India is one of the fastest growing economies since last few years and witnessed a large amount of foreign investment in various sector. The government has formulated it Policy aiming towards attracting more and more funds considering the domestic business concerns simultaneously. This article’s aim is to give a introduction of the way of introduction of FDI in India
The 2012 A.T. Kearney Foreign Direct Investment Confidence Index has ranked India second most attractive destination for FDI , an improvement from its third rank in the year 2010.
During December 2012, top 10 Sectors attracting highest FDI inflows were: Services Sector (19 per cent), Construction development: Townships,housing, built-up infrastructure* (12 per cent), Telecommunications (7 per cent), Computer Software & Hardware (6 per cent), Drugs & Pharmaceuticals (5 per cent), Chemicals (other than Fertilizers) (5 per cent), Power (4 per cent), Automobile Industry (4 per cent), Metallurgical Industries (4 per cent), Hotel & Tourism (3 per cent).
Top 10 Investing Countries: Top 10 investing countries during December 2012 were: Mauritius (38 per cent), Singapore (10 per cent),U.K (9 per cent), Japan (7 per cent), U.S.A (6 per cent),Netherlands (5 per cent), Cyprus (4 per cent), Germany (3 per cent), France (2 per cent), U.A.E (1 per cent).
A foreign company planning to set up business operations in India can enter by:
- Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.
- Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.
Entry Routes for Investment
Procedure under Automatic Route
FDI in sectors/activities permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of 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.
Procedure under Government Approval
FDI in activities not covered under the automatic route require prior Government approval. Such proposals are considered by the Foreign Investment Promotion Board (FIPB), a Government body that offers single window clearance for proposals on foreign investment in the country that are not allowed access through the automatic route.
Government approval is required in the following cases:
- Where a foreign investor has an existing joint venture/technology transfer / trademark agreement in the same field, prior to January 12, 2005, the proposal for fresh investment / technology transfer / collaboration / trademark agreement in a new joint venture would have to be under the Government approval route through FIPB.
- In sectors with caps, including inter-alia defence production, air transport services, ground handling services, asset reconstruction companies, private sector banking, broadcasting, commodity exchanges, credit information companies, insurance, print media, telecommunications and satellites, Government approval / FIPB approval would be required in all cases where:
- An Indian company is being established with foreign investment and is owned or controlled by a non-resident entity or
- The control or ownership of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, is being transferred to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares.
- These guidelines do not apply for sectors/activities where there are no foreign investment caps, that is, 100% foreign investment is permitted under the automatic route.
Investment by way of Share Acquisition
A foreign investing company is entitled to acquire the shares of an Indian company without obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines.If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange, it would require the approval of the Security Exchange Board of India.
New investment by an existing collaborator in India
A foreign investor with an existing venture or collaboration (technical and financial) with an Indian partner in particular field proposes to invest in another area, such type of additional investment is subject to a prior approval from the FIPB.
General Permission of RBI under FEMA
Indian companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors.The companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.
Participation by International Financial Institutions
Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc., in domestic companies is permitted through automatic route, subject to SEBI/RBI regulations and sector specific cap on FDI.
Currently FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:
- Atomic Energy
- Lottery Business
- Gambling and Betting
- Business of Chit Fund
- Nidhi Company
- Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) Trading in Transferable Development Rights (TDRs).
- Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.
Amount of FDI inflows for the financial year 2012-13 for the month of December 2012 was US$ 1.1 billion. Amount of total FDI equity inflows into India (equity inflows + re-invested earnings + other capital) for the financial year 2012-13 (from April 2012 to December, 2012) was estimated at US$ 27.19 billion. Cumulative Amount of FDI Equity Inflows (excluding, amount remitted through RBI’s-NRI Schemes) (from April, 2000 to December, 2012) was recorded at US$ 187.80 billion.
(Reference: Ministry of External Affairs, Reserve Bank of India, Economic Survey Report)