The foreign investments regulatory framework has witnessed changes recently in an attempt to make the process smoother and attractive towards global players. In the first half of the FY 2024-25, India witnessed a 42 per cent surge in foreign investments. Here's a guide to the key investment routes, including recent changes in FEMA guidelines that impact foreign investments:
Also Read: Outlook Money's 2025 Budget Coverage
Direct Investment in India
Foreign investors can invest directly in India either through investing stakes in Indian enterprises or participation in the debt markets or investments in certain sectors:
1. Foreign Direct Investment: FDI is investment undertaken by foreign entities in an Indian company with a minimum 10 per cent equity stake, which can be both listed and unlisted companies, and subject to sectoral caps that are varied as the nature of the sector goes. For example, in defence, aviation, media or such sectors where FDI is capped or requires the government's approval prior.
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2. Foreign Portfolio Investment: It gives the platform to foreign investors to invest in the listed equities, bonds, and derivative securities in the Indian public markets. Foreign investors have to get registered as a sub-custodian or a deputed depository bank in India which unlocks access to the Indian stock exchanges. There are two categories of FPIs:
Category I FPIs: This involves government-related institutions, pension funds, and sovereign wealth funds whose risk profiles are minimal.
Category II FPIs: These are corporations, family offices, and HNWIs excluded from Category I.
3. FVCI (Foreign Venture Capital Investment) - Under the FVCI route, investments in Indian entities across sectors like high growth and emerging, especially technology, biotechnology, health care, e-commerce, and infrastructure sectors can be availed. Ineligibility conditions and restrictions regulate the FVCIs so that funds are employed appropriately.
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4. External Commercial Borrowings (ECBs): Foreign entities can make loans to eligible Indian entities under the ECB route. Such loans are subject to certain conditions related to maturity, application of funds, and currency of borrowing, as specified by the Reserve Bank of India (RBI).
Indirect Exposure to India
Foreign investors can also become a part of the economic growth of India through indirect investment routes:
1. Dependent Receipts: Foreign investors may also invest indirectly in Indian securities by purchasing dependent receipts, like American Depository Receipts or Global Depository Receipts, issued against Indian securities but quoted on international stock exchanges, where foreign investors find it easy to invest in the Indian markets.
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2. Overseas Derivative Instruments (ODIs): The other indirect route of investment available to foreign investors is through ODIs, which allow them to invest in Indian securities through derivative instruments. Normally, these are issued by Category I FPIs that can offer the underlying assets for investment.
3. Alternative Investment Funds (AIFs): The AIF aggregates funds from the investor to be invested in the growth-intensive sectors including early-stage and other growth-intensive industries including SMEs, social ventures, and infrastructure. AIFs structure is governed by SEBI. There are three categories of funds:
Category I AIFs: Investment in early-stage ventures or social ventures or industries promoted by the government as suitable. For instance, venture capital SME funds.
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Category II AIFs: It is only for regular and day-to-day operational needs but can also be invested in categories like private equity, debt, etc.
Category III AIFs: Strategies of trading are applied where leverage may or may not be involved, and under this, investors can invest in the derivatives.
4. REITs and InvITs ( Real Estate Investment Trusts and Infrastructure Investment Trusts): Foreign investors can make investments through REITs and InvITs to participate in India's real estate sector as well as its infrastructure sectors. It presents the necessary regulations and streamlines the way for overseas investors to participate in such high-performing asset classes.
International Financial Services Centre (IFSC)
AIFs, REITs, and InvITs in India can be established under the IFSC. It has regulatory benefits, including a list of exceptions from applicable Indian regulations, freedom of investment, and access to international financial markets.
Foreign Portfolio Investors
Foreign Institutional Investors can be registered with one or more IFSCs and will be permitted access to Indian capital markets. Under the SEBI (FPI) Regulations, 2019, provisions have been defined regarding the eligibility criteria requirements, permissible investment, and compliance reporting requirements.
1. Registration Process: An FPI will have to submit CAF and KYC documents to a local sub-custodian. After the registration, the authorities would issue a PAN. The FPIs would be allowed to trade and invest in India.
2. Investment Limits: The FPI is permitted to invest in the equity instruments of the listed companies within an aggregate limit of 10 per cent of a company's paid-up capital. However, entities having more than 50 per cent common ownership, it is considered part of the same investor group. Hence, all investments need to abide by these limits.
FEMA Guidelines
Recent reforms under FEMA facilitate cross-border transactions and efficiency for foreign investors:
1. INR Accounts for Repatriation: Indian Rupee accounts can now be opened by overseas branches of Authorized Dealers (banks) for Non-Residents with the permission to settle current as well as capital account transactions with the residents of India in order to simplify the settlement of cross-border trade and investments.
2. Cross-Border INR Transactions: This provision allows NRI residents to make cross-border transactions in instruments other than debt. However, this capital inflow has been much smoother both from NRIs and other foreign investors.
3. SRVAs: The SRVAs launched in 2022 have been the game-changers in foreign trade transactions. SRVAs allow rupee settlements of trade, thus reducing the dependence on foreign currency. Already, many foreign banks have opened SRVAs with Indian banks, thus promoting more currency flexibility in trade transactions.
4. Increase Currency Options: In December 2023, the RBI modified the Foreign Exchange Management (Manner of Receipt and Payment) Regulations that permit cross-border transactions in all foreign currencies, and local currencies of the trading partner countries. This policy reduces transaction costs and enhances India's global trade ties.
New FEMA regulations will make investment easier with regard to INR accounts and cross-border transactions. In addition, improvements in the regulation of FPIs and AIFs and the benefits that IFSC receives in India make it a more attractive destination for global investors.
