Foreign Direct Investment (FDI) into India is governed by the Foreign Exchange Management Act (FEMA) and the Consolidated FDI Policy issued by the Government of India. This framework defines permissible equity inflows, sectoral caps, approval routes, valuation norms, documentation, and reporting requirements. Below is an overview of the key compliance and legal requirements for foreign investors seeking FDI in India.

Automatic Route vs Government Route

Automatic Route: In most sectors, foreign investors can invest up to the prescribed sectoral cap without prior approval. Under this route, neither the Reserve Bank of India (RBI) nor the government's approval body (formerly FIPB, now under DPIIT) is required.

Government Route: For certain sensitive sectors or higher shareholding thresholds, prior government approval is required. Proposals are filed online through the Foreign Investment Facilitation Portal (FIFP) and processed by DPIIT in consultation with relevant ministries and RBI. The Government route applies when sectoral limits are exceeded (e.g. beyond 74% in defence or insurance) or where FDI is not normally permitted. Investors from countries sharing land borders with India (e.g. Pakistan, Bangladesh) can invest only via government route in most sectors.

Sectoral Caps and Prohibited Areas

India's FDI policy sets specific caps and routes for each sector. Key examples include:

• Defence: Up to 74% (automatic, with DPP conditions); FDI beyond 74% requires Government approval.
• Telecommunications: Upto 49% (automatic).
• Insurance: 100% (automatic for fully Indian-owned companies but this enhanced limit will be available for those companies which invests the entire premium in India)
• Banking (Private Sector): Up to 74% (49% automatic, above 49% via Government route)
• Aviation, Retail, Healthcare, IT: Many allow 100% automatic (e.g. private airlines 49%, others up to 100%; single-brand retail 100%, multi-brand 51%).
• Media & Broadcasting: Caps vary (e.g. FM radio 49%, print media 26–100% depending on type).

In sectors not explicitly listed, FDI up to 100% is generally allowed under the automatic route, subject to applicable laws.

Certain activities are prohibited for FDI. Notable examples:

• Lottery businesses (government or private lotteries).
• Chit funds.
• Transferable Development Rights (TDR) trading.
• Manufacture of tobacco products (cigars, cigarettes, etc.).
• Gambling and betting (including casinos).
• Nidhi companies.
• Real estate business (except development of townships, affordable housing, or SEZ projects).

If an investment proposal involves a prohibited sector, it will not be approved under any route.

Valuation and Pricing Norms

Under FEMA, equity issued to foreign investors must follow RBI pricing guidelines. In practice:

• Listed companies: Issue price must be based on SEBI's pricing formula (generally the higher of 90% of weighted average market price or the price in any preferential issue).
• Unlisted companies: Issue price must not be below the fair value certified by a SEBI-registered Category I Merchant Banker or a Chartered Accountant using the Discounted Cash Flow (DCF) method.
• Rights Issues & Preferential Allotment: Special pricing floors apply, ensuring non-residents are not issued shares at a discount.

These norms ensure FDI flows at market-aligned prices. Underpayments can trigger RBI queries or penalties.

Documentation and Compliance Filings

Key documentation and filings include:

• Corporate Approvals: The Indian company must pass a board resolution and issue fresh shares to the foreign investor.
• Investment Agreements: Draft share subscription or share purchase agreements, and collect KYC documents of the foreign investor.
• Repatriation Proof: Obtain a Foreign Inward Remittance Certificate (FIRC) from the remitting bank to evidence the inward investment funds.
• Form FC-GPR: Once shares are allotted, the company must report the FDI to RBI by filing Form FC-GPR through its Authorized Dealer bank within 30 days. This form provides RBI with details of the investment (investor identity, amount, shareholding change).
• Form FC-TRS: If shares are subsequently transferred between a resident and a non-resident (including NRIs), the transfer must be reported via Form FC-TRS within 60 days of the transaction.
• Government Approvals: Under the Government route, proof of DPIIT (or Cabinet) approval must accompany the RBI filings.
• Other Compliance: Developers of infrastructure (e.g., airports, roads) may need to comply with additional sectoral regulations and obtain relevant licenses.

Repatriation: Dividends paid by Indian companies are freely repatriable. Upon selling FDI-held shares, the proceeds (after taxes) can also be remitted abroad. Sale or transfer transactions must comply with FEMA (including filing FC-TRS).

Taxation of FDI

Foreign investors are subject to Indian tax laws like domestic investors. For example:

• Capital Gains: Gains on sale of Indian shares are taxed as capital gains (long-term or short-term) per the Income Tax Act. For listed equity, long-term gains above INR 1 lakh are taxed at 10%, and short-term gains at 15%.
• Dividends: Since 2020, companies do not pay Dividend Distribution Tax. Dividends paid to non-resident shareholders are taxable in their hands, and companies must withhold tax (typically 20%) on dividend payments, subject to treaty benefits.
• Corporate Tax: Indian companies with FDI are taxed at standard corporate rates (currently ~22-30%, depending on concessions). Sector-specific incentives (like in SEZs or infrastructure) may be available.
• Withholding: All payments to foreign entities (dividends, interest) generally require withholding as per Indian tax law.

Investors should plan carefully and use Double Taxation Avoidance Agreements (DTAA) where applicable to minimize tax liability.

Conclusion and Next Steps

Investing in India via the FDI route involves multiple steps: choosing the correct entry route (Automatic or Government), adhering to sectoral caps, ensuring proper pricing, and fulfilling RBI filing requirements (FC-GPR, FC-TRS, etc.). The documentation—from board resolutions to share certificates and FIRCs—must be in order for compliance.

Navigating FDI India compliance can be complex. Tax Vimarsh's experts can guide you through foreign investment rules, sectoral limits, pricing norms, and RBI filings. Contact Tax Vimarsh today for end-to-end assistance with your foreign investment in India, ensuring your FDI is fully compliant and efficient.