This article is written by Nishka Kamath. This handy guide will serve as a handbook and navigate the reader through the fundamental regulatory compliance a foreign direct investor who wants to invest or learn about FDIs must know. It will also be beneficial for a lawyer, an advocate, or a legal professional dealing with FDIs in India.

Introduction

Foreign direct investments (FDIs) have been one of the most considerable aspects behind India’s rapid monetary development, thus opening up new routes for innovation, job creation, and technological advancement. In 2024, the Union Cabinet, chaired by Prime Minister Narendra Modi, ratified the amendment to the FDI (Foreign Direct Investment) Policy in the space sector. This has caused quite a favourable impact on the space industry of our nation. This Amendment defines 3 categories of space activities, namely:

1. Up to 49% under the automatic route for-

1. launch vehicles and associated systems or subsystems, 
2. creation of spaceports for launching and receiving spacecraft.
3. Up to 74% under the automatic route for-

1. satellite manufacturing and operation, 
2. satellite data products, ground segment, and
3.  user segment.
4. Up to 100% under the automatic route for-

1. manufacturing of components and systems/subsystems for satellites, 
2. ground segment and user segment.

This amendment brought in a lot of positive changes for the space industry like-

1. It removed ambiguity as specific categories (within the space industry) are defined now.
2. For investments under the automatic route, delays associating to government approvals are annihilated, thus ensuring quicker investment timeliness and ameliorating bureaucratic hurdles.
3. This Amendment also addressed national security concerns by levying limitations on particular sectors (like satellite launches).
4. It also helped in boosting investments in the space sector as the space sector was opened for private participation, while realising the Indian Space Policy 2023, and bringing up the Telecommunications Act, 2023.

If you are enthusiastic to go over more such insightful facts, please keep reading. 

Now, it is crucial you understand there are 4 main types of foreign investments, namely:

1. FDI (Foreign Direct Investment),
2. FPI (Foreign Portfolio Investment),
3. Foreign Indirect Investment, and
4. Sovereign Wealth Funds.

Please note: Before we read about FDIs, it is vital to note that shares and debentures can be part of FDIs and FPIs. An investment made in a share or debenture would form a part of an FDI if the investment is made with the intention of having a lasting interest and significant control in the Indian company. On the other hand, a passive investment that does not involve significant control over an Indian company would fall under an FPI. This article will focus mainly on FDI (Foreign Direct Investment). 

So, let us begin, shall we?

ABCs of regulatory compliances for FDI (Foreign Direct Investment) in India

Foreign investors, especially those who are exploring Indian markets, must learn the basics of FDIs. Doing so becomes quite important so such investors can make informed decisions. 

What exactly is Foreign Direct Investment (FDI)

In simple words, any investment that is made by an individual or a firm which is located in a foreign land or a foreign country is referred to as Foreign Direct Investment, commonly known as FDI. Usually, an FDI occurs when a foreign entity obtains ownership or controls stakes in the shares or establishes some sort of business in another country. Any foreign investment will be considered to come under the bracket of FDI only in cases when the investment is made in the form of-                              

1. Equity shares,
2. Fully and mandatorily convertible preference shares, and
3. Fully and mandatorily convertible debentures.

Please note: The FDI Policy (discussed in detail below) does not consent to issuance of any optionally convertible security.                                     

Under FDI, the investor has a say in the company’s day-to-day operations. Additionally, one must note that FDI is not simply the inflow of money but also the inflow of ‘technology, knowledge, skills and expertise/know-how.’ Rather, it is said to be one of the most significant sources of non-debt financial resources for the economic development of a country. Further, FDI is said to be a total of equity capital, long-term capital, and short-term capital, as shown in the balance of payments. It mainly includes activities like-

1. Taking part in the management,

1. Joint venture,
2. Transfer of technology and expertise.

Moreover, the stock of FDI is the net (i.e., outward FDI minus inward FDI) cumulative FDI for any given period. Direct investment excludes investment through the purchase of shares (if that purchase results in an investor controlling less than 10% of the shares of the company).

Examples of Foreign Direct Investment (FDIs) in India

Mentioned below are some instances of Foreign Direct Investments (FDIs) in India:

Investment made by Google in Jio Platforms

In the year 2020, Google announced an investment of about $4.5 billion (this comes to an average of 7.73%) in Jio Platforms- which is a subordinate of Reliance Industries. This investment was made with the main motive of stimulating the digital economy of India and broadening access to cost-effective smartphones and the internet.

Interesting fact: This investment is one of the biggest deals in recent Indian corporate fundraising sessions.

Investments made by Facebook in Jio Platforms               

In 2020, an investment of  $5.7 billion (an estimated ₹ 43,574 crore) by Facebook in Jio Platforms Limited. This investment made Facebook the largest minority stakeholder of the Platform. It was made with a belief that this investment will provide digital solutions to small businesses and also extend internet connectivity further.

Expansion of Amazon

We all know, the growth of Amazon is extremely impressive and remarkable. In January 2020, an announcement was made by Amazon claiming that an investment of $1 billion (which comes to an estimate of ₹75,000,000,000) is made by them in India to help 10 millions small and medium-sized businesses grow by selling their commodities online. It also aims to create 1 million additional jobs in India in the time period of 2020-2025.

Acquisition of Flipkart by Walmart 

In 2018, Walmart (which is an American multinational retail corporation) acquired a majority stake in Flipkart, one of the largest online retailers or e-commerce platforms in India. The same was done by investing about $16 billion (which comes to an estimate of ₹1,343,136,640,000). This investment paved the way for Walmart to establish a stronger presence in the growing online retail market in India.

Foreign Direct Investment (FDI) and its definitions

In accordance with the FEMA Regime, FDI is defined as an “investment through equity instruments by a person resident outside India in an unlisted Indian company; or 10 per cent or more of the post-issue paid-up equity capital on a fully diluted basis of a listed company”.

According to the definitions given by the World Bank–

FDI’s shorter definition says that it is the net inflow of investment to “acquire a lasting management interest” which can be 10% or more of voting stock, “in an enterprise operating in an economy other than that of the investor.”. Further, the short definition states that it refers to the sum total of-

1. Equity capital,
2. Reinvestment of earnings,
3. Other long and short term capital is shown in the balance of payments.

Furthermore the definition states that it shows the ‘total net’, i.e., “the net FDI in the reporting economy from foreign sources less net FDI by the reporting economy to the rest of the world. Data are in current U.S. dollars.reporting economy to the rest of the world. Data is in current U.S. dollars.”

The long definition of FDI states that it is the net inflow of investment to acquire a lasting management interest” which can be 10% or more of voting stock,  in an enterprise operating in an economy other than that of the investor. Further, it is said to be the sum total of 

1. equity capital, 
2. reinvestment of earnings, 
3. other long-term capital, and short-term capital as shown in the balance of payments. 

“This series shows total net, that is, net FDI in the reporting economy from foreign sources less net FDI by the reporting economy to the rest of the world. Data is in current U.S. dollars.”

What does Foreign Direct Investment (FDI) include

Broadly speaking, FDI includes several domains like:

1. M&As (mergers and acquisitions),
2. Greenfield investments (discussed in detail below),
3. Constructing new facilities,
4. Reinvesting profits obtained through overseas operations, and
5. Intra-company loans,
6. Equity capital,
7. Purchasing or acquiring pre-existing shares.

Types of Foreign Direct Investments (FDIs)

Basically, there are four types of FDIS, out of which two (horizontal and vertical) are of significant importance, and the other two (conglomerate and platform) types are emerging. Let us take a quick look at each of them.

Horizontal Foreign Direct Investment (FDI)

Horizontal FDI can be said to be the investment made by a domestic company in a foreign entity that belongs to the same industry. Say, for instance, a domestic company manufacturing fast fashion products may invest in a foreign company that has the same or similar products to offer. One can say that the domestic company will try to make a replica of its existing business conditions in a foreign country via horizontal FDI. Among the types of FDIs, one might encounter this often in their surroundings. Usually, horizontal FDI occurs when companies or organisations open a new branch or subsidiary in a foreign location. It can be said to be an extension of the company or entity in foreign locations. Further, horizontal FDI can also occur in the form of M&A (Merger and Acquisitions). A company might consolidate with or acquire a foreign entity that belongs to the same industry. Horizontal FDI can be beneficial for businesses as they can get revenue from foreign locations and extend their market share.

Basically, under horizontal FDI, a business spreads and enters a foreign nation through the FDI route without making any sort of amends in its core values. An instance of the same would be McDonald’s, the world’s largest fast food restaurant chain, making an investment in an Asian country to expand the number of stores in a particular region.

Vertical Foreign Direct Investment (FDI)

Vertical FDIs occur when a business invests in different supply chain processes in foreign locations. Investors invest their capital across different stages of production in foreign countries. Further, one must note that vertical FDI occurs in two manners, namely:

Investment at lower stages of the supply chain

This is when a company makes investments in foreign countries in lower stages of the supply chain. Say, for instance, in any process related to raw material extraction, manufacturing and other such lower stages of the supply. This process is also known as backward integration.

Investment at higher stages of supply

Whereas, a company or entity may also invest in higher stages of the supply chains in foreign locations. For instance, a company involved in diamond distribution can invest capital in a foreign company that is well-known for marketing diamond jewellery. It is pertinent to note that such an investment is also addressed as forward integration. While backward integration may not be of the same industry, forward integration typically occurs when it is related or when it belongs to the very same industry. Simply put, a business enters into a foreign economy to bolster a segment of its supply chain without amending its business in any manner.

An example of vertical FDIs would be if McDonald’s decided to buy a large-scale meat processing plant based in Canada or a European country to bolster the supply chain of meat in the target nation.

Conglomerate Foreign Direct Investment (FDI)

There are several instances when an investment is made in a domestic company in a whole different foreign entity, in a completely unrelated entity. When an investor invests his/her money in FDIs that are not related to their pre-existing businesses in the domestic company, it is referred to as conglomerate FDI. For instance, say, there is a domestic pharma company named Pharmasy, which may decide to invest in a foreign company that assembles automobiles. So, in the above scenario, the pharma and automobile industries are, in no way, linked to each other.

Please note: Conglomerate FDI is not everyone’s cup of tea. A foreign investor may find it quite difficult to work in entirely new operations, especially in a foreign country. Considering this, most of the foreign direct investors prefer to invest their capital in the same industry when investing in a foreign land. Reason being, establishing a totally unrelated business or acquiring a foreign company in an industry in which he/she has no prior experience can be quite an arduous task. Generally, those companies and investors who have a significant amount of capital and experience engage in conglomerate FDIs. Among the types of FDIs, conglomerate FDI is used by companies for diversification.

In other words, when a business organisation or individual invests in a foreign country in a totally different product or buys the whole entity altogether, it is known as conglomerate FDI. The main idea behind such an investment is to expand one’s business, add more business niches, and start new journeys in foreign nations. For instance, in the late 1980s, a clothing store was launched by Sir Richard Branson’s Virgin Group known as ‘Virgin Clothing’. However, the venture was not very successful, and now, very few outlets remain, most of them are based in the Middle East.

Platform Foreign Direct Investment (FDI)

Generally, at times, large-scale companies or MNCs (Multinational Corporations) make use of a country as their platform or hub for global operations. The organisation can select a foreign country as a hub for its global operations. Here, the company making use of the foreign country as a hub for its global operations may be said to be involved in platform FDI. Among the aforementioned types of FDI, this type is significantly complex in nature. Considering the same rationale, MNCs and large-scale companies indulge in platform FDI. Let us take a look at an example to understand this better. Let’s say, N&K, a global MNC, has established its R&D (Research and Development) centre in India. This MNC also decides to utilise this hub to manufacture, distribute and supply chain optimization. It takes this step because the Indian business landscape offers market access to all Asian countries. In such a scenario, N&K is using India’s platform for operations. Further, it is said to have an involvement in platform FDI.

In other words, this type refers to the expansion of a business to a foreign country; however, all the commodities and resources manufactured there are exported to third countries. This type of FDI is generally seen in free-trade zones of FDI-hungry countries. For instance, numerous luxury items and famous fashion brands are Manufactured in countries like Bangladesh, Vietnam and Thailand. These items are further sold in other countries, which is a clear case of platform FDI at work.

All you need to know about Foreign Direct Investment (FDI) in India

Where can Foreign Direct Investments be made in India

An investor can invest in any one of the following manners in India as each of these forms has its own unique characteristics and implications.

Equity Foreign Direct Investment (FDI)

Equity FDI is one of the most common FDIs where a foreign investor obtains a significant stake in a company based in India. Equity FDIs can be in the form of:

1. Common shares,
2. Preferred shares, or
3. Convertible debentures.

It gives the individual investing money a say in the management of the company.

Joint ventures

In a joint venture (JV), Indian and foreign companies unite to set up a new entity, thus sharing several factors, like:

1. Resources,
2. Risks,
3. Profits, and
4. Loss.

This form of investment is especially for those businesses that are seeking to leverage local expertise and market knowledge.

Wholly owned subsidiaries

Here, a foreign company configures a subsidiary in India, and the ownership and control of which is totally in the hands of the foreign entity. This offers total autonomy and permits foreign investors to independently implement business strategies.

Convertible instruments

Foreign investors can also invest their capital into companies of Indian origin through instruments like convertible preference shares or convertible debentures. Such instruments initially start as debt but can be later converted into equity, thus providing flexibility.

Foreign Direct Investment (FDI) in real estate

Any foreign investor who wants to invest his/her capital in India can do it through the real estate sector. One can directly invest their capital in properties or indirectly through Real Estate Investment Trusts (REITs) or Real Estate Mutual Funds (REMFs).

Routes

Automated and government route

In India, FDI can be divided into two routes, namely:

1. Automatic, and
2. Government route.

Investments made through the automatic route do not need prior approval from the government or other authorities; whereas, the investments that come under the government route need clearance from relevant ministries and people in power.

Foreign investors can invest in capital instruments, including equity shares, debentures, preference shares and share warrants that belong to an Indian company either via the automatic route or the government route. If the investment is made through the Automatic Route, the investor does not have to seek prior approval from the Government. However, if the investments are made through the government route, then seeking prior permission from the Government is a must. The appropriate Administrative Ministry/Department reviews proposals for foreign investment under the government route. Foreign Investment Facilitation Portal (aka FIFP) is the new online single-point interface of the Indian Government that allows investors to enable FDI. 

How exactly do Foreign Direct Investments (FDIs) work

FDI is one of the most important means to boost growth and development in Indian markets. It involves investors from foreign nations to directly add capital to Indian businesses and projects. Such an investment can take several forms, such as equity, joint ventures, or wholly owned subsidiaries. Such investments are made in multiple sectors with the main motive of gaining profits; some of these sectors are as follows:

1. Manufacturing,
2. Services, and
3. Infrastructure.

In order to attract investors into investing in Indian markets, India has developed and implemented a liberalised approach and further made provisions that would ease restrictions. All this took place in the last few years. This surely makes it favourable for investors to invest in India. Further, the Government of India takes regular initiatives to review and update these policies to remain competitive in the global market. FDI has proved to be beneficial to India in numerous ways. It has brought foreign expertise, technology, and job opportunities. Further, it helps bridge the trade deficit and contributes to overall economic growth. Whereas, in return, investors get access to a vast market, a workforce that is quite skilled and trained, along with receiving potentially high yields on their investment. FDI has helped the Indian economy in the following manner:

1. It helps companies maintain control on a global scale.
2. It has helped several business sectors in removing monopolistic operations.
3. At times, it also provides a cushioning effect in cases where there is an extreme decline in business activities, thus stabilising the markets.
4. It has paved the path for job creations as new employment opportunities are created when a business is evolving and growing its operations or manufacturing, inter alia, using an FDI investment, thus positively affecting the Indian economy.

Also, it is pertinent to note that foreign investments can either be ‘organic’ or ‘inorganic’. Under organic investments, an origin investor will invest funds to develop the business and accelerate growth in the preexisting established business. Whereas, inorganic investments are those investments when an investing entity buys out a business in its target country. In ever-so-growing, developing, and emerging economies like India and other parts of South-East Asia, FDI is said to have offered a stimulus to businesses that were in poor financial shape before. The Indian Government has taken several initiatives to ensure that a larger chunk of investment pours into the country across several sectors, including:

1. Defence production,
2. The telecom sector,
3. PSU oil refineries,
4. IT, etc.

Since FDI is a non-debt financial resource, it has the ability to provide a fillip to the economic development of India. FDI has been possible for two reasons: globalisation and internationalisation. However, one of the well-known economists of Canada, Stephen Hymer (also known as the ‘Father of International Business’), stated that foreign investments are much more likely to grow because of the following reasons:

1. Investors could gain control over companies based out in foreign lands.
2. It acted as a medium to get rid of certain monopolistic practices.
3. Last, but not least, as market imperfections will always exist, these investments will give companies a cushioning effect in case there is a sharp and unpredictable decline in business activity.

Did you know? If the total foreign equity inflow in the proposal exceeds Rs. 5000 crore, the concerned Administrative Ministry/Department must place the proposal before the CCEA (Cabinet Committee of Economic Affairs). Also, it may also consider the proposals which may be referred to it by the Minister in Charge of the concerned Ministry.

How can a company based in India receive foreign investment

Foreign investors can invest their capital and resources in the form of equity, joint ventures or wholly owned subsidiaries in Indian companies through automatic or government routes. The routes have been discussed in detail in the above passages. It is pertinent to note that the Government of India has initiated a new portal called ‘ Foreign Investment Facilitation Portal (FIFP)’, which acts as a single-point interface that allows investors to invest hassle-free in India. Further, this portal intends to ease the single window clearance of applications that are in the approval process. Apart from this, an investor is supposed to follow the sectoral cap or limit that is mentioned for each sector in the table of Schedule I of FEM (Non-debt Instruments), 2019 Rules. Furthermore, the investors must follow all the suitable rules and regulations, security conditions, and state/local laws/regulations. 

Pros and cons of Foreign Direct Investment (FDI)

Pros

FDIs can be a considerable aspect of economic growth, expansion, and development for countries across the globe. The following are some of the primary pros of FDI:

Boosts the economic growth of a country

FDIs can boost the financial growth of a country as they bring in monetary help and capital, which in turn aids in bolstering the economic development of that country. This, further, can be utilised in funding new projects, broadening the already existing projects or modernising infrastructure, thus creating employment opportunities and boosting productivity.

Providing access to international markets

FDIs provide access to international markets that can assist domestic companies in enlarging their customer base and escalating their exports. These investments can be incredibly favourable for small and medium-sized business organisations that may be unsatisfactory in having the vital resources, expertise, and skills to come into foreign markets on their own.

Transfer of technology and skills

Foreign investors who invest in India can bring alongside new technology, expertise and skills to the domestic economy that can help support productivity and competitiveness. This can assist in developing economies that do not have the necessary resources or adequate knowledge to bring out new technology or products.

Generating employment opportunities

FDIs have the ability to generate employment opportunities in the domestic economy, especially in labour intensive sectors. This, in turn, can help eradicate unemployment and poverty and also assist workers in upgrading and raising their standards.

Diversification of economy

FDIs can make the domestic economy more diverse by bringing about new industries, commodities and products into the market. This will help lessen dependency on one industry or export market, thus making the economy more resilient to external shocks.

More competitive environment

With foreign investors investing their capital, resources, technology and expertise in India, a more competitive business environment is said to have developed.

Improvement in quality

With FDIs, there is a major improvement in the quality of products and services in several sectors.

Increase in exports

Export is yet another method by which a company can grow faster. FDI can help a company expand its exports as companies can use the capital invested by the foreign investor to explore other locations and expand their product reach. Say, a company located in India can serve a business in Canada by shipping its products there. Exports can help organisations widen their revenue and increase India’s tax earnings, which would further support the economy.

Make exchange rates better

An investor investing his/her capital in any Indian business will lead to more foreign currency inflow, which in turn could help the Reserve Bank of India (RBI) keep surplus of foreign reserves, thereby, helping stabilise the rupee’s exchange rate.

Creates a competitive market

When foreign entities hailing from diverse nations come to India and invest their capital in an Indian organisation, it helps raise the standard of the business. This creates a ripple effect, forcing other competitors to upgrade their standards to stay in the market and to gain market share. This eventually creates healthy competition, eventually benefiting consumers of that product or resource.

Cons

There are some downsides of FDIs; they are as follows:

Can hurt local investors

Since foreign investors invest their capital and resources in Indian markets, competition between local investors and international giants has been seen to have been created. While this can prove to be beneficial for companies and consumers, there is a downside- it can transfer veto power out of the country (and transfer it to the investors in case the investor has taken a massive stake in the business). In such a case, the foreign investor will have the power and may demand that the company run on his/her terms. At times, their interests might not be in alignment with the company they have invested in or with the consumers in India.

Can cause economic colonisation

Since India has a long history of colonisation, a lot of stakeholders are under the fear that FDI would allow a modern-day version of the same. With FDIs, investors can have a major ownership over businesses in India, which would allow them to dominate and grow in a country where they have a political say.

Can affect domestic companies

With foreign investors investing in India, domestic investors and companies can be adversely affected, considering the higher investments, better technology and resources put forth by the foreign investors. Small companies and investors may not be able to keep up with the MNCs in their sector; this poses a risk to domestic firms closing their organisations and companies considering the increased amount of capital and investments in FDIs. Additionally, local businesses lose out as big corporations take charge or ownership of the whole market. One instance of this could be Walmart, whose entire portfolio is now owned by Flipkart (as discussed in the aforementioned paragraphs).

Profit repatriation

With FDIs, there is always the risk of profit repatriation, meaning any profit generated in India will not enter the domestic economy.

Foreign Direct Investment (FDI) permitted and restricted sectors as per the FDI Policy, 2020, and NDI Rules

In India, FDIs are allowed in most sectors, and the sectoral lists for FDI fall under 4 categories, namely:

1. 100% Automatic route,
2. Up to 100% Automatic route,
3. Up to 100% FDI permitted under Automatic & Government,
4. Up to 100% FDI permitted under Automatic & Government.

As reiterated above, automatic route investments are those that do not need prior permission from the government or other authorities; whereas, the investments that come under the government route need approval from relevant ministries and people in power.

FDI is also subject to other sectoral laws or regulations of the relevant industry regulators. Let’s examine each of these routes and each sector involved in them.

Permitted sectors

100% Automatic route

Category	Sector/industry	FDI Cap	Approval route
Advanced engineering	Automobile	100%	Automatic
Advanced engineering	Auto-components	100%	Automatic
Aviation	Airports -Greenfield projects	100%	Automatic
Aviation	Airports -Brookfield projects	100%	Automatic
Aviation	Airports-Existing projects	100%	Automatic
Aviation	Air-Transport Services (Non-Scheduled Air Transport Services/ Helicopters services/ seaplane services requiring DGCA approval)	100%(It is 100% for NRIs)	Automatic
Aviation	Ground Handling Services subject to sectoral regulations and security clearance	100% (It is 74% but 100% for NRIs)	Automatic
Aviation	Maintenance and Repair organisations; flying training institutes; technical training institutions.	100%	Automatic
Finance and banking	Asset Reconstruction Companies	100% [It is 100% of paid upcapital of ARC(FDI+FII/FPI)]	Automatic
Finance and banking	Non-banking Finance Companies (only for some selected  activities)	100%	Automatic
Finance and banking	Other Financial Services	100%	Automatic
Finance	Credit Information Companies	100%	Automatic
Infrastructure	Railway Infrastructure	100%	Automatic
Infrastructure	Construction development projects (it includes- development of townships, constructing any residential or commercial apartments or premises, constructing roads and bridges, building hotels, making hospitals, opening an educational institute, recreational facility, city and regional level infrastructure, townships)	100%	Automatic
Infrastructure	Industrial parks (both, new and existing)	100%	Automatic
Agribusiness	Agriculture and animal husbandry	100%	Automatic
Advanced engineering	Automobile	100%	Automatic
Agribusiness	Agriculture and animal husbandry  (including breeding of dogs)	100%	Automatic
Agribusiness	Floriculture, Horticulture, Apiculture and Cultivation of Vegetables & Mushrooms under controlled conditions	100%	Automatic
Agribusiness	Production and developing a new variety of seeds and planting material	100%	Automatic
Agribusiness	Services related to agro and allied sectors	100%	Automatic
Livestock	Pisciculture, Aquaculture	100%	Automatic
Media and Broadcasting	Teleports (setting up of up-linking HUBs/Teleports), DTH (commonly known as Direct to Home), Cable Networks, Mobile TV, HTS (also known as Headend-in-the Sky Broadcasting Service)	100%	Automatic
Media and Broadcasting	Up-linking of Non ‘News & Current Affairs’ TV Channels/Down-linking of TV Channels	100%	Automatic
Media and Broadcasting	Publishing/printing of scientific and technical magazines/speciality journals/ periodicals, subject to guidelines by the Ministry of Information and BroadcastingPublication of facsimile editions of foreign newspapers	100%	Automatic
Retail	Capital Goods, Cash & Carry Wholesale Trading (including sourcing from MSEs)	100%	Automatic
Retail	Business to Business (B2B) e-commerce	100%	Automatic
Retail	Single Brand product retail trading	100%	Automatic
Natural gas and Petroleum	Coal and Lignite [provided the regulations of Coal Mines (Nationalization) Act, 1973 are followed]	100%	Automatic
Natural gas and Petroleum	Activities related to exploration, building and investing in marketing, petroleum product pipelines, naturalgas/pipelines, LNG Regasification infrastructure, carrying on a proper market study and formulation and Petroleum refining in the private sector, subject to the existing sectoral policy and regulatory framework	100%	Automatic
Natural gas and Petroleum	Mining and exploration of metal and non-metal [provided the regulations of Mines and Minerals (Development & Regulation) Act, 1957 are followed]	100%	Automatic
Natural gas and Petroleum	Renewable Energy	100%	Automatic
Natural gas and Petroleum	Thermal Power	100%	Automatic
Business	E-commerce Activities	100%	Automatic
Food	Food Processing	100%	Automatic
Jewellery	Gems & Jewellery	100%	Automatic
Accessories	Leather	100%	Automatic
Accessories	Textiles & Garments	100%	Automatic
Shipping	Ports & Shipping,	100%	Automatic
Others	White Label ATM Operations and Insurance & Insurance Intermediaries	100%	Automatic
Others	Tourism & Hospitality	100%	Automatic
Others	Electronic Systems	100%	Automatic
Others	Education	100%	Automatic
Others	Courier services	100%	Automatic
Others	Private Security Agencies	100%	Automatic

Upto 100% Automatic route

Category	Sector/industry	FDI Cap	Approval route
Finance and banking	Infrastructure companies in Securities Markets particularly include stock exchanges, depositories and clearing corporations, provided they are in compliance with provisions set forth by SEBI)	49%(FDI + FII/FPI)	Automatic up to 26%Government beyond 26%
Healthcare	Medical Devices	100%	Automatic up to 100%
Natural gas and petroleum	Petroleum Refining  (By PSUs)	49%	Automatic
Other	Pension	49%	Automatic
Other	Power Exchanges	49%	Automatic

Upto 100% FDI permitted under Government route

Category	Sector/industry	FDI Cap	Approval route
Banking and Finance	Banking- Public Sector subject to Banking Companies Acts 1970 and 1980.	20% (FDI+FII/FPI)	Government
Advanced Engineering	Defence	49%	Government up to 100% of local defence ventures after obtaining approval
Media and Broadcasting	Broadcasting Content Services (FM Radio, uplinking of news and current affairs TV Channels)	49%	Automatic up to 49% Government beyond 49%
Media and Broadcasting	Uploading and/or streaming of ‘News and Current affairs’ through digital media platforms	26%	Government
Media and Broadcasting	Print Media (publishing and/or printing of scientific and technical magazines/speciality journals/ periodicals and facsimile editions of foreign newspapers)	100%	Government
Aviation	Investment by foreign airlines	49%	Government beyond 49%
Retail	Food products	100%	Government
Retail	Multi-Brand Retail Trading	51%	Government
Natural gas and petroleum	Mining & Minerals separations of titanium bearing minerals and ores, its value addition and integrated activities	100%	Government
Infrastructure	Satellite- establishment and operation provided it is in compliance with guidelines set by Department of Space/ISRO)	100%	Government
Others	Core Investment Company	100%	Government

Upto 100% FDI permitted under Automatic and Government

Category	Sector/industry	FDI Cap	Approval route
Aviation	Air transport services (Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline; Regional Air Transport Service)	Up to 49% (auto)(Up to 100% under automatic route for NRIs) + above 49% and up to 74% (Govt.)	Automatic up to 49%Government beyond 49%
Finance and banking	Banking (Private sector)	74%(FDI+FII/FPI)	Automatic up to 49%Government beyond 49% and up to 74%
Healthcare	Automatic up to 49%Government beyond 49%	74%	Automatic up to 74%Government beyond 74%
Healthcare	Healthcare (Brownfield)	74%	Automatic up to 74%Government beyond 74%
Advanced Engineering	Defence	74%	Automatic up to 74%Government beyond 74%
Pharmaceuticals (Brownfield)	Pharmaceuticals (Brownfield)	74%	Automatic up to 74%Government beyond 74%
Others	Private Security Agencies	49-74%	Automatic up to 74%Government above 49% and up to 74%
Infrastructure	Telecom Services	49%	Automatic up to 49%Government beyond 49%

Points to be taken into consideration while reading about the permitted sector as per the FDI Policy 2020

• All the information stated above is in alignment with the extant Consolidated FDI Policy that has been issued by  DPI, which goes through amendments from time to time.
• In those sectories and/or activities that are not mentioned above, FDI is permitted up to 100% when it comes to investments via automated route, provided the investment is in lieu with the rules, law, regulations and provisions prevailing at that time, the security and other such considerations. 
• Any individual who is not a resident of India can invest his/her capital in India, subject to the FDI Policy, besides those sectors or activities that are not allowed. Further, if an entity of a country shares a land border with India or where the beneficial owner of investment into India is situated or is a citizen of any such country, the person can make investments only under the government route. Furthermore, a citizen who is from Pakistan or an entity that is based in Pakistan can invest only through the government route, in sectors or activities that do not include:

1. Defence,
2. Space,
3. Atomic energy, and
4. Those sectors and activities that are not allowed through foreign investments.

Restricted sectors

A foreign investor cannot invest through FDIs in India in the following sectors:

1. A business that includes a lottery, including government/private lottery, online lotteries, etc.
2. Gambling and betting that includes casinos, etc.
3. Chit funds (it is a type of investment where all the members unanimously come together and deposit a pre-agreed amount of money in a pot).
4. A Nidhi company (it can be defined as a type of Non-Banking Financial Company (NBFC), which is formed to borrow and lend money to the members of the company. This type of company relies on mutual benefit and instils the habit of saving among its members).
5. TDRs (also known as Trading in Transferable Development Rights).
6. Businesses related to real estate or constructing farmhouses.
7. Producing cigars, cheroots, cigarillos and cigarettes, of tobacco or substitutes of tobacco.
8. Activities or sectors that are not open to private sector investment, for instance, atomic energy.
9. Legal, accounting and architectural services.
10. B2C e-commerce.

Key laws and regulatory compliances every foreign direct investor must know about

In India, the main law that governs and regulates FDIs is FEMA (Foreign Exchange Management Act), 1999. Currently, the FDI framework is governed by the Consolidated Foreign Direct Investment Policy Circular dated 15-10-2020, as modified through several Circular/Press Notes/Press Releases which are issued by the Department for Promotion of Industry and Internal Trade (DPIIT), Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, dated 17.10.2019 notified by the Department of Economic Affairs (DEA), Ministry of Finance, Government of India which superseded the erstwhile Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017. Further, it is pertinent to note that the payment of inward remittance and reporting requirements are specified under the  Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, which has been issued by the RBI. Let us take a look at all the other laws and regulations that govern FDIs in India.

Point to be noted: This is not an all-exhaustive list of laws and regulatory compliances for foreign direct investors in India. There are several amendments that take place time and again, so it is always advised to consult a proper advisor before one decides to invest their assets and capital. Further, hypothetical examples are given at several places for better understanding of the readers.

Foreign Exchange Management Act (FEMA), 1999

Due to the increase of capital inflow in the Indian economy, a flexible system was designed, which led to the replacement of FERA by Foreign Exchange Management Act (FEMA), 1999, aka FEMA Regime. This Regime, as amended from time to time, is one of the major laws governing FDI regimes in India. Under this Act/Regime, the government has a major goal of managing the capital inflow and outflow rather than strictly regulating the same. 

Further, as per FEMA Regime, FDI is defined as an “investment through equity instruments by a person resident outside India in an unlisted Indian company; or 10 per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed company”.

Shares

Fully and mandatorily convertible preference shares along with fully and mandatorily convertible debentures have to be in accordance with FEMA. The price or conversion formula for conversion of instruments must be ascertained upfront during the issuance of the instruments and must not, in any manner, be lower than the fair value worked out, during the issuance of such an instrument, as per the set guidelines by FEMA.

Entities eligible to receive Foreign Direct Investment

When it comes to eligible investors, the FEMA Regime states that an entity means an Indian company or a LLP (Limited Liability Partnership). FDI is allowed in LLPs engaged in sectors where 100% FDI is allowed under the automatic route, and there are no foreign investment-linked performance conditions.

In 2022, a new circular was issued by the DPIIT (dated 14 March 2022), to widen the scope of the term ‘Indian company’. Post the circular, the definition of the term included “a body corporate established or constituted by or under a central or state act, which is incorporated in India”. The main motive behind such a modification was to introduce the word ‘corporation’ as an Indian entity to pave the path for foreign investors in the Life Insurance Corporation (LIC) of India, the largest public sector insurance company in India, which was established as a ‘corporation’ under the Life Insurance Corporation Act, 1956. From April 2022, FDI in LIC is permitted up to 20% under the automated route.

Please note: The FEMA Regime specifically mentions that societies, trusts and any other excluded entities do not come under the India company and consequently, are not qualified to be regarded as investee entities under the FEMA Regime.

Types of securities

As per the FEMA Regime, with respect to the FDI mode, the following equity instruments of an Indian company could be invested into-

1. Equity shares (this includes partly paid shares),
2. Fully paid and mandatorily convertible preference shares,
3. Fully paid and mandatorily convertible debentures, and
4. Share warrants.

Please note: The FEMA Regime also authorises clauses in equity instruments that are subject to a lock-in period of 1 year or as mentioned in the requirements of the particular sector. Once the lock-in period has passed, the non-resident is permitted to exit without any assured return. Additionally, non-residents can invest in the capital contribution of LLPs.

Convertible notes

Apart from the equity instruments mentioned above, the FEMA Regime authorises foreign investment by way of convertible notes. The key features of convertible notes are as follows:

1. They can be issued only by start-up companies for an amount of ₹2.5 million or more in a single tranche;
2. They are regarded as hybrid instruments having characteristics of both debt and equity. These instruments are prima facie acknowledged as a debt, which at the option if the holder of the convertible note is either repayable or convertible into equity of the start-up company, within a period of 10 years from the time of issuing the convertible note; and
3. Issuance and transfer of convertible notes to non-residents are subject to adherence to the pricing guidelines, entry routes, and sectoral conditions prescribed by the FEMA Regime.

Reporting requirements

Foreign investors are obliged to report their investments (including reporting about the details of the investment, the source of funds, etc.), to the RBI or authorised banks (could be through the bank account opened by the foreign investors under the FEMA regulations).

Limitations of investment

FEMA further specifies the maximum percentage of capital a foreign investor can invest when it comes to some sectors. A foreign investor has to ensure such requirements are being met, while investing in India.

Securities and Exchange Board of India Act, 1992 and SEBI Regulations

Investors have to ensure that their investments are in accordance with the relevant regulations of SEBI, like the Issue of Capital and Disclosure Requirements (ICDR) Regulations/Substantial Acquisition of Shares and Takeovers (SAST) Regulations, as well as other applicable rules and regulations. Let us take a quick look at some of the regulations that are guidelines a foreign investor while investing in India must keep a note of.

Role of SEBI in FDI

Regulating stock exchange markets

It regulates the stock exchange and ensures every process runs in a fair, transparent and orderly manner.

Protection of investors

It plays a crucial role in protecting the interests of the investors in the securities market and does the same for investors investing through FDIs.

Regulatory compliances related to SEBI for investors investing through FDIs

There are some rules and regulations related to SEBI that come into play, which an investor investing through FDIs must take note of, namely:

Registering with SEBI

Every foreign investor and foreign entity investing in Indian securities has to register with SEBI.

Limitations on investment and restrictions 

SEBI (along with other acts, rules, and regulations) imposed a bar on how much percentage of foreign investment is allowed. The criteria of percentage is strictly based on the category of the business and its type of route (government or automated).

Pricing guidelines

For the purpose of acquisition and transfer of equity instruments under the FDI mode, the FEMA Regime provides some guidelines related to pricing which are in accordance with the SEBI guidelines. 

Issuance and transfers of equity instruments from residents to non-residents

For a listed Indian company

Here, the pricing of equity instruments of a listed Indian company which is to be issued or transferred to a non-resident must not be below the range determined by the relevant SEBI guidelines.

For an unlisted Indian company

For the issuance or transfer of equity instruments of an unlisted Indian company, the pricing of equity instruments must not be below the fair value as ascertained by the SEBI registered merchant banker, CA (chartered accountant) or practising cost accountant,  in accordance with an internationally accepted pricing methodology, on an arm’s-length basis (‘fair value’).

FDI instead of FPI

As per one of the many SEBI guidelines, if the FPI reaches or exceeds 10% of the total paid-up equity capital of a company on a fully diluted basis, they must follow extant FEMA rules in this regard. Further, if such FPI and investor group decide to opt to treat their entire investment into a company as FDI under Regulation 22(3), then in such a case, the FPI, including its investor group, shall not make further portfolio investment in that company under the Regulations. Instead, such an investment shall be treated as FDI, provided the prescribed RBI norms (as amended from time to time) are followed. 

Please note: The FPI, group investors have to inform the respective custodians of this, who, in turn, will address this to the board, depositories and the issuer.

Foreign Trade (Development and Regulation) Act, 1992

The Foreign Trade (Development and Regulation) Act, 1992, governs and regulates India’s foreign policy. This Act was enacted as a substitute for the Import and Exports (Control) Act of 1947. This Act, now, governs and handles the whole import and export scenario (simply put, it looks after the foreign trade) of India. This Act grants the Central Government the authority to perform several duties and take actions relating to developing an appropriate framework for developing and standardising foreign commerce. Further, as per this Act, the Central Government has the power to enact laws related to foreign commerce, which is where FDI comes into play. Furthermore, the Act also entrusts the Central Government with the authority to make any provisions related to the formulation of national import and export policy. So, if any investor wants to invest their capital in India, some provisions of this Act will be applicable as this Act permits the Central Government to appoint officers and authorities to carry out all foreign trade policy as per the rules (for instance, designate a Director-General by notifying about his/her appointment in the official Gazette and for the Director-General to carry out activities relating to foreign trade policies).

NDI Rules

The Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (commonly addressed as the ‘NDI Rules’) define FDI as “ an investment through equity instruments by a person resident outside India in an unlisted Indian company, or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company”. 

Did you know? The Indian Government and RBI have issued the NDI Rules and FDI Policy to govern FDI into Indian entities.

Interconnected relationship between FDI and NDI

The FDI Policy puts forth the conditions on investment, entry routes for different sectors (i.e., automatic or governmental approval), limits up to which investment is allowed in different sectors, eligible investment instruments, etc. These policies are enacted into law through NDI Rules.

Transactions that may be subjected to Foreign Direct Investments (FDIs)

Any sort of investment made by individuals residing outside India is subject to the NDI Rules. Simply put, the term investment can be described as any activity related to subscribing, acquiring, holding or transfer of any security or unit thus issued by an individual who is a resident of India. Further, all investments are generally subject to the NDI Rules; however, there are certain categories prescribed for different sectors under the FDI Policy. Most of the sectors allow 100% FDI, i.e., an investment up to 100% in the issued and paid-up capital of the investee company or about 100% of the capital contribution in case of LLP under the automatic route (meaning those routes that do not need prior governmental approval). These thresholds are discussed above under the ‘FDI permitted and restricted sector as per FDI Policy, 2020, and NDI Rules’ section.

Permitted investments under Non-debt Instruments (NDI) Rules

As per the NDI Rules, FDI includes any investments carried out by an individual residing outside India in equity instruments of Indian companies. As reiterated time and again, for listed entities, investments up to 10% or more of the post-issue paid-up capital is treated as FDI. Further, the following investments are allowed under the NDI Rules:

Equity shares

This includes partly paid equity shares, provided that about 25% of the consideration is received upfront and they are fully called-up within a year of issuance.

Convertible debentures

These have to be fully and mandatorily convertible and must be fully paid.

Preference shares

These also have to be fully and mandatorily convertible and must be fully paid.

Share warrants

For share warrants, at least 25% of the consideration must be received upfront and the balance is to be received within 18 months from the date of issuance.

Did you know? Apart from the above-mentioned equity instruments, FDI is also made an exception for start-ups.

Materiality thresholds and other requirements

As stated in the FDI Policy, the following are –

1.  Up to 100% in case of-

1. automatic routes for tea, coffee, plantations, airports, etc., or
2. government approval route for mining and mineral separation, titanium-bearing minerals and ores, publishing or printing scientific and technical magazines, etc.
3. Up to 74% FDI allowed-

1. under the automatic route for pharmaceutical defence, etc., or
2. government approval route for private sector banking, publishing newspapers, etc.
3. Up to 49% for

1. automatic route for air transport services, private sector banking, etc., or
2. government approval route for terrestrial broadcasting FM, up-linking news and current affairs, etc.
3. Up to 26% for
4. government approval route for uploading news and current affairs through digital media.

Acquisitions

Acquisitions of the foreign parent/holding company of an Indian investee company do not fall under the bracket of NDI Rules, until and unless such acquisition triggers the need to seek approval from the government for an investment made in the Indian entity. For example, in case the transactions involve an entity or beneficiary in an FDI restricted country.

Internal restructuring 

In case of internal restructuring, the NDI Rules will be applicable only if the transferee is an individual who lives outside India, which at the first place resulted in FDI in the Indian investee company. Further, if the share transfer is between a resident and non-resident (even in case the transferee is a resident of India), all the reporting requirements as per the NDI Rules will be applicable.

Greenfield and brownfield investments

NDI Rules and FDI Policy are applicable to both, greenfield and brownfield investments. You may wonder what exactly these greenfield and brownfield investments are? Let’s find out!

Greenfield investment 

Under greenfield investment, a company develops and constructs its own brand new facilities from the group up. They can be built anywhere but are found mostly in the countryside or rural areas.

Did you know? It’s quite an uncommon sight to find a Greendale site near the city centre these days.

Brownfield investment

Whereas, in brownfield investment companies purchase or lease pre-existing facilities, thus not building them from scratch. They are particularly located in urban areas.

The act of evocation

One may wonder whether an FDI authority or other such governmental body has the power of evocation/ex-officio/call-in powers? To answer the question, yes, the RBI is the statutory administrator of the NDI Rules and has the authority to interpret and issue instructions, and publish circulars and clarification as it may deem fit to ensure the provisions of the NDI Rules are correctly implemented. Further, some powers and functions have been delegated to authorised dealer banks (i.e., those banks who have been permitted to deal in foreign exchange by the RBI via which foreign payments and transactions need to be routed). Authorised dealer banks are governed by the instructions and directions put forth by the RBI as and when required. 

Furthermore, authorised bank dealers have been entrusted with the responsibility to verify the documents of investors further or obtain/request evidence for verifying the transactions thus reported and ensure that they are in accordance with the requirements set forth by the NDI Rules and FDI Policy. The Directorate of Enforcement (which was established under FEMA) and its officers have the authority to look into any matter that contravenes FEMA regulations. These officers have the authority to issue summons, search, seizure, etc., the duties and responsibilities being quite similar to the officers under Indian tax law to investigate contraventions of tax law.

Sectors under the FDI scope

As reiterated above, there are different sectors which have different limits for FDI (in percentage) as subjected to the NDI Rules and FDI Policy. In cases where the same is not mentioned, 100% FDI under the automatic route will be allowed. 

Qualified investors

As per the NDI Rules, any non-resident of India can only invest in India if he/she fulfils all the conditions mentioned under the NDI Rules and FDI Policy. A person residing in India can be defined as-

1. Any person living in India for more than 182 days during the course of the preceding economic year (April-March) subject to limited expectation (i.e., any person who has shifted to a foreign nation for employment or the like),
2. Any person or corporate body that is redirected or based in India, or
3. Any office, branch, or agency outside India that is owned or controlled by a person residing in India.

Downstream foreign investment

In cases when an Indian entity is not ‘owned’ or ‘controlled’ by any individual(s) residing in India, any investment carried out by such an entity in another Indian entity will be regarded as downstream foreign investment. The same will be governed by the NDI Rules and FDI Policy. Here, the term ‘owned’ refers to a beneficial holding or more than 50% of the equity instruments of a company. Whereas, the term ‘controlled’ referred to the power to appoint a majority of directors or to control the management of the company or policy decisions.

Procedures

Before or post-closing filing

In case the proposed transaction comes under the purview of government approved routes as stated under the NDI Rules and FDI Policy, such approval must be obtained before the investment of the target India entity is completed. However, if the proposed transaction comes under the purview of a government approved route (while the requirements stated under NDI Rules and FDI Policy continue to apply- for instance, the pricing guidelines for share transfers and issuances to non-residents), the investment has to be reported to the authorities only as a post-closing action, i.e., after the investment is complete.

Please note: Reporting all the obligations along with other restrictions, limitations and conditions under the NDI Rules and FDI Policy are opposite to investment through both the routes (i.e., the government and the automatic route).

Pre-closing filing

In case the proposed transaction comes under the purview of government approved routes as stated under the NDI Rules and FDI Policy, it is mandatory that one seeks approval before the investment is completed. In these instances, such approval must, therefore, be a condition precedent to the completion of a transaction.

Please note: Irrespective of the fact that the translation falls under the government or automated route, post-closing reporting to the authorities is compulsory.

Post-closing filing

In case the proposed transaction comes under the purview of government approved routes, pre-filing the application for approval and obtaining approval is mandatory before the translation is closed. Further, if the transaction falls under the automatic route, or even if it is government approved that has been sanctioned, the authorities can impose the prescribed penalty if any of the provisions under the NDI Rules or FEMA has been infringed.

Advance ruling

The NDI Rules and the FDI Policy do not offer a specific way to get an official ruling in advance to ascertain if a particular FDI proposal needs government approval or meets other conditions under the NDI Rules. However, if such a need arises, the involved parties can approach the RBI via their authorised dealer bank to seek their advice on such matters before moving forward with such a transaction. Most of the authorised dealer banks tend to adopt a conservative approach to the requirements under the NDI Rules and FDI Policy and may suggest that an application be made for approval in case there is any doubt about the application of the sectoral conditions or NDI Rules.

Timing for filing

FDI proposals that need government approval with respect to the NDI Rules and FDI Policy must be submitted online with the DPIIT through the Foreign Investment Facilitation Portal. The same must include the necessary supporting documents. The application will then be forwarded by the DPIIT to the relevant governmental body or ministry for approval based on the sector where FDI was proposed, amongst other factors (regarded as the ‘Competent Authority’). Further, please note, as per the Standard Operating Procedure for Processing FDI Proposals that has been published by DPIIT-

1. The estimated time period for processing an FDI proposal is 12 weeks (however, in reality, it may take more time).
2. If there are no major issues in the application and the documents thus submitted, the approval can be granted within 16 weeks.

Conditionality of approval

Type of conditions or commitments

Apart from the conditions mentioned under the NDI Rules relating to FDI, the competent authority may impose some more conditions. An example of the same could be an FDI proposal in the mining sector which may be subject to specific conditions imposed by the Ministry of Mining along with requiring the applicant to implement pollution control measures.

Certain conditions set forth by the competent authority

1. It is not crucial to seek prior permission from the competent authority in case there is an increase in the increase in the amount of foreign equity, as long as the percentage of foreign/non-resident Indian (NRI) equity remains unchanged and the sum of foreign equity is within an amount as specified (in INR).
2. The Government, as it deems fit, must take proper steps to prevent air, water, and soil pollution.
3. Any claims relating to tax relief under the Income Tax Act, 1961, or relevant tax treaties are reviewed independently by the tax authorities to ascertain eligibility and extent. The approval of the competent authority, does not, in itself, constitute recognition of eligibility for such relief.
4. Approval from the Competent Authority does not automatically grant any immunity from tax investigations aimed at determining the applicability of specific or general anti-avoidance rules.

Please note: For FDI proposals in the defence sector, the Competent Authority may examine closely and thoroughly the proposal on national security grounds and impose conditions as they deem fit to safeguard security of the nation.

Level of discretionary power entitled to the authorities

The DPIIT and Competent Authority have been entrusted with the authority to approve (with or without conditions), or reject any FDI proposals. Also, the RBI has the authority to (upon making a proper application for sufficient reasons) allow a person residing outside India to invest in India subject to such conditions as it may consider fit.

Role played by other national authorities

While the relevant ministry or government department is the Competent Authority, that processes an FDI proposal application, some foreign investment proposals need security clearance from the Ministry of Home Affairs, and include:

1. Investment in broadcasting, telecoms, satellites-establishment and operation, private security agencies, defence, civil aviation, and mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities; and 
2. Transactions that involve an entity or beneficial owner located in a FDI Restricted Country.

Sanctions

For breach of conditions and/or  commitments attached to the approval

In case there is any breach of conditions enlisted under the NDI Rules or any approval granted by the authorities for FDI, a punishment of up to 3x times the sum involved in the breach may be imposed.

For investment carried out without prior approval

If any FDI transaction was carried on that requires government approval as per the NDI Rules was required previously and the same was not followed, a penalty of 3x times the sum involved in the contravention/breach may be imposed. Further, apart from the penalty, the adjudicating authority will require that the securities in which the contravening FDI transaction has been carried on be confiscated by the government. Furthermore, the parties may also have to (based on the sensitivity of the sector) take the following steps:

1. Undertake a divestment of the FDI made; or
2. Make an application seeking post facto approval for the investment (and compound the contravention by paying the penalty imposed).

COVID– special regime: a must-know detail

To prevent any opportunistic takeovers/acquisitions of companies of Indian origin, considering the COVID-19 Pandemic, a Press Note was issued in April 2020. As per the Note, any entity or citizen from a country subject to FDI restrictions can invest in FDI only through the government route. Furthermore, if there is any transfer of ownership in an existing or future FDI in an Indian entity, whether directly or indirectly, that results in beneficial ownership falling under these limitations, seeking government approval becomes integral for such a change relating to beneficial ownership.

Foreign Direct Investment Policy (FDI Policy)

Please note: Before we begin reading about the latest FDI Policy, it is pertinent to mention that-

1. The FDI policy was introduced in India in 1991, as part of the Foreign Exchange Management Act (FEMA). In this year, the Government of India initiated a series of reforms that liberalised the policy.
2. India’s FDI Policy has undergone several changes since the country’s economy opened in 1991.
3. The period between 1948 and 1968 was regarded as a ‘cautious welcome’. 
4. The FDI Policy has undergone several amendments since its implementation, including-

1. Consolidated FDI Policy Circular of 2020,
2. Consolidated FDI Policy Circular of 2017,
3. Consolidated FDI Policy Circular of 2016,
4. Consolidated FDI Policy Circular of 2015,
5. Sectors where Government approval is required,
6. Sectors Under Automatic Route with Conditions.

Consolidated Foreign Direct Investment (FDI) Policy Circular of 2020

The Consolidated FDI Policy Circular of 2020 came into effect on October 15, 2020. The main objective behind implementing such a policy by the Government of India was to attract and promote FDIs to enhance domestic capital, technology, and skillset, thus, accelerating economic growth and development.

General conditions on FDI, as mentioned in the 2020 policy

Eligible investors 

1. A foreign entity can invest his/her capital and resources in India, provided the investment is made in sectors or for activities that are not prohibited. Further, an entry or individual can invest only through the Government route if the beneficial owner resides in a place that shares a land border with India.
2. NRIs who live in Nepal or Bhutan or are citizens of Nepal or Bhutan, can invest in the capital of Indian companies on a repatriation basis. However, these investors have to adhere to the condition that the investment amount must be paid only via inward remittance in free foreign exchange by way of normal banking channels.
3. Further, OCBs (Overseas Corporate Bodies) since September 16, 2003, are no longer recognized as a class of investors in India. It is noteworthy that former OBCs based outside India and are not under the purview of adverse notice of RBI, have the permission to make fresh investments as incorporated non-resident entities, by following the guidelines mentioned in the FDI Policy and Foreign Exchange Management (Non-Debt Instrument) Rules, 2019.
4. Furthermore, if a company, trust, or partnership firm that is based outside India and is the owner and controlled by NRIs (non-resident Indians), then they have the permission to invest in India with the same special provisions that are available to them under the FDI Policy.

Eligible investee entity 

Indian company

An Indian company can issue capital against FDI.

Partnership firm or proprietary concern

1. An NRI can invest his/her capital in a firm or proprietary concern in India or on a non-repatriation basis. However, the following rules have to be followed:

1. The amount is invested by inward remittance or out of NRE (Non-Resident External) or FCNR(B) [Foreign Currency Non-Resident (B)] or NRO (Non-Resident Ordinary) account maintained with Authorised dealers or authorised banks.
2. That firm or proprietary concern is not affianced with-

• Agriculture,
• Plantation,
• Real estate business or 
• Print sector.

3. The amount thus invested shall not be eligible for repatriation outside India.

2. NRIs may take prior permission from the RBI to invest in sole proprietorship concerns/partnership firms with the option of repatriation. Ultimately, the Government of India has the discretion to decide the application. 
3. Any individual residing outside India and is not an NRI can make an application and seek prior permission from the RBI for investing in the capital of a company or a proprietorship concern or any group of individuals in India. The application will be decided by consulting the Government of India, so whether or not the application will be approved will depend on the discretion of the Government. 
4. When it comes to restrictions, an NRI is not permitted to make investments in a firm or proprietorship concern that is related to:

• Agriculture,
• Plantation,
• Real estate business or 
• Print sector.

Trusts

Any individual who does not reside in India does not have the authority to invest in trusts other than that of VCF registered and regulated by SEBI and ‘Investment vehicle’. 

LLPs (Limited Liability Partnerships)

Any foreign investor can invest in LLPs, provided these conditions are fulfilled:

1. Foreign investment is allowed under the automatic route in LLPs that operate in sectors or activities where 100% FDI is permitted under the automatic couture only and there are no FDI-linked performance conditions.
2. Also, any Indian company or an LLP that has foreign investment can also invest in another LLP, but only in sectors that are 100% allowed under the automatic route and there are no FDI-linked performance conditions.
3. The conversion of an LLP with foreign investment and is operating in sectors or in activities where 100% FDI is allowed via automatic route, and there are no FDI-linked performance conditions. Just like that, the conversion of an LLP that has foreign investment and is operating in sectors or in activities where 100% FDI is allowed via automatic route and there are no FDI-linked performance conditions, into an LLP is permitted under the automatic route.
4. Foreign investments in LLP are subjected to compliance with the conditions of the LLP Act, 2008.

Investment vehicle

An entity, which is an ‘investment vehicle’ that is registered and regulated in accordance with relevant regulations that are framed by SEBI or any other author that was appointed to serve purpose that includes:

1. Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012;
2. Real Estate Investment Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014;
3. Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014;

will have the permission to receive foreign investment from an individual who resides outside India (it has to be an individual other than someone who is a citizen of or any other entity that is registered or incorporated in Pakistan or Bangladesh) in the manner and in accordance with the provisions specified under Schedule VIII of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

Startup companies

Start-ups can issue convertible notes to individuals who reside outside India, provided the following conditions are met:

1. Any individual residing outside India (excluding residents of or entities registered or incorporated in Pakistan and Bangladesh) may make a purchase of convertible notes that are issued by an Indian startup company for an amount of Rs. 25 lakh rupees or more in a single tranche.
2. Further, if the startup company operates in a sector where an FDI needs prior approval from the Government, then convertible notes can be issued to such non-residents only after the Government has approved it. Furthermore, if the startup company issues equity shares in defiance of convertible notes, the same must be in accordance with the entry route, sectoral caps, pricing guidelines and other such conditions necessary for foreign investments.
3. For convertible notes that are issued to individuals residing outside India, the startup company can receive the amount of consideration by inward remittance through banking channels or by debit to the NRE / FCNR (B) / Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016, which is amended from time to time.
4. NRIs may acquire convertible notes on a non-repatriation basis by taking into consideration Schedule IV of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
5. Any individual residing outside India may acquire or transfer through sale convertible notes, from or to an individual residing in or outside India, subject to the transfer taking place in accordance with the applicable pricing guidelines under FEMA. It is pertinent to note that prior approval must be obtained by the Government for such acquisitions or transfers in case the startup company is engaged in any sector or work that requires prior approval from the Government.
6. The startup company issuing convertible notes is also obliged to furnish reports as mandated by the RBI.

Other entities

FDIs in resident entities, except for the aforementioned entities, are not allowed.

Instrument of investments, issuing and transfer of shares

Instrument of investments 

Generally, Indian companies are authorised to issue equity shares, fully, compulsorily, and mandatorily convertible debentures, and fully, compulsorily, and mandatorily convertible preference shares provided they are in accordance with the guidelines or valuation norms that are prescribed under FEMA Regulations. The price or the conversion formula of convertible capital instruments must be ascertained upfront while the instruments are being issued. One must note that the price during the conversion must not be lower than fair value worked out while issuing such instruments, in accordance with the rules and regulations of FEMA.

Further, the capital instruments must be issued within 60 days from the date of receipt of the inward remittance received through normal banking channels, including an escrow account opened and maintained for the purpose or by debit to the NRE/FCNR (B) account of the non-resident investor. Failure to do so in 60 days, may amount to a refund within 15 days from the date of completion of 60 days to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be. If one contravenes such a regulation, it will be regarded as a violation of FEMA regulations and will attract punishment. 

Please note: In exceptional situations, the delay in refund of the amount of consideration may be put into consideration by the RBI, depending on the merits of the case.

Issue price of shares

The price of shares to be issued for residents residing outside India under the FDI Policy shall not be less than-

1. If the shares of the company are listed on any recognized stock exchange in India, then the price should be in accordance with the SEBI guidelines.
2. In case the shares are not listed on any recognised stock exchange in India, then the price should be the fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on an arm’s length basis.
3. In case there is a transfer of shares from one resident to another non-resident, then the pricing guidelines that are specified by the RBI from time to time where the issue of shares is on preferential allotment has to be followed.

Please note: When non-residents (including NRIs) invest in Indian companies in accordance with the provisions stated in the Companies Act 2013, as applicable through subscription to its MoA, such an investment may be made through face value subject to their eligibility to invest under the FDI scheme.

Transfer of shares and debentures 

We know, that NRIs can invest in Indian companies by way of purchasing or acquiring pre-existing shares from an Indian shareholder or from other NRIs, provided it is in accordance with the FDI sectoral policy (relating to sectoral caps and entry routes), applicable laws and other conditionalities including security conditions. For transfership, general permissions have to be taken, some of them inter alia, are as follows:

1. Any individual residing outside India (other than NRI and erstwhile OCB) may transfer through sale or gift, shares or convertible debentures to an individual residing outside India (this includes NRIs). In the case of sectors involving automatic routes, Government approval is not needed for transfership of shares from one non-resident to another non-resident. Additionally, one must seek approval from the Government in sectors that come under the Government approval route, for transfering of stakes from one non-resident to another non-resident.
2. Further, the following cases need the approval of RBI for transfer of capital instruments:
3. Transfer of capital instrument from one resident to a non-resident by way of sale in cases where:

• The transfer is done at a price which falls outside the purview of the guidelines that are prescribed under Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
• Transfer of capital instruments by an individual who is an acquirer of capital and is a non-resident of India involving deferment of payment of the amount of consideration. It is pertinent to note that in case approval is granted for a transaction, the same has to be reported in Form FC-TRS, to an AD Category-I bank for necessary due diligence, and this has to be done within 60 days from the date of receipt of the full and final amount of consideration.

2. Transferring capital instrument, through gifts, by an individual residing in India to another individual residing outside India. While such an application is forwarded to the RBI for approval for transferring capital instruments through gifts, there are some documents that need to be enclosed. The documents include:

• The name and residential address of the transfer (or the donor) and the transferor (or the donee).
• The kind of relationship between the transferor and the transferee, etc.

3. Transfer of shares from NRI to non-resident.
4. Also, the following cases need no approval from RBI for the transfer of capital instruments:

1. Transferring shares from an NRI to a resident under the FDI scheme where the pricing guidelines under FEMA, 1999, are met.
2. Transferring shares from resident to non-resident, when-

• The Government has given its approval.
• The transfer of shares is in accordance with the pricing guidelines and documentation requirements as specified by the RBI from time to time.
• Where the transfer of shares attracts SEBI (SAST) Regulations.
• Where the transfer of shares does not meet the pricing guidelines under the FEMA, 1999.
• Where the investee company is in the financial sector.

Entry routes for investment

1. As reiterated in the above passages, non-residents can make investments in shares and debentures of Indian companies either through the Automatic route or the Government route. Under the automatic route, the NRIs do not need to seek approval from the Government to make an investment as opposed to the Government route, where it is mandatory for foreign investors to seek prior approval from the Government of India. Further, the proposals for foreign investment are considered by the respective Administrative Ministry/Department.
2. Foreign investment in these sectors or activities under government route will be subject to the approval of the government, where:

1. An Indian company is set up with foreign investment, and ownership of the same does not lie with the resident entity.
2. An Indian company is established with foreign investment, and the resident entity does not control it.
3. An Indian company currently owned by a resident Indian citizen, or by Indian companies owned/ controlled by resident Indian citizens, whose control will be/is being transferred/passed on to a non-resident entity due to transfership of shares and/or fresh issue of shares to non-resident entities, whether through amalgamation, merger or demerger, acquisition, or similar means.
4. A preexisting Indian company’s ownership, currently owned or controlled by resident Indian citizens and by Indian companies, which, in turn, are controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity due to transfership of shares and/or fresh issue of shares to non-resident entities either via amalgamation, merger or demerger, acquisition, etc.
5. Further, here a clarification is made that foreign investments will include everything (ranging from all types of foreign investments, which could be direct and indirect, irrespective of whether the said investment has been made under Schedule I (FDI), II (FPI), III (NRI), VI (LLPs), VII (FVCI), VIII (Investment Vehicles) and IX (DRs) of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. A note must be made that FCCBs and DRs of debt will not be considered foreign investment, taking into consideration the fact that they are regarded as debt that can be issued under Schedule IX and not foreign investment. Yet, if any individual residing outside India converts any debt interment into equity, then such conversion will be regarded as foreign investment.
6. Investments made by NRIs under Schedule IV of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, will be considered to be domestic investments at par with the investments made by residents.
7. Any company, trust, or partnership firm based outside India but owned and controlled by NRIs is eligible for investments under Schedule IV of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. Further, such an investment will also be considered a domestic investment at par with the investment made by the residents.

Caps on investment

Here, any individual, residing outside India, can make an investment, but only up to the percentage of the total capital as mentioned in the FDI Policy. There are certain caps for each sector, which have been discussed in Chapter 5 of the Circular. Let us take a quick look at what it is all about.

Prohibited sectors

FDI is prohibited in the following sectors:

1. Lottery business (this includes Government/private lottery, online lotteries, etc.),
2. Gambling and betting, including casinos, etc.,
3. Chit funds,
4. Nidhi company,
5. TDRs (aka, Trading in Transferable Development Rights),
6. Real estate business or construction of farmhouses,
7. Manufacturing cigars, cheroots, cigarillos, and cigarettes, or any items of tobacco or of tobacco substitutes,
8. Any activity or sector that is not open to private sectors, like-

1. Atomic energy,
2. Railway operations (the only exceptions falling under the exceptional categories, which are discussed below).

Did you know? Foreign technology collaboration, be it in any form, including licensing for franchise, trademark, brand name, management contract is also restricted for all activities relating to lottery, business, gambling and betting activities.

Permitted sectors

FDI is allowed in some sectors and for some activities. There is a certain percentage limit for each sector and activity for foreign investors to invest their capital and other resources. The same has been discussed in detail in the ‘FDI permitted and restricted sectors as per FDI Policy 2020’ section of this article.

Entry conditions on investment

Investments by non-residents can be allowed in the capital of a resident entity in some sectors or activities with entry conditions. Such conditions may consist of norms for minimum capitalisation, lock-in period, etc. All the entry conditions are discussed in Chapter 5 in the Policy and in the ‘FDI permitted and restricted sectors as per FDI Policy 2020’ section of this article.

Additional conditions on investment apart from entry conditions

In addition to the entry requirements of foreign investment, individuals investing their capital and resources must adhere to all the requisite sectoral laws, regulations, rules, security conditions and state/local laws/regulations. Further, the establishment of a branch office, liaison office or project office or any place of business in India is subject to be governed by the Foreign Exchange Management (establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016. Furthermore, the acquisition or transfership of immovable property in India by citizens belonging to some nations will be governed by the relevant provisions under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, as amended periodically.

Foreign Direct Investment (FDIs) in downstream investment by eligible Indian entities

The guidelines for calculating total foreign investment, including direct and direct investment in an Indian company/LLP, at every stage of investment and cover downstream investment. The same has been discussed in Annexure 4 of the policy.

Remittance, Reporting and violation of Foreign Direct Investment (FDI) Policy

The Government under Annexure 5 of this Policy, has provided an elaborate scheme for remittance, reporting, and violation of FDI Policy.

Companies Act, 2013

Issuance of equity shares

Equity shares are issued in accordance with the provisions of the Companies Act, 2013. Also, partly paid equity shares and warrants are also issued by an Indian company by the provisions of the Companies Act, 2013, along with the SEBI guidelines, as applicable. 

Please note: The pricing and receipt of balance consideration shall be as stipulated and as amended from time to time.

Power of Tribunal

Under Section 232 of the Companies Act, 2013, which talks about mergers and acquisitions, amongst other things. This Section states that the Tribunal has the authority to make provisions relating to the share capital which is/are held up by a non-resident shareholder under the norms or guidelines related to FDI and regulations specified by the Central Government or any law amended or enforced.

Please note: The allotment of shares of the transferee company to such shareholders shall be in the way that is mentioned in the order. 

Guidelines on share application money

As per the provisions stated in the Companies Act, 2013, the company has to hold the share application money in a separate bank account and cannot utilise it before shares are allotted to the investors. In case of any contravention from the company, then the promoters and directors will be liable to face a punishment which may extend to the amount involved or ₹2 crores, whichever is higher. Further, the company shall also refund all the amount to the subscribers within a span of 30 days from the time the penalty was levied, along with a 12% p.a. interest.

Indian Contract Act, 1872

The Indian Contract Act, 1872, does not have specific provisions related to FDI, there are some sections (not an exhaustive list) that will be applicable to contracts involving FDIs in India (most of them applicable to automatic route and not the governmental route), they are as follows:

Section 10 of Indian Contract Act, 1872: Which agreements are contracts

Under Section 10, an agreement is a contract if it is made by the free consent of the parties involved in the contract and is not declared to be void. Thus, FDI contracts/agreements must be in accordance with this Section in order to be enforceable. 

Section 11 of Indian Contract Act, 1872: Competency of parties to a contract

Under Section 11, foreign investors investing in FDI must be legally capable (be a major, be of sound mind, must not be disqualified from entering into a contract by any law) of entering into such a contract/agreement.

Section 12 of Indian Contract Act, 1872: Persons of sound mind

Under Section 12, a person must be of sound mind when entering into a contract and investing in FDIs. Here, the term sound mind will mean that he/she is capable of understanding the contract and forming a rational judgement. Whereas, any person will be regarded to be of unsound mind, say a patient in a lunatic asylum, a sane man who is delirious (behaving irrationally or babbling) because of fear, or is drunk and is not capable of forming a rational judgement will not be capable of entering into a contract/agreement relating to FDIs.

Section 13 of Indian Contract Act, 1872: Consent

Under Section 13, agreeing to enter into a contract/agreement relating to FDIs must be entered into by the consent of all the parties.

Section 14 of Indian Contract Act, 1872: Free consent

Under Section 14, free consent is said to be if it is not caused by-

1. Coercion,
2. Undue influence,
3. Fraud,
4. Misrepresentation, or
5. Mistake.

All of the above pointers are discussed in the upcoming passages under relevant sections. Foreign investors investing in FDIs must be well aware of free consent to complete the validity of the contract, i.e., consent was given voluntarily and was well-informed. This will help avoid legal disputes in the foreseeable future. Also, where there is no contract there cannot be a contract at all. Moreover, where there is consent but not free consent, there is a contract, but it is voidable. So, the party whose consent was not freely obtained will have the option to declare it as voidable.

Section 15 of Indian Contract Act, 1872: Coercion

Under Section 15, coercion is regarded as 

1. performing or threatening to commit any activity that is forbidden by the IPC (Indian Penal Code), 1860, which is now amended and addressed as BNS, 2023, i.e., the Bharatiya Nyaya Sanhita;
2. unlawfully detaining or threatening to detain any property to the prejudice of any individual whatsoever-

with the intent of causing an individual to enter into an agreement.

Contracts involving foreign investors on FDIs must ensure that agreements are not made under coercion as mentioned in the above pointers.

Please note: It is immaterial whether the IPC (now BNS) is or is not in force in the place where the coercion is employed.

Section 16 of Indian Contract Act, 1872: Undue influence

Section 16, talks about undue influence. It states that a contract can be considered to be made by undue influence where-

1. One party was in a position to dominate the will of the party or other parties to the contract, and
2. Uses such a power to obtain an unfair advantage over the other party.

So, foreign investors investing in FDIs while entering into contracts or agreements must make sure that no party or parties is unfairly pressured into entering into an agreement.

Section 17 of Indian Contract Act, 1872: Fraud

Section 17 talks about fraud. It states that it means and includes-

1. Suggesting facts that is not true or one considers it to not be true (suggestio falsi),
2. Concealing a fact even when one had knowledge or belief of the fact (suggestio falsi),
3. Promising something without intending to perform it, and
4. Committing any such deceitful act.

Any such act committed by parties to a contract, with the intention to deceive another party will be considered as fraud. Foreign investors investing in FDIs must ensure that their agreements/contracts are not based on any such fraudulent representations or any of the above activities.

Section 18 of Indian Contract Act, 1872: Misrepresentation

Section 18 deals with misrepresentation. It includes-

1. Giving statements that someone may genuinely consider as true but it is actually false,
2. Not fulfilling one’s duties properly, thereby causing breach of duty, thus leading to an unfair advantage to the individual committing it by misleading another to his prejudice, or to the prejudice of any one claiming under him, or when
3. A party, no matter how innocently, causes the other party to misunderstand something important (thereby to make a mistake) about the agreement, like providing wrong details.

While entering into contracts or agreements related to FDIs, foreign investors and their other parties should be vigilant of these pointers and make sure that all statements made in contracts are to the point, apt and genuine.

Section 19 of Indian Contract Act, 1872: Voidability of agreements without free consent

Under Section 19 that discusses voidable contracts and states that if they are entered into by coercion, fraud, or misrepresentation, then the agreement is a contract voidable at the option of the party whose consent was obtained with these activities. This Section will come into play if there are any disagreements in the contracts/agreements related to FDI in the matters relating to the agreement being made by coercion, fraud, or misrepresentation, even for the foreign investors.

Section 20 of Indian Contract Act, 1872: Agreement void where both parties are under mistake as to matter of fact

Under Section 20, agreements or contracts are void if they are entered into by mistake of fact. Thus, contracts related to FDIs and involving foreign investors must be clear and succinct in order for them to be enforceable.

Section 21 of Indian Contract Act, 1872: Effect of mistakes as to law

This Section claims that a contract cannot be simply regarded to be voidable just because it was caused by a mistake as to any law in force in India; instead, if it is related to a law, not in force in India, then it will still be considered as a mistake of fact. So, if there is a foreign investor or say even an Indian party making a mistake related to Indian laws, they cannot simply cancel the contract or consider it to be voidable because of that mistake. Nonetheless, if the mistake is related to a law of a foreign nation, then it can also have the same impact and be regarded as a factual mistake. For instance, if a foreign investor misunderstood any Indian regulatory requirements, the contract remains valid, even when such a mistake was made.

Section 22 of Indian Contract Act, 1872: Contract caused by mistake of one party as to matter of fact

Under Section 22, a contract caused by mistake as a matter of fact (say, there is a factual error), does not render the contract to be automatically voidable. So, in case there is a factual mistake, say, there is any sort of misunderstanding related to FDI contracts/agreements, the contract generally remains binding. This Section lays emphasis on due diligence and clarity in communication between foreign investors and Indian parties to avoid costly misunderstandings.

Section 23 of Indian Contract Act, 1872: Lawful considerations and objects

Under Section 23, considerations and objects of agreement are lawful, unless-

1. It is forbidden by law,
2. May have the ability to defeat the law,
3. Is fraudulent in nature,
4. Involves or implies injury to any person or property,
5. Is considered immoral by the court, or 
6. Is against public policy.

Contracts and agreements involving FDIs will be deemed to be unlawful, and thus void, if any of the aforementioned activities take place. So, if a foreign investor enters into a contract with an Indian entity for a business that is considered to be illegitimate in India, say, betting or gambling, then in such cases, the contract/agreement would be void. Also, if the investor breaches any of the set guidelines or Indian laws or violates a public policy, the contract/agreement will be unenforceable.

Section 24 of Indian Contract Act, 1872: Agreements considered to be void in case considerations and objects are unlawful in part

Under Section 24, if any part of a single consideration for one or more objects or anyone or any part of any one of several considerations for a single object is unlawful, then the agreement will be declared to be void. Foreign investors investing in FDIs, especially in the private sector, must conduct thorough research and legal checks to ensure their investments and contracts/agreements are entirely legitimate, as any involvement in an illegitimate activity would attack the possibility of leading to financial losses and legal complications for him/her.

Section 25 of Indian Contract Act, 1872: Agreement without consideration void, unless stated otherwise

Under Section 25, an agreement without consideration is void unless it comes under the categories of the following exceptions:

1. It is in written form, and is registered under the law for the purpose of registering documents,
2. Is a promise to compensate in part or whole to any individual who has voluntarily done something for the promisor or something which the promisor was legally compellable to do, or
3. Is a promise made in written format which is designed by the person to be charged therewith or by any agent who is entrusted with the authority on his/her behalf, to pay in part or whole the debt of which the creditor might have enforced payment but for the law for the limitation of suits. In any of these cases, such an agreement is a contract.

So, foreign investors investing in FDI must make sure their contracts/agreements are in accordance with this Section and involve a transparent exchange of value (i.e., consideration here). Simply put, agreements without proper consideration will be considered void, thus causing an impact of a contract/agreement being unenforceable, which is why such documents must be made with proper scrutiny and in accordance with all the provisions instated.

Section 27 of Indian Contract Act, 1872: Agreements in restraint of trade declared to be void

Under Section 27, every contract/ agreement by which one is prevented from exercising a lawful profession, trade, or business of any kind is void. So, foreign investors investing in any contract/agreement related to FDIs must be extra cautious when such terms relating to FDIs and trade are involved.

Section 28 of Indian Contract Act, 1872: Agreements in restraint of legal proceeding declared to be void

Section 28 states that a contract/agreement is void if it restricts a party’s ability to enforce his/her right or puts a bar on the specified time period to carry on such an activity. Foreign investors, while investing in FDI and while entering into such contracts/agreements must ensure that no such clause is included or it may be considered to be void, thus enforceability of the agreement and the protection of their rights.

Section 29 of Indian Contract Act, 1872: Agreements void for uncertainty

Under Section 29, agreements/contracts whose meaning is not certain or capable of being made certain, i.e., unclear and ambiguous terms, are considered void. Thus, contracts involving FDIs and foreign investors must be drafted with proper scrutiny and in a clear manner, thereby avoiding any ambiguity (which may be caused due to differences in language, culture, and legal interpretations) as that would lead to the agreement being declared void. 

Section 30 of Indian Contract Act, 1872: Agreements by way of wager considered void

Under Section 30, agreements by way of wager (betting, gambling, etc.) are considered void, and one cannot file a suit for recovery of anything won on any wager, or entrusted to any individual to abide by the outcomes of any game or under some circumstances upon which wager is made. For foreign investors investing in FDI, this means that any contracts involving speculative transactions or uncertain events could be considered to be unenforceable, which is why they must ensure that the contracts/agreements entered upon are based on legitimate business activities and not otherwise. 

Section 31 of Indian Contract Act, 1872: Contingent contract

Section 31 states that a contingent contract is a contract to do or abstain from doing something if some circumstance or collateral to such a contract occurs or does not occur. For foreign investors investing in FDI, this Section comes into play when they are entering into any contract/agreement involving FDI where some circumstances or events like that of government approval or market conditions or such situations are involved.

Contingent vs. absolute contract: a must know detail

There is quite a difference between a contingent and an absolute contract. Let us understand this with the help of an example.

Contingent contract

Say, there is an Indian company entering into an FDI agreement with a non-resident or foreign investor for selling 23% of equity shares, however, the same is contingent on the company receding permission from the RBI and FEMA. Here, this agreement/contract is dependent on an external event, thus being an instance of a contingent contract. 

Absolute contract

Now if the same Indian company enters into an FDI agreement with a non-resident or foreign investor for selling 24% of equity shares. Once the payment is made, the shares will be transferred to the investor. So, there are no clauses or anything involved, thus it is an absolute contract.

Section 32 of Indian Contract Act, 1872: Contract contingent on an event happening when they are enforceable

Section 32 states that contracts that are entered into by keeping a clause that a certain future event takes place only then it will be enforceable by law. If we take the above instance, if the RBI and FEMA give its approval, only then the contract will be enforceable. In case the event becomes impossible to occur, then such a contract will be deemed to be unenforceable.

Section 56 of Indian Contract Act, 1872: An agreement to perform an impossible act 

Under Section 56, any agreement or contract entered into that consists of an act that is impossible in nature will be considered to be void. There are two other clauses under this, namely-

Contract to perform an act that has later turned impossible or unlawful

If parties, even the one involving FDIs enter into a contract to perform any activity, however, if the contract thus made becomes impossible or for some reason- unlawful, it becomes void.

Compensation for loss through non-performance of the act that is considered or recognized as impossible or unlawful

Here, if any party has made a promise to do something which he/she believes or with reasonable diligence, might have known and which the promisee was not aware of, to be impossible or unlawful, then such a promisor must compensate to the promisee for any loss incurred considering the non performance of the promise.

All these provisions will be applicable to foreign investors investing in FDIs in case the contract thus entered upon turns out to be impossible or unlawful.

Section 62 of Indian Contract Act, 1872: Consequences of novation, rescission or modification in the contract

Section 62 talks about the consequences of bringing up a new contract or rescinding or modifying the old one. So, if any of the parties to a contract relating to FDI are in agreement to replace the old contract with a new one or to revoke or make changes in it, thus the terms of the contract being negotiated, then, in such instances, the obligations instated in the original contract will not be performed.

Section 73 of Indian Contract Act, 1872: Compensation for loss or damage caused by breaching terms of the contract

Under Section 73, if either of the parties breaches the terms of the contract, then the party suffering the damage is eligible to receive compensation. However, one must note that such compensation is not given for any remote and indirect loss or damage sustained by reason of breach. So, even in FDIs if one party breaches the terms of the contract, then they are entitled to receive compensation. For instance, an Indian company enters into an agreement with a foreign investor who was keen to invest his capital and resources in pharmaceuticals, particularly setting up a manufacturing plant related to the same. Now, in the contract, it is stated that the Indian company is obliged to finish the construction in 2 and a half years from the date of entering into the contract. In case the Indian party fails to establish the unit, the foreign investor will be entitled to receive compensation.

Section 74 of Indian Contract Act, 1872: Compensation for breach of contract where penalty is stipulated for

As discussed above in Section 73, in case of breach of contract the party who has suffered damages will be entitled to receive compensation. However, as per Section 74, at times, the amount of compensation (liquidated damages) is determined by the parties at the time of entering into the contract. So, here, instead of approaching the court or other authorities to ascertain the amount of compensation, the same is determined in advance. Let us understand this better with the help of the above example. Say, in the contract there is a clause that states that if the Indian company fails to complete the work within 2.5 years, the other party, i.e., the foreign investor will be entitled to receive liquidated damages of $5 billion. Here, the penalty is stipulated in advance as in terrorem of the offending party.

Section 75 of Indian Contract Act, 1872: Rights of a party rightfully rescinding a contract

Under Section 75, any individual who cancels or rescinds a contract is entitled to be compensated for any damage thus sustained because of the non-fulfillment of the contract. Let us take into example the above example and understand this Section better. Say, the foreign investor and the Indian company agreed that the Indian company would be looking after all the formalities like- setting, looking for the land to build the unit, obtaining permission from the authorities, etc., all within the course of 2.5 years. Now, even after 3.5 years, the Indian company is not successful in following the aforementioned formatlies. Frustrated by this, the investor decided to rescind the contract after giving due notice. Here, the investor is entitled to receive the compensation for the damages suffered.

Arbitration and Conciliation Act, 1996

Just like the Contract Act, there are no explicit provisions relating to FDIs for foreign investors under the Arbitration and Conciliation Act, 1996; however, there are some provisions that are of utmost importance when it comes to resolving disputes that may arise from FDI transactions, some of the most important ones (not an exhaustive list, please carry out a research on your own) are as follows:

Section 2 (1)(f) of the Arbitration and Conciliation Act, 1996: International commercial arbitration defined

Under Section 2(1)(f), the term ‘international commercial arbitration’ means an arbitration that is related to disputes arising out of legal relationships, be it contractual or not, to be considered as commercial under the Indian law and where at least one of the parties is a foreign entity, i.e., either-

1. A non-resident of India,
2. An organisation or a corporate body based in any country other than India,
3. An association or a body of individuals whose central management and control is exercised in a country that is not India, or
4. The Government of a foreign country.

In other words, international arbitration can refer to that arbitration that takes place either in India or outside India, wherein some ingredient of foreign origin is involved. Here, the matters are decided based on substantive laws of India or any other foreign nation. For foreign investors investing in FDIs, this Section comes into play while ascertaining whether a foreign investor and an Indian entity qualifies as an international commercial arbitration. Involvement of this Section in FDIs will allow foreign investors to use international arbitration to-

1. Resolve disputes,
2. Offer a neutral platform, and
3. Offer more familiarity with international standards.

For example, if there is a foreign company situated in Germany, who invests their capital in Medicinal equipments or devices, and some sort of dispute arises over the fulfilment of the contract or the like, then the dispute would come under the purview of ‘international commercial arbitration’ as one of the parties thus involved is of foreign origin.

Section 7 of the Arbitration and Conciliation Act, 1996: Arbitration agreement

Section 7 discusses arbitration agreement. It means any agreement made by the parties to submit to arbitration all or some disputes that have arisen or which may arise between them in respect of a defined legal relationship, be it contractual or not. It also states that an arbitration agreement may also be in the form of an arbitration clause included in a contract or a separate legal agreement for that matter. Further, such an agreement must nd on writing in case it is included in-

1. A document signed by the parties,
2. An exchange of correspondence in the form of letters, telex, telegrams or other such means of telecommunication (this includes any communication in the electronic form) which provide a record of the agreement, or
3. An exchange of statements of claims and defence wherein the existence of the agreement is allegedly acknowledged by one party and not denied by the other.

Furthermore, the reference in a contract to a document having an arbitration clause comprises an arbitration agreement in case if the contract is in written form and the references are such as to make the arbitration clause a part of the contract. So, foreign investors investing in FDIs, especially in the private sector, must ensure there is a clear, written arbitration agreement thus providing a secure dispute resolution mechanism. For example, a foreign investor residing in America enters into an FDI agreement with an Indian company For the purpose of manufacturing medical devices. In the contract, there is a clause to which the parties have given their assent to, and it states that in case any dispute arises, it will be resolved by means of arbitration in Singapore as per their norms (Singapore International Arbitration Centre-SIAC is the one generally applicable). So, such a clause has to be in written format to ensure there is no issue in the later stages. 

Some essentials of arbitration agreement one must know about

1. It has to be in written format.
2. There has to be a present or future dispute contemplated between the parties to the agreement.
3. There must be an intention of the parties to submit to arbitration, and
4. The parties must be ad idem (in agreement).

Section 8 of the Arbitration and Conciliation Act, 1996: power of parties to arbitration when an arbitration agreement is involved

Section 8 discusses the power to refer parties to arbitration, especially when there is an arbitration agreement involved. So, if foreign investors are facing any issues and there is an arbitration clause involved in the contract, the judicial authority (in India), before whom such a matter is addressed to can resolve it. For instance, an investor from Australia invests his capital in an Indian real estate project. Now, suppose some issue has arisen and the Indian party despite there being an arbitration clause, approaches the court by filing a lawsuit.  So, if the court is satisfied that a valid arbitration agreement exists, it can order that the parties have to refer to arbitration instead of proceeding with the lawsuit. 

Section 9 of the Arbitration and Conciliation Act, 1996: Interim measures, etc., by the court

Section 9 allows parties to seek interim relief from courts before or during the arbitration process even any time after the arbitral award is made but before it is enforced as mentioned in Section 36 of the Act. 

Please note: Arbitral tribunals can grant interim reliefs that are enforceable as Indian court orders, thus erasing the need to seek interim measures from courts once a tribunal is in place.

Section 10 of the Arbitration and Conciliation Act, 1996: Number of arbitrators

Under Section 10, the parties are free to decide how many arbitrators they want to appoint. The only thing they have to keep in mind is that the number of arbitrators cannot be an even number. This is also applicable to FDI agreements that involve an Indian party and a foreign investor.

Section 11 of the Arbitration and Conciliation Act, 1996: Appointing arbitrators

Under Section 11, various provisions on appointment of arbitration are involved. One of them states that those parties who cannot decide to choose/appoint an arbitrator within 30 days from the receipt of the request to do so from the other party, can request the 2 appointed authorities to do so or the arbitral institution will be responsible for the same. When it comes to international commercial arbitration involving FDIs by foreign investors, the parties must choose those individuals who have expertise in international law or the relevant industry, thus ensuring fair and knowledgeable adjudication of disputes. For example, a German corporation decides to invest its capital in an Indian company manufacturing medical devices and a dispute arises but the parties are not able to appoint an arbitrator. In such an instance if there are other arbitrators chosen, they can decide upon the other arbitrators, if not, the arbitral institution can. 

Please note: The arbitrator can be of any nationality. The parties to the contract or arbitration agreement are free to decide what procedure they want to follow for appointing the arbitrators.

Section 18 of the Arbitration and Conciliation Act, 1996: Equal treatment of parties 

Under Section 18, every party must be treated equally. Further, each party must be given a fair chance to present his/her case. This Section is also applicable to foreign investors investing in FDIs.

Please note: If a valid arbitration agreement prima facie exists, courts will refer the matter to arbitration without any further inquiry. However, there must not be an explicit non-arbitrable issue that falls under the purview of a specialised court (like insolvency, criminal wrongs, etc.).

Section 22 of the Arbitration and Conciliation Act, 1996: Language

Under Section 22, parties have the free will to decide upon which language must be used in case of arbitral proceedings. In case of issues, as mentioned in the Act, the arbitral tribunal shall ascertain which language or languages should be used while carrying out the arbitral proceedings. When it comes to foreign investors, this Section is quite important, as investors can have their linguistic preferences, ensuring the proceedings are carried out in a language both the parties are comfortable with, thus ensuring that there are no misunderstandings and the arbitration process is smooth. 

For instance, a German investor and an Indian company enter into an arbitration agreement and agree that in case of any dispute, the issue will be raised to the concerned arbitrators. However, they do not agree on which language has to be used. The German investor is fixated on keeping the language of dispute resolution in German while the Indian company wants it to be in Hindi. Here, both the parties can mutually agree on a language, like English, that both parties are comfortable with thus making sure there is clear and concise communication and no misunderstandings during the proceedings.

Section 34 of the Arbitration and Conciliation Act, 1996: Application for setting aside arbitral award

Section 34 talks about setting aside an arbitral award and provides specific grounds for doing so, like-

1. The party was incapacitated,
2. The arbitration application was not given proper notice about the appointment of an arbitrator or the arbitral proceedings,
3. The party who made the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise not able to present the case, or
4. The arbitral awards deal with a dispute not contemplated by or not falling within the terms of submission to arbitration, or it has decisions on matters beyond the scope of the submission to arbitration.

For foreign investors, understanding the limited grounds on which an award can be set aside is of utmost importance. Such a Section sheds light on the finality of arbitral awards, thus providing foreign investors the confidence that the disputes will be resolved in an efficient manner. 

Section 36 of the Arbitration and Conciliation Act, 1996: Enforcement of arbitral awards

As amended, Section 36, talks about enforcement of arbitral awards (be it domestic or foreign arbitral awards). So, foreign investors investing in FDI, they must know that arbitral awards relating to foreign investments, especially those made in other jurisdictions, can be enforced in India as if they were the judgements of Indian courts. This Section ensures that there is a reliable mechanism for foreign investors to have arbitral awards enforced, thus providing for securing their rights and claims. Say a foreign investor received an arbitral award based in London against an Indian company, the investor seeks to enforce the award in India. This Section allows the investor to enforce the award as if it was a decree passed by the Indian court.

Part II of the Arbitration and Conciliation Act, 1996: Enforcement of certain foreign awards

This Part of the Act talks about the recognition and enforcement of foreign arbitral awards in India under the New York and Geneva Conventions. This is particularly relevant for foreign investors who obtain arbitral awards in their home countries or other jurisdictions. This Section simply acts as an assurance for foreign investors that India is aligned with international standards when it comes to arbitration, thus making it easy to enforce foreign awards and ensuring that the rights of investors are protected across borders. These provisions in the Act are crucial (to know) for foreign investors in India, offering them a structured, neutral, and enforceable means of resolving disputes, thus making the investment environment more secure.

Competition Act, 2002

The Competition Act, 2002, was enacted with the aim of preventing anti-competitive practices, promoting and sustaining competition in the market, and safeguarding consumer interests in India. While the Act does not have any specific provisions that talk about FDI, there are some provisions that can be regarded to be relevant to FDI, some of them are as follows:

Section 3 of the Competition Act, 2002: Anti-competitive agreement

Section 3 talks about anti-competitive agreements and has some provisions that no individual shall enter into an agreement with respect to production, supply, distribution, storage, acquisition, or control of goods or provision of services, which is likely to cause an appreciable adverse effect on competition within India. It further states that any agreement meant against the provision will be considered to be void. So, foreign investors investing in FDI must ensure the agreements do not violate the provisions of this Section.

Section 4 of the Competition Act, 2002: Abuse of dominant position

Section 4 prohibits the abuse of a dominant position by any enterprise or a group, including foreign investors. So, if any foreign investor(s) invests in an Indian market, he/she/they must be cautious if any such investment leads to a dominant market position, thus preventing practices that could pose a threat to competition or consumers in the Indian market.  

Section 5 of the Competition Act, 2002: Regulation of combinations

Section 5 talks about ‘combinations’ that include the acquiring of one or more enterprises by one or more individuals or mergers or acquisitions of enterprises. For foreign investors investing in FDIs, if the aggregate of the assets is more than 2 billion US dollars, including at least Rs. 5000 crore, or there is a turnover of more than 6 billion US dollars or includes at least Rs. 1500 crores in India, they must notify the same to CCI (Competition Commission of India) for approval, thereby promoting a fair and competitive market. This Section ensures that foreign investments do not lead to any monopolistic or anti-competitive practices in the Indian market.

Section 6 of the Competition Act, 2002: Regulations of combinations

Section 6 forbids combinations that cause or are likely to cause an appreciable adverse effect on competition within the relevant Indian market, as such combinations are deemed to be void. Thus, foreign investors planning significant investments through mergers or acquisitions need to obtain clearance from the Commission (by notifying them as may be specified along with requisite payment of fees) to ensure that their investment does not harm competition.

Section 20 of the Competition Act, 2002: Inquiry into combination by Commission

Section 20 entitles the Commission to inquire into combinations to ascertain whether they have an adverse effect on competition, one of the duties including scrutinising (or reviewing and potentially blocking or amending) foreign investment that may result in a combination, resulting in harming competition. 

Section 32 of the Competition Act, 2002: Acts taking place outside India but having an effect on competition in India

Section 32 refers to the entrusting of the Commission (CCI) with the right to exercise jurisdiction over acts taking place outside India but which may have an effect on competition in India. This Section comes into play when foreign investors whose global operations may have an impact on the Indian market.

Income Tax Act, 1961

Some of the Sections applicable to foreign investors investing in FDIs under the Income Tax Act, 1961, are as follows:

Section 90 and 90A of the Income Tax Act, 1961: Agreement with foreign countries or specified territories and Adoption by Central Government of agreement between specified associations for double taxation relief

Section 90 and 90A talk about agreements of the Government with the governments of foreign nations to avoid double taxation. These agreements help prevent foreign investors from being taxed twice on the same income, i.e., once in India and again in the investor’s home country. This Section acts as a medium to help foreign investors reduce their overall tax burden and provide clarity on how much tax is to be paid. 

For instance, there is an Australian investor who has invested his capital in the finance sector of the Indian company and earns interest from the Indian company. If there were no such sections, the investor would have been taxed twice on the same income. But due to this provision, the investor will only be taxed once and he can claim credit for the tax paid in India against the tax liability in Australia, thus reducing the overall tax burden and avoiding double taxation.

Advantages of relief granted to FDI investors under Sections 90 and 90A of the Income Tax Act, 1961

Avoiding double taxation

The main goal is to prevent investors from being taxed twice. Simply put, they are prevented from being taxed once in the residence and once in the source country, thus ensuring fairness and promoting international economic activities.

Promoting economic cooperation

By providing a clear framework for taxation, these sections encourage cross-border trade and investment, fostering economic cooperation between nations.

Section 115A of the Income Tax Act, 1961:Tax on dividends, royalty and technical service fees in the case of foreign companies

Section 115A talks about the income tax on several subjects and this Section applies to any income earned by NRIs, as well. Here, the term ‘income’ will include- dividends, royalty and technical service fees as they are the most common forms of income. Foreign investors must be aware of the specific tax brackets and regulations to plan their investments effectively in India. Further, this Section also mentions the situations under which these tax rates are applicable,  influencing the overall tax liability on FDI.

Section 115AC of the Income Tax Act, 1961: Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer

Section 115AC talks about bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer issued by Indian companies and purchased by foreign investors in foreign currency. It also covers profits or capital gains, like- interest on bonds, dividends, etc. Foreign investors investing in such instruments must consider their tax rate as they will influence the net income from such investments, thus providing clarity on the tax rate on them. This is where Section 115AC comes into play.

For instance, there is a Canadian investor who has purchased GDRs in Canadian Dollars (CAD) that were issued by a company based in India. After some time, the investor decides to sell these GDRs resulting in capital gains. Under Section 115AC, all the revenue received from the sale of such GDRs including interest send dividers and the capital gains are subject to certain tax rates.

Some other provisions one must know

Taxation of dividend income for Foreign Direct Investments (FDIs) in India

Foreign direct investors are not required to pay tax on the dividend income from an Indian company if it has already paid DDT (i.e., Dividend Distribution Tax) on that income. Nonetheless, depending on the local tax laws of those nations, such dividends may be subject to taxation in the country where the investors live.  It is often observed that the credit for DDT paid by an Indian entity may or may not be available when the dividend is taxed in the investor’s place of residence or where he/she is domiciled.

Tax deduction of dividends in computing taxable income 

When determining the taxable income of an Indian firm, the dividends paid out by the Indian company are not sanctioned as a tax deduction. Rather, these payouts are subject to DDT, which is levied at an effective tax rate of 20.36% of the dividend amount.

Tax on conversion of CCD (Cash Concentration or Disbursement) into equity shares 

According to the provisions of the domestic tax law of India, the conversion of compulsorily convertible debentures into equity shares is not subject to taxation in India. 

Cost of acquisition of equity shares acquired through conversion of CCD/preference shares

When equity shares are acquired by a non-resident through conversion of CCDs or preference shares, the cost of acquisition will be treated as the proportional cost of the original CCDs or preference shares for the purpose of calculating capital gains.

Tax on the sale of equity shares

The transfership of equity shares in India is subject to capital gains tax. For shares of a company based in India and purchased by non-residents in foreign currency, there is a special taxation mechanism in place to eliminate the impact of foreign currency fluctuation on capital gains. However, there is no benefit relating to indexation for the cost of acquiring such shares. 

Civil Procedure Code (CPC), 1908

The Civil Procedure Code, 1908, does not specifically have provisions related to Foreign Direct investment (FDI). The CPC is a procedural law that involves limitations on civil matters, including the jurisdiction of courts, the procedure for filing suits, and the execution of judgements on such matters. Generally, FDI is governed by the rules and regulations discussed in this section; however, if an issue related to FDI becomes a part of civil litigation, the relevant laws related to CPC will come into play. Several matters, like how the case will be handled in the civil court, including the filing of the lawsuit, service of summons, execution of decrees, etc., will fall under the CPC. A quick overview of the following sections could come in handy for foreign investors investing in FDIs.

Section 13 of the Civil Procedure Code, 1908: When a foreign judgement is not conclusive

Under Section 13  a foreign judgement will be conclusive and enforceable in India, except-

1. The judgement is not given by a court of competence jurisdiction.
2. The judgement is not given based upon the merits of the case in hand.
3. If the judgement appears to be an incorrect view of international law or acts as a refusal to recognise the Indian laws thus set.
4. The judgement was given without it following the principles of natural justice.
5. The judgement was obtained by fraud.
6. Thebjudheent sustains a claim founded on a breach of any law enforceable in India.

Please note: A foreign judgement is defined as the judgement given by a foreign court under Section 2(b) of the Code. The term ‘foreign court’ means any court based outside India and the one which is not established or continued by the authorities of the Central Government. 

An instance of this could be a German company getting a judgement in a German Court but the same may not be recognized in India, thus it is challenged by the Indian company against whom the order was placed. The Indian Company argues that the judgement falls under Section 13 of the Act as it is obtained by fraud, thus bringing an exception.

Order 21 of the Civil Procedure Code, 1908: Execution of decrees or orders by court

Here, the decree or order thus obtained will be transferred for execution, even those decrees and orders relating to foreign investors. This is important for foreign investors to understand for enforcing contracts, recovering debts, or obtaining any sort of relief for damages incurred in India. Say, there is a foreign investor from Austria who has obtained a decree from an Indian Court. In the decree, the Court has ordered that the Indian company compensate the investor for infringing the contract. The investor with the help of Order 21 can initiate proceedings to receive or recover the compensation or the amount thus awarded. 

Section 86 of the Civil Procedure Code, 1908: Suits against foreign Rulers, Ambassadors and Envoys

Under Section 86, a foreign State may not be sued in Indian courts except when the Central Government has given its consent to do so. The same must be in writing by a Secretary to that Government. While this Section is not directly related to FDIs, it could come into play in cases where any foreign owned entity is involved.

Important Government Authorities in India concerning Foreign Direct Investment (FDI)

The following are the most important government authorities in India concerning FDIs:

FIFP (Foreign Investment Facilitation Portal)

The FIFP is the latest online single point interface of the Indian Government for foreign investors to facilitate FDIs. It is being looked after by-

1. Department for Promotion of Industry and Internal Trade (DPIIT), and
2. Ministry of Commerce and Industry.

The key role of FIFP is to help foreign investors investing in FDIs obtain the necessary approvals, clearances, and applications (which are through approval routes) through a single window.

Did you know? In 2017, the then Finance Minister, Arun Jaitley, made an announcement that FIPB Foreign Investment Promotion Board) will be abolished and will be replaced by the FIFP (Foreign Investment Facilitation Portal).

Department for Promotion of Industry and Internal Trade (DPIIT)

The DPIIT is responsible for the formulation and implementation of policies related to industrial growth and investment, including FDI. It also oversees the FDI Policy framework and ensures that investments related to FDIs are in alignment with India’s economic goals. It is the nodal department for promoting and facilitating FDIs in India.

Reserve Bank of India (RBI)

The main role of RBI is to regulate foreign exchange and oversee the financial aspects of FDI. It serves as the primary regulatory authority for FDI under FEMA guidelines and works in tandem with the Indian Government to formulate and implement policies related to FDI. Furthermore, one of its major tasks involves granting approvals and clearances for transactions related to FDIs, especially in those sectors where automatic approval is not available or when FDI limitations are imposed. RBI further ensures that all foreign investments are in compliance with India’s foreign exchange laws. It also provides guidelines for investment in different sectors.

Directorate General of Foreign Trade (DGFT)

The DGFT, formed in 1991, regulates and promotes foreign trade policy, including imports and exports, with the main aim of promoting India’s exports. It also plays a vital role in issuing licences and authorizations for activities related to FDI, particularly in sectors involving trade and commerce, thus acting as a licensing authority for import and export businesses in India. The main task of DGFT is to formulate guidelines relating to Indian importers and exporters.

Ministry of Corporate Affairs (MCA), Government of India

The MCA oversees the registration and regulation of companies in India. It makes sure that foreign investors comply with corporate laws, governance, and reporting requirements. It is responsible for the administration of several acts, namely-

1. The Companies Act, 2013,
2. The Companies Act, 1956,
3. The Competition Act, 2002.

Securities and Exchange Board of India (SEBI)

The main role of SEBI is to protect investor interests and maintain market integrity. It also has the authority to take action against those who violate such regulations. Thus, helps to ensure that foreign investments in India are transparent and compliant with the regulations.

Income Tax Department

The Income Tax Department is responsible for the collection of taxes from foreign investors, including income tax and its exemptions, capital gains tax, exemption from duty on import, VAT (value added tax) rebate on export, and other related taxes.

Several Ministries of the GOI, such as Power, Information and Communication, Energy, etc.

These ministries provide sector-specific guidance and approvals for foreign investments in their respective areas. They ensure that FDI complies with the regulations and policies specific to sectors like energy, communications, and infrastructure.

All these authorities work together to create a streamlined process for foreign investors, ensuring that their investments in India are in compliance with all relevant laws and regulations.

Punishment for not abiding by the NDI Rules and other Foreign Direct Investment (FDI) Rules

The penalty for not abiding by the NDI Rules and other laws related to foreign direct investment is discussed under the penal provisions of FEMA. The Directorate of Enforcement (ED) is responsible for enforcing such a penalty. For every breach of law, the punishment is 3x the actual amount, if the amount is quantifiable; or up to INR 200,000 (roughly US$2,400) in case the amount is not quantifiable. Further, if the breach continues, the ED can levy a further penalty of up to INR 5,000 (roughly US$60) for every day that such contravention continues after the date of its occurrence.

Example

Let us understand this with the help of an instance. Say, there is a company in India that fails to report a transaction (the amount being INR 10,000,000) to the RBI within the set timeline, thus causing a breach of NDI Rules. The ED can impose a penalty upon them as follows:

For quantifiable amount

For a quantifiable amount, the penalty would be 3x times, i.e., 30,00,000.

For non-quantifiable amount

For a non-quantifiable amount, the penalty would be 20,00,000, max.

For continuous breach

In case if the company continues to violate the rules by not rectifying the issue, the ED can impose an additional penalty of up to INR 5,000 (roughly US$60) for each day the contravention continues after the initial violation.

In order to avoid such penalties as those imposed by the ED, it is advised that one complies with the guidelines set under NDI Rules, FDI Policy, FEMA, and other laws, regulations, and acts.

Legal protections available for foreign direct investors in India

The following are some vital legal protections available for FDIs in India:

Bilateral Investment Treaties (BITs)

India has entered into several BITs without many countries. These treaties provide a legal framework for protecting foreign direct investments in India by establishing mutual rights and obligations between India and the home country of the investor (i.e., where the investor resides).

Free trade agreements (FTAs)

FTAs are arrangements between two or more nations or trading blocks that are made with the major goal of reducing barriers to imports and exports among them. These agreements are often similar to protections granted under BITs.

Foreign Exchange Management Act (FEMA), 1999

As discussed above, FEMA regulates foreign direct investment in India. It further provides a legal framework for cross-border transactions.

Arbitration and Conciliation Act, 1996

The Arbitration and Conciliation Act, 1966, provides a legal framework to resolve disputes through arbitration. This will ensure there is a faster and more flexible alternative to court litigation. 

Dispute resolution mechanism for foreign direct investment disputes

Arbitration

Most contracts have a commercial arbitration clause that has to be taken into consideration by the investor and the parties in dispute. The arbitrator(s) will grant an award in the favour of whom he deems fit.

Mediation

When a dispute is at the initial stage, foreign investors can seek a remedy of mediation. The Finance Ministry has recommended mediation and the establishment of special fast-track courts for resolving such disputes.

Litigation

Foreign investors can initiate litigation against an Indian state by filing a suit or through a writ petition in an Indian court. Having said that, when investors enter into commercial contracts with Indian state entities, they must be vigilant enough to review the dispute resolution clause before they initiate a lawsuit. Most of the contracts have a commercial arbitration clause, and if they do not pay attention to the same, a foreign investor may face legal repercussions. Investors can file an application in Indian courts in case the Indian State entity does not proceed with arbitration, or agree to appoint an arbitrator.

BITS or FTAs

Foreign investors investing in FDIs can initiate trattoria arbitration under BITs or FTAs with investment provisions. Most investment treaties offer arbitration as a mechanism for resolving disputes on FDIs. 

Recent investment and developments of FDIs in India

Following are some of the major investments and developments in the field of FDIs in India:

1. In June 2024, there was an increase in FDI commitments (from US $1.14 billion in 2023 to US$ 2.14).
2. In April 2024, the Ministry of Finance put forth a Notification of FDI in the space sector. This marks a significant milestone, opening up greater opportunities for Indian space startups to access global capital. This development acts as a strong commitment to promoting growth, and innovation, and aligning the space industry with international standards.
3. In the past 9 years, the Indian insurance sector has drawn around Rs 54,000 crore (US$ 6.48 billion) in foreign direct investment (FDI). The increase in FDI limits and the growth in the number of insurance companies have significantly contributed to enhanced insurance penetration and density in the country.
4. In March 2024, the FDI Policy was reviewed by the Ministry of Commerce and Industry in India and changes were brought in the space sector. 
5. In January 2024, DP World sealed agreements worth approx 25,000 crores (valued at $2.76 billion dollars) with the Government of Gujarat.

For more such information, click here.

Efforts by the Indian Government to increase Foreign Direct Investment (FDI) in India

PM Gati Shakti Scheme

Introduced in 2021 in October, the Prime Minister Gati Shakti scheme has been regarded to be quite a transformative plan for attaining financial progress by having a major focus on various modes of transportation and a logistics infrastructure that is complimented by clean energy transmission, IT communications, and social infrastructure. Further, this scheme adopts a 3-fold approach by bringing all government ministries under a single, unified platform to ensure transparency and synchronisation. Furthermore, it includes the establishment of a multimodal transportation grid to reduce costs related to logistics and the formation of a joint committee between these ministers to make sure the scheme is implemented effectively. This approach aims to-

1. Annihilate the wastage of time and cost by government departments,
2. Remove the complexities from the already existing ministerial framework in India by reducing departmentalisation, and
3. Make efforts so several government ministries can collaborate effectively.

National Single Window System (NSWS) 

Introduced in September 2021, the National Single Window System (NSWS) is a digital platform created to assist and ease the approval process across different businesses. It covers 32 Central Government departments and 31 State Government departments across India. This system comprises a database wherein all the approvals are added under a single portal. So, it-

1. Does not require an end user to visit individual ministries and departments along with the implementation of a secure document repository,
2. Acts as a ‘know your approvals’ module that provides direction and instructions from the government,
3. Acts as a real-time status tool to track approval applications,
4. Provides fast query management to ensure there is speedy resolution of procedural questions or ambiguities, and
5. Operates as a system to renew approvals easily.

Disinvestment

In the 2021-22 budget, the government introduced a new regime on disinvestment, which differentiates between ‘strategic’ and ‘non-strategic’ sectors. The motive of the government behind this is to privatise all non-strategic sectors while retaining a minimal presence of PSUs (public sector undertakings) in the strategic sectors. Having said that, the government has successfully divested from 2 major PSUs, namely:

1. Air India, via a 100% stake sale to the Tata Group (along with a 100% stake sale of low-cost carrier Air India Express and a 50% stake sale in the ground handling services provider Air India SATS), and
2. Life Insurance Corporation (LIC) of India, through an initial public offering whereby the government offloaded 3.5% of its 100% stake in the insurer.

Further, the budgeted disinvestment target for the financial year 2022-23 was estimated at US$7.8 billion (which comes to about ₹65,000 crore).

Production Linked Incentive (PLI) scheme

Several government schemes, like the production-linked incentive (PLI) scheme in 2020 relating to the manufacture of electronics, have been said to have a boost in foreign investments. This scheme is in line with the main motive of creating a self-reliant economy. In accordance with this scheme, financial incentives are provided to eligible companies on the sale of goods manufactured in India. Further, this scheme has been extended to manufacturing-focused sectors, including automobiles, textiles, and pharmaceuticals, with a total budgeted outlay of near about INR 200,000 crore (it comes to an estimate of US$24 billion).

Other initiatives

1. The 2019 move by the Government to amend the FDI Policy 2017 and allow up to 100% FDI under the automatic route in case of coal mining activities also proved to rise in FDI inflow.
2. Further, FIFP is the online single point interface of the Government of India, administered by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, wherein investors can facilitate FDI.

Stats

India has seen quite a phenomenal growth in the field of FDI inflows. As per research, it has increased 20x times from 2000-01 to 2023-24. As per the DPIIT, India’s cumulative FDI inflow stood between $990.97 billion between April 2000 and March 2024. This was because the government took up a lot of initiatives and put in a lot of hard work to improve and ease FDI norms and enhance the ease of doing business. Further, the total FDI inflow into India from the period of April 2023 to March 2024, stood to be around 70.95 billion US dollars (which comes to around ₹59,50,98,44,62,500/-). Furthermore, the FDI equity inflow from the period of April 2023 to March 2024 stood at 44.42 billion US dollars (which comes to around ₹37,25,76,08,15,000/-).

Between the period of April 2000 and March 2024, India’s service sector attracted the highest FDI equity inflow of 16.13%, thus amounting to US $ 109.49 billion. This was followed by the computer software and hardware industry at 15.16%, amounting to US $ 102.88 billion, trading at 6.39% (US $ 43.39 billion), respectively. Then there was telecommunications at 5.79% (US $ 39.33 billion), and the automobile industry at 5.34% (US $ 36.27 billion).

India also saw a significant FDI inflow during April 2000 and March 2024, coming from Mauritius at US$ 171.85 billion with a total share of 25.31%. This was followed by Singapore at 23.56% (US$ 159.94 billion), the USA at 9.6% (US$ 65.19 billion), the Netherlands at 7.17% (US$ 48.68 billion), and Japan at 6.17% (US$ 41.92 billion).

The state that received the highest FDI equity inflow from the period between October 2019 and March 2024, was Maharashtra (US$ 69.08 billion) at 29.68%. This State was followed by Karnataka (US$ 51.03 billion) at 21.93%, then came Gujarat (US$ 39.20 billion) at 16.84%, which was followed by Delhi (US$ 31.72 billion) at 13.63%, and Tamil Nadu (US$ 10.94 billion) 4.7%.

Conclusion

Navigating the regulatory landscape in India can be quite complex, but with the right knowledge, foreign investors investing in FDIs can unlock immense potential in this vibrant market. By adhering to the key compliance requirements outlined in this handy guide, investors investing in FDI can safeguard their investments, foster sustainable growth, and contribute to India’s dynamic economy. Staying informed and proactive will not only ensure compliance but also pave the way for long-term success in one of the world’s most promising investment destinations.

Please note: Policies relating to FDIs evolve and are amended from time to time, they may also overlap in some cases (say, for instance, the NDI Rules and FDI Policy), which is why it is advised to investigate thoroughly the policies and other extant laws and regulations to avoid legal repercussions in the foreseeable future.

Frequently Asked Questions (FAQs)

What is Foreign Direct Investment (FDI)?

Foreign Direct Investment, commonly known as FDI, refers to the investments made by foreign investors in Indian businesses and projects. It is crucial for India’s economy as it brings in capital, technology, and expertise that will boost the economic growth of India while also creating job opportunities and infrastructure development.

Further, foreign direct investment is regarded as a type of cross border investment wherein a resident belonging to one economy establishes a long term interest in and a major influence over a resident belonging to another economy.

Why is Foreign Direct Investment (FDI) important for India’s economy?

One of the main reasons for FDI being of significant importance is that it boosts economic development. In India, it is also a principal source to receive money from outside as well as to yield higher revenues. It more often than not results in setting up factories in the country of investment with some local equipment which additional materials and/or labour-being used.

How are Foreign Direct Investments (FDIs) regulated by the Indian Government? 

In India, FDI is governed by the Foreign Exchange Management Act (FEMA) and specific sectoral directions issued by the Department for Promotion of Industry and Internal Trade (DPIIT). The Indian Government ensures that these policies are updated on a regular basis to attract more investors to invest capital and resources in India and to promote ease of doing business.

Can a non-resident acquire shares on the stock exchange?

The following individuals can acquire FDI-compliant instruments on the stock exchanges:

1. FPIs and FIIs registered with SEBI,
2. NRIs,
3. A non-resident of India, apart from the portfolio investor, is also eligible to acquire shares on the stock exchange via a registered broker subject to the conditions that the non-resident investor has already acquired and continues to hold the control, which is in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations, i.e., the investor has complied with the minimum stake requirement under the SEBI Regulation as per the set guidelines. 

In which sectors is Foreign Direct Investment (FDI) allowed through the automatic route?

In India, FDI through automatic routes is allowed in numerous sectors, most of which are discussed in detail above. However, the most important ones are as follows:

1. Pharmaceuticals,
2. Manufacturing,
3. Information technology, etc.

Under this route, investors are not obliged to take prior permission from the government to invest their capital and resources.

Is there a cap on Foreign Direct Investment (FDI) when it comes to investing in different sectors in India?

India has sector-specific caps on FDI to regulate foreign ownership. For instance, in the insurance sector, the limitation is 74% FDI; whereas when it comes to retail sectors, FDI can be 100% in some sectors and 49% to 51% in other sectors, inter alia. However, there are certain terms and conditions the investors have to follow. Please refer to the detailed table mentioned above under the title ‘FDI permitted and restricted sectors as per FDI Policy, 2020, and NDI Rules’.

What are the actions foreign investors must take to repatriate profits and dividends from their Indian investments?

Foreign investors can withdraw profits, dividends, and capital gains from tiger Indian investments through normal banking channels. However, there are certain procedures that need to be followed along with obtaining necessary approvals from authorised banks.

What are the different types of foreign direct investments?

There are about 4 types of FDIs, namely:

1. Horizontal FDI,
2. Vertical FDI,
3. Conglomerate FDI, and
4. Platform FDI.

All of them are discussed in detail in the above passages.

What are the main benefits of Foreign Direct Investments (FDIs)?

Well, there are several benefits of FDIs, some of them are as follows:

1. Brings financial resources that helps in boosting the country’s economy, thereby bringing economic development;
2. Introduces new technologies, skills, knowledge, and so on;
3. Provides employment opportunities in the nation where such investments are made;
4. Boosts the competitive business environment of the country;
5. Brings a positive change in the quality of products and services in a lot of industries, thereby refining the standards.

Which industries are not permitted to accept any sort of Foreign Direct Investment (FDI) in India?

As per the current rules and regulations, the following sectors cannot accept FDI:

1. Betting and gambling,
2. Lottery operations (also includes government/private lotteries, online lotteries, and the like),
3. Activities and/or sectors that are not accessible to private sector investments (for example, nuclear energy, Indian Railways).

Which country had the highest Foreign Direct Investment (FDI) in India?

In the financial year 2022-2023, Singapore had the highest FDI equity inflow to India. The valuation for the same was over 17 billion U.S. dollars. This amounted to about 30% of total FDI inflows in fiscal year 2023. The second country on the list was Mauritius with about 6 billion U.S. dollars, followed by the United States, United Arab Emirates (UAE), Netherlands, Japan, United Kingdom, etc.

What is the procedure for resolving matters relating to Foreign Direct Investments (FDIs) in India?

Well, as discussed above if the parties are in a dispute relating to any matters that involve FDIs, they can resolve the matters through the arbitration under the Arbitration and Conciliation Act, 1996. Domestic legal remedies are also available under the Indian laws, involving the CPC, the Contract Act, etc.

References

• The Law of Contracts by N. H. Jhabvala, 2019, 6th edition
• The Arbitration and Conciliation Act, 1996, by Simran. R. Gurnani, 1st edition
• The Code of Civil Procedure, 1908, by N. H. Jhabvala, 33rd edition 
• https://www.scribd.com/document/465217126/NRIT
• https://www.makeinindia.com/policy/foreign-direct-investment
• https://srldrugs.com/investment-law-in-india-key-regulations-guidelines
• third-edition/article/india-overview-of-the-legal-framework-and-treatment-of-fdi 
• https://shodhganga.inflibnet.ac.in/bitstream/10603/354054/8/08_chapter%202.pdf 
• https://globalcompetitionreview.com/guide/foreign-direct-investment-regulation-guide/
• https://trilegal.com/wp-content/uploads/2023/06/Foreign-Direct-Investment-in-India.pdf 
• https://www.lexology.com/library/detail.aspx?g=f57151a1-0c8a-48d8-aa46-643f4d5fe751 

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