A foreign company can invest in an Indian company through a joint venture agreement or as a wholly owned subsidiary in the areas which are otherwise not reserved exclusively for the public sector or which are not under the prohibited categories. Foreign investment into India is governed by the Foreign Direct Investment (FDI) Policy and the Foreign Exchange Management Act, 1999 (FEMA).
Sectors in which FDI is prohibited
As per the latest FDI Policy, FDI is prohibited in the following activities/sectors:
- Retail Trading (except single brand product retailing)
- Lottery Business including Government /private lottery, online lotteries,etc.
- Gambling and Betting including casinos etc.
- Business of chit fund
- Nidhi company
- Trading in Transferable Development Rights (TDRs)
- Real Estate Business or Construction of Farm Houses
- Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
- Activities / sectors not opened to private sector investment including Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).
Besides foreign investment in any form, foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also completely prohibited for Lottery Business and Gambling and Betting activities.
Sector Specific Policy
Other than the above sectors in which FDI is expressly prohibited, FDI up to 100% is allowed in most sectors/activities under the automatic route. In sectors where investment upto 100% is not permitted, the permitted level of investment and the conditions applicable, if any, have been prescribed. For investment above such levels, prior approval of the FIPB is required to be obtained.
Therefore, for foreign investments into India, the following two modes of approval mechanism has been provided:
Approvals of composite proposals involving foreign investment or foreign technical collaboration are also granted on the recommendations of the FIPB. The companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors.
- Automatic Approval Route: FDI in sectors or activities to the extent permitted under automatic route does not require any prior approval either by Government of India or Reserve Bank of India (RBI). The investors are only required to notify the regional office concerned of RBI and file the required documents with that office within 30 days of issue of shares to foreign investors.
- Foreign Investment Promotion Board (FIPB) Approval Route: FDI in activities not covered under the automatic approval route requires prior Government approval and are considered by the FIPB. The FIPB considers and approves proposals for foreign investment on a case to case basis. Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted.