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India's Policy on Foreign Direct Investment (FDI)

Saturday, September 9, 2006


India's  Policy on Foreign Direct Investment (FDI)

Policy on Foreign Direct Investment

India has among the most liberal and transparent policies on FDI among the emerging economies. FDI up to 100% is allowed under the automatic route in all activities/sectors except the following, which require prior approval of the Government:-

1. Sectors prohibited for FDI
2. Activities/items that require an industrial license
3. Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the same field
4. Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (substantial acquisition of shares and takeovers) regulations, 1997 is attracted
5. All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is not permitted

Most of the sectors fall under the automatic route for FDI. In these sectors, investment could be made without approval of the central government. The sectors that are not in the automatic route, investment requires prior approval of the Central Government. The approval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDI is not allowed.

After the grant of approval for FDI by FIPB or for the sectors falling under automatic route, FDI could take place after taking necessary regulatory approvals form the state governments and local authorities for construction of building, water, environmental clearance, etc.

Manual for FDI brought out by the Department of Industrial Policy and Promotion provides details about FDI Policy and Procedures and is available at

Sectoral policy/equity caps in certain sectors could be seen in the Manual for FDI in Annexure II at

All Press Notes of Department of Industrial Policy and Promotion that provides details about FDI policy are available at their website .

FDI policy is also notified by Reserve Bank of India (RBI) under Foreign Exchange Management Act (FEMA) and could be seen at


Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares of foreign investors.


Procedure under Government Approval

FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of Foreign Investment Promotion Board (FIPB).

Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.

Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion.

Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. No fee is payable. The guidelines for consideration of FDI proposals by the FIPB are at Annexure-III of the Manual for FDI.


IEM Form

Manual for FDI 

Prohibited Sectors

The extant policy does not permit FDI in the following cases:

i. Gambling and betting
ii. Lottery Business
iii. Atomic Energy
iv. Retail Trading
v. Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations)


General permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do no require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors.

The companies are required to notify the concerned Regional Office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.


Industrial Licensing

With progressive liberalization and deregulation of the economy, industrial license is required in very few cases. Industrial licenses are regulated under the Industries (Development and Regulation) Act 1951. At present, industrial license is required only for the following: -

1. Industries retained under compulsory licensing
2. Manufacture of items reserved for small scale sector by larger units
3. When the proposed location attracts locational restriction

The following industries require compulsory license: -

I Alcoholics drinks
II Cigarettes and tobacco products
III Electronic aerospace and defense equipment
IV Explosives
V Hazardous chemicals such as hydrocyanic acid, phosgene, isocynates and di-isocynates of hydro carbon and derivatives


Procedure for obtaining an industrial license

Industrial license is granted by the Secretariat for Industrial Assistance in Department of Industrial Policy and Promotion, Government of India. Application for industrial license is required to be submitted in Form FC-IL to Department of Industrial Policy and Promotion.


Small Scale Sector

An industrial undertaking is defined as small scale unit if the capital investment does not exceed Rs. 10 million (approximately $ 222,222). The Government has reserved certain items for exclusive manufacture in the small-scale sector.

Non small-scale units can manufacture items reserved for the small-scale sector if they undertake an obligation to export 50% of the production after obtaining an industrial license.

Definition of Small Scale Industries

List of items reserved for small-scale sector

Ministry of Small Scale Industries

Development Commissioner, Small Scale Industries


Locational restrictions

Industrial undertakings to be located within 25 kms of the standard urban area limit of 23 cities having a population of 1 million as per 1991 census require an industrial license. Industrial license even in these cases is not required if a unit is located in an area designated as an industrial area before 1991 or non-polluting industries such as electronics, computer software, printing and other specified industries.


Environmental Clearances

Entrepreneurs are required to obtain Statutory clearances, relating to Pollution Control and Environment as may be necessary, for setting up an industrial project for 31 categories of industries in terms of Notification S.O. 60(E) dated 27.1.94 as amended from time to time, issued by the Ministry of Environment and Forests under The Environment (Protection) Act 1986. This list includes petrochemicals complexes, petroleum refineries, cement, thermal power plants, bulk drugs, fertilizers, dyes, papers etc.,

However, if investment in the project is less than Rs.1 billion (appox. $ 22.2 million), such Environmental clearance is not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals, asbestos and asbestos products, integrated paint complexes, mining projects, tourism projects of certain parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating industries.

Setting up industries in certain locations considered ecologically fragile (e.g. Aravalli Range, coastal areas, Doon Valley, Dahanu etc.) are guided by separate guidelines issues by the Ministry of Environment and Forests.


Other approvals/clearances at State level
Land, Water, Electricity, Registrations etc.

For further details please refer the website of Ministry of Environment and Forests

Environmental Clearance (EC) Process in India: A new website - []

Source: Embassy of India

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