After the economic liberalization from 1991, India has emerged as an attractive investment destination. Today, it is one the largest democracies in the world and offers tremendous opportunities for growth and investment. Foreign investors are willing to invest in India because of the easy foreign direct investment policies and special benefits like tax exemption. The wages in India are also relatively cheaper and the country has an abundant flow of workforce and a robust financial sector.
It is, therefore, safe to say that foreign investors are readily available to invest in India. The procedure for receiving Foreign Direct Investment in India involves two routes. An Indian business may receive FDI under the Automatic Route or the Government Route.
Under the Government Route, investment proposals are considered by the respective Administrative Department. Foreign investments in different sectors and activities under this route will be subject to approval by the Government of India when:
- An Indian company is being set up by the means of foreign investment and is not owned by a resident entity.
- An Indian company is being set up with foreign investment and is not controlled by a resident entity.
- The control of an existing Indian business that is owned and controlled by an Indian citizen(s) is transferred or will be transferred in the coming future to a foreign entity as a consequence of transfer or issue of shares through an amalgamation, merger/demerger, acquisition etc.
- The ownership of an existing Indian business that is owned and controlled by an Indian citizen(s) is transferred or will be transferred in the coming future to a foreign entity as a consequence of transfer or issue of shares through an amalgamation, merger/demerger, acquisition etc.
- It is clarified that Foreign investment shall include all types of foreign investments, direct and indirect, regardless of whether the said investments have been made under Schedule 1 (FDI), 2 (FII), 2A (FPI), 3 (NRI), 6 (FVCI), 9 (LLPs), 10 (DRs) and 11(Investment Vehicles) of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations.
FCCBs and DRs having underlying of instruments which can be issued under Schedule 5, being in the nature of debt, shall not be treated as foreign investment. However, any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned as foreign investment.
- Investment by NRIs under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident outside India) Regulations will be considered to be a domestic investment, just like investments by Indian citizens residing in the country.
- A company, trust and partnership firm incorporated outside India and owned and controlled by non-resident Indians will be eligible for investments under Schedule 4 of FEMA (Transfer or issue of Security by Persons Resident outside India) Regulations and such investment will also be deemed domestic investment at par with the investment made by residents.
After receiving Foreign Direct Investment either under the Automatic Route or the Government Route, an Indian company is required to comply with provisions of the FDI policies, which include the reporting of the foreign investment to the Reserve Bank of India (RBI). Now, while looking for foreign investment, the borrower must keep in mind that there are different criteria’s, procedures, rules, reporting requirements, etc. for each sector. While 100% FDI inflow is permitted in some sectors, 26%, 51%, (up to 100%) may be allowed in others.