Explore the comprehensive analysis of India’s Consolidated Foreign Direct Investment (FDI) Policy 2020, highlighting key changes, sectoral revisions, and regulatory implications.
The Department for Promotion of Industry and Internal Trade (DPIIT) issued the consolidated Foreign Direct Investment (FDI) policy circular of 2020 (“Revised Policy”) on 28 October 2020. The DPIIT has released an updated consolidated FDI policy after a long gap of 3 years since the last one which was issued on 28 August 2017.
The present consolidation subsumes and supersedes all Press Notes/Press Releases/Clarifications/Circulars issued by the DPIIT, which were in force as on October 15, 2020 and reflects the FDI Policy as on October 15, 2020.
The Revised Policy will take effect from October 15, 2020 and will remain in force until Consolidated FDI Policy 2020 Department for Promotion of Industry and Internal Trade superseded in totality or in part thereof.
The Revised Policy is aligned with the Implementation of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 by incorporating all necessary changes, including procedural instructions on payment of inward remittance and reporting requirements.
Overview of the key changes in the FDI regime since 2017 (i.e., between the previous FDI policy of 2017 and Revised Policy):
- Implementation of the NDI Rules – Last year in October, the Central Government introduced NDI Rules in supersession of the Foreign Exchange Management (Transfer and Issue of Security by a Person Resident outside India) Regulations, 2017 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018. This change led to a shift in rule making power (so far as foreign investment in India is concerned) to the Central Government. Subsequently, in July 2020, the NDI Rules were amended, and the Reserve Bank of India was entrusted with the sole power to consider applications for investments in India which were not specifically permitted under the Foreign Exchange Management Act, 1999 or rules and regulations made thereunder.
- Inclusion of PN 3 of 2020 – Restrictions over countries sharing land borders with India – The Revised Policy incorporates the key restrictions imposed by the Press Note No. 3 – 2020 earlier this year relating to FDI from entities or citizen of neighbouring countries sharing land borders (including China) with India.
As per PN3 of 2020, any FDI from such countries will require prior government approval. The Revised Policy also included the scenario with respect to transfer of ownership of an Indian entity, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview stated above. Therefore, any transfer of ownership resulting into transfer of beneficial ownership to entities or citizens of neighbouring countries sharing land borders will require government approval. The term “beneficial ownership” remains undefined and creates ambiguity for foreign investors who may not be owned/controlled by any Chinese entities or citizens but have minority shareholding from China or other countries sharing land borders with India.
- Revisions of sectoral caps – Various press notes/circulars were issued by DPIIT to bring in changes in FDI limits and sector specific conditions. We have set out below a summary of key changes brought into effect in various sectors:
| Sector | Summary of changes introduced |
| Defence | FDI limit in defence manufacturing, under the automatic route was increased from 49% to 74% and certain sector specific conditionality are revised |
| Contract Manufacturing | Necessary clarification was issued to include contract manufacturing under ‘manufacturing’ sector under automatic route |
| Single Brand Retail Trading | 100% FDI under automatic route was permitted in the sector. Further, certain sector specific conditionality including local sourcing norms were also relaxed |
| E-commerce | Certain restrictions were imposed on e-commerce marketplace entities or group companies from selling their products on the platform run by the said marketplace entity |
| Digital Media | DPIIT had introduced a FDI regime for entities engaged in the news digital media sector and allowed FDI up to 26% under the government approval route for entities engaged in uploading / streaming of news and current affairs through digital media platforms |
- The Revised Policy retains a prerequisite of FC-TRS acknowledgement before transfer of shares is recorded in a target company’s books. Therefore, the buyers of the shares of Indian companies need to ensure that the FCTRS filings are completed and accepted in an expedited manner so the name of the buyer can be recorded in the books of the company immediately upon closing.
Provision wise comparison between Consolidated Policy 2017 and Revised Policy 2020
| Consolidated Policy 2017 | Consolidated Policy 2020 | |||||
| Definition of Depository Receipt (DR) | DR means a negotiable security issued outside India by a Depository bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian bank in India. DRs are traded on Stock Exchanges in the US, Singapore, Luxembourg, etc. DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded anywhere/elsewhere are known as Global Depository Receipts (GDRs). DRs are governed by Notification No. FEMA 330/ 2014-RB, issued by Reserve bank of India. | DR means a foreign currency denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of eligible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes ‘global depository receipt’ as defined in the Companies Act, 2013 | ||||
| Definition of Domestic Custodian | NA | ‘Domestic Custodian’ means a custodian of securities registered with the SEBI in accordance with the SEBI (Custodian of Securities) Regulations, 1996. | ||||
| Definition of Domestic Depository | NA | ‘Domestic Depository’ means a custodian of securities registered with the SEBI and authorised by the issuing entity to issue Indian depository receipts. | ||||
| Definition of Foreign Currency Convertible Bond | ‘Foreign Currency Convertible Bond’ (FCCB) means a bond issued by an Indian company expressed in foreign currency, the principal and interest of which is payable in foreign currency. FCCBs are issued in accordance with the Foreign Currency Convertible Bonds and ordinary shares (through depository receipt mechanism) Scheme, 1993 and subscribed by a non-resident entity in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part. | ‘Foreign Currency Convertible Bond’ (FCCB) means a bond issued under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, as amended from time to time. | ||||
| Definition of Foreign Direct Investment | ‘FDI’ means investment by non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations,2000 (Original notification is available at https://rbi.org.in/Scripts/BS_ FemaNotifications.aspx?Id=174. Subsequent amendment notifications are available at https://rbi.org.in/Scripts/BS_ FemaNotifications.aspx). | ‘FDI’ or ‘Foreign Direct Investment’ means investment through capital instruments by a person resident outside India in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company;
Note:- In case an existing investment by a person resident outside India in capital instruments of a listed Indian company falls to a level below ten percent, of the post issue paid-up equity capital on a fully diluted basis, the investment shall continue to be treated as FDI |
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| Definition of Foreign Portfolio Investor |
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Foreign Portfolio Investor’ (FPI) means a person registered in accordance with the provisions of Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, as amended from time to time. | ||||
| Definition of Investment | NA | ‘Investment’ means to subscribe, acquire, hold or transfer any security or unit issued by a person resident in India. | ||||
| Definition of Startup Company | NA | ‘Startup Company’ means a private company incorporated under the Companies Act, 2013 and identified under G.S.R. 127(E) dated 19th February, 2019 issued by the DPIIT, Ministry of Commerce and Industry. | ||||
| Definition of Sweat Equity Shares | Sweat Equity Shares’ means such equity shares as issued by a company to its directors or employees at a discount or for consideration other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. | ‘Sweat Equity Shares’ means sweat equity shares defined under the Companies Act, 2013. | ||||
| Eligible Investors | A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. | A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
(b) In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval. |
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| Approval requirement by OCBs | OCBs have been derecognized as a class of investors in India with effect from September 16, 2003. Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government route; and with the prior approval of RBI if the investment is through Automatic route. | OCBs have been derecognized as a class of investors in India with effect from September 16, 2003. Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments as incorporated non-resident entities in accordance with the FDI Policy and Foreign Exchange Management (Non-Debt Instrument) Rules, 2019. | ||||
| Terms and conditions to be followed for Investment made by Foreign Portfolio Investors | (i) Foreign Institutional Investor (FII) and Foreign Portfolio Investors (FPI) may in terms of Schedule 2 and 2A of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations, as the case may be, respectively, invest in the capital of an Indian company under the Portfolio Investment Scheme which limits the individual holding of an FII/FPI below 10% of the capital of the company and the aggregate limit for FII/FPI investment to 24% of the capital of the company. This aggregate limit of 24% can be increased to the sectoral cap/statutory ceiling, as applicable, by the Indian company concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body and subject to prior intimation to RBI. The aggregate FII/FPI investment, individually or in conjunction with other kinds of foreign investment, will not exceed sectoral/statutory cap. | Foreign Portfolio Investors (FPI) may make investments in the manner and subject to the terms and conditions specified in Schedule II of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. | ||||
| Conditions to be followed for Investment through a registered broker | Only registered FIIs/FPIs and NRIs as per Schedules 2,2A and 3 respectively of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, can invest/trade through a registered broker in the capital of Indian Companies on recognised Indian Stock Exchanges | Registered FPIs and NRIs can invest/trade through a registered broker in the capital of Indian Companies on recognised Indian Stock Exchanges as per the applicable Schedule under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, as amended from time to time | ||||
| Terms and conditions to be followed by Foreign venture capital investor. | A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to 100% of the capital of an Indian company engaged in any activity mentioned in Schedule 6 of Notification No. FEMA 20/2000, including startups irrespective of the sector in which it is engaged, under the automatic route. | A Foreign Venture Capital Investor (FVCI) may make investments in the manner and subject to the terms and conditions specified in Schedule VII of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. | ||||
| Terms and conditions to be followed by an investment vehicle | An entity being ‘investment vehicle’ registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose is permitted to receive foreign investment from a person resident outside India (other than an individual who is citizen of or any other entity which is registered / incorporated in Pakistan or Bangladesh) including an Registered Foreign Portfolio Investor (RFPI) or a non-resident Indian (NRI). | An entity being ‘investment vehicle’ registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose is permitted to receive foreign investment from a person resident outside India (other than an individual who is citizen of or any other entity which is registered / incorporated in Pakistan or Bangladesh) in the manner and subject to the terms and conditions specified under Schedule VIII of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. | ||||
| Terms and conditions to be followed by Start-up companies | Startup Companies
Start-ups can issue equity or equity linked instruments or debt instruments to FVCI against receipt of foreign remittance, as per the FEMA Regulation. NRIs may acquire convertible notes on non-repatriation basis in accordance with Schedule 4 of the Notification No.FEMA.20/2000-RB dated 3rd May 2000. |
Startup Companies
Start-ups can issue equity or equity linked instruments or debt instruments to FVCI against receipt of foreign remittance, as per the Schedule VII of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. NRIs may acquire convertible notes on non-repatriation basis in accordance with Schedule IV of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. |
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| Terms and conditions to be followed for acquisition or transfer of immovable property in India by citizens of certain countries | For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, approval of Reserve Bank of India is not required in cases where Government approval or license/permission by the concerned Ministry/Regulator has already been granted. | Establishment of branch office, liaison office or project office or any other place of business in India shall be governed by the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016. Further, acquisition or transfer of immovable property in India by citizens of certain countries shall be regulated as per the relevant provisions under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, as amended from time to time. | ||||
| Entry route for Investing Companies registered as Non-Banking Financial Companies (NBFC) | Foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian company/ies/ LLP, will require prior Government approval, regardless of the amount or extent of foreign investment. | Foreign Investment in Investing Companies registered as Non-Banking Financial Companies (NBFC) with the RBI, being overall regulated, would be under 100% automatic route. | ||||
| Concerned Authority for granting approval | Applications involving investments from Countries of Concern which presently include Pakistan and Bangladesh, requiring security clearance as per the extant FEMA 20, FDI Policy and security guidelines, amended from time to time –
Ministry of Home Affairs |
Applications involving investments from an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country {as required in terms of Press Note 3 of 2020 read with Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020 dated 22.04.2020} –
Concerned Administrative Ministry/Department as identified by the DPIIT |
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| Requirement for cases pertaining to sectors/activities under Government approval route | NA | Cases pertaining to sectors/activities under Government approval route requiring security clearance as per the extant Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, FDI Policy and security guidelines, as amended from time to time | ||||
| Concerned Authority for granting approval | FDI proposals by Non-Resident Indians (NRIs)/ Export Oriented Units requiring approval of the Government and Applications relating to issue of equity shares under the FDI policy under the Government route for import of capital goods/machinery/equipment (excluding second-hand machinery)
and applications relating to issue of equity shares for pre-operative/pre-incorporation expenses (including payments of rent etc.) were to be approved by Department of Industrial Policy & Promotion. |
FDI proposals by Non-Resident Indians (NRIs)/ Export Oriented Units requiring approval of the Government and Applications relating to issue of equity shares under the FDI policy under the Government route for import of capital goods/machinery/equipment (excluding second-hand machinery) and applications relating to issue of equity shares for pre-operative/pre-incorporation expenses (including payments of rent etc.) are now to be approved by Concerned Administrative Ministry/Department as identified by the DPIIT. | ||||
| Entry Route for Activity | NA | MINING – For sale of coal, coal mining activities including associated processing infrastructure subject to the provisions of Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957 as amended from time to time and other relevant Acts on the subject. – 100% Automatic Route
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| Entry Route for Defence Industry | Defence Industry subject to Industrial license under the Industries (Development & Regulation) Act, 1951; and Manufacturing of small arms and ammunition under the Arms Act, 1959 – Automatic up to 49%
Government route beyond 49% wherever it is likely to result in access to modern technology or for other reasons to be recorded. |
Defence Industry subject to Industrial license under the Industries (Development & Regulation) Act, 1951 and Manufacturing of small arms and ammunition under the Arms Act, 1959 – Automatic up to 74%
Government route beyond 74% wherever it is likely to result in access to modern technology or for other reasons to be recorded * FDI up to 74% under automatic route shall be permitted for companies seeking new industrial licenses. |
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| Entry Route for Digital Media | NA | Uploading/Streaming of News & Current Affairs through Digital Media – Percentage of Equity/ FDI Cap – 26%
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| Other guidelines for Foreign Direct Investment on e-commerce sector | E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field. | E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field. Services should be provided by e-commerce marketplace entity or other entities in which e-commerce marketplace entity has direct or indirect equity participation or common control, to vendors on the platform at arm’s length and in a fair and non-discriminatory manner. Such services will include but not limited to fulfilment, logistics, warehousing, advertisement/ marketing, payments, financing etc. Cash back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory. For the purposes of this clause, provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory.
E-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only. E-commerce marketplace entity with FDI shall have to obtain and maintain a report of statutory auditor by 30th of September every year for the preceding financial year confirming compliance of the e-commerce guidelines. |
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| Entry route for Single Brand product retail trading | Automatic up to 49%
Government route beyond 49% |
Entry Route 100% – Automatic | ||||
| Entry route for Insurance company and other related business | i) Insurance Company
(ii) Insurance Brokers (iii) Third Party Administrators (iv) Surveyors and Loss Assessors (v)Other Insurance Intermediaries appointed under the provisions of Insurance Regulatory and Development Authority Act, 1999 – Percentage of Equity/ FDI Cap – 49% Automatic route entry |
Insurance Company % of Equity/ FDI Cap – 49% Automatic route entry
And Intermediaries or Insurance Intermediaries including insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, Surveyors and Loss Assessors and such other entities, as may be notified by the Insurance Regulatory and Development Authority of India from time to time – Percentage of Equity/FDI Cap – 100% Automatic Entry |
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| Types of instruments in Issue of Foreign Currency Convertible Bonds (FCCBs) and Depository Receipts(DRs | In terms of Notification No. FEMA.20/2000-RB dated May 3, 2000 as amended from time to time, a person will be eligible to issue or transfer eligible securities to a foreign depository, for the purpose of converting the securities so purchased into depository receipts in terms of Depository Receipts Scheme, 2014 and guidelines issued by the Government of India thereunder from time to time. | In terms of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 as amended from time to time, a person will be eligible to issue or transfer eligible securities to a foreign depository, for the purpose of converting the securities so purchased into depository receipts in terms of Depository Receipts Scheme, 2014 and guidelines issued by the Government of India thereunder from time to time. | ||||
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