India’s foreign investment regulations and limitations

Jan 25, 2012 12:00 AM

A look at foreign investment access to the Indian market as relates to several key sectors

by Ankit Shrivastava, Dezan Shira & Associates

India has recently liberalized foreign investment regulations in many of its key sectors, opening up commodity exchanges, credit information services and aircraft maintenance operations.
The foreign investment limit in public sector unit refineries has been raised from 26 % to 49 % and an additional sweetener is that the mandatory disinvestment clause within five years has been done away with.

In a major relief to financially distressed airline companies, the government of India has also made a statement that foreign airlines will soon be allowed to acquire up to 49 % stake in domestic carriers. After being debated for years, the Ministry of Civil Aviation announced the move following a 75-minute meeting with the Finance Minister in the backdrop of at least two major domestic airlines struggling to avoid a shutdown due to financial troubles.
Additionally, 100 % FDI in aircraft maintenance and repair operations has been allowed.

India has also decided to allow 26 % FDI and 23 % FII investments in commodity exchanges, subject to the proviso that no single entity will hold more than 5 % of the stake. Sectors like credit information companies, industrial parks and construction and development projects have also been opened up to more foreign investment.
Keeping India’s civilian nuclear ambitions in mind, India has also allowed 100 % FDI in mining of titanium, a mineral which is abundant in India.

In India, any manufacturing project by a non-micro or small-scale enterprise that manufactures items reserved for the MSE sector would need to take the government route if foreign investment is more than 24 % of the capital. Such an undertaking would also require an industrial license under the Industries (Development & Regulation) Act (1951).
The issue of industrial license is subject to a few general conditions and the specific condition that the industrial undertaking shall export a minimum of 50 % of the new or additional annual production of the MSE reserved items to be achieved within a maximum period of three years.

The Government of India made a decision to bring out the National Manufacturing Policy to carry about a quantitative and qualitative change with the following six objectives:

  1. Augment manufacturing sector growth to 12-14 % over the medium term to make it the process of growth for the economy. The 2-4 % degree of difference over the medium term growth rate of the overall economy will facilitate manufacturing to contribute at least 25 % of the national GDP by 2022.
  2. Increase the speed of employment in manufacturing to generate 100 mm additional jobs by 2022.
  3. Create suitable skill sets among the rural immigrant and urban deprived to make growth wide-ranging.
  4. Boost domestic value addition and technological “depth” in manufacturing.
  5. Improve international competitiveness of Indian manufacturing through appropriate strategy support.
  6. Ensure sustainability of growth, mainly with regard to the environment including energy efficiency, optimal utilization of natural resources and restoration of damaged/degraded eco-systems.

Opened up to foreign investment in 1991, the automobile sector in India is now open to 100 % FDI.
The automobile industry in India is growing by 18 % per year.

  • FDI up to 100 % has been permitted under the automatic route to this sector, which has led to a turnover of $ 12 bn in the Indian auto industry and $ 3 bn in the auto parts industry.
  • The manufacturing of automobiles and automobile components is permitted with 100 % FDI under the automatic route.
  • The automobile industry in India does not belong to the licensed agreement.
  • Imports of components are allowed without any restrictions and also encouraged.

Unlike China, India has allowed FDI inflows in its coal industries.
Following are some of the vital points for overseas investment in the coal sector.

  • The captive coal mining unit allows private sector participation.
  • All the sales of coal mining are made through Coal India Ltd.
  • FDI inflows are permitted in the coal production unit in India depending on outputs.
  • Foreign investors holding less than a 50 % share in coal production units in India can invest in coal mining or other related activities, and this does not require approval from the Foreign Investment Promotion Board. This has been systematized by the Indian government in order to put certain restrictions on the power of the foreign investors while investing in the Indian market.
  • FDI of higher value are sometimes permitted in coal production depending on the end-product. If the output of coal production unit links to any significant sector or activities, then FDI of higher value is not permitted, which is just the opposite if the end-product is not so serious.
  • FDI inflows up to 100 % are permitted in the coal and lignite mining for captive consumption in the power generation sector, and for captive consumption of the same in steel and cement sector, FDI is allowed up to 74 %.
  • FDI of up to 10 % is allowed in the coal processing unit which includes coal washing and sizing.

Renewable energy sector
The government of India, like China, allows 100 % foreign direct investment in the renewable energy sector and has put in place policies conducive to attracting foreign companies to the market.

FDI up to 100 % is permitted through the automatic route for the manufacturing of drugs and pharmaceuticals, provided the activity does not attract compulsory licensing or involve the use of recombinant DNA technology and specific cell/tissue targeted formulations.
FDI proposals for the manufacturing of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology, and specific cell/tissue targeted formulations will require prior government approval.

Internet-based services
FDI up to 74 % is permitted, subject to licensing and security requirements for the following:

  • Internet service (with gateways).
  • Infrastructure providers (IP Category II).

Radio paging service
FDI up to 100 % is permitted in respect to the following telecom services:

  • ISPs not providing gateways (both for satellite and submarine cables).
  • Infrastructure providers providing dark fibre (IP Category I).
  • Electronic mail.
  • Voice mail.

Healthcare and medical institutions
Like China, FDI is permitted up to 100 % under the automatic route in hospitals in India. Controlling stakes are also permitted in hospitals for foreign investors. Foreign Investment Promotion Board approval is only required for foreign investors with prior technical collaboration, but allowed up to 100 %.
Current regulations also permit other forms of capital mobilization, such as through ADRs and GDRs, up to 49 %, which are treated as FDI.

Energy and petroleum
India now permits up to 100 % foreign direct investment into the petroleum and natural gas sector, under the automatic approval route of the Reserve Bank of India.
The caps on FDI are as follows:

  • FDI up to 100 % is permitted via the automatic route on petroleum product marketing. FDI for this sector would be permissible subject to the existing sectoral policy and regulatory framework in the oil marketing sector.
  • FDI up to 100 % is allowed on the automatic route in oil exploration in both small and medium-sized fields, subject to and under the policy of the government on private participation in: (1) exploration of oil and (2) the discovered fields of national oil companies.
  • FDI up to 100 % is permitted via the automatic route for petroleum product pipelines subject to and under the government policy and regulations thereof.
  • FDI up to 100 % is permitted for natural gas/liquefied natural gas pipelines with prior government approval.
  • FDI up to 100 % is permitted in, other than refining and including market study and formulation; investment/financing, setting up infrastructure for marketing in petroleum and natural gas sector subject to sectoral regulations, issued by the Ministry of Petroleum and Natural Gas, and in the case of actual trading and marketing of petroleum products, divestment of 26 % equity in favour of Indian partner/public within five years.
  • FDI up to 26 % is permitted in the refining sector in case of public sector undertakings, with prior approval of the Foreign Investment Promotion Board and up to 100 % in case of private companies under the automatic route.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, India, Singapore and Vietnam.
For more information regarding doing business in emerging Asia, please email, visit

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