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Author: Gaurav Shanker, Managing Partner And Yamini Mishra, Associate |

Article by Business Law Chamber

India was the 9th largest recipient of foreign direct investment (FDI) in 2019 according to the World Investment Report 2020 by the UN Conference on Trade and Development (UNCTAD) with 51 billion dollars of inflows during the year.

Many countries worldwide, including India, experienced a significant downfall in the investment market due to the prevailing COVID-19 pandemic. However, as per the UNCTAD report, a lower but, positive economic growth in India is expected, which may attract market-seeking investments even in the post-pandemic period.

Indian industries experiencing a surge during these times are expected to attract major FDI in sectors such as health & wellness, e-commerce, online education and learning, telecom, packaging industry, etc. Further, with an ever-growing consumer base, India continues to be one of the world's largest markets for manufactured goods and services.

In addition to the above, the country ranks 63rd among 190 nations in the World Bank’s Ease of Doing Business 2020 report and continues to improvise and facilitate foreign investors to do business in India. Foreign investors are majorly attracted to the Indian market as most of the business sectors produce significant/ high returns on investment with minimal risks. Apart from higher returns on investment, other factors attracting FDI include the country’s stable government, strong economic growth, market size, robust domestic demand, well-developed administration and an independent judicial system, vast geography making the country a repository of resources and educated, hard-working, skilled and cheap work force leading to reduction in cost of production.

Foreign exchange laws in India is governed by the Reserve Bank of India (RBI) under the rules, regulation and policies as issued from time to time.

The categories of foreign investors who can hold stakes in Indian companies, subject to conditions and sectoral caps on ownerships, are:

  • Foreign Portfolio Investors: a non-resident person (excluding NRIs), who is a resident of a country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to the bilateral memorandum of understanding with the Securities and Exchange Board of India. In case the foreign investor is a bank, it must be a resident of a country whose central bank is a member of Bank for International Settlements.

    Ineligible foreign investors under this category includes those who are resident in a country identified in the public statement of Financial Action Task Force as:

    (i) a jurisdiction having a strategic anti-money laundering or combating the financing of terrorism deficiencies to which counter measures apply; or
    (ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies
  • Foreign Institutional Investors (FII): an entity established or incorporated outside India which proposes to make investment in India and which is registered as a FII in accordance with the Securities and Exchange Board of India (Foreign Institutional Investor) Regulations 1995.
  • Foreign Venture Capital Investors: a foreign venture capital investor incorporated and established outside India and registered with the Securities and Exchange Board of India under the Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000.
  • Non-Resident Indians (NRI): an individual resident outside India who is a citizen of India.
  • Overseas Citizen of India (OCI): individual resident outside India who is registered as an Overseas Citizen of India Cardholder under section 7A of the Citizenship Act, 1955.
  • Other Non-Resident Investors: Investors resident outside India other than NRI or OCI. It includes long term investors like Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds and Foreign Central Banks.

A foreign national may invest in, including but not limited to, equity shares, convertible debentures, preference shares and share warrants issued by an Indian company. In case of a listed Indian company (a company whose shares are listed on the stock exchange), the investment to be made by the non-resident entity must be 10% or more of the post issue paid-up equity capital on a fully diluted basis.

The Indian Company Law provides that a company must have a minimum number of shareholders and directors which may vary depending upon the class or type of the company to be incorporated. The minimum number of shareholders may vary from one to seven, while, minimum number of directors may vary from one to three. Further, there is no restriction on the shareholders to be Indian residents, however, at least one of the directors on the board of directors should be a resident of India.

Foreign investment in India may fall under either of the following:

  • Automatic Route: Under this route, a prior approval from the Government of India, the RBI and/or the concerned ministries is not required. The RBI is to be informed post completion of the investment. The foreign investments in most of the sectors come under automatic route and be subject only to reporting requirements and pricing guidelines, as applicable.
  • Government Route: Under this route, a prior permission by the government and/or its concerned ministries is mandatory. Few of the sectors which require government approval include multi-brand retail, telecom, defence, broadcasting, etc.

According to an amendment earlier this year, foreign investment from countries sharing borders with India shall fall under the government route. Due to this amendment, any foreign investments from China (including Hong Kong), Bhutan, Bangladesh, Nepal, Pakistan, Afghanistan and Myanmar will require prior approval from the Government of India; this condition is also applicable on investor companies that has investors or shareholders from any of the above countries.

Foreign investment in India is prohibited in lottery business, gambling and betting, chit funds, trading in transferable development rights (TDR), manufacturing of cigars, cheroots, cigarillos, and cigarettes (tobacco or tobacco substitutes), real estate business or construction of farm houses (excludes real estate investment trusts (REITs) registered with the SEBI, development of townships, etc.) and other sectors that are not open for private sector investments such as atomic energy, railway operations (other than railway infrastructure).

Due to ease of business and investment in various sectors being liberalized to a great extent and India happens to draw significant foreign investment. The country continues to offer an evergrowing as well as a secure investment climate to the foreign residents willing to invest in India.