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Foreign Investment


In accordance with the Foreign Direct Investment (FDI) Policy of Government of India, FDI is prohibited in certain sectors such as Agriculture, atomic energy, retail trade etc., restricted by imposing sectoral caps in certain sectors such as Insurance, Telecom etc., and freely permitted under the automatic route in all the remaining sectors. FDI in sectors under automatic route does not require any prior approval either by the Government of India or the Reserve bank of India (RBI). The investee company is only required to notify the regional office concerned of RBI of receipt of inward remittances within 30 days of such receipt and will have to file certain Returns within 30 days after issue of shares to foreign investors.

The Foreign Exchange Management Act, 1999 enacted by the Central Government is the relevant law. This Act has conferred the Central Government power to make Rules on certain items reserved for itself and RBI with power to make regulations on all other items. Several Rules and Regulations have been formed by virtue of this enabling provision. The Central Government also keeps issuing Press Notes having the force of law and RBI also keeps issuing circulars time and again.

For the past few years, RBI has also taken up noble act of consolidating all the relevant Rules, Regulations, Circulars, Clarifications and issuing consolidated master circulars in relation to most of the aspects involving foreign exchange.

Policy on Foreign Direct Investment

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 the following, which require prior approval of the Government:-

1. Sectors prohibited for FDI
2. Activities/items that require an industrial license
3. Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the same field
4. Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (substantial acquisition of shares and takeovers) regulations, 1997 is attracted
5. All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is not permitted

Most of the sectors fall under the automatic route for FDI. In these sectors, investment could be made without approval of the central government. The sectors that are not in the automatic route, investment requires prior approval of the Central Government. The approval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDI is not allowed.

After the grant of approval for FDI by FIPB or for the sectors falling under automatic route, FDI could take place after taking necessary regulatory approvals form the state governments and local authorities for construction of building, water, environmental clearance, etc.

Manual for FDI brought out by the Department of Industrial Policy and Promotion provides details about FDI Policy and Procedures and is available at http://www.dipp.nic.in/manual/FDI_Manual_Latest.pdf

All Press Notes of Department of Industrial Policy and Promotion that provides details about FDI policy are available at their website http://siadipp.nic.in/policy/changes.htm.

FDI policy is also notified by Reserve Bank of India (RBI) under Foreign Exchange Management Act (FEMA) and could be seen at www.rbi.org.in.

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares of foreign investors.

Procedure under Government Approval

FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of Foreign Investment Promotion Board (FIPB).

Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.

Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion.

Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. No fee is payable. The guidelines for consideration of FDI proposals by the FIPB are at Annexure-III of the Manual for FDI.

Form FC-IL - COMPOSITE FORM FOR FOREIGN COLLABORATION AND INDUSTRIAL LICENCE http://siadipp.nic.in/download/il-form.doc
IEM Form http://siadipp.nic.in/policy/policy/ip202.htm
Manual for FDI http://www.dipp.nic.in/manual/FDI_Manual_Latest.pdf

Prohibited Sectors

The extant policy does not permit FDI in the following cases:

i. Gambling and betting
ii. Lottery Business
iii. Atomic Energy
iv. Retail Trading
v. Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations)

General permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do no require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors.

The companies are required to notify the concerned Regional Office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.

India has liberalized its foreign exchange controls. Rupee is freely convertible on current account. Rupee is also almost fully convertible on capital account for non-residents. Profits earned, dividends and proceeds out of the sale of investments are fully repatriable for FDI. There are restrictions on capital account for resident Indians for incomes earned in India.

The Reserve Bank of India’s Foreign Exchange Department administers Foreign Exchange Management Act 1999(FEMA). Foreign Exchange Management (transfer of securities to any person resident outside India) Regulation as amended from time to time regulates transfer for issue of any security by a person resident outside India.

Repatriation of investment capital and profits earned in India

(i) All foreign investments are freely repatriable, subject to sectoral policies and except for cases where Non Resident Indians choose to invest specifically under non-repatriable schemes. Dividends declared on foreign investments can be remitted freely through an Authorized Dealer.
(ii) Non-residents can sell shares on stock exchange without prior approval of RBI and repatriate through a bank the sale proceeds if they hold the shares on repatriation basis and if they have necessary NOC/ tax clearance certificate issued by Income Tax authorities.
(iii) For sale of shares through private arrangements, Regional offices of RBI grant permission for recognized units of foreign equity in Indian company in terms of guidelines indicated in Regulation 10.B of Notification No. FEMA.20/2000 RB dated May ‘2000. The sale price of shares on recognized units is to be determined in accordance with the guidelines prescribed under Regulation 10B(2) of the above Notification.
(iv) Profits, dividends, etc. (which are remittances classified as current account transactions) can be freely repatriated.

Acquisition of Immovable Property by Non-resident

A person resident outside India, who has been permitted by Reserve Bank of India to establish a branch, or office, or place of business in India (excluding a Liaison Office), has general permission of Reserve Bank of India to acquire immovable property in India, which is necessary for, or incidental to, the activity. However, in such cases a declaration, in prescribed form (IPI), is required to be filed with the Reserve Bank, within 90 days of the acquisition of immovable property.

Foreign nationals of non-Indian origin who have acquired immovable property in India with the specific approval of the Reserve Bank of India cannot transfer such property without prior permission from the Reserve Bank of India. Please refer to the Foreign Exchange Management (Acquisition and transfer of Immovable Property in India) Regulations’ 2000 (Notification No. FEMA.21/ 2000-RB dated May 3, 2000).

FAQs on Acquisition and Transfer of Immovable Property in India by a person resident outside India http://www.rbi.org.in/scripts/FAQview.aspx?id=33

Acquisition of Immovable Property by NRI

An Indian citizen resident outside India (NRI) can acquire by way of purchase any immovable property in India other than agricultural/ plantation /farm house. He may transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a Person of Indian Origin resident outside India or a person resident in India.

Please refer to the Foreign Exchange Management (Acquisition and transfer of Immovable Property in India) Regulations’ 2000 [Notification No.FEMA.21/2000-RB dated May 3, 2000]: http://www.rbi.org.in/scripts/BS_ECMNotificationUserView.aspx?Id=161

Foreign Exchange Management Act 1999: http://indiacode.nic.in/fullact1.asp?tfnm=199942
Regulations of RBI on FEMA: http://www.rbi.org.in/scripts/BS_ECMNotification.aspx
FAQs on Accounts opened by Foreign Nationals and Foreign Tourists: http://www.rbi.org.in/scripts/FAQview.aspx?id=30

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