A comprehensive analysis of foreign investment scenario and the legal aspects in India

1. Foreign Direct Investment in India
SHILPA DUTTA(Advocate)
SUPREME COURT
BHAGWAN DAS ROAD
NEW DELHI - 110001
EMAIL: shilpa.dutta05@gmail.com

2. Foreign Direct Investment
Foreign direct investment (FDI) is an investment made by a company or individual
in one country in business interests in another country, in the form of either
establishing business operations or acquiring business assets in the other country (e.g.
ownership or controlling interest in a foreign company).
FDI has played an important driver to fuel economic growth , employment creation and
also contribute in human capital formation, international trade integration in India post
economic liberalization (1991).
FDI is permitted as under the following forms of investments –
• Through financial collaborations.
• Through joint ventures and technical collaborations.
• Through capital markets via Euro issues.
• Through private placements or preferential allotments.

3. Why FDI?
A. Gain a foothold in a new geographic market.
B. Increase a firm’s global competitiveness and positioning.
C. Fill gaps in a company’s product lines in a global industry.
D. Reduce costs in areas such as R&D, production and distribution.

4. Factors required to attract FDI
• Low cost but qualified, Educated / Skilled Labor Pool.
• Long – term Market Potential or Yields greater than can be achieved Domestically.
• Access to Natural Resources.
• Geography
• Stability of the economic and Political Environment

5. FDI Scenario in India
1.5 2.2
4.6
2.5
3.9
7
2.3 2.7
6.5
34.7
39.6
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
FDI Inflow ($ Billion)

6. FDI Scenario in India.. (Cont.)
FDI in FY 2015-16 : $40 Billion
34%
21%
10%
7%
7%
21%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FDI (FY 2015-16)
Singapore Mauritius USA
Netherland Japan Other
21%
8%
8%
8%
7%5%
4%3%
3%
2%
31%
FDI Inflow
Services Sector
Computer Software &
Hardware
Telecommunication
Housing & Real Estate
Construction Activities
Power
Automobile
Metallurgical
Petrolium & Natural Gas
Chemicals

7. Foreign Direct Investment Routes
Automatic Route
• The investor are only required to notify the Regional office concerned of RBI and
file the required documents with that office within 30 days of receipt of inward
remittances.
Government Approval
• FDI in activities not covered under the automatic route requires prior
Government Approval and are considered by the Foreign Investment Promotion
Board (FIPB).
• Approvals of composite proposals involving foreign investment/ foreign technical
collaboration are also granted on the recommendation of the FIPB.
1
2

8. Automatic Route
• FDI in sector/ activities to the extent permitted under automatic route does not require any
prior approval either by Government of India or RBI.
• The following documents need to be filed with the RBI:
1. name of the collaborators/ promoters/ shareholders
2. details of allotment
3. copy of the foreign collaboration agreement
4. the original foreign inward remittance certificate from the authorized dealer and
other specified information
• The investment should be in accordance with the prescribed guidelines. This procedure is
applicable only for fresh investments directly in Indian companies and not for purchase of
shares from the existing shareholders.
• This route is available to all sectors or activities that do not have a sector cap i.e. where 100%
foreign ownership is permitted, or for investments that are within a sector cap and where the
Automatic route is allowed.

9. Automatic Route : New Ventures
• All items/activities for FDI up to 100% by Non-Resident Indians (NRI)/Overseas
Corporate Bodies (OCB) fall under the Automatic Route except those that expressly
require a prior Government approval.
• Investment in Public Sector Units and also for units located in Export Oriented Units
(EOU)/Export Processing Zones (EPZ)/Special Economic Zones (SEZ)/Electronic
Hardware Technology Parks (EHTP)/ Software Technology Parks (STP) would also
qualify for the Automatic Route.
• Investment under the Automatic Route is governed by the notified sectorial policy
and equity caps and RBI ensures compliance of the same.
• Any change in sectorial policy/sectorial equity cap is notified by the SIA in the
Department of Industrial Policy & Promotion.

10. Automatic Route : Existing Companies
Automatic route for FDI/NRI/OCB investment is available to the existing companies with
an expansion programme, subject to following additional requirements that:
• the increase in equity level must result from the expansion of the equity base of the
existing company without acquisition of existing shares by NRI/OCB/foreign
investors.
• the money to be remitted should be in the sector(s) under the automatic route.
Otherwise, the proposal would need Government approval through the FIPB
supported by a Board Resolution of the existing Indian company.
For existing companies without an expansion programme, the additional requirements
are that:
• they are engaged in the industries under automatic route (including additional
activities covered under the automatic route regardless of whether the original
activities were undertaken with Government approval or by accessing the automatic
route).
• the increase in equity level must be from expansion of the equity base.
• the foreign equity must be in foreign currency.

11. Government Approval
• Application of all FDI cases, except Non-Resident Indian (NRI) investments and
100% Export Oriented Units (EOUs), should be submitted to the FIPB Units,
Department of Economic Affairs (DEA), Ministry of Finance.
• Applications for NRI and 100% EOU cases should be presented to SIA in Department
of Industrial Policy and Promotion.
• Application can also be submitted with Indian Missions abroad who forward them to
the Department of Economic Affairs for further processing.

12. Government Approval : Regulation and Procedures
Approval procedures have been laid out for undertakings that are :
• exempt from industrial licensing requirements (including existing units
undertaking substantial expansion)
• subject to compulsory industrial licensing.
• small scale units exceeding the prescribed limit of investment in plant and
machinery and continuing to manufacture small scale reserved item(s) or,
in cases where exemption from industrial licensing granted for any item, is
withdrawn.

13. Government Approval : FIPB Route
For the following categories, Government approval for FDI/NRI/OCB through the FIPB
shall be necessary:
• proposals requiring an Industrial License.
• proposals in which the foreign collaborator has a previous venture/tie-up in India in
the same or allied field. However, this condition is not applicable for proposals in the
Information Technology industry.
• proposals relating to acquisition of shares in an existing Indian company.
• proposals falling outside notified sectoral policy/caps or under sectors for which FDI
is not permitted and/or whenever any investor chooses to make an application to the
FIPB and not to avail of the automatic route.
Indian companies getting foreign investment approval through FIPB route do not
require any further clearance from RBI for the purpose of receiving inward remittance
and issue of shares to the foreign investors.

14. Entry Strategies For Foreign Investors
A foreign company has the following options to set up business operations in India :
• By incorporating a company under the Companies Act, 1965
1) A wholly owned subsidiary
2) Joint Venture – existing company or new company with domestic partner
• As an unincorporated entity
1) Liaison Office
2) Project Office
3) Branch Office

15. Liaison Office
• Liaison Office not permitted to undertake any commercial/trading/industrial activity
• The role of the liaison office is limited to
1. Collecting information about possible market opportunities and providing information
about the company and its products to prospective Indian customers
2. Acting as a communication channel between the parent company and Indian
companies.
3. It can promote export/import from/to India and also facilitate technical/financial
collaboration between present company/Group companies and companies in India.
4. Approval for establishing a liaison office in India is granted by RBI.

16. Project Office
• General permission to foreign entities
to establish Project / Site Offices
(temporary in nature)
• Such offices cannot undertake or
carry on any activity other than the
activity relating and incidental to
execution of the project.
Branch Office
• Foreign companies engaged in
manufacturing and trading activities
abroad are allowed to set up Branch
offices in India for specified purposes
• Branch Offices are established with
the approval of RBI
• Permitted to remit outside India profit
of the branch

17. Foreign Investments through GDRs (Euro Issues)
• Foreign Investment through GDRs is treated as Foreign Direct Investment.
Use of GDRs
The proceeds of the GDRs can be used for :
1. Financing capital goods imports,
2. Capital expenditure including domestic purchase/installation of plant,
3. Equipment and building and
4. Investment in software development,
5. Prepayment or scheduled repayment of earlier external borrowings, and
6. Equity investment in JV/WOSs in India.

18. Investment by way of Share Acquisition
• A foreign investing company is entitled to acquire the shares of an Indian company
without obtaining any prior permission of the FIPB subject to prescribed parameters/
guidelines.
• If the acquisition of shares directly or indirectly results in the acquisition of a
company listed on the stock exchange, it would require the approval of the Security
Exchange Board of India.

19. New investment by an existing collaborator in India
• A foreign investor with an existing venture or collaboration (technical and financial)
with an Indian partner in particular field proposes to invest in another area, such
type of additional investment is subject to a prior approval from the FIPB.

20. Purchase Price Of Shares in FDI
A. The price of shares issued to persons resident outside India under the FDI Scheme
shall not be less than :
(i) the price worked out in accordance with the SEBI guidelines, as applicable, where
the shares of the company is listed on any recognized stock exchange in India;
(ii) the fair valuation of shares done as per SEBI guidelines for listed companies or as
per any internationally accepted pricing methodology on arm’s length basis, for unlisted
companies

21. Purchase Price Of Shares in FDI … Contd.
B. The price of shares transferred from resident to a non-resident and vice versa should
be determined as under:
i) Transfer of shares from a resident to a non-resident:
a) In case of listed shares, at a price which is not less than the price at which a
preferential allotment of shares would be made under SEBI guidelines.
b) In case of unlisted shares at a price which is not less than the fair valuation as per
any internationally accepted pricing methodology on arm’s length basis to be
determined by a SEBI registered Category-I- Merchant Banker/Chartered Accountant.
ii) Transfer of shares from a non-resident to a resident - The price should not be more
than the minimum price at which the transfer of shares would have been made from a
resident to a non-resident.
In any case, the price per share arrived at as per the above method should be certified
by a SEBI registered Category-I-Merchant Banker / Chartered Accountant.

22. Modes of Payment allowed for receiving FDI
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 by:
• Inward remittance through normal banking channels.
• 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 NRE/FCNR account of a person concerned maintained with AD
category-I bank.
• Conversion of royalty / lump sum / technical know-how fee due for payment
or conversion of ECB, shall be treated as consideration for issue of shares.
• Debit to non-interest bearing Escrow account in Indian rupees in India which
is opened with the approval of from AD category-I bank and is maintained
with AD category-I bank on behalf of residents and non-residents towards
payment of share purchase consideration.

23. Procedure After FDI Investment
A two-stage reporting procedure has to be followed :
1. On receipt of share application money:
• Within 30 days of receipt of share application money/amount of consideration from the non-resident
investor, the Indian company is required to report to the Foreign Exchange Department, Regional
Office concerned of the Reserve Bank of India, under whose jurisdiction its Registered Office is
located, the Advance Reporting Form, containing the following details
a) Name and address of the foreign investor/s
b) Date of receipt of funds and the Rupee equivalent
c) Name and address of the authorized dealer through whom the funds have been received
d) Details of the Government approval, if any KYC report on the non-resident investor from the
overseas bank remitting the amount of consideration.
• The Indian company has to ensure that the shares are issued within 180 days from the date of
inward remittance which otherwise would result in the contravention / violation of the FEMA
regulations.

24. Procedure After FDI Investment ... Contd.
2. Upon issue of shares to non-resident investors:
Within 30 days from the date of issue of shares, a report in Form FC-GPR- PART A together with the
following documents should be filed with the Foreign Exchange Department, Regional Office
concerned of the Reserve Bank of India.
• Certificate from the Company Secretary of the company accepting investment from persons resident
outside India certifying that:
The company has complied with the procedure for issue of shares as laid down under the FDI scheme
as indicated in the Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to
time.
• The investment is within the sectoral cap / statutory ceiling permissible under the Automatic Route of
the Reserve Bank and it fulfills all the conditions laid down for investments under the Automatic Route,
• OR
• Shares have been issued in terms of SIA/FIPB approval No. --------------------- dated --------------------
(enclosing the FIPB approval copy)
• Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant
indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

25. Major Bodies Constituted For FDI
1991 – Foreign Investment Promotion Board (FIPB)
1996 – Foreign Investment Promotion Council (FIPC)
1999 – Foreign Investment Implementation Authority (FIIA)
2004 – Investment Commission
Secretariat for Industrial Assistance (SIA)

26. Advantages of FDI
Increase in Domestic Employment / Drop in unemployment
New Technology and “Know How” Transfer
Positive Influence on the Balance of Payments
Increased Capital Investment
Targeted Regional and Sectoral Development
Investment in Needed Infrastructure

27. Disadvantages of FDI
Industrial Sector Dominance in the Domestic Market
Technological Dependence on Foreign Technology Sources
Disturbance of Domestic Economic Plans in favor of FDI-Directed Activities
“Cultural Change” created by “Ethnocentric Staffing” The Infusion of Foreign
Culture, and Foreign Business Practices

28. FDI Sectorial Guidelines
AIRPORTS
• Foreign Investment up to 100% is allowed in green field projects under automatic
route
• FDI is allowed in existing projects
1. Up to 74% under automatic route
2. Beyond 74% and up to 100% subject to Government approval
TELECOM
• FDI in basic and cellular, unified access services, national / international long distance,
V-Sat, public mobile radio trunk services, global mobile personal communications
services
1. Automatic up to 49%
2. FIPB beyond 49% but up to 74%
• Manufacture of telecom equipment's – Automatic up to 100%.

29. FDI Sectorial Guidelines …(Contd).
DOMESTIC AIRLINES
• FDI up to 49% (40%) permitted under automatic route
• Automatic Route is not available
• However, a foreign airlines are not allowed to have any direct or indirect equity
participation
• 100% investment by NRIs / OCB’s
DRUGS AND PHARMACEUTICALS
• FDI up to 100% is permitted under the automatic route for manufacture of drugs and
pharmaceuticals
• FDI up to 74% in the case of bulk drugs, their intermediates Pharmaceuticals and
formulations would be covered under automatic route
• FDI above 74% for manufacture of bulk drugs will be considered by the Government
on case to case basis

30. FDI Sectorial Guidelines …(Contd).
INSURANCE
• FDI up to 26% allowed on the automatic route
• However, license from the Insurance Regulatory & Development Authority (IRDA) has
to be obtained
• There is a proposal to increase this limit to 49%
MINING
• Coal and Lignite mining for captive consumption by power projects, and for iron and
steel and cement production – Automatic up to 100%
• Mining covering exploration and mining of diamonds and precious stones, gold, silver
and minerals – Automatic up to 100%

31. FDI Sectorial Guidelines …(Contd).
PETROLEUM
• Petroleum and natural gas sector, other than refining and including market study and
formulation; setting u infrastructure for marketing – Automatic up to 100%
• For petroleum and refining activity 100% FDI is permitted in Indian Private Companies
under automatic route and up to 26% FDI is permitted in Public Sector Undertakings
with Government approval
PRIVATE SECTOR BANKING
• Foreign Investment up to 74% is permitted from all sources under the automatic route
subject to guidelines for setting up of branches / subsidiaries of foreign banks issued
by RBI from time to time.

32. FDI Sectorial Guidelines …(Contd).
TRADING
• Wholesale / cash & carry trading – Automatic up to 100%
• Trading for exports – Automatic up to 100%
• Trading of items sourced from small scale sector – 100% with Government approval
• Single Brand product retailing – 51% with Government approval
PRINT MEDIA
• FDI up to 100% in publishing/printing scientific & technical magazines, periodicals and
journals
• FDI up to 26% in publishing newspapers and periodicals dealing in news and current
affairs
• All investments are subject to the guidelines issued by the Ministry of Information and
Broadcasting

33. FDI Sectorial Guidelines …(Contd).
BROADCASTING
• FDI permitted for setting up hardware facilities such as up-linking, HUB, etc. up to
49% under Government approval route
• FDI permitted in Cable Network up to 49% under Government approval route
• Foreign Investment (FDI/FII) up to 49% allowed under Government approval route in
Direct to Home Service Providers. FDI limited to 20%
• FDI permitted in FM radio up to 20% under Government approval route

34. FDI Sectorial Guidelines …(Contd).
INFRASTRUCTURE
100% FDI is permitted for the following activities:
• Electricity Generation (except Atomic energy)
• Electricity Transmission
• Electricity Distribution
• Mass Rapid Transport System
• Roads and Highways
• Toll Roads
• Vehicular Bridges
• Ports and Harbors
• Hotel and Tourism

35. Special Investment Avenues
ELECTRONIC HARDWARE AND SOFTWARE TECHNOLOGY PARKS
• 100% Foreign Investment under automatic route is allowed in electronics and software
industries set up exclusively for exports
• Eligible to purchase, free of customs duty/excise duty, their entire requirement of capital
goods, raw materials and components, spares and consumables, office equipments etc.
EXPORT ORIENTED UNITS
• 100% foreign equity (is permitted through Automatic Route similar to SEZ units) in
Export Oriented Units (“EOUs”) even if it is manufacturing an item reserved for the small
scale sector
• EOU enjoy several privileges like duty exemption on import and domestic procurement
• Project with minimum investment of Rs. 10 million and above in building, plant and
machinery qualify to be considered under EOU scheme
• Exemption of Industrial Licensing for manufacture of items reserved for SSI sectors

36. Participation by International Financial Institutions
• Equity participation by international financial institutions such as ADB, IFC, CDC,
DEG, etc., in domestic companies is permitted through automatic route, subject to
SEBI/RBI regulations and sector specific cap on FDI.

37. Forbidden Territories
• Atomic energy.
• Arms and Ammunition.
• Lottery business including govt./ Private lottery, online lotteries etc.
• Chit Funds business.
• Gambling and Betting including Casinos.
• Trading in Transferable Development Rights (TDRs)Housing and Real Estate
Business (except development of townships, construction of
residential/commercial premises, roads or bridges to the extent Notification
No. FEMA 136/2005-RB dated July 19, 2005)
• Agricultural (excluding Floriculture, horticulture, development of seeds,
Pisciculture, Animal Husbandry and cultivation of vegetables, Mushrooms etc.
under controlled conditions and services related agro and allied sectors) and
Plantation activities (other than Tea Plantations)

38. Foreign Venture Capital Investment
• A SEBI registered Foreign Venture Capital Investor has general permission from the
Reserve Bank of India to invest in a Venture Capital Fund (VCF) or an Indian Venture
Capital Undertaking (IVCU), in the manner and subject to the terms and conditions
specified in Schedule 6 of RBI Notification No. FEMA 20/2000-RB dated May 3, 2000,
as amended from time to time.
• These investments by SEBI registered FVCI, would be subject to the SEBI regulation
and sector specific caps of FDI.
• FVCIs can purchase equity / equity linked instruments / debt / debt instruments,
debentures of an IVCU or of a VCF through initial public offer or private placement in
units of schemes / funds set up by a VCF.
• At the time of granting approval, the Reserve Bank permits the FVCI to open a
Foreign Currency Account and/ or a Rupee Account with a designated branch of an
AD Category – I bank.

39. Government Approvals for Joint Ventures
• All the joint ventures in India require governmental approvals, if a foreign partner or
an NRI or PIO partner is involved.
• The approval can be obtained from either from RBI or FIPB. In case, a joint venture
is covered under automatic route, then the approval of Reserve bank of India is
required.
• In other special cases, not covered under the automatic route, a special approval of
FIPB is required.

40. Instruments To Receive FDI in Indian Company
Foreign investment is reckoned as FDI only if the investment is made in equity shares,
fully and mandatorily convertible preference shares and fully and mandatorily
convertible debentures with the pricing being decided upfront as a figure or based on
the formula that is decided upfront.
Any foreign investment into an instrument issued by an Indian company which:
• gives an option to the investor to convert or not to convert it into equity or
• does not involve upfront pricing of the instrument as a date would be
reckoned as ECB and would have to comply with the ECB guidelines.
The FDI policy provides that the price/ conversion formula of convertible capital
instruments should be determined upfront at the time of issue of the instruments. The
price at the time of conversion should not in any case be lower than the fair value
worked out, at the time of issuance of such instruments, in accordance with the extant
FEMA regulations [valuation as per any internationally accepted pricing methodology on
arm’s length basis for the unlisted companies and valuation in terms of SEBI (ICDR)
Regulations, for the listed companies] without any assured return.

41. Non-monetary Investment By Foreign Entity
An Indian company eligible to issue shares under the FDI policy and subject to pricing
guidelines as specified by the Reserve Bank from time to time, may issue shares to a
person resident outside India :
• being a provider of technology / technical know-how, against Royalty / Lump sum
fees due for payment;
• against External Commercial Borrowing (ECB) (other than import dues deemed as
ECB or Trade Credit as per RBI Guidelines).
• With prior approval from FIPB for against import of capital goods/ machineries /
equipment and Pre-operative/pre-incorporation expenses subject to the compliance
with the extant FEMA regulations and AP Dir Series 74 dated June 30, 2011.
Provided, that the foreign equity in the company, after such conversion, is within the
sectoral cap.

42. Non-monetary Investment By Foreign Entity.. (Cont.)
Further, on a review in September 2014, it has been decided that an Indian investee
company may issue equity shares against any other funds payable by them, remittance
of which does not require prior permission of the Government of India or Reserve Bank
of India under FEMA, 1999 or any rules/ regulations framed or directions issued
thereunder, provided that:
• The equity shares shall be issued in accordance with the extant FDI guidelines on
sectoral caps, pricing guidelines etc. as amended by Reserve bank of India, from
time to time;
Explanation: Issue of shares/convertible debentures that require
Government approval in terms of paragraph 3 of Schedule 1 of FEMA 20 or import
dues deemed as ECB or trade credit or payable against import of second hand
machinery shall continue to be dealt in accordance with extant guidelines;
• he issue of equity shares under this provision shall be subject to tax laws as
applicable to the funds payable and the conversion to equity should be net of
applicable taxes.

43. Can Non-resident Sell Their Shares ?
Non-Residents were already permitted to sell the shares on the recognized stock
exchange in accordance with Regulation 9(2)(iii(b) of Notification FEMA No. 20 dated
May 3, 2000.
• Yes, the non-resident shall be at liberty to sell those shares as applicable under FDI
guidelines. The shares acquired under the present scheme shall be treated as
acquisition under FDI scheme and as such all requirement namely, sectoral cap,
entry route, pricing, reporting, documentation etc. would have to be complied with.
• Thus, non-resident having acquired shares under the scheme can subsequently
transfer shares under FDI scheme.