The government of India has established two routes through which foreign investors can make investments into the Indian economy. The routes for FDI are the automatic route and the government route. A thorough understanding of the two routes is required in terms of foreign investments as the government has divided the various sectors amongst them.

Government Route : As the name suggests, the route for foreign investments that has government involvement is known as the government route. To make foreign investments in the sectors that come under the government route, the foreign investors are required to first take approvals from the government as without approvals the foreign entities would not be able to make the investments in India. The foreign investors have to submit a proposal to the respective administrative ministry department who is responsible for granting permissions and then the investments can be made. 

Automatic Route : The sectors that come under the automatic route of FDI do not require any approvals from the government. The foreign investors can make the investments without taking any approvals from the government through the automatic route but the revised policies must be checked before making the investments to avoid any confusion. 

One of the major factors that make India an attractive destination for foreign direct investments is the market size as India has a huge customer base that the foreign investors want to make the best use of. The buying capacity of the consumers is huge and India provides a good market for foreign goods.

Due to the high return on investments, foreign investors want to invest in Indian companies and also launch their products. The government of India plays its role rightfully in enhancing the number of foreign investments coming into the country by making time to time reforms in the FDI policy that increase the ease of doing business in the country.

According to the World Bank data, India is currently in the 63 rd position in the Ease of Doing Business Rankings and this is a very positive thing for the country and for its aim of attracting a high volume of foreign investments into the country.

It is due to the government reforms being made in the business environment of India that the country has not reached the top 100 countries to be featured on the Ease of Doing Business Rankings but has attained the 63 rd position also. 
 
According to the Department of Promotion of Industry and Internal Trade, the FDI equity inflow in India is at the US $469.99 billion during April 2000 and March 2020, which clearly indicates that the hard work of the government of India has paid off by improving the ease of doing business in India and also making relaxations in the FDI norms. 
 
The FDI equity inflow in India is at the US $ 49.97 billion in 2019-20. The highest FDI equity inflow has been attracted by the service sector of US$ 7.85 billion. 
 
In 2019-20, India received the maximum FDI equity inflow from Singapore of US $14.67 billion, Mauritius of the US $8.24 billion, Netherlands of US 6.50 billion, USA of US $ 4.22 billion and Japan (the US $3.22 billion).

India has gained its position in being one of the top 10 countries that have received the highest foreign direct investments in the world. According to the recent UN report, India had attracted $49 billion inflows in 2019. There is a 16% increase in foreign investments that reflects a good position of FDI India.

The following are the recent developments that have taken place in foreign direct investments in India.

• Between April 23 and July 16, 2020, Jio Platforms Ltd. sold 25.24 per cent stake worth Rs 1.52 trillion (US$ 21.57 billion) to various global investors from separate deals involving Facebook, Silver Lake, Vista, General Atlantic, Mubadala, Abu Dhabi Investment Authority (ADIA), TPG Capital, L. Catterton, Public Investment Fund (PIF), Intel Capital, Qualcomm Ventures and Google. This is the largest continuous fundraise by any company in the world.

• In May 2020, Philips, Dutch health tech and consumer electronics company, announced its plan to invest Rs 250-300 crore (US$ 35.47-42.56 million) to boost its manufacturing and R&D facilities in India.

• In January 2020, Amazon India announced an investment of US$ 1 billion for digitising small and medium businesses and creating one million jobs by 2025.

• In January 2020, Mastercard announced its plans to invest up to US$ 1 billion in India over the next five years to double its research and development effort in the Indian market.

• In October 2019, French oil and gas giant, Total S.A., acquired 37.4 per cent stake in Adani Gas Ltd for Rs 5,662 crore (US$ 810 million), making it the largest FDI in India’s city gas distribution (CGD) sector.

• In August 2019, Reliance Industries (RIL) announced one of India's biggest FDI deals with Saudi Aramco to buy a 20 per cent stake in Reliance's oil-to-chemicals (OTC) business at an enterprise value of US$ 75 billion.

The following are the government developments concerning FDI in India. In May 2020, Government increased FDI in Defence manufacturing under the automatic route from 49 per cent to 74 per cent.
 
In April 2020, the Government amended existing consolidated FDI policy for restricting opportunistic takeovers or acquisition of Indian companies from neighbouring nations.
 
In March 2020, Government permitted non-resident Indians (NRIs) to acquire up to 100 per cent stake in Air India.

The following are the recent measures that have been taken by the government of India in terms of foreign direct investment. According to the survey done by the Emerging Market Private Equity Associatio (EMPEA), India will be the most attractive emerging market for global partners (GP) investment.

The main aim of government initiatives taken for FDI in India is to bring ease of doing business and for the promotion of foreign investments in various sectors of the economy. In recent months, the government has given the allowance of 100% FDI in various sectors and is in talks for giving 100% FDI in more sectors.

The Indian government aims to achieve the goal of US $100 billion worth of FDI in just two years. India has been attracting major foreign investments even when the world economy is not in good condition due to COVID 19 pandemic.

The following are the recent government initiatives taken for foreign direct investments in India.

• In May 2020, the Government increased FDI in defence manufacturing under the automatic route from 49 per cent to 74 per cent.

• In April 2020, the Government amended existing consolidated FDI policy for restricting opportunistic takeovers or acquisition of Indian companies from neighbouring nations.

• In March 2020, Government permitted non-resident Indians (NRIs) to acquire up to 100 per cent stake in Air India.

• In December 2019, the Government permitted 26 per cent FDI in digital sectors.

• In August 2019, Government permitted 100 per cent FDI under the automatic route in coal mining for open sale (as well as in developing allied infrastructure like washeries).

• In Union Budget 2019-20, the Government of India proposed opening FDI in aviation, media (animation, AVGC) and insurance sectors in consultation with all stakeholders.

• 100 per cent FDI is permitted in insurance intermediaries.

• As of February 2019, the Government of India has been working on a road map to achieve its goal of US$ 100 billion worth of FDI inflow.

• In February 2019, the Government of India released the Draft National E-Commerce Policy to encourage FDI in the marketplace model of E-commerce. Further, it stated that the FDI policy for the E-commerce sector was developed to ensure a level playing field for all participants.

Foreign direct investment is the sum of equity capital, long term capital, and short term capital as reflected in the balance of payments. FDI is characterized by participation in management, joint-venture, transfer of technology and expertise.

The stock of foreign direct investment is the net (i.e., the outward FDI minus inward FDI) cumulative FDI for any given duration. 

Foreign direct investment (FDI) in India was introduced in 1991 under the Foreign Exchange Management Act (FEMA) implemented by the then finance minister, Dr. Manmohan Sign. It commenced with the baseline of 1 billion dollars in 1990.

India, today is considered as an important destination for foreign direct investment. The major sectors that attract overseas investment are telecommunications, construction activities, and computer software and hardware.

Being an FDI agency in India, we facilitate FDI in finance, digital media, apparels, and other sectors. 

Types of FDI

To further understand the nuances of FDI in India, let us have a look at the types of foreign direct investments.

1. Horizontal FDI

• In this type of FDI the parent company initiatives the same business model in another country.
• The goods and services that are manufactured abroad are mostly similar to the products/services that are manufactured in the home country of the company.
• The term horizontal is given to this type of FDI because the similar operations of a company are carried out in another country

2. Vertical FDI

• This type of FDI is known as the export platform foreign direct investment in which the exports are sent back to the home market.
• The main contributor to this type of FDI is the increase of the trade blocks that have low internal trade barriers but have higher external barriers.

3. Platform FDI

• In the case of platform FDI, a business gets expanded to another country but the aim of this expansion is to take the output from the foreign country and export it to the third country.

Methods of FDI

Foreign investors have the opportunity of expanding their business into other countries through the means of foreign direct investment. The following are the various methods of foreign direct investment:

• Mergers and acquisitions
• Joint Ventures with foreign companies
• Starting subsidiary in an abroad country of the domestic company
• Getting voting stocks in a foreign company

Foreign direct equity inflows are the sum of inward direct investments into a country by non-resident or foreign investors. A foreign direct investment is an investment made by an entity not residing in the country the investment is being made in.

This investment is characterized by a controlling ownership in a business. FDI is, therefore, different from foreign portfolio investment (FPI) by the notion of direct control.

Foreign direct investment typically includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans”. This overseas investment generally involves participation in management, joint-ventures, transfer of technology, and expertise.

We offer FDI consulting in India and help bridge the gap between overseas investors and investment opportunities.