The Indian emerging market offers great potential for foreign investors, with its gross domestic product at over USD 3 trillion and foreign direct investments surging across a range of industrial sectors over recent years.
Additionally, according to a Morgan Stanley report, India will become one of the third-largest economic powers in the world in the next 10 to 15 years, which will inevitably encourage global giants to invest in this country.
Supported by its strong partnership and robust democracy, India has already welcomed numerous lucrative business opportunities. Entering the market doesn’t come without its challenges, however. In this article, we go through six important aspects foreign investors should consider before investing in India.
Key takeaways
- Foreign companies can enter the Indian market through three major investment types which are foreign institutional investment (FII), foreign portfolio investment (FPI), and foreign direct investment (FDI)
- To ensure investment in an area where FDI is permitted, foreign companies should be aware of forbidden industries (real estate, tobacco, atomic energy, etc.)
- Foreign investors should be aware of pricing requirements that are set by the exchange controls to minimise long-term investment risks
Different types of investments available
Foreign companies can enter the Indian market through a variety of investment types. Foreign corporations’ funds may be used to purchase shares, real estate, management, or joint ventures.
Thus, foreign investments in India can be divided into three categories: foreign institutional investment (FII), foreign portfolio investment (FPI), and foreign direct investment (FDI).
Foreign firms must consult with market entry services to determine which type of investment will be profitable for their business interest. This will support their strategic planning efforts and secure a higher ROI in the future.
FDI limits
Since the Indian economy imposes foreign exchange controls, any outbound or inbound foreign investments are subject to official regulation. For most industrial sectors, foreign investment is currently allowed via the automated route.
However, other industries, including atomic energy, real estate, tobacco, etc., are forbidden.
In addition, other industries have strict limits on the number of local sourcing requirements. Hence, it is essential to do a thorough assessment to avoid investment risk.
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- Understand all compliance requirements
Statutory and regulatory compliance requirements
Every new company entering the Indian market must comply with several strict regulatory and statutory compliance requirements. Among them is the Contract Labour Act of 1970 (CLRA), the Payment of Wages Act of 1936, the Minimum Wages Act of 1948, and more. The central, state and local administrations are the three strata in which these regulatory compliances are carried out.
Structure-related concerns
For instance, stamp duty payment significantly varies across Indian states. Foreign investors are strongly advised to consult with an experienced advisor in India to understand local laws and regulations better.
A foreign investor also needs an Indian representative to be the acquirer for business or asset transfers. In some industries where 100% FDI is permitted, the representative firm may be a subsidiary of the foreign investor.
Pricing requirements
The fair market value of the individual shares must be paid in a secondary transaction involving a foreign firm and an Indian company if the foreign investor wishes to make investments in a particular industrial sector by purchasing shares of the unlisted Indian company.
The price of such shares is determined in accordance with a recognised international pricing method. Foreign investors should be aware of such pricing requirements as the exchange control sets them to minimise long-term investment risks.
Exit rights
Foreign companies must also consider their exit rights. RBI limits “downside protection” for all equity instruments that a particular Indian business offers to foreign investors for M&A exit rights. As a result, there cannot be any contract in India that guarantees returns to a foreign investor.
Furthermore, foreign investors must ensure they are not classified as “promoters” in an initial public offering (IPO). This way, they can avoid the three-year lock-in restrictions and the disclosure requirements imposed on Indian promoters.
How Acclime can help
Foreign companies may find it hard to select the right type of investment, suitable exit strategy, or any other essential market entry factors that would work best for them without a good understanding of the Indian market. This is where the importance of consultants comes to play.
Acclime India, a corporate & consulting services specialist in India, helps overseas businesses thoroughly investigate, understand and analyse the above-stated factors and customise their entry strategies for the Indian market.
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