India Tightens Foreign Investment Controls, Requires Approval for Pakistan Funds, Closes Sensitive Sectors

India Tightens Foreign Investment Rules for Countries Sharing a Land Border

May 2, 2023

The Indian government has issued a notification tightening foreign investment rules for countries sharing a land border with it, with specific provisions for Pakistan. The Ministry of Finance has amended the framework, which will require any individual or entity registered in Pakistan to invest in India through the government approval route.

Under the revised rules, such investments will be permitted only in sectors other than defence, space, atomic energy, and other areas where foreign investment is prohibited. The notification states that a citizen of Pakistan or an entity incorporated in Pakistan shall invest only under the Government route, and that such investments will be allowed only in sectors other than defence, space, atomic energy, and such other sectors or activities prohibited for foreign investment.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The revised rules also extend the government approval requirement to all countries sharing a land border with India. According to the notification, an entity or a citizen of a country that shares a land border with India, or where the beneficial owner of an investment into India is a citizen of any such country, shall invest only under the Government route.

Comparison of Countries with Government Approval Requirement

The Ministry of Finance has further specified that any subsequent transfer of ownership that results in beneficial ownership falling under these restrictions will require prior government approval. In the event of the transfer of ownership resulting in the beneficial ownership falling within the restriction, such subsequent change will also require prior Government approval.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

The rules clarify that multilateral institutions will not be treated as entities of a particular country. A multilateral bank or fund shall not be treated as an entity of a particular country.

This move comes alongside a separate policy shift allowing 100 percent foreign direct investment in insurance companies under the automatic route. The decision expands the existing framework, where foreign investment in insurance companies was previously capped, and is aimed at increasing capital inflows into the sector. However, Life Insurance Corporation of India (LIC) will continue to operate under a separate framework, with foreign investment in LIC remaining capped at 20 percent under the automatic route.

Foreign investment into India is governed by the Foreign Exchange Management Act (FEMA), 1999, and rules notified under it. Investments are classified under the automatic route, where no prior government approval is required, and the government route, where approvals are mandatory.