This article has been written by Aditi Sahu, pursuing a Diploma in Business Laws for In-House Counsels from LawSikho. The article has been edited by Aatima Bhatia (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).

Introduction 

In India, successive governments’ policies, as well as trade liberalization, have resulted in a surge in foreign investment. The government’s liberalization policy results in a smoother integration with the global economy, as well as rapid and significant growth for the country’s economy. The outflow of foreign investment from India is also prevalent in the Indian economy, as international corporations invest in India. In India, foreign investment includes investments made in India by foreign companies. Foreign investment in India has had numerous good effects on the country, including more employment and the betterment of the country’s fundamental infrastructure.

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India’s economy has huge potential for attracting foreign investment. Also, the investors would have to encounter certain uncertainties as well; yet, India offers significant investment opportunities for global players. The majority of them have already made investments in India, while a few more plan to do so soon.

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What is foreign direct investment (FDI)?

The term “foreign direct investment” refers to a company purchasing a majority stake in a company operating in a different country. The overseas investment allows foreign firms to be more directly involved in operations in their host country. There is a lot of value being brought to the table by these newcomers in addition to money. For the most part, foreign direct investment (FDI) occurs when an investor sets up foreign operations or purchases foreign business assets, including acquiring ownership or a controlling interest in a foreign company.

Foreign Direct Investment (FDI) is defined as a “person resident outside India can invest through capital instruments in an unlisted Indian company or 10% or more of a listed Indian firm’s post-issue paid-up equity capital on a fully diluted basis.”

What are the routes through which India gets FDI?

  1. Automatic Route: The automatic route allows foreign investment in all activities/sectors defined in Regulation 16 of FEMA 20 (R) without previous clearance from the government or the Reserve Bank of India. In the automatic route, the RBI or the Indian government do not need to approve FDI from a non-resident or Indian company.

Sectors included in the ‘up to 100 % automatic route’ category include:

  • Company in the infrastructure sector listed on the stock exchange: 49%
  • Insurance coverage is available for up to 49% of the cost.
  • Medical devices: up to a 100%
  • Pension: 49% Petroleum Refining (49% by PSUs): 49%
  • Involved in Power Exchanges: 49%
  • Agriculture and Animal Husbandry: 100%
  • Asset Reconstruction Companies: 100%
  • Air Transportation Services (non-scheduled and other services within civil aviation industry): 100%
  • Airports (Greenfield and Brownfield): 100%
  • Auto Components: 100%
  • Automobiles: 100%
  • Biotechnology (Greenfield): 100%
  • Broadcast content services (TV channel up-linking and down-linking): 100%
  • Broadcast carriage services: 100%
  • Capital goods: 100%
  • Wholesale cash and carry trading (including MSE sourcing), and many more: 100%
  1. Government Route: Foreign investment that does not fall within the automatic route must first have government clearance. It’s impossible to move forward without the support of the government. The company will be required to apply via the Foreign Investment Facilitation Portal, which allows for single-window clearance. In consultation with DPIIT (Ministry of Commerce), the application is sent to the appropriate ministry for review and approval or rejection. DPIIT will issue the Standard Operating Procedure (SOP) for processing FDI policy applications.

Sectors that fall under the ‘up to 100 %government route’ scope include:

  • Banking and government: 20% 
  • Broadcasting Content Services: 49%
  • 100% of assets are held by the core investment company.
  • Products of the Food Industry Mineral separations of titanium-containing minerals and ores: 100% 
  • Retail trading: 100%
  • 51% of retail sales are from many brands.
  • Print Media (publications/printing of scientific and technical magazines/specialty journals/periodicals and facsimile editions of foreign newspapers): 100%
  • Print Media (publication of newspapers, periodicals, and Indian editions of foreign magazines dealing with current events and news): 26%
  • 100% of satellites will be built and operated.

Regulatory compliances for FDI in India

A person residing outside of India who has invested in an Indian company is permitted to invest in the capital instruments issued by such firm if the following conditions are fulfilled:

  1. The Indian company’s offer should be consistent with the 2013 Companies Act.
  2. As long as the problem is resolved, the company will comply with the sectoral cap.
  3. To be eligible for a rights or bonus issue, a shareholder’s shareholding must have been acquired and held in compliance with FEMA Regulations, 2017.
  4. A bonus issue or rights issue acquired by a person located outside India will be subject to the same requirements that apply to the original holding against which the rights issue or bonus issue was issued, except for share warrants.
  5. For a listed Indian company, the rights granted to a person residing outside of India will have a price set by the firm itself.
  6. If it’s an unlisted Indian company, the rights issued to non-residents cannot be less than those offered to Indian residents.
  7. An investment made through a rights or bonus issue is subject to the terms and conditions in effect at the time the issue is made.
  8. Money received as inward remittance from overseas can be paid from funds in an NRE/FCNR (B) account maintained under the Foreign Exchange Management (Deposit) Regulations, 2016, or from money kept in the account.
  9. It is also possible to pay the consideration by debiting the NRO account kept as per the Foreign Exchange Management (Deposit) Regulations, 2016 if the initial investment was made without regard to repatriation.

Violation of any regulatory compliances will attract penal provisions under the Foreign Exchange Management (FEMA) Act, 1999. This Act is administered by RBI, Enforcement Directorate, The Ministry of Finance (Government of India) are the appropriate authority who can investigate the matter and initiate the suit against the defendant for violating the regulatory compliances of FDI under the FEMA Act. 

Restrictions on FDI

The Government of India segregates the restrictions of Foreign Investment into two categories. On one hand, there are 100% restrictions for some sectors and on the other hand, there are some restrictions for permitted sectors.

Sectors in which FDI is 100% restricted

  1. Betting and gambling
  2. Lottery operations (including government and private lotteries, as well as internet lotteries)
  3. Activities and sectors that are not open to private sector investment (for example, atomic energy and railroads)
  4. Trading in the retail sector (expect single-brand product retailing)
  5. A chit fund is a type of investment.
  6. Nidhi is a corporation based in India.
  7. Construction of farm dwellings or real estate enterprise
  8. Transferable development rights (TDRs) are traded (TDRs)
  9. Tobacco, cigars, cheroots, cigarillos, cigarettes, and various tobacco alternatives are manufactured.
  10. Agriculture is one of the most important industries (excluding floriculture, horticulture, apiculture, and cultivation of vegetables and mushrooms under controlled conditions, the development, and production of seeds & planting materials, animals husbandry including the breeding of dogs, viniculture & aquaculture under controlled conditions and services related to the agro and allied sector).\
  11. Transportation by train (other than permitted activities)
  12. Foreign technological partnership in any form, including franchise, trademark, brand name, and management contract licensing. 

Restrictions in Permitted Sectors

  1. FDI in Single Brand Retail Trading

The government has now approved FDI of up to 100% in the retail trade of single brand products, subject to the prior approval of the FIPB and compliance with the following conditions:

  • The foreign investor must be the owner of the brand or one non-resident entity, whether the brand owner or not and shall be allowed to engage in single-brand product retail trading for a specific brand through a legally tenable agreement with the brand owner for the specific brand for which approval is sought.
  • If the proposed FDI exceeds 51% of the total capital of the company, at least 30% of the products sold must be mandated sourced from Indian small industries (where the total investment in plant and machinery does not exceed US$ 2 million at the time of installation), village and cottage industries, and artisans and craftsmen.
  • E-commerce retail trading, in any form, is prohibited.
  • Investors must apply to SIA for approval from the government to bring in FDI for the retail sale of a single brand product before they can do so. The application should specify which product categories will be sold under a single brand name. Any dependence on the single brand’s products or categories of products will necessitate new government authorization.
  1. FDI in Multi-brand Retail Trading

The approval process in states that promote multi-brand retail trading allows foreign participation in multi-brand retail trading of up to 51%.

Certain conditions would have to be met before the investment would be approved. Here are a few examples of these circumstances:

  • A minimum of $100 million in FDI is required; 50% of the first $100 million in FDI has to be invested in backend infrastructure; and
  • At least 30% of the value of the manufactured/processed product purchase must come from Indian micro, small, and medium businesses.
  • According to the 2011 census, retail sales outlets are only available in cities with a population of more than one million people.
  • For multi-brand retail trading, e-commerce is not permitted.
  1. FDI in Telecom Sector
  • Up to 49% of FDI in telecom services is permitted under the automatic route, and up to 100% of FDI is permitted with prior clearance by the Financial Intelligence Policy Board. For this reason, telecom services include basic, cellular, and unfired access, long-distance national/international, V-sat, public mobile radio trunked services, and worldwide mobile personal communication services, as well as various value-added services.
  • The overall foreign holding would include investments from FIIs, NRIs, FCCBs, and American depository receipt shares, as well as proportionate foreign investment in Indian promoters/investment businesses, including those companies’ holding companies.
  • To ensure that investments do not come from countries of concern or hostile entities, the FIPB reviews investment proposals before approving them. The FIPB must follow additional limits on the transfer of accounting information, user information, and infrastructure/network diagram data when evaluating the proposals.
  1. Investment in Infrastructure Companies in the Stock Markets
  • Under SEBI regulations, foreign investment in securities market infrastructure companies, including stock exchanges, depositories, and clearing corporations, is permitted up to 49% of the paid-up capital.
  • The FII component cannot exceed 23% and the FDI component cannot exceed 26% of the permissible 49%. Foreign direct investment (FDI) is only permitted in certain enterprises with government clearance. FII participation is also restricted to secondary market purchases.
  1. Investment in Credit Information Companies (CICs)
  • The Credit Information Companies (Regulation) Act, 2005 allows foreign investment in CICs, but only if it complies with all applicable regulations, including those issued by the Reserve Bank of India. Only 49% of a company’s paid-up capital can be invested by foreign investors in aggregate (including both FDI FII limits). 
  • Only in CICs listed on stock exchanges can SEBI registered FIIs invest up to 24%(within the overall authorized ceiling of 49%). However, no FII can own more than 10% of the CIC’s stock either directly or indirectly.
  1. Investment in Commodity Exchanges
  • In commodity exchange, only the government/approval route allows a composite ceiling of 49% for foreign investment, whereas FII purchases are restricted to secondary market acquisitions. 
  • To comply with the requirement that no non-resident investor or entity, including persons working in concert with them, hold more than 5% of the total equity in such a corporation, foreign investment in commodity exchanges is required to be compliant.
  1. Investment in Public Sector Banks

The aggregate statutory cap on FDI and FII investment in nationalized banks is 20%. Investments in the Indian state bank and its affiliated bank are subject to the same limit.

  1. Investment in Print Media, dealing with news and Current affairs
  • The government/approval method allows up to 100% FDI in the publication of the facsimile version of foreign newspapers by the owner of the original foreign daily, subject to compliance with the standards published by the ministry of information and broadcasting.
  •  Only a company incorporated or registered in India under the requirements of the Companies Act is allowed to publish.
  • NRIs, PIOs, and FIIs can invest up to 26% of their FDI and investment in the publication of Indian editions of foreign magazines that cover news and current affairs, as well as newspapers and periodicals that cover news and current affairs, via the government approval route and by following the minister of information and broadcasting’s guidelines.

Conclusion

To conclude, we can say that the government of India places restrictions on FDI to protect domestic industries and critical resources (oil, minerals, etc.), preserve national and local heritage as well as protect sectors of their population as well as retain socio political independence and control economic growth.

References

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