FDI Policy 2020

Introduction
• With a view to attracting Foreign Direct Investment (FDI), Government of India has
put in place a liberal policy under which FDI up to 100% is permitted under the
automatic route in most sectors/activities. Significant changes have been made in the
FDI policy regime in recent times to ensure that India remains an increasingly
attractive investment destination.
• The Department for Promotion of Industry and Internal Trade (DPIIT) under the
Ministry of Commerce and Industry, is the nodal department for the formulation of
the Government’s policy on Foreign Direct Investment (FDI). It is also responsible for
the maintenance and management of data on inward FDI into India, based on the
remittance reported by the Reserve Bank of India.
• DPIIT has been undertaking various initiatives and reforms such as the launching of
Make in India, supporting champion sectors and subsectors, setting up of an EGoS
and Project Development Cells, creating a GIS based Industrial Information System
and National Investment Clearance Cell amongst others. These activities are being
supported under the Scheme for Investment Promotion (SIP) launched in 2008. The
Government has approved the continuation of SIP, for a further duration of five years
(FY 2021- 22 to 2025-26) with a financial outlay of Rs. 9.70 billion, vide Notification
dated 29 November 2021.
The Empowered Group of Secretaries (EGoS), constituted by the Investment
Promotion Section of DPIIT, provides support and facilitation to investors for
investing in India and to boost growth in key sectors of the economy.
• Project development cells have been set up in 29 departments to fast-track investment
by facilitating coordination between the central and state governments. The Cells
enhance the pipeline of investible projects in India and in turn increase domestic
investment and foreign direct investment (FDI) inflows.
• The FDI Policy framework is embodied in the Consolidated FDI Policy Circular, as
amended from time to time. The currently effective Consolidated FDI Policy
Circular was issued by DPIIT on October 15, 2020
• The objective of the FDI Policy is to attract and promote foreign direct investment to
supplement domestic capital, technology, and skills, for accelerated economic growth.
• FDI is subject to compliance with all relevant sectoral laws, regulations, rules,
security conditions, and state/local laws/regulations.
Entry Routes for Investment
• Automatic Route
• No prior approval is required for FDI under the automatic route, only
information to the Reserve Bank of India (RBI) within 30 days of inward
remittances or issue of shares to non-residents is required. RBI has prescribed
 a new form, Form FC-GPR (instead of earlier FC-RBI) for reporting shares
issued to foreign investors by an Indian company.
• Government Route
• Foreign investment proposals not covered under the ‘Automatic Route’ are
considered for Governmental Approval by the respective competent authority /
Administrative Ministry/Department.
• DPIIT oversees the applications filed on the Foreign Investment Facilitation
Portal and forwards them to the concerned administrative ministry (competent
authority)
• DPIIT is the administrative ministry for FDI proposals by Non Resident
lndians (NRl)/ Export Oriented Units (EOU’s) requiring approval of the
Government.
• Approval letters in standard format are uploaded on the portal for the benefit
of investors. An SOP is being followed to process FDI applications.
• FDI proposals involving total foreign equity inflow of more than Rs 50 billion,
are referred to Cabinet Committee on Economic Affairs (CCEA).
Introduction
• The Consolidated FDI Policy, 2020 incorporates restrictions notified earlier in the
year on FDI coming in from overseas entities or citizens belonging to neighboring
countries that share a land border with India, including China, to prevent opportunistic
takeovers of firms whose operations and finances may have suffered during the
lockdowns and due to the general impact of the COVID-19 pandemic.
• Other updates to the 2020 FDI policy have consolidated the changes introduced to
India’s FDI regulation since the previous policy was implemented (August 28, 2017).
These include respective press notes issued by the Department for Promotion of
Industry and Internal Trade (DPIIT) and RBI regulations over the last three years.
• The new iteration of the FDI policy was announced as India witnessed a 16 percent
year-on-year rise in FDI to US$27.1 billion during April-August in 2020. In the same
period, in 2019, India had received FDI worth US$23.35 billion. Further, the total FDI
inclusive of reinvested earnings for the first five months of this financial year was
US$35.73 billion; this figure was US$31.60 billion during the same period in the
preceding financial year.
Key Highlights
• Foreign Investment in Investing Companies registered as Non-Banking Financial
Companies (NBFC) with the RBI, being overall regulated, would be under 100%
automatic route.
• Foreign Investment in Core Investment Companies (CICs) and other investing
companies, engaged in the activity of investing in the capital of other Indian
company(ies)/LLPs, is permitted under Government approval route.
• In Defence Sector, FDI up to 74% under automatic route shall be permitted for
companies seeking new industrial licenses. (Previously, it was allowed up to 49%
under automatic route)
• Infusion of fresh foreign investment up to 49%, in a company not seeking industrial
license or which already has Government approval for FDI in Defence, shall require
mandatory submission of a declaration with the Ministry of Defence in case change in
equity /shareholding pattern or transfer of stake by existing investor to new foreign
investor for FDI up to 49%, within 30 days of such change. Proposal for raising FDI
beyond 49% from such companies will require Government approval.
• Foreign Investments in the Defence Sector shall be subject to scrutiny on grounds of
National Security and Government reserves the right to review any foreign investment
in the Defence Sector that affects or may affect national security.
• In Broadcasting Content Services Sector, FDI up to 26% under Government Route
shall be permitted for companies which are under Uploading/Streaming of News &
Current Affairs through Digital Media.
• It is clarified that real-estate broking service does not amount to real estate business
and 100% foreign investment is allowed in the activity under automatic route.
• In Single Brand Product Retail Trading, FDI up to 100% is allowed under Automatic
Route. (Previously, it was allowed up to 49% under Automatic Route and beyond
49% under Government Route)
• In Insurance Sector, FDI up to 100% is allowed under Automatic Route to
Intermediaries or Insurance Intermediaries including insurance brokers, re-insurance
brokers, insurance consultants, corporate agents, third party administrator, Surveyors
and Loss Assessors and such other entities, as may be notified by the Insurance
Regulatory and Development Authority of India from time to time. (Previously, FDI
up to 49% was allowed under Automatic Route to Insurance Companies and
Insurance Intermediaries whereas now 49% cap is only on Insurance companies)
• The condition of Indian owned and controlled, shall not be applicable to
Intermediaries and Insurance Intermediaries and composition of the Board of
Directors and key management persons shall be as specified by the concerned
regulators from time to time.
• The foreign direct investment proposals shall be allowed under the automatic route
subject to verification by the Authority and the foreign investment in intermediaries or
insurance intermediaries shall be governed by the same terms as provided under rules
7 and 8 of the Indian Insurance Companies (Foreign Investment) Rules, 2015, as
amended from time to time.
Government scrutiny of investments from India’s neighboring countries
• Foreign investments from these neighboring countries and beneficiaries of such
investment in India who are situated in or are citizens of any such country – are to be
vetted by the government irrespective of the scope of the investment. In fact,
according to a government official, given that there is no mention of a minimum or a
maximum threshold limit – even if the foreign investment from such country is a
fraction or small amount, it will trigger government scrutiny.
• The circular states:
• An entity of a country, which shares a land border with India or where the beneficial
owner of an investment into India is situated in or is a citizen of any such country –
can invest only under the Government approval route. Further, a citizen of Pakistan or
an entity incorporated in Pakistan can invest, only under the Government route. No
such investment is allowed from Pakistan in defense, space, atomic energy and
sectors/activities that are prohibited for foreign investment.
• Accordingly, any investment being made from Bangladesh, China, Pakistan, Nepal,
Myanmar, Bhutan and Afghanistan (“Neighbouring Countries”)2 or where the
beneficial owner of an investment into India is situated in or is a citizen of any of the
aforementioned countries (“Neighbouring Country Investments”), shall require prior
approval of the Government regardless of the sector/activities in which investment is
being made.
• In the event of the transfer of ownership of any existing or future FDI in an entity in
India, directly or indirectly, results in the beneficial ownership falling within the
restriction/purview of the above – this will also require Government approval.
Beneficial owners
• The Press Note and the FDI Policy do not provide the calculation methodology or
conditions for determining beneficial owners and a clarification is expected from
DIPP. This is important since many Indian companies and offshore entities, such as
private equity funds investing in India have Chinese investors.
• Ultimately a definition may emerge that resembles Section 90 of the Companies Act,
2013 (“Act”) and Companies (Significant Beneficial Ownership) Rules, 2019
(“Rules”). Under this, a “significant beneficial owner” in relation to a reporting
company means an individual, who acting alone or together, or through one or more
persons or trusts, possesses one or more of the following rights or entitlements:
• (i) holds indirectly, or together with any direct holdings, at least 10% of the shares or
at least 10% of the voting rights of the shares;
• (ii) has the right to receive or participate at least 10% of total distributable dividend
in a financial year whether directly or indirectly; or
• (iv) has right to exercise, or actually exercises, significant influence or control, in any
manner other than through direct-holdings alone. However the definitions in foreign
exchange are different to the Companies Act and need to be clarified.
Investment cap on digital news media
• A 26 percent cap on equity / FDI has been introduced in the segment that covers
digital news (uploading or streaming of news and current affairs through digital
media), which also requires government approval.
• This brings it at par with the investment cap on newspaper and periodical publications
and the publication of Indian editions of foreign magazines dealing with news and
current affairs, which are also subject to the government approval route. Detailed
guidelines on foreign direct investment into the broadcasting sector are provided in
Annexure-6 of the circular.
Compliance obligations for e-commerce entities
• The FDI policy allows e-commerce activities under automatic route with 100%
equity/FDI cap for the marketplace based model of e-commerce, subject to the
following conditions:
• The latest FDI policy states that it is mandatory for e-commerce entities with foreign
investment to obtain and maintain a statutory audit report by September 30 every year
for the preceding financial year, which indicates their compliance with India’s laws.
This compliance requirement was first introduced in 2019.
• The 2020 FDI policy circular also details the recent changes in regulating foreign
investment in e-commerce in India, which includes the following:
• Prohibiting an entity related by equity to the e-commerce platform from doing
business on the website portal;
• Restricting vendors from buying more than 25 percent of their inventory from the
platform and its group companies; and
• Banning exclusive product launches.
• These norms regulating e-commerce entities were implemented from 2018.
• 100 percent FDI under automatic route is permitted in the marketplace model of e-
commerce in India. The marketplace-based model means the e-commerce entity
essentially provides an information technology platform on a digital and electronic
network – to act as a facilitator between buyer and seller.
• Thus, e-commerce entities in India that receive FDI can only engage in business to
business (B2B) e-commerce and not in business to consumer (B2C) e-commerce.
• E-commerce marketplace entity will not mandate any seller to sell any product
exclusively on its platform only.
• E-commerce marketplace entity with FDI shall have to obtain and maintain a report of
statutory auditor by 30th of September every year for the preceding financial year
confirming compliance of the e-commerce guidelines.
Multi Brand Retail Trading
• MBRT means sale of different products of different brands through one platform. FDI
in MBRT in all products is permitted upto 51% with Government approval and will
require amongst others, compliance with the following:
• 1. Minimum Investment: Minimum amount to be brought in as FDI by Foreign
Investor would be USD 100 million (INR 700 crores approx.);
• 2. Backend Infrastructure: At least 50% of total FDI brought shall be invested in
‘backend infrastructure’ within 3 years of the first tranche of FDI;
• ‘Back-End Infrastructure’ will include capital expenditure on all activities, excluding
that on front-end units. For instance, back-end infrastructure will include investment
made towards processing, manufacturing, distribution, design improvement, quality
control, packaging, logistics, storage, warehouse, agriculture market produce
infrastructure etc.;
• Expenditure on land cost and rentals, if any, will not be counted for purposes of
‘backend infrastructure’
• 3. Mandatory Procurement:
• At least 30% of the value of procurement of manufactured/processed products
purchased shall be sourced from Indian micro, small and medium industries, which
have a total investment in plant & machinery not exceeding US $ 2.00 million (INR
14 crore approx.);
• A period of 5 years has been given for meeting this requirement for the first
compliance
• 4. Location for Retail Stores
• Retail sales location may be set up only in cities with a population of more than 10
lakh as per 2011 Census;
• In addition to the above existing condition, retail sales outlets can now be set up in
cities as per the decision of the respective State Governments;
Entry routes for investment into India and the approving authorities for the
government route
• Investments can be made by non-residents in the equity shares/fully, compulsorily and
mandatorily convertible debentures/fully, compulsorily and mandatorily convertible
preference shares of an Indian company, through the automatic route or the
government route.
• Under the automatic route, the non-resident investor or the Indian company does not
require any approval from government of India for the investment.
• Under the government route, prior approval of the government of India is required.
Proposals for foreign investment under government route, are considered by the
respective administrative ministry/department.
 • In the table below, we present the respective competent authorities for granting
approval for FDI into those activities/sectors scrutinized by the government.
Competent Authorities for grant of approval for foreign investment for sectors/activities
requiring Government approval:
Insurance
• The insurance intermediary that has majority shareholding of foreign investors shall
undertake the following:
• (1) be incorporated as a limited company under the provisions of the Companies Act,
2013;
• (2) at least one from among the Chairman of the Board of Directors or the Chief
Executive Officer or Principal Officer or Managing Director of the insurance
intermediary shall be a resident Indian citizen;
• (3) shall take prior permission of the Authority for repatriating dividend; Consolidated
FDI Policy 2020 Department for Promotion of Industry and Internal Trade 63
• (4) shall bring in the latest technological, managerial and other skills;
• (5) shall not make payments to the foreign group or promoter or subsidiary or
interconnected or associate entities beyond what is necessary or permitted by the
Authority;
• (6) shall make disclosures in the formats to be specified by the Authority of all
payments made to its group or promoter or subsidiary or interconnected or associate
entities;
Eligible Investors
• Eligible Investors – An entity of a country, which shares land border with India or
where the beneficial owner of an investment into India is situated in or is a citizen of
any such country, can invest only under the Government route.
• Foreign Portfolio Investors (FPI) may make investments in the manner and subject to
the terms and conditions specified in Schedule II of Foreign Exchange Management
(Non-Debt Instruments) Rules, 2019.
• A Foreign Venture Capital Investor (FVCI) may make investments in the manner and
subject to the terms and conditions specified in Schedule VII of Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019.
• Establishment of branch office, liaison office or project office or any other place of
business in India shall be governed by the Foreign Exchange Management
(Establishment in India of a branch office or a liaison office or a project office or any
other place of business) Regulations, 2016. Further, acquisition or transfer of
immovable property in India by citizens of certain countries shall be regulated as per
the relevant provisions under the Foreign Exchange Management (Non-Debt
Instruments) Rules, 2019, as amended from time to time.
Eligible Investors under FDI
1. A non-resident entity
2. NRI’s resident in Nepal and Bhutan
3. Erstwhile OCB’s that are incorporated outside India
4. A company trust or partnership firm incorporated outside India and owned and
operated by NRI’s
5. Foreign Portfolio Investors, FII’s
6. A SEBI registered FVCI
7. A non-resident Indian
ELIGIBLE INVESTEE ENTITIES
• Indian Company
• Partnership Firm/Proprietary Concern
• Trusts:Trusts other than in ‘VCF’ registered and regulated by SEBI and ‘Investment
vehicle’.
• Limited Liability Partnerships (LLPs)
• Foreign Investment in LLPs is permitted subject to the following conditions:
• (i)FDI is permitted under the automatic route in Limited Liability Partnership (LLPs)
operating in sectors/ activities where 100% FDI is allowed through the automatic
route and there are no FDI-linked performance conditions.
• (ii)An Indian company or an LLP having foreign investment, is also permitted to
make downstream investment in another company or LLP in sectors in which 100%
FDI is allowed under the automatic route and there are no FDI-linked performance
conditions.
• FDI in Investment Vehicle An entity being ‘investment vehicle’ registered and
regulated under relevant regulations framed by SEBI or any other authority
designated for the purpose including Real Estate Investment Trusts (REITs) governed
by the SEBI (REITs) Regulations, 2014, Infrastructure Investment Trusts (InvIts)
governed by the SEBI (InvIts) Regulations,
• 2014, Alternative Investment Funds (AIFs) governed by the SEBI (AIFs)
Regulations,2012 and notified under Schedule 11 of Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000
is permitted to receive foreign investment from a person resident outside India (other
than an individual who is citizen of or any other entity which is registered /
incorporated in Pakistan or Bangladesh), including a Registered Foreign Portfolio
Investor (RFPI) or a non-resident Indian (NRI).
FDI in Startup Companies
• Start-ups can issue equity or equity linked instruments or debt instruments to FVCI
against receipt of foreign remittance, as per the Schedule VII of Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019. In addition, start-ups can issue
convertible notes to person resident outside India subject to the following conditions
1. A person resident outside India (other than an individual who is citizen of Pakistan
or Bangladesh or an entity which is registered/incorporated in Pakistan or
Bangladesh), may purchase convertible notes issued by an Indian startup company for
an amount of twenty five lakh rupees or more in a single tranche. ‘Startup Company’
means a private company incorporated under the Companies Act, 2013 or Companies
Act, 1956 and recognised as such in accordance with notification issued by the
Department of Industrial Policy and Promotion (Now, Department for Promotion of
Industry and Internal Trade), Ministry of Commerce and Industry, and as amended
from time to time.
2. A startup company engaged in a sector where foreign investment requires
Government approval may issue convertible notes to a non-resident only with
approval of the Government.
3. A startup company issuing convertible notes to a person resident outside India shall
receive the amount of consideration by inward remittance through banking channels
or by debit to the NRE / FCNR (B) / Escrow account maintained by the person
concerned in accordance with the Foreign Exchange Management (Deposit)
Regulations, 2016, as amended from time to time.
4. NRIs may acquire convertible notes on non-repatriation basis in accordance with
Schd IV of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
• A person resident outside India may acquire or transfer, by way of sale, convertible
notes, from or to, a person resident in or outside India, provided the transfer takes
place in accordance with the pricing guidelines as prescribed by RBI. Prior approval
from the Government shall be obtained for such transfers in case the startup company
is engaged in a sector which requires Government approval. 6 The startup company
issuing convertible notes shall be required to furnish reports as prescribed by Reserve
Bank of India.
ENTRY ROUTES FOR INVESTMENT
• An Indian company may receive Foreign Direct Investment under the two routes as
given under:
• Automatic Route:
• FDI is allowed under the automatic route without prior approval either of the
Government or the Reserve Bank of India in all activities/sectors as specified in the
consolidated FDI Policy, issued by the Government of India from time to time.
• Government Route
• FDI in activities not covered under the automatic route requires prior approval of the
Government. Proposals for foreign investment under Government route, are
considered by respective Administrative Ministry/Department. Foreign investment in
sectors/activities under government approval route will be subject to government
approval where:
(i) An Indian company is being established with foreign investment and is not owned
by a resident entity or
(ii) An Indian company is being established with foreign investment and is not
controlled by a resident entity or
(iii) The control of an existing Indian company, currently owned or controlled by
resident Indian citizens and Indian companies, which are owned or controlled by
resident Indian citizens, will be/is being transferred/passed on to a non resident entity
as a consequence of transfer of shares and/or fresh issue of shares to non-resident
entities through amalgamation, merger/demerger, acquisition etc. or
(iv) The ownership of an existing Indian company, currently owned or controlled by
resident Indian citizens and Indian companies, which are owned or controlled by
resident Indian citizens, will be/is being transferred/passed on to a non-resident entity
as a consequence of transfer of shares and/or fresh issue of shares to non-resident
entities through amalgamation, merger/demerger, acquisition etc.
(v) It is clarified that foreign investment shall include all types of foreign investments,
direct and indirect, regardless of whether the said investments have been made under
Schedule I (FDI), II (FPI), III (NRI), VI (LLPs), VII (FVCI), VIII(Investment
Vehicles) and IX (DRs) of Foreign Exchange Management (Non-Debt Instruments)
Rules, 2019.
Caps on Investments

Sector/Activity % of Equity/ FDI Cap Entry Route

Agriculture & Animal 100% Automatic

Husbandry

Plantation Sector 100% Automatic

Mining 100% Automatic

Mining (Coal & Lignite) 100% Automatic

Petroleum & Natural 100% Automatic

Gas(Exploration activities,
marketing of Petro
Products

Petroleum & Natural 49% Automatic

Gas(Petro refining by
PSU’s

Defence Manufacturing 100% Automatic up to

49% Above 49% under
Government route in
cases resulting in access
to modern technology in
the country

Broadcasting 100% Automatic

Teleports,DTH, Cable
Networks)
Broadcasting 100% Automatic

Broadcasting content 49% Government

services

Print Media 26% Government

Civil Aviation –Air 100% Automatic

Transport Services
(Greenfield projects
&Existing

Construction 100% Automatic

Development:
Townships, Housing,
Built-up Infrastructure

Industrial Parks 100% Automatic

Satellites- establishment 100% Government

and operation, subject to
the sectoral guidelines of
Department of
Space/ISRO

Private Security 74% Automatic up to 49%

Agencies Above 49% & up to 74%
under Government route

Telecom Services 100% Automatic up to 49%

Above 49% under
Government route

Cash & Carry Wholesale 100% Automatic

Trading
E-commerce activities 100% Automatic

Single Brand retail 100% Automatic

trading

Multi Brand Retail 51% Government

Trading

Duty Free Shops 100% Automatic

Banking Pvt 74% Automatic up to 49%

Government route
beyond 49% and up to
74%

Banking- Public Sector 20% Government

subject to Banking
Companies (Acquisition
& Transfer of
Undertakings) Acts
1970/80

Credit Information 100% Automatic

Companies

Insurance Company 49% Automatic

Intermediaries or 100% Automatic

Insurance Intermediaries

Pension Sector 49% Automatic

 Power Exchanges 49% Automatic

Non-Banking Finance 100% Automatic

Companies (NBFC)

LLP’s
• Limited Liability Partnerships (“LLPs”) allowed to avail the foreign funding: Any
investment (by way of capital contribution or acquisition of transfer of profit shares of
LLP) made by a person resident outside India on a repatriable basis to the capital of a
limited liability partnership is now recognised as valid foreign investment under FDI
Policy 2020.
Reporting Structure of FDI
• The reporting structure of FDI was changed with effect from September 01, 2018. The
Reserve Bank has introduced an online application, FIRMS (Foreign Investment
Reporting and Management System), which provides for the SMF. With the
implementation of SMF, the reporting of FDI, which was presently a two-step
procedure viz., ARF and FC-GPR was merged into a single revised FC-GPR.
• FIRMS is an online reporting platform for reporting of foreign investment in India in
SMF. It provides a one online platform, 24*7 reporting facility for the users.
• The SMF form has merged 9 forms
• RBI introduced this new system for smoothening the reporting system for transactions
which are FDI related. All forms which used for making required reporting to RBI has
been combined in one form so that user can access one common platform for all
reporting but unfortunately, this new system also brought some difficulties which
make this system complicated for users.
• Manual for SMF FIRMS application specified some instructions to AD(s) for
handling the reporting but still users face lots of difficulties while making the
reporting such as asking for additional documents, no resubmission is allowed due to
which user needs to file fresh form every time resulting into chances of late fees, etc.
• For ease of doing business, Presently, Reporting of Foreign
• investments is required to be done through the Single Master Form
• (SMF) available on the FIRMS platform.
• For the purpose of reporting in the SMF, an Indian entity which has
• received foreign investment or
• indirect foreign investment or
 • expects to receive foreign investment
• is required to file an entity master on the FIRMS platform.
• Single Master Form (SMF) subsumed all the forms of FDI except few
• Online Platform https://firms.rbi.org.in
• ARF and FC-GPR would be merged into a single revised FC-GPR vSMF includes
reporting of ‘indirect foreign investment’
• FIRMS divided in two modules:
• Entity Master
• Single Master Form
Reporting requirements
• (a) All the reporting is required to be done through the Single Master Form (“SMF”)
available on the Foreign Investment Reporting and Management System (“FIRMS”)
platform at https://firms.rbi.org.in.
• (b) Reporting to be made within 30 (thirty) days of receipt of money from the foreign
investor and the Indian company will report to the Regional Office of RBI under
whose jurisdiction its registered office is located.
• Reporting requirements in case of secondary investment
• (c) Reporting to RBI (through AD-Category I bank) to be made in form FC-TRS,
within 60 (sixty) days of transfer of capital instruments or receipt / remittance of
funds whichever is earlier. [Under the previous FDI policy of 2017, the reporting in
case of secondary investment was to be made within 60 days from the date of receipt
of the amount of consideration.]
• (d) Transfer of equity instruments on a recognised stock exchange by a person
resident outside India shall be reported by such person in Form FC-TRS.