Legal Articles


Foreign Direct Investment (FDI) is the investment of funds by the overseas investor, whether individual or an entity, in the economy of another country for the purpose of yielding economic and other allied benefits. Subsequent to the economic liberalisation reforms in the year 1991, the scope of FDI in India has been extended to foster economic development and thus, the Government devices the Indian FDI policy in a manner conducive for international investments.

In India, the Department for Promotion of Industry and Internal Trade (DPIIT), which functions under the Ministry of Commerce and Industry, is entrusted with the responsibilities of formulation, promotion, and approval of the FDI policy. Further, as the investments are infused from foreign nations, the FDI policy is in consonance with the ‘Foreign Exchange Management Act, 1999 and regulated by the Reserve Bank of India (RBI). The RBI further issues and notifies various ‘press notes’ and ‘circulars’ in this regard which are to be read with the consolidated FDI policy. In case of transfer of capital instruments, provisions of section 6(3) of the FEMA Act, 1999 read in consonance with the Foreign Exchange Management (Transfer or Issue of a Security by a Person Resident Outside India) Regulations, 2017 shall apply.

The Indian FDI policy provides for investments through ‘automatic route’ in sectors where prior approval of the RBI or the Government is not required. However, the policy stipulates certain sectors where investments shall be made through ‘approval route’. The concerned ministries through Foreign Investment Facilitation Portal (FIFP), administered by the Ministry of Commerce and Industry, process the applications under the approval route, in accordance with the Standard Operating Procedure (SOP) and their approvals are subject to the sectoral caps and the prohibited list as per the updated consolidated FDI policy.

Very often, FDI transactions take effect by way of mergers, amalgamations or acquisitions. In this course, the investor may gain control over the investee body corporate or, their combined market share and value of their assets or turnover breaches the threshold specified under section 5 of the Competition Act, 2002. In case of such combinations, the investor or the investee body corporate or both, as the case may be, shall file a notice in the prescribed form along with prescribed fees to the Competition Commission of India (CCI) requiring its approval for the proposed transaction or combination, unless the transaction is specifically exempted by the Commission. The CCI plays a supervisory role in determining whether the combination would be deterrent to the existing competition in the economy.

Income earned as a result of such investment is subject to tax, payable by the investors at applicable rates in India. The investee body corporate shall be liable to pay tax at the rate of 30 per cent along with applicable surcharges and cess. Further, a company shall be liable to deduct tax on distributed profits at applicable rates. Through systematic tax planning, benefits of Minimum Alternate Tax (MAT), Double Taxation Avoidance Agreement (DTAA) and Special Economic Zones (SEZ) can be availed.

Thus, it can be seen that the Government of India is easing the norms to increase the inflow of funds from overseas economies by providing advantages to both, the investors and the investees and at the same time ensuring the legal compliances and fairness in competitive dealings.

FDI is a propulsive factor which upsurges the national economy beyond fiscal evolution –Kunal Chandriani

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