project from another country is made by an investor, company, or government and is considered as FDI.

What is the automatic route of FDI in India?

Foreign direct investments may be drawn via the automatic route in India without requiring the government or the Reserve Bank of India’s approval.

What are the two routes for foreign direct investment?

There are basically two ways to bring FDI into India. There is the Automatic Route, which doesn’t need consent or authorisation is required for investment.And there is a Government Route. No investment in this route is permitted without the Government of India’s prior approval.

What is the difference between automatic and approval routes for FDI?

The Automatic Route and the Approval/Government Route are the two main routes available for foreign direct investment into India. In the case of the automatic route, the investor does not need prior approval before investing; however, the same is required in the approved route.

Is 100% FDI permitted under the automatic route in food processing industries?

Yes, the automated route in India allows 100% FDI into the food processing sector.

Is betting and gambling-related business investment allowed in FDI in India?

No, FDI investment in betting, gambling, and related business is prohibited in India.

What is the main importance of FDI in economic growth?

FDI is considered a major engine of economic growth, as it can bring in capital, skills, technology, market access, and employment opportunities in the host country.

References

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

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