Foreign Investment in India

An Expert's View about Business Support Services in India

Posted on: 14 Feb 2010

India is the seventh-largest country in terms of geographical area, the second-most populous country and the world’s largest democracy in the world.  India is a republic consisting of 29 States and 6 Union Territories.  India has legislative powers distributed between Centre and the States with a parliamentary system of democracy.  The official language of the Republic of India is Hindi with English as a secondary official language. There are about 16 officially recognized languages spoken across 28 states in India.

Foreign investment in India is primarily covered under the Foreign Exchange Management Act, 1999 (“FEMA”) the Regulations / Notifications made there under from time to time. All Regulations under FEMA are issued by the country’s Central Bank, the Reserve Bank of India (“RBI”).

Foreign Direct Investment India (“FDI”) Policy issued by the Government of India is covered in FEMA. The FDI Policy is periodically reviewed and modified. Changes in sectoral policy/sectoral equity cap are notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry.

The foreign companies are allowed to set up Liaison Offices / Branch Offices for the purpose of representing the parent company or other foreign companies in India, conducting research, undertaking export and import trading activities and for liaison work.

The current foreign investment guidelines India allow foreign investment to be made freely in most of the sectors, including the services sector, except the activities that require an Industrial License, Proposals in which the foreign collaborator has an existing venture/tie up in India in the same field, where the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 gets attracted and Proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted which require specific approval of the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance, Government of India:

Therefore, there are two broad areas of foreign investment regulatory policy, i.e. sectors where foreign investment is allowed freely and on an automatic basis (Automatic Route) and sectors where prior approval of the Government of India is required (FIPB Route). These are discussed below in detail.

Foreign Direct Investment (“FDI”) is allowed in most of the sectors other than certain specified sectors, subject to specified ceilings in foreign investment in certain specified sectors. These ceilings on foreign investment in specified sectors are detailed in the sectoral cap policy

Where no sectoral caps are prescribed, foreign investment under the Automatic Route is available even for proposals for foreign investment upto 100% of the capital. FDI in sectors / activities under the “Automatic Route” does not require any prior approval of the Government of India (FIPB) or the Reserve Bank of India (“RBI”). However, the Indian company in which such foreign investment is made is required to notify the RBI.

For proposals not falling under the Automatic Route, specific and prior approval of the Government of India would be required. Government approvals are accorded on the recommendations of the Foreign Investment Promotion Board (“FIPB”), Department of Economic Affairs, Ministry of Finance with the Union Finance Secretary, Commerce Secretary and other key secretaries of the Government as its members.

The FIPB, while according its approval, will keep sectoral caps, if any, in mind. These sectoral guidelines are meant to assist the FIPB to consider proposals in an objective and transparent manner. However, these would not in any way restrict the flexibility or bind the FIPB from considering the proposals in their totality or making recommendations based on other criteria or special circumstances or features it considers relevant. Besides these are meant to be in the nature of administrative guidelines and would not in any way be legally binding in respect of any recommendation to be made by the FIPB or decisions to be taken by the Government in cases involving FDI.

For investment proposals covered by the Automatic Route, the RBI has issued general permission to companies to issue shares to the foreign investor, without any prior approvals.

By Notification No: GSR29(E) issued by the Board of Economic Affairs, Ministry of Finance, the words for the words “non-convertible debentures/bonds” in Schedule 5, in paragraph 1 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB, dated May 3, 2000) have been substituted by the words “listed non-convertible debentures/ bonds, commercial papers”

For investment proposals covered under the FIPB Route, upon receipt of the FIPB approval, the foreign investor may acquire the shares in the Indian company.

In both the above instances, the Indian company issuing the shares is required to file a declaration in prescribed form together with prescribed documents, with the concerned Regional office of RBI under whose jurisdiction its registered office in situated, within 30 days from the date of issue of shares to the foreign investor. A person resident outside India can purchase equity shares / compulsorily convertible preference shares and compulsorily convertible debentures (equity instruments) issued by an Indian company under the FDI policy and the Indian company is allowed to receive the amount of consideration in advance towards issue of such equity instruments, subject to certain terms and conditions. The RBI vide circular no. 20 dated 14 December 2007 has notified that, with effect from 29 November 2007, the equity instruments should be issued within 180 days of the receipt of the inward remittance.

The profits earned in India by companies is permitted freely by way of dividends, subject to applicable Indian Income Tax. Remittance of profits earned in India by branches of foreign companies to their head office outside India is subject to prior approval of RBI.

Technology Transfer

Under the current FDI regime there is no requirement of obtaining the approval of the Government of India or the RBI and registering the Foreign Technology License Agreements with the RBI, if the terms of such Foreign Technology License Agreement fall under the automatic route i.e. royalty does not exceed 5 per cent on domestic sales and 8 per cent on exports and lump sum payment does not exceed US$ 2 million. The royalties can be paid without any limit in time and can also be paid by a wholly owned subsidiary to its parent company.

The royalty is payable on the value added portion only and is calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc.

Any proposal not covered by the aforesaid parameters would require a specific approval from the Government of India. This approval is accorded by the Secretariat for Industrial Approvals (SIA).

Use of Foreign Brand Names

Use of foreign brand names / trade marks on goods for sale (whether imported or locally manufactured) within India is freely allowed. Payment of royalty upto 2% on exports and 1% on domestic sales in allowed under the Automatic Route, without any approval from the Government of India or the RBI, for use of trademarks and brand name of the foreign collaborator without technology transfer. Royalty on the trademark / brand name shall be paid as a percentage of the net sales, viz. gross sales less agents’/dealers’ commission, transport cost, including ocean freight, insurance, duties, taxes and other charges and cost of raw materials, parts and components imported from the foreign licensor or its subsidiary/affiliated company. Please note that in case of a technology licensing arrangement (as discussed earlier in this note), payment of royalty for technology license includes the payment of royalty for use of trademark / brand name of the foreign collaborator.

Employment of Foreign nationals

Indian companies are also allowed to engage services of foreign nationals on a long-term basis and foreign nationals are permitted to make recurring remittances for family maintenance, subject to limits specified from time to time.  There is no restriction on the appointment of foreign nationals as directors of Indian companies.


The Public Liability Insurance Act, 1991 and the Rules, 1991 is an Act to provide for public liability insurance for the purpose of providing immediate relief to the persons affected by accident occurring while handling any hazardous substance and for matters connected therewith. Section 3 provides that the owner shall be liable to give such relief as specified in the Schedule, where death or injury is caused to a person (other than a workman) or damage to any property has resulted from an accident. For this purpose, before the owner starts handling any hazardous substance, he shall take out policies of insurance to insure against his liability. Such policy shall not be for an amount less than the paid up share capital of the company and shall not exceed such amount as may be prescribed. The liability of owner under one insurance policy shall not exceed the amount specified in the terms of the contract of insurance in that insurance policy.

Posted: 14 February 2010

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