Foreign Investment in India

Eligibility for Investing in India

• A person resident outside India (other than a
citizen of Pakistan or Bangladesh) or an
incorporated entity outside India, (other than
an entity in Bangladesh or Pakistan) has the
general permission to purchase shares or
convertible debentures or preference shares of
an Indian company subject to certain terms
and conditions
• The Indian companies have general permission
to issue equity / preference / convertible
preference shares and convertible debentures
subject to certain conditions.
• No person resident outside India other than
NRIs/PIO shall make any investment by way of
contribution to the capital of a firm or a
proprietorship concern or any association of
persons in India. The RBI may, on an
application made to it, permit a person
resident outside India to make such
 Policy Framework
• The Industrial Policy Reform of 1991
• Industrial policy provisions applicable to
both domestic and foreign companies
• Once applicable permissions obtained,
foreign companies are treated at par with
an Indian company – national treatment
• Under FEMA 2000, approval of RBI
required for establishment in India of a
branch, liaison office or a project office
 RBI Automatic Route

• RBI approval in many industries within sectoral

caps: 100%, 74%, 51% and 26%. The lists are
comprehensive and cover most industries of
interest to foreign companies.
• The RBI’s approval is automatic (provided
certain parameters are met) and only a filing is
to be made after allotting shares to foreign
equity holder(s).
• Foreign technology agreement: not
compulsory
• Automatic clearance for foreign technology
agreements if lump sum payments up to USD
2 million and royalty payments up to 5% of
domestic sales and 8% of exports
• Payment of royalty up to 1% on domestic sales
and 2% on exports on the use of trade marks
and brand name of the foreign collaborator
without technology transfer
 FIPB
• Foreign Investment Promotion Board
(FIPB) consists of a group of Secretaries
(Finance, External Affairs, SSI,
Commerce) under the Chairmanship of
Secretary, Department of Economic
Affairs, Ministry of Finance.
Representation of the Ministry under
whose jurisdiction a particular
investment is proposed, is also invited.
FIPB recommends projects to Finance
Minister for approval. Investments
exceeding Rs.600 crores require the
approval of the Cabinet Committee on
 FIPB Route

• Proposals attracting compulsory

licensing
• Items of manufacture reserved for small
scale sector (A company which is a
small scale industrial unit may issue
shares or convertible debentures to a
non-resident, to the extent of 24% of its
paid-up capital.)
• Extension for foreign collaboration
agreements
• List of activities or items for which FDI is
prohibited.
• List of Industries in which Automatic
Route Not Available
 Foreign Investment
Implementation Authority (FIIA)
• Foreign Investment Implementation
Authority (FIIA) has been established to
facilitate quick implementation of FDI
approvals and assist foreign investors in
getting necessary approvals.
• Fast Track Committees have been set up
in 30 Ministries/ Departments for regular
review of FDI mega projects (with
proposed investment of Rs. 1 billion and
above), and resolution of any difficulties.
 Portfolio Investment Scheme
• Foreign Institutional Investors registered with
SEBI and Non-resident Indians are eligible to
purchase the shares and convertible debentures
under the Portfolio Investment Scheme. The FII
should apply to the designated AD, who may then
grant permission to FII for opening a foreign
currency account and/or a Non Resident Rupee
Account.
• NRIs should apply to the concerned designated
branch of the AD authorised by RBI to administer
the Portfolio Investment Scheme (PIS) for
permission to open a NRE/NRO account under the
Scheme.
 Foreign Institutional Investors
• FIIs are not permitted to invest in Print
Media Sector through FDI or PIS routes.
Such investment by FII requires prior
approval of Government of India, Foreign
Investment Promotion Board and Ministry
of Information & Broadcasting. FIIs should
also take delivery of the shares purchased
and give delivery of shares sold.
• The FIIs are also permitted to trade in all
exchange traded derivative contracts
subject to position limits as prescribed by
SEBI and advised by RBI to the custodian
banks.
 Foreign Institutional Investors
• Registered FIIs have been permitted to
purchase shares/convertible debentures of an
Indian company through offer / private
placement. This is subject to applicable ceiling.
A FII may invest in a particular issue of an
Indian company either under FDI Scheme or
PIS.
• The FII shall restrict allocation of its total
investment between equities and debt
including dated Government Securities and
Treasury Bills in the Indian Capital Market in
the ratio of 70:30, with a cap of USD 200
million in Government securities. The FII can
also form a 100% Debt Fund and get
registered with SEBI for investment in debt
investments. Investment in debt securities by
FIIs are subject to limits, if any, stipulated by
 Foreign Institutional Investors

• Guidelines originally issued in Sept.1992

• Consists of pension funds, mutual funds,
investment trusts, AMCs, endowments, etc.
• Good track record, competence, financial
soundness, registration from regulatory
authority in home country
• Registration (5 yrs.) by nodal agency - SEBI,
also RBI.
• Allowed to invest in all the securities traded on
the primary and secondary markets
• Foreign Institutional Investors can buy dated
Government securities/ treasury bills, non-
convertible debentures /bonds issued by
Indian companies and units of domestic
mutual funds either directly from the issuer of
such securities or through a registered stock
 Foreign Institutional Investors

• No max./min. restriction, no lock-in period

• Role of designated branch, custodian
• Allowed to repatriate at market rates the
capital gains, dividends, interest income
• ADs can also offer forward cover to FIIs to the
extent of total inward remittance net of
liquidated investments
• Overall FII limit does not include portfolio
investments by NRIs, NRI-OCBs, FDI,
GDRs/ADRs, single-regional funds, etc.
• Generally, investment limit for FIIs hiked to the
limit applicable for FDI/ statutory ceiling in that
particular sector.
• Till the end of 2005, over 800 FIIs registered,
not all active
 Foreign Institutional Investors
• FII net inflows: $10.7 billion in 2005, $9.2
billion in 2004 and $ 6.6 billion in 2003. Total
net inflow since 1993: $42 billion in a total
market cap of $ 550 billion.
• Investments through three routes: registered
FII, registered as a sub-account of a
sponsoring FII, and indirectly through access
products or Participatory Notes (PNs).
• Estimated 90% investment through sub-
accounts, as this avoids procedural problems:
establishing broker and custodian
relationships, filing of tax certificates, etc. PNs
account for about 25% of total FII investment,
including sub-accounts.
• PNs are derivative products wherein the holder
gets all the economic benefits of a direct
exposure to Indian equities with a