India’s Treatment of FDI Proposals Requiring Government Approval: What You Need to Know

India has two routes of processing foreign investment proposals – the automatic route and the government approval route. There is a standard operating procedure in place for managing investment proposals in the government approval route.

Over the last 10 years, India has liberalized its foreign direct investment (FDI) caps across most industries, with several permitting automatic investments up to 100 percent. Some sectors, either due to their sensitive nature, security concerns, or because of government objectives regarding indigenous capacity-building, only allow investments through a government approval route – either in total or above a specific percentage.

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In 2020, the government consolidated its FDI policy to include various recent changes, with effect from October 15, 2020. However, restrictions were formally introduced on FDI coming in from overseas entities or citizens belonging to neighboring countries that share a land border with India.

In this article, we specifically discuss India’s treatment of proposals for foreign investment in sectors and activities that require government approval.

India’s SOP for processing FDI proposals

India has put in place a standard operating procedure (SOP) to process FDI proposals in restricted sectors – where specific government approval is required. This is laid down in the Consolidated FDI Policy (amended October 2020) and the Foreign Exchange Management Non-Debt Instrument Rules (amended October 17, 2020). Foreign entities, or individuals, that intend to invest in such sectors or activities must file their proposals online through the Foreign.

Filing application: Documents required

Applicants should format their proposals as per the requirements of the FIFP and ensure they have uploaded the following documents:

• Certificate of Incorporation (CoI) of the Investee and Investor Companies/Entities
• Memorandum of Association (MoA) of the Investee and Investor Companies/Entities
• Board Resolution of the Investee and Investor Companies/Entites
• Audited Financial Statement of the Last Financial Year of the Investee and Investor Companies/Entities
• Article of Association (AoA) of the Investor and Investee Companies/Entities
• List of Names and Addresses of all Foreign Investors/Collaborators, along with Passport Copy/Identification Proof of the Investor Company/Entity
• Details of Ownership and Control of the Investee and Investor Companies/Entities
• Diagrammatic Representation of the Flow and Funds from the original investor to the investee company, and the Pre and Post Shareholding Pattern of the Investee Company
• Affidavit stating that all information provided as a hard copy and online are the same and accurate
• Signed executive copies of the Investment Agreement/Shareholders Agreement/Share Transfer Agreement
• Board Resolution of any Joint Venture (JV) Company
• Certificates of Incorporation and Charter Documents of any JV company, which is a party to the proposed transaction
• Copies of Reporting Compliances in respect of Downstream Investment(s)
• Copy of relevant past Government/Foreign Investment Promotion Board (FIPB)/Secretariat of Industrial Assistance (SIA)/Reserve Bank of India (RBI) Proposals that relate to the current proposal, if the current proposal is an amendment to the previous one
• Copy(ies) of Foreign Inward Remittance Certificate(s) (FIRCs), along with relevant Reporting Forms in the case of Post-Facto Approval as well in the case previous/existing foreign investment(s) are involved
• Details of the Names and Addresses of Promoters, Investment Managers, Trustees and Sponsors of the Investment Fund, in the case of investments by those entities which themselves are pooled investment funds
• List of existing/proposed Downstream Investment(s) by the Indian Investee Entity, details of the Shareholding/Capital contributions by the Indian Investee Entity in such downstream entity(ies) as well as the details of the sector(s)/activity(ies) of these Downstream Entity(ies)
• Approval(s) from the National Company Law Tribunal (NCLT)/other competent authority for those proposals regarding mergers/demergers/amalgamations, as required according to the Companies Act 2013
• Valuation Certificate, as required by the FDI Policy and FEM Non-Debt Instrument Rules in 2019
• Non-Compete Clause Certificate of the Investee and Investor Company in the case of investments in the pharmaceutical sector, as per Annexure 10 of the FDI Policy
• Certificate of Statutory Auditors, as mandated by the FDI Policy
• Letter of Authorization by the applicant in favor of the person who is filing the application
• A filled-in Security Clearance Form, which is available on FIFP, as required by the Ministry of Home Affairs (MHA)

Once applicants have filed their proposals online, the Department for Promotion of Industry and Internal Trade (DPIIT) will identify the Administrative Ministry/Department that best fits overseeing each proposal and then e-transfer the proposals to them for processing and/or disposal.

The following tables list the particular sectors for which foreign investment proposals need to go via the government route and the competent government authorities that can either approve or reject them.

Sectors where investments are reviewed and the relevant reviewing authorities

Expected timeline for submitting and processing the FDI proposal

There are strict time limits attached to the process of submitting the FDI proposal. This ensures timely feedback from the concerned government ministry / department.

In case of digitally signed applications, the applicant is not required to submit any physical copy with the Competent Authority. However, for applications that are not digitally signed, the DPIIT will inform the applicant through online communication to submit one signed physical copy of the proposal to the Competent Authority.

For submission of physical copy, investors should note the following timelines:

• Applicants are required to submit the signed physical copy of the application within seven days of such communication from the DPIIT.
• If no physical copy of the application is received within seven days of the said communication, additional seven days may be provided by Competent Authority to submit the physical copy of the application.
• In case the signed physical copy of the application is not submitted to the Competent Authority within 14 days of the initial communication from DPIIT to the applicant, the proposal will be treated as closed.
• Calculation of time limits for disposal of applications will be with reference to the date of filing of online application. However, if the signed physical copy of the application is not filed with the Competent Authority within seven days of the communication from DPIIT to the applicant, the date of filing of the physical application will be considered as the reference date for calculation of time limits.

After the proposal is received, it is circulated online within two days by the DPIIT to the Reserve Bank of India (RBI) for comments from the perspective of the Foreign Exchange Management Act, 1999 (42 of 1999) and FEMA rules/regulations. Proposals for foreign investment requiring security clearance would additionally be referred to Ministry of Home Affairs (MHA) for comments. Further, all proposals would be forwarded to Ministry of External Affairs (MEA) for information. All comments will be given directly to the concerned administrative ministry/department.

Ministries or departments consulted on the proposal are expected to upload their comments on the portal within four weeks from the online receipt of the proposal. In case comments are not received within the stipulated time, it will be presumed that they have no comments to offer. Comments by the MHA on proposals for investment in sectors requiring security clearance will be provided to the Competent Authority within six weeks from the online receipt of such proposals. In cases where the MHA is not able to provide its comments within six weeks, it will inform the concerned administrative ministry or department of the expected time frame.

Within one week, the Competent Authority will scrutinize the proposal and documents submitted and ask the applicant for relevant additional information/documents, if required. All such queries shall be made online/emailed to the applicant. If no clarifications to the queries are received within one week, the applicants will be asked to expedite their clarifications within next seven days, failing which a final reminder may be issued to the applicant to provide the information in seven days before closing the application due to incomplete/inadequate information/documents from the applicant. To the extent possible, all queries to the applicant shall be raised by the competent authority in the initial communication itself. Time taken by the applicant in addressing the queries raised by the Competent Authority will be excluded from the time limits for disposal of proposal.

Once the proposal is complete (which takes six to eight weeks depending on whether security clearance is required from the MHA), the Competent Authority will process the proposal for decision within the following four weeks. Approval/rejection letters will be sent online by the Competent Authority to the applicant, consulted ministries/departments, and DPIIT.

In case of proposals involving total foreign equity inflow of more than INR 50 billion (US$691.31 million), the Competent Authority shall forward it to the Cabinet Committee on Economic Affairs (CCEA) within the above timelines. After the decision of CCEA, a letter conveying the same will be issued within one week.

Total time period of the process

Process of review  

Competent authorities review foreign investment proposals in three steps. These are:

1. Secretary of the DPIIT organizes regular monthly reviews with the concerned administrative ministries/departments every four to six weeks, to discuss the pending proposals. Secretaries of each ministry/department may also attend these meetings.
2. On the FIFP portal, administrative ministries/departments update their decisions regarding the proposal applications as well as the information regarding dates of physical receipts of the applications.
3. All administrative ministries/departments have been encouraged to furnish fortnightly reports on pending applications and update their database that shows all the applications they have received and cleared.

Which proposals require security clearance from the Ministry of Home Affairs?

• Investments in broadcasting, telecommunication, satellites – establishment and operation, private security agencies, defense, civil aviation and mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities.
• Applications arising out of Press Note 3 of 2020 dated 17.04.2020 read with Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020 dated 22.04.2020 as under:

a) investments from 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. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defense, space, atomic energy and sectors/activities prohibited for foreign investment.; and/or

b) transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of Para 3.1.1(a) of the FDI Policy.

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