Foreign Direct Investment (FDI) in India’s Manufacturing Sector: A Comprehensive Guide

India’s manufacturing sector presents numerous opportunities for foreign investors, especially with the simplification of the Foreign Direct Investment (FDI) process. If you’re planning to enter India’s manufacturing space, here’s a comprehensive guide to help you navigate the process.

1. FDI Limit and Route

India has opened up its manufacturing sector to foreign investment, permitting up to 100% FDI through the automatic route. This means that foreign investors do not require prior approval from the Government of India or the Reserve Bank of India (RBI). This liberalization significantly simplifies market entry for foreign entities looking to set up operations in India.

2. Modes of Manufacturing

Foreign investors have two primary options for setting up manufacturing operations in India:

Self-Owned Manufacturing Operations: Investors can choose to establish their own manufacturing facilities within India.

Contract Manufacturing: Investors can also opt for contract manufacturing, which can be structured either on a Principal-to-Principal or Principal-to-Agent basis. This option allows manufacturers to collaborate with Indian entities under legally enforceable contracts.

Important Note: Contract manufacturing must take place within India to qualify under the automatic route. Offshore manufacturing arrangements do not fall under this framework.

3. Sales and Distribution Channels

Once a foreign manufacturer sets up operations in India, they can sell their products through various channels, including wholesale, retail, and e-commerce platforms. No additional approvals are required for the downstream retailing of products manufactured in India. This enables seamless integration of operations — from manufacturing to final consumer sales — all under a single investment framework.

4. Prohibited Sectors

While the manufacturing sector is largely open to FDI, there are certain restrictions:

Prohibited Sectors: FDI is not allowed in the manufacturing of cigars, cheroots, cigarillos, and cigarettes of tobacco or tobacco substitutes.

5. Compliance Snapshot

Despite the liberalized entry process, investors must still adhere to the following compliance requirements:

Sectoral Caps: Compliance with applicable sectoral caps is mandatory, which may limit the amount of foreign investment in certain sectors.

Security and Regulatory Conditions: Companies must comply with India’s security regulations and other applicable regulatory conditions.

Timely Reporting: Investors must report the issuance of equity instruments to the RBI by filing Form FC-GPR (Foreign Currency-Gross Provisional Report), ensuring timely submission of the prescribed filings.

6. Final Thoughts

India’s manufacturing sector offers a plug-and-play FDI environment, making it an attractive destination for global players and domestic manufacturers alike. The liberalized FDI regime, combined with flexible manufacturing options and ease of market access, ensures that foreign investors can enter the market with minimal regulatory hurdles.

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Priya Kapasi Shah

Associate Partner | Tax & Regulatory | [email protected]

Heads Treelife’s Financial Advisory practice, specializing in investment structuring, cross-border transactions, and tax and regulatory advisory. Also leads on AIF setups and advisory services for GIFT IFSC.

Dhairya Chaniyara

Senior Associate | Tax & Regulatory | [email protected]

Focuses on direct tax and regulatory services with a specialization in GIFT IFSC. Brings experience from various industries, including manufacturing, FMCG, IT-ITES, and healthcare, to deliver impactful tax solutions.