Foreign direct investment is an investment made by an individual or a firm made into a business based in another country. As per the Organisation for Economic Cooperation and Development (OECD), an investment that is 10 per cent or more from the overseas is considered as foreign direct investment.
One main characteristic of FDI is that the foreign investor is granted at least 10 per cent of voting rights in the day to day functioning of the business where the investment is being made. When voting rights are given, a lasting interest is automatically assumed by the investor and this long term interest in the business is what differentiates foreign direct investment from foreign portfolio investment.
Foreign investors are willing to invest in India thanks to favourable policies, thriving markets, subsidized rates, preferential tariffs and relatively cheaper wages.
The government of India has time and again taken steps to liberalize foreign direct investment norms to encourage more overseas investors. This is done in view of the plethora of advantages associated with FDI equity inflows. Some benefits of FDI for the host country are as follows:
- More job opportunities leading to an increase in employment
- An inflow of managerial expertise, skills, knowledge, and technology
- Development of human capital
- Economic stimulation
To make India more investor-friendly, the government has undertaken reforms and simplified investing conditions to encourage foreign investment in different sectors such as digital media, contract manufacturing, coal mining, and single brand retail trade.
Another way FDI proves to be beneficial is by offering simpler terms of borrowing funds to business. Today, more and more business people are exploring the option of raising funds from overseas investors as an alternative to borrow from within the country. One major reason for this is the comparatively higher rates of interest when borrowing locally.
Foreign investments can be made under two routes—Automatic route and Government route.
- The Automatic Route- 100 per cent foreign direct investment is permitted under the automatic route in many sectors, except the ones where a prior government approval is required.
The foreign investors are required to inform the regional office under the reserve bank of India within 30 days of receiving the inward payments. They must register the necessary documents with the regional office within 30 days of handing over the shares to the NRI investors.
2. The Government Route– Sectors and activities that are not covered under the automatic route require an approval from the Government of India and are considered by the Ministry of Finance and Foreign Investment Promotion Board (FIPB).