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Foreign Direct Investment In India

Under the Companies Act, 1956, a foreign entity can incorporate a company and set up its business operations in India through Joint Ventures with any other Indian establishment or on its own as wholly owned subsidiary of a foreign company. On the other side, a foreign entity can also enter indian market by establishing Project office, Liaison office or Branch office instead of incorporating a distinct entity. Moreover, permitted activities under Foreign Exchange Management Regulations, 2000 can also be undertaken by these offices. Financial and economic stability along with the political conditions are good to be taken into account while investing in any developing country. The good news is that India is one of the rapidly growing economies of the world and has been ranked among the top 3 destinations in terms of inbound investments.

Important Things to be Taken Care by an Investor

  • More investments will take place if the host country faces depreciation in the currency
  • As GDP growth determines the market size, it’s important to invest in developing countries
  • Good Infrastructure supports the business. Thus, it’s prudent to target countries with good infrastructure
  • Taxes from both the parent and host countries are imposed on MNCs, thus the host country which reduces the double taxation attracts more FDI

Foreign investment in Indian company directly can be done via two routes depending upon the situation in which investment is done. The two routes are explained below:

Automatic Route

All activities/sectors excluding the following ones which require prior approval of the Government in FDI are allowed under automatic route:

  • Activities/items in which industrial license is required
  • If the collaborator has proposals containing existing and current financial collaboration in India in the 'same' field,
  • Any proposal for obtaining or purchasing shares in an existing Indian company dealing in financial services sector or where Securities & Exchange Board of India (Substantial Takeovers and Acquisition of Shares ) Regulations, 1997 is attracted;
  • All proposals that are not a part of notified sectoral policy/caps or under sectors in which FDI is not permitted.

Note: There are certain sectors for which the FDI is prohibited under both government as well as automatic route. Following is the list of such sectors: Retail Trading | Lottery Business | Atomic Energy| Gambling and Betting | Housing and Real Estate business| Agriculture (excluding Horticulture, Floriculture, Development of Seeds, Pisciculture and Cultivation of Mushrooms, Vegetables, etc. under controlled conditions, Animal Husbandry and agro and allied sectors related services) | Plantations (Other than Tea plantations).

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