By Amit Kishore Singh,

Legal & secretarial, Suzuki Motorcycle India (P) Ltd 


India’s liberal Trade Policy has a direct effect on Foreign Direct Investment (FDI) flows and two are closely inter-related. After China, India seems become a favorite destination for Global Investors. The financial year 2006-2007 has seen FDI equity inflows go up to almost US$ 16 billion from US$ 5.5 billion in the previous year. India share of world trade has moved from 0.765% during last five years to above 1.5 % in 2006.


In view of above, it’s appeared that the India’s liberalization and privatization process over the past decade has created massive investment opportunities which have indubitably led to the growth and development of the Indian economy. Before this phase of liberalization, volume of foreign investment was insignificant under the regulatory regime prevailing in India.


In the context of changed global scenario the FDI has become a major source of finance and results in industrial co-operation marked by international mobility of capital from developed nations to the developing nations. The Global investors and developed countries are also seeking investment of their surplus fund in the most rewarding manner. In the light of reformed FDI policy, India is one of the best place to explore the opportunities.


In a globalized economy, one can operate capital flows beyond national boundaries and barriers. The Global investor or investors from developed countries seeking investment outside their countries because of low rate of return in their own counties. India being a developing nation is a best one to attract the global investor because of increased rate of economic growth, cheap and talented manpower and resources.


However, in the era of globalization, the Indian economy has to be open in a systematic and logical manner. There has been a plethora of changes in the laws governing foreign exchange in India. India has departed from the stringent regulations under Foreign Exchange Regulation Act, 1973 (‘FERA”) to effective management of foreign exchange under the present Foreign Exchange Management Act, 1999(‘FEMA).Under the provisions of FEMA, the Reserve Bank of India (‘RBI”) has been given the power to make, issue and implement rules and regulations pertaining to Foreign Exchange transaction. The rules pertaining to FDI are governed by Foreign Exchange Management (Transfer or Issue of security by a person resident outside India) Regulations, 2000.


A Foreign Company can set up business by having a Liaison or Representative Office or set-up Joint Venture with an Indian partner or establish a Wholly Owned Subsidiary.


A Foreign Company can commence its business in India with or without retaining status of a Foreign Company. It may retain its status as a Foreign Company, if it intends to carry out business through Branch Office or a Project Office or a Liaison Office subject to the provision of Foreign Exchange Management (Establishment in India of Branch Office or office or other Place of Business) Regulation, 2000 under the FEMA, 1999.


Moreover, Foreign Company can incorporate a Indian Company according to the Indian Companies Act, 1956 in the form of Wholly owned subsidiary Company (WOS) or as a Joint venture Company.


Under Foreign Exchange Management (Transfer or issue of security by a person resident outside India) regulation, 2000 two modes are prescribed for a Foreign Company to invest in India to set up business in India.


Under Automatic Route : The FDI is allowed upto 100% in all ‘business’ activities/ sectors except the following which requires prior governmental approval:


i.                     Activities/items that require an Industrial license;

ii.                   Proposal in which the foreign collaborator has an existing financial/technical collaboration in India in the same “field”;

iii.                  Proposal for acquition of shares in an existing Indian company in financial service sector and where Securities Exchange Board of India (Substantial acquition of shares and take over) Regulations, 1997 is attracted;

iv.                 All proposal falling outside notified sectoral policy caps or under sectors in which FDI is not permitted;

v.                   Investment in excess of sectoral equity caps/limits as prescribed in the said regulation. For example in Insurance the FDI cap is 26% beyond which permission of FIPB is required.


If all of the above conditions are satisfied no prior approval of Government of India or RBI is required. However, the Indian Company is required to file a report with RBI within 30 days of receipt of consideration (eg. share application money) from the foreign investor. Thereafter, it is required to file another declaration in the prescribed Form (FC-GPR) with in 30 from the date of issue of shares to the foreign Investor.


Approval Route (Government Route): Foreign Investment which does not qualify for the automatic approval route is required to be approved by the Foreign Investment Promotion Board (‘FIPB’), Ministry of Finance. Foreign Investment is prohibited under Government as well as Automatic Route in the following sectors as on 10/02/2006:


i.                     Retail Trading (except single brand product retailing)

ii.                   Automatic Energy;

iii.                  Lottery Business;

iv.                 Gambling and Betting


All activities/sectors would require prior Government approval for FDI  where more than 24% foreign equity is proposed to be included for manufacture of items reserved for Small Scale Sector. Normally, Secretariat of Industrial Approval (SIA) or FIPB takes 25-30 days to accord approval. FIPB considers various factors before giving approval like quantum of investment, employment generation, technology adoption, export commitments, affect on environment etc.

That, day is not far when we will be able to label India as a developed nation. The role of FDI is crucial in this regard, as it will leads to new opportunities to the Indian as well as for global executives,  that can be fully optimized.