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Foreign Investment In India

The Foreign Investment in India is undertaken in accordance with the FDI Policy which is formulated and announced by the Government of India. The Government of India has allowed different channels of Investment in India on basis of the entity of the foreign national. The foreign investment refers to the direct or indirect investment done by a company or an individual in some other country.

Foreign Investment in India can be summarized in the below mentioned points:

Foreign Direct Investment in India

Foreign Direct Investment (FDI) in India is undertaken in accordance with the FDI Policy which is formulated and announced by the Government of India.

Investment in Indian companies can be made by both non-resident as well as resident Indian entities. Any non-resident investment in an Indian company is “Direct Foreign Investment”.

Investment by resident Indian entities could again comprise both resident and non-resident investments. Thus, such an Indian company would have “Indirect Foreign Investment” if the Indian investing company has foreign investment in it. The indirect investment can also be a cascading investment, i.e. through multi-layered structure.

Types of Instruments to invest in India
  • Equity shares
  • Fully Compulsorily and Mandatorily convertible Debentures.
  • Fully Compulsorily and Mandatorily convertible Preference shares.
  • Issue of other types of preference shares such as non-convertible, optionally convertible or partially convertible, has to be in accordance with the guidelines applicable for External Commercial Borrowings (ECBs).

Entry Routes for Investment in India

Under the Foreign Direct Investments (FDI) Scheme, investments can be made in shares, mandatorily and fully convertible debentures and mandatorily and fully convertible preference shares of an Indian company by non-residents through two routes:
  • Automatic Route- Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment.
  • Government Route- Under the Government Route, the foreign investor or the Indian company should obtain prior approval of the Government of India(Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance or Department of Industrial Policy & Promotion, as the case may be) for the investment.

Who can invest in India?

  • A non-resident entity (other than citizens of Pakistan and Bangladesh or an entity incorporated in Pakistan or Bangladesh who can only invest with a prior approval of FIPB) can invest in India, subject to the FDI Policy.
  • NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis.
  • Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government route and with the prior approval of RBI if the investment is through Automatic route.
  • An FII may invest in the capital of an Indian Company under the Portfolio Investment Scheme which limits the individual holding of an FII to 10% of the capital of the company and the aggregate limit for FII investment to 24% of the capital of the company

Mode of Payment

An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures:
  • Inward remittance through normal banking channels.
  • Debit to NRE / FCNR account of a person concerned maintained with an AD (Category I) bank.
  • Conversion of Royalty / Lump sum / Technical know-how fee due for payment, import of capital goods by units in SEZ or conversion of ECB shall be treated as consideration for issue of shares.
  • Conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
  • Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD (Category I) bank on behalf of residents and non-residents towards payment of share purchase consideration.

Further, the Reserve Bank may on an application made to it and for sufficient reasons, permit an Indian Company to refund / allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.

Prohibition on Foreign Investment in India

Foreign investment in any form is prohibited in a company which is engaged or proposes to engage in the following activities:-
  • Business of chit fund
  • Nidhi company
  • Agricultural or plantation activities
  • Real estate business or construction of farm houses (does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships).
  • Trading in Transferable Development Rights (TDRs).
  • Lottery Business including Government /private lottery, online lotteries, etc.( Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities).
  • Gambling and Betting including casinos etc.
  • Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

Modes of Investment under Foreign Direct Investment Scheme

  • Issuance of fresh shares by the company
  • Acquisition by way of transfer of existing shares by person resident in or outside India:
    • Sale or Gift of Shares/ Convertible debentures by person resident in or outside India
    • Sale of Shares/ Convertible debentures on the Stock Exchange by person resident outside India
    • Transfer of shares/convertible debentures from Resident to Person Resident outside India
    • Acquisition of shares under the FDI scheme by a non-resident on a recognized Stock Exchange
  • Issue of Rights / Bonus shares
  • Issue of shares under Employees Stock Option Scheme (ESOPs)
  • Conversion of ECB / Lump-sum Fee / Royalty / Import of capital goods by units in SEZs in to Equity/ Import payables / Pre incorporation expenses
  • Issue of shares by Indian Companies under ADR / GDR
  • Through issue / transfer of ‘participating interest / right’ in oil fields to a non resident

Acquisition of shares under Scheme of Merger / Amalgamation

Mergers and amalgamations of companies in India are usually governed by an order issued by a competent Court on the basis of the Scheme submitted by the companies undergoing merger/amalgamation.

Once the scheme of merger or amalgamation of two or more Indian companies has been approved by a Court in India, the transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject to the conditions that :
  • the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap
  • the transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy (refer para 7(c)).

Remittance of sale proceeds

AD Category – I bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate from the Income Tax Department has been produced.

Remittance on winding up/liquidation of Companies

AD Category – I banks have been allowed to remit winding up proceeds of companies in India, which are under liquidation, subject to payment of applicable taxes.

AD Category – I banks shall allow the remittance provided the applicant submits:
  • No objection or Tax clearance certificate from Income Tax Department for the remittance.
  • Auditor's certificate confirming that all liabilities in India have been either fully paid or adequately provided for.
  • Auditor's certificate to the effect that the winding up is in accordance with the provisions of the Companies Act, 1956.
  • In case of winding up otherwise than by a court, an auditor's certificate to the effect that there is no legal proceedings pending in any court in India against the applicant or the company under liquidation and there is no legal impediment in permitting the remittance.

Guidelines for calculation of total foreign investment, i.e. direct and indirect foreign investment in an Indian company

All investments made directly by non-resident entities into the Indian company would be counted towards ' Direct Foreign Investment'.

Investment by resident Indian entities could again comprise both resident and non-resident investments. Thus, such an Indian company would have ‘Indirect Foreign Investment’ if the Indian investing company has foreign investment in it.
  • The methodology for calculation of total foreign investment would apply at every stage of investment in Indian companies and thus in each and every Indian company.
  • The full details about the foreign investment including ownership details etc. in Indian company and information about the control of the company would be furnished by the Company to the Government of India at the time of seeking approval.
  • In any sector, where Government approval is required for foreign investment and in cases where there are any inter-se agreements between share-holders which have an effect on the appointment of the Board of Directors or on the exercise of voting rights or of creating voting rights disproportionate to shareholding or any incidental matter thereof, such agreements will have to be informed to the approving authority.
  • In all sectors attracting sectoral caps, the balance equity i.e. beyond the sectoral foreign investment cap, would specifically be beneficially owned by/held with/in the hands of resident Indian citizens and Indian companies, owned and controlled by resident Indian citizens.


FDI Approval Routes In India

The Foreign Direct Investment in India is not automatic route of investment in the country and require prior approval of government. The approval is required on the proposals which involves investment or some technical collaboration with Indian ventures. The permission is granted when Foreign Investment Promotion Board (FIPB) recommended it to the government for approval.

Sectors under Government Route

FDI in activities not covered under the automatic route require prior government approval. Approval of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of Foreign Investment Promotion Board (FIPB).

Sector/ Activity % Allowed ROUTE
Tea Plantation - Tea sector including tea plantations 100% Government
Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities 100% Government
Defence Industry - subject to Industrial license 26% Government
Terrestrial Broadcasting FM (FM Radio), subject to such terms and conditions, as specified from time to time, by Ministry of Information & Broadcasting, for grant of permission for setting up of FM Radio stations. 26% Government
Up-linking of 'News & Current Affairs' TV Channels 26% Government
Up-linking of 'News & Current Affairs' TV Channels 26% Government
Up-linking a Non-‘News & Current Affairs’ TV Channels / Down- linking of TV Channels 100% Government
Print Media
Publishing of Newspaper and periodicals dealing with news and current affairs 26%(NRI/PIO/FII) Government
Publication of Indian editions of foreign magazines dealing with news and current affairs 26%(NRI/PIO/FII) Government
Publishing / printing of Scientific and Technical Magazines / specialty journals / periodicals, subject to compliance with the legal framework as applicable and guidelines issued in this regard from time to time by Ministry of Information and Broadcasting 100% Government
Publication of facsimile edition of foreign newspapers 100% Government
Airports
Existing projects Above 74% Government
Non-Scheduled Air Transport Service Above 49% & up to 74% Government
Ground Handling Services subject to sectoral regulations and security clearance Above 49% Government
Satellites – Establishment and operation Government
Satellites – Establishment and operation, subject to the sectoral guidelines of Department of Space / ISRO 74% Government
Private Security Agencies 49% Government
Telecom services (including Telecom Infrastructure Providers Category-l) Above 49% Government
Single Brand product retail trading Above 49% Government
Asset Reconstruction Companies
Asset Reconstruction Company(ARC) means a company registered with the Reserve Bank of India under Section 3 of the SARFAESI Act Above 49% Government
Banking –Private sector
Banking –Private sector Above 49% & up to 74% Government
Banking- Public Sector subject to Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80. This ceiling (20%) is also applicable to the State Bank of India and its associate Banks. 20%(FDI & PIO) Government
Pharmaceuticals
Greenfield 100% Government


**NOTE: All the above investments are subject to the conditions laid down in the RBI Circular on Foreign Direct Investment

Procedure to be followed after investment is made under the Government Route

Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.

Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion.

Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. No fee is payable. The guidelines for consideration of FDI proposals by the FIPB are at Annexure-III of the Manual for FDI.

A two-stage reporting procedure has to be followed:
On receipt of share application money:
Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India under whose jurisdiction its Registered Office is located, the Advance Reporting Form, containing the following details:
  • Name and address of the foreign investor
  • Date of receipt of funds and the Rupee equivalent
  • Name and address of the authorised dealer through whom the funds have been received
  • Details of the Government approval, if any
  • KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.

The Indian company has to ensure that the shares are issued within 180 days from the date of inward remittance which otherwise would result in the contravention / violation of the FEMA regulations.

Upon issue of shares to non-resident investors
Within 30 days from the date of issue of shares, a report in Form FC-GPR- PARTA together with the following documents should be filed with the Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India.
  • Certificate from the Company Secretary of the company accepting investment from person resident outside India certifying that:
    • The company has complied with the procedure for issue of shares as laid down under the FDI scheme.
    • Shares have been issued in terms of SIA/FIPB approval No. --------------------- dated -------------------- (enclose the FIPB approval copy)
    • Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.
    • Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the person resident outside India.


FDI Automatic Routes In India

Sectors under Automatic Route

In pursuance of Government's commitment to early implementation of the second phase of the economic reforms and with a view to further liberalising the FDI regime, all items/ activities have been placed under the automatic route for FDI/NRI and OCB investment, except the following:

All proposals that require an Industrial Licence which includes
  • The item requiring an Industrial Licence under the Industries Development& Regulation Act 1951
  • Foreign investment being more than 24% in the equity capital of units manufacturing items reserved for Small Scale Industries
  • All items which require an Industrial Licence in terms of the locational policy notified by Government under the New Industrial Policy of 1991.
  • All proposals in which the foreign collaborator has a previous venture / tie up in India.
  • All proposals relating to acquisition of shares in an existing Indian company in favour of a foreign/NRI/OCB investor
  • All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and /or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route
Sector/ Activity % Allowed ROUTE
Agriculture & Animal Husbandry - Floriculture, Horticulture, Apiculture and Cultivation of Vegetables & Mushrooms under controlled conditions; Development and production of Seeds and planting material; Animal Husbandry (including breeding of Dogs), Pisciculture, aquaculture, under controlled conditions; and services related to agro and allied sectors 100% Automatic
Mining - Mining and Exploration of metal and non metal ores including diamond, gold, silver and precious ores but excluding titanium bearing minerals and its ores; 100% Government
Coal and Lignite - Coal & Lignite mining for captive consumption by power projects, iron & steel and cement units and other eligible activities permitted. Setting up coal processing plants like washeries, subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing. 100% Automatic
Petroleum & Natural Gas - Exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products and natural gas, marketing of natural gas and petroleum products, petroleum product pipelines, natural gas/ pipelines, LNG Regasification infrastructure, market study and formulation and Petroleum 100% Automatic
Petroleum & Natural Gas - Petroleum refining by the Public Sector Undertakings, without any disinvestment or dilution of domestic equity in the existing PSUs. 49% Automatic
Broadcasting Carriage Services - Teleports, Cable Networks, Direct to Home(DTH), Mobile TV, Headend-in-the Sky Broadcasting Services(HITS), 74% Automatic
Cable Networks (Other MSOs not undertaking upgradation of networks towards digitalization and addressability and Local Cable Operators (LCOs).

Broadcasting Content Services
49% Automatic
Airports
Greenfield Projects 100% Automatic
Existing projects 100% Automatic upto 74%
Scheduled Air Transport Service / Domestic Scheduled Passenger Airline 49% FDI 100% NRI Automatic
Non-Scheduled Air Transport Service 74% FDI 100% NRI Automatic upto 49%
Helicopter services / seaplane services requiring DGCA approval 100% Automatic
Ground Handling Services subject to sectoral regulations and security clearance 74% FDI 100% NRI Automatic upto 49%
Ground Handling Services subject to sectoral regulations and security clearance 74% FDI 100% NRI Automatic upto 49%
Courier services for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898 and excluding the activity relating to the distribution of letters. 100% Automatic
Construction Development: Townships, Housing, Built-up infrastructure
Townships, housing, built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) 100% Automatic
Industrial Parks – new and existing 100% Automatic
Telecom services (including Telecom Infrastructure Providers Category-l) 100% Automatic upto 49%
Cash & Carry Wholesale Trading / Wholesale Trading (including sourcing from MSEs) 100% Automatic
E-commerce activities 100% Automatic
Single Brand product retail trading 100% Automatic upto 49%
Asset Reconstruction Companies
Asset Reconstruction Company(ARC) means a company registered with the Reserve Bank of India under Section 3 of the SARFAESI Act 100% of paid up capital of ARC Automatic upto 49%
Banking –Private sector
Banking –Private sector 74% incl. investment by FII Automatic upto 49%
Credit Information Companies (CIC) 74%(FDI & FII) Automatic
Infrastructure Company in the Securities Market
Infrastructure companies in Securities Markets, namely, stock exchanges, depositories & clearing corporations, in compliance with SEBI Regulations- [FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital] 49% (FDI & FII) Automatic
Insurance 26% Automatic
Foreign investment in NBFC is allowed under the automatic route in only the following activities: 100% Automatic
Pharmaceuticals 100% Automatic
Existing Companies 49 %( FDI & FII) Automatic
Power Exchanges
Power Exchanges under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010 49% (FDI & FII) Automatic


**NOTE: All the above investments are subject to the conditions laid down in the RBI Circular on Foreign Direct Investment

Procedure to be followed after investment is made under the Automatic Route

A two-stage reporting procedure has to be followed:
On receipt of share application money:Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India under whose jurisdiction its Registered Office is located, the Advance Reporting Form, containing the following details:
  • Name and address of the foreign investor
  • Date of receipt of funds and the Rupee equivalent
  • Name and address of the authorised dealer through whom the funds have been received
  • Details of the Government approval, if any
  • KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.

The Indian company has to ensure that the shares are issued within 180 days from the date of inward remittance which otherwise would result in the contravention / violation of the FEMA regulations.

Upon issue of shares to non-resident investors

Within 30 days from the date of issue of shares, a report in Form FC-GPR- PARTA together with the following documents should be filed with the Foreign Exchange Department, Regional Office concerned of the Reserve Bank of India.
  • Certificate from the Company Secretary of the company accepting investment from person resident outside India certifying that:
    • The company has complied with the procedure for issue of shares as laid down under the FDI scheme.
    • The investment is within the sectoral cap / statutory ceiling permissible under the Automatic Route of the Reserve Bank and it fulfills all the conditions laid down for investments under the Automatic Route.
    • Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the person resident outside India.




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