Foreign direct investment (FDI) in India


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Foreign direct investment (FDI) in India - A latest Guide to FDI for FIIs and all other Foreign Investors.

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Foreign direct investment (FDI) in India

  1. 1. Foreign direct investment (FDI) in India Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds Types of Foreign direct investment (FDI) 1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. 2. Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. 3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country. Advantages in India • World's largest democracy with 1.2 billion people. • Stable political environment and responsive administrative set up. • Well established judiciary to enforce rule of law. • Land of abundant natural resources and diverse climatic conditions. • Rapid economic growth: GDP to grow by 8.5% in 2010-11* and 9.0% in 2011-12. • India's growth will start to outpace China's within three to five years and hence will become the fastest large economy with 9-10% growth over the next 20-25 years (Morgan Stanley). • Investor friendly policies and incentive based schemes. • Second most attractive Foreign Direct Investment (FDI) location in the world: India received a total of US$ 25.9 billion of FDI in 2009-10. • Healthy macro-economic fundamentals: Investment rate is expected to be 37% in 2010-11 and 38.4% in 2011-12 while Domestic Savings rate is expected to be 34% in 2010-11 and 36% in 2011-12. • India's economy will grow fivefold in the next 20 years (McKinsey). • Cost competitiveness; low labor costs.
  2. 2. Recent changes 2012 – October: In the second round of economic reforms, the government cleared amendments to raise the FDI cap (a) In the insurance sector from 26% to 49%; (b) In the pension sector it approved a 26 percent FDI; Now, Indian Parliament will have to give its approval for the final shape," 2012 - September: The government approved the (a) Allowed 51% foreign investment in multi-brand retail, (b) Relaxed FDI norms for civil aviation and broadcasting sectors. – FDI cap in Broadcasting was raised to 74% from 49%; (c) Allowed foreign investment in power exchanges 2011 – December: (i) The Indian government removed the 51 percent cap on FDI into single-brand retail outlets and thus opened the market fully to foreign investors by permitting 100 percent foreign investments in this area. WHO CAN INVEST IN INDIA 1. A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy. A citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Policy, only under the Government route.
  3. 3. 2. NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels. 3. OCBs have been derecognized as a class of Investors in India with effect from September 16, 2003. Erstwhile OCBs, which are incorporated outside India and are not under the adverse notice of RBI, can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government route; and with the prior approval of RBI if the investment is through Automatic route. 4. (i) An FII may invest in the capital of an Indian Company under the Portfolio Investment Scheme which limits the individual holding of an FII to 10% of the capital of the company and the aggregate limit for FII investment to 24% of the capital of the company. This aggregate limit of 24% can be increased to the sectorial cap/statutory ceiling, as applicable, by the Indian Company concerned by passing a resolution by its Board of Directors followed by passing of a special resolution to that effect by its General Body. The aggregate FII investment, in the FDI and Portfolio Investment Scheme, should be within the above caps. (ii) The Indian company which has issued shares to FIIs under the FDI Policy for which the payment has been received directly into company’s account should report these figures separately under item no. 5 of Form FC-GPR (Annex-1-A) (Post-issue pattern of shareholding) so that the details could be suitably reconciled for statistical/monitoring purposes. (iii) A daily statement in respect of all transactions (except derivative trade) have to be submitted by the custodian bank in floppy / soft copy in the prescribed format directly to RBI to monitor the overall ceiling/sectorial cap/statutory ceiling. 5. No person other than registered FII/NRI as per Schedules II and III of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations of FEMA 1999, can invest/trade in capital of Indian Companies in the Indian Stock Exchanges directly i.e. through brokers like a Person Resident in
  4. 4. India. 6. A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to 100% of the capital of an Indian Venture Capital Undertaking (IVCU) and may also set up a domestic asset management company to manage the fund. All such investments can be made under the automatic route in terms of Schedule 6 to Notification No. FEMA 20. A SEBI registered FVCI can also invest in a domestic venture capital fund registered under the SEBI (Venture Capital Fund) Regulations, 1996. Such investments would also be subject to the extant FEMA regulations and extant FDI policy including sectorial caps, etc. SEBI registered FVCIs are also allowed to invest under the FDI Scheme, as non-resident entities, in other companies, subject to FDI Policy and FEMA regulations. ENTITIES FOR FDI 1. FDI in an Indian Company (i) Indian companies including those which are micro and small enterprises (MSEs) can issue capital against FDI. 2. FDI in Partnership Firm / Proprietary Concern: (i) A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided; (a) Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers / Authorized banks. (b) The firm or proprietary concern is not engaged in any agricultural /plantation or real estate business or print media sector. (c) Amount invested shall not be eligible for repatriation outside India. (ii) Investments with repatriation benefits: NRIs/PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns/partnership firms with repatriation benefits. The application will be decided in consultation with the Government of India. (iii)Investment by non-residents other than NRIs/PIO: A person resident outside India other than NRIs/PIO may make an application and seek prior approval of Reserve Bank for making investment by way of contribution to the capital of a firm or a
  5. 5. proprietorship concern or any association of persons in India. The application will be decided in consultation with the Government of India. (iv)Restrictions: An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business (i.e. dealing in land and immovable property with a view to earning profit or earning income there from) or engaged in Print Media. 3. FDI in Venture Capital Fund (VCF): FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs) /Venture Capital Funds (VCFs) /other companies, as stated in paragraph 3.1.6 of this Circular. If a domestic VCF is set up as a trust, a person resident outside India (non- resident entity/ individual including an NRI) cannot invest in such domestic VCF under the automatic route of the FDI scheme and would be allowed subject to approval of the FIPB. However, if a domestic VCF is set-up as an incorporated company under the Companies Act, 1956, then a person resident outside India (non- resident entity/individual including an NRI) can invest in such domestic VCF under the automatic route of FDI Scheme, subject to the pricing guidelines, reporting requirements, mode of payment, minimum capitalization norms, etc. 4. FDI in Trusts: FDI in Trusts other than VCF is not permitted. 5. FDI in other Entities: FDI in resident entities other than those mentioned above is not permitted. ENTRY ROUTES FOR FDI 1 Investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, through two routes;
  6. 6. 1. The Automatic Route: under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the RBI or Government of India for the investment. 2. The Government Route: under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required. Proposals for foreign investment under Government route as laid down in the FDI policy from time to time, are considered by the Foreign Investment Promotion Board (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance GUIDELINES FOR CONSIDERATION OF FDI PROPOSALS BY FIPB: The following guidelines are laid down to enable the FIPB to consider the proposals for FDI and formulate its recommendations. 1. All applications should be put up before the FIPB by its Secretariat within 15 days and it should be ensured that comments of the administrative ministries are placed before the Board either prior to/or in the meeting of the Board. 2. Proposals should be considered by the Board keeping in view the time frame of thirty (30) days for communicating Government decision. 3. In cases in which either the proposal is not cleared or further information is required in order to obviate delays presentation by applicant in the meeting of the FIPB should be resorted to. 4. While considering cases and making recommendations, FIPB should keep in mind the sectorial requirements and the sectorial policies vis-à-vis the proposal (s). 5. FIPB would consider each proposal in its totality. 6. The Board should examine the following while considering proposals submitted to it for consideration: (i) whether the items of activity involve industrial license or not and if so the considerations for grant of industrial license must be gone into; (ii) whether the proposal involves any export projection and if so the items of export and the projected destinations; (iii)Whether the proposal has any strategic or defense related considerations.
  7. 7. 7.While considering proposals the following may be prioritized: (i) Items falling in infrastructure sector; (ii) Items which have an export potential; (iii)Items which have large scale employment potential and especially for rural people; (iv) Items which have a direct or backward linkage with agro business/farm sector; (v) Items which have greater social relevance such as hospitals, human resource development, life saving drugs and equipment; (vi) Proposals which result in induction of technology or infusion of capital. 8. The following should be especially considered during the scrutiny and consideration of proposals. (i) The extent of foreign equity proposed to be held (keeping in view sectorial caps if any; (ii) Extent of equity from the point of view whether the proposed project would amount to a holding company/wholly owned subsidiary/a company with dominant foreign investment (i.e. 76% or more) joint venture; (iii)Whether the proposed foreign equity is for setting up a new project (joint venture or otherwise) or whether it is for enlargement of foreign/NRI equity or whether it is for fresh induction of foreign equity/NRI equity in an existing Indian company; (iv) In the case of fresh induction offerings/NRI equity and/or in cases of enlargement of foreign/NRI equity, in existing Indian companies whether there is a resolution of the Board of Directors supporting the said induction/enlargement of foreign/NRI equity and whether there is a shareholders agreement or not; (v) In the case of induction of fresh equity in the existing Indian companies and/or enlargement of foreign equity in existing Indian companies, the reason why the proposal has been made and the modality for induction/enhancement (i.e. whether by increase of paid up capital/authorized capital, transfer of shares (hostile or otherwise) whether by rights issue, or by what modality; (vi) Issue/transfer/pricing of shares will be as per SEBI/RBI guidelines; (vii) Whether the activity is an industrial or a service activity or a combination of both;
  8. 8. (viii) Whether the items of activity involves any restriction by way of reservation for the Micro & Small Enterprises sector; (ix) Whether there are any sectorial restrictions on the activity; (x) Whether the proposal involves import of items which are either hazardous/banned or detrimental to environment (e.g. import of plastic scrap or recycled plastics). 9. No condition specific to the letter of approval issued to a non-resident investor would be changed or additional condition imposed subsequent to the issue of a letter of approval. This would not prohibit changes in general policies and, regulations applicable to the industrial sector Approval for FDI in Limited Liability Partnership firms The Cabinet Committee on Economic Affairs approved the proposal to amend the policy on allowing Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP) firms on 11 may 2011 The FDI in LLPs will be implemented in a calibrated manner, beginning with the ‘open’ sectors where monitoring is not required, subject to the following conditions: (a) LLPs with FDI will be allowed, through the Government approval route, in those sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions. (b) LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business. (c) LLPs with FDI will not be eligible to make any downstream investments. There are also further following conditions relating to funding, ownership and management of LLPS: I. Funding of LLPs: (a) An Indian company, having FDI, will be permitted to make downstream
  9. 9. investment in LLPs only if both the company, as well as the LLP are operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions. (b) Foreign Capital participation in the capital structure of the LLPs will be allowed only by way of cash considerations, received by inward remittance, through normal banking channels, or by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank; and (c) Foreign Institutional Investors (Flls) and Foreign Venture Capital Investors (FVCIs) will not be permitted to invest in LLPs. LLPs will also not be permitted to avail External Commercial Borrowings (ECBs.) II. Ownership and management of LLPs: (a) For the purpose of determination of the designated partners in respect of LLPs with FDI, the term "resident in India" would have the meaning, as defined for "person resident in India", under Section 2(v) (i) (A) & (B) of the Foreign Exchange Management Act, 1999; What are the Limits for FDI in different Sectors: (A) 26% FDI is permitted in  Defenses  Newspaper and media **  Petroleum refining  Pension sector (allowed in October 2012 as per cabinet decision) (B) 49% FDI is permitted in: Banking Cable network** DTH **
  10. 10. Infrastructure investment Telecom Insurance (Enhanced from 26% to 49% in October, 2012) 49% (FDI & FII) in power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations 2010 subject to an FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital is now permissible. [Permitted in September 2012] (C) 51% is permitted in Multi-Brand Retail (Since September 2012) Petro-pipelines (D) 74% FDI is permitted in Atomic minerals Science Magazines /Journals Petro marketing Coal and Lignite mines Telecom (E) 100% FDI is permitted in Single Brand Retail (Increased to 100% from 51% in December 2011). Advertisement Airports Cold-storage BPO/Call centers E-commerce
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