India: Consolidated Foreign Direct Investment Policy

Last Updated: 27 October 2015
Article by D. H Law Associates

The Government of India through Ministry of Commerce & Industry recently issued its consolidated Foreign Direct Investment Policy Circular of 2015 ("Circular of 2015") updating the Foreign Direct Investment Policy ("FDI Policy"). The Circular of 2015 has been put into effect from 12th May 2015 and supersedes all Press Notes/Press Releases/ Clarifications/ Circulars issued by Department of Industrial Policy and Promotion ("DIPP"). This Circular of 2015 will remain in force until superseded in totality or in part thereof. This article discusses the key amendments/ clarifications introduced by the Circular of 2015.

Most Recent Policy Measures

The Circular of 2015 have introduced the following amendments/ clarifications:

  • Pharmaceuticals-Medical Devices

Under the Circular of 2015, FDI up to 100 (hundred) percent under the automatic route is now permitted for manufacturing of medical devices. Therefore the conditions with respect to greenfield and brownfield projects of this industry i.e. Pharmaceuticals, is not applicable to Medical Devices. Further the Circular of 2015 provides an exhaustive definition of the term 'Medical Device'.

  • Insurance

Under the Circular of 2015, the sectoral cap is now raised to 49 (forty nine) percent from 26 (twenty six) percent. Further the Circular of 2015 states that FDI upto 26 (twenty six) percent is allowed under automatic route and beyond 26 (twenty six) percent and up to 49 (forty nine) percent is through government route. No Indian insurance company shall allow the aggregate holdings by way of total foreign investment in its equity shares by foreign investors, including portfolio investors, to exceed 49 (forty nine) percent of the paid up equity capital of such Indian insurance company.

  • Telecom

Under the Circular of 2015, the sectoral cap is now raised to 100 (hundred) percent from 74 (seventy four) percent. Further the Circular of 2015 states that FDI up to 49(forty nine) percent is allowed under the automatic route and beyond 49 (forty nine) percent through government route, subject to observance of licensing and security conditions by licensee as well as investors as notified by the Department of Telecommunications (DoT) from time to time.

  • Railway Infrastructure

Under the Circular of 2015, FDI upto 100 (hundred) percent under the automatic route is permitted for construction, operation and maintenance of the following: (i) Suburban corridor projects through PPP, (ii) High speed train projects, (iii) Dedicated freight lines, (iv) Rolling stock including train sets, and locomotives/coaches manufacturing and maintenance facilities, (v) Railway Electrification, (vi) Signaling systems, (vii) Freight terminals, (viii) Passenger terminals, (ix) Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and connectivities to main railway line and (x) Mass Rapid Transport Systems.

FDI in the abovementioned activities is open to private sector participation including FDI is subject to sectoral guidelines of the Ministry of Railways. Further proposals involving FDI beyond 49 (forty nine) percent in sensitive areas from security point of view, will be brought by the Ministry of Railways before the Cabinet Committee on Security ("CCS") for consideration on a case to case basis.

  • Defence

Under the Circular of 2015, FDI in this sector is now liberalized upto 49 (forty nine) percent under the automatic route as opposed to 26 (twenty six) percent under the FDI Policy of 2014. Further the Circular of 2015 states that FDI up to 49 (forty nine) percent is allowed under the government route and FDI beyond 49 (forty nine) has to be referred to CCS on case to case basis, wherever it is likely to result in access to modern and 'state of art' technology in the country. Further the FDI limit of 49 (forty nine) percent is composite and includes all kinds of foreign investments i.e. FDI, Foreign Institutional Investors (FIIs), Foreign Portfolio Investors (FPIs), Non Resident Indians (NRIs), Foreign Venture Capital Investors (FVCI) and Qualified Foreign Investors (QFIs).

  • Non-Banking Finance Companies

Under the Circular of 2015, FDI in this sector is upto 100 (hundred) percent under the automatic route. The Circular of 2015 clarifies that Leasing and Finance covers only financial leases and not operating leases. FDI in operating leases is permitted up to 100 (hundred) percent through the automatic route.

  • Optionality Clause

The Circular of 2015, has given effect to Reserve Bank of India's ("RBI") circular that allowed Indian companies to issue equity shares, fully, compulsorily and mandatorily convertible preference shares with optionality clause, subject to conditions as specified in the Circular of 2015. The FDI Policy reiterates the RBI's stand that foreign investors are not permitted to exit with an 'assured return'.

  • Depository Receipt Scheme

The Circular of 2015, has incorporated various provisions of the Depository Receipt Scheme, 2014 ("DR Scheme") issued by the Ministry of Finance. A person can issue Depository Receipts, if it is competent to issue eligible instruments to person resident outside India under Schedules 1, 2, 2A, 3, 5 and 8 of Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time. Further the issue of depository receipts as per DR Scheme shall be reported to RBI by the domestic custodian as per the reporting guidelines for DR Scheme i.e. Form DRR to be filed within 30 (thirty) days from the date of closure of issue/ programme.

  • Pricing of Shares

Under the Circular of 2015, the price of the shares will be determined on the fair valuation of shares done by a merchant banker registered with the Securities and Exchange Board of India (SEBI) or by a chartered accountant as per any internationally accepted pricing methodology on arm's length basis, incase of the shares of the company are not listed in any recognised stock exchange in India.

  • Transfer of Shares and Convertible Debentures

Under the Circular of 2015, shares and convertible debentures can be transferred from one non-resident to another non-resident without prior approval of government or RBI in sectors which are under the automatic route. However, approval of government will be required for transfer of stake from one non-resident to another non-resident in sectors which are under government approval route.

  • Reporting for Issue of Shares

Under the Circular of 2015, issue of equity shares against any other funds payable by the investee company and remittance of which does not require any prior permission of the government or of RBI under Foreign Exchange Management Act, 1999 or any rules/ regulations framed or directions issued thereunder, is permitted. Further the equity shares shall be issued in accordance with the existing FDI guidelines on sectoral caps, pricing guidelines etc. as amended by RBI, from time to time.

  • Acquisition of Shares under Scheme of Merger/Demerger/Amalgamation

Under the Circular of 2015, it has been clarified that Foreign Investment Promotion Board's ("FIPB") approval would not be required in case of mergers and acquisitions taking place in sectors under the automatic route.

  • Reporting of Partly Paid up Shares

Under the Circular of 2015, an investee company issuing partly paid up shares has to furnish a report not later than 30 (thirty) days from the date of receipt of each call payment and file a report in form FC-GPR to the extent they become paid up.

  • Approvals for cases under Government Route

Under the Circular of 2015, Finance Minister (in-charge of FIPB) would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs. 2000 (two thousand) crores. Further the recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 2000 (two thousand) crores would be placed for consideration of the Cabinet Committee on Economic Affairs ("CCEA"). The CCEA would also consider the proposals which may be referred to it by the FIPB/ Finance Minister.


The relaxation provided under the Circular of 2015 by the Government of India has been aimed to boost foreign investment flows into India. The liberalization brought about by this Circular of 2015 may indeed provide lot of comfort to the foreign investors and will encourage the present government's initiative under 'make in India campaign'.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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