Investment TypesForeign Direct Investment
A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, under the FDI Policy. The investment must come into an Indian company (newly created for the purpose, or into an existing company). FDI is not presently allowed in entities other than companies, such as proprietary businesses, partnerships and trusts (other than Venture Capital Funds). The levels of investment are restricted by the sector-level policies as set forth in the FDI policy as illustrated below.
Prohibited sectors/ activities: The Foreign investment policy prohibits investments in the following sectors/activities:
- Retail Trading (except single brand product retailing)
- Lottery Business including Government /private lottery, online lotteries, etc.
- Gambling and Betting including casinos etc.
- Business of chit fund
- Nidhi company
- Trading in Transferable Development Rights (TDRs)
- Real Estate Business or Construction of Farm Houses
- Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
Government Route / Prior Approval Route
In some sectors/activities, foreign investment is allowed only with prior approval of the Government through the Foreign Investment Promotion Board (FIPB). Investment is allowed in specified activities subject to sector-specific equity limits and/or other conditions.
Sectors/ Activities permitted without prior approval (Automatic Route)
In sectors/activities not specified under the Prior Approval route, FDI is permitted upto 100% on the automatic route (i.e. no prior permission is required), subject to sectoral rules/ regulations/ security conditions as applicable.
Additionally, as per the new FDI circular (circular 01, dated: 31st March 2011), the condition of obtaining government approval for investments subject to ‘Existing Venture/ tie-up condition” have been lifted. From now on, new proposals in the same field wherein non-resident investor already has an existing joint venture/ technology transfer/ trademark agreement will be permitted under the automatic route. However, with effect from January 12, 2005 the joint venture agreements are expected to include a ‘conflict of interest’ clause to determine/ safeguard the interests of joint venture partners in the event of one of the partners desiring to set up another joint venture or a wholly owned
subsidiary in the same field of economic activity. The policy is, however, expected to protect the interest of the joint venture partner where the agreement had been entered on/ prior to January 12, 2005.
The following table provides a brief overview of FDI limits in different sectors/activities along with other terms and conditions where applicable. In sectors/activities not listed below, FDI is permitted upto 100% on the automatic route, subject to applicable laws/sectoral rules/regulations/security conditions.
Note: The Department of Industrial Policy & Promotion (DIPP) issued two Press Notes during February 2009, laying down the policy for computation of direct and indirect FDI where sectoral caps apply, linking approvals to the concept of control for the first time. The fundamental principle emerging from these Press Notes is that as long as an Indian company is “owned” and “controlled” ultimately by resident Indian citizens, it will be able to attract foreign capital to make downstream investment across sectors.
Consequently, the new FDI policy allows induction of foreign capital in excess of prescribed sectoral caps (such as in defence, telecom, I&B) through downstream investment by Indian companies having FDI but which are “owned” and “controlled” by resident Indian citizens. It should also be noted that the
methodology for computation of foreign investment does not apply to sectors which are governed specifically by a separate statute such as the insurance sector.
