Foreign Direct Investment(FDI)

Foreign Direct Investment (FDI) may be defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The FDI Relationship consists of a parent enterprise and a foreign Affiliate which together form a transnational corporation (TNC). In order to qualify as FDI, the investment must allow the parent enterprise control over its foreign affiliate. FDI is now recognized as an important driver of growth in the country.

The Government is, therefore, making all efforts to attract and facilitate FDI and investment From Non-Resident Indians (NRIs) including Overseas Corporate Bodies (OCBs), which are predominantly owned by them, to complement and supplement domestic investment. In order to make investment in India attractive, investment and returns on them are freely repatriable, except where the approval is subject to specific conditions, viz. lock-in period on original investment, dividend cap, foreign exchange neutrality, etc., as per the notified sectoral policy.

Foreign direct investment is freely allowed in all sectors (including the services sector), except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. FDI for virtually all items/activities can be brought in through the automatic route under powers delegated to the RBI, and for the remaining items/activities through Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB).

With a view to injecting the desired level of technological dynamism in Indian industry and promoting an industrial environment where the acquisition of technological capability receives priority, foreign technology induction is encouraged both through FDI and through foreign technology collaboration agreements. Foreign technology collaborations are permitted either through the automatic route under delegated powers exercised by the RBI, or by the Government.   

However, cases involving industrial licenses/small scale reserved items do not qualify for automatic approval and would require consideration and approval by the Government. The automatic route of technology collaboration would also not be available to those who have, or had, any previous technology transfer/trademark agreement in the same or allied field in India.

 Types of FDI 

Foreign direct investments may be the following types:

➤ 1. Greenfield Investment:

It refers to direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know –how, and can lead to linkages to the global marketplace.

➤ 2. Mergers and Acquisitions:

 The primary type of FDI is the transfer of existing assets from local firms to foreign firms. Cross-border mergers occur when the assets and operations of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of asset ant operations is transferred from a local to a foreign company with the local company an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide no long-term benefits to the local economy.

➤ 3. Horizontal Foreign Direct Investment:          

It refers to investments abroad in the same industry as the one a firm operates in at home.

➤ 4. Vertical Foreign Direct Investment:

         It may take two forms:                   

A. Backward Vertical FDI: 

Where an industry abroad provides inputs for a firm’ s domestic production.

B. Forward Vertical FDI: 

In which an industry abroad sells the outputs of a firm’s domestic production.

Forms of Business

A Foreign company planning to set up business operations in India has the following options:

A. As an incorporated entity by incorporating a company under the Companies Act,1956 through

             1. Joint ventures; or

             2. Wholly owned subsidiaries.

 B. As an unincorporated entity through a

             1. Liaison office/representative office

             2. Project office

             3. Branch office

Forms of Investment

A foreign company can invest in India through an route or through the government route.

Now investment by entities from countries that share a border with India will now require a clearance from the Center. A non-resident entity can invest in India subject to the FDI Policy except in those sectors and activities which are prohibited.

           Automatic Route

A. FDI up to 100% is allowed under the automatic route in all activities sectors except the following, which require prior approval of the Government:

1. Activities/items that require an industrial

2. Proposals in which the foreign collaborator has an existing financial/technical collaboration with India in the same field

3. Proposals for the acquisition of shares in an existing Indian company in the financial services sector  and where the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 is attracted.

4. All proposals falling outside notified sector policy/caps or under sectors in which FDI is not permitted.                                                 

B. FDI in sectors/activities to the extent permitted under the automatic route does not require any prior approval either by the Government or RBI. The investors only required to notify the concerned Regional office of RBI within 30 days or receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.

      Government Route

A. FDI in activities not covered under the automatic route requires prior Government approval and is considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Applications can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications  all the relevant details are also accepted. No fee is payable.

B. Indian companies having foreign investment approval through the FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the  

Companies are required to notify the concerned regional office of RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors  or NRIs.

Sectors where FDI is not allowed in India

FDI, at present, is prohibited under the Government as well as the automatic route for the following sectors:

1.  Retail trading

2.  Atomic energy                             

3.  Lottery business

4.  Gambling and betting

5.  Housing and real estate business

6. Agriculture (excluding floriculture, horticulture, development of seeds, animal husbandry, pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations (other than tea plantations).