Doing Business In India: FAQ

1. Why Destination India?
As a result of a burgeoning yearly growth, deep capital markets and loosened foreign direct investment (FDI) laws, the Indian Economy has seen a paradigm swing and is on a strong growth curve. India is one of the limited economies to have battered the recent global monetary crisis and its gross domestic product (GDP) has been rising and will carry on rising in excess of 8 per cent per year. India’s economy has strong rudiments and is host to eminent global corporate giants that are leaders in their respective fields. It ranks higher than several countries in key factors such as market size and innovation. Indian markets have noteworthy potential and offer prospects of high profitability and a favorable regulatory regime for investors. The fast and steadily growing economy of India in majority of its sectors has made India the apple of investors’ eye, for most prolific, lucrative, and secure foreign investment. According to a current survey by the United Nations Conference on Trade and Development (UNCTAD), India has conspicuously emerged out as the second most popular and desirable terminus in the entire world, after China, for vastly profitable foreign direct investment. In recent years, majority of the investors in Indian business segments of infrastructure, telecommunication, information technology, computer hardware and software, and hospitality services, have been from countries like US, UK, Mauritius, Singapore, and many others.

2. What are the main sectors for FDI in India?
The Foreign Direct Investment in Indian business sectors, can simply be made in a variety of ways, through the Governmental and Automatic Routes. Though Joint Ventures are the most popular and preferred forms of making investment in Indian industry, the most lucrative business sectors for FDI in India have been Infrastructure (Power, Steel, Railways, etc.); Telecommunications; Hospitality sector; Education; Retail; Real Estate; Retail sector, Petroleum and Petroleum Products; Biotechnology; Alternative Energy, etc.

3. What laws govern entry of FDI in India?
There are two routes for FDI approvals:

  1. The Automatic route via Reserve Bank of India (RBI)
    No prior approval is required for FDI under the Automatic Route. Only information to the RBI within 30days of inward remittances or issue of shares to Non Residents is required.  RBI has prescribed a new form, Form FC-GPR (instead of earlier FC-RBI) for reporting shares issued to the Foreign Investors by an Indian company.

  1. Foreign Investment Promotion Board route (FIPB route)
    Foreign Investment proposed not covered under the ‘Automatic Route’ are considered for Governmental Approval on the recommendations of the Foreign Investment Promotion Board (FIPB).

4. What are the FDI restrictions?
FDI up to 100% is allowed under the automatic route in all activities/sectors except those sectors, which require prior approval of the Government: Sectors prohibited for FDI

  • Activities/items that require an industrial license

  • Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the same field

  • Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (substantial acquisition of shares and takeovers) regulations, 1997 is attracted.

  • Proposals falling outside notified sectoral policy/ CAPS under sectors in which FDI is not permitted.

Most of the sectors fall under the automatic route for FDI. In these sectors, investment could be made without approval of the central government. The sectors that are not in the automatic route, investment requires prior approval of the Central Government. The approval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDI is not allowed.

 5.  Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route?
FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

i)  Retail Trading (except single brand product retailing)
ii) Atomic Energy
iii) Lottery Business
iv) Gambling and Betting
v) Business of Chit Fund
vi) Nidhi Company
vii) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) .
viii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the  extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).
ix) Trading in Transferable Development Rights (TDRs).
x ) Manufacture  of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.

6. What are the considerations to be made by any Investor?
Several factors need to be considered in order the commence business activity in India such as selection and formation of the appropriate corporate vessel, forming Joint ventures, applicable compliances, setting up subsidiaries, tax planning, project financing, etc. A foreign company can commence operations in India by incorporating a company under the Companies Act, 1956 through a Joint Venture or through Wholly Owned Subsidiaries. Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy. Details of the FDI policy, sectoral equity caps & procedures can be obtained easily.  Foreign Companies can set up their operations in India by forming strategic alliances with Indian partners. Joint Ventures may bring along advantages to the foreign investor by way of established distribution and marketing set up of the Indian partner, availability of financial resources of the Indian partners and established contacts of the Indian partners.

Foreign companies can also set up wholly owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy. However, Joint Ventures are the most common and preferred forms of making investment in Indian industry. At present, the most rewarding business sectors for FDI in India are, Infrastructure (Power, Steel, Railways, etc.); Telecommunications; Hospitality sector; Education; Retail; Real Estate; Retail sector, Petroleum and Petroleum Products; Biotechnology; Alternative Energy, etc.

Other Useful Links

Foreign Investment Promotion Board

India Opportunities

Reserve Bank of India
American Chamber of Commerce of India

India opens up retail and aviation sector to FDI