This article has been written by Rahel Roy, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).

Introduction

India has become one of the most favoured destinations of foreign investors in recent years. Numerous factors are involved in the increased foreign investment such as: an abundant supply of labour, business-friendly policies, rising number of the educated middle class, etc. India attracted a total of $72.12 billion in Foreign Direct Investment (hereinafter, FDI ) from April, 2020- January, 2021.

When foreign investors are looking to invest in India, they need to be aware of the compliance needs which are related to the sectors in which the foreign investor is looking to invest in. The need for approval from authorities for FDI varies from one sector to the other. For example, FDI in the automobile sector does not need any prior approval from the government authorities while such approval is needed for the retail food products businesses. It is important for the foreign investors and legal professionals equally to understand the different entry routes in India for investment by a non-resident. 

What is the entry route?

Entry routes refer to the different approval requirements which foreign investors need to fulfil before investing in India. There are two routes through which a non-resident can invest in India – automatic route and approval route. When a non-resident investor invests through the automatic route they do not have to take any prior approval from the government, whereas, through the government route, prior approval of the government is necessary to be obtained before investing in India.

The automatic route

 Below are the sectors which can enter through automatic route-

 Through the Automatic Route, though the investors do not have to take prior approval of the government authorities or RBI , they have to abide by the sectoral regulations. 

Government route 

There are a few sectors in which foreign investment cannot take place without the prior approval of the government authorities. According to the consolidated FDI policy, approval for FDI will be required when:

1. An Indian company is being incorporated with investments from non residents and is not owned by an Indian entity.
2. An Indian company is being incorporated with investments from non residents and such company is not controlled by a resident of India.
3. A company which is currently owned or controlled by a resident is being transferred to a non – resident by transfer of shares or fresh issue of shares to a non-resident entity pursuant to a scheme of merger, amalgamation , acquisition, etc.
4. A company, trust and partnership firm established outside India and owned and controlled by non-resident Indians will be eligible for investment under Schedule IV of the Foreign Exchange Management ( Non-debt Instruments) Rules, 2019 and such instruments will also be deemed to be at par with domestic investments. 

The sectors which need the approval of the government are –

Steps involved in government route

Steps involved in taking approval of the government to enter through the government route will be as follows- 

1. The applicant should submit the proposal for foreign investment to the Department of Promotion of Industries and Internal Trade.
2. After the  application has been received by the Department of Promotion of Industries and Internal Trade (DPIIT) , it will identify the concerned administrative ministry/ department  and transfer the application to the concerned administrative ministry/ department within 2 days.
3. When the proposal is received it should be circulated by DPIIT to the Reserve Bank of India for review of the compliance  to the Foreign Exchange Management Act. In sectors which require security clearance for foreign investments , the proposal needs to be sent to the Ministry of Home Affairs .All proposals should be sent to the Department of Revenue and the Ministry of External Affairs. These ministries can communicate any objections or reviews directly to the concerned ministry.
4. If there are any specific issues in the proposal from the perspective of FDI policy, it may be referred to the DPIIT for clarification. Therefore, consultation with DPIIT will be based on circumstances and not regular and routine. The specific issue of the proposal with regards to the FDI policy  will be clarified by the DPIIT within 15 days.
5. The Ministries or Departments  whose consultations regarding the proposal are preferred  should publish the information relating to the proposal within 4 weeks of the online receipt of the proposal. If the comments of the consulted ministries or authorities are not received within stipulated time , it would be considered that they have no comments to offer . When a proposal is sent to the Ministry of Home Affairs for security clearance it is supposed to send its clarification or comments to the competent authority within 6 weeks from the online receipt of such proposals. In cases where such  proposals are not sent back with clarification within the stipulated time MHA will have to intimate  the concerned administrative Ministry or Department about the time frame within which it will be able to give its comments.
6. The concerned authority should examine the proposal and documents  within 1 week and ask the applicant to furnish any additional documents , if required.  Such queries should be emailed to the applicant so as to avoid any delay.
7. Once the proposal is received , the concerned authority should process the application for decision and send the same to the applicant within 2 weeks. 
8. All the recommendations of the FIPB on the FDI proposals above Rs 5000 crores should be first placed before the Cabinet Committee on economic affairs (CCEA) for consideration . After approval has been received by the CCEA, an approval letter should be issued by the concerned ministry within one week.
9. If the application gets rejected or  conditions in addition to the conditions laid down in the FDI policy or sectoral regulations  have been stipulated on the approval of the proposal , the approval of DPIIT should compulsorily be sought by the concerned ministry within 8 or 10 weeks from the receipt of the proposal. 

Prohibited sectors

Foreign Investments are not allowed in the following sectors through any route-

1. Lottery Business Including private or government lotteries, online lotteries, etc.
2. Chit Funds- It is a type of rotating savings and agreement between different persons to subscribe to a certain sum for a  money specified period of time.
3. Nidhi Companies.
4. Trading in transferable development rights.
5. Real estate or construction of farm houses  but prohibition on FDI in Real estate business will not include construction of town shops, residential and commercial infrastructure , roads and bridges and Real Estate Investments trusts which are registered and regulated by SEBI through the SEBI (REITs) Regulations, 2014.
6. Manufacture of tobacco products and tobacco substitutes.
7. Sectors not open for private investments – atomic energy.

Conclusion

The Central Government’s dedication towards increasing the inflow of foreign investment in India has been remarkable. Even through the approval route, the government has made the process more streamlined and the decision on the proposal is conveyed to the applicant quicker. Experts believe that the spike in FDI will continue in India. “FDI in India is likely to pick up going ahead on the back of a strong rebound in growth. Any pullback in FDI, I think, will only be temporary.” Frederic Neumann, co-head of Asian economics research at HSBC. 

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