Foreign Investment – FDI Laws

When a foreign investor wishes to incorporate a company in India,
or seeks to invest in an existing company in India, the transaction
is termed as Foreign Direct Investment or more popularly, FDI.

Laws Governing FDI in India

The Foreign Exchange Management Act of 1999 is an "inclusive"
Act, enlisting all the sectors where foreign investment is allowed.
The Government issues restrictions and conditions as and when
required through notifications, circulars, press notes and clarifications
on the Act.

Categories of FDI

a) Cases where FDI is not allowed
b) Cases in which FDI is allowed with Government approval
c) Cases in which FDI is allowed without Government approval,
i.e. automatic route

In the case of (b) and (c), any investment would require investigation
into aspects of structuring the deal, especially the financial
implications of direct and indirect taxes, stamp duties, excise
and the like.

Rules and Regulations of FDI

The law governing FDI is contained in Foreign Exchange Management
(Transfer or issue of security by a person resident outside India)
Regulations, 2000. The Regulations have been notified vide Notification
No.FEMA 20/2000-RB dated May 3, 2000.

The Act has been amended since through press notes and circulars.

The sectors in which FDI is not allowed

• Retail Trading
• Atomic Energy
• Lottery Business
• Gambling and Betting
• Agriculture (excluding Floriculture,
  Horticulture, Development of Seeds, Animal Husbandry, Pisciculture
  and Cultivation of Vegetables, Mushrooms etc. under controlled
  conditions and services related to agro and allied sectors)
  and Plantations (Other than Tea plantations).

Sectors Permitted for FDI

• Petroleum Sector (except for private
  sector oil refining), Natural Gas/LNG Pipelines
• Investing companies in Infrastructure
  and Services Sector
• Defence and Strategic Industries
• Atomic Minerals
• Print Media
• Broadcasting
• Postal Services
• Courier Services
• Establishment and Operation of Satellite
• Development of Integrated Township
• Tea Sector

Sectors for FDI with Government Approval

In the last category, a scrutiny of the proposed investment would
be based on
a) The sector,
b) The investment cap, and
c) A description of the activity, items and conditions.

The investment cap or sectoral cap refers to the maximum percentage
of shares that is allowed for the foreign investor. If the quantum
of the proposed investment is within the prescribed limit, no
Government sanction is required.

Conversely, Government approval is sought in case the investment
is expected to cross set limits.

With 23 items on the list in this category, the last entry is
a General entry which specifies that for any of the 22 items listed
before, and other than those covered in categories a) and b),
100% FDI is allowed under the automatic route. Listed below are
the sectors with the investment cap in brackets:

1) Private Sector Banking (49%)
2) Non-Banking Financial Company (100%)
3) Insurance (26%)
4) Telecommunications (74%)
5) Petroleum Refining, Marketing, Pipelines (100%)
6) Housing & Real Estate (100%)
7) Coal & Lignite (100%)
8) Venture Capital Fund / Venture Capital Undertaking (100%)
9) Trading (51%/100% )
10) Power (100%)
11) Drugs & Pharmaceuticals (100%)
12) Roads and Highways, Ports & Harbors (100%)
13) Hotel & Tourism (100%)
14) Mining (51% / 74%)
15) Advertising (100%)
16) Films (100%)
17) Airports (74%)
18) Mass Rapid Transit System (100%)
19) Pollution Control (100%)
20) Special Economic Zones (100%)
21) Air Transport Services (49% / 100%)
22) Townships (100%)
23) Any other activity other than the ones mentioned above or
not following in categories ‘a’ and ‘b’ above. (100%)

Some sectors have differential investment caps for different investors.
For example, mining can have an investment of 51% from foreign
investors, but 74% can be invested by NRIs. Besides, each industry
has a set of regulations attached, which need to be met before
an investment is made.

Other modes of FDI

Global Depository Receipts (GDR), American Deposit Receipts (ADR),
Foreign Currency Convertible Bonds (FCCB) are treated as Foreign
Direct Investment. Indian companies are allowed to raise equity
capital in the international market through the issue of GDRs,
ADRs and FCCBs.

There are no caps to this investment; the pre-requisite being
that a company applying for approval should have a good financial
record for three years. The conditions can be relaxed for infrastructure
projects such as power generation, telecommunication, petroleum
exploration and refining, ports, airports and roads.

There is no constraint on the number of GDRs, ADRs and FCCBs
a company or a group of companies can float in a financial year.
A company engaged in the manufacture of items covered under the
Automatic Route, whose direct foreign investment after a proposed
GDR/ADR/FCCBs issue is likely to exceed the percentage limits
under the automatic route, or which is implementing a project
falling under Government approval route, would need to obtain
prior Government consent through FIPB before seeking final approval
from the Ministry of Finance.

Foreign investment through preference shares is also treated
as foreign direct investment. Proposals are processed either through
the automatic route or FIPB as the case may be.