Foreign Direct Investment (FDI) in India


Foreign Direct Investment (FDI) in India

Meaning of Foreign Direct Investment (FDI) in India

A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. [1]

Which legislation governs FDI policies?

FDI in India is regulated by the Foreign Exchange Management Act, 1999 (FEMA).

Which are the sectors in which FDI is permitted in India?

In the following sectors/activities, FDI is allowed, subject to applicable laws/regulations; security and other conditionality.

  • Agricultural and animal husbandry
  • Tea plantation
  • Mining and petroleum and natural gas
  • Manufacturing of items reserved for production in MSMEs
  • Defense
  • Broadcasting services
  • Print media
  • Civil Aviation
  • Courier services
  • Construction development
  • Industrial parks
  • Satellites
  • Private security agencies
  • Telecom services
  • Trading
  • E-Commerce activities
  • Single brand product retail trading
  • Multi-brand product retail trading
  • Railway infrastructure
  • Financial services
  • Insurance
  • Pharmaceuticals
  • Power Exchanges

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

FDI has prohibited under the Government Route as well as the Automatic Route in the following sectors:

  • Atomic Energy
  • Lottery business (including government/ private lottery, online lotteries, etc)
  • Gambling and Betting
  • The business of Chit Fund
  • Nidhi company
  • 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)
  • Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges
  • Trading in Transferable Development Rights (TDRs).
  • Manufacture of cigars, cheroots, cigarillos, and cigarettes, of tobacco or of tobacco substitutes

What is Global Depository Receipt?

A Global Depositary Receipt (GDR) is a bank certificate issued in multiple countries for shares in a foreign company. The shares of a GDR trade as domestic shares. They are offered for sale globally through various banks.

What is American Depository Receipt?

American Depository Receipt is issued only by U.S. banks for foreign stocks that are traded on a U.S. exchange. The underlying security of the ADRs is held by an American financial institution overseas rather than by a global institution.

Can Indian companies issue Foreign Currency Convertible Bonds (FCCBs)?

FCCBs can be issued by Indian companies in the overseas market in accordance with the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.

Can an escrow account be opened without RBI permission for the non-resident permitted to acquire share on stock exchange under FDI scheme?

Yes, an escrow account for the purpose can be opened under General Permission under Regulation 5(5) of Foreign Exchange Management (Deposit) Regulations.

Can a foreigner set up a partnership/ proprietorship concern in India?

No. Only Non-Resident Indians / Persons of Indian Origin are allowed to set up partnership/proprietorship concerns in India on non-repatriation basis.

Can a foreign investor invest in shares issued by an unlisted company in India?

Yes. As per the regulations/guidelines issued by the Reserve Bank of India/Government of India, the investment can be made in shares issued by an unlisted Indian company subject to compliance with FEMA provisions such as pricing, reporting, etc.

Can a company issue debentures as part of FDI in India?

Yes. Debentures which are fully and mandatorily convertible into equity within a specified time would be reckoned as part of share capital under the FDI Policy.


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