Changes in India’s foreign investment rules are notified in two different ways: (1) Press Notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT) for most sectors, and (2) legislative action for insurance, pension funds, and state-owned enterprises in the coal sector. FDI proposals in sensitive sectors will, however, require the additional approval of the Home Ministry.

The DPIIT, under the Ministry of Commerce and Industry, is the lead investment agency, responsible for the formulation of FDI policy and the facilitation of FDI inflows. It compiles all policies related to India’s FDI regime into a single document that is updated every year. This updated policy compilation can be accessed at: http://dipp.nic.in/foreign-direct–investment/foreign–direct–investment-policy.  The DPIIT disseminates information about India’s investment climate and, through the Foreign Investment Implementation Authority (FIIA), plays an active role in resolving foreign investors’ project implementation problems. The DPIIT oftentimes consults with lead ministries and stakeholders. However, there have been specific incidences where some relevant stakeholders reported being left out of consultations.

In most sectors, foreign and domestic private entities can establish and own businesses and engage in remunerative activities. However, there are sectors of the economy where the government continues to retain equity limits for foreign capital as well as management and control restrictions. For example, India caps FDI in the Insurance Sector at 74 percent and mandates that insurance companies retain “Indian management and control.” Similarly, India allows up to 100 percent FDI in domestic airlines but has yet to clarify governing substantial ownership and effective control (SOEC) rules. A list of investment caps is accessible in the DPIIT’s consolidated FDI circular at: https://dpiit.gov.in/foreign-direct-investment/foreign-direct-investment-policy .

The Indian Government has continued to liberalize FDI policies across sectors. Notable changes during 2021 included:

Increasing the FDI cap for the insurance sector to 74 percent from 49 percent, albeit while retaining an “Indian management and control” requirement.

Increased the FDI cap for the pensions sector to 74 percent from 49 percent. The rider of “Indian management and control” is applicable in the pension sector.

Eliminated the FDI cap in the telecom sector. 100 percent FDI allowed for insurance intermediaries.

Eliminated the FDI cap for insurance intermediaries and state-run oil companies.

Increased the FDI cap for defense manufacturing units to 74 percent from 49 percent and up to 100 percent if the investment is approved under the Government Route review process.

Since the abolition of the Foreign Investment Promotion Board (FIPB) in 2017, FDI screening has been progressively liberalized and decentralized. All FDI into India must complete either an “Automatic Route” or “Government Route” review process. FDI in most sectors fall under the Automatic Route, which simply requires a foreign investor to notify India’s central bank, the Reserve Bank of India (RBI), and comply with relevant domestic laws and regulations for that sector. In contrast, investments in specified sensitive sectors – such as defense – require review under the Government Route to obtain the prior approval of the ministry with jurisdiction over the relevant sector along with the concurrence of the DPIIT.

In 2020, India issued Press Note 3 requiring all proposed FDI by nonresident entities located in (or having “beneficial owners” in) countries that share a land border with India to obtain prior approval via the Government Route. This screening requirement applies regardless of the size of the proposed investment or relevant sector. The rule primarily impacted the People’s Republic of China, whose companies had more FDI in India, but other neighboring countries affected include Pakistan, Bangladesh, Nepal, Myanmar, and Bhutan.

A. Third-party investment policy reviews

https://www.oecd.org/economy/india-economic-snapshot/ 

https://www.worldbank.org/en/country/india/overview 

https://www.wto.org/english/tratop_e/tpr_e/tp503_e.htm 

B. Civil society organization reviews of investment policy-related concerns

https://www.ncaer.org/publication_details.php?pID=370 

https://www.orfonline.org/research/jailed-for-doing-business/ 

The DPIIT is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector. The DPIIT also is responsible for the overall industrial policy and facilitating and increasing FDI flows to the country.

However, Invest India  is the government’s lead investment promotion and facilitation agency and is managed in partnership with the DPIIT, state governments, and business chambers. Invest India works with investors through their investment lifecycle to provide support with market entry strategies, deep dive industry analysis, partner search, and policy advocacy as required. Businesses can register online through the Ministry of Corporate Affairs (MCA) website: http://www.mca.gov.in/ .

To fast-track the regulatory approval process, particularly for major projects, the government created the digital multi-modal Pro-Active Governance and Timely Implementation (PRAGATI) initiative in 2015. The Prime Minister personally monitors the PRAGATI process, to ensure government entities meet project deadlines. As of September 2021, the Prime Minister had chaired 38 PRAGATI meetings with 297 projects, worth around $200 billion, approved and cleared. In 2014, the government also formed an inter-ministerial committee, led by the DPIIT, to track investment proposals requiring inter-ministerial approvals. Business and government sources report this committee meets informally on an ad hoc basis as they receive reports from companies and business chambers seeking assistance with stalled projects.

According to data from the Ministry of Commerce’s India Brand Equity Foundation (IBEF), outbound investment from India has both increased and changed which countries and sectors it targets. During the last ten years, Overseas Investment Destination (OID) shifted away from resource-rich countries, such as Australia, UAE, and Sudan, toward countries providing higher tax benefits, such as Mauritius, Singapore, the British Virgin Islands, and the Netherlands. Indian firms invest overseas primarily through mergers and acquisitions (M&A) to get direct access to newer and more extensive markets and better technologies and increasingly achieve a global reach. According to RBI data, outward investment from India in 2021 totaled around $29 billion compared with around $30 billion the previous year. The RBI’s recorded total of outward investment includes equity capital, loans, and issuance of guarantees.

Indian stocks experienced significant losses at the start of 2021, stemming from the effects of the COVID-19 pandemic on the economy. By midyear, markets began to recover, with India’s stock benchmarks reaching record highs and becoming among the top performers globally. Indian companies raised a combined $15.57 billion through 121 IPOs in 2021, the highest amount ever raised in a single calendar year compared with the previous high of $8.4 billion in 2017.

Foreign investment inflows drove markets higher through February 2021. However, these investments began exiting the market when faced with the potential for faster-than-expected withdrawal of monetary stimulus and the Delta variant of COVID-19. Domestic institutional investors compensated outflows of foreign investment through significant investment in Indian stocks. Foreign investors’ net investment in 2021 was about $7 billion, significantly lower than the $14.5 billion in 2020 and $19 billion in 2019. Domestic investors put about $12.5 billion in 2021 into Indian domestic equity markets. Indian investors opened 27.4 million new stock trading accounts in 2021, up from 10.5 million accounts opened in 2020.

The SEBI is considered one of the most progressive and well-run of India’s regulatory bodies.  The SEBI regulates India’s securities markets, including enforcement activities and is India’s direct counterpart to the U.S. Securities and Exchange Commission (SEC).  The Board oversees seven exchanges: BSE Ltd. (formerly the Bombay Stock Exchange), the National Stock Exchange (NSE), the Metropolitan Stock Exchange, the Calcutta Stock Exchange, the Multi Commodity Exchange (MCX), the National Commodity & Derivatives Exchange Limited, and the Indian Commodity Exchange.

Foreign venture capital investors (FVCIs) must register with the SEBI to invest in Indian firms. They can also set up domestic asset management companies to manage funds. All such investments are allowed under the automatic route, subject to SEBI and RBI regulations, as well as FDI policy. FVCIs can invest in many sectors, including software, information technology, pharmaceuticals and drugs, biotechnology, nanotechnology, biofuels, agriculture, and infrastructure.

Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines. Standard Chartered Bank, a British bank was the only foreign entity to list in India but delisted in June 2020. Experts attribute the lack of interest in IDRs to initial entry barriers, lack of clarity on conversion of the IDRs holdings into overseas shares, lack of tax clarity, and the regulator’s failure to popularize the product.

External commercial borrowing (ECB), or direct lending to Indian entities by foreign institutions, is allowed if it conforms to parameters such as minimum maturity; permitted and non-permitted end-uses; maximum all-in-cost ceiling as prescribed by the RBI; funds are used for outward FDI or for domestic investment in industry, infrastructure, hotels, hospitals, software, self-help groups or microfinance activities, or to buy shares in the disinvestment of public sector entities. The rules are published by the RBI: https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510 

According to RBI data, ECB by corporations and non-banking financial companies reached $38.8 billion in 2021. Companies have been increasingly tapping overseas markets for funds to take advantage of low interest rates in global markets. On December 8, 2021, the RBI announced a switch in calculation of interest rates for ECB and trade credits from the London Interbank Offered Rate (LIBOR) to alternative reference rates (ARRs).

The RBI has taken several steps in the past few years to bring the activities of the offshore Indian rupee (INR) market in Non-Deliverable Forwards (NDF) onshore, with the goal of deepening domestic markets, enhancing downstream benefits, and obviating the need for an NDF market. FPIs with access to currency futures or the exchange-traded currency options market can hedge onshore currency risks in India and may directly trade in corporate bonds.

The RBI allowed banks to freely offer foreign exchange quotes to non-resident Indians. The RBI has stated that trading on INR derivatives would be allowed and settled in foreign currencies in International Financial Services Centers (IFSCs). In June 2020, the RBI allowed foreign branches of Indian banks and branches located in IFSCs to participate in the NDF. With the INR trading volume in the offshore market higher than the onshore market, the RBI felt the need to limit the impact of the NDF market and curb volatility in the movement of the INR. In August 2021, the RBI released a working paper  discussing the influence of offshore markets on onshore markets.

The International Financial Services Centre at Gujarat International Financial Tech-City (GIFT City) is being developed to compete with global financial hubs. In January 2016, BSE Ltd. was the first exchange to start operations there. The NSE, domestic banks, and foreign banks have also started IFSC banking units in GIFT city. As part of its FY 2021-22 budget proposal, the government recommended establishing an international arbitration center in GIFT City to help facilitate faster resolution of commercial disputes, akin to the operation of the Singapore International Arbitration Centre (SIAC) or London Commercial Arbitration Centre (LCAC).

The public sector remains predominant in the banking sector, with public sector banks (PSBs) accounting for about 66 percent of total banking sector assets. However, the share of public banks in total loans and advances has fallen sharply in the last five years (from 70.84 percent in FY 2015-16 to 58.68 percent in FY 2021-22), primarily driven by stressed balance sheets and non-performing loans. In recent years, several new licenses were granted to private financial entities, including two new universal bank licenses and 10 small finance bank licenses. The government announced plans in 2021 to privatize two PSBs. This followed Indian authorities consolidating 10 public sector banks into four in 2019, which reduced the total number of PSBs from 18 to 12. However, the government has yet to introduce the necessary legislation needed to privatize PSBs. Although most large PSBs are listed on exchanges, the government’s stakes in these banks often exceeds the 51 percent legal minimum. Aside from the large number of state-owned banks, directed lending and mandatory holdings of government paper are key facets of the banking sector. The RBI requires commercial banks and foreign banks with more than 20 branches to allocate 40 percent of their loans to priority sectors which include agriculture, small and medium enterprises, export-oriented companies, and social infrastructure. Additionally, all banks are required to invest 18 percent of their net demand and time liabilities in government securities.

PSBs continue to face two significant hurdles: capital constraints and poor asset quality. As of September 2021, gross non-performing loans represented 6.9 percent of total loans in the banking system, with the PSBs having a larger share of 8.8 percent of their loan portfolio. The government announced its intention to set up the NARCL and India Debt Resolution Company Limited (IDRCL) to take over legacy stressed assets from bank balance sheets. With the IBC in place, banks are making progress in non-performing asset recognition and resolution.

To address asset quality challenges faced by public sector banks, the government has injected $32 billion into public sector banks in recent years. The capitalization largely aimed to address the capital inadequacy of public sector banks and marginally provide for growth capital. Bank mergers and capital raising from the market, improved public sector banks’ total capital adequacy ratio (CAR) from 13.5 percent in September 2020 to 16.6 percent in September 2021.

Women’s lack of sufficient access to finance remained a major impediment to women’s entrepreneurship and participation in the workforce. According to experts, women are more likely than men to lack financial awareness, confidence to approach a financial institution, or possess adequate collateral, often leaving them vulnerable to poor terms of finance. Despite legal protections against discrimination, some banks reportedly remained unwelcoming toward women as customers. International Finance Corporation (IFC) analysts have described Indian women-led Micro, Small, and Medium Enterprises (MSME) as a large but untapped market that has a total finance requirement of $29 billion (72 percent for working capital). However, 70 percent of this demand remained unmet, creating a shortfall of $20 billion.

The government-affiliated think tank NITI-Aayog provides information on networking, mentorship, and financing to more than 25,000 members via its Women Entrepreneurship Platform (WEP), launched in March 2018. The government’s financial inclusion scheme Pradhan Mantri Jan Dhan Yojana (PMJDY) provides universal access to banking facilities with at least one basic banking account for every adult, financial literacy, access to credit, insurance, and pension. As of March 2, 2022, 249 million women comprised 55 percent of the program’s 448 million beneficiaries. In 2015, the government started the Micro Units Development and Refinance Agency Ltd. (MUDRA), which supports the development of micro-enterprises. The initiative encourages women’s participation and offers collateral-free loans of around $15,000 to non-corporate, non-farm small and micro enterprises. As of October 29, 2021, 215 million loans have been extended to women borrowers.

In FY 2016, the Indian government established the National Infrastructure Investment Fund (NIIF), India’s first sovereign wealth fund, to promote investments in the infrastructure sector. The government agreed to contribute $3 billion to the fund, with an additional $3 billion raised from the private sector primarily from foreign sovereign wealth funds, multilateral agencies, endowment funds, pension funds, insurers, and foreign central banks. Currently, the NIIF manages over $4.3 billion in assets through its funds: Master Fund, Fund of Funds, and Strategic Opportunities Fund. The NIIF Master Fund is focused on investing in core infrastructure sectors including transportation, energy, and urban infrastructure.

The government owns or controls interests in key sectors with significant economic impact, including infrastructure, oil, gas, mining, and manufacturing. The Department of Public Enterprises ( http://dpe.gov.in ) controls and formulates all the policies pertaining to SOEs, and is headed by a minister to whom the senior management reports. The Comptroller and Auditor General audits the SOEs. The government has taken several steps to improve the performance of SOEs, also called Central Public Sector Enterprises (CPSEs), including improvements to corporate governance. This was necessary as the government planned to disinvest its stake from these entities.

According to the Public Enterprise Survey 2019-20, as of March 2020 there were 366 CPSEs, of which 256 are operational with a total turnover of $328 billion. The report revealed that 96 CPSEs were incurring losses and 14 units are under liquidation.

Foreign investment is allowed in CPSEs in all sectors. The Master List of CPSEs can be accessed at http://www.bsepsu.com/list-cpse.asp . While the CPSEs face the same tax burden as the private sector, they receive streamlined licensing that private sector enterprises do not on issues such as procurement of land.

The government has not generally privatized its assets but instead adopted a gradual disinvestment policy that dilutes government stakes in SOEs without sacrificing control. However as announced in the FY 2021-22 budget, the government has recommitted to the process of privatization of loss-making SOEs with an ambitious disinvestment target of $24 billion. In addition to completing the privatization of national carrier Air India in early 2022, the government has prioritized privatizing the Bharat Petroleum Corporation Limited and reducing its shares in the state-owned Life Insurance Corporation (LIC). Details about the privatization program can be accessed at the Ministry of Finance site for Disinvestment ( https://dipam.gov.in/ ).

FIIs can participate in these disinvestment programs. Earlier limits for foreign investors were 24 percent of the paid-up capital of the Indian company and 10 percent for non-resident Indians and persons of Indian origin. The limit is 20 percent of the paid-up capital in the case of public sector banks. There is no bidding process. The shares of the SOEs being disinvested are sold in the open market.

India is a multiparty, federal, parliamentary democracy with a bicameral legislature. The president, elected by an electoral college composed of the state assemblies and parliament, is the head of state, and the prime minister is the head of government. National parliamentary elections are held every five years. Under the constitution, the country’s 28 states and eight union territories have a high degree of autonomy and have primary responsibility for law and order. Electors chose President Ram Nath Kovind in 2017 to serve a five-year term. Following the May 2019 national elections, Prime Minister Modi’s Bharatiya Janata Party (BJP) led National Democratic Alliance (NDA) received a larger majority in the lower house of Parliament, or Lok Sabha, than it had won in the 2014 elections and returned Modi for a second term as prime minister. Observers considered the parliamentary elections, which included more than 600 million voters, to be free and fair, although there were reports of isolated instances of violence.

Matt Ingeneri
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri
New Delhi
+91 11 2419 8000
ingeneripm@state.gov