A foreign company can set up a wholly owned subsidiary company in India subject to the FDI Policy/FEMA regulations. Therefore in a sector/industry where the 100% investment is permitted as per FDI Policy/FEMA Regulations then a foreign investor can set up a wholly owned subsidiary in India in which the entire equity capital is owned by such foreign investor/company. Therefore sectoral cap plays an important role while deciding whether a foreign enterprise can set up a wholly owned subsidiary in India or not.
It is to be noted that Indian Government has allowed 100% sectoral cap in most of sector in which foreign investor can own the entire equity and run the business without any an Indian Partner. For example, in most of manufacturing sectors like cement, construction etc, Indian government allows 100% sectoral cap and accordingly a foreign investor can set up a cement plant here in India and that foreign investor is not required to have an Indian partner. However in some cases where Indian Government has not permitted foreign investor to have 100% equity and mandated such investor to find out any local businessman and then forge the joint venture relationship and do the business in India.
1. No Interference of Local Partner: As the parent company holds the entire stake in the wholly owned subsidiary therefore there will be no Indian partner and as a result there will be no interference in the management of the company by an outsider from foreign investor point of view.
2. Quick Decision: The decision will be quick as only parent entity is involved in the management of the company.
3. Financial Flexibility: As no other partner is involved, foreign investor can manage the financial aspects keeping in mind its own interest and comfort of the parent entity.
4. Global Practices: As no local partner is involved, it would be easy for the parent entity to introduce global practices followed by the parent entity in India as well.
There are two routes under which an investment by a foreign enterprise is permitted in India. First is the Automatic Route in which foreign enterprise does not need to obtain the consent of any government authority before making an investment. Here only the intimation to the prescribed authority regarding the investment needs to be made. Second Route is the approval route in which a proper approval needs to be sought from the appropriate authority before making any investment. Both the routes have been discussed hereunder:
1. Automatic Route: Under the automatic route, no approval (either from the Government of India or the Reserve Bank of India) is required for making an investment in India in the sectors/activities as specified in the FDI Policy issued by the Government of India from time to time.
For example, in certain sectors 100% foreign equity is allowed like manufacturing, mining and exploration of metal and non-metals ores.
In addition to these there may be situation where lower investment limits are prescribed though the route is automatic. For example Insurance in which foreign stake up to 49% in an Indian company is allowed under the automatic route. Similarly in other sector as well like Cable network, Commodity exchange, Credit Information Companies, lower investment limits has been prescribed though the route is automatic.
2. Government Route: There are certain sectors in which there is no automatic approval and in those cases you have to obtain the prior approval from the Government of India before making any investment in India. Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, under the Ministry of Finance deals with those cases and approves them.
There are sectors where 100% Foreign Direct Investment is allowed but government approval is required. Some of the examples of such sectors are Up-linking of Non-news & Current affairs’ TV Channels/ Down-linking of TV Channels, Publishing/ printing of scientific and technical magazines/ specifically journals/ periodicals etc.
In addition to above there are other sectors where lower limits are prescribed under the Government Route. Some of the examples of such sectors are Defence Industry, Terrestrial broadcasting FM etc.