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Foreign direct investment into india

Introduction

The Indian Government embarked on liberalising the regulatory framework, with specific reference to foreign investment through the Statement on Industrial Policy of 1991.  Since then, the Indian regulatory environment for foreign investment has been consistently eased to make it investor- friendly.

While the early years of liberalization witnessed the first phase of structural reforms in the industrial, financial and export sectors, the last few years have seen the beginning of the second phase of economic restructuring with major fiscal reforms in foreign investment and trade policy spheres.

In 2011-12, FDI inflows recorded a strong growth of 34% (US$ 12 billion). In particular, FDI inflows into equity capital rose by 88% to US$ 36.5 billion. According to the United Nations Conference on Trade and Development, India ranks second in global FDI growth, behind Brazil, and is seen as one of the top five attractive destinations for international investors. In 2011-12, sectors which attracted large FDI inflows were chemicals (US$ 7.2 billion), services (US$ 5.2 billion), pharmaceuticals (US$ 3.2 billion),

telecom (US$ 2 billion), construction (US$ 2.8 billion), power (US$ 1.65 billion) and metallurgical industries (US$ 1.8 billion).

Under the current FDI Policy, foreign investment is permitted by all categories of investors and in all sectors except the prescribed prohibited sectors. Apart from these prohibited sectors, foreign investments can be made in other sectors under:

  • Approval route, i.e., by the Government through the Foreign Investment Promotion Board (FIPB) under the Ministry of Finance
  • Automatic route, i.e., no prior approvals, under delegated powers exercised by the Reserve Bank of India (RBI)

 

FDI of up to 100 per cent is allowed in the following sectors in India:

Automatic Route

Automatic Route with Conditions

Approval Route

  • Food processing
  • Brewing and distillation of alcohol
  • IT and IT enabled services
  • Manufacture of consumer and industrial products (except the ones that are reserved for small scale sectors, require industrial license or are prohibited)
  • Transportation services
  • Hotels and tourism
  • Power
  • Advertising and films
  • Data processing and software development
  • Business and management consultancy services
  • Market research services
  • Construction of infrastructure
  • Construction of ports and harbours
  • Accounting and book-keeping services
  • Health and medical services
  • Storage and warehouse services
  • Greenfield pharmaceutical projects
  • Greenfield airport projects
  • 18 Non-banking financial services
    • Merchant banking
    • Underwriting
    • Investment advisory
    • Financial consultancy
    • Portfolio management services
    •  Stock broking
    • Asset management
    • Venture capital
    • Custodial services
    • Factoring
    • Credit rating agencies
    • Leasing and finance
    • Housing finance
    • Forex broking
    • Credit cards
    • Money changing
    • Micro credit and rural credit
    • Wholesale trading
  • Construction and development of townships
  • Agriculture and animal rearing
  • Airports
  • Helicopter and seaplane services
  • Maintenance and repair services
  • Flying and technical training institutes
  • Industrial parks
  • Coal and lignite

 

  • Broadcasting of non-news channels
  • Publishing/Printing of speciality magazines
  • Courier services
  • Test marketing activities
  • Single brand retail trading
  • Tea plantation
  • Titanium mining
  • Brownfield pharmaceutical companies

 

FDI ranges between 26 per cent and 74 per cent in the following sectors:

Asset Reconstruction Company

Banking

Broadcasting

Airports

Air Transport services

Civil Aviation Services

Petroleum and natural gas

Telecom

Commodity Exchange

Defence

Insurance

Satellites: Establishment operations

Security agencies in the private sector

Stock exchanges, depositories, corporations

 

 

Prohibition of FDI in the following sectors:

Atomic energy and railways

Lotteries, gambling and betting

 

Agriculture (excluding floriculture, horticulture, seed development, animal husbandry, pisciculture, aquaculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors)

Plantations (excluding tea plantations)

 

Retail trading (other than single brand retail)

 

Real estate (except construction development projects)

Chit funds, nidhi companies, or trading in transferable development rights

Manufacturing of cigars, cheroots, cigarillos and cigarettes, and tobacco and tobacco substitutes

 

 

Legal Structure

A foreign company looking to set up operations in India, can consider the following options:

Operating as an Indian company
Wholly-owned subsidiary company

A foreign company can set up a wholly owned subsidiary company in India to carry out its activities. Such company shall be treated as an Indian resident despite being 100% foreign-shareholders. The Company has minimum requirement of two members, for a private limited company, and seven members, for a public limited company. Activities of such company will need to comply with the provisions of the FDI policy.

Joint venture with an Indian partner (equity participation)
Although a wholly owned subsidiary has proved to be the preferred option, foreign companies can also carry out its activities in India by forming strategic alliances with Indian partners. The company also needs to comply with the provisions of the FDI Policy.

Limited liability partnership (LLP)
LLP is a new form of business structure in India. It combines the advantages of a company, such as being a separate legal entity having perpetual succession, with the benefits of organisational flexibility associated with a partnership. At least two partners are required to form an LLP and they have limited liability.

 

Operating as a foreign company

Liaison office
The role of these offices is limited to collecting information about the market and providing information about the company and its products to prospective Indian customers.

Project office
Foreign companies planning to execute specific projects in India can set up temporary project and site offices here for this purpose

Branch office
Foreign companies engaged in manufacturing and trading activities abroad can set up branch offices in India for the following purposes such as Export and import of goods, Professional or consultancy services, Research work in which the parent company is engaged, to promote technical or financial collaboration between Indian companies and the parent or overseas group company, representing the parent company in India and acting as a buying or selling agent in India, IT and software development services in India, Technical support for products supplied by the parent or group companies.

Gautam Khurana
India Law Offices
office@indialawoffices.com

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