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In this Q&A session, our Senior Associate for International Business Advisory , Sunny Makhija, discusses Foreign Direct Investment (FDI) in India.
How can an Indian company receive foreign investment?
Foreign investment can be made in India either through the automatic route or government route.
Foreign investment is allowed under the automatic route without prior approval from the government in all the activities mentioned under the Regulation 16 of FEMA 20 (R).
There are a few sectors in which investment is not permitted under the automatic route and requires approval such as print media, satellites operations, etc.
Foreign investment coming through the government route requires approval from the government of India. Approval is given from a case to case basis and proposals for foreign investment are considered by respective ministries/ department.
Factors such as amount of investment, employment opportunities, benefit to Indian economy, among others, are considered.
What are the different entity types available for foreign companies planning to establish a presence in India?
Various entity options are available for foreign investors planning to setup their businesses in India. These include wholly owned subsidiary, limited liability partnership (LLP), branch office, liaison office, and project office.
Each entity type has its advantages and disadvantages. Depending on the nature of work and the sector in which company intends to invest, a suitable entity type should be chosen.
For example, a liaison office is mainly established to spread awareness about products and services of the firm. It acts as a channel of communication between the head office and the entities in India and can not undertake any commercial activity in India. This may not be suitable for certain companies.
We therefore advice companies to conduct a thorough study on various entry models before investing.
Is there any special condition for FDI in LLP?
A limited liability partnership or LLP can be setup in India as per the provisions of LLP Act, 2008.
It should be noted that FDI is permitted under automatic route in LLPs operating in sectors/activities where 100% FDI is allowed, and there are no FDI-linked performance conditions.
Are there any restrictions on investing in India from certain countries?
Yes, there are a few restrictions for foreign investors/ companies from Pakistan, Bangladesh, Nepal, and Bhutan. For instance, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the government route. Similarly, a citizen of Pakistan or an entity incorporated in Pakistan can invest only under the government route and sectors such as defence, space, and atomic energy are prohibited for foreign investment.
What are the sectors in which foreign investment is not allowed?
As per the current FDI policy, there are a handful of sectors in which foreign investment is prohibited. These are:
- Gambling and Betting
- Lottery Business including Government/private lottery, online lotteries, etc.
- Nidhi Company
- Chit Funds
- Real Estate Business or Construction of farmhouses
- Trading in Transferable Development Rights
- Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
- Sectors not open to private investment such as atomic energy
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