FDI is still prohibited in some sectors or sub-sectors even though India has slowly implemented a program of economic reform and relaxed many of these constraints. Local investment conditions may vary from state to state. However, in some cases, local investment conditions may vary within a state also, due to various levels of corruption, labor relations, and quality of government operations.
In many sectors the GOI grants automatic FDI approvals and has gradually expanded the list over time. Foreign investors for these sectors simply notify the Reserve Bank of India (RBI) of their investments and do not need government licenses or approvals. However, still some sectors require government approval by the Foreign Investment Promotion Board (FIPB) or the cabinet committee on Foreign Investment. Under the Government approval route, the ministry of Finance's Department of Economic Affairs receives applications for FDI proposals other than by Non-Resident Indians (NRIs), Export-Oriented units (EOU(s) which are industrial companies that export their entire production of goods and services), and proposals for FDI in single Brand product retailing. FDI proposals for single brand product retailing and by NRI's are received by the Ministry of Commerce and Industry (MOCI) Department of Industrial Policy (DIPP). EOU(s) send their FDI proposals to the MOCI's Department of Commerce. The rules differ from industry to industry and are frequently changed as per requirements.
Recent changes made in the FDI policy tend toward greater liberalization. Reforms in the Industrial policies have reduced industrial licensing requirements, removed restrictions on expansion, and facilitated easy access to foreign technology and FDI. Still there are some restrictions on the majority of existing joint ventures, but new and upcoming joint ventures can negotiate their own terms on a commercial basis. The ability of a local firm to restrict its foreign partner's business strategy has been reduced, but exit strategies and dissolution procedures for existing joint ventures still remains uncertain.
There are several ways to cover the foreign investment policy that includes the Foreign Exchange Management Act (FEMA), the RBI guidelines, and Press Notes issued by the MOCI and Ministry of Finance. The GOI revealed a draft incorporating FDI policy consolidating 177 Press Notes for easy reference, in December 2009. The policy is scheduled to be operational by March 31. The policy is reassessed every six months, incorporating the changes in the regulations during the intervening period of six months.
As per the MOCI Press Notes released in February 2009, if a company with foreign investment is majority owned or controlled by resident Indians, the company could conduct "downstream" investment (investment in another company) without counting towards FDI caps in the receiving entity or sector. In contrast, downstream investment by a foreign-owned and a foreign-controlled entity counts pro-rata towards FDI caps. (For this purpose, NRIs are considered foreign.) This allows foreign shareholding to count as domestic shareholding as long as it comes through a shell company with only 49 percent foreign ownership. Importantly, the GOI no longer differentiates between portfolio and direct investment in calculating foreign ownership. Several large firms, especially banks, with low FDI but high foreign portfolio holdings may find themselves breaching foreign ownership limits when the DIPP "notifies" the Press Notes, expected in May 2010, putting them in force.
Foreign investment is prohibited in many areas or subsectors of agriculture, real estate, multi-brand retailing, legal services, security services, atomic energy, and railways, gambling, betting, casinos, and lotteries. Some forms of realty development, such as integrated townships, are permitted FDI. NRIs, however, are allowed to invest in housing and real estate development. They are also allowed to hold up to 100 per cent equity in civil aviation companies, where foreign equity is otherwise limited to 49 percent. NRIs are able to claim "Overseas Citizenship of India," which allows them to own property and invest in India as citizens.
In 2008, India's National Security Council suggested umbrella legislation, called the National Security Exception Act, which would authorize the government to suspend or prohibit any foreign acquisition, merger, or takeover of Indian companies that could be considered damaging to national interests. However, the Ministry of Finance, which would have the lead on drafting such legislation, has been silent on such legislation and such legislation has not yet been introduced in Parliament.
Overseas Corporate Bodies (OCBs) are subject to the same FDI regulations as NRIs. An OCB is a company, partnership firm, or other corporate body that is at least 60 percent owned directly or indirectly by NRIs including an overseas trust in which not less than sixty percent beneficial interest is held by a NRI directly or indirectly.
The GOI's privatization and disinvestment policy permits foreign investors to bid for the sale of state-owned enterprises. Foreign investors are given national treatment at the time of initial investment or after the investments are made. Obligations and local content requirements are imposed on foreign investors in certain consumer goods industries.
Existing companies can also use the automatic approval route for additional FDI provided the sector falls under the automatic route. Requirements are: (i) the equity increase must accompany an expansion of the company's equity base (i.e., the NRI/foreign investors cannot simply acquire existing shares); (ii) the investment must involve a foreign currency remittance; and (iii) the Indian company's Board of Directors must give its approval to the equity increase.
A detailed list of the various FDI norms for most Industry and business sectors is given under the previous Chapter on "FDI Regulations and standards".
