General Awareness for Bank Exams: Foreign Direct Investments in India

Oct 29, 2015 15:37 IST

Foreign direct investment (FDI) is a major source of non-debt financial resource for the economic development of the country. Foreign companies invest in India to take advantage of cheaper wages, special investment privileges like tax exemptions, etc.

The continuous inflow of FDI in India, which is now allowed across several industries, clearly shows the faith that overseas investors have in the country's economy. The Indian government’s policy regime and a robust business environment have ensured that foreign capital keep flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges and stock exchanges, among others.

Growth of FDI in India:

FDI into India through the approval route shot up 162 per cent to US$ 1.91 billion in the first ten months of the ongoing fiscal year, indicating that government's effort to improve ease of doing business and relaxation in FDI norms may be yielding results.

As per data released by Department of Industrial Policy and Promotion (DIPP), FDI to India doubled to US$ 4.48 billion in January 2015, the highest inflow in last 29 months, from US$ 2.18 billion in January 2014.

FDI inflows into India during January-June stood at $31 billion, ahead of China’s $28 billion and the US’s $27 billion.

The top 10 sectors receiving FDI include telecommunication which received the maximum FDI worth US$ 2.83 billion in the 10 month period, followed by services (US$ 2.64 billion), automobiles (US$ 2.04 billion), computer software and hardware (US$ 1.30 billion) and pharmaceuticals sector (US$ 1.25 billion).

India received the maximum FDI from Mauritius at US$ 7.66 billion, followed by Singapore, the Netherlands, Japan and the US during April-January 2014-15 period. Healthy inflow of foreign investments into the country helped India’s balance of payments (BoP) situation and stabilised the value of rupee.

What are the forms in which business can be conducted by a foreign company in India?

A foreign company planning to set up business operations in India may:

  • Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.
  • Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management Regulations (FEMA), 2000.

What is the procedure for receiving FDI in an Indian company?

An Indian company may receive FDI under the two routes as given under:

i.  Automatic Route

FDI is allowed under the automatic route without prior approval either of the Government or the RBI in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

ii. Government Route

FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

Application can be made in form which can be downloaded from Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India. Plain paper applications carrying all relevant details are also accepted. No fee is payable. The Indian company having received FDI either under the Automatic route or the Government route is required to comply with provisions of the FDI policy including reporting the FDI to the RBI.

What are the instruments for receiving FDI in an Indian company?

 Foreign investment is reckoned as FDI only if the investment is made in equity shares, fully and mandatorily convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront in accordance with the provision of the Companies Act, 2013 and the SEBI guidelines.

Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route?

FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

i. Atomic Energy

ii. Lottery Business

iii. Gambling and Betting

iv. Business of Chit Fund

v. Nidhi Company

vi. Agricultural (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 activities (other than Tea Plantations)

vii. Housing and Real Estate business (except development of townships, construction of residen­tial/commercial premises, roads or bridges

viii. Trading in Transferable Development Rights (TDRs).

ix. Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.