FDI in India is regulated primarily by India's Department of Promotion of Industry and International Trade (DPIIT), under its Foreign Exchange Management Act (FEMA) regime. India remains one of the most popular FDI destinations in the world, ranking as the eighth-largest recipient of FDI in 2023, the third-highest recipient of FDI in greenfield projects and the second-highest recipient of FDI in international project finance deals according to the World Investment Report 2023. Attracting FDI inflows continues to be a priority for the Indian government, which is targeting total FDI of US$100 billion in the near future, according to India's Minister for Informational Technology.

Summary of major changes in 2023

• India continued to be a major destination of foreign direct investment, having received a total FDI inflow of US$70.9 billion for the financial year 2022 to 2023
• There were no major changes to India's FDI legislation in 2023

Who files?

There are two routes governing FDI into India: the automatic route and the government approval route. Whether an investor proceeds via one route or the other would depend largely on the sector in which the investee entity falls, as well as the quantum value of the investment.

Under the automatic route, FDI is allowed without the need to obtain any approval or license from the government. The amount of investment permitted would depend on the sector that the investee entity operates in. For example, some sectors, such as the manufacturing, telecom and financial services sectors, allow foreign investors to invest up to 100 percent of an Indian entity.

Certain other sectors fall under the government approval route, and require the prior approval of the government, the Reserve Bank of India (RBI), or both. Key sectors that require government approval include the multi-brand retail trading sector, where FDI of up to 51 percent is permissible assuming certain regulatory conditions are met; and the brownfield pharmaceutical sector, where any FDI above 74 percent must obtain government approval.

Some sectors such as lottery businesses and the manufacture of tobacco or tobacco substitutes are prohibited sectors where FDI is not permitted.

Governmental approval is also required where an investor is incorporated in any country sharing a land border with India (China, Afghanistan, Nepal, Myanmar, Bhutan, Pakistan and Bangladesh), or where the beneficial owner of any investment into India is situated in or is a citizen of any of these countries.

No application is required for transactions that fall within the automatic route. For transactions that fall under the government approval route, the foreign investor will have to file its FDI proposal under the foreign investment facilitation portal (FPIP) managed by the DPIIT. The proposal will then be sent by the DPIIT to relevant stakeholders, such as the RBI and the Ministry of External Affairs.

Types of deals reviewed

The FEMA regime governs several types of transactions, including equity investment into an Indian company by a foreign investor, including the acquisition of equity shares, fully paid and mandatorily convertible preference shares or debentures, and share warrants.

It also governs investment into capital contributions of Indian LLPs; and investment into convertible notes, provided that the convertible notes meet certain conditions. For example, the convertible notes can be issued only by start-up companies for an amount of 2.5 million Indian rupees (approximately US$30,000) or more in a single tranche, and issuance and transfer of these notes must adhere to pricing guidelines and sectoral conditions as prescribed under the FEMA regime.

Scope of the review

If a transaction falls under the government approval route, then the foreign investor must submit an FDI proposal to the DPIIT using the FPIP.

Documents that an FDI proposal must annex include: charter documents of the foreign investor and investee entity; audited financial statements and tax returns of both the foreign investor and investee entity; diagrammatic representation of the flow of funds from the foreign investor to the investee entity; and a summary of the FDI proposal by the foreign investor.

Foreign investment into certain sectors may require prior security clearance from the Ministry of Home Affairs. These sectors include broadcasting, telecommunication, private security agencies and civil aviation. For these sectors, the FDI proposal will also be sent to the Ministry of Home Affairs for its review.

The Indian government has broad discretion whether to grant or reject a proposal. The DPIIT and competent authorities would consider, among other things, the reputation of the foreign investor, its history of owning and operating similar investments, national security and the overall impact of the proposed investment on the national interest.

Review process timeline

The DPIIT's standard operating procedure on FDI applications provides an indicative timeline of eight to 12 weeks from the date of application to the date of approval. However, it is not unheard of for investors to require up to six to nine months for the entire application to be disposed of, including time spent providing clarifications or supplementary documents in response to questions from the DPIIT or any other competent authority.

How foreign investors can protect themselves

The FEMA regime contains extensive guidelines for FDI into India, and guidelines and restrictions may differ depending on the sector and mode of investment. Separate from the FEMA regime, there may also be other considerations that a foreign investor may need to consider before investing into an Indian entity, including special benefits or incentives for setting up businesses in special economic zones and other sectoral regulations for businesses in regulated industries.

Investors should engage counsel who are familiar with the particular federal, state and sectoral landscape in which they wish to invest, and be acquainted early on with the particular restrictions or rules that may govern their investments. This would allow investors to prepare more comprehensive and compliant FDI proposals and increase the chances of it obtaining the relevant approvals and licenses early on in the process.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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