Foreign Direct Investment

Foreign companies intending to setup business in India, need to consider, broadly, two aspects:

1. Financial aspect, which is governed by Foreign Direct Investment (FDI) policy; and

2. Industrial policy, which specifies whether any license required to setup manufacturing base in India; location of such base and clearance under pollution laws (for details click here).

On this page, Indian FDI policy is introduced.

Foreign Direct Investment (FDI)

Foreign Direct Investment by non-resident in resident entities through transfer or issue of security to person resident outside India is considered a ‘Capital account transaction’ and Government of India and Reserve Bank of India regulate this under the law called Foreign Exchange Management Act, 1999 and various regulations framed thereunder.

FDI can be divided into two broad categories:

I. Sectors in which foreign direct investment in India is prohibited.

II. Sectors in which foreign investment in India is permitted, either

(A) under an automatic route, or

(B) under Government route (prior approval of Government/Reserve Bank of India).

I. Sectors in which foreign direct investment in India is prohibited ... Click here to know details.

II (A). Sectors in which foreign investment in India is permitted under an automatic route

Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the RBI or Government of India for the investment. There is a notified sectoral policy. Click here to know sector specific policy.

Generally speaking, FDI in sectors / activities to the extent permitted under automatic route does not require any prior approval either of the Government or the Reserve Bank of India (RBI). RBI has given permission to Indian Companies to accept investment under automatic route in most sectors without obtaining prior approval from RBI. Post investment, the Indian investee company is only required to notify the concerned Regional office of the 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.

FDI for Cash & Carry wholesale trading (which includes B2B sales) is permissible upto 100% on automatic route.

'Wholesaling' consists of the sale of goods/ merchandise to retailers, to industrial, commercial, institutional, or other professional business users or to other wholesalers and related subordinated services.

'Retailing' services consists of the sale of goods/ merchandise for personal or household consumption either from a fixed location (e.g. Store, kiosk, etc.) or away from a fixed location and related subordinated services.

Thus, the quantity of sale is not the detriment for wholesale trade, but it is the type of customer who determines whether the trade is wholesale or retail.  Further, it is apparent that industrial, commercial, institutional and professional business users are also considered as wholesale customers, even if they are consumers. Business-to-business sale is permissible under the extant policy.

Since as per the extant policy FDI in retail trade (except single brand) is prohibited, the company would need to constantly monitor and regulate its business and membership in such a way that those who do not fulfill wholesale criteria are weeded out, and sales are effected only to such customers as fit the definition.

II (A)(1) Investment under automatic route in New Ventures

All items/activities for FDI/NRI/OCB investment up to 100% fall under the Automatic Route. Click here to know caps on investments/100% investments permissible.

Investment in public sector units as also for EOU/EPZ/EHTP/STP units would also qualify for the Automatic Route.

II (A)(2) Investment under automatic route in Existing Companies

(a) For existing companies with an expansion programme :

The additional requirements for eligibility for automatic approval are that

(i) the increase in equity level must result from the expansion of the equity base of the existing company without the acquisition of existing shares by foreign/NRI investors,

(ii) the money to be remitted should be in foreign currency and

(iii) proposed expansion programme should be in the sector(s) under automatic route.

If any of the above conditions are not met, the proposal would need Government approval through the FIPB. For this the proposal must be supported by a Board Resolution of the existing Indian company.

(b) For existing companies without an expansion programme :

The additional requirements for eligibility for automatic approval are that

(i) they are engaged in the industries under automatic route,

(ii) the increase in equity level must be from expansion of the equity base and

(iii) the foreign equity must be in foreign currency.

Further in case of companies listed in India, the SEBI requirement is that - not more than 20 per cent of the entire contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.

II (B). Sectors in which foreign investment in India is permitted under an Government route (prior approval of Government/RBI)

Under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required.

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. Applications can also be submitted with Indian Missions abroad who forward them to the Department of Economic Affairs for further processing.

FDI in certain sectors requires Government approval. Click here to know details.