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Foreign investment in India
 is governed by the FDI policy. Before the economic liberalization in India in the 1990s, there were a high number of restrictions for FDI in India. Gradually, the restrictions have been watered down to a great extent and currently the restrictions are in place for only those business activities that are strategic to the interests of the country or are politically sensitive issues.

Thus today, FDI is classified into:

  • Business sectors where FDI is not allowed at all
  • Business where prior permission is required from the Foreign Investment Promotion Board (FIPB) (approval route)
  • Business where no prior permission is required (automatic route).

In all case, once the FDI is received and accepted by the recipient company, intimation is to be sent to the Reserve Bank of India (RBI)

Thus the first place for any foreign national or any Non-Resident to look out for is the FDI policy. He has to first understand if there are any restrictions, prohibitions in the proposed business activity and then move forward to the Company formation in India.


What is a foreign investment?

Foreign investment includes capital flows from one country to another, granting the foreign investors extensive ownership stakes in domestic companies and assets. Foreign investment denotes that foreigners have an active role in management as a part of their investment or an equity stake large enough to enable the foreign investor to influence business strategy. The FDI policy governs foreign investment in India. Before the economic liberalization in India in the 1990s, there were many limitations for FDI in India. Gradually, the reductions have been watered down to a great extent. Currently, the restrictions are in place for only those business activities that are strategic to the country’s interests or are politically sensitive issues.

What are the categories under which FDI has been classified?

Today, FDI has been classified into the following categories:

  • Business sectors where FDI is not permitted at all
  • Business where advance permission is required from the foreign investment promotion board FIPB ( approval route)
  • Business where no prior permission is required ( automatic route)
How can an Indian company acquire foreign investment?

An Indian company can receive foreign investment through the following routes:

  • Automatic route:
    Foreign investment is permitted under the automatic route without prior approval of the government or the RBI in all activities/ sectors as specified in Regulation 16 of FEMA 20 (R).
  • Government route:
    Foreign investment in activities not covered under the automatic route needs prior permission of the government.
What are the sector-wise FDI limits under approval/ government route in India?

The FDI policy has gone through various changes. In specific sectors, it requires prior government approval, and some don’t, whereas some sectors are prohibited from FDI. The FDI limit of the banking sector is 20%, FDI limit of the broadcasting content services sector is 49%, and FDI limit of multi-brand retail trading sector is 51% under the government route. The two sectors which have a 26% FDI limit under the government route are- digital media and print media (newspaper publishing, periodicals and Indian edition of foreign magazines). The sectors which have 100% FDI limit under government route are- core investment company, food products retail trading, mining, print media  publication, speciality journals, periodicals and facsimile edition of foreign newspapers) and satellites.

What is the procedure followed for FDI government approval under the FDI approval route?

The government has tried to make the process for government approval less complicated and expeditious by providing an online facility for filing such applications and fixing the time period for processing the approval. The standard approach is as follows:

  • All foreign investment proposals that require government acceptance must be filed on the FDI portal- foreign investment facilitation.
  • The information in a prescribed form, along with the documents, must be uploaded on it.
  • Once the application is filed, DIPP shall identify the prescribed competent authority and subsequently e-transfer the proposal.
  • If the application is digitally signed, then no action is required further; however, if the proposal is not digitally signed, physical duplicates of all the certificates should be provided to the concerned ministry, authority or department as specified by DIPP.
  • The application should be disposed of within the stipulated time limit from the date of filing such an application.
  • DIPP shall identify and transfer the proposal to the concerned ministry within the next two days. Such a proposal shall also be sent to the RBI for comments on FEMA compliances within two days of receipt of such application.
  • If the department needs some clarification with respect to the FDI policy, it can ask for comments from DIPP. DIPP must respond within 15 days from the date of explanation sought from it. Any additional clarifications asked from the applicant shall be provided within one week by the applicant.
  • The proposals involving investments exceeding 50 billion rupees, the department shall send it before the cabinet committee of economic affairs (CCEA) for its contemplation.
  • The overall time for the whole process ranges between 8 to 10 weeks if security clearance is required. In addition, in case of rejection of the proposal, DIPP must be consulted; this may add another two weeks.
What is the checklist for the FDI approval route/ government route?

The following is a checklist under the FDI approval route/ government route that startups and established companies must keep in mind before proceeding with foreign direct investment:

  • One should examine whether there is any shift of shares from resident to a non-resident that needs government approval;
  • And check whether the prior permission of the foreign investment promotion board (FIPB) is acquired for foreign investments that are in excess of the sectoral cap.

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