FOREIGN DIRECT INVESTMENT (FDI) IN INDIA
The capital investment in India from a foreigner or a foreign entity is restricted and is governed by the provisions of the Foreign Exchange Management Act (FEMA). Every year central government through RBI comes up with a consolidated FDI policy, also known as Master Circular on FDI.
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Entry Routes for Investment in India
Under the Foreign Direct Investments (FDI) Scheme, investments can be made in shares, mandatorily and fully convertible debentures and mandatorily and fully convertible preference shares of an Indian company by non-residents through two routes:
- Automatic Route- Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment.
- Government Route- Under the Government Route, the foreign investor or the Indian company should obtain prior approval of the Government of India(Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance or Department of Industrial Policy & Promotion, as the case may be) for the investment.
Who can invest in India?
- A non-resident entity (other than citizens of Pakistan and Bangladesh or an entity incorporated in Pakistan or Bangladesh who can only invest with a prior approval of FIPB) can invest in India, subject to the FDI Policy.
- NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis.
- Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government route and with the prior approval of RBI if the investment is through Automatic route.
- An FII may invest in the capital of an Indian Company under the Portfolio Investment Scheme which limits the individual holding of an FII to 10% of the capital of the company and the aggregate limit for FII investment to 24% of the capital of the company
Mode of Payment
An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures:
- Inward remittance through normal banking channels.
- Debit to NRE / FCNR account of a person concerned maintained with an AD (Category I) bank.
- Conversion of Royalty / Lump sum / Technical know-how fee due for payment, import of capital goods by units in SEZ or conversion of ECB shall be treated as consideration for issue of shares.
- Conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
- Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD (Category I) bank on behalf of residents and non-residents towards payment of share purchase consideration.
Further, the Reserve Bank may on an application made to it and for sufficient reasons, permit an Indian Company to refund / allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.
Prohibition on Foreign Investment in India
Foreign investment in any form is prohibited in a company which is engaged or proposes to engage in the following activities:-
- Business of chit fund
- Nidhi company
- Agricultural or plantation activities
- Real estate business or construction of farm houses (does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships).
- Trading in Transferable Development Rights (TDRs).
- Lottery Business including Government /private lottery, online lotteries, etc.( Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities).
- Gambling and Betting including casinos etc.
- Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).