Foreign Investment Approval
Foreign direct investment (FDI) is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy. Ownership of 10 percent or more of the voting power in an enterprise in one economy by an investor in another economy is evidence of such a relationship. FDI is a key element in international economic integration because it creates stable and long-lasting links between economies. FDI is an important channel for the transfer of technology between countries, promotes international trade through access to foreign markets, and can be an important vehicle for economic development. The indicators covered in this group are inward and outward values for stocks, flows and income, by partner country and by industry and FDI restrictiveness. Basic principles of FDI into India India’s business sectors may be divided into three for the purposes of FDI inflow: prohibited sectors – prohibited from receiving FDI. Includes atomic energy, real estate business, lottery business, manufacturing tobacco products, gambling and betting; automatic route – no prior approval required from the government for receiving FDI. Includes airports, construction, industrial parks, mining, manufacturing and IT; and government approval route – prior approval required from the government for receiving FDI. Includes air transport services, satellites, print media and public sector banks. The FDI Policy further imposes sector-specific FDI thresholds based on the sensitivity of the sector, regardless of whether the sector falls under the automatic route or the government approval route. These are, generally: up to 100% FDI allowed (includes manufacturing, construction and IT); up to 74% FDI allowed (includes pharmaceuticals and defence); up to 49% FDI allowed (includes air transport services and private sector banking); and up to 26% FDI allowed (print media). If the NDI Rules and FDI Policy do not specifically prescribe any conditions for any sector, 100% FDI under the automatic route is allowed for that sector. Where an Indian entity is neither ‘owned’ nor ‘controlled’ by resident Indian citizens, any investment made by that entity in another Indian entity will be considered downstream foreign investment, and governed by the NDI Rules and FDI Policy. For the purposes of the NDI Rules, ‘owned’ refers to a beneficial holding of more than 50% of the equity instruments of a company, and ‘controlled’ refers to the right to appoint a majority of directors or to control the company’s management or policy decisions. Under the NDI Rules, FDI includes any investments made by a person resident outside India in equity instruments of Indian companies. For listed entities, investments of at least 10% or more of the post issue paid-up capital is treated as FDI. The NDI Rules permit investment into: equity shares (including partly paid equity shares, provided that at least 25% of the consideration is received upfront and they are fully called-up within 12 months of issuance); convertible debentures which are fully and mandatorily convertible, and fully paid; preference shares which are fully and mandatorily convertible, and fully paid; and share warrants, for which at least 25% of the consideration is to be received upfront and the balance is to be received within 18 months of issuance. While FDI is only permitted in these equity instruments, a recent exception applies to start-ups, as discussed below. Recent amendments to India’s FDI regime On 17 April 2020, the Indian government amended the FDI Policy making it mandatory to obtain government approval for FDI received from countries that “share a land border” with India, which include China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan. While the move was ostensibly intended to “curb opportunistic takeovers / acquisitions”, the intention has been widely held to have stemmed from the need to limit the inflow of Chinese investments since FDI from Pakistan and Bangladesh was already subject to similar restrictions. As a result of this amendment, FDI inflow from these countries has been restricted, with only 80 of 388 proposals received as of July 2022 granted approval, However, other than this protective limitation, India has been on the path of liberalisation since 1991. Even as recently as 2021, and going against the tide of the prevailing protectionist trends, India has brought about relaxations in several key sectors, including: insurance – the FDI limit in the insurance sector was raised from 49% to 74% under the automatic route. defence – the FDI limit in the defence sector was significantly liberalised by raising the FDI limit for investment under the automatic route from 49% to 74%. telecoms – as a much-needed boost to the telecoms sector in India, the government increased the FDI limit into the sector from 49% to 100% under the automatic route. oil and gas – while the overall cap for FDI into the oil and gas sector continues to remain at 49% under the automatic route, a window has been created for 100% FDI in oil and gas public sector undertakings (PSU) that have obtained ‘in-principle approval’ from the government for strategic disinvestment. Further, and in line with government policy to create an ever-burgeoning start-up ecosystem in India, the ‘Start-up India Initiative’ has introduced two further changes targeted at start-up investment. While FDI is generally permitted only through equity instruments, eligible start-ups have the benefit of issuing convertible notes (CN): instruments evidencing receipt of money initially as a debt, and which are either repayable at the option of the holder or convertible into such number of equity shares of the company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument. For start-ups to be eligible to issue CNs, the minimum amount of investment required from a single investor is INR 25 lakhs (roughly US$ 30,000) in a single tranche. The maximum tenor of conversion or repayment of a CN is 10 years. Eligible start-ups can also benefit from the ‘angel tax’ exemption under Income Tax Act if their aggregate paid-up share capital and share premium after the issue or
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