Article on Foreign Direct Investment (FDI)

(1.) What Is Foreign Direct Investment?

India’s Growth story is intrinsically linked with the story of both Indian entrepreneurship and Foreign direct investment. India is one of the top five attractive location for investment. Japan bank of international cooperation continues to rate India as topmost promising country for overseas business operations.

A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country.

Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. However, FDIs are distinguished from portfolio investments in which an investor merely purchases securities of foreign-based companies. FDIs are actively utilized in open markets rather than closed markets for investors.

The Government has put in place a policy framework on FDI which is transparent, Predictable, and easily comprehensible. The framework is embodied in circular which may be update.

(2.) How a Foreign Direct Investment Works?

Foreign direct investments are commonly made in open economies that offer a skilled workforce and above average growth prospects for the investor, as opposed to tightly regulated economies. Foreign direct investment frequently involves more than just a capital investment. It may include provisions of management or technology as well. The key feature of foreign direct investment is that it establishes either effective control of or at least substantial influence over the decision-making of a foreign business.

The Bureau of Economic Analysis (BEA), which tracks expenditures by foreign direct investors into U.S. businesses, reported total FDI into U.S. businesses of $253.6 billion in 2018. Chemicals represented the top industry, with $109 billion in FDI for 2018.

Foreign direct investments can be made in a variety of ways, including the opening of a subsidiary or associate company in a foreign country, acquiring a controlling interest in an existing foreign company, or by means of a merger or joint venture with a foreign company.

The threshold for a foreign direct investment that establishes a controlling interest, per guidelines established by the Organisation of Economic Co-operation and Development (OECD), is a minimum 10% ownership stake in a foreign-based company. However, that definition is flexible, as there are instances where effective controlling interest in a firm can be established with less than 10% of the company’s voting shares.

(3.) Who can invest in India?

A non-resident can invest in India subject to FDI policy except in those sectors which are prohibited. An FII or FPI may invest in the capital of an Indian economy under the portfolio investment schemes which limits the individual holding FII or FPI below 10% of the capital of the Company. The aggregate limit of investment is 24% of the capital of the company. The aggregate limit can be increased to the sectorial cap as applicable by Indian company concerned through a resolution by its bord of director followed by special resolution to that effect and subject to prior intimation to RBI.

However, a citizen of Bangladesh or an entity established in Bangladesh can invest only under government route.

Recent Amendments in FDI Policy

The amendments in FDI policy is to discourage opportunistic investment in Indian companies by neighbouring countries like china during the COVID-19 pandemic.

Recent China’s central bank has increased stake to 1.01% in HDFC bank via automatic route.

Revised FDI policy – Any entity of a country which shares land borders with India or where the beneficial owner of investment into India is Situated or is citizen of any such country can invest only under a Government Route.

Routes through which India gets FDI

Automatic route : The non-resident or Indian company does not require prior nod of the RBI or government of India for FDI.

Government route : The government’s approval is mandatory. The company will have to file an application through Foreign Investment Facilitation Portal, which facilitates single window clearance. The application is then forwarded to the respective ministry, which will approve/reject the application in consultation with the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce. DPIIT will issue the Standard Operating Procedure (SOP) for processing of applications under the existing FDI policy.

Government route

➢ Banking & Public sector: 20%
➢ Broadcasting Content Services: 49%
➢ Core Investment Company: 100%
➢ Food Products Retail Trading: 100%
➢ Mining & Minerals separations of titanium bearing minerals and ores: 100%
➢ Multi-Brand Retail Trading: 51%
➢ Print Media (publications/ printing of scientific and technical magazines/ specialty journals/ periodicals and facsimile edition of foreign newspapers): 100%
➢ Print Media (publishing of newspaper, periodicals and Indian editions of foreign magazines dealing with news & current affairs): 26%
➢ Satellite (Establishment and operations): 100%

Automatic Route

➢ Agriculture & Animal Husbandry,
➢ Air-Transport Services (non-scheduled and other services under civil aviation sector), Airports (Greenfield+ Brownfield),
➢ Asset Reconstruction Companies, Auto-components, Automobiles, Biotechnology (Greenfield), Broadcast Content Services (Up-linking & down-linking of TV channels, Broadcasting Carriage Services,
➢ Capital Goods, Cash & Carry Wholesale Trading (including sourcing from MSEs),
➢ Chemicals, Coal & Lignite, Construction Development, Construction of Hospitals,
➢ Credit Information Companies, Duty Free Shops, Ecommerce Activities, Electronic Systems, Food Processing, Gems & Jewellery, Healthcare, Industrial Parks, IT & BPM.
➢ Infrastructure Company in the Securities Market: 49%
➢ Insurance: up to 49%
➢ Medical Devices: up to 100%
➢ Pension: 49%
➢ Petroleum Refining (By PSUs): 49%
➢ Power Exchanges: 49%

FDI Prohibition

There are a few industries where FDI is strictly prohibited under any route. These industries are :

➢ Atomic Energy Generation
➢ Any Gambling or Betting businesses
➢ Lotteries (online, private, government, etc)
➢ Investment in Chit Funds
➢ Nidhi Company
➢ Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc)
➢ Housing and Real Estate (except townships, commercial projects, etc)
➢ Trading in TDR’s Cigars, Cigarettes, or any related tobacco industry.

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