Every business, established or start-up, at some point or the other requires funds. Raising money from within the country can prove to be a difficult task when capital is not readily available. In such a situation, companies turn towards foreign direct investments that have become an important source of funding for domestic businesses.
Under foreign direct investment, a foreign entity- individual or firm- invests money in a business based in another country. FDI in India is a critical driver of economic growth and is rigorously promoted by the government in order to attract more investments.
For an investment to be considered as FDI, it should be
10% or above from overseas as per the Organization for Economic Corporation and Development (OECD). Foreign direct investments in India are regulated under the FEMA or Foreign Exchange Management Act, 2000 which is governed by the Reserve Bank of India (RBI).
There are two ways by which a foreign investor can invest in India– the automatic route and the government route.
- Automatic Route: Under this route, a prior approval from the government of India and its concerned ministries is not required. The RBI can be informed after the investment has taken place.
- Government Route: Under this route of FDI approval, a prior permission by the government and its concerned ministries is mandatory.
The categories of foreign investors who can hold stakes in Indian companies subject to conditions and sectoral caps on ownerships are- Foreign Portfolio Investors, Foreign Institutional Investors, Foreign Venture Capital Investors, and Non-Resident Indians.
All non-resident entities are permitted to invest in India either through the automatic or government route. However, entities- individual or company who belong to Bangladesh and Pakistan can only invest under the government route.
Now, investments through FDI are not simply the transfer of funds from one country to another. FDI comes with a factor of ‘lasting control’ and is, therefore, characterized by a notion of ‘controlling ownership’.
An investment is considered ‘FDI’ if the foreign investor is given at least 10 per cent voting rights in the business where the investment is being made.
The APPROVAL PROCESS for foreign direct investments in India are based on a standards and plan developed by DIPP.
- Submission of proposal and uploading document on Foreign Investment Facilitation Portal.
- Department of Industrial Policy and Promotion (DIPP) assigns the case to the concerned Ministry within 2 working days.
- Submission of physical copies to concerned department is not required in case of digitally signed documents.
- For applications not digitally signed, online communication to applicant will be made to submit one signed physical copy of the proposal to the Competent Authority. Applicants are required to submit required documents within 5 days of such intimation.
- The proposal is circulated online within 2 days to Reserve Bank of India for review from FEMA perspective. All proposals are shared with Ministry of External Affairs (MEA) and Department of Revenue (DoR) for record. Any advice/comments from above mentioned departments are directly shared with concerned Administrative Ministry/Department assigned to decide on the proposal.
- Proposals are scrutinized within 1 week and additional information/clarifications, if required, are asked for.
- On getting all required information, the Competent Authority is required to give out its decision in next two weeks. Approval/rejection letters are sent online to the applicant, consulted Ministries/Departments and DIPP.
- Where total foreign equity inflow is more than Rs 5000 crore, the Competent Authority is required to place the same to Cabinet Committee on Economic Affairs for consideration within timelines.