India is one of the largest economies in the world. It is the most favorable market for investment purposes in the coming 20 years. Doing business in India was considered as a complex process, however, a significant change in the investment policies can be seen as India has recently jumped 14 places in the year's Global Ease of Doing Business rankings published by the World Bank India has also secured a place among the top 10 improvers for the third consecutive year for ease of doing business.1
This note is a brief overview of the routes through which a foreign investor can do business in India or invest in India, sets out briefly the manner and do's and don'ts of doing business in India and various legal underpinnings which an investor should consider in order to take an informed decision to do business in India.
In India, investment made by a foreign investor is mainly governed by the Foreign Direct Investment Policy ("FDI Policy") issued by the Department of Industrial Policy and Promotion ("DIPP"), Ministry of Commerce and Industry, Government of India (as amended from time to time). The FDI Policy sets out the conditions, procedures and reporting requirement of a foreign investment. The FDI Policy is revised periodically either by way of amendments or annual restatement.
In addition to the FDI Policy, a foreign investor is also required to consider and ensure compliance of various regulations issued by the Reserve Bank of India ("RBI"), the regulatory authority empowered to make regulations under the Foreign Exchange Management Act, 1999 ("FEMA"), the primary exchange control law of India.
Who can invest?
The following defined classes of foreigners/ foreign entities may invest in India: (i) a non-resident entity or a non-resident individual; (ii) foreign institutional investor2; (iii) foreign portfolio investor3; (iv) a foreign venture capital investor4; (v) Non-Resident Indian ("NRI")5.
[Note: Nature of investment by an NRI is discussed below.]
Permitted and Prohibited Sectors for investment
The FDI policy provides a comprehensive list of sectors/ activities in which investment can be made by a foreign investor, for instance, foreign investment in sectors/ activities such as lottery business, gambling and betting, chit funds, real estate business6, manufacturing of cigars, cigarettes etc. is prohibited. However, investment in majority of sectors is permitted with or without entry/exit conditions, minimum capitalization norms, end use conditions or conditions to protect domestic industry.
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1 World Bank Group, Doing Business 2020, Economy Profile – India, available at https://www.doingbusiness.org/content/dam/doingBusiness/country/i/india/IND.pdf
2 A foreign institutional investor means an entity incorporated outside India, which proposes to make an investment in India and is registered as a 'foreign institutional investor' under the Securities and Exchange Board of India (SEBI) (Foreign Institutional Investor) Regulations 1995.
3 A foreign portfolio investor means a person registered as a foreign portfolio investor in accordance with Securities and Exchange Board of India (SEBI) (Foreign Portfolio Investors) Regulations, 2014.
4 A foreign venture capital investor means an investor incorporated and established outside India, which is registered under the Securities and Exchange Board of India (Foreign Venture Capital Investor) Regulations, 2000.
5 A non-resident Indian means an individual resident outside India, who is a citizen of India or is an overseas citizen of India (OCI) cardholder in accordance with the Indian Citizenship Act, 1955.
6 Real estate business shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.