Foreign Direct Investment in India

A recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010-2012. A report by Ernst and Young, foreign direct investment in India has witnessed an eight fold increase in its FDI in March 2012. The FDI in 2010 was $44.8 billion, and in 2011 it experienced an increase of 25% to $50.8 billion. With the government initiating further reforms into the sector, India is set to attract major investments in the near future.

Registrars of Companies (ROC) in India, appointed under Section 609, are vested with the principal duty of registering companies established in the respective States and Union Territories in India.

The setting up of business in India is regulated by the Indian Companies Act, 1956. The Act lays down the guidelines for foreign companies that wish to set up their business in India. As per the law, these companies can:

  • Incorporate a company under the Companies Act, 1956, as an Indian company - joint venture or a wholly owned subsidiary.
  • Set up a liaison/representative or a branch/project office of a foreign company and undertake activities as governed by the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

To encourage FDI in India, the government has initiated a number of steps including allotting special land to major industries and service sectors. These include the Technology Park (both hardware and software), Special Economic Zones (SEZs), Export Promotion Zones (EPZs), etc. The Growth Center Schemes also aim to attract investors.

FDI is allowed in most of the sectors, as per the extant FDI Policy of India. Most of them are covered under the Automatic Route after the liberalization of the Forex Regulations of India and a few are still covered under the Approval Route. However FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

  • Retail Trading (except single brand product retailing)
  • Atomic Energy
  • Gambling and Betting
  • Lottery Business
  • Nidhi Company
  • Business of Chit Fund
  • Agricultural (with some exceptions) and Plantations activities (other than Tea Plantations)
  • Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
  • Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005)
  • Trading in Transferable Development Rights

Procedure for receiving Foreign Direct Investment in an Indian company

An Indian company may receive Foreign Direct Investment under the following two routes:

  1. Automatic Route: FDI up to 100% is allowed under the automatic route in almost all the activities/sectors. FDI under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India. Sectors/activities not permitted under automatic route have to take approval from FIPB (read more).
  2. Government Route: All FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. (Read more)