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India FDI Policy – a move towards transparency and clarity

Law-Now
07.04.2010

The Government of India (“GoI”) has issued a new foreign direct investment (“FDI”) policy document (“FDI Policy”), which is effective from 1 April 2010, with a view to having a “transparent, predictable, simple and clear” regulatory framework that reduces the regulatory burden.  The GoI wishes to attract and promote FDI from non-residents in activities which significantly contribute to industrialization and socio-economic development in India.

FDI in India is regulated by the GoI and the Reserve Bank of India (“RBI”) under the Foreign Exchange Management Act 1999 (“FEMA”) and its various regulations.  Hitherto, the Department of Industrial Policy & Promotion, Ministry of Commerce, Government of India made policy announcements from time to time which were notified by the RBI as amendments to notification No. FEMA 20/2000-RB of May 3, 2000.  In addition, RBI issued its own regulations.

The GoI’s aim in issuing the FDI Policy is to consolidate, and in some instances clarify, all the extant foreign investment notifications, rules and regulations prevailing as at 31 March 2010 in India into one comprehensive document, rather than to make changes to the existing policy framework.  It is envisaged that a consolidated circular would be issued every 6 months to give updates on the policy framework; as such the next circular will be issued on 30 September 2010.

Although the previous Press Notes/Press Releases/Clarifications have been superseded, all actions that may have been taken consistent with them prior to 1 April 2010 would be deemed to have been taken under the new FDI Policy.

Entry Routes for Investment

Investments can be made through two routes: the ‘automatic route’ and the ‘Government route’.  Under the automatic route, no approval from the RBI or GoI is required for the investment.  Under the Government route, prior approval of the GoI through the Foreign Investment Promotion Board (“FIPB”) is required.

In sectors with foreign investment caps, GoI/FIPB approval would be required in all cases where:

  1. an Indian company is being established with foreign investment and is owned or controlled by a non-resident entity; or

  2. the ownership or control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, are transferred to a non-resident entity (as a consequence of transfer of shares and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc.).

Sector-Specific Policies 

The FDI policies for certain sectors are set out in the table below:

SECTOR     FDI POLICY 
Advertising 100% FDI is permitted under the automatic route
Airports     Greenfield projects:  100% FDI is permitted under the automatic route.

Existing projects:  FDI up to 100% is permitted.  FDI up to 74% is under the automatic route and beyond 74% under the Government route.
Asset Reconstruction Companies ("ARCSs") Persons resident outside India, other than Foreign Institutional Investors (“FIIs”), can invest in the equity capital of ARCs registered with the RBI under the Government route.  Investments by FIIs are not permitted in the equity capital of ARCs and FDI is restricted to 49% of the paid-up capital of the ARC.

However, registered FIIs can invest in security receipts (“SRs”) issued by ARCs. FIIs can invest up to 49% of each tranche of SRs, with the condition that investment by a single FII in each tranche of SRs must not exceed 10% of the issue.
Banking - Private Sector The FDI limit in private sector banks is 74% including investment by FIIs.  FDI up to 49% is under the automatic route and beyond that up to 74% under the Government route.
Banking - Public Sector FDI in nationalized banks is subject to an overall statutory limit of 20% under the Government route.
Business Services 100% FDI permitted under the automatic route in data processing, software development and computer consultancy services; software supply services, business and management consultancy services, market research services, and technical testing and analysis services.
Commodity Exchanges     There is a composite ceiling of 49% for FDI under the Government route as follows:

(i) investment up to 26% as FDI under the FDI Scheme incorporated as Schedule 1 under Regulation 5(1) of the FEMA Regulations

(ii) investment up to 23% by registered FIIs under the Portfolio Investment Scheme incorporated as Schedule 2 under Regulation 5(2) of the FEMA Regulations

FII purchases are restricted to the secondary market only.

No foreign investor/entity, including persons acting in concert, can hold more than 5% of the equity in these companies.
Construction and Maintenance   

100% FDI is permitted under the automatic route in the construction and maintenance of, inter alia, roads, rail-beds, bridges, tunnels, pipelines, hydroelectric projects, power plants and industrial plants.

100 % FDI is permitted under the automatic route in the construction and maintenance of roads and highways offered on BOT basis including the collection of tolls.

Defence     FDI up to 26% is permitted under the Government Route.
Drugs and Pharmaceuticals 100% FDI is permitted under the automatic route.
Health and Medical services 100% FDI is permitted under the automatic route.
Hotels and Tourism 100% FDI is permitted under the automatic route.
Insurance     FDI up to 26% is allowed under the automatic route.
Mining

100% FDI is permitted under the automatic route for, inter alia,:·

  • Mining and exploration of metal and non-metal ores· 
  • Coal and lignite mining for captive consumption by power projects, iron & steel and cement units
  • Setting up coal processing plants like washeries

FDI up to 100% is permitted under the Government route in mining and mineral separation of titanium bearing minerals and ores. 

Non-banking finance companies ("NBFCs") 100% FDI in NBFCs is permitted under the automatic route in activities such as merchant banking, asset management, investment advisory services, financial consultancy, stock broking and forex broking. 
Petroleum and Natural Gas 100% FDI is permitted under the automatic route in exploration of oil and natural gas fields, infrastructure related to marketing of petroleum products, actual trading and marketing of petroleum products, petroleum product pipelines, natural gas/LNG pipelines, market study and formulation and petroleum refining in the private sector.

FDI up to 49% is permitted under the Government route in petroleum refining by the Public Sector Undertakings. This should not involve any divestment or dilution of domestic equity in the existing PSUs.
Ports and Harbours 100% FDI is permitted under the automatic route.
Power 100% FDI is permitted under the automatic route for:

(i) generation and transmission of electric energy produced in hydro-electric, coal/lignite based, thermal, oil-based and gas-based thermal power plants;

(ii) non-conventional energy generation and distribution;

(iii) distribution of electric energy to household, industrial & commercial users;

(iv) power trading.
Research and Development 100% FDI is permitted under the automatic route.
Telecommunications FDI up to is 74% is permitted.  FDI up to 49% is on the automatic route and beyond that on the Government route.
Trading 100% FDI is permitted under the automatic route in wholesale trading and e-commerce activities.
Venture Capital Fund   A Foreign Venture Capital Investor (“FVCI”) may contribute up to 100% of the capital of an Indian Venture Capital Undertaking under the automatic route, and may also set up a domestic asset management company to manage the fund. FVCIs are also allowed to invest in other companies subject to FDI regulations.

Please note that the list above is not exhaustive.  To access the full FDI Policy please click here.

If you have any problems opening or printing the PDF file above, please click here for help.
For further information, please contact:
Vivek Katyal Vivek Katyal
London
+44 (0) 20 7367 3135 

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