Foreign Direct Investment (FDI) refers to when a resident who is not Indian invests in an unlisted Indian company or owns at least 10 percent of the completely diluted post-issue paid-up equity capital of a listed Indian company.
There are various benefits that attract foreign investors to participate in FDI, such as market diversification, access to local expertise, lower labour costs, and tax incentives. In addition to being beneficial for foreign investors, FDI is also a significant driver of economic growth and a reliable source of non-debt finance for the economic development of India.
In this article, we'll explore the requirements that the Reserve Bank of India (RBI) has set up for Foreign Direct Investments in India.
India and Foreign Direct Investments
There are several methods through which foreign investors can invest in India through FDI, including
subscribing to the Memorandum of Association,
preferential allotment/private placement/private arrangement,
purchasing shares from Indian residents/companies,
conversion of convertible notes,
and swap of capital instruments.
Foreign investors can invest in India through two routes: the Government Route and the Automatic Route.
The Automatic Route allows for investments made by non-Indian residents without the need for prior approval from the Reserve Bank or Government.
The Government Route requires prior approval and compliance with conditions set by the government. Applications can be made on the Foreign Investment Facilitation Portal (FIFP), which is an online portal administered by the Department of Industrial Policy and Promotion and the Ministry of Commerce and Industry to facilitate FDI approvals for investors.
Requirements set by RBI
Requirements for investing in India through FDI are as follows:
Non-resident entities are allowed to invest in India, with the exception of certain prohibited sectors or activities. However, entities from countries that share a land border with India or have beneficial owners of investments in India that are citizens or residents of those countries can only invest under the government route. Additionally, citizens of Pakistan or entities incorporated in Pakistan are only allowed to invest in sectors other than defence, space, atomic energy, and prohibited sectors under the government route.
Any subsequent changes in ownership of existing or future FDI in India that results in beneficial ownership falling under the restrictions outlined in the point above will also require government approval.
Non-Resident Indians (NRIs) who are residents of Nepal or Bhutan, as well as citizens of Nepal or Bhutan, are allowed to invest in Indian companies on a repatriation basis as long as the amount of investment is paid through normal banking channels in free foreign exchange.
Overseas Corporate Bodies (OCBs) have been derecognized as a class of investors in India since September 16, 2003. Erstwhile OCBs that are incorporated outside India and not under the adverse notice of the Reserve Bank of India (RBI) can make fresh investments as incorporated non-resident entities in accordance with FDI policy and Foreign Exchange Management (Non-Debt Instrument) Rules, 2019.
Companies, trusts and partnership firms incorporated outside India that are owned and controlled by NRIs can invest in India with the same special dispensation that is available to NRIs under the FDI policy.
Foreign Portfolio Investors (FPI) are allowed to make investments as per the terms and conditions mentioned in Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
Registered FPIs and NRIs can trade or invest via a registered broker in the capital of Indian companies on recognized Indian stock exchanges as per the required schedule under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, as amended with time.
Foreign Venture Capital Investors (FVCI) are allowed to make investments as per the terms and conditions outlined in Schedule VII of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
NRIs or Overseas Citizens of India (OCIs) are allowed to subscribe to the National Pension System administered and governed by Pension Fund Regulatory and Development Authority (PFRDA) as long as the subscriptions are done through normal banking channels and the individual is eligible to invest as per the provisions of the PFRDA Act. The annuity/accumulated savings from this investment will be repatriable.
Which sectors in India are not allowed to receive FDIs?
Investment by residents that are not Indian is not allowed in certain sectors, including:
Lottery Business, including government, private, and online lotteries
Gambling and betting, including casinos
Chit funds (except for investments made by non-resident Indians and Overseas Citizens of India on a non-repatriation basis)
Nidhi company (Mutual Benefit Funds Company)
Trading in Transferable Development Rights (TDRs)
Construction of Farm Houses or Real Estate Business
Manufacturing of cheroots, cigarillos, cigars, and cigarettes, of tobacco or of tobacco substitutes. However, foreign investment in other activities related to these products, such as wholesale cash and carry and retail trading, will be subject to the sectoral restrictions outlined in Regulation 16 of FEMA 20(R)
Sectors that are not open to Private Sector Investment, such as the atomic energy sector and railway operations sector
Foreign technology collaboration, such as licensing for franchise, trademark, brand name, and management contract, is also prohibited in case of lottery business, gambling and betting activities.
India has made significant improvements to its investment climate since opening up its economy in 1991, which is largely attributed to the ease of FDI rules in the country. India is now ranked among the top 100 nations for ease of doing business, and FDI inflows have steadily increased in recent years.
India is now considered to be a leading destination for FDI, with a survey indicating that 80% of global respondents plan to invest in India. India's government efficiency, stable public finances, and funding and subsidies offered to private firms make it even more attractive for FDI. These factors are expected to help India attract FDI worth $120-160 billion annually by 2025.
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