Foreign direct investment (FDI) in India is a major monetary source for economic development in India. Apart from being a critical driver of economic growth, foreign direct investment (FDI) is a major source of non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc. For a country where foreign investments are being made, it also means achieving technical know-how and generating employment.

Investment climate in India has improved considerably since the opening up of the economy in 1991. This is largely attributed to ease in FDI norms across sectors of the economy. India, today is a part of top 100 club on Ease of Doing Business (EoDB)and globally ranks 1st in the greenfield FDI ranking. India received the record FDI of $ 60.1 bn in 2016-17.

The Indian government’s favourable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, and stock exchanges, among others.

What is Foreign Direct Investment

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control.

FDI Entry Routes into India

There are three categories for entry routed into India:

CATEGORY 1	CATEGORY 2	CATEGORY 3
100%	Up to 100%	Up to 100%
FDI Permitted throughAutomatic Route	FDI Permitted throughGovernment Route	FDI Permitted throughGovernment + Automatic Route

Automatic Route

Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment.

Government Route

Under the Government Route, prior to investment, approval from the Government of India is required. Proposals for foreign investment under Government route, are considered by respective Administrative Ministry/ Department.

Government Plus Automatic Route

Under this route, a part of the investment does not require any approval under automatic route and other part is required to be approved from the Government of India.

Prohibited Sectors

1. Lottery Business including Government/private lottery, online lotteries, etc.*

2. Gambling and Betting including casinos*

3. Chit Funds

4. Nidhi Company

5. Trading in International Finance Corporation (IFC))

6. Real Estate Business or Construction of farm houses**

7. Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes

8. Sectors not open to private sector investment- atomic energy, railway operations (other than permitted activities mentioned under the Consolidated FDI policy)

*Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities

**Real estate business shall not include development of town shops, construction of residential/ commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations, 2014

Procedures for Government Approval

1. Filing of Application

Proposal for foreign investment, along with supporting documents to be filed online, on the Foreign Investment Facilitation Portal, at the following url: www.fifp.gov.in/

2. Internal Procedure for Approvals: (a) Department for Promotion of Industry and Internal Trade (DPIIT) will identify the concerned Ministry/ Department and thereafter, circulate the proposal within 2 days. In addition, once the proposal is received, the same would also be circulated online to the RBI within 2 days for comments from FEMA perspective. (b)Proposed investments from Pakistan and Bangladesh would also require clearance from the Ministry of Home Affairs. (c) DPIIT would be required to provide its comments within 4 weeks from receipt of an online application, & Ministry of Home Affairs (if applicable) to provide comments within 6 weeks. (d)Pursuant to the above, additional information/ clarifications may be asked from the applicant which is to be provided within 1 week. (e) Proposals involving FDI exceeding INR 50 bn (approx. $ 775 mn) shall be placed before the Cabinet Committee of Economic Affairs.

3. Final Approval

Once the proposal is complete in all respects, the same gets approved within 8-10 weeks.

FDI Reporting Requirements

FDI Reporting Requirements

Documents for Form FC-GPR (Foreign Currency – Gross Provisional Return) SMF

• CS Certificate
• Declaration by the Authorised Representative of the Indian Company/LLP
• Pre and post shareholding pattern in the Indian company
• Copy of government approval (if applicable)
• Copy of the order of the High Court on the scheme of merger/ demerger/ amalgamation (if applicable)
• RBI approval on the amount of refund with respect to the amount of the issue (if applicable)
• Valuation certificate
• Approval letter (if non-compliant with the guidelines – if applicable)
• Relevant RBI approvals for an issue of equity shares against funds payable to the foreign investor
• FIRC/ Debit statement
• Know Your Customer (KYC)
• Board Resolution

Note: 

As per the RBI notification on “Foreign Investment in India – Reporting in Single Master Form” of 7th June 2018, now provides for all the extant reporting structures of various types of foreign investments in India are now provided under a Single Master Form (SMF) which is required to be filed online.

As per the RBI Notification ARF and FC-GPR is merged into a single revised FC-GPR (SMF). All new filings for the Form FC-GPR (SMF) have to be done in Single Master Form only.

Market size

According to Department for Promotion of Industry and Internal Trade (DPIIT), the total FDI investments in India April-December 2018 stood at US$ 33.49 billion, indicating that government’s effort to improve ease of doing business and relaxation in FDI norms is yielding results.

Data for April-December 2018 indicates that the services sector attracted the highest FDI equity inflow of US$ 6.59 billion, followed by computer software and hardware – US$ 5.00 billion, trading – US$ 3.04 billion and telecommunications – US$ 2.29 billion. Most recently, the total FDI equity inflows for the month of December 2018 touched US$ 4.39 billion.

During April-December 2018, India received the maximum FDI equity inflows from Singapore (US$ 12.98 billion), followed by Mauritius (US$ 6.02 billion), Netherlands (US$ 2.95 billion), USA (US$ 2.34 billion), and Japan (US$ 2.21 billion).

Investments/ developments

India emerged as the top recipient of greenfield FDI Inflows from the Commonwealth, as per a trade review released by The Commonwealth in 2018.

Note: Exchange Rate Used: INR 1 = US$ 0.0143 as on December 31, 2018.