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FDI Automatic and Government Routes Explained

FDI Automatic and Government Routes Explained

Foreign direct investment or FDI is an important factor that facilitates economic development of a country. FDI is an investment from an entity residing outside the country where the investment is to be made. It is characterized by a controlling ownership in a business of the domestic country by the entity based in another country. This ‘controlling ownership’ is what distinguishes foreign direct investment from foreign portfolio investment.

A prerequisite of FDI is giving the foreign investor at least 10 per cent voting rights in the day to day functions of the business.

Apart from being a critical driver of economic growth, FDI also bring in managerial know how, new job opportunities, an inflow of new technology, tech expertise and also results in improved infrastructure.

Investors can expand their business in another country in many ways. They can also acquire voting stocks of a business based outside their country. Below outlined are ways in which foreign investors can invest in a business based in India.

  • Obtaining voting stocks in a company that is based in another country
  • Acquisitions and Mergers
  • Joint ventures with a business placed in another country
  • Commencing a subsidiary of a domestic firm in another country

 

Foreign direct investment in India can be done under two routes.

  1. Automatic Route

Under this route, foreign direct investment up to 100 per cent is allowed in all sectors and activities except the following. The services listed below require prior approval of the government.

  • Where more than 24 per cent foreign equity is proposed to be received for manufacture of items reserved for the Small Scale sector.
  • FDI in sectors or activities to the amount permitted under Automatic Route does not require any previous approval either by the government or the Reserve Bank of India.
  • The overseas investors are only required to notify the Regional Office concerned of the Reserve Bank of India within 30 days of receipt of inward remittances and file the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the non-resident investors.
  • Where provisions of Press Note 1 (2005 Series) issued by the Government of India are attracted.

 

  1. Government Route

Sectors and activities that do not come under the automatic route necessitate a sanction from the Government of India and its concerned ministries.

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