Everything you need to know about the Foreign Direct Investment (FDI) Policy of India

Apart from a growing population and rising personal income, a major factor that draws foreign companies to India is its FDI policies. In FY 2021-22, there was a Foreign Direct Investment (FDI) in India inflow of USD 83.57 billion, which is currently the highest in this country’s history.

An interesting fact in this regard is that these high numbers were recorded even after the government imposed certain restrictions by setting the new Foreign Direct Investment (FDI) Policy of India. This is mainly due to the reforms introduced by the authorities for economic liberalization and enhancing the ease of doing business in this country.

Foreign Direct Investment (FDI) Policy of India– What is It?

According to the reports, Foreign Direct Investment (FDI) is the purchasing of equity by a foreign resident or entity of

a) an unlisted Indian organization

or

b) 10% or higher post-issue paid-up equity capital of a listed Indian organization on a fully diluted basis.

Now, FDI investments in India can be done via two routes:

• Automatic Route

Under the automatic route, there is no need to take prior permission from the Reserve Bank of India (RBI) or the Indian Government. Foreign companies simply must send a notification to the RBI on the issuance of shares to the foreign resident or entity by the Indian company within 30 days.

• Government Route

In the case of the government route, the foreign individual or entity must gain approval from the RBI, the Indian Government, and the Foreign Investment Promotion Board (FIPB).

As per the new FDI policy of India, countries sharing a land border with the nation and individuals benefiting from the investors who are citizens or currently residing in such countries can only invest under the government route.

How Do FDI Policies Differ Sector-Wise?

When it comes to the automatic route, there are certain sectors where foreign individuals or companies can make 100% FDI investment. Whereas, in the case of others, investment is allowable only up to a certain percentage after which government approval is necessary.

For instance, businesses related to the coal mining sector, financial services (under RBI and SEBI regulations, white label ATMs and credit information organizations), railways infrastructure, civil aviation (all except scheduled air transport services), e-commerce, wholesale trading, petroleum and natural gas, industrial parks, etc., can apply for 100% FDI under the automatic route.

Alternatively, companies from sectors like defense manufacturing, pharmaceuticals (brownfield), single brand retail, telecom services, etc., are allowed automatic route FDI investments up to a certain percentage. To invest after that, government approval is necessary.

The FDI policy of India allows foreign investments in sectors that can affect national security only via the government route. Moreover, the percentage of foreign direct investment possible also tends to vary across sectors.  Examples in this regard are public sector banks, digital media, multi-brand retailing, space satellites, pension, print media, and more.

Furthermore, there are certain sectors where there is no permission for foreign direct investments as per government rules. They are as follows:

• Tobacco, Cigarettes, Cheroots, Cigars, and Related Products
• Casinos, Gambling, Betting, etc.
• Nidhi Companies
• Chit Funds
• Real Estate
• Atomic Energy
• Transferable Development Rights

Key Aspects of the FDI Policy

[/vc_column_text][vc_column_text]Historically, the Indian Government has been modifying its foreign investment policies often to ensure transparent and fair business operations. This is primarily done to reap the benefits of capital investment from foreign entities and increase the country’s foreign exchange reserves.

Here are some of the key aspects of the FDI policy of India:

• A Non-Resident Indian (NRI) can invest in all sectors except those that are prohibited by the FDI laws. Moreover, if that individual resides in a country that shares borders with India, he/she can only invest through the government route.
• Citizens or companies in Pakistan are eligible to make foreign direct investments in all sectors except atomic energy and defense. They also cannot invest in those activities/sectors where FDI is not applicable.
• Usually, government approval is necessary for making foreign direct investments in case of the following circumstances:

1. Activities performed in a particular sector that requires an industrial license
2. Proposals for acquiring shares in an existing Indian firm by an NRI or a foreign investor.
3. If the foreign entity already has a previous or ongoing venture or tie-up in the same sector/activity being applied for.

• Foreign individuals/entities can invest up to 100% via the automatic route for Special Economic Zones.
• 100% foreign direct investments under the automatic route are also permissible for Export Oriented Units (EOUs). However, they are subjected to sectoral norms. Additionally, proposals not under the automatic route need the Foreign Investment Promotion Board (FIPB)’s consideration and approval.

How does the FDI Policy benefit Foreign Companies?

Opting for the FDI policy of India has several benefits for foreign investors/companies. Some of the benefits of investing in Indian markets are:

• Increasing Market Size

Thanks to India’s growing population, it constitutes one of the world’s largest markets. A large section of it belongs to the middle class and they serve as an excellent consumer base for foreign products. Moreover, the increase in personal disposable income of the common man also helps international firms gain a new and growing customer base.

• Developing Economy

India is one of the world’s fastest-growing economies. Its real GDP is estimated to grow at the rate of 7.1% in FY2023-24. Moreover, due to its National Infrastructure Pipeline, the country is all set to transform into a USD 5 trillion economy by 2025.

• Ease of Doing Business

Between 2014 to 2022, India improved its rank in ease of doing business from 142 to 63. This is mainly due to the amicable industrial policies, availability of advanced infrastructure, easy credit facilities, and wide availability of skilled labor.

• Major Manufacturing Hub

In comparison to other countries, it is significantly cheaper to manufacture products in India. In addition, this nation has access to all of the major markets in Asia. Thus, it has the capacity to serve as an attractive region for foreign businesses to set up their manufacturing operations.

Another major factor that makes India an attractive business destination for foreign entities is the presence of business consulting firms. There are several companies like Tecnova which are experts in facilitating foreign direct investments in the target sector of the business entity. Additionally, they have experts who have in-depth knowledge of every industrial sector and can even suggest investments in those that have excellent growth potential.

References

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