Foreign Direct Investments in India

Practical Guide

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How are foreign investments regulated in India?

Foreign investment in India is regulated by India’s Foreign Exchange Management Act (FEMA), the Foreign Direct Investment (FDI) Policy and regulations notified under FEMA by the Reserve Bank of India (India’s Central Bank) from time to time.

Which foreign investments are subject to clearance in India?

Foreign investment into India is possible through two routes, i.e., the automatic route and the approval route. Automatic route means that no prior investment approvals are required and only post share allotment filings are involved. Foreign investment in activities not covered under the automatic route requires prior approval of the government (approval route). In very few sectors such as banking, foreign investment is permitted only under the approval route. In certain sectors FDI is permitted under the automatic route up to a specified threshold, and government approval is required for any investment beyond such threshold. For instance, sectors such as defence and brownfield pharmaceuticals both fall under the automatic route up to 74 per cent, and require government approval for any foreign investment beyond 74 per cent.

Also, prior government approval is required for all FDI from neighbouring countries with whom India shares land borders.

Foreign investment is entirely prohibited in certain sectors such as the lottery business, gambling and betting, chit funds, atomic energy, railways, etc.

What is the foreign investment clearance process in India?

A single window portal has been designed for foreign investment clearance process in India. An application for approval is required to be filed on the portal and the Department for Promotion of Industry and Internal Trade transfers the proposal to the relevant authorities such as the Reserve Bank of India, the Ministry of External Affairs and in case of proposals requiring security clearance, the Ministry of Home Affairs. The proposals are typically approved or rejected within 8 weeks or where security clearance is required, within 10 weeks, from the date of receipt of the FDI application.

Are there any specific conditions that can be imposed on the foreign investment by the Indian authorities?

There is no single set of conditions that may be imposed on the foreign investment by Indian authorities applicable to all sectors. Instead, different criteria may be imposed depending on the applicable laws governing the relevant sector.

What main challenges do foreign investors face in India?

While investing in India has become fairly easy in the recent times due to liberalisation of the regulatory regime, exiting from India is a cumbersome process. Once the Indian business is closed or the shares are sold, the repatriation of the sale proceeds is permitted subject to payment of applicable taxes and completion of certain exchange control compliances. The time taken to fulfil prior compliances depends on the company’s assets and liabilities at the time of winding up and generally takes a minimum of 12 to 24 months. Also, the tax regime in India can be fairly complicated for foreign investors.

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