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 Foreign Investment Approvals
Overview | Approvals Procedure | External Commercial Borrowings
Foreign Direct Investment In India

FDI and Investment-friendly policies
The various investment-friendly policies announced by the Government of India welcomes Foreign Direct Investment (FDI) in many of the core industries. These policies fundamentally aim at improving the core business activities of the country and at the same time offer employment to millions of educated population of the country.

Government has facilitated the business activities by allotting special land to major industries and service sectors. These include the Technology Park (both hardware and software), Special Economic Zones (SEZs), Export Promotion Zones (EPZs), etc. Apart from these are the Growth Center Schemes that provide various incentives to the investors.

For most of the industries and the service sectors FDI is allowed freely through automatic approval from the Reserve Bank of India (RBI). However, there are certain sectors/ activities where the FDI is not allowed beyond a certain limit. These businesses or activities need to get the approval from the government, which in turn is decided on the basis of the recommendations from the Foreign Investment Promotion Board (FIPB).

The following are the important sectors where FDI is allowed freely.

Infrastructure: it includes various segments such as power generation and transmission; projects on various energy sources; roads, highways, ports, and other mass transport systems.
Airport development
Construction activities
Manufacturing activities, except those items categorized under compulsory licensing or those allotted exclusively for the small-scale industries category.
Software development
Electronic items
Tourism and related activities
Hospitals and pharmaceuticals
Film production
Food processing
Finance companies, other than non-banking.
Courier services, except those with distribution of letters
Business- to –Business e-commerce
Trading activities that follow the prescribed norms
ISPs that do not offer gateways and mail facilities
Alcohol distilling and brewing

The significance of EOU and EPZ 
The Export Processing Zones (EPZs) are completely separated from the Domestic Tariff Area (DTA) by economic barriers. They are intended to boost world-class export at minimum cost. The duty-free exports at EPZs focus the competitive international market.

The 100% Export Oriented Units (EOUs) were set up in 1980 in order to trigger large-scale export activities. The EOUs allow the investor to procure the necessary raw materials and the machinery from anywhere, without paying any excise or custom duty. However, the EXIM policy demands that these units export the entire manufactured product and procure the minimum Net Foreign Exchange as a Percentage of exports (NFEP) in the prescribed period. Some of these units are allowed to sell their products in the Domestic Tariff Area (DTA) provided they satisfy the DTA sale entitlement, i.e., 50% of the FOB value. They have to follow the criteria of the minimum NFEP and also pay the duties whichever applicable. The Development Commissioner of the EPZ is given the authority to allow the DTA sale as per the provisions of the Export Import Policy.

The EOU scheme allows a lot of freedom to the entrepreneur in choosing the location of his business activity. He can choose the premises for the manufacturing activity provided it abides by the location policy prescribed by the government.

The EOUs are not required to obtain special license for manufacturing the items specified under the SSI. Also those units that intend to export the entire products or services such as repair, reconditioning, etc., are allowed in the EOUs.

The Development Commissioners of the EOUs and SEZs are given the authority to approve the fresh applications and also to amend the applications after approval as per the clauses mentioned in the EXIM policy. This power of the DCs facilitates the effective functioning of the units. 

Approvals Procedure

Procedure for getting approval for FDI
Getting an automatic approval for procuring 100% FDI is easy for most of the sectors / activities. Thanks to the investment-friendly policies offered by the government that allow a flexible and transparent investment environment in the country. The investment in such sectors can be made without getting prior approval from the central government.

However, the following special sectors or activities require prior approval from the government. They have to approach the government through the Foreign Investment Promotion Board (FIPB) in order to get approval.

Sectors/activities that are not eligible for procuring FDI.
Sectors/activities that require an industrial license.
A proposal from a foreign investor who has already got collaboration with any other business in India in the same field.
A proposal from a foreign investor for acquiring the shares from an existing financial services company in India. These proposals are restricted by certain policies adopted by the Securities and Exchange Board of India (SEBI) in 1997.
Investment proposals for categories/items that do not fall under the Sectoral Policy/CAPS category.

Procedure for getting automatic approval
The only procedure in procuring automatic approval is to inform the Reserve Bank of India (RBI) through bank in which share application money has been received in the prescribed Form FC-GPR within 30 days after making the inward transfer of funds required for the business and submit all the necessary documents within a period of 30 days of issuing the shares to the investors.

Procedure for getting FIPB approval
Approval for proposals that are not covered under the automatic category, such as the composite proposals that involve foreign investment/technical collaboration, is made through FIPB route. There are two types of proposals under this procedure.

All FDI applications except the Non-Resident Indian (NRI) and 100% Export Oriented Units (EOU) have to be submitted to the FIPB, Department of Economic Affairs, Ministry of Finance.
Applications under the NRI and 100% EOU category have to be submitted to the SIA under the Department of Industrial Policy and Promotion.

Applications can be made either in the Form FC-IL (Composite form for Foreign Collaboration and Industrial License) or in a plain paper with all the details mentioned in it.

Those proposals approved by the FIPB do not require any further approval from the RBI for any kind of inward transfer of funds and issue of shares to foreign investors. However, they are supposed to intimate the Regional Office of the RBI about the inward transfer of funds or the issue of the shares to the investors within a period of 30 days.

Getting approval for External Commercial Borrowing (ECB)
There are two ways in which ECB approval can be procured – automatic route and approval route.

Industrial sectors, including the infrastructure, are approved through automatic route that does not require RBI/government approval. ECB up to US$20 million with a minimum three-year maturity or ECB up to US$500 million with a minimum five-year maturity is allowed under this category. The maximum ECB that can be raised through automatic route during a financial year is US$500 million.

To get the automatic approval, the following procedures have to be followed.

Apply in the prescribed format in Form 83, along with a duplicate, to the concerned Authorized Dealer (AD). The form has to be certified by a Company Secretary or a Chartered Accountant. The AD will forward one copy of the application to the Director, Balance of Payments Statistics Division, Department of Statistical Analysis and Computer Services (DESACS), Reserve Bank of India, for allotting the loan registration number.
After receiving the loan registration number, the borrower will be eligible to use the loan.
The borrower will have to submit the ECB-2 Return every month to the DESACS. It has to be certified by the concerned AD and should reach the DESACS within seven working days from the last day of the closing month.

The approval for all proposals other than those fall under the automatic route, are decided by an Empowered Committee under the RBI.

External Commercial Borrowings

External Commercial Borrowings ("ECB") refer to commercial loans in the form of bank loans, buyers' credit, securitized instruments (e.g. floating rate notes and fixed rate bonds) availed from non-resident lenders with minimum average maturity of three years. ECB can be accessed under two routes, viz:

Automatic route;
Approval route.
Automatic route 
ECB for investment in real sector-industrial sector, especially infrastructure sector in India, will be under the automatic route (i.e. will not require RBI/Government approval), subject to prescribed regulatory compliance and the following key conditions. 

Eligible borrowers 
Corporates registered under the Companies Act, except financial intermediaries (such as banks, financial institutions (“FII’s”), housing finance companies and NBFCs). Units in SESZ are allowed to raise ECB funds for their own requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any units in the Domestic Tariff Area. 

Further, Non-Government Organizations ( “NGOs”), engaged in micro-finance activities, satisfying prescribed conditions are eligible to avail of ECB. 

Recognized Lenders 
Recognized lenders include internationally recognized sources such as:
International banks;
International capital markets;
Multilateral financial institutions (such as International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation, etc);
Export credit agencies;
Suppliers of equipment;
Foreign collaborators
Foreign equity holders (other than erstwhile OCBs).
A “foreign equity holder” to be eligible as a “recognized lender” under the automatic route would require a minimum holding of equity in the borrower company as set out below:
For ECB of up to US$5 million- a minimum equity of 25% held directly by the lender.
For ECB of more than US$5 million-a minimum equity of 25% held directly by the lender and a debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB not exceeding four times the direct foreign equity holding).
The Regulations also prescribe further conditions in case of provision of ECB by overseas organizations and individual lenders to NGOs engaged in micro-finance activity. 

Amount and maturity 

The limits for qualifying for the automatic route are:
ECB up to US$20 million or equivalent with minimum average maturity of three years;
ECB above US$20 million and up to US$500 million or equivalent with minimum average maturity of five years;
The maximum amount of ECB which can be raised by a corporate is US$500 million during a financial year;
NGOs engaged in micro-finance activities can raise ECB up to US$5million during a financial year;
ECB up to US$20 million can have call/put option provided the minimum average maturity of three years is complied with before exercising call/put option.
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