#Deepsight | 11 July 2022

FOREIGN INVESTMENT IN
INDIA
 W ho is a “Foreign Investor”?
As per the (Indian) Foreign Exchange Management Act, 1999 (“FEMA”), a foreign investor is a
person or body corporate registered or incorporated outside India and not having an office,
branch, or agency in India. FEMA governs foreign investments in listed (on recognized stock
exchanges) as well as unlisted companies in India. FEMA governs the entry routes for foreign
investors in Indian companies.

E N T RY ROUT ES FO R FO R E I G N I N V ES TME NT S I N
I NDIAN COM PANIE S
Foreign Direct Investments
The FEMA NDI Rules, 2019 and the
consolidated Foreign Direct Investment
Policy, 2020 (“NDI Rules”) defines FDI as
“investment through capital instruments by a
person resident outside India in an unlisted
Indian Company; or in ten per cent or more
of the post issue paid-up equity capital on a
fully diluted basis of a listed Indian
company”.
Foreign Venture Capital Investment
As per the SEBI (Foreign Venture Capital Investors)
Regulations, 2000, a “Venture Capital Fund” means a
fund registered with SEBI under the Securities and
Exchange Board of India (Venture Capital
Funds) Regulations, 1996 or under the Securities
and Exchange Board of India (Alternative
Investment Funds) Regulations, 2012 in the sub-
category of “Venture Capital Fund” under Category I
Alternative Investment Fund.

Foreign Portfolio Investment

FPI means “any investment made by a resident outside India through
the equity instruments where such investment is less than ten per cent
of the post issue paid-up share capital on fully diluted basis of a listed
Indian company or less than ten per cent of the paid-up value of each
series of equity instruments of a listed Indian company”.
 ROUTES FOR FDI IN INDIAN
COMPANIES
1. Automatic Route (100%) for certain sectors:

 Th e r e i s no pr io r a ppr o va l r eq ui r e d f r o m t he G o ve r n m e nt a n d a f o r e i g n i n ve s t o r
c a n h o l d u p t o 1 0 0 % o f t h e c a p i t a l o f a n u n l i s t e d c o m p a ny.
 I n c a s e o f a n l i st ed c om pa ny, t h e m i ni m um pu bl i c s ha r eh ol di ng ( p u b l i c f l oat )
s h o u l d b e 2 5 %, o r, i n s o m e c a s e s , 1 0 %.
 C u r r e n t l y, m o s t ( b u t n o t a l l ) s e c t o r s a l l o w 1 0 0 % f o r e i g n i n ve s t m e n t .

2 . A u t o m a t i c R o u t e ( a s p r e s c r i b e d) :

 Fo r c e r t a i n s e c t o r s , t h e c a p f o r f o r e i g n i n ve s t me n t i s u p t o t h e pr e s c r i be d
pe r c e nt a ge a n d b e yo n d s u c h c a p , p r i o r a p p r o va l o f t h e g o ve r n me n t ma y b e r e q u i r e d
( u n l e s s d i s a l l o we d p o s t t h e a u t o m a ti c r o u t e c a p ) .

3. Approval Route:

 P r i o r a p p r o va l o f t h e g o ve r n m e n t i s r e q u i r e d .

4 . P r o h i bi t e d S e c t o r s

 C e r t a i n s e c t o r s a r e c o m pl e t e l y p r ohi bi t e d f o r f o r e i g n i n ve s t me n t , s u c h a s l o t t e r y
b u s i n e s s , g a mb l i n g a n d b e t t i n g , c h i t f u n d s , N i d h i c o mp a n y, r e a l e s t a t e b u s i n e s s o r
c o n s t r u c ti o n o f f a r m h o u s e s , R E I Ts , c i g a r, t o b a c c o m a n u f a c t u r i n g , a m o n g o t h e r s .
 Permitted Sectors (under Automatic and Government Route)

The FDI Policy has prescribed the maximum amount which can be invested by a foreign
investor in the specific sector. The table below specifies the sectoral caps to investment in an
entity depending upon the sector and the route for investment:

SECTORAL CAPS AND ROUTES:

 INVESTMENT RESTRICTIONS BASED ON GEOGRAPHICAL
CONSIDERATIONS

As per the NDI Rules, if the foreign investor as an entity or the the beneficial owner of the
investment is situated or is a citizen of a country which shares land border with India (which
includes China), then the investment is allowed only under the Government route (approval
route).

Entities from China, Bangladesh, Pakistan, Nepal, Myanmar, Afghanistan, and Bhutan may make
applications for Government approval on the Foreign Investment Facilitation Portal of Department
for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of
India.

LOCK-IN PERIOD ON FOREIGN INVESTORS

In case a foreign investor holds any pre-issue capital in the issuer company (IPO-bound
company) which is pursuing an initial public offer, then a lock-in period of 06 (six) months post-
IPO shall apply to the shareholding of the foreign investor as per Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

However, a lock-in period of 18 (eighteen) months and 06 (six) months shall be applicable in
case of promoters and anchor investors, respectively.
 FDI vs FPI vs FVCI : Key Differences:

Different registration requirements in case an investment is made through the

FDI route (lower level of registrations required) & FPI route (prior
registrations required, for e.g., Category I, etc.) & FVCI (registrations
required).
Different compliance requirements exist for FDI vs. FPI vs. FVCI
investments.

FDI investments can be more than 10%, however, FPI investments can be
under 10%, in each case, in the share capital of the Indian company.

FDI seeks to provide direct control in the Indian company whereas FPI & FVCI
investments do not and are used largely for reaping financial benefits of the investment.

An FVCI is required to invest not more than 33.33% of the investible funds by way
of: (a) subscription to IPO of a VC undertaking or investee company whose shares are
proposed to be listed; (b) debt or debt instrument of a VC or investee company in which
the FVCI has already made an investment by way of equity; (c) preferential allotment of
equity shares of a listed company subject to lock in period of one year.