Foreign Direct Investment in India
With strong fundamentals, robust economy, well laid institutional setup, geographical advantages and growing appetite for consumption especially that of middle class India is placed as a preferred destination for global environment. In a recent study of ernst and young in association of UNCTAD India has been placed within top 5 attractive destinations for investment. Whereas japan bank has rated as the top most country for overseas business environment. Having such a rating and preference the Government of India over a period of time has been able to put in place a policy framework for foreign direct investment which can be rightly said to be transparent, easily comprehensible, stable, progressive and predictable.
The Policy Documents are as under, Which you may download by Clicking the same
- Foreign Direct Investment Policy (Circular of 2016, effective from 6th June 2016)
- Sectors under Automatic Route with some comditions
- Sectors where government approval is required
- FDI Policy of 2015
Who can invest in india?
A non-resident can invest in india subject to FDI policy in those sectors/ activities which are not prohibited, which are defence, space, and atomic energy. There are two methods of FDI investment one is known as automatic route while other is known as approval route. In all those cases which falls under automatic route there is no need to obtain any prior approval or permission before FDI,however, the same needs to be reported to the Government after the FDI has been received.
A) Automatic Route
FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require prior approval of the Government:
- Activities/items that require an Industrial License;
- Proposals in which the foreign collaborator has an existing financial / technical collaboration in India in the ‘same’ field,
- Proposals for acquisition of shares in an existing Indian company in: Financial services sector and where Securities & Exchange Board of India (Substantial Acquisition of Shares and Takeovers ) Regulations, 1997 is attracted;
- All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.
FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.
B) Government Route
FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Application can be made in Form FC-IL; Plain paper applications carrying all relevant details are also accepted. No fee is payable.
C) Prohibited Sectors for FDI :
FDI is prohibited under Government as well as Automatic Route for the following sectors:
- Retail Trading
- Atomic Energy
- Lottery Business
- Gambling and Betting
- Housing and Real Estate business
- Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors).
- Plantations (Other than Tea plantations).
A foreign company planning to engage in a business in India can do the same in following manner:-
Setting up of a subsidiary company:
A subsidiary company is registered in the same manner as an Indian company is registered. It has same rights and privileges/ obligations as an Indian company has. It is subject to the same tax rates, similar treatment in the court of law at par with the any other Indian company. However, the documentation is quite different while incorporating a subsidiary company involving foreign stakeholders.
Setting up of a branch office:
A branch office of a foreign company is considered as a foreign company in india which is controlled by their head office. These are regulated by a specific provision of FEMA as applicable and enforced by the RBI. They are also required to file annual activity certificate along with audited balance sheet and profit & loss account. A branch office can be established for the purposes of export and import of goods, for rendering of professional or consultancy services, to carry research work for the parent company, to promote financial or technical collaboration b/w the parent foreign company and any other Indian company to represent the parent foreign company in India and to act as the buying/ selling agents, to render services in IT and software development, to do foreign airline and shipping business in India or to render support to the customers of foreign parent company in India. However, a branch office is not allowed to carry out any manufacturing or processing activity in India except inside a special economic zone (SEZ). To establish a branch office in india prior approval of Reserve Bank of India is required which is normally granted to only those applicants who have standing in the parent country of at least 3 years with a track record of generating profit more than 50,000 usd. The profit of a branch office is taxable at a rate applicable to foreign countries. The proceeds of operation of the branch office after payment of applicable taxes can be repatriated to the parent company.
Setting up of a project office:
To execute projects undertaken by a foreign company, the RBI has granted general permission for establishment of project offices in India by the foreign companies. Such offices can only undertake activities which are necessary for the execution of the specific project for which the permission is granted. The project offices are considered as a foreign company operating in India. The profit of a project office is taxable at a rate applicable to foreign countries. The proceeds of operation of the project office after payment of applicable taxes can be repatriated to the parent company.
Setting up of a liaison/ representative office:
A liaison office or a representative office can be established by a foreign company subject to the prior approval of the RBI. A liaison office cannot have any source of income in india. All their expenses like rent, salary, other staff welfare expenses from the money received from the head office. Further, apart from market research , representation of foreign company before the prospective/ customer a liaison office cannot do any other activity. Since liaison office is not allowed to do any business office in India hence there is no question of any profit being accrued to these entities hence, no taxation.
Investment by foreign individuals in india:
An individual residing outside India can invest in any Indian company subject to sector/ activity based prohibitions and all other prohibitions which is otherwise applicable to a foreign entity for establishing a subsidiary company is also applicable to any non resident individuals while investing in any Indian company or while setting up an indian company along with another foreign individual or an Indian Individual.