Approval of Foreign Direct InvestmentAs the third-largest economy in the world, India has become one of the most preferred destinations for foreign investment. With skilled labor and expertise in certain areas like information technology, auto components, chemicals, apparels, pharmaceuticals and jewellery, India promises huge returns to global investors.
According to the latest survey by AT Kearney, India has replaced the US as the second most attractive FDI location, up from last year's third place ranking. This due to the adopting of more prudent FDI policy by the government of India by which more sectors were opened for foreign investors and on many sectors 100% FDI is permitted.
FDI investment or foreign direct investments in India are approved through two routes:
- Automatic approval by RBI
- Government Route through FIPB
Automatic Approval by RBI
Automatic approval to invest in India is granted by RBI within a period of two weeks. However this requires meeting of certain parameters. The approval is granted to following proposals:
- 50% foreign equity in 3 categories relating to mining activities (List 2)
- 51% foreign equity up to 51% in 48 specified industries (List 3).
- 74% foreign equity up to 74% in 9 categories (List 4).
The list is extensive and covers almost all the sectors for foreign investors. An automatic approval is granted by RBI for investment in high-priority industries or for trading companies primarily engaged in exporting.
Opening an office in India
For the above purposes foreign companies or investors can open the offices to asses the commercial opportunity for self, plan business, obtain legal, financial, official, environmental, and tax advice as needed, choose legal and capital structure, select a location, obtain personnel, develop a product marketing strategy and more.
Automatic Approval for New Ventures
All items and activities (except those that expressly require a prior Government approval.) for which 100% FDI is permitted comes under automatic approval route. NRIs and Oversea Corporate Bodies (OCB) can make investment in these sectors by applying through the route of automatic approval route of RBI.
Investment in the following sectors and units also comes under the automatic approval route of the RBI:
- Public Sector Units
- 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.
The investment made under the Automatic Route is regulated by the by the notified sectoral policy and equity caps and RBI ensures compliance of the same.
Automatic Approval for the Existing Companies
Automatic approval is also meant for the existing companies. NRIs /OCB, who wish to induct foreign equity or have an expansion programme, can do so provided:
• The equity level of the company must increase from the expansion of the equity base of the existing company and not by acquiring existing shares by NRI/OCB/foreign investors
• The remitted money should be in the sector(s) under the automatic route.
If these conditions are not fulfilled, the investors would have to take the approval through the FIPB. For this, the proposal must be supported by a Board Resolution of the existing Indian company.
The companies which don’t have any expansion programme require additional requirements to be eligible for automatic route which are as follows:
- Companies should be engaged in the industries under automatic route (this includes additional activities covered under the automatic route immaterial of whether the original activities were undertaken with Government approval or by accessing the automatic route)
- The equity level must increase from expansion of the equity base
- The equity must be a foreign currency.
- Equity participation by international financial institutions for equity participation in domestic companies is permitted through automatic route subject to Securities Exchange Board of India (SEBI) and RBI regulations and sector specific caps on FDI.
Indian companies, receiving inward remittances are required to notify the RBI of such receipt within 30 days and file required documentation within 30 days of issue of shares to Foreign Investors. This facility is also available to NRI/OCB investment.
The FIPB Route:
FIPB or Foreign Investment Promotion Board main function is to approve all those cases where the parameters of automatic approval are not fulfilled. The processing time taken by FIPB is between 4 to 6 weeks. The processing is done liberally for all sectors and all types of proposals, and rejections are few. In case foreign investor wishes to hold less than the entire equity of the company, it is not necessary for him to have a local partner. The equity proportion not proposed to be held by the foreign investor can be offered to the public.
Approval by FIPB is necessary for the following categories of industries by NRI/OCB and other investors.
- FIPB is necessary for those proposals which require an Industrial License.
- Proposals where the foreign collaborator has a previous venture/tie-up in India in the same or allied field. This condition does not apply to proposals pertaining to Information Technology industry.
- Investors investing more than 24 per cent in the equity capital of units manufacturing items reserved for small scale industries
- FIPB route is also necessary in the items requiring an Industrial License in terms of the locational policy notified by Government under the New Industrial Policy of1991.
- Proposals meant to acquire shares in an existing Indian company.
- All proposals not inside the notified sectoral policy/caps or under sectors for which FDI is not permitted
- If any investor chooses to submit proposals through the FIPB route bypassing the automatic route.
Useful Links
http://www.iic.nic.in/iic3_a.htm
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