What is Foreign Direct Investment?

February 24, 2022

What is Foreign Direct Investment?

Foreign Direct Investment (FDI) refers to investment from an individual or a firm located in a foreign country, in the Indian economy. Typically, this sort of investment can be made in an unlisted Indian company. In the case of FDI in a listed Indian company, an investment of up to 10 percent or more of the company’s post-issue paid-up equity capital is allowed.

Recent FDI announcements identified the Copenhagen Infrastructure Partners (CIP), which plans to invest US$ 100 million in Amp Energy India. Another instance is FedEx Express’ recent US$ 100 million investment in Delhivery, an Indian logistics start-up.

Foreign capital investments in the country have increased over the years, owing to favourable policies and a healthy business environment. The Government has relaxed FDI norms in key sectors, such as financial markets, defence, telecom and power exchanges.

Foreign investors can directly invest in India (under the FDI category) through the following ways:

  • Subscription to the Memorandum of Association (MoA)
  • Merger/De-merger/Amalgamation
  • Preferential allotment/Private placement/ Private arrangement
  • Purchase of shares from Indian Residents/Companies
  • Rights/Bonus Issue
  • Conversion of convertible notes
  • Swap of capital instruments

FDI routes in India

India follows two routes for foreign investment:

Automatic Route: In this case, no Government approval is needed and the private foreign investor needs only to notify the Reserve Bank of India (RBI) after the investment is made. The Government has allowed FDI through an automatic route in the majority of sectors. These include:

  • Medical devices: up to 100%
  • Thermal power: up to 100%
  • Insurance: up to 49%
  • Power exchanges: up to 49%
  • Petroleum Refining (By PSUs): up to 49%
  • Telecom: 100%.

Government-approval Route:In this route, no foreign investment can be made without the prior approval of the Government of India. Foreign investment in sectors such as defence, media, pharmaceuticals and insurance require Government approval.

Examples:

  • Broadcasting Content Services: 49%
  • Banking & Public sector: 20%
  • Food Products Retail Trading: 100%
  • Core Investment Company: 100%
  • Multi-Brand Retail Trading: 51%
  • Mining: 100%
  • Satellite (Establishment and Operations): 100%.

In 2020, the Indian Government made changes to its Foreign Direct Investment policy. The new norms have made it mandatory for companies, based in countries sharing a border with India, to get Government approval before making any investment in India-based businesses.

Prohibited sectors for FDI in India

Foreign entities are not allowed to make investments in Indian companies in the following sectors:

  1. Lottery Business of all kinds, including Government/Private lottery and online lotteries
  2. Gambling and betting, including casinos
  3. Chit funds (other than the investment made by NRIs and OCIs on a non-repatriation basis)
  4. Nidhi company
  5. Trading in Transferable Development Rights (TDRs)
  6. Real estate or construction of farmhouses
  7. Manufacture of tobacco products or their substitutes
  8. Sectors where private sector investment is not allowed, such as atomic energy and railway operations.

Here are some critical aspects of an FDI

  • FDI is not limited to capital investment alone, but also extends to the transfer of technology, knowledge, skills, and expertise
  • FDI accounts for the lion’s share of non-debt financial resources for the economic development of a nation
  • Companies usually go through the FDI route in an economy that offers better growth prospects and a skilled workforce.

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