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FDI and regulatory approvals – automatic and approval route

As per the FDI Policy, foreign direct investment into an Indian company may fall under one of three categories:
  • Automatic routeSectors where foreign investment is permitted (up to 100%) without approval of the Foreign Investment Promotion Board (FIPB) qualify under the automatic route. ​This is the default route for FDI in absence of any specific rules - all sectors which are not prohibited or fall under the approval route (which are listed out in the FDI policy) belong to the automatic route. Practically, barring a handful of sectors which are regulated, FDI in most cases happens through the automatic route. Many high growth sectors such as software, biotechnology, manufacturing, exploration of petroleum and natural gas etc. are in automatic route, signifying that no FIPB approval is required for FDI.
Automatic route – sectors witnessing maximum foreign investor activity
  • Approval route – For varioussectors, approval of the FIPB is required to receive foreign investment into an Indian entity. 
​There are also a number of sectors which have sectoral limits on FDI – that is FDI is permitted under automatic route up to a certain percentage, beyond which it is either completely prohibited or requires approval. For instance, in a certain sector the government may allow 74% FDI under automatic route, but may require FIPB approval for FDI above that limit.

Understanding approval route
What does it mean when we say that sectoral cap for FDI is 74% in a sector?
It means that a company in that particular sector can issue upto 74% of all of its shares to foreign investors (including shares of different classes, such as equity shares, preference shares and convertible debt instruments, which when converted into equity, will result in 74 percent shares being held by foreigners) irrespective of the number of investors.
It is also possible that a sector can have different caps under approval route and automatic route. For instance, if a sector has a cap of 49% under automatic route and 74% under approval route, then the company can issue up to 49% of all of its shares to foreign investors without seeking approval from the FIPB, and can issue up to 74% of all of its shares to foreign investors if FIPB approves of the same. Companies in such a sector can not take more than 74% foreign investment in any circumstances. This cap works as a limit on the maximum shareholding percentage foreigners can acquire. For example, FDI in telecom is permitted up to 49% without approval.  FDI between 49 to 74% in the telecom sector requires FIPB approval. FDI in excess of 74% is not permitted.
Defense, air transport services, courier services, telecom, print media, private security agencies, insurance, banking companies are some examples of sectors under the approval route. The full list of sectors under approval route can be found in the Consolidated FDI Policy Circular of May 2015 on the link here.


Practical point
In addition to approvals from FIPB, compliance with regulations made by a sectoral regulator may also be necessary. For example, foreign investment in insurance is also governed by regulations of the Insurance Regulatory and Development Authority (IRDA) in addition to the FDI Policy. Similarly, foreign investment under the airlines sector is governed by the Directorate General of Civil Aviation (DGCA). While working on a transaction, one must check whether sectoral regulations are attracted and whether the relevant sectoral regulator needs to be informed or its approval taken. 


  • Prohibited sector - FDI is prohibited under 9 sectors specified under the FDI Policy. Note that FDI is prohibited is Gambling and Betting, including casinos, etc. The FDI Policy further specifies that foreign technology collaboration in any form, including licensing for franchise, trademark, brand name, management contract is also prohibited in respect of lotteries, gambling and betting activities. The full list of prohibited sectors is provided in the annexes.

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