The Government of India has drafted a policy framework on Foreign Direct Investment, which provides a situation wherein, both the host and the home nation derive benefits of the mutual investing capacity. The Framework is embodied in the circular on Consolidated FDI Policy. The government under the framework policy aims to regulate as well as facilitate the investment as an investor friendly policy. There are a variety of criteria and pre-requisite embodied in the policy and The FDI Policy is applicable across the sectors and industries and is also equally applicable to the SME sectors.

The entities that are eligible under the FDI policy are hereunder[1]:-

  • A Non-resident Entity
  • NRIs in Nepal and Bhutan as well as citizens of Nepal and Bhutan
  • Erstwhile Overseas Corporate Bodies (OCBs) that are incorporated outside India.
  • A Company, trust, partnership firm incorporated outside India.
  • A SEBI registered Foreign Venture Capital Investor (FVCI)

The aforementioned entities can invest overseas under the FDI policy in any Indian Company, Partnership Firm, Proprietary Concern, Trusts, Limited Liability Partnership, Investment Vehicles and  Startup Companies. Although there is a restriction on NRIs to invest in any entity engaged in agricultural, plantation or real-estate business.

The Indian Companies may receive Foreign Direct Investment under two routes namely Government Route and Automatic Route. Under the Government Route the investors are required to obtain prior approval of the Government. The major industries which require the government approval prior to the investment are Mining, Defense, Telecommunications, Civil Aviation and Satellites.  Whereas under the Automatic Route the investor can invest without the need of prior approvals of the Government or Reserve Bank of India.

The investment under the FDI policy can be made by the non-residents by three means, namely[2]:

  • Equity Shares
  • Fully, Compulsorily, and Mandatorily Convertible Debentures.
  • Fully, Compulsorily, and Mandatorily Convertible Preference Shares.
  • Foreign Currency Convertible Bonds
  • Depository Receipts
  • Two-way Fungible Schemes

In addition to the mode and sectors specified by the policy framework, the FDI  policy demarcates certain prohibited sectors such as Chit Funds, Gambling and Betting, Casinos, Lottery Business, Trading in Transferable Development Rights, Atomic Energy, Railways, Tobacco Manufacturing.

The Indian Entities having received FDI either under Automatic Route or Government Route and by issue of any instruments are required to report the details of the investment to the Reserve Bank of India.

The Policy enacted and regulated is focused to maintain a transparent regime and in lieu embrace the global economy.

[1] The Institute of Companies Secretaries Of India. Economic, Business And Commercial Laws(Delhi: Delhi Computer Services, 2018)

[2] Ibid

About the Author: This post is prepared by Ms. Arpana Singh, law student at Central University of South Bihar and is an intern at MyLawman. She can be reached at arpana129@gmail.com. 

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