Foreign Investment Approvals

Foreign investment in India is mainly regulated by the FDI policy, which is managed by the Secretariat for Industrial Assistance (SIA), the Department of Industrial Policy and Promotion (DIPP), the Foreign Investment Promotion Board (FIPB), and the Reserve Bank of India (RBI). Here’s how foreign investment can be made in India:

• FDI (Foreign Direct Investment)
• FIIs (Foreign Institutional Investors) through the Portfolio Investment Scheme (PIS)
• NRIs (Non-Resident Indians) and Persons of Indian Origin (PIO) through the PIS
• Qualified Foreign Investors (QFIs) through the PIS
• Foreign Venture Capital Investors (FVCIs)

India’s FDI policy has become more liberal and transparent over time, making it one of the most open among emerging economies. The government releases a comprehensive FDI policy every six months, allowing investments either through the automatic route or the approval route.

• Automatic Route: No prior approval is needed from the RBI or FIPB. Investors simply need to inform the RBI within 30 days of receiving the investment and provide details of the shares allotted within another 30 days.
• Approval Route: Investments in sectors not covered under the automatic route require prior approval from the Government of India. Applications must be submitted to the FIPB.

• Any non-resident entity can invest in India, except citizens and entities from Pakistan and Bangladesh, who need prior FIPB approval.
• NRIs and PIOs can invest in partnership firms or proprietary concerns in India on a non-repatriation basis, with specific conditions.

a. FDI in Indian Companies: Foreign Direct Investment (FDI) in Indian companies is allowed but must follow sectoral limits, pricing conditions, and other regulations.

b. FDI in Partnership Firms/Proprietary Concerns:

For NRIs and PIOs:

• NRIs (Non-Resident Indians) and PIOs (Persons of Indian Origin) can invest in partnership firms or proprietary concerns in India on a non-repatriation basis if the firm is not involved in agriculture, plantation, real estate, or print media.
• The investment must come from inward remittances or from NRE/FCNR (B)/NRO accounts with an authorized bank.
• The invested amount cannot be sent outside India.
• NRIs and PIOs can seek RBI approval to repatriate funds, with the decision made on a case-by-case basis.

For Other Non-Residents:

• Non-residents who are not NRIs or PIOs must seek RBI approval to invest in partnership firms or proprietary concerns. The RBI, in consultation with the government, will decide based on the specifics of each application.

Foreign Direct Investment (FDI) in LLPs is allowed under the government approval route if the sector permits 100% FDI through the automatic route and there are no performance conditions attached. LLPs with FDI cannot operate in agriculture, plantation, real estate, or print media.

An Indian company with FDI can invest in an LLP if both operate in sectors allowing 100% FDI through the automatic route without performance conditions. However, LLPs with FDI cannot make further downstream investments.

Foreign investment in LLPs is allowed only through cash from inward remittances via normal banking channels or NRE/FCNR accounts, except when converting an existing company into an LLP.

Foreign Venture Capital Investors (FVCIs) and Foreign Institutional Investors (FIIs) cannot invest in LLPs, and LLPs cannot take external commercial borrowing (ECBs). Converting a company with FDI into an LLP requires meeting these conditions and FIPB approval.

Indian companies can issue equity shares, fully convertible debentures, and fully convertible preference shares, following these conditions:

• Compliance with pricing guidelines and valuation norms under FEMA.
• Setting the conversion price/formula upfront.
• The conversion price must be at least the fair value as per FEMA guidelines at issue time.

The RBI has clarified that shares or debentures with optional clauses but no assured exit price are eligible instruments. These instruments must have a minimum lock-in period of one year or as prescribed.

• For listed companies, exit at market price on a recognized stock exchange.
• For unlisted companies, exit at a price based on returns on equity from the last audited balance sheet.
• For preference shares or debentures, exit at a price based on an internationally accepted pricing method at the exit time, certified by a chartered accountant or SEBI registered merchant banker.

Indian companies can also raise funds through foreign currency convertible bonds (FCCBs) and depository receipts per relevant regulations and guidelines. Non-convertible or optionally convertible preference shares are treated as debt and follow ECB regulations.

FIPB approval is needed in these cases

• Foreign investment over 25% in an industry not a micro or small enterprise but reserved for small enterprises.
• Foreign investment in an Indian company only investing in other Indian companies, regardless of the investment amount.
• Foreign investment in an Indian company with no operations or downstream investments, regardless of the investment amount.

Applications for approval can be submitted to FIPB/Ministry of Finance on plain paper or online by the investing company or foreign investor, detailing the proposal. FIPB reviews non-automatic route proposals involving investments over Rs 10,000 million and submits recommendations to the Cabinet Committee on Economic Affairs.

Applications can also be sent to the Department of Economic Affairs (DEA) and the Ministry of Finance. NRI investments, export-oriented units (EOUs), and single-brand retail trading applications go to the SIA of DIPP. Applications can also be submitted to Indian missions abroad, which forward them to DEA for processing. Approval is granted individually after examining each proposal.