What Every Foreign Investor Must Know Before Investing in India

India ranks as the 5th largest economy in the world. It globally ranked 6th largest by nominal GDP & 3rd largest by PPP in 2020. In 2021, the estimated nominal GDP of India is 2.8 trillion USD and its estimated GDP per capita (PPP) is 9.56 trillion USD.

India is preferred by foreign investors to invest in mainly due to its prospective market size. As per a report of The World Economic Forum, India would become the third-largest consumer market & its consumer spending would be about 6 trillion US dollars by the year 2030. India is the second populous country in the world with a population of about 1.39 billion and thus offers the advantage of cheap human resources. UNCTAD through its ‘World Investment Report 2020’ states that in the year 2019, India was the 9th largest receiver of FDI with an inflow of about 51 billion dollars. In 2020, while the global FDI collapsed due to the effect of the pandemic, but the FDI in India escalated by 13% in comparison to the previous year.

To boost the economic recovery in the post-covid times, India is reforming its foreign direct investment norms to attract more foreign investors in the diverse sectors. Hence there is an avalanche of opportunities for foreign investors in India.

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Foreign Investors must know a few things before investing in India. Let’s discuss them.

Ensure That the Chosen Sector for Investment is ‘Not FDI Prohibited’
Foreign investors investing in India must ensure that the sector they are wanting to invest in is FDI permitted.

Although India permits FDI in numerous sectors, there is an absolute FDI prohibition in certain sectors. The list of FDI prohibited sector in India includes:

  • Lottery business (includes government/ private lottery, online lotteries, etc)
  • Gambling & Betting Sector including casino (All the forms of Foreign technology collaboration in the Lottery Business, Gambling & Betting sector like licensing for franchise, trademark, brand name, management contract is also not permissible in India)
  • Chit Funds
  • Trading in Transferable Development Rights (TDR)
  • Manufacturing Cigars, cheroots, cigarillos, cigarettes, Tobacco, or tobacco substitute products
  • Nidhi Company (A type of Non-Banking Financial Company)
  • Activities/sectors not accessible to the private sector investment. E.g., Atomic Energy and Railway operations
  • Real Estate Business or Construction of Farm Houses (Real Estate Business does not incorporate the development of townships, construction of residential /commercial premises, roads or bridges, and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014.)

Know the FDI Restrictions for ‘The Border Countries’

According to the government’s ‘Consolidated FDI Policy circular of 2020’, a non-residential entity can invest in any FDI permitted sectors in India, in compliance with the country’s FDI policy. But an entity from any of the countries sharing the land border with India, which includes: China, Pakistan, Nepal, Myanmar, Bhutan, Afghanistan & Bangladesh can invest in India only via the Government route. This means that they must get approved by the Reserve Bank of India (RBI) or the government of India before investing in India. This regulation is applicable even if the beneficial owner of the investment is located in or is a citizen of any of these nations.

Particularly, the entity/citizen of Pakistan cannot invest in the sectors of defence, space, atomic energy as well as the FDI prohibited sectors.


Understand the Duties and Liabilities of The Director

According to the Companies Act, 2013 of the Ministry of Corporate Affairs, Government of India, a foreign national can be appointed as a Director of an Indian company. But the person must comply with the below-mentioned criteria:

  • The person must obtain Director Identification Number (DIN) prior to getting appointed as a director of an Indian company.
  • The person must furnish DIN & pronounce that he is ‘not disqualified’ from becoming a Director in acquiescence to this act.
  • The person must present his written consent to undertake as director in the Form DIR-2, which must be registered in 30 days from the date of his appointment.
  • The director is responsible for fulfilling the duties of Directors as well as statutory liabilities listed out by the Companies Act, 2013. In the instances of misconduct by the director, fines & penalties can be imposed.


Make Certain That the IP is Protected

In India, IP ownership differs under varied IP laws. If the IP is not validly assigned by the company then it is by default owned by the employee or the contractor. Hence, for a business whose value essentially depends on its patents & intangible assets, it must make certain that the IP is validly assigned as well as owned by the company. To validly assign the IP, a deed with stamp duty paid is mandatory.

Set Expectations Accordingly

Investing in any sector in India involves a regular compliance filing with the Reserve Bank of India. It is obligatory even if no approval is needed for the transaction. Hence it is usually a time-consuming process. Even if the negotiation & signing of the main transaction documents can be accomplished very promptly, the procedures for closing such as receiving the shares certificate, getting appointed to the BOD, tax identification information, etc. are usually slow-moving.

Be Aware of The Pricing Guidelines

Because India is an economy with exchange controls, the RBI (Reserve Bank of India) proposes the pricing guidelines for the Non-Residents for acquiring the capital instruments of Indian companies. For instance, the price of the capital instruments of an Indian company that is listed on the recognized stock exchange of India should not be less than the pricing in conformity to the pertinent guidelines of SEBI. If it is not listed on the recognized stock exchange of India, then the price of the capital instrument of the Indian company should not be less than the fair valuation of capital instruments made by a SEBI registered merchant banker or a chartered accountant.

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