Introduction: Delving into the realm of Foreign Direct Investment (FDI) in India uncovers a landscape shaped by regulatory frameworks, policy formulations, and procedural intricacies. Understanding FDI entails navigating through entry routes, compliance requirements, and the evolving dynamics of investment facilitation.
Q.1 What is meant by Foreign Direct Investment (FDI)?
Ans. Foreign Direct Investment (‘FDI’) means investment through equity instruments by a person resident outside India in an unlisted Indian company; or in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. In case an existing investment by a person resident outside India in equity instruments of a listed Indian company falls to a level below 10% of the post issue paid-up equity capital on a fully diluted basis, the investment shall continue to be treated as FDI. ‘Fully diluted basis’ means the total number of shares that would be outstanding if all possible sources of conversion are exercised.
Q.2 What is the role of the Department for Promotion of Industry and Internal Trade (DPIIT) in the context of FDI Policy?
Ans. DPIIT is the nodal Department for formulation of the policy of the Government on Foreign Direct Investment (FDI). The FDI policy is reviewed on an ongoing basis, with a view to making it more investor-friendly. To attract higher levels of FDI, Government has put in place a liberal policy on FDI, under which FDI up to 100%, is permitted, under the automatic route, in most sectors/activities. Significant changes have been made in the FDI policy regime in recent times, to ensure that India remains an increasingly attractive investment destination. The Department plays an active role in the liberalization and rationalization of the FDI policy. Towards this end, it has been constructively engaged in extensive stakeholder consultations on various aspects of the FDI policy. DPIIT makes policy pronouncements on FDI through Consolidated FDI Policy Circular/Press Notes/Press Releases (available at (https://dpiit.gov.in/policiesrules-and-acts/press-notes-fdi-circular) which are notified by the Department of Economic Affairs (DEA), Ministry of Finance, Government of India as amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (FEM (NDI) Rules, 2019) under the Foreign Exchange Management Act, 1999 (42 of 1999) (FEMA).
Q.3 What is the regulatory and governing framework for FDI in India?
Ans. Foreign investment in India is regulated under codified foreign exchange regulations, sector specific policies/regulations, government policies as well as International agreements. Primarily, foreign investment is regulated through the Foreign Exchange Management Act, 1999 as amended from time to time (FEMA) and rules/regulations issued thereunder. The main objective of FEMA is to regulate, consolidate and amend the law relating to foreign exchange to facilitate foreign investment, external trade and payments and promote the orderly development and maintenance of foreign exchange market in India within the broad policy framework on foreign investment issued by the Government from time to time. Presently, the FDI regime in India is primarily governed by the Consolidated Foreign Direct Investment Policy Circular dated 15.10.2020, as amended through various Press Notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT)(FDI Policy), sector specific policies/regulations, Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 dated 17.10.2019 notified by the Department of Economic Affairs (DEA), Ministry of Finance (FEM Non-Debt Instruments Rules 2019) which superseded the erstwhile Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 Notification No. FEMA 20(R)/2017-RB dated 07.11.2017 (FEMA 20R Regulations).
Q.4 Who is the concerned authority to deal with violations of FDI Policy/regulations?
Ans. As per Para 3 of Annexure 5 of the Consolidated Foreign Direct Investment Policy Circular dated 15.10.2020 available at https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020- 29October2020_1.pdf, “FDI is a capital account transaction and thus any violation of FDI regulations are covered by the penal provisions of the FEMA. Reserve Bank of India administers the Foreign Exchange Management Act (FEMA) and Directorate of Enforcement under the Ministry of Finance is the authority for the enforcement of FEMA. The Directorate takes up investigation in any contravention of FEMA.”
Q.5 What is the procedure for mode of payment, remittance of sale/ maturity proceeds and reporting of FDI?
Ans. The instructions on mode of payment, remittance of sale/maturity proceeds and reporting requirements are stipulated under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 vide Notification No. FEMA. 395/2019-RB dated 17.10.2019 issued by the RBI available at https://taxguru.in/rbi/foreign-exchange-management-mode-payment-reporting-non-debt-instruments-regulations-2019.html.
Q.6 How can a foreign investor set up business operations in India through a company?
Ans. A foreign investor can set up business operations in India by incorporating a company under the Companies Act, 2013 and operate through various forms such as Joint Venture/Wholly Owned Subsidiary/Holding Company in compliance of the entry route/sectoral cap and other conditions under the FDI Policy and Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
Q.7 Can foreign entities set up a branch office/liaison office/project office or any other place of business in India?
Ans. A person resident outside India can established a branch office/liaison office/project office or any other place of business in India in India in accordance with 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 issued vide Notification No. FEMA 22(R)/2016-RB dated March 31, 2016, as amended from time to time available at https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10327&Mode=0
Q.8 Can Indian Limited Liability Partnerships (LLPs) receive investments from foreign investors?
Ans. Yes. Foreign investment in LLPs is permitted subject to the conditions as stipulated under Para 3.2.4 of the Consolidated FDI Policy Circular dated 15.10.2020.
Q.9 What is “downstream investment”?
Ans. “Downstream investment” means investment made by an Indian entity which has total foreign investment in it, or an Investment Vehicle in the capital instruments or the capital, as the case may be, of another Indian entity.
Q.10 What is indirect foreign investment?
Ans. “Indirect foreign investment” means downstream investment received by an Indian entity from,- (A) another Indian entity (IE) which has received foreign investment and (i) the IE is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India; or (B) an investment vehicle whose sponsor or manager or investment manager (i) is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India: Indian entity which has received indirect foreign investment shall comply with the entry route, sectoral caps, pricing guidelines and other attendant conditions as applicable for foreign investment.
Q.11 How is total foreign investment in an Indian company/LLP calculated?
Ans. The guidelines for calculation of total foreign investment, both direct and indirect in an Indian company/LLP, at every stage of investment, including downstream investment, are detailed under Annexure 5 of the Consolidated FDI Policy Circular dated 15.10.2020.
Q.12 What are the entry routes for FDI?
Ans. Permissible FDI can be made under “Automatic route” or “Government route”. “Automatic route” means the entry route through which investment by a person resident outside India does not require the prior approval of the Reserve Bank of India or the Central Government. “Government Route” means the entry route through which investment by a person resident outside India requires prior Government approval and foreign investment received under this route shall be in accordance with the conditions stipulated by the Government in its approval. Besides the entry conditions on foreign investment, the investment/investors are required to comply with all relevant sectoral laws, regulations, rules, security conditions, and state/local laws/regulations.
Q.13 What is the procedure and documents required to apply for Government approval for FDI?
Ans. Proposals for foreign investment in sectors/activities requiring Government approval as per the Consolidated FDI Policy dated 15.10.2020, as amended from time to time (FDI Policy) and Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 dated 17.10.2019, as amended from time to time are required to be filed online through the Foreign Investment Facilitation Portal (FIFP) https://www.fifp.gov.in as per the guidelines and requirements prescribed under Standard Operating Procedure (SOP) for processing FDI proposals, as amended from time to time available at http://fifp.gov.in/Forms/SOP.pdf. For further information may refer to FAQs related to Foreign Investment Facilitation Portal (FIFP) given at https://fifp.gov.in/FIFP_FAQ.aspx
Q.14 What are sectors/activities in which FDI is prohibited?
Ans. As per Para 5.1 of the Consolidated FDI Policy Circular dated 15.10.2020, FDI is prohibited in:
a) Lottery Business including Government/private lottery, online lotteries, etc.
b) Gambling and Betting including casinos etc.
c) Chit funds d) Nidhi company
e) Trading in Transferable Development Rights (TDRs)
f) Real Estate Business or Construction of Farm Houses ‘Real estate business’ shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014.
g) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
h) Activities/sectors not open to private sector investment e.g. (I) Atomic Energy and (II) Railway operations (other than permitted activities mentioned in permitted sectors).
Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business, Gambling and Betting activities.
Q.15 Are there any restrictions/provisions related to FDI from land bordering countries?
Ans. Para 3.1.1 of the FDI Policy as amended vide Press Note 3 of 2020 dated 17.04.2020 enforced through the corresponding amendment under Rule 6(a) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 states the following:- 3.1.1(a) 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. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.
Accordingly, in terms of Press Note 3 of 2020, 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. Additionally, any transfer of ownership of any existing or future FDI in an entity in India resulting in the beneficial ownership falling within the aforesaid jurisdiction(s) will also require Government approval.
Q.16 What is PN3 Proposal?
Ans. PN3 Proposals are those proposals which require prior Government approval under the provisions of Para 3.1.1 of the FDI Policy as amended vide Press Note 3 of 2020 dated 17.04.2020 enforced through the corresponding amendment under Rule 6(a) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. For details, please see Question No. 15 above.
Q.17 Where can I get FDI data/Statistics?
Ans. DPIIT compiles and maintains the data of Foreign Direct Investment regarding FDI Equity inflow in the country as reported by the Reserve Bank of India. It is published on a quarterly basis on the department’s website (https://dpiit.gov.in/). It is published in ‘FDI Statistics’ and ‘FDI Newsletter (formerly SIA Newsletter)’ and uploaded on the website under the heading ‘Publications’ at the links: https://dpiit.gov.in/publications/fdi-statistics and https://dpiit.gov.in/publications/sinews-letters, respectively.
Q.18 How can I get clarifications on issues related to Foreign Direct Investment (FDI) Policy?
Ans. Foreign Direct Investment (FDI) Policy related queries may be submitted in prescribed proforma as given in the following link: https://fifp.gov.in/Forms/FDIPolicyForm.pdf and emailed to fdiclarification@gov.in
Q.19 How can I get clarifications on issues related to Foreign Investment Facilitation Portal (FIFP)?
Ans. Foreign Investment Facilitation Portal (FIFP) related Technical Queries may be emailed to fifp-dipphelpdesk@gov.in.
Conclusion: In navigating the terrain of Foreign Direct Investment (FDI) in India, one encounters a structured framework delineated by regulatory policies, procedural guidelines, and avenues for investor engagement. The journey through FDI elucidates the interplay between regulatory mechanisms and investor aspirations, shaping India’s position as an investment destination.
Source: https://dpiit.gov.in/fdi-policy-0
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