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Monday, September 4, 2006

Any proposal involving Foreign Investment earlier required approval of the Government of India. However, as part of the liberalization process, the approval procedures have been very much simplified decentralized and streamlined. Accordingly, automatic approval by Reserve Bank of India (RBI) would be granted for investment in the following areas :


i) New Investment in High Priority Industries

Automatic approval will be given by the Reserve Bank of India for direct foreign investment up to 51 per cent foreign equity in high priority industries. The list of high priority food industries is given at Appendix-III. The clearance can be given within 15 days if the foreign equity covers the foreign exchange requirement for imported capital goods. It must comprise of plant and machinery which are new and not second hand.

ii) Trading (Super Star Trading House, Star Trading House, Trading House and Export House)

To provide access to international markets, majority foreign equity holding up to 51 per cent equity will be allowed by the Reserve Bank of India to trading companies primarily engaged in export activities. Such trading companies will be treated at par with domestic trading and export houses in accordance with the Export/Import policy of the Government. The Company shall have to register itself with the Ministry of Commerce (office of the Director General, Foreign Trade) as registered Exporter/Importer.

In case of existing companies already registered as an Export House, Trading House, Star Trading House, or Super Star Trading House, the Reserve Bank of India will give automatic approval for foreign investment up to 51 per cent equity, subject to the provision that the company passes a special resolution for preferential allocation of fresh equity to the foreign investors.

Criteria for recognition of a trading company as a Super Star Trading House, Star Trading House, Trading House or an Export House are given at Appendix IV.

iii) 100% Export Oriented Industries

In the case of 100% Export Oriented Units (EOU) and Units in the Free Trade Zone/Export Processing Zone (EPZ), foreign participation may go up to 100 per cent of equity. Automatic approval for the 100% EOUs will be granted by the Secretariat for Industrial Approvals (SIA), Department of Industrial Development, Department of Industries, Udyog Bhawan subject to the fulfilment of certains norms (Appendix V).

In case of the units set up in Free Trade Zone (FTZ)/ Export Processing Zones (EPZ), automatic approvals will be granted by the respective Development Commissioners located in each state.

Enhancement of Foreign Equity in Existing company

i) An existing company engaged in the manufacture of items included in Appendix V which have foreign holding less than 51 per cent also increase their foreign holding to 51 per cent, as part of their expansion programme, which should relate to Appendix-V items. The additional equity should be a part of the financing of the expansion programme and the money to be remitted should be in foreign exchange. It is not necessary that the company should be exclusively engaged in activities as given in Appendix-V only. The proposed expansion must relate exclusively to the high priority industries.

ii) A company exclusively engaged in high priority industries may increase the foreign equity to 51 per cent even without any expansion programme. The increase in equity level must result from expansion of the equity base of the existing company and the additional equity must be from remittance in foreign exchange.

In all the foregoing cases, the import of components, raw materials and intermediate goods and payment of know-how fees and royalty will be governed by the general policy applicable to domestic units. The payment of dividends in the case of industries in the consumer goods sector, are required to be balanced by export earnings over a period of seven years from the commencement of production or from the date of allotment of the shares for raising foreign equity without an expansion programme, in respect of the companies engaged in the high priority industries Appendix III. The list of consumer goods industries to which the condition of "Dividend Balancing' will apply is given at Appendix VI.

The condition of Dividend Balancing however, does not apply to investments approved by international organizations like the International finance Corporation, the Deutsche Entwicklungs Fescllschaft (DEG), the Commonwealth Development Corporation, the Asian Development Bank etc.


Other foreign investment proposals, including proposals involving 51 per cent foreign equity which do not meet the foregoing criteria, need prior clearance of the Government. All such proposals except for the units set up in the Free Trade Zone (FTZ)/Export Promotion Zones (EPZs) are considered for approval by the Foreign Investment Promotion Board (FIPB).

The FIPB is located in the Prime Minister’s Office.

The non-automatic channel approval decision is conveyed by 45 days.

The FIPB is specially empowered to "engage in purposive negotiation" and also consider proposals "in totality, free from predetermined parameters or procedures" .Applications for approval of such foreign investment proposals should be submitted in form FC (SIA) to the Foreign Investment Promotion Board, Prime Minister’s Office, South Block, New Delhi OR to the Secretariat for Industrial Approvals (SIA), Department of Industrial Development, Ministry of Industry, Udyog Bhavan, New Delhi-110001. Applications on plain paper carrying all relevant details are also accepted.

Foreign equity proposals need not necessarily be accompanied by foreign technology agreements.

Proposal which do not fulfil the conditions of automatic approval and are desired to be set up in the FTZs/EPZs will be referred to the Board of approvals for granting permission. In such cases applications are to be made to the concerned Development Commissioner in which FTZ/EPZ are located.

Foreign Investment in the Small Sector

Manufacturing units with an investment in plant and machinery up to Rs. 6 million, ancillary units with an investment in plant and machinery upto Rs. 7.5 million and units which are willing to undertake an export obligation to the extent of 30% of their annual production by the third year with an investment up to Rs. 7.5 million are eligible for Small Scale Registration which are given by the State Directorate of Industries located in each state.

To provide access to the capital market and to encourage modernisation and technological upgradation in the Small Scale Sector, foreign equity participation to the extent of 24% of the total share holding has been allowed.

Equity participation beyond 24% in respect of items exclusively reserved for the Small Scale Sector is considered for approval if there is a commitment of 75% export.

Transfer of Foreign Technology

(i) Automatic approval will be granted by RBI subject to the conditions that the lumpsum payment does not exceed Rs. 10 million (net of taxes), royalty does not exceed 5% (net of taxes) for domestic sales and 8% (net of taxes) for export and that the total payment of lump sum and royalty does not exceed 8% of the sales turn over in a period of ten years from the date of agreement or seven years from the commencement of commercial production granted by the Reserve Bank of India.

Applications for automatic approval in the above cases should be submitted in FC (RBI) form to the Reserve Bank of India, Bombay.

All other proposals including those which do not meet any or all of the above parameters will require the approval of the Government. For such cases an application in form FC. (SIA) is to be submitted to the Secretariat for Industrial Approvals, Government of India, Ministry of Industry, Udyog Bhavan, New Delhi-110 001.

(ii) EXTENSION : Extension of foreign technology agreements including those which have received automatic approval in the first instance require the approval of the government for which applications should be submitted in form FC (SIA) to the Secretariat for Industrial Approvals, New Delhi.


(A) ESTABLISHMENT OF NEW UNITS : The new Industrial Licensing Policy of the Government of India has exempted all industries from the requirement of obtaining industrial license except those reserved for the Public Sector; (Appendix-I) those in respect of which industrial Licensing is compulsory (Appendix VII) License is also required for industries related to the items reserved for exclusive manufacture in the Small Scale Sector.

The exemption from industrial licensing is subject to:

(a) The proposed project (except in the case of a project relating to electronics, computer software, printing industry, industry located within an area designated as industrial area by the State Government before the 25th July, 1991 or the small scale or the ancillary sector) being not located within twenty five (25) kilometers from the periphery of more than one million according to the 1991 census; (Appendix-VIII) and

(b) The Central and State environmental laws and regulations including local zoning and land use laws and regulations.

(B) SUBSTANTIAL EXPANSION OF EXISTING UNITS : Substantial expansion of existing units will be exempt from licensing, provided the item of manufacture is not included in schedule I, II, or III, to the Notification dated the 25th July, 1991 of the Department of Industrial Development. However, substantial expansion will be subject to the locational conditions. Existing units may manufacture any new article without additional investment if the article is not otherwise subject to compulsory licensing. An industrial undertaking with a valid registration granted to it prior to the 25th July, 1991 is not required to apply for a license, even if the item of manufacture is one which compulsory licensing.

(C)FILLING OF MEMORANDA : In respect of new projects for the manufacture of not covered by compulsory licensing or their substantial expansion, the only requirement is that the industrial undertaking should file, a memorandum) to the Secretariat for Industrial Approvals. Another memorandum in the prescribed form is to be filed with the secretariat for industrial approvals when the unit commences its commercial production.


Foreign Capital invested in India, profits and dividend earned in India can be repatriated after payment of taxes due on them. However, units operating in a limited list of Consumer Goods Industries are subjected to dividend balancing with matching export earnings for a period of seven years.


Reserve Bank of India permits transfer of shares with regard to Disinvestment proposals from foreign investors on a near automatic basis. Applications in this regard in form ST-I along with the necessary documents should be submitted to the Controller, Reserve Bank of India, Bombay.

Investment Protection

Bilateral Investment Protection and Promotion :

The first Bilateral Agreement has been signed with U.K. on 14th March, 1994.

It's broad intent is to promote and protect investment from either countries. Investment is defined broadly as every kind of asset established or acquired in accordance with the national laws of each country in which the investment is made and, in particular, includes intellectual property rights, goodwill, technical assistance and know how in accordance with the relevant laws of the country in which the investment is made.


Income derived by foreign companies as dividend, interest, royalty of technical fees, is taxed at a rate lower than that applicable to domestic companies. While the rate of tax for domestic companies is 40% plus a surcharge of fifteen percent if total income exceeds Rupees seventy five thousand, in the case of foreign companies and non-resident assesses the rates are as follows:

*Dividend income and interest - 20 per cent

*Royalty and fees for Technical service - 30 per cent

The rates applicable to the non-residents and foreign companies may be less where agreements for the avoidance of double taxation exist between India and the country of which the non-resident or the foreign company is a resident and the agreement so provides.

In the case of the NRIs, the rate of tax is 20% on income from foreign exchange investment as arising from

* Shares in an Indian Company

* Debentures issued by or deposits with an Indian Company which is not a private company.

Interest payable on moneys borrowed or debts incurred in a foreign country by an industrial undertaking in India for purchase of plant and machinery is exempt from income-tax to the extent such interest does not exceed the amount of interest calculated at the rate approved by the Government.

Indian companies and other persons resident in India are entitled to a deduction of 100% of the profits derived by them from the export of goods.

In the case of 100% Export Oriented. Unit and units in Export Processing Zones there is a tax holiday (in relation to income tax) for a period of five consecutive years of which the unit may avail itself during any block of five years in the first eight years form the commencement of production.

Source: Ministry of Food Processing Industries

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