Indian IT industry is one of the fastest growing industries in the country. It comprises of software industry and information technology enabled services (ITes), which even includes business process outsourcing (BPO) industry. It is considered as a pioneer in software development and a leading destination for IT- enabled services.

Indian IT’s core competencies and strengths have attracted significant investments from major countries. The computer software and hardware sector in India attracted cumulative Foreign Direct Investment (FDI) inflows worth US$ 39.47 billion between April 2000 and June 2019 and ranks second in inflow of FDI, as per data released by the Department for Promotion of Industry and Internal Trade (DPIIT).

The market size of IT-BPM sector in India stood at US$177 billion in 2019 witnessing a growth of 6.1 per cent year-on-year and is estimated that the size of the industry will grow to US$ 350 billion by 2025. Further, it has contributed around 7.7 per cent to the country’s GDP and is expected to contribute 10 per cent of India’s GDP by 2025.

India has become the digital capabilities hub of the world with around 75 per cent of global digital talent present in the country.

Now, let us have an overview of the policy governing foreign direct investment under this sector.

FDI in Information Technology sector

About FDI Policy 

The Foreign Direct Investment Policy (FDI Policy)set up under Department of Industrial Policy and Promotion (DIPP) prescribes the foreign investment guidelines and the cap (i.e. limit) in specified industrial sectors. These policy reforms are meant to provide ease of doing business and accelerate the pace of foreign investment in the country.

The Government has taken various effective steps to simplify the Foreign Direct investment policy. And in the recent times many activities have been transferred to unrestricted sectors in which 100% Foreign Direct investment is permitted.

FDI Routes in India

FDI Routes in India

*The company has to file an application through Foreign Investment Facilitation Portal, which facilitates single-window clearance. The application is then forwarded to the respective ministry, which approves/rejects the application in consultation with the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce. DPIIT issues the Standard Operating Procedure (SOP) for processing of applications under the existing FDI policy.

Broadly, under the FDI policy, industrial sectors are categorized as:

  1. Permitted
  2. Prohibited

Permitted Sectors

There is a list of industries under FDI policy where FDI is allowed upto the limit (sectoral cap) indicated against each sector/activity, subject to applicable laws/regulations; security and other conditionalities.

The Sectoral cap i.e. the maximum amount which can be invested by foreign investors in an entity, unless provided otherwise, is composite and includes all types of foreign investments, direct and indirect.

Foreign investment in sectors under Government approval route resulting in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities will be subject to Government approval.

The onus of compliance of above provisions will be on the investee company.

Prohibited Sectors

There are a few industries where FDI is strictly prohibited under any route. These industries are:

  • Activities/sectors not open to private sector investment e.g. Atomic Energy and Railway operations (other than permitted activities)
  • Any Gambling or Betting businesses
  • Lotteries (online, private, government, etc)
  • Investment in Chit Funds
  • Nidhi Company
  • Real Estate or construction of farm houses (except townships, commercial projects, etc)
  • Trading in TDR’s
  • Cigars, Cigarettes, or any related tobacco industry

Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

However, there are few sectors for which FDI limit is not prescribed under the policy. For those, para 5.2(a) of FDI policyspecifically mentions that:

“In sectors/activities not listed, FDI is permitted up to100% on the automatic route, subject to applicable laws/regulations; security and other conditionalities.”

Therefore, it shall be inferred from above that upto 100% FDI is allowed for Information Technology sector under automatic route.

Further, since the activities of BPO companies come under the purview of “IT enabled services”, 100% FDI is permitted under the automatic route for companies carrying on such businesses. However, the activities of a BPO are subject to the guidelines as issued by the Department of Telecommunications (“DoT“).

Moreover, 100% FDI is permitted in the Electronic hardware sector and the Software development sector under the automatic approval route.

However, FDI in IT sector shall adhere to the rules/ guidelines prescribed by‘Ministry of Electronics and Information Technology’.

Reporting of share capital

There are few rules and regulations which have to be followed by the investee companywhile receiving share application money in foreign currency, allotment/ issue of shares to the investor and further transfer of shares to other company.

In 2018, RBI introduced an online reporting platform, FIRMS (Foreign Investment Reporting and Management System), for reporting of foreign investment in India in Single Master Form. FEMA 20(R) prescribes for the reporting of foreign investment in India through various returns i.e. 9 separate forms that have been subsumed in one Single Master Form (SMF). FIRMS provide 24*7 online reporting facilities for the applicant.

Registration as Entity user is the initial step in the new reporting system. If company is registered as Entity user, it can file the Entity Master Form (EMF) for providing the details of Foreign Direct Investment including indirect foreign investment.

About the Author

CA Neeraj BhagatAuthor is Neeraj Bhagat, FCA helping foreign companies in setting up and closure of business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. He is also founder of Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm established in the year 1997 with its head office at New Delhi.

Author Bio

Qualification: CA in Practice
Company: Neeraj Bhagat & Co.
Location: New Delhi, New Delhi, IN
Member Since: 28 Feb 2019 | Total Posts: 156
Neeraj Bhagat & Co. is helping foreign companies in opening up of Liaison/ Branch Office in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat is the founder of Neeraj Bhagat & Co. Chartered Accountants, a Chartered View Full Profile

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February 2024