Since opening up its economy to overseas investments in 1991, India has become one of the top destinations for foreign direct investments. Foreign investors take advantage of relatively lower wages, tax exemptions and FDI facilitating norms.
Over the years, the government of India has made several reforms in foreign direct investment norms. More recently, the government approved several reforms in FDI regulations across several sectors such as digital media, single brands retail trade, coal mining, contract manufacturing, and aviation. These reforms were introduced in order to encourage more foreign investors to invest in the country after India witnessed a dip of 1 per cent in FDI equity inflows for the first time in 6 years.
Apart from being a critical source if economic growth, overseas investments into India businesses also brings in managerial knowhow, new technology, more jobs, and even improved infrastructure. It more than the transfer of monetary funds across borders as foreign direct investment comes with a notion of direct control. This is how it is distinguished from foreign portfolio investment.
Foreign investment is an integral part of the economy as it is enabled the country to achieve a certain level of financial stability.
FDI or foreign direct investment in India can be made in the form of joint ventures, financial collaborations, capital markets, and private placements.
Foreign investors can make their investments is almost all sectors. There are some sectors where no or limited FDI is allowed like the manufacture of cigarettes and tobacco, manufacture of electronic aerospace and defence equipment.
In order to invest in India, an investor must know that there are broadly three types of Foreign Direct Investment (FDI):
- Vertical Investment
Under vertical investment, a business that is differentiated to an extent is established in a foreign country.
- Horizontal Investment
Under this type of investment, an investor opens the same business in a foreign country.
- Conglomerate Investment
Under the conglomerate investment type, an investment is carried out even if the business is unrelated or different to its existing business.
To drive more deeply into foreign investment in India let us first outline the types of investors:
- FVCI (Foreign Venture Capital Investors)
- Pension/Provident Fund
- Financial Institutions
- Foreign Trust
- Sovereign Wealth Funds
- NRIs (Non Resident Indians)/ PIOs (Persons of Indian Origin)
- Foreign Institutional Investors
- Private Equity Funds
- Partnership / Proprietorship Firm