India is one of the fastest growing economies and poised to be the world's 3rd largest globally by 2030. Foreign direct investment has played a transformative role in India's development by providing non-debt financial resources, fostering technology transfer and licenses for international products and services and creating wide scale employment and growth. Policies like 'Make in India,' unified goods and services tax, removal of angel tax, liberalised automatic investment route for most industries have increased investor's confidence. India also offers skilled and semi-skilled work force with competitive costs and strategic incentives for manufacturing, making it attractive to international corporations to invest in the country.
Investment Routes
Foreign companies can invest in India through foreign direct investment (FDI) for direct ownership and control over Indian entities; as foreign institutional investors (FII) for market-based investments; as foreign venture capital investors (FVCI) for funding startups; as foreign portfolio investors (FPI) such as large mutual funds, investment banks, and insurance companies for diversified financial assets.
FDI is one of the most suited routes for collaborations, joint ventures, technology transfers, brand licensing, manufacturing and export, and control and ownership of business in India. A foreign company has several options for setting up an entity in India including through a private limited company, a limited liability partnership (LLP), a liaison office, a branch office, a project office, or forming a joint venture with a local partner in accordance with the Foreign Exchange Management Act, 1999 (FEMA) and its regulations. A foreign company can choose any of these entity options in any state across India as there are no state-specific restrictions.
In terms of the extant Foreign Direct Investment Policy, 2020 (FDI policy), foreign investment up to 100% (hundred percent) of the securities (including shares and fully and mandatorily convertible preference shares and debentures) of Indian companies is freely permitted in most sectors ("Unregulated Sectors"). A foreign investor can, without prior government approval, invest in securities of an existing Indian company in Unregulated Sectors, in accordance with the pricing guidelines, and subject to overall compliance with the FDI policy and accordingly such securities can also be issued/ transferred to it by Indian or foreign shareholders. However:
- Foreign investment beyond prescribed percentages is regulated in a few sectors, such as insurance, scheduled/regional air transport services, banking, telecom, defence and multi-brand retail trading etc. and requires prior government approval ("Regulated Sectors"). A financial collaboration in the Regulated Sectors ordinarily requires the presence of an Indian equity partner to hold the remaining equity and compliance with the relevant sectoral conditions on entry route, conditionalities and caps.
- Foreign investment is prohibited in certain sectors such as atomic energy, lottery, gambling, trading in transferable development rights, manufacturing of tobacco products or substitutes, railway operations (except for permitted operations), etc.
- Government of India in April 2020, introduced certain changes to the FDI policy. These changes mandate that investments from entities or individuals from countries sharing land borders with India (being China, Hong Kong, Macau, Afghanistan, Bangladesh, Pakistan, Bhutan, Myanmar and Nepal) require prior government approval.1
- The Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024, have removed the previous 49% threshold for FPIs under the automatic route, allowing investments up to the sectoral cap limits, as long as there is no transfer of ownership or control from an Indian resident to the FPI. This change enables FPIs to invest in sectors with a sectoral cap higher than 49%, thus broadening investment opportunities in the Indian economy.2
For the purposes of its investment, the foreign company will be required to open a bank account with an Authorised Dealer Category-I (AD-I) bank and the AD-I banks are authorized to handle both current and capital account transactions.
Exciting Sectors to Invest in India
India offers a wealth of investment opportunities across various sectors with several industries experiencing significant growth and attracting substantial foreign interest. In addition to its massive services, automotive and textile industries (which continues to receive investment growth), some of the other exciting sectors to invest include:
- Pharmaceutical Industry: The Indian pharma sector had a strong 2024, with 31 M&A deals worth $2.3 trillion3. Notable transactions include Mankind Pharma's $1.6 billion acquisition of Bharat Serums and Vaccines4 and Sun Pharmaceutical's acquisition of Taro Pharmaceuticals5.
- Electric Vehicle (EV) Industry: The EV sector in India is rapidly expanding, driven by government incentives and foreign investments. M&A activity increased by 263% in Q2 20246, with major deals such as Tesla's partnership with Tata Electronics7 and Mahindra & Mahindra's joint venture with Volkswagen8.
- Entertainment Industry: The media and entertainment sector led M&A activity in Q1 FY2024 with $4.7 billion in 29 deals9. Key deals include Reliance Industries' acquisition of Disney's India operations10 and Adar Poonawalla's $119 million investment in Dharma Productions11.
- Generative Artificial Intelligence: India is emerging in generative AI, attracting global investments. Funding surged to $400 million in 2024, up from $250 million in 202312. India ranks among the top six economies for investments in AI startups, with significant growth expected in the coming years.
Cultural Considerations for Investment in India
India offers vast opportunities for foreign investments, collaborations and partnerships but understanding cultural nuances is crucial for success. Here are some of the key cultural nuances to consider:
- Family-Owned Businesses: Many large Indian companies are family-run, with decision-making often centralized and controlled. Building strong promoter-to-promoter relationships and respecting the consensus-driven nature of these businesses is essential. For instance, decisions involve consultation at multiple levels and flexible approach to problem-solving will be handy, especially in ventures with family-run businesses.
- Price Sensitivity and Volume: India is a price-sensitive market. Companies like McDonald's and KFC had to adjust their pricing strategies while focusing on volume. Foreign investors must be prepared to cater to this 'value for money' mindset while appreciating the volume-based nature of the market.
- Building Trust: Building trust through relationships, face-to-face interactions, respect for local norms and maintaining hierarchy is critical. Investing time in personal relationships and showing respect for cultural expectations will be enablers for long-term success.
- Corporate Governance: India is high governance jurisdiction i.e., even though most sectors are open to foreign investments and M&As, there are multiple level of corporate governance related compliances beginning from basic KYC (know your client) assessments to FDI and beneficial owner reporting etc., but once the investors settle down with these processes, India offers a massive market opportunities.
- Innovation and Technology: India is open to innovative products and technology, making it an ideal time for foreign clients to enter the market. Indian businesses are also exploring expansion into global markets, particularly in sectors such as hospitality, pharmaceuticals, luxury products, media and entertainment, automotive, fintech, and renewable energy.
Conclusion
India's last couple of decades growth trajectory establishes that the country has immense potential for foreign investment across various high-growth sectors and is backed by strong government policies and reforms that facilitate ease of doing business.
In addition, India is also focusing on international trade and vigorously strengthening its global trade relationships through strategic collaborations with other key foreign partners. The India-EU Free Trade Agreement is gaining momentum, focusing on reducing tariffs, expanding market access, and promoting joint efforts in infrastructure, digital connectivity, and innovation. The India-UAE Comprehensive Economic Partnership Agreement, signed in 2022, has boosted trade, promoting growth in sectors like jewellery, textiles and renewable energy, particularly solar and green hydrogen.13 The U.S. continues to be India's one of the largest trade partner in goods and services (which reached $119.71 billion in FY24), driven by exports in IT services, textiles, and pharmaceuticals, alongside U.S. investments in India's technology, energy, and defence sectors.14 Through agreements like the ASEAN-India Free Trade Agreement, India has expanded its trade footprint in Southeast Asia, with major exports including pharmaceuticals, engineering goods and textiles. Japan and India collaborate extensively on infrastructure development through initiatives like the Delhi-Mumbai Industrial Corridor and Bullet Train Project.
With strategic collaborations with global partners and an ever-expanding trade footprint, India is poised to remain a top investment destination and it's time to unlock long-term participation goals in India's continued economic growth.
Footnotes
1 https://dpiit.gov.in/sites/default/files/pn3_2020.pdf
2 https://pib.gov.in/PressReleseDetailm.aspx?PRID=2046086®=3⟨=1
3 https://www.globaldata.com/store/report/m-and-a-deals-by-theme-and-sector-analysis/
9 https://www.pwc.in/ghost-templates/deals-at-a-glance-q1-cy24.html
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