Foreign Direct Investment India Delhi Law Firm(Trustman & Co)

FOREIGN DIRECT INVESTMENT INDIA

India, the largest democracy and 10th largest economy in the world, with its consistent growth performance and abundant high- skilled manpower provides enormous opportunities for investment, both domestic and foreign. India is the fourth largest conomy in terms of purchase power parity and the tenth most industrialized country in the world. Since the beginning of economic reforms in 1991, major reform initiatives have been taken in the fields of investment, trade, financial sector, exchange control simplification of procedures, enactment of competition and amendments in the intellectual property rights laws, etc. India provides a liberal, attractive, and investor friendly investment climate. Main features of policy on Foreign Direct Investment are dealt with in this chapter.

INVESTMENT OUTLOOK

A number of studies in the recent past have highlighted the growing attractiveness of India as an investment destination. According to the study by Goldman Sachs, Indian economy is expected to continue growing at the rate of 5% or more till 2050. Indian economy is slated to become the fourth largest economy by 2050. Some of these conclusions are listed below :

• 3rd most attractive destination -ATKEARNEY Business Confidence Index, 2004

• Best off shoring destination-ATKEARNEY Offshoring Index, 2004

• Among the top three investment hotspots- UNCTAD and Corporate Location Survey April 2004.

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 :

i. Activities/items that require an Industrial Licence (Refer para 2.1);

ii. Proposals in which the foreign collaborator has an existing financial / technical collaboration in India in the ‘same’ field(Refer Press Note no. 1 of 2005 series),

iii. Proposals for acquisition of shares in an existing Indian company in:

a. Financial services sector and

b. Where Securities & Exchange Board of India (Substantial Acquisition of Shares and Takeovers ) Regulations, 1997 is attracted;

iv. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted. (Refer Annexure II).

1.4 FDI policy is reviewed on an ongoing basis and changes in sectoral policy/sectoral equity cap are notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy & Promotion. FDI Policy is also notified by Reserve Bank of India (RBI) under Foreign Exchange Management Act (FEMA).

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 to foreign investors.

PROCEDURE UNDER GOVERNMENT APPROVAL

FDI in activities not covered under the automatic route according to para 1.3 above, requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB). Approvals of composite proposals involving foreign investment/foreign technical collaboration is also granted on the recommendations of the 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 & Promotion.

Applications can also be submitted with Indian Missions abroad who forward them to the Department of Economic Affairs for further processing.

Application can be made in Form FC-IL, Plain paper applications carrying all relevant details are also accepted. No fee is payable.

PROHIBITED SECTORS

1.8 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 or 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 not 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.