Every business—big or small, start-up or established, requires capital to either stay afloat or expand. Businesses can seek investment from either within the country or from foreign investors. Today, more and more companies are looking to raise capital/ investment from beyond the country borders due to relatively lower rate of interest.
One more reason Indian businesses are looking at options outside the country is the rigid process that accompanies investments from India. Indian business can look for foreign direct investments to fund their business activities.
What is Foreign Direct Investment?
Foreign direct investment or FDI is when a foreign investor invests in a business that is based in another country. FDI is not merely the transfer of funds; an essential characteristic of it lies in ‘lasting interest’. To ensure a lasting interest, the foreign investor is given a minimum of 10 per cent voting rights in the Indian business. This controlling ownership is what differentiates foreign direct investment from foreign portfolio investment.
Foreign investors are also permitted to invest in small-scale industrial units, apart from the sectors that are prohibited by the government of India. While most sectors of the Indian economy are open for investment, there are sectors where no or restricted investment is allowed.
Sectors where FDI is prohibited are:
- Lottery business—including private, government, and online lotteries
- Betting and Gambling
- Sectors like railways and atomic energy
- Business of chit fund
- Nidhi company
- Construction of farm-house’
- Manufacture of tobacco, cigar, cigarette, and other tobacco related items
- Trading in TDR’s or Transferable Development Rights, etc.
Foreign investments in the small-scale industrial units are limited to 24 per cent of paid-up capital. In order to issue more than 24 per cent to foreign investors, SSI units are required to comply with the following conditions:
- The firm must give up its small-scale industrial unit status, i.e. exceeding prearranged limits of investment in plant and machinery according to Micro, Small and Medium Enterprises Development Act, 2006.
- The company must not participate in manufacture of reserved items.
- The company must comply with sectoral caps.