Overview:

Functioning as a catalyst in economic growth, Foreign Investments – either in direct or indirect way, has been playing a huge role when it comes to socio-economic stability in any foreign trade exchange. But what does it mean in general? As it connects the countries across the world, does it require major trade approvals from government and regulatory authorities like RBI, SEBI in domestic countries like India? Why are certain sector-related investments being restricted in India as per FDI policy? This article will be looking into what direct investment is their type and what are certain sectors in which FDI policy prohibits investments in India.

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What is a foreign investment?

Before looking into different types of foreign investments, it is important to define the term foreign investment. Foreign Investment, as the term denotes, refers to the capital flow that takes place between two countries through which an investor is given a certain amount of holding stakes in the domestic companies either in capital structure or in the assets of the company. By investment, we mean that there is an act of subscription, acquisition, transfer or holding of the security issued by the issuing company in a domestic country. As per the Foreign Direct Investment policy of India in 2020, Foreign Investment has been defined as the investment initiated by an investor, who is residing outside India, on the assets of an Indian company or in any capital of an LLP in India on the basis of repatriation. It has been noted that if a person shows a beneficial interest that he or she has held in an Indian company, then such investment shall be considered to be foreign investment in India. As per Indian FDI policy, an individual person residing outside India can have a foreign investment either through Foreign Direct Investment or Foreign Indirect or Portfolio Investment in an Indian company.
  • Direct and Indirect Investments:

Having seen what foreign investment is, let us define what the types of foreign investments are. Foreign investments are of two classes, and one is foreign direct investment, and the other is foreign indirect or portfolio investment. Firstly, as the name denotes, in foreign direct investment, an investor will invest on the basis of growth and other factors of a domestic company in an open economy. Again, the Indian FDI policy of 2020 defines FDI as any investment made by an investor resident outside India on the capital instruments of an unlisted Indian company or an investment of 10% or more of the paid-up equity capital of a listed company. It has also been stated in the FDI Policy that even if the investment made by such non-resident investor goes below 10 per cent also, such an investment shall be considered as foreign direct investment.

On the other hand, Foreign Portfolio or Indirect Investment (FPI) means that an investor makes an investment in order to diversify the portfolio of the company. Indian FDI policy defines FPI as an investment that is made by a person residing outside India in a capital instrument of a listed company, where the percentage of investment is less than 10% of the post issue paid-up share capital of such company or which is less than 10% of paid-up value of the capital instrument. For the time being, a person is said to be Foreign Portfolio Investor when he/she register themselves as per SEBI (FPI) regulations of 2019. Such registered investors shall be allowed to invest in Indian securities as per the foreign exchange management act of 1999 and its rules.

  • Regulation of Foreign Direct Investments in India:
It is important to note that FDIs brings along specific legal requirements that are to be complied with by the investors before making their investments. So, we should refer to respective regulatory bodies and laws when it comes to foreign exchanges like FDI. The three central regulatory bodies involved in FDIs are the Reserve Bank of India, SEBI and the Union Government of India. FDI policy permits two ways to get approvals for investments in India. They are 1)Automatic route & 2) Government route. In the case of automatic route approval, there is no requirement of prior approval for a person residing outside India to get from RBI and the union government. On the other hand, the government route requires prior governmental consent or approval and proper compliances of rules framed by the union government is required. Apart from such rules, all the investors should comply with the sector-related laws in India, their rules, regulations and conditions from time to time.
  • FDI – Prohibited Sectors in India:
Chapter 5 of Foreign Direct Investment policy, 2020 provides sector-related conditions on FDI, and it contains explicitly the sectors in which the FDI cannot be applied or shall not be subjected to any FDI. Clauses (a) to (h) are those sectors in which prohibition applies. They are reiterated as,
  • a. Lottery Businesses, including those run by a government or private and Online lotteries,
  • b. Betting and Gambling including Casino,
  • c. Investments in Nidhi companies,
  • d. Chit funds,
  • e. Any trading in Transferrable Development rights,
  • f. Business relating to the Real estate or construction of Farm houses, which does not include the development of the township, construction of commercial or residential premises, roads or bridges and the real estate investment trusts which are regulated by SEBI (regulations), 2014
  • g. Manufacturing of the cigarettes, cheroots or Tobaccos,
  • h. Sectors or activities that are not open to private sector investments include Atomic Energy & Railway operations, excluding those permitted activities mentioned in permitted sectors.
Lastly, prohibitions are also made on Foreign Tech collaboration, including licensing for the franchises, trademark, management contracts.