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A brief about FDI in India

August 6, 2023

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This article is written by Anisha Dutta pursuing Diploma in US Tax Compliance and Paralegal Work.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

Foreign Direct Investment (FDI) takes place when an investor purchases or acquires business assets in a foreign country. Business assets can be defined as establishing new business operations/entities in another country or acquiring ownership stake in already existing business entities.

Foreign Direct Investments are not just profit-oriented investments. They are made with the aim of extending long-term investment in the economy of a country. Besides the inflow of money, the transfer of technology and resources also takes place. It strengthens the financial position of the entity and gives rise to new employment opportunities as well.

Types of FDI

FDI can be mainly categorised into four different types, namely: Horizontal, Vertical, Conglomerate, and platform.

Under Horizontal FDI, a business entity makes investments in the business of another country carrying on similar activities. A good example of Horizontal FDI in India is McDonald’s opening its chains in India.
Under Vertical FDI, investments are made across another country in an entity that is involved in the same industry but operates at a different level of the supply chain. Hence, the business activities differ from those of the parent company. Maruti Suzuki has opened up various manufacturing facilities and supply chain networks in India. This is an example of Vertical FDI.

Under Conglomerate FDI, an entity invests in another entity engaged in completely unrelated activities. Walmart’s investment in the leading Indian e-commerce company, Flipkart, is an example of conglomerate FDI in India.
Under Platform FDI, a business expands its operations in a foreign country, and all the outputs from such operations are exported to a third country.

India and FDI

The introduction of Foreign Direct Investment in India dates back to 1991, the beginning of “Economic Liberalisation in India”. Today, FDI plays a key role in the development of the Indian economy and is one of the biggest monetary sources for economic growth. In the Financial Year 21-22, India received its highest ever FDI inflow of INR 6,31,050 crore. FDI Equity inflow in Manufacturing sectors increased to INR 1,58,332 crore in FY 21-22 from INR 89,766 crore (FY 2020-21)

In India, Foreign Direct Investment is regulated by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.

The Foreign Investment Promotion Board (FIPB), under the Department of Economic Affairs, Ministry of Finance, is the concerned authority for controlling, coordinating, and processing FDIs under government approval.

Which business entities are eligible to receive FDI in India?

The following entities are eligible to receive FDI in India:

A company
A Partnership Firm
A Proprietary Concern
Limited Liability Partnership
Start-up Companies
An investment Vehicle

Modes of FDI in India

There are two routes through which an Indian Company or business entity can acquire Foreign Direct investment, namely:

Automatic Route
Government Route

Automatic Route

Investments made under this route do not require the prior approval of the Government of India. There are certain specified sectors in which 100% foreign direct investment can be made without any approval from the Government. Sectors like animal husbandry, plantations, mining, etc. are allowed for 100% FDI under the automatic route.

In certain other sectors, FDIs are accepted up to a ceiling. Any foreign investment up to that ceiling can be done through the Automatic route without seeking any approval from the Government.

The complete list of the sectors and their permissible FDI limits is stated in Regulation 16 of FEMA 20 (R).

Government Route/ Approval Route

Sectors that are not covered under the automatic Route are covered under this route. This route requires the foreign investor to obtain prior approval from the Government of India.

Further, if a foreign investor wants to invest in an Indian entity beyond the permissible threshold under the automatic route, then the approval of the Government is required.

Procedure for Government Approval

Let us understand the detailed procedure for obtaining Government Approval.

An online application has to be filed with the Foreign Investment Promotion Board (FIPB), Ministry of Commerce and Industry, on the Foreign Investment Facilitation Portal, along with all supporting documents as required.

The Department forwards the application to the concerned Ministry and awaits its comments and observations on the same.

The application is also forwarded to the Reserve Bank of India to ensure that the terms and

The conditions of the applications are in line with the regulations of the Foreign Exchange Management Act (FEMA).

Keeping in view the remarks of the concerned Ministry and RBI, the final decision to accept or reject an application rests at the discretion of the FIPB. The FIPB is required to provide its comments to the applicant within 4 weeks from the date of the application.

The FIPB may also ask for additional clarifications or documentation from the application if it deems it necessary. The complete process takes around 8-9 weeks from the date of filing the application.

Eligible investors for FDI

The following persons or entities are eligible to make FDIs in Indian entities:

Any non-resident entity or person can make FDI in India under automatic route in the permitted sectors and up to the permissible limits.
A resident or entity of countries sharing borders with India, say, Bangladesh, Pakistan,

Afghanistan, China, Nepal, and Bhutan can only invest through the Government Route.

Foreign Institutional Investors and Foreign Portfolio Investors can invest through the government route.
Foreign Venture Capital Investors, registered with the Securities Exchange Board of India (SEBI), can invest under the Government Route.
Erstwhile OCBs

Prohibited Sectors

There are certain sectors where FDI is completely prohibited by the Indian government in any form.

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

Initiatives undertaken by the Government of India

The Indian Government has undertaken many initiatives in the last decade to increase FDI in India for the betterment of the Economy.

In September 2014, the Make in India Initiative was launched with the objective of opening up the manufacturing sector of the country to foreign investment. For decades, the contribution to Indian GDP has been mostly made by the service sector. Through this scheme, the Government aimed to receive FDI in the manufacturing sector and increase its contribution to GDP growth.

Sectors like Defence, Railways, Construction, Insurance, Pension Funds, and Medical Devices were opened up for Foreign Direct Investment. An Investor Facilitation Cell (IFC) was also set up to assist foreign investors in seeking regulatory approvals, providing support during the pre-investment phase, and providing execution and post-execution support.

In the year 2015, FDI in India witnessed a tremendous growth of 48% and became one of the top global destinations for FDI, surpassing the United States and China.

In September 2015, the Ministry of Railways signed formal agreements with global giants Alstom BSE 0.40% and GE Transport to set up locomotive manufacturing factories in Madhepura and Marhaura in Bihar, a project worth Rs. 40000 crore.

In 2020, amidst the CoronaVirus Pandemic, a few other changes were made to the FDI policy. To protect Indian companies from hostile takeovers, a strict watch has been placed on all FDIs coming from countries sharing borders with India. Investments from these countries were brought under the purview of the Government Route.

Further in 2020, the FDI upper limit for the Defense Manufacturing Sector was raised from 49% to 74% under the Automatic Route and 100% under the Government Route.

In 2021, the FDI upper limit for the Telecom sector was raised from 74% to 100% under the Automatic Route. Also, the upper limit for the Insurance Sector was raised from 49% to 74%.

Significant FDIs made in India in the recent past

Phoenix Mills Ltd., a textile manufacturing Company in India, received an investment of INR 450 crore in qualified institutional placement offering in August 2020 from The Government of Singapore.
Jio Platforms Ltd. sold 25.24 percent of its stake worth Rs 1.52 trillion to various foreign investors between April 23 and July 16, 2020.
In January 2020, Amazon announced an investment of around US$1 billion to help digitise small and medium businesses in India.
In 2019, Saudi Aramco bought 20 percent stake in Reliance’s oil-to-chemicals at

a value of US$ 75 billion.

In May 2023, world’s biggest contract electronics manufacturer, Faxconn, purchased a plot of land in Tamil Nadu ahead of its plan to set up Apple manufacturing units.

Role of FDI in developing economies like India

FDI creates huge employment opportunities in developing nations.
FDI improves the financial status of companies in developing nations, boosts business operations, and increases productivity.
Foreign Investors generally have an established global
marketing network, which contributes to the promotion of exports in developing countries.
FDI contributes to increased capital inflows.
FDI results in an increase in wages and salaries.

Conclusion

Foreign investors see huge potential in the Indian economy given its highly skilled workforce, low wage requirements, and ever-growing consumer market. Today, India is one of the most attractive FDI destinations in the world. In the year 2022, India bagged the 16th position in Kearney’s foreign direct investment (FDI) confidence index. India’s economic development has witnessed promising growth in the recent past and has the potential to continue growing tremendously in the years to come.

References

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A brief about FDI in India

Introduction

Types of FDI

India and FDI

Which business entities are eligible to receive FDI in India?