Foreign Direct Investment
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Foreign Direct Investment
The Indian Economy was famously called a License Raj in the 1960s, 70s and 80s. It has now turned full circle by transforming itself into a liberalized economy. The Industrial Policy of 1991 paved the way for economic liberalization of the Indian Economy, which led to billions of dollars finding its way into India as Foreign Direct Investment (FDI). All the major MNCs across the world now have their presence in India in diverse sectors such as telecommunication, banking, insurance, manufacturing, software development, services, construction, trading, etc.
The Government now controls only key areas such as Railways, Atomic Energy etc. Most of the business sectors are now 100% open to foreign investment. There are now only a handful of business areas where 100% FDI is restricted and even in these FDI is permitted up to 74%.
Further almost all the business sectors where 100% FDI is permitted have been put on the Automatic Approval Route which implies that there is no impediment in the foreign company in proceeding straight away with the establishment of the required legal entity and commencing its business operations. The required approvals for the foreign investment can be obtained post incorporation of the legal entity.
In areas where the FDI is not available under the automatic approval route, Prior Approval is required from the Department of Industrial Policy and Promotions (DIPP) under the Ministry of Commerce and Industry.
The requirement of a license to carry on a business has been done away in most business activities and compulsory licensing is restricted only a few areas. However companies are required to file an Industrial Entrepreneurs Memorandum (IEM) with the relevant authorities before commencement of business.
The firm has assisted hundreds of foreign companies to invest in India across diverse business sectors and foreign direct investment is one of the firm’s key practice areas.
FDI in India normally takes the equity route and foreign companies prefer to incorporate their Wholly Owned Subsidiary (WOS) in India and control 100% of their foreign investment. However when the FDI Policy does not permit 100% of the shares to be held by a foreign company in an Indian company due to the Sectoral Cap the foreign investment must take the Joint Venture route.
FDI In Trading
FDI in trading is permitted on a wholesale basis on a business to business (B2B) scale. Hence a foreign company can incorporate its subsidiary with 100% foreign investment and import goods and sell them to wholesalers, distributors, retailers or re-sellers. Since FDI in wholesale trading is permitted under the automatic approval route, the foreign company can incorporate its own Wholly Owned Subsidiary in India and immediately commence its business operations. However the foreign investment needs to be approved by the Reserve Bank of India (RBI).
FDI in Retail Trading
Foreign Direct Investment in Retail Trading is permitted only in single brand retailing. Foreign Direct Investment in retail trading other than single brand retailing is completely prohibited.
FDI In Defense Sector
Foreign Direct Investment in defense sector is permitted up to 49% under the Government Approval Route. Further the company needs to obtain an Industrial License under the Industries (Development & Regulation) Act, 1951. However dual use items i.e. items which are used for military as well as civilian applications do not require an industrial license from a defense angle.
Since FDI is permitted only up to 49%, foreign companies necessarily have to take the joint venture route and incorporate a joint venture company with Indian shareholders in this sector. The Joint Venture Company should be an Indian company owned and controlled by resident Indians. The management of the company should be in Indian hands with majority representation on Board as well as the chief executives of the company should be resident Indians.
>Approvals are considered by the Directorate of Industrial Policy and Promotion under the Ministry of Commerce and industry, New Delhi after clearance by the Ministry of Defense. However approvals where the foreign investment exceeds INR 1200 crores would require clearance by the Cabinet Committee on Security (CCS).
FDI in Housing, Township and Construction Sectors
FDI is permitted 100% under the automatic approval route in townships, housing, built up infrastructure and construction development projects. However there are stringent norms to be followed. The minimum capitalization is USD 5 Million with a lock in period of three years. The minimum area to be developed under ach project of a company where FDI is permitted is (i) in case of development of serviced housing plots, a minimum of 10 hectares and (ii) in case of construction-development projects, a minimum built-up area of 50,000 sq. mts. Companies cannot sell undeveloped plots or engage in the business for real estate i.e. buying and selling without any developmental activity.
Prohibited Sectors for Foreign Investment
Business Sectors and FDI Cap
FDI in Exports
FDI in LLP