The year 1991 plays a significant role in economic history of India as India attained liberalisation for the very first time in 1991 after independence. The concept of economic liberalisation was introduced to attain several objectives – industrialisation, expansion in the role of private and foreign investment, and introducing a free market system.
Foreign investment has played pivotal role in safeguarding Indian economy and has been great assistance for capital needs especially since capital in India is not easily accessible. Apart from being a critical driver of economic growth, foreign investment is a major source of non-debt financial resource for the economic development of India. For a country where foreign investments are being made, it also means achieving technical know-how and generating employment.
Considering India is one of the developing countries, highly rich in its economic resources, India has always been an attractive investment destination. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc.
The Indian government’s favourable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, insurance, PSU oil refineries, telecom, power exchanges, and stock exchanges, among others.
Concept of foreign direct investment was governed and regulated under Foreign Exchange Management Act, 1973, which was soon replaced by Foreign Exchange Management Act, 1999 (“FEMA”). Since then, policy for foreign investment into India has been highly regulated with many developments periodically. Additionally, recently, FEMA law has gone under many changes from the governance point of view.
Further, on October 17, 2019, Central Government has notified Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”). On October 15, 2020, the Department for Promotion of Industry and Internal Trade (“DPIIT”) issued a Consolidated FDI policy, 2020 (“FDI Policy”) in supersession of all press notes / press releases / clarifications / circulars issued by DPIIT in the past. Both of the above governs foreign direct investment into India. In case of discrepancy amongst NDI Rules and FDI Policy, provisions as per NDI Rules will prevail.
Foreign investment is an investment in the form of a controlling and beneficial ownership invested on a repatriable basis in a legal entity recognised for making a foreign investment. In India, foreign investment can be made in an Indian Company and in a LLP. Following are kinds of equity instruments for making foreign investment:
Types of Equity Instruments in a legal entity in India:
- Foreign Investment in unlisted company;
- Foreign investment in listed company:
- Foreign investment of 10% or more in listed company;
- Foreign investment of less than 10% in listed company;
- Foreign investment in LLP;
Considering in India, there are recognised legal entity(ies) forms apart from a company and LLP, such as proprietorship concern, partnership concern, investment trust and an association of person. Foreign investment on repatriable basis in such legal entities is restricted. However, there is provision under FEMA where foreign investment in such legal entities may be allowed if application made to RBI. RBI in such cases, in consultation with central government, permit foreign investment by person resident outside India in such legal entity, subject to the conditions. Considering investment by NRI / OCI on a non-repatriable basis is akin to domestic investment, investment by NRI / OCI in such other legal entities, is permitted except if such legal entities are involved in business of agriculture / plantation activity / print media or real estate business.
Entry route for foreign investment into India:
There are 3 categories of entry route for foreign investments, details of which is as under:
Particulars | Description |
Category I: Automatic Route | 100% foreign investment is allowed without any restrictions and / or conditions |
Category II: Government Route | Foreign investment upto 100% is allowed, subject to approval from government |
Category III: Government + Automatic Route | Foreign investment upto 100% is allowed partially through automatic route and partially through approval from Government. Certain % of investment is allowed under automatic route, without any approval mechanism and investment beyond free threshold limit requires approval of Government |
Above categories of entry route are sector specific. Depending upon the sensitivity of sector and growth requirement, entry routes are decided per each sector. There are few sectors, where no foreign investment is allowed, list of such prohibited sectors is as under:
- Lottery Business including Government/private lottery, online lotteries, etc;
- Gambling and Betting including casinos;
- Chit Funds;
- Nidhi Company;
- Trading in International Finance Corporation (IFC));
- Real Estate Business or Construction of farm houses;
- Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes;
- Sectors not open to private sector investment- atomic energy, railway operations (other than permitted activities mentioned under the Consolidated FDI policy).
Eligible investors:
Any person resident outside India are allowed to invest in India, subject to entry routes as mentioned above. However, as an exception, citizen / entity incorporated in a country which shares land border with India is allowed to invest only if approval from Government of India is obtained, even if investment is made under automatic route. Any indirect investment from such citizen or entity is also not allowed as ultimate beneficial ownership would lie with such citizen/ entity.
Instruments for raising foreign investment:
- Equity contribution in a Company:
- Equity Instrument in a company, listed or unlisted;
- Fully, Compulsorily and Mandatorily Convertible Debentures (“CCDs”) in a company, listed or unlisted;
- Fully, Compulsorily and Mandatorily Convertible Preference Shares (“CCPSs”) in a company, listed or unlisted;
- Share Warrants in a company, listed or unlisted
- Convertible Notes in an eligible company;
- Capital participation in LLP;
- Investment in units of Alternative Investment Funds (AIFs), Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvIts);
- Investment in units of mutual funds or Exchange-Traded Fund (ETFs) which invest more than fifty per cent in equity;
- Acquisition, sale or dealing directly in immovable property;
- Contribution to trusts; and
- Depository receipts issued against equity instruments;
These are the investment instruments for direct investment into the Indian entity.
Conclusion:
India has always been the most attractive investment destination. Now with digital transformation, and China controversy, more and more foreign investments are been made into India. With a positive outlook on India, it would be interesting to see how coming 5 to 10 years shapes the growth of India.
For more detailed discussion on the above subject, please do not hesitate to connect at contact@devadhaantu.in
