Foreign Direct Investment or FDI Policy in India Foreign Direct Investment or FDI means a direct investment by a non-resident entity or person resident outside India in India. This is encouraged in liberalised economies to supplement the existing resources of the country that includes domestic capital, technology and skills, and hence, thereby accelerate the economic growth of the country. The Indian government through the Department of Industrial policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India makes policy announcements on FDI and these are contained in the master circular on Consolidated FDI Policy and the Reserve Bank of India as being the regulator of money affairs in India through amendments to the notification of FEMA or Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulation, 2000 notify to the general public. The notification in practice takes effect from date of issue of press release/press notes. The RBI or Reserve Bank of India has issued the circular on Consolidated Policy on FDI on 10 th April 2012 which takes effect from the same date. FDI can be made by the following Persons/Entities A non-resident entity/ a person resident outside India can invest in India but this shall be subject to the FDI policy. A citizen of Pakistan/ entity incorporated in Pakistan can invest in India in sectors other than Defence, atomic energy and space but this investment shall be only through the government route. This is by virtue of the latest press release by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry. A citizen of Bangladesh/entity incorporated in Bangladesh can invest in India but only through government route that is permission is required to be taken for same from the government. A non-resident Indian can invest in India. The Erstwhile Overseas Corporate Body cannot invest in India with effect from 2003. Foreign Institutional Investors or FII can invest in India but subject to FDI policy. FDI Mode can be made in the following Entities: A Company A Proprietary Concern A Partnership A Limited Liability Partnership An Indian Venture Capital Fund Undertaking A Trust FDI in India can be made by the following two Modes: Automatic route Government route
Under the Automatic route, the Foreign Investors or Indian Companies are not required to take permission of any kind from the RBI or Government of India before investing in India but the investment in India by this foreign investor has to be in strict compliance to the FDI policy. On the other hand, under the Government route, the Foreign Investor or Indian Company is required to take prior permission from the Government of India through Ministry of Finance, Foreign Investment Promotion Board or FIPB for investment in India. Foreign Direct Investment is prohibited in Sectors where Private investment is prohibited by policy and these include Atomic energy, Railway transport (mass transport system). Lottery business including government or private lottery business. Gambling. Business of Chit Funds. Real estate or construction on farm land. Nidhi Companies Trading in Transferable Development Rights or (TDIs) Manufacture of Cigars, Cigarettes, cheroots, cigarillos or Tobacco Substitutes etc. Foreign Direct Investment in India is made under: Foreign Direct Investment or FDI in India is in strict accordance to FDI Policy as laid down by the notifications released by RBI. FDI in India is subject to some notified guidelines. Foreign investment in India through FDI mode is only through investment in equity shares, fully or mandatorily convertible preference shares or fully or mandatorily convertible debentures strictly priced in accordance to guidelines prescribed by FEMA regulations and SEBI and this pricing should be determined at the time of issuing these instruments and at the time of conversion, the price should not be lower than the fair value determined at the time of issuance of these instruments. FDI in India is hundred percent in only few sectors of industries and is subjected to restrictions or conditions or sectorial caps as laid down by the said notification on FDI policy. Sectors of industries where direct foreign investment or FDI can be made through automatic route are generally in practice those sectors where hundred percent investments is allowed baring few cases where certain restrictions are placed. Procedure required to be followed in Case of Investment by Automatic Route: The entity that receives share application money from foreign investor or the Indian entity that is issuing shares to foreign investor is required to inform about the same within thirty days from the day of inward remittance to the Foreign Exchange Department, the concerned regional office of the Reserve Bank of India or RBI and file all the documents with the said office as prescribed.
Procedure required to be followed in Case of Investment by Government Approval Route: The Foreign Investors are required to make applications in Form FC-IL as prescribed by the notification to the Foreign Investment Promotion Board or FIPB for the approval of the proposal of investment and indicate all the necessary details as prescribed. Applications can also be made on plain sheet of paper and these are also accepted by the FIPB. The companies that receive approval for investment in the above mentioned mode from FIPB or Foreign Investment Promotion Board are there after not required to seek any further approval from RBI or Reserve Bank of India in regard to the same. The company are only required to notify about the same to the concerned regional office of RBI and file the prescribed documents within thirty days of inward remittance of funds or on issue of shares to foreign investors respectively. Foreign Direct Investment in Various Sectors of Industries: FDI in Power Sector Hundred percent FDI is permitted under the automatic route in projects of electricity generation, transmission, distribution. FDI up to hundred percent in permitted in generation and transmission of electric energy produced in hydro-electric, coal/lignite based thermal, oil-based and gas based thermal power plants. However, FDI is not permitted in generation, transmission and distribution of electric energy produced by atomic energy. Recent Press release by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry states that up to forty nine percent investment is permitted in Power Exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010. This investment shall be subject to FDI limit of twenty six percent and twenty three percent of FII or Foreign Institutional Investment of the paid up capital. Under this investment, FDI is permitted through the government route and FII shall be permitted by the automatic route. FII purchases shall be restricted to secondary market only. No non-resident investor/ entity, including persons acting in concert, shall hold more than five percent of the equity in these companies and the foreign investment are required to be in compliance with SEBI Regulations and any applicable laws and regulations that are in force. FDI in Mining Sector Hundred percent FDI is allowed in Mining and exploration of metals and non-metals ores including gold, diamond, precious metals that are subject to the Mines and Minerals (Development & Regulation) Act, 1957 through automatic route. Hundred percent FDI in mining of Coal, iron and steel for power consumption is also allowed through the automatic route.
FDI in Industrial Undertakings Producing Products Reserved for Micro and Small Scale Industries: An industrial undertaking other than Micro or Small Scale Enterprise that is engaged in producing goods that are reserved for the same that is Micro or Small Scale Enterprise and is being invested with foreign capital of more than twenty four percent of the total capital of the said undertaking is required to seek approval of the Government of India for same that is application in Form FC-IL and notifying the RBI within thirty days of inward remittance. The industrial undertaking is also required to apply for industrial license under the Industries (Development and Regulation) Act 1951 and fulfil the conditions as laid down by the respective Act. One of the conditions is the industrial undertaking is required to export a minimum fifty percent of the reserved products produced by it for three years. FDI in Retail Sector FDI up to hundred percent are allowed in the Single Brand Retail but it is subject to some conditions like products that are sold are required to be sold under the same brand internationally in one or more than one country other than India, Single Brand product Retailing trading shall include only those that are branded during manufacturing etc. FDI in Multi Brand Retailing of all products is permitted by virtue of latest FDI policy but with a sectorial cap of up to fifty one percent through government mode. This is however required to be bodily adopted by an amendment to the FEMA regulations by the RBI. The Supreme Court of India has delivered a judgement recently in October in this regard. However, FDI in Multi Brand Retail is subject to some conditions or restrictions and these include: I. Fresh agricultural produce that includes fruits, vegetables, flowers, grains, pulses, fresh poultry, fish products and meat products are required to be unbranded. II. A foreign investor is required to bring or invest minimum amount of US $ 100 million in form of FDI in India. III. At least thirty percent of the value of procurement of manufactured/processed products purchased shall be sourced from Indian small industries which have a total investment in plant & machinery not exceeding US$ 1.00 million. IV. Retail trading in any form by means of e-commerce, shall not be permissible, for companies with FDI, engaged in the activity of multi brand retail trading. V. Retail outlets would be setup only in those States/Union Territories which have agreed to allow FDI in Multi Brand Retail Trading under this policy. FDI in Aviation Up to hundred percent FDI is permitted through the automatic route of investment in India in Helicopter Services/Seaplanes Services but it has to approved by Directorate General of
Aviation or DGCA and up to forty nine percent of FDI is permitted through the automatic route is permitted in Schedule and Non-Schedule Air Transport Services. Non-resident Indian are permitted to invest up to hundred percent in India in Schedule Air Transport/Domestic scheduled passenger Airline and Non-scheduled air transport services. Foreign airlines are not allowed to invest through above mentioned routes in Scheduled/non-scheduled Air transport services. Foreign investor in case wishes to invest more that forty nine percent through FDI mode in India is required to invest through the government route but subject to limitation of investing only up to seven four percent. Foreign airlines are permitted to invest in India but only in scheduled or non-scheduled air transport services but this shall not include the Air India and this investment shall be through the government route and this FDI is subject to some conditions like: Forty nine percent shall include both FDI AND FII i.e. Foreign Institutional Investment and the investment by foreign airlines shall be in consonance to SEBI guidelines and rules, regulations that includes SEBI (Issue of Capital and Disclosure Requirements) Regulations, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, as well as other applicable rules and regulations and all technical equipment that might be imported into India, as a result of such investment, shall require clearance from the relevant authority in the Ministry of Civil Aviation, Government of India and many more. Hundred percent FDI is permitted through the automatic route in maintenance and repair organization, flying training institutions and technical training institutions. Hundred percent FDI through the government approval route is permitted in courier services for carrying packages, parcels and other items that do not come within the ambit of Post Office Act, 1898 and excluding activities relating to the distribution of letters. FDI in Agriculture Hundred percent FDI is allowed in through the automatic route in the following sectors of agriculture: I. Floriculture, II. Horticulture, III. Apiculture (relating to production of honey by bee keeping) IV. Cultivation of vegetables and mushrooms under controlled conditions, V. Development and production of seeds and planting material; VI. Animal Husbandry (including breeding of dogs, rearing of animals) VII. Aquaculture, under controlled conditions; VIII. Services related to agro and allied sectors FDI is allowed only in the above mentioned agricultural activities but are subject to guidelines and these include: that foreign investors investing are required to follow all the Acts, Rules and regulations that are is force and applicable to these activities, company dealing with genetically modified plants or organisms are required to follow all the safety norms prescribed by Environment (Protection) Act on the genetically
modified organisms and in case of any import of genetically modified materials, then they shall be subject to the conditions laid down by the notifications issued under Foreign Trade (Development and Regulation) Act, 1992 or Import of any material shall be in accordance to National seed Policy. Hundred percent FDI is permitted in Tea Plantation also but shall be only through the government route that is the proposal is required prior approval of the Government of India. FDI in Information Technology Sector Recent press release by the Ministry of Commerce and Industry indicates that Government of India has increased the FII limit from forty nine percent to seventy four percent in Teleports; Direct to Home (DTH); Cable Networks (MSOs operating at National or State or District level). FDI up to forty nine percent is permitted under automatic route and foreign investment beyond seventy four shall be permitted by government route. Foreign investment up to forty nine percent is permitted under the automatic route and in case foreign investment beyond forty nine percent but up to seventy four percent then, permission for the same is required to be taken under the Government route for operators in Mobile T.V services. Up to twenty six percent FDI is permitted through the government route for setting up Terrestrial Broadcasting services that is FM Radio channels. Hundred percent FDI under the automatic route is allowed in Data processing, software development and computer consultancy services; Software supply services; Business and management consultancy services, Market Research Services, Technical testing & Analysis service. FDI in Telecom Services Foreign direct investment in telecom services is allowed up to seventy four percent and direct and indirect foreign investment in the company shall be counted for the purpose of FDI ceiling. FDI up to forty nine percent is permitted by the automatic route and FDI beyond forty nine percent is through government route. Some of conditions that are laid down for FDI in telecom services in India: I. FDI shall be applicable in cases of Basic, Cellular, Unified Access Services, National/ International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added Services. II. Foreign Investment shall include investment by Foreign Institutional Investors (FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and convertible preference shares held by foreign entity. III. The 'Indian' shareholding will not be less than twenty six percent.
IV. FDI in the licensee company/indian promoters/investment companies including their holding companies shall require approval of the Foreign Investment Promotion Board (FIPB) if it has a bearing on the overall ceiling of seventy four percent. While approving the investment proposals, FIPB shall take note that investment is not coming from countries of concern and/or unfriendly entities. V. The investment approval by FIPB shall envisage the conditionality that the Company would adhere to licence Agreement. VI. FDI shall be subject to laws of India and not the laws of the foreign country/countries. FDI in Petroleum Industries FDI up to hundred percent under the automatic route is permitted in exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products, actual trading and marketing of petroleum products, petroleum product pipelines, natural gas/lng pipelines, market study and formulation and Petroleum refining in the private sector. However this shall be subject to the existing sectorial policy and regulatory framework in the oil marketing sector and the policy of the Government on private participation in exploration of oil and the discovered fields of national oil companies. Up to Forty nine percent FDI is permitted under the Government route in Public Sector Undertakings or PSU engaged in petroleum refining. However, this should not involve any divestment or dilution of domestic equity in the existing PSUs. Up to hundred percent FDI is permitted through the automatic route in renewable energy production. FDI in Real Estate FDI up to hundred percent under the automatic route is permitted for building 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) but these are subject to some guidelines and these guidelines are also applicable to investments made by NRI. Some of these guidelines are: I. The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/ Municipal/ Local Body concerned. II. The investor/ investee company shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/ bye-laws/ regulations of the State Government/ Municipal/ Local Body concerned.
III. The State Government/ Municipal/ Local Body concerned, which approves the building/ development plans, would monitor compliance of the above conditions by the developer. FDI in Infrastructure Building like Roads: Hundred percent FDI through the automatic route is permitted in services like operation of highway bridges, toll roads and vehicular tunnels, services incidental to transport like cargo handling incidental to land transport, construction and maintenance of roads and bridges build on transfer basis including collection of tolls. FDI in Port Development Hundred percent FDI is allowed under the automatic route for: I. Leasing of existing assets of ports. II. Construction/ creation and maintenance of assets such as-container terminals bulk/ break bulk/ multi-purpose and specialised cargo berths, warehousing, container freight stations, storage facilities and tank farms, setting up of captive power plants, dry docking and ship repair facilities. III. Leasing of equipment for port handling and leasing of floating crafts. IV. Captive facilities for port based industries. The above enumerated are the some of the sectors of industries where FDI is permitted by government route or automatic route. There are many more sectors of industries that are open for FDI and many more sectors in future shall hopefully open up for FDI. FDI policy has truly liberalised the economy and brought some significant changes in the economy. Products and technology that was once available only in abroad is now a door step away. This will definitely encourage economic growth with the use of best of both the worlds but at the same it has raised some important debates in some sectors of industries like for instance the retail industry where questions are raised on sustainability of the Indian shop owners in the wake of foreign retail brand stores. But, one cannot deny the fact the FDI policy has been formulated keeping in mind all sections of society and aimed for benefit the country with all check and balances in place that is informing the RBI and FIPB for necessary approval of proposals of FDI and thereby it can be said that FDI policy in India is not fully drown in wave for foreign direct investment and keep in mind interest of Indian people. In the end, it can be said that the government policy on FDI has truly opened the Indian economy post 1990 and only future can tell how it shall shape the Indian Economy and fulfil the objective for which it was implemented that is accelerate economic growth of the country. DISCLAIMER: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. The contents should not be construed as legal advice or an invitation for a lawyer-client relationship and should not rely on information provided herein. Although we Endeavour to provide accurate and timely information; there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.