FDI in India: An Overview of India’s Foreign Investment Policy

A brief introduction to the foreign investment policy of India.

There’s hardly any facet of life in India where the term foreign isn’t trendy. People here have a special love for products which are foreign and trends which hail from the western world. However, the term received a real special status in 1991 when the country liberalised its investment policy to permit foreign entities and investors to enter Indian markets in various sectors which were prohibited earlier. It’s 2019 and 28 years since the ‘opening of flood gates’,the Foreign Direct Investment inflows which once stood at USD 0.165 billion in 1991-92, stood stands at USD 64.375 billion during the year 2018-19, that’s a storythe country proudly narrates. While a majority of investment is routed through Mauritius, major investing countries include USA, Japan, Netherlands, UK, Germany, Singapore, France, South Korea and Switzerland. India has been an attractive economy for electrical equipment, services, telecommunications, fuel, automobile, housing and real estates, food processing, drug and pharmaceuticals, etc.which have attracted the highest amount of FDI.[a]

Routes for FDI

India doesn’t have a uniform Foreign Direct Investment rate, instead,the policy and rates are sector-specific. These sectors can be primarily categorised into four lists, of which one consists of prohibited sectors. Thus, it leaves the foreign investors with three lists of sectors where they can invest and the policies for their investment accordingly follow the route applicable.

  1. Prohibited Sectors:The Foreign Direct Investment policy specifies an exhaustive list of factors where foreign direct investment is prohibited or is subject to certain conditions. These sectors have been preserved to protect the interests of the economy.
  2. Automatic Route:Automatic route consists of sectors where no approval is required to be obtained by the private foreign investor. The investing enterprise can invest in any company it is desirous of investing in, without any prior approval from the Government.
  3. Government Route:The sectors which are not covered by the automatic route, fall under the Government route. Prior approval from the Government is required to be taken before the investing enterprise makes any investment in any Indian company.
  4. Automatic + Government Route: There are certain routes where Foreign Direct Investment is usually automatic i.e. without any approval, however, only up to a certain limit. Beyond the specified limit, prior approval is required from the government.

Prohibited Sectors for FDI

Sector Policy
Lottery business Prohibited
Gambling and betting including casinos Prohibited
Chit funds Prohibited
Nidhi company Prohibited
Trading in Transferable Development Rights (TDRs) Prohibited
Real Estate Business or construction of farmhouses Prohibited
Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes Prohibited
All activities which are not open to private sector investment

e.g. Atomic Energy, Railway Transport

Prohibited

FDI by Automatic Route

Sector Automatic Government
Agriculture and Animal Husbandry 100%
Air Transport Services 100%
Airports 100%
Asset Reconstruction Companies 100%
Auto components 100%
Automobiles 100%
Biotechnology 100%
Broadcast Content Services 100%
Capital Goods 100%
Cash and carry Wholesale Trading 100%
Chemicals 100%
Coal and Lignite 100%
Construction Development: Townships, Housing, Built-up Infrastructure 100%
Construction of Hospitals 100%
Credit Information Companies 100%
Duty-Free Shops 100%
E-commerce activities 100%
Electronic Systems 100%
Food Processing 100%
Gems and Jewellery 100%
Healthcare 100%
Industrial Parks 100%
Infrastructure Company in the Securities Market 49%
Insurance 49%
IT and BPM 100%
Leather 100%
Manufacturing 100%
Medical Devices 100%
Mining or Exploration of Metal and Non-Metal Ores 100%
Other Financial Services 100%
Other Services under Civil Aviation Sector 100%
Pension 49%
Petroleum and Natural Gas 100%
Petroleum Refining (by Public Sector Undertaking) 49%
Pharmaceuticals 100%
Plantation Sector 100%
Ports and Shipping 100%
Power Exchanges 100%
Railway Infrastructure 49%
Renewable Energy 100%
Roads and Highways 100%
Single Brand Product Retail Trading 100%
Textiles and Garments 100%
Thermal Power 100%
Tourism and Hospitality 100%
White Label ATM Operation 100%

FDI by Government Route

Sector Automatic Government
Banking – Public Sector 20%
Broadcasting Content Services 49%
Core Investment Company 100%
Digital Media 26%
Food Products Retail Trading 100%
Mining or mineral separation of titanium bearing minerals and ores, its value addition and integrated activities 100%
Multi Brand Retail Trading 51%
Print Media (Foreign editions) 100%
Print Media (Indian editions) 26%
Satellites – Establishment and Operation 100%

FDI by Automatic + Government Route

Sector Automatic Government
Air Transport Services 49% 51%
Banking – Private Sector 49% 51%
Biotechnology 74% 26%
Defence 49% 51%
Healthcare 74% 26%
Pharmaceuticals 74% 26%
Private Sector Agencies 49% 51%
Telecom Services 49% 51%

Processing of FDI Proposals under Government Route

The Department of Industrial Policy and Promotion (DIPP) has set a standard operating procedure for processing of FDI proposals. The standard procedure, thus followed, is as below:

  1. FDI proposals are required to be filed online on the FDI portal i.e. Foreign Investment Facilitation Portal. Information in prescribed forms and documents as per the list are required to be uploaded here.
  2. If the application is digitally signed, no further action required. For applications not signed digitally, physical copies of all documents would be required to be submitted to the concerned the Ministry or the Department as DIPP may refer to.
  3. The time limits for disposal of application would reckon from the date of filing an online application. In case where application is not digitally signed and the physical copies are not submitted within 7 days from filing online application, the time limits would be decided on the basis of date of submitting physical documents.
  4. DIPP will identify and transfer the proposal to concerned administrative the Ministry or the Department within the next 2 days.The proposal would also be sent to Reserve Bank of India (RBI) for comments on Foreign Exchange Management Act (FEMA) compliances within 2 days from receipt of application.
  5. The Departments to whom the case maybe referred to, for approval or rejection, is as follows:
Sector The Ministry / The Department
Mining Approval from the Ministry of Mines and Security clearance from the Ministry of Home Affairs
Defence Approval from the Department of Defence Production and security clearance The Ministry of Home Affairs
Small arms and ammunition Approval from the Ministry of Home Affairs
Broadcasting; Print Media Approval from the Ministry of Information & Broadcasting and security clearance from the Ministry of Home Affairs
Civil Aviation Approval from the Ministry of Civil Aviation and security clearance from the Ministry of Home Affairs
Satellites Approval from the Department of Space and security clearance from the Ministry of Home Affairs
Telecommunication Approval from the Department of Telecommunications and security clearance from the Ministry of Home Affairs
Private Security Agencies;

Investments from countries of concern whichcurrently includes Pakistan or Bangladesh

Approval from the Ministry of Home Affairs
Single, Multi-brand, Food Product Retail Trading;

FDI Proposals by Non-Resident Indians (NRI) or Export Oriented Units (EOU);

Issue of equity shares for:

1. Import of Capital Goods / Machinery / Equipment (excluding second-hand machinery)

2. Pre-operative / pre-incorporation expenses

Approval from the Department of Industrial Policy and Promotion
Public Sector or Private Sector Banking Approval from the Department of Financial Services
Other Financial services not covered by the Department of Financial Services;

Foreign Investment in Core Investment Company or Indian Company engaged in activity of investing in the capital of other Indian Companies

Approval from the Department of Economic Affairs
Pharmaceuticals Approval from the Department of Pharmaceuticals

 

  1. The concerned the Department shall scrutinise the application and, if required, request additional documents or clarifications, from the applicant would be obtained.
  2. If required, consultation would be sought from the Department of Industrial Policy and Promotion (DIPP) with respect to FDI policy or any other the Department or the Ministry, as required. DIPP would answer such consultations within 15 daysfrom date of consultation and for the other the Departments or ministries within 4 weeks.The Ministry of Home Affairs, when sought for Security Clearance, would provide such clearance within 6 weeks from receipt of proposals.
  3. The entire process shall be completed within 6 weeks or in case where the Ministry of Home Affairs has sought clarifications, 8 weeks, from the date of filing application.In case, the FDI proposal involves A total foreign equity inflow of more than INR 50 Billion, the application shall be placed for consideration of the Cabinet Committee on Economic Affairs within the above timelines. Overall, the maximum time period that may be taken for action on FDI approval would be 10 weeks.

Documents required along with FDI Proposals

General

  1. Certificate of Incorporation, Memorandum of Association, Articles of Association and Board Resolution of the Investee and Investor Entities
  2. Audited Financial Statement of the previous financial year of the Investee & Investor Entities
  3. List of Names and addresses of all foreign collaborators along with Passport Copy/Identification Proof of the Investor Entity.
  4. Certificate of statutory auditors

Related Entities

  1. List of the downstream companies of the Indian company and the details of the equity held by the Indian Company along with the details of the activities of the companies; Copy of Downstream Intimation
  2. A signed copy of documents, as applicable, the Joint Venture agreement, shareholders agreement, technology transfer agreement, the trademark or brand assignment agreement
  3. Certificates of Incorporation and charter documents, Board Resolution, of any joint venture/company which is a party to the proposed transaction

Funding

  1. Diagrammatic representation of the flow of the funds from the original investor to the investee company and the details of Pre-investment and Post-investment shareholding pattern of the Investee Company
  2. Foreign Inward Remittance Certificate (FIRC) in case investment has already come in and in case of post-facto approval
  3. Valuation certificate as approved by a Chartered Accountant

Miscellaneous

  1. An affidavit stating that all information provided in hard copy and online are the same and correct
  2. Copy of relevant past FIPB/SIA/RBI approvals, connected with the current proposal (in case of amendment proposal)

Special Cases

  1. Where entities themselves are pooled investmentfunds, the names and addresses of the promoters, as well as all the contributors.
  2. High Court order in case of a scheme of arrangement
  3. Non-compete clause certificate of the investor and investee company in case ofinvestment in the pharmaceutical sector

RBI’s Reporting Norms for FDI

Under the Automatic route, or after obtaining approvals under Government Route, the investing entity can invest in the investee entity and post issue of capital instruments, the investee entity shall report about the same to the RBI within 30 days from the date of issue of capital instruments. The reporting of Foreign Investments are required to be done through the RBI’s FIRMS Platform. The same can be accessed from here.[b]

The Indian Entity is required to file an Entity Master on the FIRMS Platform. For this purpose, ‘Entity User’ Registration is required to be submitted on the said portal. After filing the same, a Single Master Form (SMF) is also required to be filed, and the same can be accessed after registering as ‘Business User’ on the said portal. Entity user registration helps in furnishing information about the entity while the Business user registration helps in furnishing various forms and returns.[c][d]

[a] Image Source: https://kyotoreview.org/yav/thai-foreign-policy-behaviours/

[b] Link: https://firms.rbi.org.in/firms/faces/pages/login.xhtml

[c] Tags: FDI in India, Foreign Investment, FDI, FDI Proposals

[d] Word count: 1905 words, directly quoted from source – 0 words

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