India: streamlined treatment of FDI aims to promote opportunities for investors

Introduction

Over the years, India has become one of the preferred destinations for foreign investments owing to favourable demographics as well as noticeable and consistent growth trajectory. Ranking as the 15th-largest recipient of foreign direct investment (FDI), the fourth-highest recipient of FDI in greenfield projects and the second-highest recipient of FDI in international project finance deals in 2023, according to the World Investment Report 2024,^[2] India witnessed FDI inflow of approximately US$70.95 billion during the 2023-2024 financial year.^[3]

This chapter lays down an overview of the regulations governing FDI in India, along with a brief description of the modalities and rules associated with making foreign investments in India.

Overview of regime

Legislative framework

The primary legislation governing the foreign exchange regime in India is:

1. the Foreign Exchange Management Act, 1999 (FEMA) along with the rules and regulations framed thereunder including the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019; and
2. the Consolidated Foreign Direct Investment Policy, 2020 (FDI Policy) issued by the Department of Promotion of Industry and International Trade (DPIIT) by way of press notes issued by DPIIT (collectively referred to here as ‘the FEMA Regime’).

Key regulators and authorities

The key regulators of foreign investment in India are the DPIIT (in the Ministry of Commerce and Industry (MCI)), along with other concerned governmental departments and ministries; and the Reserve Bank of India (RBI), which has been empowered to administer the NDI Rules.

Modes of foreign investment

Foreign investment in India can be made through the following three modes: FDI, FVCI, and FPI, which are detailed below.

FDI

FDI, which is the focus of this chapter, is the most prevalent and preferred mode of investment in India. The attendant conditionalities, rules and restrictions in relation to investments under the FDI mode are discussed below.

The FEMA Regime defines FDI as ‘investment through equity instruments by a person resident outside India in an unlisted Indian company; or 10 per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed company’.

Routes of FDI

The FEMA Regime contemplates FDI into India via two routes: the automatic route and the government (approval) route. The available route depends on the sector in which the business of the Indian investee entity falls and the quantum of the investment. Under the automatic route, FDI is permitted without any approval from the government or RBI, up to 100 per cent. Some sectors that fall under the 100 per cent automatic route include greenfield pharmaceuticals, manufacturing, telecom services, and other financial services.^[4] Sectors and activities that are neither specifically listed under the FEMA Regime, nor included under the prohibited sectors as listed below, fall under the 100 per cent automatic route and are not subject to any sectoral cap. Nevertheless, FDI in such sectors remains subject to the applicable regulations and rules.

Investments in sectors falling under the government route require the prior approval of the government or the RBI, or both, and any investment made under this route is subject to conditions that may be stipulated by the government or RBI, or both, in its approval, in addition to the conditions specified in the regulations. Sectors that fall under the 100 per cent government route (i.e., where foreign investment is permitted up to 100 per cent with approval) include print media,^[5] mining and mineral separation of titanium bearing minerals and ores, and financial services (where the financial services activity is not regulated by any financial services regulator or only a part of the financial services activity is regulated by a financial services regulator). Further, investments that are considered to have an impact on the national security of India also fall under the government route, and the same are discussed in further detail below.

In certain sectors, FDI is permitted under the automatic route up to a specified threshold, and government approval is required for any investment beyond such threshold. For instance, sectors such as defence and brownfield pharmaceuticals both fall under the automatic route up to 74 per cent, and require government approval for any foreign investment beyond 74 per cent.

Sectoral caps

As indicated above, while over the years foreign investment has been liberalised considerably by the Indian government whereby 100 per cent FDI in a majority of sectors has been made permissible, for a few sectors that are considered imperative from a national security perspective, the FEMA Regime prescribes thresholds beyond which investments by non-residents are not permitted, either under the automatic route or the government route. For instance, an entity engaged in private sector banking can receive foreign investment only up to 74 per cent of its share capital, of which 49 per cent falls under the automatic route, and any investment beyond 49 per cent and up to 74 per cent requires government approval; and the sector of print media^[6] is allowed to receive foreign investment only up to 26 per cent of its share capital, and such foreign investment can only be made under the government route.

Prohibited sectors

FDI is prohibited in entities engaged in following sectors:

1. lottery business;
2. gambling and betting including casinos, etc.;
3. chit funds;
4. nidhi companies;
5. trading in transferable development rights;
6. real estate business or construction of farm houses;^[7]
7. manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or tobacco substitutes;
8. activities or sectors not open to private sector investment, for example, atomic energy, railway operations (other than as specifically permitted under the FEMA Regime); and
9. foreign technology collaborations in any form including licensing for franchise, trademark, brand name and management contract is also prohibited for lottery business, gambling and betting activities.

Entities eligible to receive FDI

In the context of eligible investees, the FEMA Regime defines an Indian entity to mean an Indian company or a limited liability partnership (LLP). The definition of an Indian company includes a body corporate established or constituted by or under any central or state act, which is incorporated in India. FDI is permitted in LLPs engaged in sectors or activities where 100 per cent foreign investment is allowed under the automatic route and there are no FDI-linked performance conditions.

It is pertinent to note that the FEMA Regime explicitly clarifies that societies, trusts and any other excluded entities do not fall under the ambit of an Indian company and, consequently, are not eligible investee entities under the FEMA Regime.

Types of securities

Under the FEMA Regime, with respect to the FDI mode, a non-resident can invest in the following equity instruments of an Indian company:

1. equity shares, including partly paid equity shares;
2. fully paid and fully and mandatorily convertible preference shares;
3. fully paid and fully and mandatorily convertible debentures; and
4. share warrants.

The FEMA Regime also permits optionality clauses in equity instruments, which are subject to a minimum lock-in period of one year or as prescribed in the conditionalities for the specific sector, whichever is higher. Upon expiry of the lock-in period, the non-resident is eligible to exit without any assured return.

Further, non-residents can invest in capital contribution of LLPs or acquire or transfer profit shares of LLPs.

Convertible notes

In addition to the equity instruments as set out above, the FEMA Regime permits foreign investment by way of convertible notes. The key features of convertible notes are as follows:

1. they can be issued only by start-up companies^[8] for an amount of 2.5 million rupees or more in a single tranche;
2. they are a hybrid instrument with features of both debt and equity. The instrument acknowledges receipt of money initially as a debt, which at the option of the holder of the convertible note is either repayable or convertible into equity shares of the start-up company within 10 years from the issuance of the convertible note, upon occurrence of events indicated in the instrument’s terms;^[9] and
3. issuance and transfer of convertible notes to non-residents are subject to adherence to the pricing guidelines, entry routes and sectoral conditions as prescribed under the FEMA Regime.

Pricing guidelines

For acquisition and transfer of equity instruments under the FDI mode, the FEMA Regime prescribes certain pricing guidelines, which are as follows.

Issuance and transfer of equity instruments from residents to non-residents

Pricing of equity instruments of a listed Indian company to be issued or transferred from a resident to a non-resident is not to be less than the price as determined in accordance with the relevant guidelines issued by the Securities Exchange Board of India (SEBI).

For issuance or transfer of equity instruments of an unlisted Indian company, the pricing of equity instruments is not to be less than the fair value as determined by a SEBI registered merchant banker, chartered accountant or practising cost accountant, in accordance with an internationally accepted pricing methodology, on an arm’s-length basis (fair value).

For convertible equity instruments, the price or conversion formula of the instrument is to be determined upfront at the time of issuance. The price at the time of conversion is not to be lower than the fair value worked out at the time of issuance.

Transfer of equity instruments from non-residents to residents

Transfer of equity instruments of a listed Indian company from a non-resident to a resident cannot be undertaken at a price that is higher than the price as determined in accordance with the relevant guidelines issued by SEBI. In the case of equity instruments in an unlisted Indian company, the pricing cannot exceed the fair value.

The guiding principle for pricing guidelines is to ensure that a non-resident investor takes the equity risk and is not guaranteed any assured exit price at the time of its investment. This also assists in keeping a check on the outflow of foreign exchange from India.

Transfer of equity instruments from non-residents to non-residents

Transfers of equity instruments among non-residents do not attract pricing guidelines.

Reporting obligations

Foreign investments in equity instruments or capital of eligible investee entities are required to be reported to the RBI within prescribed time periods. The regulatory filings for the purpose of reporting of foreign investments are to be made on a unified online RBI portal referred to as the Foreign Investment Reporting and Management System (through SMF). Transactions among non-residents are exempt from these reporting obligations.

Additionally, every Indian company that has received FDI is required to file an annual return with the RBI by 15 July each year.

Downstream investment

Indirect foreign investment in an Indian investee entity is known as downstream investment, which is an investment (primary or secondary) made by a foreign owned^[10] or controlled^[11] Indian entity into another Indian investee entity. Downstream investment for the investee entity is subject to:

1. prior approval of the board of directors of the investee entity; and
2. the entity making the downstream investment bringing in requisite funds from abroad or making the downstream investment out of its internal accruals.

It is important to note that funds borrowed from the domestic markets cannot be utilised for making the downstream investments. Further, depending on the nature of the transaction, the rules and regulations in relation to FDI such as the pricing guidelines and reporting requirements are applicable in the case of a downstream investment, as well.

Downstream investment by a foreign owned or controlled LLP in an Indian company is permitted if the investee company is operating in sectors where foreign investment up to 100 per cent is permitted under the automatic route and there are no additional conditions applicable.

Swap of equity instruments and equity capital

The NDI Rules previously permitted issuance of equity instruments by an Indian company to a person resident outside India against a transfer of equity instruments of another Indian company. However, transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India against a transfer of equity instruments of another Indian company was not permitted. While the Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI Rules) permitted a swap of equity capital of a foreign entity, this was not provided for in the NDI Rules and prior RBI approval was required for such transactions.

Effective 16 August 2024, the NDI Rules were amended to permit a transfer of equity instruments of an Indian company, equity capital of a foreign entity or both as consideration in relation to transactions involving:

1. transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India, or
2. issue of equity instruments of an Indian company to a person resident outside India.

Such transactions are required to be in compliance with the rules prescribed by the Indian government including the OI Rules and the regulations specified by the RBI. Government approval is required to be obtained for transfers where government approval is applicable under the FEMA Regime.

This change is in line with the Union Budget speech for the 2024-2025 financial year, where the union minister of finance and corporate affairs announced that the rules and regulations for FDI and overseas investment will be simplified to facilitate foreign direct investments, nudge prioritisation, and promote opportunities for using the Indian rupee as a currency for overseas investments.

FVCI

An FVCI is a foreign venture capital investor incorporated and established outside India, which is required to be registered with SEBI. An FVCI is permitted to invest in unlisted securities of Indian companies engaged in the following sectors:

1. biotechnology;
2. IT related to hardware and software development;
3. nanotechnology;
4. seed research and development;
5. research and development of new chemical entities in the pharmaceutical sector;
6. the dairy industry;
7. the poultry industry;
8. production of biofuels;
9. hotels and convention centres with a seating capacity of more than 3,000; and
10. infrastructure.^[12]

FVCIs can also invest in:

1. securities of listed Indian companies, subject to compliance with the applicable SEBI regulations;
2. units of:
   • venture capital fund (VCF);
   • a Category I alternative investment fund (Cat-I AIF); or
   • units of a scheme or fund set up by a VCF or a Cat-I AIF; and
3. equity or equity linked instruments or debt instruments issued by Indian start-ups.

Opting for the FVCI mode of investment provides an investor the following benefits:

1. FVCIs are exempt from pricing restrictions as applicable to FDI investments; and
2. shares held by an FVCI are not subject to the statutory post-initial public offering lock-in period of six months provided that the FVCI has held the concerned shares for at least six months from the date of acquisition.

FVCIs registered with SEBI can also opt to invest under the FDI mode. However, the investment would be subject to the conditions in relation to FDI detailed above.

FPI

A foreign portfolio investor (FPI) is a person registered under the relevant SEBI regulations. FPIs are classified into two categories – Category I and Category II, where Category I includes government and government-related investors such as sovereign wealth funds and central banks, Category II includes all investors not eligible under Category I including corporate bodies, charitable organisations and unregulated funds.

FPIs can make investments in listed Indian companies or companies to be listed. The FEMA Regime defines foreign portfolio investment as follows:

Any investment made by an FPI through equity instruments where such investment is less than 10 per cent of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10 per cent of the paid-up value of each series of equity instrument of a listed Indian company.

If the investment made by an FPI including its investor group breaches the prescribed 10 per cent threshold, the FPI may divest such holding within five trading days. Alternatively, the investment is classified as FDI and the FPI or its investor group would be prohibited from making any further portfolio investment in such investee company; and is required to comply with all conditions associated with FDI, such as the pricing guidelines and reporting obligations.

In addition to the above, the cap for aggregate holdings of all FPIs collectively in a particular Indian investee company has been increased up to the sectoral caps applicable to the Indian investee company. However, for sectors where FDI is prohibited, the aggregate cap for FPI stands at 24 per cent.

The pricing of equity instruments for foreign portfolio investments is determined as follows:

1. for a public offer, the price of the equity instruments is required to be not less than the price offered to the residents of India; and
2. for a private placement, the pricing either has to be in accordance with the guidelines prescribed by SEBI or the fair value.

Where an FPI holds equity shares in an unlisted company and continues to hold such shares after such company lists its shares, the FPI’s holdings are subject to lock-in for the same period as is applicable to shares held by an FDI investor placed in a similar position according to the extant applicable laws.

Impact of covid-19

The most significant impact of the pandemic on Indian foreign investment has been the changes introduced under Press Note 3 (2020 Series) (PN#3) issued by the DPIIT on 17 April 2020.

Introduced with the intent of ‘curbing opportunist takeovers/acquisitions of Indian companies due to the covid-19 pandemic’,^[13] the PN#3 was issued promptly after the announcement of the People’s Bank of China raising its stake in HDFC Bank Limited, one of the largest private Indian banks, from 0.8 per cent to 1.01 per cent between January 2020 and March 2020, at a time when the value of these shares was sliding on account of the covid-19 pandemic.^[14]

Pursuant to the PN#3, any investment by an entity of a country sharing its land border with India (i.e., Afghanistan, Bangladesh, Bhutan, China (including Hong Kong), Myanmar, Nepal and Pakistan) (neighbour countries) or where the beneficial owner of an investment into India is situated in or is a citizen of any neighbour country may be made only with prior approval of the Indian government.^[15]

The requirement to obtain prior government approval is regardless of the sector or activity of the Indian investee company. Further, the term ‘beneficial owner’ has not been defined under the PN#3 and as such, there is no formal guidance on the quantum of shareholding that would qualify as beneficial ownership under the PN#3.

The approval process is extensive and entails a security clearance of the investor entity by the Indian government. Consequently, the approval process has been time-consuming and as such, out of a total 526 investment proposals received in the past four years, 124 have been approved, 201 rejected, and the rest are still pending.^[16]

Similar changes in other statutes

Subsequent to the issuance of the PN#3, the Indian government introduced similar amendments in other statutes:

1. The Ministry of Finance, Department of Expenditure, Public Procurement Division, vide order dated 23 July 2020 imposed restrictions on entities from the neighbour countries participating in public procurement contracts in India, pursuant to which they are, inter alia, required to obtain prior registration with the registration committee constituted by the DPIIT.
2. MCA introduced a few amendments to the Indian company law which, inter alia, require:
   • nationals of the neighbour countries to obtain security clearance from the Ministry of Home Affairs (MHA) prior to being appointed directors of an Indian company;
   • every transferee and first directors as well as subscribers of the charter documents to provide a declaration in the securities transfer form (Form SH–4 and Form INC-9) that they do not require prior approval of the Indian government for such investment, and if they do, a copy of such approval is required to be annexed to the relevant form; and
   • the Indian investee company to not make an offer or invitation of securities by way of private placement to any body corporate incorporated in, or to any national of, neighbour countries, in the absence of an approval obtained by such investor from the Indian government.

Review process

MCA vide press release dated 24 March 2023 announced that all proposals seeking governmental approval under the FDI route are now to be filed on the National Single Window System Portal.^[17] Administrative ministries and departments will continue to examine FDI proposals on the Foreign Investment Facilitation Portal.

With the intent of simplifying the approval process for FDI, the MCI, DPIIT, issued a new standard operating procedure for processing FDIs proposals, dated 17 August 2023 (SOP) setting out the guiding principles with respect to the procedure, steps, timelines and documents to be uploaded to the portal for the approval process. The SOP is aimed at rendering the process of filing FDI applications completely paperless.

Once the application is filed by the applicant online, the DPIIT identifies and assigns the proposal to the relevant administrative ministries or departments for processing and disposal. The administrative ministries and departments then process the applications seeking post-facto approval in terms of the FDI Policy.

The application is also sent by the DPIIT to the RBI, for its comments from the perspective of the FEMA Regime, and the Ministry of External Affairs (MEA) for information and comments, if any. Further, certain proposals that are considered critical from the perspective of national security also require security clearance from the MHA; these include investments in broadcasting, telecommunication, private security agencies, defence, civil aviation, and applications arising out of the PN#3.

Proposals requiring clarification under the FDI Policy may be referred to DPIIT. Clarification and consultation with any other ministry or department will require the approval of their secretary. The competent authority may also ask the applicant for additional information and documents.

Once the processing is complete in all respects, the competent authority will take a decision within the prescribed timeline and convey the same to the applicant.

In addition to the above, proposals involving FDI in excess of 50 billion rupees also require clearance of the Cabinet Committee of Economic Affairs.

With respect to the approximate timeline for the approval process, while the SOP prescribes an indicative timeline of 12 weeks from the date of submission of the application, the effective time taken for disposal of the application is generally longer. The approval process could take six to nine months, subject to factors such as the sector for which the application is made; approvals under PN#3 (if required); and) other nuances of the application. This is primarily attributable to the level of scrutiny involved and the interplay between several departments and ministries in the decision-making process. Furthermore, the indicative timeline does not factor in the time spent by applicants in removing deficiencies in the proposals and supplying additional information, as required.

Conditions

To enable the RBI to effectively administer foreign investment in India, the elaborate legislative framework curated under the FEMA Regime prescribes several obligations and requirements on all parties involved including the investor, transferee, transferor and the issuer or investee company. These include:

1. Reporting obligations: every FDI related transaction is required to be reported to the RBI within prescribed timelines, and every Indian company that has received FDI is required to file an annual return with the RBI.
2. Pricing guidelines: the pricing guidelines ensure that a non-resident does not acquire equity instruments at a price that is lower than fair value; or sell or transfer equity instruments to a resident at a price above fair value.
3. Geographical restrictions: in addition to the PN#3, foreign nationals from neighbour countries are required to obtain security clearance for being appointed as a director of an Indian company; Indian company law also requires at least one director of an Indian company to be an Indian resident.^[18] Appointment of key designations such as managing director, manager or full-time director needs to be approved by the Indian government if the position is not being held by an Indian resident.^[19]
4. Attendant conditions: the FEMA Regime prescribes certain set conditions required to be fulfilled for FDI in identified sectors. Examples of such sectors and the associated conditions are below.

Defence

While FDI up to 100 per cent is permitted in the defence sector, only 74 per cent is permitted under the automatic route for companies seeking a new industrial licence. Investments beyond 74 per cent require prior approval of the Indian government. Several conditions have been prescribed with respect to investments in this sector, which include:

1. the application for grant of a licence to be reviewed by DPIIT, the MCI in consultation with the Ministry of Defence and the MEA;
2. investments are subject to security clearance by the MHA; and
3. the investee company receiving FDI is to be structured to be self-reliant in terms of designing and development of the products. The investee company or joint venture, is also to provide for maintenance and life cycle support facility for the products manufactured by it in India.

Insurance

The sectoral cap for FDI in the insurance sector is 74 per cent, which falls under the automatic route. However, the conditions required to be fulfilled for FDI in this sector include:

1. Investment is subject to compliance with the Insurance Act, 1938, and the investee company needs to obtain the necessary licence or approval from the Insurance Regulatory and Development Authority of India (IRDAI) for undertaking insurance and related activities.
2. An Indian insurance company receiving foreign investment requires that the following persons shall be resident Indian citizens:
   • at least one among its:
     • chairperson of its board;
     • managing director; and
     • chief executive officer;
   • the majority of its key management persons; and
   • the majority of its directors.
3. An Indian insurance company receiving foreign investment must comply with the Indian Insurance Companies (Foreign Investment) Rules, 2015 and applicable rules and regulations notified by the Department of Financial Services or the IRDAI.

Pharmaceuticals

FDI up to 100 per cent under the automatic route is permitted in greenfield projects, while under brownfield projects, FDI is permitted only up to 74 per cent under the automatic route, with investments beyond 74 per cent falling under the government route. FDI in the pharmaceutical sector is subject to certain conditions such as:

1. non-compete provisions not being allowed (except under exceptional circumstances with government approval); and
2. the non-resident and the investee brownfield pharmaceutical company to furnish a certificate setting out the inter se agreements between them.

The other sectors and activities in relation to which such specific conditions have been prescribed include mining, broadcasting, print media, civil aviation, construction and development of townships, housing, built-up infrastructure, cash and carry wholesale trading, e-commerce, multi-brand retail trading, railway infrastructure, asset reconstruction companies, banking and credit information companies.

1. General approval conditions: in addition to the conditions prescribed under the FEMA Regime, the RBI or competent authority tend to impose certain common conditions on granting an approval under the government route. These may include conditions in relation to:
   • tax: any form of tax relief claimed by foreign investors under the Indian tax laws or the relevant double taxation avoidance agreements is to be subject to a separate examination by the relevant tax authorities;
   • environment: adequate anti-pollution measures are to be adopted including adoption of measures to monitor effluent and emissions in accordance with applicable standards;
   • compliance with other laws: depending on the sector of the investee entity, the proposed investment must be in compliance with applicable laws including those related to anti-money laundering, central and state environmental laws including local zoning, land use laws and import policy; and
   • board composition: the government provides a conditional approval directing the non-resident investor who acquired a minority stake in the investee company not to control the majority of the board composition. The actual control of the board must be retained by the resident promoters or shareholders.
2. Sectoral regulation: in addition to the stipulations prescribed under the FEMA Regime, the relevant sectoral regulators may impose additional conditions. For instance, in transactions involving investment in the insurance sector requiring approval of IRDAI, conditions such as a lock-in for a period ranging up to five years on the investor’s investment are common.

Penalties and rectification measures

For any contravention under the FEMA Regime or approvals granted by the RBI, the contravener may, upon adjudication, be liable to a penalty of up to three times the amount involved in the contravention. Where the amount involved is not quantifiable, the penalty may extend up to 200,000 rupees. Separately, for any contravention that continues beyond the first day, an additional penalty of 5,000 rupees for each day of delay may also be payable by the contravener.

However, in order to mitigate transaction costs, and rectify contraventions in a time-effective manner, a contravener could opt for a process known as compounding in lieu of the aforementioned adjudication process. Compounding is a voluntary process in which an individual or a corporate seeks remediation of an admitted contravention by payment of the requisite penalty as determined by the Director of Enforcement, RBI. A compounding process can be undertaken only after all administrative actions have been completed, by way of obtaining post facto approvals or unwinding the transactions, where such transactions are not permissible. The FEMA Regime requires the compounding process to be completed within 180 days from the date of receipt of the compounding application by the authority. A contravention that has been compounded cannot be the subject matter of any separate or future adjudication by the RBI.

In relation to contraventions associated with a delay in adhering to the reporting obligations, the contravener has the option to make the relevant filings by payment of a late submission fee computed on the basis of the calculation matrix set out under the FEMA Regime. All other contraventions under the FEMA Regime would have to be compounded or adjudicated, as set out above.

Practical insights

India has in place a fairly extensive framework for regulating foreign investments, with guidelines ranging from pricing to sector-specific caps and conditions. Building on this framework, the Indian government has taken multiple steps to streamline and liberalise the process of foreign investment, which includes allowing 100 per cent investments in a majority of sectors and introducing a unified portal for reporting of foreign investment transactions.

Investors should understand and carefully analyse the relevant provisions as well as several other factors before making any investment in India. These factors include the growth potential in the relevant sector, degree of regulatory supervision and communication with regulators in conducting of business, state-specific incentives for establishing businesses in particular locations and the requirement to obtain approval for foreign investment from the RBI or the Indian government. In light of this, a single window clearance system has been established by certain states wherein an investment facilitation centre is available to assist investors with their foreign investment process in these states.

Approval requirements and communication between regulators is an important aspect to consider in the context of transaction timelines and needs to be appropriately factored into the structure and design of documentation for any transaction. For example, foreign investment transactions under the government route that contemplate a merger, demerger or amalgamation involve an additional layer of approval from the National Company Law Tribunal, Competition Commission of India or other relevant authority under the applicable statute, apart from obtaining an FDI approval under the FEMA Regime.

It is also pertinent to note that FDI approvals are discretionary. Information in relation to previous approvals or rejections is not freely available in the public domain, which results in a lack of information and a degree of uncertainty which prospective investors should be mindful of in their comprehensive risk assessment of the transaction.

Therefore, a clear understanding of the applicable framework and assessment of the aforementioned factors is integral prior to making foreign investment in India.

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Endnotes

^[1] Radhika Gaggar and Anand Jayachandran are partners, Supriya Aakulu is a principal associate and Suja Nair is an associate at Cyril Amarchand Mangaldas.

^[2] United Nations Conference on Trade and Development, World Investment Report, 2024 (see unctad.org, p. 9).

^[4] Other financial services mean financial services activities regulated by financial sector regulators, such as the RBI, Securities Exchange Board of India, the Insurance Regulatory and Development Authority of India, National Housing Bank or any other financial sector regulator as may be notified by the government of India.

^[5] Publishing or printing of scientific and technical magazine or specialty journals or periodicals; and publication of facsimile edition of foreign newspapers.

^[6] An entity engaged in the business of publishing of newspapers and periodicals dealing with news and current affairs and publishing Indian editions of foreign magazines dealing with news and current affairs.

^[7] Real estate business means dealing in land and immoveable property with a view to earn profit from there and does not include development of townships, construction of commercial premises, etc. and earning of rent or income on lease of the property, not amounting to transfer.

^[8] A startup company means a private company incorporated under Indian company law, registered with the DPIIT in accordance with G.S.R. 127 (E), dated 19 February 2019.

^[9] This period was increased to 10 years from five years under Press Note 1 of the 2022 Series issued by the DPIIT on 14 March 2022.

^[10] An Indian company wherein the beneficial holding of more than 50 per cent of the equity instruments of such company is owned by non-residents. With respect to an LLP, ownership is to be construed as capital contribution of more than 50 per cent and having a majority profit share.

^[11] An Indian company of which the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner lies with non-residents. In relation to an LLP, the right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over the policies of the LLP, lies with non-residents.

^[12] The term ‘infrastructure sector’ has the meaning as provided in the Harmonised Master List of Infrastructure sub-sectors approved by the Indian government vide notification F. No. 13/06/2009-INF dated 27 March 2012.

^[15] Previously, these restrictions were limited to investments made by residents or entities from Bangladesh and Pakistan only.

^[18] Such directors should have stayed in India for at least 182 days during the financial year.

^[19] Such person should have spent at least 12 months in India prior to such appointment.