Invest @ India
Contents
Table of Contents
Overview
Foreign Direct Investment (FDI) plays a pivotal role in driving India’s economic growth, serving as a significant non-debt financial resource for the nation’s development efforts.
Global corporations strategically invest in India, drawn by the country’s attractive investment opportunities, including tax incentives and competitive labor costs. These investments not only bring technological advancements but also generate employment and offer various other benefits. The surge in FDI is a testament to the government’s proactive policy measures, a vibrant business environment, increasing global competitiveness, and India’s growing economic influence.
To bolster Foreign Direct Investment (FDI) in the country, the Indian government has introduced a series of policies and initiatives. Noteworthy among these is the “Make in India” campaign, which aims to streamline procedures and create a favorable investment climate across different sectors.
The liberalization of FDI policies, particularly in retail, defense, insurance, and single-brand retail trading, has been a central strategy. The implementation of the Goods and Services Tax (GST) has enhanced transparency, while Special Economic Zones (SEZs) offer specialized areas with tax benefits.
In the fiscal year 2021-22, India’s FDI inflows reached an all-time high of US$ 84.84 billion, with the service sector, computer software and hardware, and trading being the primary recipients.
Statistics
According to the World Investment Report 2022, India ranked eighth among the leading global destinations for Foreign Direct Investment (FDI) as of 2020. Major deals in the technology and healthcare sectors led multinational corporations (MNCs) to form strategic partnerships with leading domestic business groups, resulting in an 83% surge in cross-border M&A activity, totalling US$ 27 billion in 2020.
The World Investment Report 2023 further highlighted India’s status as an FDI powerhouse, ranking third globally in greenfield project investments. Over the past decade (April 2014-March 2024), India has received a total of US$ 667.41 billion in FDI from more than 170 countries, spanning 33 Union Territories and States and 63 sectors across the country.
FDI Regulations
India offers an automatic route for FDI in several sectors, simplifying the investment process for foreign investors in India. However, certain sectors require government approval, and FDI caps and conditions vary from one industry to another.
Strict reporting requirements, in line with the Foreign Exchange Management Act (FEMA), are in place to ensure transparency in foreign investments in India.
FDI in India are subject to regulation and oversight by various government bodies, such as
- Department for Promotion of Industry and Internal Trade (DPIIT)- DPIIT formulates and implements policies to promote and regulate foreign investment in India across sectors.
- Reserve Bank of India (RBI)- RBI manages the monetary aspects of foreign investments in India.
- Securities and Exchange Board of India (SEBI)- SEBI regulates FDI in the capital market.
FDI Rules
Foreign Direct Investment (FDI) is a crucial driver of economic growth in India. The Indian government has established a well-defined regulatory framework to facilitate FDI, categorized under two primary routes: the Automatic Route and the Government Route.
Understanding these routes and their specific requirements, particularly in light of Press Note 3, is essential for investors.
Under the Automatic Route, foreign investments do not require prior approval from the Government of India. Companies can invest directly, provided they adhere to the sectoral caps and conditions stipulated by the government. Most sectors fall under this route, making it easier for investors to enter the Indian market.
Investments under the Government Route require prior approval from the Indian government. Proposals are evaluated by the respective administrative ministry or department responsible for the sector in which the investment is being made. This route is applicable to sectors where the government seeks to regulate or control foreign investments due to strategic, national security, or other sensitive considerations.
Press Note 3, issued by the Department for Promotion of Industry and Internal Trade (DPIIT) on April 17, 2020, introduced significant changes to the FDI policy in India, primarily concerning investments from countries that share land borders with India.
Key Provisions
Any entity or individual from a country that shares a land border with India, or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, is required to seek prior government approval before investing in India.
This primarily affects investors from countries like China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan.
The regulation covers new investments as well as acquisitions of equity stakes in existing Indian companies. Even transactions that would otherwise fall under the Automatic Route require approval if they involve investors from the aforementioned countries.
The Press Note extends the approval requirement to cases where the beneficial owner of an investment is situated in or is a citizen of a bordering country.
This is particularly relevant for investments routed through other countries but ultimately controlled by entities from these neighbouring countries.
Sectoral Limits
Different sectors in India have specific caps on the percentage of FDI allowed, which are periodically updated by the government.
Below are some key sectors and their respective FDI limits as per the latest regulations:
100% FDI under the Automatic Route, except for certain activities such as breeding of animals, where it falls under the Government Route.
Up to 100% FDI is allowed in various broadcasting sectors, but different activities such as cable networks and direct-to-home services have specific routes and conditions attached.
Up to 74% FDI is permitted under the Automatic Route, while investments beyond 74% up to 100% require government approval, with conditions related to security clearances and adherence to guidelines.
100% FDI is allowed in greenfield projects under the Automatic Route. For brownfield projects, up to 74% FDI is under the Automatic Route, and beyond 74%, it requires government approval.
100% FDI is permitted, with up to 49% under the Automatic Route, and beyond 49%, it requires government approval.
100% FDI is allowed in B2B e-commerce under the Automatic Route.
In the case of B2C, FDI is subject to government approval and certain operational conditions.
Single-brand retail: Up to 100% FDI is permitted, with up to 49% under the Automatic Route and beyond 49% requiring government approval, subject to certain conditions.
Multi-brand retail: FDI up to 51% is permitted under the Government Route with specific conditions, including state government approval and compliance with supply chain norms.
Approval Process
For sectors or investments requiring government approval:
The investor must submit an application through the Foreign Investment Facilitation Portal (FIFP). The FIF portal has been integrated with NSWS since August 05, 2022 and the FDI proposals required government approval is to be filed on National Single Window System (NSWS) portal (https://www.nsws.gov.in).
This portal facilitates the single window clearance of applications which are through approval route.
The proposal is forwarded to the respective Administrative Ministry/Department, which evaluates the investment in line with sectoral guidelines, security implications, and the broader national interest.
Upon receipt of the FDI application, the concerned Administrative Ministry/ Department shall process the application as per the Standard Operating Procedure (SOP). If the online filing of application is with digital signature by authorised signatory, physical submission of the copy is not required. For applications without digital signature, once the e-filing of the application is completed, the applicant is required to file/courier only SINGLE signed copy of the printed version of the online application, along with the duly authenticated copy of the documents attached with the application, to the Nodal Officers of the concerned Administrative Ministry/Department as per the SOP framed and laid down by DPIIT on 29.06.2017. It was last updated and amended on 09.11.2020. The additional features such as: e-communication, quicker processing, reduced paperwork, SMS/email alert and many more continue to exist.
With respect to reporting of downstream investments, the Indian entity is required to notify its downstream investment on Foreign Investment Facilitation Portal directly in the form available at (https://fifp.gov.in). within 30 days of such investment.
The concerned Ministry may consult with other agencies, including the Ministry of Home Affairs and Department of Revenue, for security and compliance clearances.
Upon satisfactory evaluation, the government grants approval, and the investor can proceed with the investment. The process is generally completed within 6-8 weeks but may vary depending on the complexity of the investment and the sector.
Restricted sectors
Certain sectors are not permitted to receive FDI in India due to a range of reasons, including national security concerns, safeguarding domestic interests, and protecting small and medium-sized enterprises (SMEs).
These sectors are listed below with data once again sourced from Make In India.
- Lottery business including Government/private lottery, online lotteries, etc.
- Chit funds
- Trading in Transferable Development Rights (TDR)
- Manufacturing cigars, cheroots, cigarillos and cigarettes, and tobacco substitutes
- Gambling and betting, including casinos
- Nidhi company
- Real estate business or construction of farmhouses
- Sectors not open to private sector investment- atomic energy, railway operations (other than permitted activities mentioned under the Consolidated FDI policy)
Compounding of Contraventions
FDI is a capital account transaction and thus any violation of FDI regulations is covered by the penal provisions of FEMA. Provisions of para 3 of Annexure – 5 of FDI Policy and Section 15 of Foreign Exchange Management Act, 1999 permit compounding of contraventions, and Foreign Exchange (Compounding Proceedings) Rules, 2000, as amended from time to time, lays down the basic framework for the compounding process.
Administrative Ministries/ Departments are advised to refer to the Master Direction- Compounding of Contraventions under FEMA, 1999 FED Master Direction No.4/2015-16 issued by the RBI, as amended from time to time.
Conclusion
The FDI framework in India is designed to encourage foreign investments while safeguarding national interests. Press Note 3 introduced crucial amendments to protect Indian companies from potential hostile takeovers, especially from bordering countries. Investors must carefully navigate these regulations, understanding the specific requirements and limits associated with both the Automatic and Government Routes, to successfully invest in the Indian market.