a foreign investor wishes to incorporate a company in India,
or seeks to invest in an existing company in India, the
transaction is termed as Foreign Direct Investment or more
Governing FDI in India The
Foreign Exchange Management Act of 1999 is an "inclusive" Act,
enlisting all the sectors where foreign investment is allowed.
The Government issues restrictions and conditions as and when
required through notifications, circulars, press notes and
clarifications on the Act.
FDIa) Cases where
FDI is not allowed
b) Cases in which FDI is allowed with
c) Cases in which FDI is allowed
without Government approval, i.e. automatic route
the case of (b) and (c), any investment would require
investigation into aspects of structuring the deal, especially
the financial implications of direct and indirect taxes, stamp
duties, excise and the like.
and Regulations of FDI The
law governing FDI is contained in Foreign Exchange Management
(Transfer or issue of security by a person resident outside
India) Regulations, 2000. The Regulations have been notified
vide Notification No.FEMA 20/2000-RB dated May 3, 2000.
Act has been amended since through press notes and
sectors in which FDI is not allowed
(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) and Plantations
(Other than Tea plantations).
Permitted for FDI
Sector (except for private sector oil refining), Natural
companies in Infrastructure and Services Sector
and Strategic Industries
and Operation of Satellite
- Development of
for FDI with Government Approval In
the last category, a scrutiny of the proposed investment would
be based on
a) The sector,
b) The investment cap, and
c) A description of the activity, items and conditions.
investment cap or sectoral cap refers to the maximum
percentage of shares that is allowed for the foreign investor.
If the quantum of the proposed investment is within the
prescribed limit, no Government sanction is required.
Government approval is sought in case the investment is
expected to cross set limits.
23 items on the list in this category, the last entry is a
General entry which specifies that for any of the 22 items
listed before, and other than those covered in categories a)
and b), 100% FDI is allowed under the automatic route. Listed
below are the sectors with the investment cap in
Private Sector Banking (49%)
2) Non-Banking Financial
3) Insurance (26%)
5) Petroleum Refining, Marketing, Pipelines
6) Housing & Real Estate (100%)
7) Coal &
8) Venture Capital Fund / Venture Capital
9) Trading (51%/100% )
11) Drugs & Pharmaceuticals (100%)
and Highways, Ports & Harbors (100%)
13) Hotel &
14) Mining (51% / 74%)
16) Films (100%)
17) Airports (74%)
Rapid Transit System (100%)
19) Pollution Control (100%)
20) Special Economic Zones (100%)
21) Air Transport
Services (49% / 100%)
22) Townships (100%)
23) Any other
activity other than the ones mentioned above or not following
in categories 'a' and 'b' above. (100%)
sectors have differential investment caps for different
investors. For example, mining can have an investment of 51%
from foreign investors, but 74% can be invested by NRIs.
Besides, each industry has a set of regulations attached,
which need to be met before an investment is made.
modes of FDI Global
Depository Receipts (GDR), American Deposit Receipts (ADR),
Foreign Currency Convertible Bonds (FCCB) are treated as
Foreign Direct Investment. Indian companies are allowed to
raise equity capital in the international market through the
issue of GDRs, ADRs and FCCBs.
are no caps to this investment; the pre-requisite being that a
company applying for approval should have a good financial
record for three years. The conditions can be relaxed for
infrastructure projects such as power generation,
telecommunication, petroleum exploration and refining, ports,
airports and roads.
is no constraint on the number of GDRs, ADRs and FCCBs a
company or a group of companies can float in a financial year.
A company engaged in the manufacture of items covered under
the Automatic Route, whose direct foreign investment after a
proposed GDR/ADR/FCCBs issue is likely to exceed the
percentage limits under the automatic route, or which is
implementing a project falling under Government approval
route, would need to obtain prior Government consent through
FIPB before seeking final approval from the Ministry of
investment through preference shares is also treated as
foreign direct investment. Proposals are processed either
through the automatic route or FIPB as the case may