Doing Business in India – Foreign Direct Investment (FDI) Policy / Entry Routes, Permitted and Prohibited Sector, Eligible Investors and Investees
Introduction
The Government of India (GoI) has been focusing on making business operating in India an easy process. The concept of ease of doing business has picked up pace in past years. As per an article of live mint, India has so far received healthy Foreign Direct Investment (FDI) in 2022 and it is expected that year 2023 will also attract the eyes of overseas investors.
Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA) 1999. FDI policy establishes the regulations and guidelines on which the foreign investment in India is governed and regulated. Currently, “Consolidated FDI Policy (Effective from October 15, 2020)” regulates foreign investment in India.
FDI Entry Routes
Foreign investment in India is freely permitted in almost all sectors and under remaining sectors is allowed on permission basis. FDI can be made under two routes—Automatic Route and Government Route.
Under the Automatic Route, the foreign investor or the Indian company does not require any approval from RBI or Government of India for the investment.
Under the Government Route, prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required.
Prohibited Sectors for Foreign Investment
The present policy prohibits Foreign Direct Investments (FDI) in the following sectors:
- Gambling and Betting;
- Lottery business (including government/ private lottery, online lotteries etc);
- Activities /sectors which are not open to private sector investment (eg, atomic energy /railways);
- Business of chit fund;
- Nidhi company;
- Real estate business or construction of farmhouses;
- Trading in transferable development rights;
- Manufacturing of tobacco, cigars, cheroots, cigarillos, cigarettes and other tobacco substitutes;
Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business, Gambling and Betting activities.
Eligible Investors
1.A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defense, space, atomic energy and sectors/activities prohibited for foreign investment.
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.
3. OCBs have been derecognized as a class of investors in India with effect from September 16, 2003.
4. A company, trust and partnership firm incorporated outside India and owned and controlled by NRIs can invest in India with the special dispensation as available to NRIs under the FDI Policy.
5. Foreign Portfolio Investors (FPI) may make investments in the manner and subject to the terms and conditions specified in Schedule II of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
6. Registered FPIs and NRIs can invest/trade through a registered broker in the capital of Indian Companies on recognized Indian Stock Exchanges.
7. A Foreign Venture Capital Investor (FVCI) may make investments in the manner and subject to the terms and conditions specified in Schedule VII of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
8. An NRI or an OCI may subscribe to the National Pension System governed and administered by Pension Fund Regulatory and Development Authority (PFRDA).
Eligible Investee Entities – who can receive FDI?
1. Any registered Indian Company
2. Partnership Firm/Proprietary Concern
3. Trusts registered as ‘Venture Capital Funds’ registered and regulated by SEBI
4. Limited Liability Partnerships (LLPs)
5. Investment Vehicle
6. Startup Companies
Disclaimer – It should be noted that the regulatory environment in India is very dynamic and the laws discussed hereunder are subject to change.
