Since the liberalization of the investment policy in India in the year 1999, India has seen rapid inflow in foreign direct investment. According to a recent survey conducted by the World Investment Report and released by the United Nations Conference on Trade and Development (UNCTAD), India ranked 7th among global economies as the top destination for FDI for 2021. India attracted the highest ever total FDI inflow of USD 83.57 billion during the financial year 2020-21, with the financial year 2022-23 amounting to USD 70.97 billion of total FDI Inflow.
The Legal Framework
In order to give a brief summary of the FDI in India, we shall delve into the legal framework. The foreign investment in India is governed by the Foreign Exchange Management Act (FEMA) 1999. The latest consolidated policy governing the foreign direct investment which came into effect from October 15th, 2020 classifies different sectors that are governed under basic 2 routes.
Under the most recent regime, FDI can be made under two routes i.e. Automatic Route and the Government Approval Route.
Under the Automatic Route, the foreign investor or the Indian company does not require any approval from RBI or Government of India for the investment. Under the Government Route, prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required.
The Consolidated FDI Policy of 2020 lays down the percentage of foreign direct investment that can be permitted in each sector. Certain sectors such as Agriculture & Animal Husbandry, Air-Transport Services, Capital Goods, Cash & Carry Wholesale Trading, E-commerce Activities, Petroleum & Natural gas, Pharmaceuticals (Greenfield) Renewable Energy, Roads & Highways, Single Brand Retail Trading, Textiles & Garments, and Insurance & Insurance Intermediaries enjoy 100% FDI under the Approval Route i.e. 100% investment can be made without receiving any prior approval from the Government of India.
Certain sectors such as investment in Infrastructure Company in the Securities Market & Insurance enjoy a limited investment of up to 49% under the Automatic Route.
Similarly, sectors such as the Banking (Public sector), Broadcasting Content Services, Food Products Retail Trading Multi-Brand Retail Trading and Print Media can avail of an investment up to a certain percentage of FDI under the Government approval route. That is to say, investment into these sectors shall be limited to the extent of the percentage as stipulated in the policy and shall require prior government approval. For example, foreign investment into Multi-Brand Retail Trading is permitted to the extent of 51% of FDI after receiving the approval of the Central Government of India.
A third category, known as FDI under Automatic and Government Approval Route, allows foreign investment to be made up to a certain percentage as stipulated into the FDI without the requirement of government approval, however for any further increase in the percentage of FDI into the sector, government approval shall be required. Sectors such as Air transport services, Banking Healthcare (Brownfield), Pharmaceuticals (Brownfield) and Telecom Services can avail of such route. For example, under the Banking (Private sector), up to 49% of FDI is permitted under the Automatic Route and for further foreign investment limited to the extent of 74%, government approval shall be required.
Along with the abovementioned routes, the Government of India has prohibited the foreign direct investment in certain stipulated sectors such as Gambling and Betting; Lottery business (including government/ private lottery, online lotteries etc.); Activities /sectors which are not open to private sector investment (e.g., atomic energy /railways); Business of chit fund; Nidhi company; Real estate business or construction of farmhouses; Trading in transferable development rights; Manufacturing of tobacco, cigars, cheroots, cigarillos, cigarettes and other tobacco substitutes.
The Government of India has laid down a procedure for investment made under the Government Approval Route.
The foreign entity desirous of investing into the particular sector under the government approval route shall file the Application Proposal for Foreign Investment, along with supporting documents to be filed online, on the Foreign Investment Facilitation Portal.
The Department for Promotion of Industry and Internal Trade (DPIIT) shall identify the concerned Ministry/Department and circulate the proposal within 2 days. Similarly, the proposal shall be circulated to the Reserve Bank of India for comments from the perspective of FEMA. DPIIT would be required to provide its comments within 4 weeks from receipt of the online application, & Ministry of Home Affairs (if applicable) shall provide comments within 6 weeks.
Proposals involving FDI exceeding USD 775 Million shall be placed before the Cabinet Committee of Economic Affairs. Once the proposal is completed, it shall be approved within 8 to 10 weeks.
In terms of numbers, the computer software and hardware sectors have attracted the highest FDI inflows of USD 9.39 billion, while the services sector has also received significant investments of USD 8.70 billion. Other sectors that received notable FDI include trading, drugs and pharmaceuticals, automobile industry, chemicals, and construction (infrastructure) activities. Regionally, Maharashtra emerged as the top recipient of FDI with a total of US$14.80 billion, Karnataka followed with USD 10.42 billion, while Delhi and Gujarat attracted US$7.53 billion and USD 4.71 billion, respectively.
The above content is provided for informational purposes only. The provision of this article does not create an attorney-client relationship between D'Andrea & Partners and the reader and does not constitute legal advice. Legal advice must be tailored to the specific circumstances of each case, and the contents of this article are not a substitute for legal counsel.