Automatic route

The automatic route connotes no requirement of any prior regulatory approval but only post facto filing / intimation with the RBI as under: FDI by a Foreign Company/Investor in an Indian Company in most of the business/commercial sectors now falls under the Automatic Route and very few cases/transactions require prior Government/FIPB approval.

If the FDI exceeds the ceiling (cap) fixed by the Government of India, then, the application for foreign Investment Approval needs to be submitted to Foreign Investment Promotion Board (FIPB).

For information about sector caps, please: Sectoral caps

Prior approval route

FDI in sectors/transactions requiring prior Government Approval is categorized as that falling under the Prior Approval Route. Such approval is granted by the Government of India, Ministry of Finance, the Foreign Investment Promotion Board (FIPB). FDI in the following activities/sectors generally requires prior approval of the Government:

Portfolio investment in India

Foreign Institutional Investors (‘FII’) registered with SEBI and Non-resident Indians are eligible to invest in India under the Portfolio Investment Scheme within prescribed guidelines and parameters.

Investment by FIIs are primarily governed by the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, (‘SEBI Regulations’). Eligible Institutional Investors that can register as FIIs include Asset Management Companies, Pension Funds, Mutual Funds, Banks, Investment Trusts, Insurance Companies, Re-insurance Companies, Incorporated/Institutional Portfolio Managers, Investment Manager/Advisor, International or Multilateral organisation, University Funds, Endowment Foundations, Charitable Trusts and Charitable Societies, Foreign Government Agencies, Sovereign Wealth funds, Foreign Central Bank, Broad based Fund, Trustee of a Trust.

Sub-account means any person resident outside India, on whose behalf investments are proposed to be made in India by a foreign institutional investor and who is registered as a sub-account under these regulations. Entities eligible to register as sub-account are braid based funds, portfolio which is broad based, proprietary funds of the FII, foreign corporate and foreign individuals satisfying the prescribed conditions, etc. Conceptually, an application for registration as an FII can be made in two capacities, namely as an investor or for investing on behalf of its sub-accounts. SEBI grants registration as FII based on certain criteria, namely constitution and incorporation of FII, being regulated in home country, track record, previous registration with any Securities Commission, legal permissibility to invest in securities as per the norms of the country of its incorporation, fit and proper person, etc. SEBI grants registration to the FII and sub-account which is permanent unless suspended or cancelled by SEBI, subject to payment of fees and filing information every three years. The approval of the sub-account is co-terminus with that of the FII.

FIIs / sub-accounts can invest in Indian equities, units, exchange traded derivatives, commercial papers and debt. FIIs can also invest in security receipts of Asset Reconstruction Companies on its own behalf.

A FII can invest any portion of its portfolio in debt instruments as the requirement to maintain 70:30 (equity: debt) investment limit by pure equity FIIs has been removed by SEBI subject to limits being sanctioned by SEBI.

The entry level guidelines / conditions for FDI in an Indian Company have been expressly clarified to extend to downstream investments as well. Further, prior Government approval followed by notification has been stipulated for Foreign Investments in an Indian Company which is an Investment Company or which does not have any operation. Prior Government approval has also been stipulated for transfer of ownership or control of Indian Companies in specified / controlled sectors from resident Indian citizens / entities to Non-resident entities.

For downstream Investment by an operating-cum-holding company with foreign investment as stipulated, a notification to the Government is stipulated within the prescribed timeframe / parameters.