Foreign Investment in India Foreign Direct Investment Opportunities
Brief Background- Foreign Direct Investment opportunities is an important monetary source for India’s economic development. Foreign investment in India has been the direct outcome of the liberal trade policies undertaken and implemented by the successive governments. In 2019 India became a part of the top 100-club on Ease of Doing Business club.
Foreign Direct Investments (FDI) are commonly made in open economies that have skilled workforce and growth prospects. FDIs not only bring money with them but also skills, technology, and knowledge. The Indian government’s favorable policy regime and good for the business environment as it ensures that foreign capital keeps coming into the country. Our Govt. has taken no. of initiatives in previous years such as relaxing FDI norms across sectors such as PSU oil refineries, telecom, power exchanges, and stock exchanges, among others.
Introduction
Foreign Direct Investment is made by the foreign entities in Indian Companies with the objective of acquiring some kind of control in the Indian companies.
It may be noted that an entity that is not incorporated abroad under any law (for ex: trust, unregistered partnerships, etc) cannot make a foreign direct investment in India.
Who can make FDI?
Foreign Direct Investment can be made by a person resident outside India, except a citizen or any entity incorporated in Pakistan, A citizen of Bangladesh can invest in India only under the Government Approvals Route of FDI policy. It is to be noted that the FDI from a citizen belongs to Pakistan or from any entity formed in Pakistan can invest in India only under the Government Approval Route of FDI policy, in sectors/activities other than defence, space and atomic energy.
Types of Instruments of FDI
• Foreign Direct Investment may be by way of investment in equity shares, fully compulsorily convertible preference shares, fully compulsorily convertible debentures.
• Other types of preference shares or Debentures are considered as debt.
• Accordingly, all norms applicable for External Commercial Borrowings related to eligible borrowers recognized lenders, amount and maturity, end – use stipulations, etc shall apply. However, optionally convertible preference shares/debentures may be to a person resident outside India under the FDI Scheme, provided option to convert can be exercised only after a minimum lock-in period of one year or such minimum period as prescribed under the FDI regulations, whichever is higher (e.g., defense and construction development sector where the minimum lock-in period of three years has been prescribed.
• Further, the inward remittances received by the Indian Company vide issuance of GDR/ADRs and FCCBs are treated as FDI and cunted towards FDI.
Procedure for approval for Foreign Direct Investment Opportunities in India
In general, Foreign Direct Investment in India can be made under the automatic route. However, in some cases government approval is required for foreign direct investment in India.
Under the Automatic Route, the foreign investors or any Indian entity does not require approval from the RBI.
In Approval Route, prior approval of the Government of India through the Foreign Investment Promotion Board (“FIPB”) is required to be taken.
Industrial Policy towards Foreign Direct Investment in India
Foreign investment in shares in any industry up to 100% is permitted except the following:
1. Proposals falling under compulsory industrial licensing
Presently, the compulsory licensing list contains only 6 articles which are:
• Brewing and Distillation of alcoholic drinks.
• Electronic Aerospace and defence equipment.
• Cigarettes and Cigars of tobacco and manufactured tobacco substitutes.
• Industrial explosives.
• Hazardous chemicals.
• Drugs and pharmaceuticals.
2.Investment of more than 24% in equity, if the manufacturer item is reserved for small scale undertaking. A small scale industrial undertaking is not permitted to have more than 24% equity participation in its paid-up capital from any other industrial undertaking whether, domestic or foreign.
Where the equity holding in a small scale industrial undertaking by any company, whether domestic or foreign exceeds 24% the industrial undertaking loses its small scale status. Thus, it will have to obtain an Industrial License.
3. Items requiring industrial license in terms of the locational policy of New Industrial Policy, 1991
All Industrial undertakings are set free to select the location of their project. However, in the case of 23 cities with a population of more than 1 million, as per the census done previously, the proposed location should be at least 25 km away from the Standard Urban Area limits of the city.
However, if any area has been designated as an “industrial area” before 25th July, 1991, then in that case restrictions of 25 km shall not apply.
It is to be noted that in the case of non-polluting industries such as electronics, computer software, printing, etc. the aforesaid provisions are not applicable.
4. Proposals outside the Sectoral policy/Caps or in sectors where Foreign Direct Investment is not permitted
• Atomic energy
• Retail Trading( except single brand product retailing)
• Gambling and betting including casinos etc
• The business of Lottery including any Government or private lottery, online lotteries, etc
• Nidhi Company
• Trading in Transferable Development Right ( TDRs )
• Real Estate Business
• Agricultural Activity( except development and production of seeds and planting material)
• Plantation Activity( except Tea Plantation)
• Activities/sectors which are not opened to the private sector for any kind of investment.
Besides foreign investment in any form, Foreign Technology Collaboration in any form including licensing for franchise, trademark, brand name, management contract is also completely prohibited for Lottery Business and Gambling and Betting activities.
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