India in focus: Foreign Investment in India
09 December 2021
According to the 2021 UN World Investment Report, India was the fifth largest recipient of foreign investment globally in 2020, attracting inflows of USD64 billion last year. This represents growth of over 25% compared to its 2019 figures, despite the global impact of COVID-19.
The growth of investment into India in recent years can be attributed to various factors, including easing of Indian foreign investment regulation. Foreign investment in Indian companies across the majority of sectors is now possible without the need for prior regulatory approval. Further, previous restrictions on investment into a number of sectors have been relaxed (including in the insurance sector, as explored in a previous India in Focus article).
Regulatory framework and nature of restrictions
Foreign investment in India is governed primarily by the Foreign Exchange Management Act 1999 as amended from time to time (FEMA), various regulations and notifications issued under FEMA as well as related foreign policy press notes and releases issued by the Indian government (the Government).
Under FEMA, investment by any person who is resident outside India into the capital of an Indian company or Indian limited liability partnership is considered foreign investment.
Restrictions applicable to foreign investors depend on: (i) the quantum of the proposed investment; and (ii) the sector into which the investment is being made.
Investment into some industries such as tobacco manufacturing, atomic energy generation and gambling is completely prohibited.
In addition, investors from any country bordering India (including China and Pakistan), or investors with beneficial owners situated in such a country, must follow the Government Route (see Section 4.1 of the PDF of this article), irrespective of the sector of the investment.
Breach of India’s foreign investment regulations can attract a penalty of up to three times the amount involved in the contravention, with daily charges for continuing breaches. FEMA is also broad in that liability can be imposed on every person who was “in charge of” or “responsible to” the Indian target company at the time of the breach. Further, depending on the specific rule breached, a breach of FEMA can also have consequences for the validity of the transaction – for example, the Government can order an unwinding of the transaction with respect to the relevant Indian target company.