Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development. Foreign direct investment is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firm’s home country. As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property, in the past decade, FDI has come to play a major role in the internationalization of business. Reacting to changes in technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI. New information technology systems, decline in global communication costs have made management of foreign investments far easier than in the past. The sea change in trade and investment policies and the regulatory environment globally in the past decade, including trade policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privatization of many industries, has probably been the most significant catalyst for FDI’s expanded role.

Foreign Investments in India attract provisions of Section 6 of Foreign Exchange Management Act (FEMA) 1999 and is subject to the Regulations issued by Reserve Bank of India under FEMA, 1999. The Regulations have been notified vide Notification No.FEMA 20/2000-RB dated May 3,2000, and amended from time to time vide various Notifications listed in Appendix. An Indian entity cannot issue any security to a person resident outside India or record in its books any transfer of security from or to such person except as provided in the Act or Rules or Regulations or with the specific permission of the Reserve Bank.

This article provides an outline of the ways in which foreign company can invest in India and the areas in which it is allowed to invest.

A number of studies in the recent past have highlighted the growing attractiveness of India as an investment destination. According to the study “Dreaming with BRICS” by Goldman Sachs, Indian economy is expected to continue at the rate of 5% or more till 2050.

India has among the most liberal and transparent policies on FDI among the emerging economies. FDI up to 100% is allowed under the automatic route in all activities/sectors except in some of the areas where it is prohibited by the government. Thus, no person resident outside India can make investment in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not which is engaged in the following activities:

• Business of chit fund,
• Nidhi company,
• Agricultural or plantation activities,
• Real estate business, or construction of farm house,
• Trading in transferable development rights,
• Atomic energy,
• Lottery and gambling.

In addition to the above activities, the FDI is also prohibited in certain activities.

In other cases investments can be made either with the specific prior approval of the Government of India, the Secretariat for Industrial Assistance/Foreign Investment Promotion Board (SIA/FIPB) or under the Automatic route. The Automatic Route is not open in the following cases and as such require specific approval of FIPB i.e. (i) where the non-resident investors who have/had a previous financial/technical/ trademark collaboration in an existing domestic company engaged in the same or allied activity, (ii) if the activity or manufacturing item of the issuer company requires an Industrial License under the provisions of the Industries (Development and Regulation) Act, 1951 or under the locational policy notified by Government of India under the Industrial Policy Resolution, 1991 and (iii) the investment is sought in excess of the prescribed sectoral limits Automatic Route.

While the nature of investment activities have been prescribed in the FEMA Regulations, the scope of these activities especially regarding the investments by non-residents under the Government approval route have been detailed in the Government Manual on Investing in India, Foreign Direct Investment, Policy & Procedures. This is a document which is available in the public domain and can be downloaded from the website of DIPP, Ministry of Commerce and Industry.

Eligibility for Investing in India

A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an incorporated entity outside India, (other than an entity incorporated in Bangladesh or Pakistan) has the general permission to purchase shares or convertible debentures or preference shares of an Indian company subject to certain terms and conditions.

The Indian companies have general permission to issue equity / preference / convertible preference shares and convertible debentures subject to certain conditions.

Investment in a trading company incorporated in India is permitted under automatic route with FDI up to 51 % provided the Indian company is primarily engaged in export activities, and the undertaking is an export house/trading house/super trading house/star trading house. Government also permits certain trading activities under FIPB route.

A company which is a small scale industrial unit and which is not engaged in any activity or in manufacture of items included in Annexure provided under regulations, may issue shares or convertible debentures to a non-resident, to the extent of 24% of its paid-up capital. Such a company may issue shares in excess of 24% of its paid-up capital if

An Export Oriented Unit or a unit in Free Trade Zone or in Export Processing Zone or in a Software Technology Park or in an Electronic Hardware Technology Park may issue shares or convertible debentures to a person resident outside India in excess of 24 %.

A foreign company planning to set up business operations in India has the following options:

• As an Incorporated Entity:

For registration and incorporation, an application has to be filed with Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies. A company can be incorporated under the companies act, 1956 in the following ways:

• Joint ventures; or
• Wholly owned subsidiaries.

Foreign equity in such Indian companies can be up to 100% depending on the requirement of the investor, subject to any equity caps prescribed in respect of the area of activities under the foreign direct investment (FDI) policy.

• As an Unincorporated Entity:

Liaison office acts as a channel of communication between the principal place of business or head office and entities in India. Liaison office can not undertake any commercial activity directly or indirectly and can not, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).

Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices can not undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.

For opening a project or site office, application may be made on Form FNC-10 to the regional offices of the Reserve Bank of India. A foreign investor need not have a local partner, whether or not the foreigner wants to hold full equity of the company. The portion of the equity thus not held by the foreign investor can be offered to the public.

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:

A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).