Foreign direct investments in India are approved through two routes:

Automatic approval by RBI:

The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving:

• foreign equity up to 50% in 3 categories relating to mining activities (List 2).

• foreign equity up to 51% in 48 specified industries (List 3).

• foreign equity up to 74% in 9 categories (List 4).

• where List 4 includes items also listed in List 3, 74% participation shall apply.

The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.

The FIPB Route:

Processing of non-automatic approval cases

FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

Types of Investment under which FDI is permitted

Foreign Direct Investment (FDI) is permitted under the following forms of investments.

1. Through financial collaborations.

2. Through joint ventures and technical collaborations.

3. Through capital markets via Euro issues.

4. Through private placements or preferential allotments

Forbidden Territories:

FDI is not permitted in the following industrial sectors:

1. Arms and ammunition.

2. Atomic Energy.

3. Railway Transport.

4. Coal and lignite.

5. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc

A new industrial policy that came into effect in 1991. First, the system for the acquisition of an industrial licence, which was required to initiate a business or expand existing facilities, was abolished. Governmental intervention, therefore, was limited and free competition was promoted. Second, a system was introduced allowing majority investment by foreign parties. Earlier, the Foreign Exchange Regulation Act (FERA) had placed many restrictions on companies with foreign equity participation of 40 per cent or more. Under the new economic reforms, however, the investment of foreign capital up to 51 per cent or less in 35 industries designated as high priority sectors of industries (including metals, electric and electronic equipment, transport equipment, industrial equipment, chemicals, pharmaceuticals, glass, cement, rubber, food processing, software, tourism, and trade) are automatically approved upon application to the Reserve Bank of India.

Another important step towards the liberalization of foreign firms' activities was the repealing of the phased domestic manufacturing programme in July 1991. This eliminated the requirement of a high local content imposed on foreign firms or joint venture firms. Moreover, the revision of the FERA in January 1993, which had limited the activities of foreign firms since 1973, also contributed to promoting overall liberalization. Under this revision, companies with more than 40 per cent of foreign capital are now permitted to engage in the establishment of branches, purchase of real estate, fund raising, acquisition of companies, and employment of expatriate advisers on an equal basis with domestic companies all of which have facilitated new investment by foreign firms.