Foreign direct investment in India

India4.jpg

India, as evidenced by its rapid economic growth in recent years, enjoys quite a favourable position as a ‘global investment hub’. In efforts to promote the competitiveness of India as an investment destination, and to attract increased foreign direct investment (FDI), the Government of India, in conjunction with the Ministry of Commerce and Industry and the Department of Industrial Policy and Promotion, has recently eased the country’s FDI procedures.

The consortium of these three institutions has implemented a regulatory framework for FDI which is transparent, comprehensible and predictable.  This regulatory framework consists of Acts and Regulations (the most prominent of which is the Foreign Exchange Management Act 1999 and its Regulations), Clarifications, Press Notes and Releases relating to FDI.  This regulatory framework is merged annually into a ‘Consolidated FDI Policy Circular’ (Consolidated FDI Policy), which subsumes and supersedes all of the regulatory framework prior to its effective date.  The most recent of these Consolidated FDI Policies was released on 10 April 2012.

All non-resident entities (that is, persons resident outside of India, other than citizens of Pakistan or entities incorporated in Pakistan) can invest in India, subject to the Consolidated FDI Policy.  Investments may be made into Indian companies, partnership firms, venture capital funds and limited liability partnerships, but not into trusts or other entities.  FDI in India is permitted through one of two channels – the automatic route or the approval route.

The Automatic Route

FDI in activities that fall under the automatic route are able to proceed without any prior approval being needed from either the Government or the Reserve Bank of India (RBI).  The majority of activities automatically permitted allow FDI of up to 100%, however some FDI is only automatically allowed up to a specified cap. 

For example, FDI in airports which are Greenfield (new) projects is automatically permitted up to 100%, however FDI in existing airport projects is only automatically permitted up to 74%, after which the approval route must be followed.

The Approval Route

For FDI in activities that fall under the approval route, prior approval is required from the Government before making the investment.  The Foreign Investment and Promotion Board (FIPB), the Department of Economic Affairs and the Ministry of Finance consider each application, and approval is granted by, and on the recommendation of, the FIPB.  The process, which is relatively straightforward, usually takes between 6 to 8 weeks.  

As a condition of approval, the FIPB usually requires that investment agreements are governed by the law of India.  However, as litigation in India is typically onerous and time-consuming, arbitration is a favourable dispute resolution process.

An Indian company that already has foreign investment approval through FIPB does not need any further clearance for receiving inward remittance and for the issue of shares to non-resident investors.  Applications for FDI under the approval route can be downloaded here.

Prohibited FDI

FDI in several activities in India is strictly prohibited.  These activities are:

  • retail trading (except for single brand product retailing);
  • lottery business (including Government, private and online lotteries);
  • gambling and betting (including casinos);
  • Chit Funds;
  • the Nidhi company;
  • trading in Transferable Development Rights;
  • real estate business or the construction of farm houses;
  • manufacturing of cigars, cheroots, cigarillos and cigarettes, and of tobacco and tobacco substitutes;
  • activities and sectors not open to private sector investment (such as atomic energy and railway transport); and
  • agricultural (excluding floriculture, apiculture, horticulture, development and production of seeds and plant material, animal husbandry, pisciculture, aquaculture, cultivation of vegetables and mushrooms under controlled conditions and services related to agro and allied sectors).

In addition to the above policies being met, there are also remittance and reporting obligations relevant to FDI which carry consequences if violated.  All other necessary approvals, such as environmental policies and other state and local governments requirements, also need to be complied with.

The liberalisation of the FDI Policy in India over recent years is evident from an analysis of the OECD’s FDI Restrictiveness Index. Of the 55 countries surveyed, India was seen to be the most restrictive to foreign investment in 2006, with an Index of approximately 0.45 (a closed market would record a score of 1, a market totally open to FDI would record a score of 0).  However, from 2006 to 2010, India more than halved its FDI Restrictiveness Index in terms of moving from a closed FDI market towards an open one.

Nevertheless, according to the 2012 Index, India is still quite restrictive to foreign investment and faces problems with high inflation and interest rates, infrastructure bottlenecks and regulatory inconsistencies.

However, India appears presently to be in a state of reform.  Liberalisation measures have created a more conducive environment for foreign investment by abolishing industrial licensing, lifting FDI equity ceilings, shifting more sectors to the automatic route, allowing foreign individual investors, pension funds and trusts to directly invest in equities, and relaxing foreign exchange regulations.   

In 2011 FDI in India reached US$32 billion (an increase of 22%) and it was the twelfth most popular target for international M&A investment according to the OECD Investment Committee.  For foreign investors who are already attracted to India’s high-growth economy and the opportunities that arise from its expanding middle class, the current Consolidated FDI Policy represents a step towards further enticing investments onto Indian shores and is indicative of the Indian government’s desire to stabilise the market and make it more attractive to foreign investors.

For further information on FDI in India, see the current Consolidated FDI Policy; and the FAQs on Foreign Investments in India, issued by the RBI. 


The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


Related Content

Contacts

Bruce Adkins

Partner. Brisbane
+ 61 7 3228 9431

Profile