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What is FDI (Foreign Direct Investment)?

FDI means foreign direct investment. Foreign direct investment is an investment made by a company or individual in one country into business interests located in another country. For Ex - Establishing business operations or acquisition of business assets in the other country.

What is FDI (Foreign Direct Investment)?

From India perspective, FDI is overseas money invested by a firm or an individual in an Indian company. In India, FDI is regulated under the foreign exchange management act, 2000. It is governed by the reserve bank of India.

Key features of foreign direct investment

  1. It is commonly made in open economies that offer a skilled workforce and good growth prospects for the investors in comparison to tightly regulated economies.
  2. It involves a long term commitment as there is no intention to seek quick capital gains.
  3. As per organization for economic cooperation & development (OECD), investment of 10% or above from overseas is considered as FDI.
  4. Foreign direct investment not only requires capital investment but also requires management as well as technology.
  5. It increases the productive capacity of the target company as it involves creation of physical assets. This helps in generating employment opportunities and fast economic growth in the host country.
  6. It establishes an effective control in the company in which the investment is made.
  7. Investing company has a major influence on the decision making process of the company in which the investment is made.

Ways of Foreign investment in India

There are two ways by which a foreign entity can invest in India –

  1. Automatic Route – In this case, foreign investor does not require approval from reserve bank of India or government of India for making an investment.
  2. Government route - In this case, foreign Investor requires prior approval of concerned departments or ministries under govt. of India via foreign investment facilitation portal. Approval of Department of Economic affairs (DEA), foreign investment promotion board (FIPB) and Ministry of finance or department of industrial policy & promotion (DIPP) should be obtained by foreign investors before making an investment.

Every sector has been allotted a particular department or a ministry for the FDI approval. Government approval is mandatory in the following 12 sectors listed below –

SECTOR MINISTRY ALLOTED
FDI in small arms Ministry of Home Affairs
Broadcasting Ministry of Information & Broadcasting
Civil aviation Ministry of Civil Aviation
Mining Ministry of Mines
Defence Ministry of Defence
Satellites Department of Space
Print media Ministry of Information and Broadcasting
Telecom Department of Telecommunications, Ministry of Communications
Trading (Single, multibrand and food products retail trading) Department of Industrial Policy and Promotion, Ministry of Commerce and Industry
Banking (Public & private) Department of Financial Services, Ministry of Finance
Pharmaceuticals Department of Pharmaceuticals, Ministry of Chemicals & Fertilizers
Private security agencies Ministry of Home Affairs
If there is more than one ministry or if there is a doubt about the ministry (as per FDI policy) Department of Economic Affairs. Ministry of Finance

For handling cases effectively, monthly reviews are given by the concerned ministries or authorities, quarterly reviews meetings are also organized to discuss the pendency of cases with the government co-attended by secretary, department of economic affairs & secretary DIPP (Department of industrial policy & promotion).

Categories of Foreign investors

  1. Non-resident entity– In accordance with the FDI policy, every non-resident entity or individual is permitted to invest in India by automatic or govt. route except in prohibited sectors. However, individuals or entities of Pakistan and Bangladesh are permitted to invest through government route only (after taking the approval from FIPB).
  2. Foreign institutional investors / foreign portfolio investors (FII/FPI) – Foreign institutional investors or foreign portfolio investors are the investors who are permitted to invest in the capital of the Indian company in the form of equity securities. They are allowed to invest and trade in equity securities. Under the portfolio investment scheme, they can do the maximum total investment of 24% of the issued and paid up capital of the company. This limit can be enhanced by passing a special resolution.
  3. NRI’s resident living in Nepal and Bhutan are also permitted to invest in the capital of Indian companies but on repatriation basis
  4. OCB’s incorporated outside India can also make investment in Indian companies, if they are not served with the adverse notice of RBI.

FDI limits in different sectors

SECTOR FDI PERMISSIBLE ENTRY ROUTE
Hotel & tourism sector 100% FDI permissible Automatic route
Insurance sector 26% FDI permissible Automatic route
Trading companies 51% FDI permissible but 100% FDI permissible if the company does bulk import and cash & wholesale trading. Government route
Non-banking financial companies 49% FDI permissible Automatic route
Call centers 100% FDI permissible Government route

FDI Prohibition

Many foreign investors invest in different sectors of India but there are some sectors in which investors are not authorized to invest and these sectors are banned by the government for investment. The sectors in which FDI is prohibited are listed below –

  1. Investment in gambling, betting including money on horse riding, casinos etc. is prohibited.
  2. Investment in lottery business such as online lotteries, govt. & private lotteries is prohibited.
  3. Investment in chit funds is also prohibited under FDI.
  4. Investment in construction of farm houses or real estate businesses is prohibited.
  5. Trading in transferable development rights is also prohibited under FDI.
  6. Investment in manufacturing of cigarettes, cigars or any tobacco substitute is also prohibited under FDI.

Investment Instruments

Indian companies can receive FDI through the following instruments given below –

  1. Investment in Equity shares issued by an Indian company in accordance with the provisions of Companies act, 2013.
  2. Investment in Partly paid equity shares
  3. Investment in Fully and mandatorily convertible preference shares
  4. Investment in Warrants issued by an Indian company in accordance with the SEBI guidelines and provision of the companies act, 2013.
  5. Investment in Fully and mandatorily convertible debentures

FDI Approval process

Every foreign investor who wants to make investment in India through automatic route has to apply through foreign investment facilitation portal (FIFP). It is an online process to approve submitted FDI applications. The whole process of FDI approval is explained in the tabular format below -

STEPS EXPLANATION TIME PERIOD TOTAL TIME PERIOD
Submission of documents In the first step, Applicant will submit the proposal and upload the required documents on Foreign investment facilitation portal (FIFP) administered by DIPP. - -
Assigning the case In the second step, Department of industrial policy & promotion (DIPP) assigns the investment proposal to the concerned ministry or department. 2 days -
Submission of signed physical copy by the applicant In the third step, If documents are digitally signed, there is no need to submit the physical copy to the concerned department but if the application is not digitally signed, the applicant has to submit the signed physical copy to the competent authority 5 days 7 days
Seeking additional information from the applicant In the fourth step, Initial examination of the investment proposal will start and they may ask for the additional information from the applicant, if needed One week Two weeks
Submission of clarifications by DIPP In the fifth step, DIPP clarify the applicants on specific issues of FDI policy Two weeks Four weeks
Comments by concerned department or ministry or RBI In the sixth step, Comments are shared by concerned department or ministry or RBI in relation to proposals Four weeks Six weeks
Comments by ministry of home affairs on security clearance proposals In the seventh step, Comments are shared by ministry of home affairs on proposals requiring security clearance. Six weeks Eight weeks
Approval on investment proposals In the eight step, Applicants gets the approval by the concerned department/ ministry on investment proposals. - -
Proposals not requiring security clearance In the ninth step, they forward the investment proposals not requiring security clearance. Two weeks Eight weeks
Proposals requiring security clearance In the tenth and the last step, the proposals have to go through security clearance for approval. - Ten weeks

Documents required for FDI approval

The documents which are required to be uploaded online along with the investment proposal are given below –

  • Documents from both investor & investee companies -
    • Incorporation certificate
    • Memorandum of Association (MOA)
    • Article of Association (AOA)
    • Board resolution
    • Audited financial statements of last financial year
  • List of names, addresses and id proof of all foreign collaborators of the investor company.
  • An affidavit declaring that all information provided in the hard copy and information submitted online is the same and correct.
  • Pre and post investment shareholding pattern of the company in which the investment is made.
  • Copy of joint venture agreement or shareholder agreement or technology transfer agreement (as applicable) in case of existing ventures.
  • Copy of past FIPB or SIA or RBI approvals connected with current investment proposal.
  • Foreign inward remittance certificate in case investment is already done in past.
  • Valuation certificate approved by Chartered accountant.

Conclusion

FDI is the most important source of funds for the individuals and the companies operating in a developing economy like India. FDI increases the productive capacity of the company and helps in generating employment opportunities too. It also leads to fast economic growth of the host country. Therefore, FDI contributes to the overall growth of the economy. Thus, India is a big market for investors to invest money and get good returns.

“The Bigger the market, more the investors and the more opportunities of investment”.