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Detail Analysis Of Foreign Direct Investment (FDI) And Restrictions On Foreign Investors

Foreign investment has increased dramatically in India as a result of successive governments' policies and trade liberalisation. The government's liberalisation programme has resulted in the country's economy integrating more smoothly with the global economy, as well as experiencing rapid and significant growth. As international firms invest in India, the outflow of foreign investment is also widespread in the Indian economy. Foreign investment in India refers to investments made by foreign companies in India.

Foreign investment in India has benefited the country in a number of ways, including increased employment and the improvement of the country's basic infrastructure. The Indian economy has a lot of room for international investment. Investors may also face some risks; yet, India provides enormous investment prospects for international firms. The majority of them have already invested in India, with a few more planning to do so in the near future.

What is foreign direct investment (FDI)?

A corporation obtaining a controlling stake in a company operating in a different nation is referred to as foreign direct investment. Foreign enterprises can be more intimately involved in operations in their host country thanks to overseas investment. In addition to money, these newcomers bring a great deal of value to the table. Foreign direct investment (FDI) happens when an investor establishes foreign operations or purchases foreign business assets, such as obtaining ownership or control of a foreign company.

Foreign Direct Investment (FDI) is defined as a:

Person resident outside India can invest through capital instruments in an unlisted Indian company or 10% or more of a listed Indian firm's post-issue paid-up equity capital on a fully diluted basis.

What are the routes through which India receives foreign direct investment?

  1. Automatic Route:
    Without prior approval from the government or the Reserve Bank of India, the automatic route allows foreign investment in all activities/sectors described in Regulation 16 of FEMA 20(R) The RBI or the Indian government do not need to authorise FDI from a non-resident or Indian company via the automatic method

    Sectors included in the 'up to 100 % automatic route' category include:

    • Company in the infrastructure sector listed on the stock exchange: 49%
    • Insurance coverage is available for up to 49% of the cost.
    • Medical devices: up to a 100%
    • Pension: 49% Petroleum Refining (49% by PSUs): 49%
    • Involved in Power Exchanges: 49%
    • Agriculture and Animal Husbandry: 100%
    • Asset Reconstruction Companies: 100%
    • Air Transportation Services (non-scheduled and other services within civil aviation industry): 100%
    • Airports (Greenfield and Brownfield): 100%
    • Auto Components: 100%
    • Automobiles: 100%
    • Biotechnology (Greenfield): 100%
    • Broadcast content services (TV channel up-linking and down-linking): 100%
    • Broadcast carriage services: 100%
    • Capital goods: 100%
    • Wholesale cash and carry trading (including MSE sourcing), and many more: 100%
       
  2. Government Route:
    Foreign investment that does not come within the automatic route requires government approval beforehand. It is difficult to move forward without the government's backing. The corporation will have to apply through the Foreign Investment Facilitation Portal, which allows for one-stop shopping for approvals.

    The application is sent to the appropriate ministry for assessment and approval or rejection after consultation with DPIIT (Ministry of Commerce). The Standard Operating Procedure (SOP) for processing FDI policy applications will be issued by DPIIT.

    Sectors that fall under the 'up to 100% government route' scope include:
    • Banking and government: 20%
    • Broadcasting Content Services: 49%
    • 100% of assets are held by the core investment company.
    • Products of the Food Industry Mineral separations of titanium-containing minerals and ores: 100%
    • Retail trading: 100%
    • 51% of retail sales are from many brands.
    • Print Media (publications/printing of scientific and technical magazines/speciality journals/periodicals and facsimile editions of foreign newspapers): 100%
    • Print Media (publication of newspapers, periodicals, and Indian editions of foreign magazines dealing with current events and news): 26%
    • 100% of satellites will be built and operated.
FDI regulatory compliance in India:
If the following requirements are met, a person resident outside of India who has invested in an Indian company is entitled to invest in the capital instruments issued by that company:
  • The offer made by the Indian company should be compliant with the Companies Act of 2013
  • The corporation will adhere to the sectoral cap as long as the matter is remedied.
  • A shareholder's stock must have been acquired and held in accordance with FEMA Regulations, 2017 to be eligible for a rights or bonus issuance.
  • Except for share warrants, a bonus issue or rights issue acquired by a person based outside India is subject to the same criteria as the initial holding against which the rights issue or bonus issue was made.
  • The rights granted to a person resident outside of India by a listed Indian company will have a price set by the company itself.
  • The rights granted to non-residents cannot be fewer than those granted to Indian residents if the company is unlisted.
  • A rights or bonus issue investment is subject to the terms and conditions in place at the time the issue is made
  • Money received as an inbound remittance from abroad can be paid from funds in an NRE/FCNR (B) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016, or from money stored in the account.
  • If the initial investment was made without respect to repatriation, the consideration can also be paid by debiting the NRO account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
The Foreign Exchange Management (FEMA) Act of 1999 imposes penalties for noncompliance with regulatory requirements. The RBI, Enforcement Directorate, and the Ministry of Finance (Government of India) are the relevant authorities to examine the problem and file a lawsuit against the defendant for breaking the FEMA Act's FDI regulatory compliances.

Restrictions Foreign direct investment (FDI) on Foreign Investors:
The Indian government divides foreign investment prohibitions into two categories. On the one hand, some areas are completely prohibited, and on the other hand, some approved sectors are subject to restrictions.

Sectors where FDI is completely prohibited:
  • Gambling and betting.
  • Lotteries are conducted (including government and private lotteries, as well as internet lotteries)
  • Activities and sectors in which private sector investment is not permitted (for example, atomic energy and railroads)
  • Trade in the retail industry (expect single-brand product retailing)
  • A chit fund is also considered as an investment.
  • Transferable development rights (TDRs) are sold in the construction of farm homes or real estate enterprises (TDRs)
  • Tobacco, cigars, cheroots, cigarillos, cigarettes, and other tobacco substitutes are made.
  • One of the most important industries is agriculture (excluding floriculture, horticulture, apiculture, and cultivation of vegetables and mushrooms under controlled conditions, the development, and production of seeds & planting materials, animals husbandry including the breeding of dogs, viniculture & aquaculture under controlled conditions and services related to the agro and allied sector).
  • Transportation by train (other than permitted activities)
  • Foreign technological partnership in any form, including franchise, trademark, brand name, and management contract licensing.

Restrictions in Permitted Sectors
  1. Foreign Direct Investment (FDI) in Single-Brand Retailing:
    The government has now permitted up to 100% foreign direct investment in the retail trade of single-brand products, subject to the FIPB's previous permission and compliance with the following conditions:
    • The foreign investor must be the brand owner or a non-resident entity, whether or not the brand owner, and must be permitted to engage in single-brand product retail trading for a specific brand through a legally enforceable agreement with the brand owner for the specific brand for which approval is sought.
    • E-commerce retail trading, in any form, is prohibited.
    • If the proposed FDI exceeds 51% of the company's total capital, at least 30% of the products sold must be sourced from Indian small industries (where the total investment in plant and machinery at the time of installation does not exceed US$ 2 million), village and cottage industries, and artisans and craftsmen.
    • Before bringing in FDI for the retail sale of a single brand product, investors must first apply to SIA for government permission. Which product categories will be sold under a single brand name should be specified in the application. Any reliance on a single brand's products or product categories will demand fresh government approval.
       
  2. FDI in Multi-brand Retail Trading:
    The clearance process in states that promote multi-brand retail trade enables up to 51 percent foreign participation in multi-brand retail trading.
    • Before the investment could be accepted, certain conditions would have to be met. Here are a few instances of such scenarios:
    • A minimum of $100 million in FDI is required; 50% of the first $100 million in FDI must be invested in backend infrastructure; and Indian micro, small, and medium firms must account for at least 30% of the value of the manufactured/processed product procurement.
    • Retail sales outlets are only available in cities with populations of more than one million people, according to the 2011 census.
    • E-commerce is not permitted for multi-brand retail trading.
       
  3. FDI in the Telecom Industry
    Under the automatic method, up to 49 percent of FDI in telecom services is permissible, and up to 100 percent of FDI is permitted with prior approval by the Financial Intelligence Policy Board. Telecom services, as a result, comprise basic, cellular, and unfired access, long-distance national/international, V-sat, public mobile radio trunked services, and worldwide mobile personal communication services, as well as a variety of value-added services.

    Investments from FIIs, NRIs, FCCBs, and American depository receipt shares, as well as proportionate foreign investment in Indian promoters/investment enterprises, including such companies' holding companies, would be included in the overall foreign ownership.

    The FIPB evaluates investment proposals before accepting them to ensure that they do not come from countries of concern or unfriendly enterprises. When reviewing the proposals, the FIPB must adhere to additional restrictions on the transfer of accounting information, user information, and infrastructure/network diagram data.
     
  4. Stock Market Investment in Infrastructure Companies:
    Foreign investment in securities market infrastructure companies, such as stock exchanges, depositories, and clearing corporations, is allowed up to 49 percent of paid-up capital under SEBI regulations.

    The FII component of the allowable 49 percent cannot exceed 23 percent, while the FDI component cannot exceed 26 percent. Foreign direct investment (FDI) in specific enterprises is only permitted with government approval. FII participation is likewise limited to purchases on the secondary market.
     
  5. Investing in credit reporting agencies (CICs)
    Foreign investment in CICs is permitted under the Credit Information Companies (Regulation) Act, 2005, but only if it conforms with all applicable regulations, including those issued by the Reserve Bank of India. Foreign investors can only invest a total of 49 percent of a company's paid-up capital (including both FDI FII limits).

    SEBI recognised FIIs can only invest up to 24 percent in CICs listed on stock exchanges (within the overall authorised ceiling of 49 percent ). However, no FII can directly or indirectly own more than 10% of the equity of the CIC.
     
  6. Commodity Exchange Investment:
    • Only the government/approval route provides a composite cap of 49 percent for foreign investment in commodity exchange, whereas FII purchases are limited to secondary market purchases.
    • Foreign investment in commodity exchanges must be compliant to meet the requirement that no non-resident investor or entity, including persons operating in concert with them, hold more than 5% of the entire equity in such a firm.
       
  7. Investment in Public Sector Bank:
    • The total statutory cap on foreign direct investment (FDI) and foreign institutional investment (FII) in nationalised banks is 20%. The same limit applies to investments in the Indian state bank and its affiliated banks.
     
  8. Investing in print media that covers news and current events
    • The government/approval approach enables up to 100 percent FDI in the facsimile version of foreign newspapers published by the owner of the original foreign daily, subject to conformity with the ministry of information and broadcasting's criteria.
    • Only a company that has been founded or registered in India in accordance with the Companies Act is permitted to publish.
    • Through the government approval route and following the minister of information and broadcasting's guidelines, NRIs, PIOs, and FIIs can invest up to 26% of their FDI and investment in the publication of Indian editions of foreign magazines that cover news and current affairs, as well as newspapers and periodicals that cover news and current affairs.
Conclusion
To summarise, the Indian government restricts FDI to protect domestic industries and essential resources (oil, minerals, etc.), conserve national and local history, protect segments of the population, maintain socio-political independence, and regulate economic growth.

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