India’s foreign trade policy has been formulated with a view to invite and encourage FDI in India. The Reserve Bank of India has prescribed the administrative and compliance aspects of FDI. A foreign company planning to set up business operations in India has the following options:
- investment under automatic route; and
- investment through prior approval of Government.
Procedure under automatic route
FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.
List of activities or items for which automatic route for foreign investment is not available, include the following:
- Banking
- NBFC’s Activities in Financial Services Sector
- Civil Aviation
- Petroleum Including Exploration/Refinery/Marketing
- Housing & Real Estate Development Sector for Investment from Persons other
than NRIs/OCBs. - Venture Capital Fund and Venture Capital Company
- Investing Companies in Infrastructure & Service Sector
- Atomic Energy & Related Projects
- Defense and Strategic Industries
- Agriculture (Including Plantation)
- Print Media
- Broadcasting
- Postal Services
Procedure under Government approval
FDI in activities not covered under the automatic route, requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB). Approvals of composite proposals involving foreign investment/foreign technical collaboration are also granted on the recommendations of the FIPB. 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 & Promotion.
Investment by way of Share Acquisition
A foreign investing company is entitled to acquire the shares of an Indian company without obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines. If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange, it would require the approval of the Security Exchange Board of India.
New investment by an existing collaborator in India
A foreign investor with an existing venture or collaboration (technical and financial) with an Indian partner in particular field proposes to invest in another area, such type of additional investment is subject to a prior approval from the FIPB, wherein both the parties are required to participate to demonstrate that the new venture does not prejudice the old one.
General Permission of RBI under FEMA
Indian companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.
Participation by International Financial Institutions
Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc., in domestic companies is permitted through automatic route, subject to SEBI/RBI regulations and sector specific cap on FDI.
FDI In Small Scale Sector (SSI) Units
A small-scale unit cannot have more than 24 per cent equity in its paid up capital from any industrial undertaking, either foreign or domestic. If the equity from another company (including foreign equity) exceeds 24 per cent, even if the investment in plant and machinery in the unit does not exceed Rs 10 million, the unit looses its small-scale status and shall require an industrial license to manufacture items reserved for small-scale sector. See also FDI in Small Scale Sector in India Further Liberalized
Sector wise Regulation in Foreign Investment
- i) Automatic route for specified activities subject to Sectoral cap and conditions.
| Sectors | Cap |
Airports
| 74% 100% |
Air Transport Services
| 100% 49% |
| Alcohol distillation and brewing | 100% |
| Banking (Private Sector) | 74% |
| Coal and Lignite mining (specified) | 100% |
| Coffee, Rubber processing and warehousing | 100% |
| Construction and Development (Specified projects) | 100% |
| Floriculture, Horticulture and Animal Husbandry | 100% |
| Specified Hazardous chemicals | 100% |
| Industrial Explosives Manufacturing | 100% |
| Insurance | 26% |
| Mining (Precious metals, Diamonds and stones) | 100% |
| Non banking finance companies ( conditional) | 100% |
Petroleum and Natural gas
| 100% 100% |
| Power generation, transmission, distribution | 100% |
Trading
| 100% 100% |
| SEZ’s and Free Trade Warehousing Zones | 100% |
Telecommunication
| 49% 49% 49% 100% |
Prior Approval from FIPB where investment is above Sectoral caps for activities listed below.
| Sectors | Cap |
| New Investment by a foreign investor in a field in which the investor already has an existing joint venture or collaboration with another Indian partner | |
| New investment sought to be made in manufacture of items reserved for Small Scale Industries | |
| |
| 49% |
| 74% |
| |
| 20% 49% 49% 49% 26% |
100%
- Cigarette manufacturing
100 %
- Courier services other than those under the ambit of Indian Post Office Act, 1898
100 %
- Defense production
26 %
- Investment companies in infrastructure / service sector (except telecom)
49 %
- Petroleum and natural gas refining (PSU)
26 %
- Tea Sector – including Tea plantation
100 %
- Trading items sourced from Small scale sector
100 %
- Test marketing for equipment for which company has approval for manufacture
100 %
- Single brand retailing
51 %
- Satellite establishment and operations
74 %
- Print Media
-
- Newspapers and periodicals dealing with news and current affairs
- Publishing of scientific magazines / specialty journals periodicals
26 %
100 %
- Telecommunication
-
- Basic and unified access services
- ISP with gateways, radio paging, end to end bandwidth
- ISP with gateway (specified)
49 % to 74 %
49 % to 74 %49 % to 100 %