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Foreign Direct Investment (FDI) is permitted as under the following forms of investments:

  • Through financial collaborations.
  • Through joint ventures and technical collaborations.
  • Through capital markets via Euro issues.
  • Through private placements or preferential allotments.

Forbidden Territories –

FDI is not permitted in the following industrial sectors:

  • Arms and ammunition.
  • Atomic Energy.
  • Railway Transport.
  • Coal and lignite.
  • Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Foreign Investment through GDRs (Euro Issues) –

Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

Clearance from FIPB –

There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year. A company engaged in the manufacture of items covered under the said policy of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

Use of GDRs –

The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.

Restrictions –

However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticipation of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.

Foreign direct investments in India are approved through two routes –

1. Automatic approval by RBI –

The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.

2. The FIPB Route – Processing of non-automatic approval cases –

FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

Short Summary

Among the developing countries in Asia, India and China are the two major economies that have adopted market oriented economic policies designed to attract FDI inflows. A company that goes for Foreign Direct Investment could possibly enjoy many incentives in the new country. Some of the tax benefits or concessions like low corporate tax and income tax rates could invariably boost the company’s profit.

Indian Companies are generally allowed to raise funds from abroad in following method:

  • Foreign Direct Investment in India (FDI)
  • External Commercial Borrowings (ECB)
  • Foreign Currency Convertible Bonds (FCCB)
  • Foreign Currency Exchangeable Bonds (FCEB)


Under Foreign Exchange Management (Transfer or Issue of Security by Persons Resident outside India) Regulations, 2000 (notification No. FEMA 20/2000-RB dated May 3, 2000) the Indian Companies are allowed to raise funds from overseas investors. An Indian company which is not engaged in any activity or in manufacturing of item included the List A and List B appended may issue fresh shares subject to the condition and sectoral cap as indicated under Foreign Direct Scheme, subject to the terms and condition specified.


There are following categories of person resident outside India who may invest in the capital of Indian Company:

1. A non-resident entity (other than citizen of Pakistan or an entity incorporated in Pakistan)

2. A citizen or entity of Bangladesh under Government Route.

3.  NRI resident as well as citizen of Nepal and Bhutan on repatriation basis.

4. Erstwhile OBCs as incorporated non-resident entities.

5. An FII under the Portfolio Investment Scheme

6. SEBI registered FIIs or NRIs through a registered broker on recognized India Stock Exchange.

7. SEBI registered Foreign Venture Capital Investor (FVCI)

An FII may invest in the capital of an Indian Company under the Portfolio Investment Scheme which limits the Individual holding of an FII to 10% of the capital of the company and the aggregate limit for FII investment to 24% of the capital of the company. The aggregate limit of 24% can be increased to the sectoral cap/statutory ceiling  as approved by RBI time to time.


There are below mentioned entity registered or incorporated under Indian law can raise funds against capital:

  • An Indian Company
  • Partnership Firm
  • Proprietary Concern
  • Indian Venture Capital Undertaking (ICV
  • Ventures Capital Fund (VCF)
  • Limited Liability Partnership (LLP)

A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest in the capital of a firm or a proprietary concern in India on non-repatriation basis.

Foreign Direct Investment in Trust other than Venture Capital Funds (VCF) is not permitted. FDI is not allowed to invest in the above mentioned entities engaged in any agricultural/plantation activity or real estate business or print media. FDI in resident entities other than those mentioned above is not permitted.


An Indian company arrange fund from a person resident out of India by issue of following type of instrument which are given below:

1. Equity Shares

2. Preference Shares (Fully, Compulsory and Mandatory Convertible)

3. Debentures (Fully, Compulsory and Mandatory Convertible)

4. Issue of Foreign Currency Convertible Bonds (FCCBs)

5. Depository Receipts (DRs) (American Depository Receipts (ADRs)/Global Depository Receipts (GDRs)

6. Foreign Currency Exchangeable Bonds (FCEBs)

Indian companies which are eligible to issue shares to person resident outside India under the FDI Policy may be allowed to retain the share subscriptions amount in Foreign Currency Account, with the prior approval of RBI.


Price of shares issued to person resident outside India under the FDI Policy, shall not be less than:

(a) The price worked out in accordance with the SEBI guidelines/regulations, as applicable, where the shares of the company is listed on any recognized stock exchange in India;

(b) The fair valuation of shares done by a SEBI registered Category-I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company is not listed on any recognized stock exchange in India; and

(c) The price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the RBI from time to time, where the issue of shares is on preferential allotment.


(i) Reporting of Inflow

(a) An Indian Company receiving invest from outside India for issuing shares/ convertible debentures/preference shares under the FDI scheme, should report the details of the amount of consideration, to the Regional office concerned of the Reserve Bank not later than 30days from the date of receipt in the Advance Reporting Form.

(b) Indian company are required to report the details of the receipt of the amount of consideration for issue of shares/ convertible debentures through an AD Category-I bank, together with the copy of the FIRC evidencing the receipt of the remittance along with the KYC report on the non-resident investor from the overseas bank remitting the amount. The report would be acknowledged by the Regional Office concerned, which will allot a Unique Identification Number (UIN) for the amount reported.

(ii) Time frame within which shares have to be issued

The capital instruments should be issued within 180 days from the date of receipt of inward remittance received through normal banking channels including escrow account opened and maintained for the purpose or by debit to the NER/FCNR (B) account of the non-resident investor. In case the equity instruments are not issued within 180 days from the date of receipt of the inward remittance or the date of debit to the NER/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by onward remittance through normal banking channels or by credit to the NER/FCNR (B) account, as the case may be. Non-compliance with the above provision would be reckoned as a contravention under FEMA and could attract penal provisions. In exceptional cases, refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt may be considered by the Reserve Bank, on the merits of the case.

(iii) Reporting of Issue of Shares

(a) After issue of capital the Indian company has to file Form FC-GPR not later than 30 days from the date of issue of capital.

(b) Form FC-GPR has to be dully filled up and signed by MD/Director/Secretary of the Company and submitted to the Authorized Dealer (AD) of the company, who will forward it to the RBI.

(c) The report of the receipt of consideration as well as Form FC-GPR have to be submitted by the AD bank to the Regional office concerned of the RBI under whose jurisdiction the Registered office of the company is situated.

(d) Annual Return on Foreign Liabilities and Assets should be filed on an annual basis by the Indian Company, directly with the “Advisor, Balance of Payment Statistical Division, Department of Statistics and Information Management, RBI, C9, 8th Floor, Bandra-Kurla Complex, Bandra (E), Mumbai-400051”. This is an annual return to be submitted by 31st July every year, pertaining to all investments by way of direct/portfolio investments/re-invested earning/ other capital in the Indian company made during the previous years.


FDI is a capital account transaction and thus any violation of FDI regulations are covered by the penal provisions of the FEMA.

(1) If any person violates/contravenes any FDI Regulations, by way of breach/non-adherence/non-compliance/contravention of any rule, regulation, notification, press note, press release, circular, direction or order issued by Government of India/FIPB/RBI in exercise of the power under FEMA, he shall, upon adjudication, be liable to a penalty up to trice the sum involved in such contraventions where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable and where such contravention is continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which contravention continues.

(2) Where a person committing a contravention of any provisions of this Act or of any rules, direction or order made there under is a company, shall be deemed to be guilty of the contravention and shall be liable to be proceeding against and punished accordingly.

(3) No contravention under Foreign Exchange (Compounding Proceeding) Rules 2000, shall be compoundable unless the amount involve in such contravention is quantifiable.

Limits on Investments by Persons Resident outside India or Foreign Companies for each Industry

S. No.


Investment Cap

Description of Activity/Items/Conditions


Private Sector Banking


Subject to guidelines issued by RBI from time to time


Non-Banking Financial Companies (NBFC)


FDI/NRI investments allowed in the following 19 NBFC activities shall be as per the levels indicated below :

(a) Activities covered – Merchant Banking; Under Writing; Portfolio Management Services; Investment Advisory Services; Financial Consultancy; Stock-broking; Asset Management; Venture Capital; Custodial Services; Factoring; Credit Reference Agencies; Leasing & Finance; Housing Finance; Forex-broking; Credit Card Business; Money-changing Business; Micro-credit; Rural credit.

(b) Minimum Capitalization norms for fund based (NBFCs) –

(i) For FDI upto 51%, US $ 0.5 million to be brought in upfront;

(ii) If the FDI is above 51% and upto 75%, US $ 5 million to be brought upfront;

(iii) If the FDI is above 75% and upto 100%, US $ 50 million out of which $ 7.5 million to be brought in upfront and the balance in 24 months.

(c) Minimum Capitalization norms for non-fund based activities – Minimum Capitalization norm of US $ 0.5 million is applicable in respect of non-fund based NBFCs with foreign investment.

(d) Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US $ 50 million as at (b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital).

(e) Joint Venture Operating NBFCs that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e., (b)(i) and (b)(ii) above.

(f) FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.




FDI upto 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory and Development Authority (IRDA)




(i) In basic, Cellular, Value Added Services, and Global Mobile Personal Communications by Satellite, FDI is limited to 49% subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which the investment is being made) to the license conditions for foreign equity cap and lock-in-period for transfer and addition of equity and other license provisions.

(ii) ISPs with gateways, radio paging and end-to-end bandwidth, FDI is permitted upto 74% with FDI, beyond 49% requiring Government approval. These services would be subject to licensing and security requirements.

(iii) No equity cap is applicable to manufacturing activities

(iv) FDI upto 100% is allowed for the following activities in the telecom sector – (a) ISPs not providing gateways (both for satellite and submarine cables); (b) Infrastructure providers providing dark fibre (IP Category I); (c) Electronic Mail, and (d) Voice Mail.

The above would be subject to the following conditions –

(a) FDI upto 100% is allowed subject to the condition that such companies would divest 26% of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world.

(b) The above services would be subject to licensing and security requirements, wherever required.

(c) Proposal for FDI beyond 49% shall be considered by FIPB on case to case basis.


(i)] Petroleum Refining (Private Sector)


FDI permitted upto 100% in case of private Indian companies

(ii) Petroleum Product Marketing


Subject to the existing sectoral policy and regulatory frame-work in the oil marketing sector

(iii) Oil Exploration in both small and medium sized fields


Subject to and under the policy of Government on private participation in –

(a) exploration of oil, and

(b) the discovered fields of national oil companies

(iv) Petroleum Product Pipelines


Subject to and under the Government Policy and Regulations thereof.]


Housing and Real Estate


Only NRIs are allowed to invest upto 100% in the areas listed below –

(a) Development of serviced plots and construction of built-up residential premises;

(b) Investment in real estate covering construction of residential and commercial premises including business centers and offices;

(c) Development of townships;

(d) City and regional level urban infrastructure facilities, including both roads and bridges;

(e) Investment in manufacture of building materials;

(f) Investment in participatory ventures in (a) to (c) above;

(g) Investment in Housing Finance Institutions which is also opened to FDI as an NBFC.


Coal & Lignite


(i) Private Indian companies setting up or operating power projects as well as coal and lignite mines for captive consumption are allowed FDI upto 100%.

(ii) 100% FDI is allowed for setting up coal processing plants subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing.

(iii) FDI upto 74% is allowed for exploration or mining of coal or lignite for captive consumption.

(iv) In all the above cases, FDI is allowed upto 50% under the automatic route subject to the condition that such investment shall not exceed 49% of the equity of a PSU.


Venture Capital Fund (VCF) and Venture Capital Company (VCC)

Offshore Venture Capital Funds/companies are allowed to invest in domestic venture capital undertaking as well as other companies through the automatic route, subject only to SEBI regulation and sector specific caps on FDI.




Trading is permitted under automatic route with FDI upto 51% provided it is primarily export activities and the undertaking is an export house/trading house/super trading house/star trading house.

However, under the FIPB route –

(i) 100% FDI is permitted in case of trading companies for the following activities :

(a) exports;

(b) bulk imports with export/expanded warehouse sales;

(c) cash and carry wholesale trading;

(d) other import of goods or services provided at least 75% is for procurement and sale of the same group and not for third party use or onward transfer/distribution/sales.

(ii) The following kinds of trading are also permitted, subject to provisions of Exim Policy – (a) Companies for providing after-sales services (that is not trading per se);

(b) Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India;

(c) Trading of hi-tech items/items requiring specialized after-sales service;

(d) Trading of items for social sector;

(e) Trading of hi-tech, medical and diagnostic items;

(f) Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name;

(g) Domestic sourcing of products for exports;

(h) Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commence simultaneously with test marketing;

(i) FDI upto 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.




FDI allowed upto 100% in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment.


Drugs & Pharmaceuticals


FDI permitted upto 100% for manufacture of drugs and pharmaceuticals provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology and specific cell/tissue targeted formulations. FDI proposal for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology and specific cell/tissue targeted formulations will require prior Govt. approval.


Road and highways, Ports and harbors


In projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors.


Hotel & Tourism


The term ‘hotels’ includes restaurants, beach resorts and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports and health units for tourists and Convention/Seminar units and Organizations.

For foreign technology agreements, automatic approval is granted if –

(i) Upto 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects design, supervision, etc.;

(ii) Upto 3% of the net turnover is payable for franchising and marketing/publicity support fee, and

(iii) Upto 10% of gross operating profit is payable for management fee, including incentive fee.





(i) For exploration and mining of diamonds and precious stones FDI is allowed upto 74% under automatic route,

(ii) For exploration and mining of gold and silver and minerals other than diamonds and precious stones, metallurgy and processing FDI is allowed upto 100% under automatic route,

(iii) Press Note 18 (1998 series) dated 14-12-1998 would not be applicable for setting up 100% owned subsidiaries in so far as the mining sector is concerned, subject to a declaration from the applicant that he has no existing joint venture for the same area and/or the particular mineral.




Advertising Sector – FDI upto 100% allowed on the automatic route




Film Sector – (Film production, exhibition and distribution including related services/products)

FDI upto 100% allowed on the automatic route with no entry-level condition.




Govt. approval required beyond 74%


Mass Rapid Transport Systems


FDI upto 100% is permitted on the automatic route in mass rapid transport system in all metros including associated real estate development.


Pollution Control & Management


In both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic route.


Special Economic Zones


All manufacturing activities except –

(i) Arms and ammunition, explosives and allied items of defense equipments, defense aircrafts and warships;

(ii) Atomic substances, Narcotics and Psychotropic Substances and Hazardous Chemicals;

(iii) Distillation and brewing of Alcoholic drinks, and

(iv) Cigarette/cigars and manufactured tobacco substitutes.


Any other sector/activity (if not included in Annexure A)



Air Transport Services (Domestic Airlines)

100% for NRIs

 49% for others

No direct or indirect equity participation by foreign airlines is allowed.


Townships, housing, built up infrastructure and construction development projects. The sector would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure


The investment shall be subject to the following guidelines –

(a) Minimum area to be developed under each project shall be as under –

(i) In case of development of serviced housing plots—10 hectares

(ii) In case of construction development project—50,000 sq. mtrs.

(iii) In case of combination project, any one of the above two conditions.

(b) The investment shall be subject to the following conditions –

(i) Minimum capitalization of US $ 10 million for wholly owned subsidiaries and US $ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the company.

(ii) Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPB.

(c) At least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor shall not be permitted to sell undeveloped plots.

(d) The project shall conform to the norms and standards, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/Municipal/Local Body concerned.

(e) The investor shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/bye-laws/regulations of the State Government/Municipal/Local Body concerned.

(f) The State Government/Municipal/Local Body concerned, which approves the building/development plans, shall monitor compliance of the above conditions by the developer.

Note: For the purpose of these guidelines, “undeveloped plots” will mean where roads, water supply, street lighting, drainage, sewerage, and other conveniences, as applicable under prescribed regulations, have not been made available. It will be necessary that the investor provides this infrastructure and obtains the completion certificate from the concerned local body/service agency before he would be allowed to dispose of serviced housing plots.]

Published by

Rajat Poddar
(Qualified CS and CA Finalist)
Category Corporate Law   Report

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