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Foreign Investment >> India

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Foreign Investment Sector


Overview: India continues controlling foreign investment with limits on equity and voting rights, mandatory government approvals, and capital controls. Since 1991, as it has slowly implemented a program of economic reform, the Government of India (GOI) has gradually relaxed many of these constraints. Nonetheless, a complex array of restrictions remains, along with an undercurrent of resentment towards foreign investment from some quarters. Foreign direct investment (FDI) is still prohibited in some sectors or sub-sectors.

Since the mid 1990s, India has allowed "automatic" FDI approvals in many sectors, gradually expanding the list over time. Where applicable, foreign investors do not need government licenses or approvals and simply notify the Reserve Bank of India (RBI) of their investments. Other sectors require approval by either the Foreign Investment Promotion Board (FIPB) or the Cabinet Committee on Foreign Investment. Under the Government approval route, applications for FDI proposals, other than by Non-Resident Indians and proposals for FDI in Single Brand product retailing, are received in the Department of Economic Affairs of the Ministry of Finance. Proposals for FDI in Single Brand product retailing and by NRIs are received in the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry. The rules vary from industry to industry and are frequently changed.

Sector-Specific Guidelines for Foreign Direct Investment (FDI) in key industries (alphabetical order):

Advertising and Films: 100 percent FDI with automatic approval is allowed, but certain conditions apply in film industry.

Agriculture: No FDI is permitted in farming, nor may foreigners own farmland. FDI in the seed industry/ floriculture, horticulture, animal husbandry, aquaculture and cultivation of vegetables and mushrooms is permitted without any limits under the automatic route. 100 percent FDI is also permitted in tea plantations, but proposals require prior government approval. There is compulsory divestment of 26 percent equity of the company in favor of an Indian partner or the Indian public within five years. In Floriculture/Horticulture/Aquaculture/Seed Development/Services related to agro and allied products, 100 percent FDI is allowed through the automatic approval process without any condition.

Airport Infrastructure: 100 percent FDI allowed for fresh projects through automatic route. FDI up to 74 percent is allowed in existing projects through the automatic route; for higher FDI in existing projects FIPB approval is required. To participate in a ground handling business at the airports, foreign companies can hold up to a 74 percents hare. NRIs are allowed 100 percent FDI in ground handling services. 100-percent FDI is allowed on automatic route for maintenance and repair organizations, flying training institutes and technical training institutes.

Alcoholic Distillation and Brewing: No FDI limit is applicable. The automatic approval route is available in this area but a license from the GOI is required.
 
Asset Reconstruction Companies: FDI is limited to 49 percent. Prior government approval is required. No portfolio investments are allowed. Where any individual investment exceeds 10 percent of the equity, the approval is subject to Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Nuclear energy: FDI is limited to 74 percent for mining and mineral separation, integration, and value addition in mining and mineral separation. FIPB approval is subject to guidelines issued by Department of Atomic Energy.

Automobiles: No FDI caps or local content requirements or export obligations are applicable. FDI in automobile manufacturing is allowed under the automatic approval route.

Banking: The GOI increased the FDI limit for private banks to 74 percent, including all foreign portfolio investments. The 74 percent cap includes all foreign portfolio investments also. Automatic approvals are granted, however, no individual foreign bank may own more than 5 percent in an Indian bank, and no non-bank, foreign or otherwise, may own more than 10 percent without prior approval of the Reserve Bank of India. For state-owned banks the FDI limit remains at 20 percent. At all times, at least 26 percent of the paid up capital must be held by residents. Wholly owned subsidiaries of foreign banks are exempt from this requirement. The Foreign Institutional Investment (FII) limit remains at 49 percent. Foreign banks in India have the option to operate as branches of their parent banks or as subsidiaries. Shareholders of banking companies may exercise their voting rights to a maximum of 10 percent of equity, even if they hold more equity. Legislation to remove this voting rights cap is stalled in Parliament.

Broadcasting: FDI (including the portfolio investments) is limited to 20 percent in FM terrestrial broadcasting, with prior government approval, subject to guidelines issued by Ministry of Information and Broadcasting. For direct-to-home broadcasting and up-linking hubs, foreign investment from all sources is limited to 49 percent (with a maximum FDI component of 20 percent), again with prior government approval. In satellite broadcasting also, FDI is limited to 49 percent with prior government approvals. TV channels, irrespective of the ownership or management control, have to up-link from India provided they comply with the broadcast code. FDI is limited to 26 percent (including portfolio investment) in news and current affairs channels up-linking from India. 100 percent FDI is permitted in entertainment and general interest channels. Under the revised Up-linking policy announced by the GOI in December 2005, FDI up to 49 percent is permitted with prior approval of the Government for setting up Up-linking HUB/Teleports

Cable Network: FDI is limited to 49 percent (inclusive of both FDI and portfolio). Prior approval is required and the approval is subject to Cable Television Networks Rules, 1994.

Cigars/cigarettes of tobacco: There is no FDI limit but prior government approval and an industrial license is required.

Civil Aviation (domestic airlines): FDI is limited to 49 percent under the automatic route for air transport services including domestic scheduled passenger airlines. For non-scheduled/chartered/cargo airlines, the FDI limit is 74 percent. Helicopter services are allowed 100 percent FDI on automatic approval basis. Foreign airlines are allowed to own the equity of companies operating helicopter services/cargo services however, they may not make either a direct or indirect investment in an Indian domestic airline. NRIs and domestic companies may own 100 percent of a domestic airline.

Although frequently debated, India has yet to open its state-run international airlines to outside investment. The US-India "Open Skies" agreement, signed in April 2005, allows unrestricted access by U.S. carriers to the Indian market, and by India carriers to the U.S. market. 100 percent FDI is permitted to new and existing airport construction projects under the automatic route subject to Ministry of Civil Aviation regulations. Existing projects, however, have to seek FIPB approval beyond 74 percent FDI.

Coal/Lignite: FDI is allowed up to 100 percent in coal processing plant/power projects, but limited to 74 percent for exploration and mining for captive consumption. Proposals in private sector companies are approved automatically. FDI is limited to 49 percent in state-owned units.

Coffee and Rubber Processing and Warehousing: 100 percent FDI is permitted under the automatic route without any condition.

Construction Development Projects: Construction and maintenance of roads, highways, vehicular bridges, tunnels, ports and harbors, housing, commercial premises, resorts, educational institutions, infrastructure and township is allowed at 100 percent FDI, with automatic approval subject to certain minimum capitalization, minimum area of development conditions issued under Press Note 2 of 2005.

Courier Services other than distribution of letters: 100 per cent FDI is permitted; however, FIPB approval is required.

Defense and strategic industries: FDI is limited to 26 percent, subject to a license from the Defense Ministry and guidelines on FDI in production of arms and ammunition. There are no automatic approvals.

Drugs/Pharmaceuticals: FDI is allowed up to 100 percent for drug manufacturing on automatic approval route.

E-commerce: FDI up to 100 percent is allowed in business-to-business e-commerce with no divestment requirements. FDI is limited to 49 percent under the automatic approval route. No FDI is allowed in retail e-commerce.

Hazardous chemicals: 100 percent FDI is allowed through the automatic approval route. However, a license is needed.

Food Processing: 100 percent FDI is allowed with automatic approval for most products with the exception of malted foods, alcoholic beverages including beer, and in a protected category reserved for “small scale industries” where foreign equity ownership up to 24 percent is allowed. FDI up to 74 percent is allowed with automatic approval for cold storage facilities.

Health and Education Services: FDI is limited to 51 percent with automatic approval. Higher equity proposals need FIPB approval.

Hotels, Tourism and Restaurants: FDI at 100 percent is allowed with automatic approval.

Housing/Real Estate: No FDI is permitted in the retail housing sector. NRIs, however, may invest up to 100 percent. FDI up to 100 percent, on prior government approval, is permitted for projects such as the manufacture of building materials and the development of integrated townships, including housing, commercial premises, resorts, and hotels.
 
Information Technology: FDI at 100 percent is allowed with automatic approval in software and electronics, except in the aerospace and defense sectors.

Insurance: FDI is limited to 26 percent in the insurance and insurance brokering. While FDI approval is automatic, a license must first be obtained from the Insurance Regulatory and Development Authority. In July 2004, the GOI announced its intention to increase the FDI cap to 49 percent, but this change first requires parliamentary approval of an amendment to the Insurance Regulatory and Development Authority Act. In December 2008, the GOI introduced this amendment bill in the upper House of Parliament (Rajya Sabha). However, the introduction of the bill is the first step in a lengthy process and an increase in the FDI limit to 49 percent would take effect only after approval from both Houses of Parliament.

Legal services: No FDI is allowed. The GOI is currently engaged in consultation with local law associations for exploring possibilities of opening up the sector to foreign lawyers.

Lottery, Gambling, Betting: No FDI in any form is allowed.

Manufacturing: FDI at 100 percent FDI is allowed, with automatic approval, in the manufacture of textiles, paper, basic chemicals, rubber, plastic, non-metallic mineral products, metal products, ship building, machinery and equipment. FDI had been limited to 24 percent in a protected category reserved for "small scale industries" (SSI), but the government announced in December 2007 that it intended to remove that cap and allow SSI FDI caps to be governed by the overall FDI policies in their sectors. The FDI change had not yet been made effective as of early January 2009. The government has also been steadily decreasing the number of industry sectors reserved under the SSI policy – from a peak of 800 industries in the late 1990s – and currently reserves just 35 specific goods/services for SSIs with a capital investment of less than $250,000. A higher percentage of foreign equity may also be approved if the company obtains a license and undertakes to export 50 percent or more of its product.

Mining: 100 percent FDI is allowed, with automatic approval, for diamond and precious stone, gold/silver and other mineral mining.
 
Non-Banking Financial Companies (Merchant banking, underwriting, portfolio management, financial consulting, stock-brokerage, asset management, venture capital, credit rating, housing finance, leasing & finance, credit card business, foreign exchange brokerage, factoring and custodial services, investment advisory services): FDI is allowed up to 100 percent with automatic approval. For joint venture operating NBFCs, subsidiaries undertaking other NBFC activities are allowed. Foreign investors can set up 100 percent operating subsidiaries without any conditions if they bring in $50 million in capital. Capital norms are as follows: if FDI is less than 51 percent, $500,000 needs to be provided up front; if FDI is between 51 percent and 75 percent, $5 million must be invested up front; and if FDI exceeds 75 percent, $50 million is needed, out of which $7.5 million must be fronted and the balance invested in two years. Approvals may not be used to undertake holding company operations pertaining to downstream investments.
 
Petroleum: FDI limits (along with tax incentives, production sharing and other terms and conditions) vary according to the sub-sector. Foreign Investment Promotion Board (FIPB) approval is required for refining with public sector unit; automatic approval is granted to all other activities.

Pollution Control: FDI up to 100 percent is allowed with automatic approval for equipment manufacture and for consulting and management services.

Ports and harbors: FDI up to 100 percent with automatic approval is allowed in construction and manufacturing of ports and harbors.

Power: FDI up to 100 percent is permitted with automatic approval in projects relating to electricity generation, transmission, distribution, and power trading other than nuclear reactor power plants.

Print Media: Foreign investment is restricted to 26 percent for news publications with editorial/management control in the hands of resident Indians. 74 percent cap is applied to non-news publications. FDI is permitted up to 100 percent in printing Science and Technology magazines/journals, subject to prior government approval and guidelines issued by Ministry of Information and Broadcasting.

Professional services: FDI is limited to 51 percent in most consulting and professional services, with automatic approval. Legal services, however, are not open to foreign investment.

Railways: FDI is not allowed in train operations, although 100 percent FDI is permitted in auxiliary areas such as rail track construction, ownership of rolling stock, provision of container services, and container depots.

Retailing: The government allows 51 percent FDI for retail trade in Single Brand products, subject to Government approval. FDI is still not allowed in any other retail activities, including in retailing of goods of multiple brands where the same manufacturer produces such branded products. However, large multinational retailers are exploring franchise-like joint venture deals with Indian partners that do not violate the FDI bar.

Roads, Highways, and Mass Rapid Transport Systems: FDI up to 100 percent is allowed with automatic approval for construction and maintenance.

Satellites: FDI is limited to 74 percent for the establishment and operation of satellites.

Shipping: FDI is limited to 74 percent with automatic approval for water transport services.

Special Economic Zones: For setting up the Zones and for setting up individual units in the SEZs, 100 percent FDI is allowed through the automatic route, subject to Special Economic Zones Act, 2005 and India's Foreign Trade Policy.

Stock Exchanges: FDI including FII up to 49 percent is allowed in stock exchanges through FIPB approval. FDI limit is 26 percent and FII ceiling is 23 percent. No single foreign investor can hold more than 5 percent stake.

Telecommunications: FDI has some percentage limits. The FDI can be made directly or indirectly in the operating company or through a holding company subject to licensing and security requirements. FDI up to 74 per cent is allowed under the automatic route in all telecom services; higher FDI needs FIPB approval. All FDI limits are inclusive of portfolio investments. The revised GOI guidelines on telecom services mandate Indian shareholding not less than 26 percent in any case.

Trading/Wholesale: FDI at 100 percent is allowed through automatic route, for activities like exports, bulk imports with export warehouse sales, as well as cash and carry wholesale trading. However, in case of test marketing or if the items are sourced from the small scale sector, then FIPB approval is required. Single brand retailing is allowed subject to the FIPB approval and FDI limited to 51 percent.

Venture Capital: FDI is allowed up to 100 percent in venture capital funds (VCF) and venture capital companies (VCC) through the automatic route, subject to Securities and Exchange Board of India (SEBI) regulations and sector specific FDI limits. VCFs and VCCs may own up to 40 percent of unlisted Indian companies. Investment in a single company by a VCF or VCC may not exceed five percent of the paid up corpus of a domestic VCF or VCC.




  2012 3rd International Conference on Environmental Science and Development (ICESD 2012)