What Are The Different Routes For Foreign Funds In The FDI Policy?

In the course of the globalized market economy, India needs to develop the workforce with huge capital to perform better against other capitalist markets to stand against all the competitive global markets. India being a leading economy with a stockpile of natural resources and human workforce it opens the doors for the foreign investors to pool their money into this developing economy. India has implemented a new set of rules for Foreign Investment inflows into the market. The new FDI policy is also known as Consolidated FDI Policy, 2017 had been implemented by the Department of Industrial Policy and Promotion to set guidelines and restrictions upon the FDI flow into different sectors of the economy. The goal is to attract Foreign Direct Investment in order to supplement domestic capital, technology, and skills for accelerated economic growth.

Types of Instruments in FDI policy

The DIPP has implemented the FDI Rule which governs the FDI inflow in India. Under the FDI rules, a foreign investor can enter into the Indian market through investment in an Indian company by buying an instrument which can be the equity shares, fully, compulsorily and mandatorily convertible or debentures which can be fully, compulsorily and mandatorily or convertible preference shares which will be subject to pricing guidelines norms prescribed under FEMA regulations. Optionality clauses are also allowed in equity shares whether fully, compulsorily and mandatorily convertible debentures and fully compulsorily and mandatorily convertible preference shares under the FDI scheme. The Rules also provides penalties for violations of provisions under the FDI rules which has been discussed later in this article.

Kinds of Routes to Foreign Investment

The Consolidated FDI policy has enumerated three kinds of foreign investment routes by which foreign funds can be directed into a particular sector of business in India. The three kinds of routes are :

  1. Automatic Route.
  2. Approval Route.
  3. Prohibited Routes
  • Foreign Investment through Automatic Routes

The most common process by which any foreign fund is invested in India is through the automatic route. There is no sectorial limit under automatic route and 100% investment can be made through a Foreign origin. The default route in FDI is automatic route. The FDI policy list several sectors which either comes under Approval route or in Prohibited route, if any sector which is not mentioned in that list it is presumed to be under automatic route Many sectors comes under the automatic route in this regard which are software, biotechnology, manufacturing, exploration of oil and natural gas, etc and does not require any government approval.

  • Foreign Investment through Approval Routes

The Consolidated FDI policy has created different parameters and the extent of foreign investment which are allowed in an entity. There can be various sector approvals to be taken from the Ministry of Corporate Affairs, the Ministry of Home Affairs for foreign investment. The extent of foreign investment has been listed in the FDI policy and the amount of acquisition a foreign entity can make into an Indian company. For example, a Foreign investment limit or a sectoral cap 49% in a company the foreign entity can invest through an automatic route and if it wants to breach that limit it needs to take approvals from the various ministries or department of the Government.

Approval routes can be of another type where a sector has been capped for an automatic route till the extent of 49% and also an approval cap where the entity can invest up to an extent of 74% in the Indian company provided that it has to take approval from the government.

Under the ambit of approval route sectors like Mining, defense, Print Media, Broadcasting, Civil Aviation, Satellites, Communications, Trading in single or multi-brand Retail, Banking and Pharmaceuticals.

  • Foreign Funding Prohibition in FDI policy

The FDI policy also states those sectors where no foreign investment is allowed or to raise funds from foreign entities. There is a strict prohibition in this regard and no FDI is allowed in the 8 sectors in India. FDI is prohibited in Gambling and Betting including casinos etc, Lottery business including Government/private lottery, online lotteries etc, in chit funds, Nidhi companies, in Trading in Transferable Development Rights (TDRs), In Real Estate Business or construction of Farmhouses, in manufacturing of cigars cigarillos and cigarettes or tobacco products and the Atomic and the Railway operations.

Other Limitation

The foreign entities making investments also have to take other Regulatory compliances for making an FDI investment into an Indian Entity. For example, foreign investment into a Banking company will require approval from RBI (Reserve Bank of India) and in case of a foreign fund to an Insurance company and approval from IRDIA (Insurance Regulatory and Development Authority).

The Foreign Institutional Investor(FII) or Foreign Portfolio Investor (FPI) can as per the limitations under the FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations can invest into the capital of the Indian Company through a Portfolio Investment Scheme which limits the holding of the FII/FPI to 10% of the capital of the company and the aggregate limit for FII/FPI investment to 24% of the capital of the company. The FII/FPI can if the company comes under the sartorial limit can invest more than 24% in the company provided that, the Board of Directors has authorities through a special resolution in general meeting and which must be subjected to prior intimation to RBI. The investment made in aggregate by FPI/FII shall not breach the sartorial limit as provided.

Consequences for Non-Compliance of FDI Policy

In the FDI policy if a person contravenes any FDI regulations any manner or any rules regulations order, circular as exercise by FEMA or provisions thereunder, which violates any conditions subject to which an authorization is issued by Government of India or Reserve Bank of India, he shall be liable for  to a penalty up to thrice the sum involved in such contraventions where such amount is quantifiable, or up to two lakh Rupees where the amount is not quantifiable and where such contravention is continuing one a further penalty which may extend to five thousand Rupees for every day after the first day during which the contraventions continues.

Where the contraventions or violations are done by a company(company means any body corporate and included a firm or other association of individuals as defined in the Companies Act), every person who, at the time the contravention was committed was in charge of and responsible o the conduct of the business of the company shall be deemed to be guilty and shall be liable to be proceeded and punished accordingly


The Consolidated FDI Policy has been drafted so far with the vision of attaining influx of foreign direct investment and less regulatory and government approvals. So far, from the previous DIPP regulation of FDI the new procedure implemented in 2017 has made Ministry of Government of India and Regulatory Bodies the approval platform which lowered the time taken for approvals. India has stepped up in the Ease of Doing business rank of 77th position from 190 nations in the list [1]still the influx of Foreign Investment has been lowered as seen from the data of 2017-18 of USD 44.85 billion which is 3 percent from the previous year. [2]The question still exist that is the regulatory and FDI framework is now in it is optimum or still, it lags behind and needs proper scrutiny again.

[1] https://currentaffairs.gktoday.in/india-ranked-77th-world-banks-ease-business-index-11201862266.html

[2] https://economictimes.indiatimes.com/news/economy/indicators/fdi-growth-hits-5-year-low-in-2017-18/articleshow/64813638.cms

Published by Nishit Paul

A Lawyer specialized in Debt Recovery, Tenancy, and other civil Litigation.

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