AIWA NGO INDIA

The Drive for Foreign Investment

Primarily, since 1991, India has sought to liberalise its economy and has continuously opened up most of its industrial and business sectors to foreign investment. The Indian government seeks to attract foreign investment by enhancing the ease of doing business, establishing long-term economic relationships with the country.

The Core Regulatory Framework

FEMA 1999

Foreign investment is principally governed by the Foreign Exchange Management Act 1999 (FEMA) and its regulations, which act as the primary consolidator of laws relating to foreign exchange in India.

RBI Regulations

To regulate investment, the RBI published regulations like TISPRO 2017. Following the 2019 amendments, the RBI now strictly has the power to specify all debt instruments capital account transactions.

DPIIT & FDI Policy

The DPIIT put in place a policy framework consolidating sectoral requirements (FDI Policy). While consolidated into FEMA, the DPIIT continues to issue vital press notes each year outlining new rules.

The 2019 Paradigm Shift & FPIs

Central Government vs. RBI Jurisdiction

In October 2019, power was distinctly divided. The Central Government was granted power to specify permissible non-debt instruments (equity in incorporated entities, LLPs, mutual funds investing >50% in equity). The RBI was granted power over debt instruments.

Approval vs. Automatic Routes

The Rules 2019 contain sectoral requirements classifying industries into the approval route, the automatic route, and certain prohibited sectors. Except for sectors requiring government approval or specific performance conditions, there are generally no preconditions for making foreign investments.

Foreign Portfolio Investors (FPI) Limits

FPI Regulations 2019 outline specific holding limits for Foreign Portfolio Investors in Indian entities:

Individual Limit: Less than 10% of total paid-up equity capital.
Aggregate Limit: Total investment of all FPIs put together cannot exceed 24%.

*If an FPI exceeds the 10% individual limit, the investment will qualify as Foreign Direct Investment (FDI).

Press Note 3 (2020)

Any entity from a country sharing a land border with India (or where the beneficial owner is situated in/citizen of such country) can invest only under the government route. This stems attempts to take control of Indian firms affected by Covid-19 lockdowns.

Press Note 4 (2020)

Continuing the trend of liberalisation, the Central Government increased the FDI cap in the defence sector to 74% from 49% through the automatic route.

In addition to federal laws, foreign investors must also comply with relevant sector-specific and state-specific (local laws) applicable to their particular industry.

Investment Law in India