FOREIGN INVESTMENT APPROVALS OVERVIEW

Foreign investment in India is primarily governed by the FDI policy formulated by the secretariat for industrial assistance (SIA), the Department of Industrial policy and promotion (DIPP), the foreign investment promotion board (FIPB) and foreign exchange regulations, which are governed by the RBI. Under the present policies and regulations, foreign investment in India is possible through the following avenues:

A. As FDI;
B. By FIIs, directly, via the Portfolio investment scheme(PIS);
C. By NRIs/persons of Indian origin (PIO), directly and indirectly, via the PIS;
D. By qualified foreign investors, via the PIs; and
E. By foreign venture capital investors (FVCIs)

FDI

A. Foreign Direct Investment

In the wake of liberalization in 1980s and the introduction of the new industrial policy of 1991, substantial policy changes were made to pull down administrative barriers to allow for the free flow of foreign capital and international trade. The FDI regime has been progressively liberalized, largely by removing restrictions on foreign investment and simplifying procedures. As a result, among the emerging economies, India has one of the most liberal and transparent foreign investment regimes.

FDI Policy

The government of India releases a compendium of FDI policy every six months. Foreign investment in India can be made either through the automatic route or the approval route.

Automatic Route

Under the automatic route, no prior regulatory approval is required from either the RBI or FIPB. Under this route, investors are required to notify the concerned regional office of the RBI within 30 days of receiving investment money in India and to file the required documents and details of the shares allotted, with the same regional office, within 30 days of issuing such shares to the respective foreign investors.

Approval/Government route

FDI in business sectors not covered under the automatic route requires prior approval from the Government of India. Applications for foreign investments that need prior governmental approval are required to be submitted to the FIPB.

Foreign persons who can invest in India under the FDI regime

• A non-resident entity (other than a citizen of Pakistan or Bangladesh or an entity incorporated in Pakistan or Bangladesh) can invest in India subject to compliance with the extent FDI regulations.
• A person who is a citizen of Bangladesh or Pakistan or an entity incorporated in Bangladesh or Pakistan can invest in India under the FDI provisions, subject to receiving the prior approval of the FIPB.

Entities into which FDI can be made under the FDI regime

a. FDI in an Indian company

This is subject to sectoral caps, pricing conditions and other conditions.

b. FDI in partnership firms/proprietary concern

• NRIs and PIOs can invest in the capital of the partnership firm or proprietary concern in India, on a non- repatriation basis, in accordance with the following conditions:
• The firm or proprietary concern is not engaged in any agriculture/plantation, real estate or print media business.
• Any amount so invested it brought in by inward remittances or out of an NRE/FCNR (B)/ NRO account maintained with an authorized dealer (AD) or other authorized banks.
• Any amount so invested cannot be remitted outside India.
• NRIs and PIOs may, however, seek the prior approval of the RBI for investment in partnership firms or proprietary concern with an option to repatriate funds out of India and the RBI, in consultation with the, government will decide on each application based upon the merits of the specific case.
• A non- resident other than an NRI or a PIO can apply and seek the approval of the RBI to invest in the capital of partnership firms/proprietary concerns and the RBI, in consultation with the government will decide on each application based upon the merits of the specific case.

Prohibited sectors

The present policy prohibits FDI in the following sectors:

• Gambling and Betting
• Lottery business (including government/ private lottery, online lotteries etc)
• Activities /sectors not open to private sector investment (eg, atomic energy /railways)
• Retails trading (expect single-brand product retailing)
• Business of chit fund
• Nidhi company
• Real estate business or construction of farm houses
• Trading in transferable development rights (TDRs)
• Manufacturing of tobacco, cigars, cheroots , cigarallos, cigarettes and other tobacco substitutes
• Agriculture (excluding floriculture, horticulture, apiculture and cultivation of vegetables and mushrooms under controlled conditions, the development and production of seeds & planting materials, animals husbandry including the breeding of dogs, viniculture & aquaculture under controlled conditions and services related to the agro and allied sector)

Permitted sectors

As mentioned above, FDI is permissible in certain with a cap on the maximum permissible foreign holding. Details of same of the sectors in which FDI is subject to sectoral caps is available on following link :

FDI Circular 2014

Other sector-specific conditions for some of the sectors

FDI in various sectors is governed by conditions laid down by the DIPP. These include, among others, minimum capitalization in the case of non-banking finance companies, minimum projects size & capitalization for real estate companies.

Discussed below are certain sectors in which FDI is permitted under the Automatic route/Approval Route subject to certain conditions/restrictions.

i. FDI in single-brand retail trading

• The government has now allowed FDI of up to 100 percent in the retail trade of single brand products, subjects to the prior approval of the FIPB and the compliance with the following conditions:
• The products to be sold are of a single brand.
• The products are sold under the same brand in India, and every other country in which the product is sold.
• Single brand product retailing only covers products that are branded during the manufacturing process.
• The foreign investor should own the brand or one non-resident entity, whether owner of the brand or otherwise, and shall be permitted to undertake single brand product retail trading for the specific brand through a legally tenable agreement, with the brand owner for the specific brand for which approval is being sought.
• If the proposal for FDI exceeds 51 percent of the total capital of the company, at least 30 percent of the products sold have to mandatorily be sourced from Indian small industries (where the total investment in plant and machinery does not exceed US$ 2 million at the time of installation), village and cottage industries, artisans and craftsmen.
• Retail trading in any form by mean of e-commerce is not permitted
• The policy requires investors to submit an application to SIA seeking permission from the government for the intended FDI in the retail trade of a single brand product. The application should specifically indicate the product/products categories that are proposed to be sold under a single brand. Any addiction to the product/product categories to be sold under the single brand will requires fresh approval from the government.

ii. Investment in multi-brand retail trading

• Foreign investment in multi-brand retail trading has been permitted up to 51 percent under the approval route in states favoring multi brand retail trading.
• The investment would be subject to certain conditions. Some of these conditions are as follows:
• Minimum US$ 100 million to be brought in as FDI;
• 50 percent of the total FDI brought in the first tranche of US$ 100 million to be invested in back end infrastructure; and
• At least 30 percent of the value of the procurement of manufactured/processed products to be sourced from Indian micro, small and medium industries.
• Retail sales outlets only in cities with a population of more than 1 million as per the 2011 census.
• E-commerce not permitted for multi brand retail trading.

iii. FDI in township, housing, built-up infrastructure and construction development projects

• FDI has been allowed in township, housing, built-up infrastructure and construction development projects (including, inter alia, housing, commercial premises, hotels, resorts, hospitals, educational institutional, recreational facilities, and city and regional level infrastructure). The government has allowed to FDI of up to 100 percent under the automatic route in this sector, subject to the following condition:
• Minimum area to be developed under each projects should be as under:
  • Land area of 10 hectares for serviced housing plots;
  • Built-up area of 50,000 sq. mt. for construction development projects; and
  • For projects that are combination of serviced housing and construction development, the satisfaction of any one of the aforementioned minimum areas condition is sufficient.
• Wholly owned subsidiaries should have a minimum capitalization of US$10 million and JVs with Indian partner should have a minimum capitalization US$5 million. The funds are required to be brought in within six months from the date that the business commences.
• The original investment i.e., the entire initial FDI cannot be repatriated for a period of three years from the date that minimum capitalization condition is achieved. If the initial investment is brought in installment/tranches, the three year lock-in period will be applied from the date of receipt of each installment/tranche or the date that the minimum capitalization condition achieved, whichever is later. The foreign investor can however exit earlier than the required three year lock-in period by seeking the prior approval of the government through the FIPB for such an exit.
• At least 50 percent of the project must be developed within five year from the date of all of the statutory clearances being obtained. The investor is not to be permitted to sell undeveloped plots, i.e., plots where road, water supply, street lighting, drainage, sewerage and other conveniences, as per the prescribed regulation have not been made available.
• The condition listed above would not apply to hotels and tourism, hospitals, special economic zones, the education sector, old age homes and investment by NRIs.

iv. FDI in the telecom sector

• FDI in telecom services is allowed up to 49 percent under the automatic route and up to 100 percent with the prior approval of the FIPB. Telecom services for this purpose includes basic, cellular, and unfired access services, national/international long distance, V-sat, public mobile radio trunked services, global mobile personal communication services and other value added services.
• The total composite foreign holding would include investments by FIIs, NRIs, FCCBs, American depository receipt shares and proportionate foreign investment in Indian promoters/investment companies, including their holding companies.
• While approving investments proposals, the FIPB normally takes note that investment is not coming from countries of concern/unfriendly entities. Certain other restrictions on the transfer of accounting information, user information and details of infrastructure/network diagram have been prescribed that are to be followed by the FIPB while considering the proposals.

v. Investment in asset-reconstruction companies

• Asset reconstruction company (ARC) means a company registered with the RBI under section 3 of the Securitization and Reconstruction of Finance Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
• A person resident outside India can invest in the equity capital of ARCs registered with the RBI under the government route.
• Such investments have to strictly be in the nature of FDI. FIIs registered with the SEBI can invest in the security receipt SRs issued by ARCs registered with the RBI. FIIs can acquire up to 74 percent of each tranche of SRs issued, subject to the condition that no single FII investment exceeds 10 percent of the total issue of each tranche of SRs.

vi. Investment in infrastructure companies in the stock markets

Foreign investment of up to 49 percent of the paid up capital is permitted in infrastructure companies in the securities markets, namely stock exchanges, depositories and clearing corporations, in compliance with SEBI regulations.

Within the permitted limit of 49 percent, the FII component cannot exceed 23 percent and the FDI component cannot exceed 26 percent. FDI in such companies is only permitted under the government/approval route. Furthermore, FII investment is permitted only through purchase from the secondary market.

vii. Investment in credit information companies (CICs)

Foreign investment in CICs is permitted subject to compliance with the Credit Information Companies (Regulation) Act, 2005, and regulatory clearance from the RBI. The aggregate foreign investment in such companies is permitted only up to 49 percent of the paid up the capital (including both FDI FII limits). Investment by SEBI registered FIIs is permitted up to 24 percent (within the overall 49 percent permitted limit) only in CICs listed on the stock exchanges. However, no FII can individually hold, directly or indirectly, more than 10 percent of the equity of the CIC.

viii. Investment in commodity exchanges

A composite ceiling of 49 percent for foreign investment in commodity exchange is only permitted under the government/approval route, whereas FII purchases are restricted to purchases made via secondary markets. Foreign investment in commodity exchanges is subject to compliance with the requirement that no non-resident investor/entity,
including persons acting in concert with them, hold more than 5 percent of the total equity in such a company.

ix. Investment in public sector banks

FDI and FII investment in nationalized banks are subject to overall statutory limits of 20 percent. The investment is subject to banking companies (acquisition & transfer of undertaking) Acts, 1970/80. The same ceiling also applies to investments in the state bank of India and its associate bank.

x. Investment in print media, dealing with news and current affairs

• FDI under the government /approval route is allowed up to 100 percent in the publication of the facsimile edition of foreign newspapers by the owner of the original foreign newspaper, subject to compliance with the guidelines issued by the ministry of information and broadcasting. Publication can be undertaken only by an entity incorporated or registered in India under the provisions of the Companies Act.
• Under the government/approval route and subject to compliance with the guidelines issued by the minister of information and broadcasting, FDI and investment by NRIs/PIOs/FII in the publication of India editions of foreign magazines dealing with news and current affairs and newspapers and periodicals dealing with news and current affairs is allowed up to 26 percent.

Computation of foreign investment

To calculate foreign investment, both direct and indirect foreign investment in an Indian company is to be considered.

Direct foreign investment

All investment made by a non-resident entity directly is an Indian company is deemed as direct foreign investment, and the entire amount of such investment is to be counted towards foreign investment when calculating a company’s total foreign investment.

Indirect foreign investment

• If any foreign investment is made by an Indian company, which is owned and controlled by resident citizens and/or Indian companies that are, in turn, owned by resident Indian citizens, such investments would not be deemed as indirect foreign investment for the purpose of calculating the total foreign investment in the target company (in which the downstream foreign investment is being made.)
• If any foreign investment is made by an Indian company that is owned and controlled by non-resident entities, the entire amount of such investment by the Indian company would be the deemed to be indirect foreign investment in the target company (in which the downstream foreign investment is being made.)
• An Indian company would be deemed to be ‘owned’ by Indian citizen and by Indian companies if more than 50 percent of equity interest in the company is beneficially owned by resident Indian citizens and Indian companies that are, in turn, ultimately owned and controlled by resident Indian citizens.
• Control has been defined as the right to appoint the majority of directors or to control management and policy decisions, including by virtue of their shareholding or management rights or shareholders or agreement or voting agreements.
• If any foreign investment is made by a WOS (100 percent subsidiary) of an operating-cum-investing company/investing company, the indirect foreign investment computed with regards to the target company (in which the downstream foreign investment is being made) would be limited to be amount of foreign investment in the operating-cum-investing company/ investing company, i.e., the downstream investment would be mirror image of the holding company.
• Downstream investment by an Indian company, which is owned and /or controlled by non-resident entity/ies, in another Indian company would be in accordance/compliance with relevant sectoral conditions on entry route, conditionality’s and caps with regards to the sectors in which the latter Indian company is operating.
• With regards to the information and broadcasting sector and the defense sector, there are certain other additional considerations that need to be complied with.
• The foreign investment calculation methodologies mentioned above are applicable in business sector that are governed specifically by a state statue or rules (for instance, the insurance sector is governed by the IRDA regulations.)

Pricing of shares issued by an Indian company

• The price of shares issued to persons resident outside India under the FDI policy is decided as follows:
• Where the shares are of an Indian listed company the price shall not be less than the price at which a preferential allotment of shares can be made under the SEBI guidelines as applicable provided that the same is determined for such duration as specified there in, preceding the relevant date which shall be the date of purchase or sale of shares.
• Fair value to be determined by a SEBI- registered category I- merchant banker or a chartered accountant as per the discounted free cash flow method, where the shares are not listed on any recognized stock exchange in India.
• With respect to unlisted shares issued to person outside India under a rights issue, the following specific conditions apply:
• If the price being offered to resident shareholder is less than the price calculated as per the discounted cash flow method, the price of shares issued to nonresident shareholders cannot be lower than the price computed as per the discounted cash flow method.
• If price being offered to resident shareholders is more than the price calculated as per the discounted cash flow method the price of share issued to nonresident shareholders cannot be less than the price offered to resident shareholders.