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FDI policy overview *

India has one of the most transparent and liberal Foreign Direct Investment (FDI) regimes among emerging and developing economies. Differential treatment is limited to a few entry rules, predominantly in some Services sectors, spelling out the proportion of equity that the foreign investor can hold in an India-registered company or business–termed "sector caps". Foreign corporate and individual investment in India, termed collectively as Foreign Direct Investment (FDI) when it relates to control or ownership of a company in India, takes one of two routes:

Automatic route or Automatic Approval:
This requires no prior approval for FDI. Post-facto filing of data relating to the investment made with the Reserve Bank of India (RBI) are for record and data purposes. This route is available to all sectors or activities that do not have a “sector cap” i.e. where 100% foreign ownership is permitted, or for investments that are within a sector cap (e.g. less than or equal to 26% share of an Insurance company) and where the Automatic route is allowed.

FIPB Approval – the Foreign Investment Promotion Board (FIPB) approves investment proposals:

• where the proposed shareholding is above the prescribed sector caps, or
• where the activity belongs to that small list of sectors where FDI is either not allowed or where it is mandatory that proposals be routed through the FIPB (e.g. sectors that require industrial licensing)

The FIPB ensures a single-window approval for the investment and acts as a screening agency (for sensitive/negative list sectors). FIPB approvals (or rejections) are normally received in 30 days. Some foreign investors use the FIPB application route where there may be absence of stated policy or lack of policy clarity.

An outline of the broad policies for groups of sectors is provided below:

Manufacturing:

• Most Manufacturing sectors are on the 100% automatic route. Foreign equity is limited only in production of defence equipment (26%) and 5 specific industries where an Industrial License (IL) is mandatory¹.
• Most mining sectors are similarly on the 100% automatic route, with foreign equity limits only on atomic minerals (74%), coal & lignite (74%).
• 100% equity is also allowed in non-crop agro-allied sectors (agro-processing) and crop agriculture under controlled conditions (e.g. hot houses).

Infrastructure

100% FDI under the automatic route is allowed for most infrastructure sectors - highways and roads, ports, inland waterways and transport, and urban infrastructure. Select Infrastructure sectors have defined caps for e.g. Telecom Services has a sector cap of 74% and Airlines have a 49% 8 sector cap of foreign that are not airline.

Services

100% FDI under the automatic route is permitted for many service sectors such as real estate construction, townships¹, resorts, hotels and tourism (including tour operators and travel agencies, serviced apartments, convention and exhibition centres), films, IT and IT - enabled services, ISP/email/voice mail services, business services and consultancy, renting and leasing, Venture Capital Funds/Companies (VCFs/VCCs), medical/health services, education, advertising and wholesale trade and courier services. 100% FDI permitted in non-banking financial services subject to minimum capitalisation norms.

Certain service sectors are being opened up in a phased manner to allow domestic companies to prepare for global competition. In both banking and insurance, foreign investment is permitted subject to specific caps or entry conditions. FDI in media is permitted with varying sector caps. Retail trade is currently restricted to 51% FDI permitted in single brand retail stores and 100% FDI permitted in wholesale cash and carry. Legal services are currently not open to foreign investment.

Restricted List of Sectors
Sectors where FDI is prohibited are Retail Trading (except single brand product retailing), Atomic Energy, Lottery Business, Gambling and Betting, Business of Chit Fund, Nidhi Company, Trading in Transferable Development Rights (TDRs) and any activity/sector that is not opened to private sector investment. Besides the above, FDI is not allowed in plantations*.

Subject to these foreign equity conditions, a foreign company can set up a registered company in India and operate under the same laws, rules and regulations as any India-owned company.

India extends National Treatment to foreign investors with absolutely no discrimination against foreign-invested companies registered in India or in favour of domestic ones.

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* Please refer to the latest Consolidated Policy on Foreign Direct Investment available at http://siadipp.nic.in/policy/changes.htm

¹ IL is required for * distillation and brewing of alcoholic drinks * tobacco cigars, cigarettes and substitutes * electronic aerospace and defence equipment * industrial explosives * hazardous chemicals

* However, FDI is allowed in Tea Plantations, Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and allowed in services related to agro and allied sectors.

¹ Subject to minimum scale norms of 25 acres or 50,000 sq. metres of constructed area.

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