Foreign investments in India are the investments made by foreign corporates, foreign nationals, as well as non-resident Indians. Funds from a foreign country can be invested in the form of securities, properties, ownership/management or collaboration. Thus, foreign Investments are classified as below:
- Foreign Direct Investment (FDI): When a foreign company or individual makes an investment in India that involves either establishing new business operations or acquiring business assets, including controlling interests, in an already existing Indian company.
- Foreign Portfolio Investment (FPI): When a foreign institutional investors invest in the shares of an Indian company, or in bonds offered by an Indian company with an intention to ensure a controlling interest in India with a lower investment than in FDI.
- Foreign Institutional Investment (FII): When a foreign institutional investors invest in the shares of an Indian company, or in bonds offered by an Indian company without the intention to take controlling interest, rather to diversify portfolio by ensuring hedging and to gain high returns.
Foreign investments in India is governed by the FDI policy released by the government of India after every six months. In order to take advantage of relatively low wages, some special investment privileges such as tax exemptions, etc. foreign companies makes investment in India. A foreign investor can penetrate the Indian market as FDI either through mergers and acquisitions or by acquiring voting stock in a foreign company or through joint ventures with foreign corporations or by starting a subsidiary of a domestic firm in a foreign country. The restrictions for FDI in India have been watered down gradually to a great extent over the years. Presently, the restrictions are in place for only those business activities that are strategic to the interests of the country or are politically sensitive issues including retail trade, defense, telecom, real estate, etc.
FDI is classified into:
- Automatic Route: Business does not requires prior permission for the investment
- Approval Route: Business needs to obtain prior approval from the Foreign Investment Promotion Board (FIPB) or RBI for the investment
Once the FDI is received and accepted by the recipient company, an intimation is to be sent to RBI. Thus, the first and foremost step for any foreign national or any non-resident to look out for is the FDI policy. One has to understand at first if there are any restrictions, prohibitions in the proposed business activity and then move forward to the company formation process.
FDI is prohibited in following nine sectors- lottery business, chit funds, Nidhi Company, gambling and betting, real estate business, and manufacturing of cheroots, cigars, cigarillos and cigarettes using tobacco.
A foreign company may plan to set up business in India through following ways:
- Incorporating a joint venture or wholly owned subsidiary as per the provisions of Companies Act,2013.
- Undertaking activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000 by setting up Liaison Office/ Representative Office or a Project Office or a Branch Office