How does Foreign Direct Investment work?
Investments from other countries (foreign countries) are made in a country’s business by investors from that country. Such investors can be individuals, corporations, or firms.
Generally, the investor will acquire assets of the business or establish operations to acquire a controlling interest in the business in a foreign country. This is distinct from purchasing equity of foreign organizations, i.e. portfolio investments.
Foreign direct investment in India
Following the economic reforms of 1991, the FDI route to India became more straightforward. In addition, for a developing country, domestic resources may not be sufficient, so foreign capital can help fill the gaps between domestic savings and investment requirements.
The process of liberalization is undertaken in order to boost the flow of foreign investment. However, liberalizing an economy usually entails regulations. FDI is one of the main drivers of economic growth for developing nations like India.
Foreign Direct Investment (FDI) routes
A foreign investor can invest in any company it wishes without government approval under the Automatic Route, which does not require government approval.
There is also the Government Route, in which no investment can be made without the government’s approval.
There is no uniform rate of foreign direct investment in India. In some industries, FDI is strictly prohibited regardless of the route. The percentages range from 26% to 49% to 51%. Some industries allow 100% FDI, which means the entire funds of the business can come from foreign direct investment.
- Energy Generation from Atoms
- Businesses that offer gambling or betting
- Online, private, government, etc. lotteries
- Chit Fund Investments
- Incorporated Company Nidhi
- Farming or Plantation Activities (there are a few exceptions, such as horticulture, fisheries, tea plantations, pisciculture, animal husbandry, etc.)
- Real Estate and Housing (excluding Townships, Commercial Projects, etc)
- The trading of TDRs
- The tobacco industry, including cigarettes, cigars, and other related products
Some sensitive industries, such as defense, insurance, and media, have had opposing views about foreign direct investment. We have FDI restrictions in many cases because they protect our democracy and nation. For instance, foreign direct investment in the defense industry is limited to 49%.
Foreign Direct Investment (FDI) Policy
It is possible for foreign companies to invest in Indian companies through joint ventures or wholly-owned subsidiaries in areas that are not reserved exclusively for public service or do not fall within the prohibited categories or are otherwise not reserved exclusively for the public sector. The Foreign Direct Investment (FDI) Policy governs foreign investment in India.
The latest Foreign Direct Investment Policy forbids FDI in the following activities/sector:
- Trading in retail (except for single-brand products)
- Lottery business includes government and private lotteries, online lotteries, etc.
- Betting and gambling, including casinos, etc.
- The business of chit funds
- The company Nidhi
- Buying and selling transferable development rights (TDRs)
- Building farms or real estate businesses
- Manufacturing Cigars, Cheroots, Cigarillos, and Cigars, or Tabaco substitutes
- Atomic energy and railway transportation are examples of activities or sectors that are not open to private sector investment
For activities such as Lottery Business, Gambling, and Betting, foreign technology collaborations in any form, including licensing for franchise, trademark, brand name, and management contract, are also deemed illegal.
POLICIES SPECIFIC TO SECTORS
Under the automatic route, FDI up to 100% is permitted in most sectors/activities other than those in which FDI is expressly prohibited. It has been prescribed what level of investment is allowed in sectors where 100% investment is forbidden, as well as any conditions that may apply. Investments above these levels require prior approval from the FIPB.
Due to this, there are two modes of approval for foreign investments in India:
- It is possible to make foreign direct investment in sectors or activities without prior approval from the Government of India or the Reserve Bank of India, to the extent permitted by the automatic route. In order to receive the required documentation, foreign investors must notify the RBI regional office within 30 days after the shares were issued.
- In cases where Foreign Direct Investment is not covered by the automatic approval route, FDI in those areas is subject to the approval of the Foreign Investment Promotion Board (FIPB). The FIPB approves foreign investment proposals on a case-by-case by the Application can be made in Form FC-IL. The application can also be submitted on plain paper containing all the necessary details.
ApFIPB Approval Route: FDI activities not covered by the automatic approval route require prior approval from the Government. The FIPB evaluates and approves foreign investment proposals on an individualizing inward remittance and issue of shares to the foreign investors.
Stepwise Process of FDI Company Registration
- Documentation and legalization are perhaps the most critical aspects of setting up a company from overseas shareholding. Our team will draft declarations as required under the companies act, 2013, Memorandum of Associations (MOAs), Articles of Associations (AOAs), and other documents as required on a case-by-case basis.
- Attestation or legalization of documents is required for any document that originates from or is signed in a foreign country. You can either get it attested by the Indian Embassy or get it apostilled according to the Hague Convention. If the foreigner arrives in India with original documents on a business visa, attestation can be done there.
- Information Technology Act defines a Digital Signature (DSC) as the electronic equivalent of a physical or paper signature. In the new process, all applications to the Registrar of Companies (ROC) are submitted in digital form, which must be authenticated by the digital signature of the shareholders and directors. The filing process begins with the issuance of a digital signature to each of the promoters.
- Name Reservation for Company The name of the proposed company must be unique and it should not sound similar to any existing company, LLP, trademark, or other business. If a subsidiary of a foreign company has India as its name, it can be referred to as a subsidiary of foreign company investment in India. Click here to learn more about company names in India.
- The ROC incorporates the company after the company name is approved and the MOA, AOA, Promoters’ ID & Address Proof, and the proof of the registered address with the NOC from the owner of the premises is submitted. After the ROC approves the name of the company, the incorporation application is submitted with the MOA, AOA, proof of address of the Promoters, and the NOC from the property owner.
- The Bank Account must be opened within 180 days of incorporation of the company by notifying the Banker in advance. The new company can not start any of its business activities unless the capital has been received in India.
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