Investment made by a person resident outside India in capital instruments of an Indian company or the capital of an Indian limited liability partnership (LLP) qualifies as FDI.

FDI in sectors which are not prohibited can be made either through the Automatic Route or the Approval Route.

Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India (DPIIT).

No time limit.

Approval of the DPIIT or the concerned administrative ministries/ departments is required for FDI in sectors falling under Approval Route or FDI beyond prescribed cap in sectors under the Automatic Route.

National interest or national security.

The FDI policy covers indirect investments into India.

The expected timeline for an approval under the Approval Route may vary depending on the sector in which the FDI is proposed.

The competent authority takes around eight to 10 weeks to process the complete proposal and convey its approval or rejection to the applicant.

Monetary penalty, adjudication and/or enforcement proceedings.

No specific provision to appeal a rejection by the competent authorities under the Approval Route.

The government amended the FDI Policy to curb opportunistic takeovers/acquisitions of Indian companies during the COVID-19 pandemic.

India’s policy on foreign direct investment (FDI) is embodied in the Consolidated FDI Policy dated 15 October 2020 issued by Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India (as amended from time to time, FDI Policy). The policy pronouncements made under the FDI Policy are notified in the Foreign Exchange Management (Non-Debt Instruments) Rules 2019, under the Foreign Exchange Management Act 1999 (FEMA).

Investment through equity instruments by a person resident outside India in an unlisted Indian company (whether greenfield or M&A), or in 10 percent or more of the post-issue paid-up equity capital on a fully-diluted basis of a listed Indian company, qualifies as FDI. This investment can be made under the primary (subscription) route or the secondary (acquisition) route, or by establishing a new company. 

Under the FDI Policy, FDI is prohibited in certain sectors or above certain thresholds, and permitted in certain other sectors or up to certain thresholds under the Automatic Route (subject to a post facto filing) or Approval Route (subject to prior approval) – see the answer to question 2.

The following is the list of sectors where FDI is prohibited under the FDI Policy:

• Atomic energy
• Railway operations
• Gambling and betting including casinos; lottery business including government/lottery, online lotteries etc.
• Chit funds
• Nidhi company
• Real estate business or construction of farm houses.
• Trading in transferable development rights
• Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.

In the sectors that are not “Prohibited Sectors”, FDI is either permitted up to 100 percent or capped as per thresholds set out in the FDI Policy.

FDI can be carried out under the Automatic Route or the Approval Route. In few sectors, additional conditions (whether under the Automatic Route or the Approval Route) are required to be complied with such as minimum capitalization requirements.

Automatic Route

Under the “Automatic Route”, FDI is permitted up to 100 percent in most sectors as set out in the FDI Policy without prior approval (only subject to a post facto filing with RBI – see the answer to question 5). For example, 100 percent FDI under the Automatic Route can be undertaken in entities engaged in manufacturing and agriculture.

Approval Route

FDI beyond the maximum percentage allowed by the Automatic Route is either prohibited or subject to prior approval of the Government as indicated in the FDI Policy (Approval Route). Different sectors are subject to varying trigger points as to when the Approval Route is required (for example, 100 percent FDI is permitted in mining of titanium subject to Government approval while up to 74 percent FDI is permitted in defense beyond which Government approval is required).

The Department for Promotion of Industry and Internal Trade (DPIIT) (a department of the Ministry of Commerce and Industry, Government of India) along with the concerned ministries/departments is primarily responsible for regulating FDI in India. In addition, the RBI also regulates foreign investment for the purposes of exchange control in accordance with the provisions of the FEMA.

The DPIIT can challenge any investment which falls foul of the Indian foreign exchange laws (e.g., for being in breach of the investment thresholds discussed in question 2), and can require that action be taken against the defaulting party.

Under the Automatic Route there is no requirement of any prior regulatory approval. Only a post facto online filing by the Indian company to the RBI through an authorised dealer bank is required.

Under either of the Automatic Route or Approval Route, prior permission from the RBI is required in certain instances of transfer of equity interests from residents to non-residents.

The approval of the DPIIT or the concerned administrative ministries/departments is required under:

• The Approval Route for:
  • transfers (whether by way of subscription or acquisition) from residents to non-residents that involve transfer of securities of companies engaged in sectors falling under the Approval Route, or
  • establishment by a foreign investor of a new company engaging in sectors falling under the Approval Route, or
• Either of the Automatic Route or Approval Route, where the transfer results are in breach of the applicable sectoral caps.

“Externalization” is a strategy of incorporating holding companies in offshore jurisdictions to enjoy certain benefits which the home country does not offer. The strategy is employed by companies to move their corporate structures away from the Indian tax and regulatory regimes. Some of the major reasons for doing so include tax benefits at the time of exit, avoiding Indian exchange control issues, mitigating currency fluctuation risk and better enforceability of rights.

The DPIIT has issued a standard operating procedure (SOP) which sets out a detailed procedure and timeline for applications as well as the list of competent authorities for processing government approvals for FDI in sectors under the Approval Route. The expected timeline for an approval under the Approval Route may vary depending on the sector in which the FDI is proposed.

Under the SOP, investors are required to make an application through the FIFP, supported by specified documents including charter documents, board resolutions and so on. The application is then forwarded to the concerned competent authority and the RBI, for comments from a foreign exchange law perspective within two days.

Any proposals involving FDI of more than INR50 billion go before the Cabinet Committee of Economic Affairs.

The competent authority takes around eight to 10 weeks to process the complete proposal and convey its approval or rejection to the applicant. No specific criteria have been prescribed based on which the competent authorities grant approval under the Approval Route, but investors lacking prior experience in the desired sector in which they propose to invest, or investors coming from non-Financial Action Task Force jurisdictions, may face stricter scrutiny.
 

The DPIIT can challenge any investment which falls foul of the Indian foreign exchange laws, and can require that action be taken against the defaulting party. However, the DPIIT may, based on the factual circumstances, either regularize the transaction post facto by requiring the parties to carry out compounding, or require the parties to unwind such transaction.

Violation of the Indian foreign exchange laws may attract a monetary penalty. It may also result in adjudication proceedings and/or enforcement proceedings being undertaken against the defaulting parties. Depending on the nature of the contravention, the parties may also undertake a voluntary compounding process by admitting a contravention, and paying the monetary penalty computed on a prescribed computational matrix.

Where FDI is under the Approval Route, the transaction cannot be completed until approval from the competent authority is received.

Failure to comply can result in a violation of the FEMA provisions and parties may be subject to penalties. See the answer to question 8.

While a revised proposal may be submitted for fresh consideration, there is no specific provision to appeal a rejection by the competent authorities under the Approval Route.

Transaction documents typically include detailed closing conditions which include:

• Receipt of Government approval in situations where FDI is under the Approval Route.

• Reporting obligations.

• Compliance with pricing norms.

For any concerns regarding interpretation of the FDI Policy, investors can seek informal guidance by filing representations to the DPIIT through industry bodies. This can be followed up with a formal request for clarification made to the DPIIT. An applicant can submit a clarification to the DPIIT listing its query in the prescribed form.

The Government of India through Press Note three (2020 Series) dated 17 April 2020  and notification dated 22 April 2020 amended the FDI Policy to curb opportunistic takeovers/acquisitions of Indian companies during the COVID-19 pandemic. Accordingly, any investment made from Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan and Afghanistan or where the “beneficial owner” (which term has not been defined) of an investment into India is situated in or is a citizen of any of the aforementioned countries, requires the prior approval of the Government regardless of the sector/activities in which the investment is made.

Recently, the government has received complaints from trader and industry associations against marketplace e-commerce entities alleging violation of the FDI Policy in the e-commerce sector.

There have not been any major changes to the FDI regime in the recent past. However, reforms have been undertaken recently across sectors, such as coal mining, contract manufacturing, digital media, single-brand retail trading, civil aviation, defense, insurance and telecom. These reforms include further liberalization of sectoral caps for FDI in these sectors.

The FDI Policy is reviewed on an ongoing basis, to ensure that India remains an attractive and investor friendly destination. Changes are made in the FDI Policy after detailed consultations with stakeholders including industry chambers, associations, representatives of industries/groups and other organizations.

It is not expected that India will introduce additional FDI restrictions. India is expected to attract a US$100 billion FDI inflow in 2022- 2023 supported by various ground touching economic reforms and significant ease of doing business in the recent years. Expected future initiatives to attract more FDI include the following:

• The Government is considering easing scrutiny on certain foreign direct investments from countries that share a border with India.
• The implementation of measures like PM Gati Shakti National Master Plan (NMP) (which provides for integrated planning and coordinated implementation of infrastructure connectivity projects), single window clearance and GIS (Geographic Information System) mapped land bank (measure to map industrial land parks to facilitate availability for potential investors).
• The Government is likely to introduce at least three policies as part of the Space Activity Bill in 2022. This Bill is expected to clearly define the scope of foreign FDI in the Indian space sector.

For more information contact Biswajit Chatterjee, Partner, Singapore (India focus group)