Procedure of obtaining Government approval for Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI)

Foreign Direct Investment means any investment made by a person resident outside in Indian Companies through equity instruments or in LLPs through capital contribution. When India is in the direction of becoming a developed country, interest of persons resident outside India is increasing substantially in Indian Entities. As the foreign funding is increasing, the regulation by the Central Government is also increasing on FDIs.

As per Schedule I of FEM (Non-Debt) Regulations, Foreign investment in India can be done through following possible routes:

  1. Automatic Approval: The automatic approval route is aimed for those sectors where FDI is least restricted and investment can be made without obtaining any prior approval from Reserve Bank of India or Central Government.
  1. Government Approval: Under the Government approval route, FDI can be made after obtaining approval from the Central Government of India. Further, Investments shall be subject to conditions specified by the government for granting approval. In most of the sectors, FDI comes under automatic approval route upto a specified percentage. However, beyond such investment, prior approval of the Central Government of India is required.

E.g FDI in the e-commerce sector comes under automatic approval route upto 100%. Whereas, FDI in Insurance sector comes under automatic approval route upto 74%. For FDI beyond 74%, prior approval of the Central Government of India is required. 

However, now the major issue arises is what is the process of obtaining prior approval from the central government of India. This article contains a detailed discussion of how to obtain Central Government approval wherever required.

As per Standard operating procedure (SOP) issued by Government of India on 17th August, 2023, the applicant is required to following procedure for obtaining prior approval of government:

1. Filing of Online Application

  • Proposals for government approval are required to be filed online through the National Single Window System (NSWS) with the Department for promotion of Industry and Internal trade (DPIIT). 
  • Administrative Ministries/ Departments will examine FDI proposals on Foreign Investment Facilitation Portal (FIF Portal). 
  • The applicant shall upload the proposal alongwith digitally signed documents.
  • The applicant shall also file the Security Clearance Form wherever applicable.
  • The government aims to make the entire process completely online and paperless. Therefore, the applicant is not required to file any physical copy of any documents that are required for processing of FDI proposals. 
  • However, concerned Administrative Ministry/ Department may call for physical copy of original documents wherever required to substantiate the authenticity of document with approval of the Secretary concerned. 
  • Competent Authorities shall not replicate an inter-Ministerial body in respective Ministries/Departments to grant approval for foreign investment. The regime for disposal of FDI proposals needs to be simpler in execution and expeditious in disposal. 

2. Documents required to be uploaded along with application

The applicant is required to upload following documents, digitally signed by the authorised signatory, alongwith proposal for obtaining prior approval of central government:

  1. Letter of authorization by the Applicant in favor of the person(s) filing the Application. 
  2. Summary on FDI Proposal 
  3. Shareholding pattern of the Investee 
  4. Diagrammatic representations
    1. Flow of funds from the investor to the investee 
    2. Group structure / organizational chart of the company clearly indicating inter-se shareholding percentage and respective place of incorporation.
  1. Beneficial Ownership Details
    1. Details of Beneficial Ownership from Countries sharing land border with India 
    2. Details of Significant Beneficial Owner (SBO
  1. Investee documents
    1. Certificate of Incorporation (CoI) of Investee 
    2. Memorandum of Association (MoA) of the Investee 
    3. Memorandum of Association (MoA) of the Investee 
    4. Board Resolution of the Investee for proposed Investment 
    5. Audited Financial Statement of Last Financial Year of the Investee 
  1. Investor Documents
    1. Certificate of Incorporation (CoI) of Investor 
    2. Memorandum of Association (MoA) of the Investor 
    3. Article of Association (AoA) of the Investor 
    4. Board Resolution of the Investor for the proposed Investment 
    5. Audited Financial Statement of Last Financial Year of the Investor 
    6. Copy of reporting compliances in respect of Downstream Investment(s), if any 
  1. Past Approvals:
    1. Copy of relevant past Approvals.
    2. Reporting Documents in support of past or existing foreign investment in Investee
    3. Signed executed copy of the Investment Agreement, JV Agreement, shareholders agreement, Approval of NCLT or any other competent authority, as required under Companies law.
    4. Valuation certificate as required in the FDI Policy and FEM NonDebt Instrument Rules 2019 and the same should be on arm’s length basis, wherever applicable. 
    5. Provide an undertaking that the Investee and Investors or their respective Promoters are not subject to any negative or caution by following authorities
      1. National Government 
      2. International Organisation 
      3. Statutory or regulatory authorities such as SEBI, RBI, SFIO, Enforcement Directorate, CBI, Income Tax Department etc.
    6. Any other approval / consent / NoC required by Investee or Investor(s) from any shareholder, third party or any other entity in respect of the proposed activity (ies)/ investment(s)/transaction(s). 
    7. Duly notarized Affidavit on stamp paper of ₹100/- only 

Note: In case documents provided by the applicant are in foreign language then the said document/language should be apostilled and translated into English language.

3. Processing of application for seeking approval

3.1 Refering of application to different ministry

  1. Referring application to concerned Administrative Ministry or department
    1. After receipt of proposal, DPITT shall identify and assign proposal to the concerned Administrative Ministry or Department for processing and disposal of the proposal.
    2. The Administrative Ministries or Departments shall process the applications seeking post-facto approval in terms of para 4.1.2 of FDI Policy.
  1. Referring application to RBI For comments
    1. The proposal shall also be circulated online by the DPIIT to the Reserve Bank of India (RBI) for comments from the perspective of FEMA rules. 
  1. Referring application to MHA for security clearance

Following Proposals for foreign investment shall be referred to the Ministry of Home affairs (MHA) for obtaining security clearance and their comments:

  1. Investments in Broadcasting, Telecommunication, Satellites-establishment and operation, Private Security Agencies, Defence, Civil Aviation and Mining & mineral separation of titanium bearing minerals and ores, its value addition and integrated activities. 
  2. Applications falling under the purview of Press Note 3 of 2020 dated 17.04.2020 read with Foreign Exchange Management (Non Debt Instruments) Amendment Rules, 2020 dated 22.04.2020. 
  1. Referring application to MEA for comment
    1. Further, all proposals shall be forwarded to the Ministry of External Affairs (MEA) for information. MEA may give their comments within the stipulated time period, wherever necessary. 
    2. All comments shall be provided directly to the concerned Administrative Ministry/ Department.

3.2 Consultation with DPIIT and other ministry

  • Proposals in which clarification is required from the point of view of FDI Policy, clarification may be obtained from DPIIT with prior approval of the Secretary of the concerned Administrative Ministry/Department. Therefore, Consultation with DPIIT will be need based and not routine or regular. 
  • Consultation can be done with another Ministry or Department subject to full justification and approval of the Secretary of the concerned Administrative Ministry or Department. 

3.3 Comments from RBI, MHA and MEA

  • All concerned Ministries and Departments, including RBI, MHA and MEA, shall provide their comments within the prescribed timeline.
  • However, in case comments of concerned ministry and Regulatory Bodies are not received within the prescribed time, it shall be presumed that they have no comments to offer. 
  • MHA may ask for additional time from the concerned ministry wherever required.

3.4 Scrutiny of application by concerned authority

  • The Competent Authority shall scrutinize the application and documents within the prescribed time period and may ask for additional documents and information.
  • All queries shall be raised only through FIF Porta. 
  • Competent authority shall try to raise all the queries in initial communication.
  • The Competent Authority should take into consideration the sectoral requirements and the sectoral policies vis-à-vis the proposals. 

3.5 Approval or Rejection of the proposal

  • Upon processing of the proposal, the Competent Authority shall take a decision within prescribed timeline and shall convey the decision to the applicant with a copy to all consulted Ministries/Departments, Regulatory Agencies and DPIIT through FIF Portal itself.

3.6 processing of delayed FDI proposals

  • To take appropriate decisions on delayed FDI proposals and proposals escalated by the processing Ministry/Department concerned for quicker disposal, an inter-ministerial committee has been constituted.
  • Such committees consist of Secretaries from DPIIT, Department of Economic Affairs, Ministry of Corporate Affairs, MHA, concerned administrative Ministry/Department and  representatives  from  RBI and NITI Aayog.
  • This committee will examine and guide the concerned Administrative Ministry or  department to process such proposals for timely disposal. 

4. Time limit for processing of application

The DPIIT and competent authorities are required to process the application by following timelines.

Action PointTime PeriodCumulative time period
Dissemination of proposal by DPIIT to the Concerned Ministries or Department, RBI, MHA and MEA 2 Days
Initial scrutiny of the proposal and documents attached therewith, and seeking relevant additional information and documents from the applicant 12 days2 weeks
Time limit for submission of clarification by DPIIT on specific issues of FDI Policy 2 weeks4 weeks
Time limit for submission of comments by MHA, MEA and any other consulted Ministry/Department / RBI/ Regulator / Stakeholder 6 weeks10 weeks
Time limit for approval on proposals by Competent Authority for grant of approval 4 weeks12 weeks

Note:

  1. Additional time of 2 weeks shall be given to DPIIT for consideration of those proposals which are proposed for rejection or where additional conditions are proposed to be imposed by the Competent Authority.
  2. Time limits allocated shall exclude time taken by applicants in removing deficiencies or time taken to provide additional information or documents.

5. Closure of incomplete Proposal

  • Where the FDI proposal is incomplete i.e., either a complete set of documents are not submitted or information is not submitted in proper format or the applicant has not responded to the queries despite repeated reminders, the Administrative Ministry or department may close the proposal after giving a final reminder to the applicant. 
  • Further, closure of FDI application will not amount to its rejection and the applicant may apply afresh along with all requisite documents, if they so wish. 
  • The application shall be closed by the Secretary of the concerned Administrative Ministry or Department.

6. Rejection of Proposal or Insertion of Additional Conditions

  • In case where the proposal is rejected or where additional conditions are imposed for approval, concurrence of DPIIT shall compulsorily be sought by the Competent Authority, with the approval of the Secretary concerned.
  • Secretary, DPIIT is the competent authority for seeking concurrence in such matters.
  • It is important to note that concurrence of DPIIT is not required for imposing conditions concerning compounding under FEMA provisions or compliance of laws/ regulations of the land or court orders
  • Copy of the rejection letter should be marked to all consulted Ministries, Departments and Regulatory agencies.

7. Withdrawal by the Applicant

  • An applicant may withdraw its FDI proposal where no final decision is granted.
  • Withdrawal can be made subject to submission of a duly authorized letter of withdrawal clearly explaining the reasons for such withdrawal addressed to the Competent Authority with a copy to DPIIT. 
  • Such withdrawal request should be acknowledged by the Competent Authority on NSWS Portal, after which the proposal shall be treated as withdrawn. 

8. Surrender of Approval by the Applicant

  • An applicant may surrender the approval letter granted after the applicant submits such declaration in original signed by the authorized representative clearly explaining the reasons for such surrender. 
  • An acknowledgement will be sent to the applicant clearly indicating the date from which the approval letter stands withdrawn. 
  • Copy of the same should be marked to all consulted Ministries, Departments and Regulatory agencies.   

9. Rectification of mistakes in Approval Letter

  • The applicant may request for rectification of typographical or grammatical mistakes in the text of Approval Letter as apparent from the records. 
  • After necessary verification and due diligence, the Administrative Ministry or Department may issue corrigendum, with approval of the Secretary concerned.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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