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India first opened its doors to foreign investment in 1991. Since then, India has grown to become one of the top destinations for foreign direct investments (FDI). In fact, the Global Investment Trend Monitor report of the United Nations Conference on Trade and Development from January 2020 reports that India is in the top 10 host economies of FDI inflows.
The FDI policy in India determines the percentage of allowed foreign ownership in a business, as well as the specifics of the registration process. It would be good to familiarize yourself with the FDI policy prior to registering a business or making direct investments in India.
When you make a direct investment in India, it can enter the country either through the Automatic Route or the Government Route. It’s important to understand that a business cannot simply choose which route it will take – the route is determined by the business activities of the company.
Essentially the government route is an additional layer of investment approvals used for more heavily regulated industries such as healthcare.
Investment Automatic Route
When your investment qualifies for the Automatic Route, it means that you do not need to get additional government approvals.
For some businesses, 100% of the FDI investments can go through the Automatic Route. There are also businesses that have a threshold of FDI allowed to enter through the Automatic Route. Once the investor or investors hit the specified percentage, all subsequent investments will go through the Government Route.
The percentage that can go through the Automatic Route depends on the industry in which the business operates.
Examples of industries where 100% of FDI can enter through Automatic Route:
- Information Technology
- Business Process Management
As the name suggests, FDI entering through the Government Route needs to get government approval first.
Some industries may have up to 100% of the FDI go through the Government Route. Like the Automatic Route, the industry of the business will determine the percentage of investment that will need government approval.
Examples of industries where up to 100% of FDI must have government approval:
- Food Products Retail Trading
- Digital Media
Industries where foreign investment is forbidden in India
The National Investment Promotion and Facilitation Agency of India lists sectors that cannot accept any foreign investments. These include the following among others.
- Lottery businesses including government or private lottery, online lotteries, and the like
- Gambling and betting
- Sectors that are not open to private sector investment
When a company receives foreign funding, it must comply with reporting requirements. The company must submit the following documents to the relevant authorities when applying for approval.
- Declaration by the authorized representative of the Indian company/limited liability partnership.
- Pre- and post-shareholding pattern in the Indian company
- Valuation certificate by a registered valuer
- Board resolution to accept FDI
- Relevant Reserve Bank of India approvals for an issue of equity shares against funds payable to the foreign investor
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