Snapshot: foreign investment law and policy in India (2024)

Law and policy

Policies and practices

What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?

Primarily, since 1991, India has sought to liberalise its economy and has continuously opened up most of its industrial and business sectors to foreign investment. In particular, the Indian government has sought to attract foreign investment into the country by undertaking steps towards enhancing the ease of doing business in India, as it has the effect of establishing long-term economic relationships with India.

Foreign investment in India is principally governed by theForeign Exchange Management Act 1999(FEMA) and the regulations framed thereunder, which consolidate the law relating to foreign exchange in India. To regulate foreign investment, the Reserve Bank of India (RBI) had published the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000 and thereafter the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations 2017 (TISPRO 2017) (as amended from time to time), under the FEMA was published on 7 November 2017. Additionally, in 2010, the Department for Promotion of Industry and Internal Trade (DPIIT) (earlier known as the Department of Industrial Policy and Promotion (DIPP)) had put in place a policy framework that consolidated the sectoral requirements and other conditions that must be complied with by foreign investors investing in Indian entities (FDI Policy). The DPIIT is the nodal department for formulation of government policy on foreign direct investment (FDI). It is also responsible for maintenance and management of data on inward FDI into India, based on the remittances reported by the RBI. The FDI Policy is reviewed on an ongoing basis, with a view to making it more investor friendly. To attract higher levels of FDI, the government has put in place a liberal policy on FDI, under which FDI up to 100 per cent is permitted, under the automatic route, in most sectors and activities. Significant changes have been made in the FDI Policy regime in recent times, to ensure that India remains an increasingly attractive investment destination. The department plays an active role in the liberalisation and rationalisation of the FDI policy. Towards this end, it has been constructively engaged in extensive stakeholder consultations on various aspects of the FDI Policy. The FDI Policy used to be updated every year and amended from time to time, and the consolidated FDI Policy of 2020 is the last policy framework issued by the DPIIT (FDI Policy 2020).

On 15 October 2019, the central government notified, inter alia, certain amendments to the FEMA, pursuant to which, the central government, rather than the RBI, has been granted the power of specifying all permissible non-debt instruments capital account transactions and the RBI has been granted the power of specifying all debt instruments capital account transactions. The central government separately, on 16 October 2019, also notified the following instruments that shall be considered as ‘non-debt instruments’, inter alia, namely: (1) all investments in equity in incorporated entities (public, private, listed and unlisted); (2) capital participation in limited liability partnerships (LLPs); (3) all instruments of investment as recognised in the FDI Policy as notified from time to time; (4) investment in units of alternative investment funds, real estate investment trusts and infrastructure investment trusts; and (5) investment in units of mutual funds and exchange-traded funds that invest more than 50 per cent in equity.

Pursuant to these amendments to the FEMA, the central government, on 17 October 2019, notified the Foreign Exchange Management (Non-debt Instruments) Rules 2019 (NDI Rules 2019) and the RBI notified the Foreign Exchange Management (Debt Instruments) Regulations 2019 (DI Regulations 2019) and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations 2019 (Reporting Regulations 2019), that have superseded the TISPRO 2017 (as amended from time to time) and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018. In the past few years, the trend for liberalisation has continued, with relevant changes being made to the Indian foreign exchange laws in this regard. For example, central government:

• inserted clause (c) under paragraph 1.2(ii) in Annexure 4 of the FDI Policy 2020 which provides that investments by non-resident Indians (NRIs) on a non-repatriation basis as stipulated under Schedule IV of the 2019 rules are deemed to be domestic instruments at par with the investments made by residents; and accordingly, an investment by an Indian entity that is owned and controlled by NRIs on a non-repatriation basis will not be considered for calculation of indirect foreign investment (see Press Note No. 1 of 19 March 2021);
• increased the FDI cap to 74 per cent (from 49 per cent) through the automatic route for insurance companies; and increased the FDI cap to 100 per cent for intermediaries or insurance intermediaries (see Press Note No. 2 of 14 June 2021);
• notwithstanding the FDI cap of 49 per cent for petroleum refining by public sector undertakings (PSUs), without any disinvestment or dilution of domestic equity in the existing PSUs; foreign investment up to 100 per cent under the automatic route is allowed in case an 'in-principle' approval for strategic disinvestment of a PSU has been granted by the government (see Press Note No. 3 of 29 July 2021);
• made the entry route 'automatic' for the entire FDI cap limit of 100 per cent while continuing observance with licensing, security and other terms and conditions as specified by the Department of Telecommunications from time to time (Press Note No. 4 of 6 October 2021); and
• permitted foreign direct investment up to 20 percent through the automatic route in Life Insurance Corporation and liberalised the conditions for investment in insurance companies and insurance intermediaries (Press Note No. 1 of 14 March 2022).

Further, the NDI Rules 2019 contain sectoral requirements that must be complied with by foreign investors for the purposes of investing in particular sectors in India and also by Indian companies that receive foreign investments in India. They also classify sectors that fall under the approval route and those that fall under the automatic route. Further, there are also certain limited sectors and industries in which foreign investment is prohibited. Except for those sectors and subject to conditions for foreign investment (performance conditions) or government approval in certain sectors; by and large, there are no preconditions for making foreign investment into other sectors in India.

Additionally, the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations 2019 (FPI Regulations), read with Schedule II of the NDI Rules 2019, permits foreign portfolio investors (FPIs) to invest in equity instruments of an Indian company and specifies the form and manner in which such investment by FPIs in Indian entities can be categorised as foreign portfolio investment or foreign direct investment (FDI). As per the NDI Rules 2019, the total holding by each FPI is required to be less than 10 per cent of the total paid-up equity capital on a fully diluted basis or less than 10 per cent of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company (individual limit) and the total investment of all the FPIs put together in an Indian company (including any other direct or indirect foreign investments) is required to not exceed 24 per cent of the paid-up equity share capital on a fully diluted basis or the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company (aggregate limit). Additionally, with effect from 1 April 2020, the applicable aggregate limit for an FPI is the sectoral cap or statutory ceiling as prescribed in Schedule 1 of the NDI Rules 2019, with respect to its paid-up equity capital on a fully diluted basis or such same sectoral cap percentage of paid-up value of each series of debentures or preference shares or share warrants. However, an Indian investee company is permitted to decrease this aggregate limit to a lower threshold limit of 24 per cent, 49 per cent or 74 per cent as deemed appropriateby passing a resolution at the meeting of its board of directors followed by a special resolution at the shareholders’ meeting, before 31 March 2020. Further, such an Indian investee company that has decreased its aggregate limit to 24 per cent, 49 per cent or 74 per cent is permitted to increase it, once, up to 49 per cent or 74 per cent or the statutorily prescribed sectoral cap as under Schedule 1 of the NDI Rules 2019, by passing a resolution at the meeting of its board of directors followed by a special resolution at the shareholders’ meeting, after which this Indian investee company cannot reduce it to a lower threshold.

Further, as per the FPI Regulations, in the event that the investment by a FPI exceeds the individual limit of 10 per cent, the investment will qualify as FDI. Further, the DI Regulations 2019, read with the FPI Regulations, also permit FPIs to invest in any debt securities, shares, debentures and warrants of listed companies or companies whose securities are likely to be listed on a stock exchange in India.

Therefore, foreign investment in India can broadly be classified into investments in debt instruments and investments in non-debt instruments.

Main laws

What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?

The key legislation that directly or indirectly regulates and governs acquisitions and investments by foreign nationals is the FEMA (along with rules and regulations thereunder, in particular, the NDI Rules 2019, the FDI Policy and DI Regulations 2019), as well as other notifications, circulars and directions pertaining to foreign investments issued by the central government and RBI from time to time.

Until 2010, the regulatory framework for foreign investment in India consisted of the FEMA; the regulations framed thereunder, the press notes and press releases issued by the DPIIT, and the notifications, circulars and directions issued by the RBI. After April 2010, the press notes and press releases issued by the DPIIT were consolidated into the FDI Policy; however, the DPIIT continues to issue press notes and press releases each year, and the changes proposed in these press notes and press releases come into effect after being incorporated in the relevant regulations framed under FEMA.

The DPIIT issued Press Note No. 3 of 2020 dated 17 April 2020, according to which any entity of a country sharing a land border in 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. This was primarily done to stem any attempts by Chinese firms to take control of Indian firms that have been affected by covid-19 related lockdowns. A corresponding amendment was introduced to the NDI Rules 2019 by the Department of Economic Affairs, Ministry of Finance, on 22 April 2020.

In addition to complying with the Indian foreign exchange laws, rules, regulations and policies, foreign investors are also required to comply with the relevant sector-specific and state-specific (local laws) legislation applicable to a particular industry or sector.

Scope of application

Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?

Under the present laws, including the Master Direction on Foreign Investment in India of 4 January 2018 (Master Direction 2018) (and as amended from time to time thereafter), foreign investment is allowed in almost all sectors either under the automatic route or under the approval route. Some sectors are exceptions, including real estate business (as specifically defined in the NDI Rules 2019); lottery; gambling and betting; chit funds; Nidhi companies; and trading in transferable development rights, where foreign investment is prohibited. In sectors that are not specifically prohibited or regulated under the NDI Rules and FDI Policy, 100 per cent foreign investment is deemed to be permitted under the automatic route.

There is a percentage threshold prescribed for foreign investment in some sectors (such as petroleum refining by public sector undertakings, terrestrial broadcasting FM, uplinking of news and current affairs TV channels, print media, scheduled air transport service and regional air transport service, private security agencies, multi-brand retail trading, banking, and infrastructure companies in securities markets) and, except for some prohibited sectors, foreign investment overall is allowed in almost all sectors under the automatic route up to 100 per cent of the equity shareholding, although, in some cases, with certain performance conditions, such as minimum capitalisation norms and exit conditions, among others.

India has consistently liberalised and eased the norms for foreign investments in India. For foreign investment in any automatic route sector, there is no need for prior approval and only certain post facto filings are required. There have been significant liberalisation and simplification efforts made in recent years through amendments in the FEMA and the rules and regulations framed thereunder; for example, important filings such as Form FC-TRS (reporting of transfer of shares between residents and non-residents) and Form FC-GPR (reporting of issuance of shares by an Indian investee company) have been made available online and subsumed into a single master form (SMF) for reporting the total investment in an Indian company. The online filing of an SMF can be done through a designated website portal from 1 September 2018. The SMF facility provides for an online reporting platform to Indian companies with investments from people resident outside India including in an investment vehicle. Subsequently, pursuant to the NDI Rules 2019, it is required that any Indian entity or investment vehicle making downstream investment in another Indian entity shall be considered as indirect foreign investment and shall, in accordance with the Reporting Regulations, 2019, be required to file Form DI with the RBI within 30 days of the date of allotment of the equity instruments.

Furthermore, a person or entity who has delayed the filing of the SMF can regularise that by paying a late submission fee, subject to the delay being condoned by the RBI.

However, in sectors where foreign investments are permitted with the prior approval of the sector-specific competent authority (eg, the Ministry of Information and Broadcasting in relation to foreign investment in the broadcasting sector; and the Department of Industrial Policy and Promotion in relation to foreign investment in the multi-brand retail trading sector) (competent authority), the government reserves the right to oversee, control, permit or prohibit investments, and mainly these sectors are considered sensitive (such as print media and multi-brand retail trading).

In terms of competition law, all forms of (domestic and international) acquisitions, mergers or amalgamations that exceed the jurisdictional thresholds and do not benefit from any exemption, must be notified to and obtain the approval of the Competition Commission of India (CCI) before the transaction can be consummated.

Joint ventures are not specifically dealt with under the Competition Act 2002 (the Competition Act) from a merger control perspective. However, to the extent that setting up a greenfield joint venture or the entry of a new partner in a brownfield joint venture involves the acquisition of shares, voting rights or assets, their notifiability is examined as acquisitions and must be notified to the CCI where the jurisdictional thresholds are met.

Further, the Competition Act does not specifically regulate any industry in relation to merger control. However, certain sector-specific exemptions are available.

With respect to minority acquisitions, an acquisition of shares or voting rights, solely as an investment or in the ordinary course of business, of less than 25 per cent of the total shares or voting rights of an enterprise, is exempt from the requirement to file a pre-merger notification with the CCI, provided there is no acquisition of ‘control’ as a result. Under the Competition Act, ‘control’ is defined to include ‘controlling the affairs or management by (1) one or more enterprises, either jointly or singly, over another enterprise or group and (2) one or more groups, either jointly or singly, over another group or enterprise’. While there is no ‘bright line’ test prescribed by the Competition Act or the CCI to define control, based on the CCI’s decisional practice, control includes de facto and de jure control as well as ‘material influence’.

Further, minority acquisitions of less than 10 per cent are deemed to be made, 'solely as an investment' where the acquirer:

• is entitled to only such rights as are exercisable by ordinary shareholders of the target enterprise;
• is not a board member on the target nor has the right or intention to appoint a board member or to nominate one; and
• does not intend to participate in the management or affairs of the target.

Definitions

How is a foreign investor or foreign investment defined in the applicable law?

The term ‘foreign investment’ is defined under the NDI Rules 2019 to mean: ‘any investment made by a person resident outside India on a repatriable basis in equity instruments of an Indian company or to the capital of a LLP’. Furthermore, a person resident outside India is permitted to hold foreign investment as either FDI or FPI in a particular Indian company.

The NDI Rules 2019 do not define the term ‘foreign investor’. However, they provide the entry routes, eligible instruments and mechanism whereby a ‘person resident outside India’ can undertake foreign investment in India. The term ‘person resident outside India’ as per FEMA section 2(w) means a person who is not resident in India. Essentially, Indian foreign exchange law allows any set-up that is an association of persons, foundations, trusts, bodies corporate, companies or entities to make FDI in India.

Special rules for SOEs and SWFs

Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?

While the NDI Rules 2019 do not define SOEs or SWFs, the term has been referred to in the FPI Regulations, wherein a sovereign wealth fund is construed as a category I FPI (Regulation 5(a)(i), FPI Regulations). Therefore, the total holding of an SWF in an Indian company must be less than 10 per cent of the total paid-up equity capital on a fully diluted basis or less than 10 per cent of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company (individual limit), exceeding which, this investment will be regarded as FDI. Further, the total investment for all the FPIs put together in an Indian company (including any other direct or indirect foreign investments) must not exceed 24 per cent of the paid-up equity share capital on a fully diluted basis or the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company (aggregate limit).

Additionally, with effect from 1 April 2020, the applicable aggregate limit for an SWF (and any other FPI) is the sectoral cap or statutory ceiling as prescribed in Schedule 1 of the NDI Rules 2019, with respect to its paid-up equity capital on a fully diluted basis or such same sectoral cap percentage of paid-up value of each series of debentures or preference shares or share warrants. However, an Indian investee company is permitted to decrease this aggregate limit to a lower threshold limit of 24 per cent, 49 per cent or 74 per cent as deemed appropriate, by passing a resolution at the meeting of its board of directors followed by a special resolution at the shareholders’ meeting, before 31 March 2020. Further, such an Indian investee company that has decreased its aggregate limit to 24 per cent, 49 per cent or 74 per cent is permitted to increase it, once, up to 49 per cent or 74 per cent or the statutorily prescribed sectoral cap as under Schedule 1 of the NDI Rules 2019, by passing a resolution at the meeting of its board of directors followed by a special resolution at the shareholders’ meeting, after which this Indian investee company cannot reduce it to a lower threshold.

Relevant authorities

Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?

Subject to satisfying the assets and turnover thresholds prescribed under the Competition Act, the regulations and notifications thereunder, and the non-applicability of any of the exemptions available to the transacting parties, investments that involve an acquisition of shares, assets, voting rights or control, or a merger or amalgamation (together referred to as ‘combinations’) must be notified to the CCI. The CCI is empowered to prohibit or modify transactions that are likely to cause an appreciable adverse effect on competition (AAEC) in India.

Further, there are specific regulators that review mergers or acquisitions of companies within certain industries and sectors (eg, the Insurance Regulatory Development Authority for insurance companies and the Telecom Regulatory Authority of India for telecom companies).

Previously, the Foreign Investment Promotion Board (FIPB) was the government body that offered a single-window clearance for proposals on FDI in India that are not allowed access through the automatic route. However, regarding OM No. 01/01/FC12017 FIPB dated 5 June 2017, the government of India has abolished the FIPB, and mandated that where FDI is only permitted through the approval route, the sector-specific competent authorities (such as the Ministry of Information and Broadcasting for activities in the broadcasting and print media sector; the Ministry of Mines for activities in the mining sector; the Department of Space for activities related to satellites; and the Department of Pharmaceuticals, the Ministry of Chemicals and Fertilizers for activities in the pharmaceuticals sector) must be approached for approval. However, in the case of doubt as to which competent authority is to be approached, the DPIIT is mandated to identify the competent authority concerned and to this effect, the DPIIT has established a Foreign Investment Facilitation Portal (FIFP).

Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?

The competent authorities have the discretion to approve, reject or defer a proposal for foreign investment where such proposals have come via the approval route after having sought the concurrence of the DPIIT. Apart from the discretion of the competent authorities, the proposed investment would also have to be in line with sectoral laws and regulations and, where necessary, applications for approval from the sectoral regulators would have to be given. If any sector-specific approval is required from any other sector regulator, it must be obtained from the relevant regulatory authority. Again, these authorities reserve the discretion to reject any applications made to them without specifying the reasons.

Further, the CCI’s discretion is limited to a qualitative assessment of whether the notified transaction causes or is likely to cause an AAEC within the relevant market in India. The CCI also has the power to direct modifications to the terms of a transaction, or even prohibit it, if it is of the view that this transaction is likely to cause an AAEC in India.