Foreign direct investment (FDI) in India

Foreign direct investment (FDI) is a direct investment into production or business in acountry by an individual or company in another country, either by buying a company inthe target country or by expanding operations of an existing business in that country.Foreign direct investment is in contrast to portfolio investment which is a passiveinvestment in the securities of another country such as stocks and bondsTypes of Foreign direct investment (FDI)1. Horizontal FDI arises when a firm duplicates its home country-based activitiesat the same value chain stage in a host country through FDI.2. Platform FDI Foreign direct investment from a source country into adestination country for the purpose of exporting to a third country.3. Vertical FDI takes place when a firm through FDI moves upstream ordownstream in different value chains i.e., when firms perform value-addingactivities stage by stage in a vertical fashion in a host country.Advantages in India

• World\'s largest democracy with 1.2 billion people.• Stable political environment and responsive administrative set up.• Well established judiciary to enforce rule of law.• Land of abundant natural resources and diverse climatic conditions.• Rapid economic growth: GDP to grow by 8.5% in 2010-11* and 9.0% in 2011-12.• India\'s growth will start to outpace China\'s within three to five years and hence willbecome the fastest large economy with 9-10% growth over the next 20-25 years(Morgan Stanley).• Investor friendly policies and incentive based schemes.• Second most attractive Foreign Direct Investment (FDI) location in the world: Indiareceived a total of US$ 25.9 billion of FDI in 2009-10.• Healthy macro-economic fundamentals: Investment rate is expected to be 37% in2010-11 and 38.4% in 2011-12 while Domestic Savings rate is expected to be 34%in 2010-11 and 36% in 2011-12.• India\'s economy will grow fivefold in the next 20 years (McKinsey).• Cost competitiveness; low labor costs.

Recent changes

2012 – October: In the second round of economic reforms, the governmentcleared amendments to raise the FDI cap

(a) In the insurance sector from 26% to 49%;

(b) In the pension sector it approved a 26 percent FDI;

Now, Indian Parliament will have to give its approval for the final shape,"

2012 - September: The government approved the

(a) Allowed 51% foreign investment in multi-brand retail,

(b) Relaxed FDI norms for civil aviation and broadcasting sectors. – FDI cap inBroadcasting was raised to 74% from 49%;

(c) Allowed foreign investment in power exchanges

2011 – December:

(i) The Indian government removed the 51 percent cap on FDI intosingle-brand retail outlets and thus opened the market fully to

foreign investors by permitting 100 percent foreign investments inthis area.

WHO CAN INVEST IN INDIA

1. A non-resident entity (other than a citizen of Pakistan or an entity incorporated inPakistan) can invest in India, subject to the FDI Policy. A citizen of Bangladesh or anentity incorporated in Bangladesh can invest in India under the FDI Policy, only underthe Government route.

2. NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan arepermitted to invest in the capital of Indian companies on repatriation basis, subject tothe condition that the amount of consideration for such investment shall be paid onlyby way of inward remittance in free foreign exchange through normal bankingchannels.

3. OCBs have been derecognized as a class of Investors in India with effect fromSeptember 16, 2003. Erstwhile OCBs, which are incorporated outside India and arenot under the adverse notice of RBI, can make fresh investments under FDI Policyas incorporated non-resident entities, with the prior approval of Government of Indiaif the investment is through Government route; and with the prior approval of RBI ifthe investment is through Automatic route.

4. (i) An FII may invest in the capital of an Indian Company under the PortfolioInvestment Scheme which limits the individual holding of an FII to 10% of the capitalof the company and the aggregate limit for FII investment to 24% of the capital of thecompany. This aggregate limit of 24% can be increased to the sectorial cap/statutoryceiling, as applicable, by the Indian Company concerned by passing a resolution byits Board of Directors followed by passing of a special resolution to that effect by itsGeneral Body.The aggregate FII investment, in the FDI and Portfolio Investment Scheme, shouldbe within the above caps.

(ii) The Indian company which has issued shares to FIIs under the FDI Policy forwhich the payment has been received directly into company’s account should reportthese figures separately under item no. 5 of Form FC-GPR (Annex-1-A) (Post-issuepattern of shareholding) so that the details could be suitably reconciled forstatistical/monitoring purposes.(iii) A daily statement in respect of all transactions (except derivative trade) have tobe submitted by the custodian bank in floppy / soft copy in the prescribed formatdirectly to RBI to monitor the overall ceiling/sectorial cap/statutory ceiling.

5. No person other than registered FII/NRI as per Schedules II and III of ForeignExchange Management (Transfer or Issue of Security by a Person Resident OutsideIndia) Regulations of FEMA 1999, can invest/trade in capital of Indian Companies inthe Indian Stock Exchanges directly i.e. through brokers like a Person Resident in

India.

6. A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to100% of the capital of an Indian Venture Capital Undertaking (IVCU) and may alsoset up a domestic asset management company to manage the fund. All suchinvestments can be made under the automatic route in terms of Schedule 6 toNotification No. FEMA 20. A SEBI registered FVCI can also invest in a domesticventure capital fund registered under the SEBI (Venture Capital Fund) Regulations,1996. Such investments would also be subject to the extant FEMA regulations andextant FDI policy including sectorial caps, etc. SEBI registered FVCIs are alsoallowed to invest under the FDI Scheme, as non-resident entities, in othercompanies, subject to FDI Policy and FEMA regulations.

ENTITIES FOR FDI

1. FDI in an Indian Company

(i) Indian companies including those which are micro and small enterprises(MSEs) can issue capital against FDI.

2. FDI in Partnership Firm / Proprietary Concern:

(i) A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outsideIndia can invest by way of contribution to the capital of a firm or a proprietary concernin India on non-repatriation basis provided;(a) Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO accountmaintained with Authorized Dealers / Authorized banks.(b) The firm or proprietary concern is not engaged in any agricultural /plantation orreal estate business or print media sector.(c) Amount invested shall not be eligible for repatriation outside India.(ii) Investments with repatriation benefits: NRIs/PIO may seek prior permission ofReserve Bank for investment in sole proprietorship concerns/partnership firms withrepatriation benefits. The application will be decided in consultation with theGovernment of India.(iii)Investment by non-residents other than NRIs/PIO: A person resident outside Indiaother than NRIs/PIO may make an application and seek prior approval of ReserveBank for making investment by way of contribution to the capital of a firm or a

proprietorship concern or any association of persons in India. The application will bedecided in consultation with the Government of India.(iv)Restrictions: An NRI or PIO is not allowed to invest in a firm or proprietorshipconcern engaged in any agricultural/plantation activity or real estate business (i.e.dealing in land and immovable property with a view to earning profit or earningincome there from) or engaged in Print Media.

3. FDI in Venture Capital Fund (VCF):

FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs)/Venture Capital Funds (VCFs) /other companies, as stated in paragraph 3.1.6 of thisCircular. If a domestic VCF is set up as a trust, a person resident outside India (non-resident entity/ individual including an NRI) cannot invest in such domestic VCFunder the automatic route of the FDI scheme and would be allowed subject toapproval of the FIPB. However, if a domestic VCF is set-up as an incorporatedcompany under the Companies Act, 1956, then a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF underthe automatic route of FDI Scheme, subject to the pricing guidelines, reportingrequirements, mode of payment, minimum capitalization norms, etc.

4. FDI in Trusts:

FDI in Trusts other than VCF is not permitted.

5. FDI in other Entities:

FDI in resident entities other than those mentioned above is notpermitted.

ENTRY ROUTES FOR FDI

1 Investments can be made by non-residents in the equity shares/fully, compulsorilyand mandatorily convertible debentures/ fully, compulsorily and mandatorilyconvertible preference shares of an Indian company, through two routes;

1. The Automatic Route: under the Automatic Route, the non-resident investor or theIndian company does not require any approval from the RBI or Government of Indiafor the investment.2. The Government Route: under the Government Route, prior approval of theGovernment of India through Foreign Investment Promotion Board (FIPB) isrequired. Proposals for foreign investment under Government route as laid down inthe FDI policy from time to time, are considered by the Foreign Investment PromotionBoard (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance

GUIDELINES FOR CONSIDERATION OF FDIPROPOSALS BY FIPB:

The following guidelines are laid down to enable the FIPB to consider the proposalsfor FDI and formulate its recommendations.

1. All applications should be put up before the FIPB by its Secretariat within 15 daysand it should be ensured that comments of the administrative ministries are placedbefore the Board either prior to/or in the meeting of the Board.2. Proposals should be considered by the Board keeping in view the time frame ofthirty (30) days for communicating Government decision.3. In cases in which either the proposal is not cleared or further information isrequired in order to obviate delays presentation by applicant in the meeting of theFIPB should be resortedto.4. While considering cases and making recommendations, FIPB should keep in mindthe sectorial requirements and the sectorial policies vis-à-vis the proposal (s).5. FIPB would consider each proposal in its totality.6. The Board should examine the following while considering proposals submitted toit for consideration:(i) whether the items of activity involve industrial license or not and if so theconsiderationsfor grant of industrial license must be gone into;(ii) whether the proposal involves any export projection and if so the items of exportand theprojected destinations;(iii)Whether the proposal has any strategic or defense related considerations.

7.While considering proposals the following may be prioritized:(i) Items falling in infrastructure sector;(ii) Items which have an export potential;(iii)Items which have large scale employment potential and especially for ruralpeople;(iv) Items which have a direct or backward linkage with agro business/farm sector;(v) Items which have greater social relevance such as hospitals, human resourcedevelopment, life saving drugs and equipment;(vi) Proposals which result in induction of technology or infusion of capital.8. The following should be especially considered during the scrutiny andconsideration ofproposals.(i) The extent of foreign equity proposed to be held (keeping in view sectorial caps ifany;(ii) Extent of equity from the point of view whether the proposed project wouldamount to aholding company/wholly owned subsidiary/a company with dominant foreigninvestment(i.e. 76% or more) joint venture;(iii)Whether the proposed foreign equity is for setting up a new project (joint ventureorotherwise) or whether it is for enlargement of foreign/NRI equity or whether it is forfresh induction of foreign equity/NRI equity in an existing Indian company;(iv) In the case of fresh induction offerings/NRI equity and/or in cases of enlargementofforeign/NRI equity, in existing Indian companies whether there is a resolution of theBoard of Directors supporting the said induction/enlargement of foreign/NRI equityandwhether there is a shareholders agreement or not;(v) In the case of induction of fresh equity in the existing Indian companies and/orenlargement of foreign equity in existing Indian companies, the reason why theproposalhas been made and the modality for induction/enhancement (i.e. whether byincrease ofpaid up capital/authorized capital, transfer of shares (hostile or otherwise) whether byrights issue, or by what modality;(vi) Issue/transfer/pricing of shares will be as per SEBI/RBI guidelines;(vii) Whether the activity is an industrial or a service activity or a combination of both;

(viii) Whether the items of activity involves any restriction by way of reservation fortheMicro & Small Enterprises sector;(ix) Whether there are any sectorial restrictions on the activity;(x) Whether the proposal involves import of items which are either hazardous/bannedordetrimental to environment (e.g. import of plastic scrap or recycled plastics).9. No condition specific to the letter of approval issued to a non-resident investorwould bechanged or additional condition imposed subsequent to the issue of a letter ofapproval. Thiswould not prohibit changes in general policies and, regulations applicable to theindustrial sector

Approval for FDI in Limited Liability Partnershipfirms

The Cabinet Committee on Economic Affairs approved the proposal to amend thepolicy on allowing Foreign Direct Investment (FDI) in Limited Liability Partnership(LLP) firms on 11 may 2011The FDI in LLPs will be implemented in a calibrated manner, beginning with the‘open’ sectors where monitoring is not required, subject to the following conditions:

(a) LLPs with FDI will be allowed, through the Government approval route, in thosesectors/activities where 100% FDI is allowed, through the automatic route and thereare no FDI-linked performance related conditions.

(b) LLPs with FDI will not be allowed to operate in agricultural/plantation activity, printmedia or real estate business.(c) LLPs with FDI will not be eligible to make any downstream investments.

There are also further following conditions relating to funding, ownership andmanagement of LLPS:

I. Funding of LLPs:

(a) An Indian company, having FDI, will be permitted to make downstream

investment in LLPs only if both the company, as well as the LLP are operating insectors where 100% FDI is allowed, through the automatic route and there are noFDI-linked performance related conditions.

(b) Foreign Capital participation in the capital structure of the LLPs will be allowedonly by way of cash considerations, received by inward remittance, through normalbanking channels, or by debit to NRE/FCNR account of the person concerned,maintained with an authorized dealer/authorized bank; and

(c) Foreign Institutional Investors (Flls) and Foreign Venture Capital Investors(FVCIs) will not be permitted to invest in LLPs. LLPs will also not be permitted toavail External Commercial Borrowings (ECBs.)

II. Ownership and management of LLPs:

(a) For the purpose of determination of the designated partners in respect of LLPswith FDI, the term "resident in India" would have the meaning, as defined for "personresident in India", under Section 2(v) (i) (A) & (B) of the Foreign ExchangeManagement Act, 1999;

What are the Limits for FDI in different Sectors:

(A) 26% FDI is permitted in

Defenses

Newspaper and media **

Petroleum refining

Pension sector (allowed in October 2012 as per cabinet decision)

(B) 49% FDI is permitted in:

Banking

Cable network**

DTH **

Infrastructure investment

Telecom

Insurance (Enhanced from 26% to 49% in October, 2012)

49% (FDI & FII) in power exchanges registered under the Central ElectricityRegulatory Commission (Power Market) Regulations 2010 subject to an FDI limit of26 per cent and an FII limit of 23 per cent of the paid-up capital is now permissible.[Permitted in September 2012]

(C) 51% is permitted in

Multi-Brand Retail (Since September 2012)

Petro-pipelines

(D) 74% FDI is permitted in

Atomic minerals

Science Magazines /Journals

Petro marketing

Coal and Lignite mines

Telecom

(E) 100% FDI is permitted in

Single Brand Retail (Increased to 100% from 51% in December 2011).

Advertisement

Airports

Cold-storage

BPO/Call centers

E-commerce

Energy (except atomic)

Export trading house

Films

Hotel, tourism

Metro train

Mines (gold, silver)

Petroleum exploration

Pharmaceuticals

Pollution control

Postal service

Roads, highways, and ports.

Township

Wholesale trading

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