What a layman understands about foreign direct investment is just the investment that is done by a foreign company or individual in the company. Most people are unaware of the vastness of this term FDI and how much impact it has created in India that we know today.
Through foreign direct investments, the foreign company gets a stake in the ownership of the business that is placed in another country. Before 1991, in India, there was no foreign direct investment and India was more of a closed economy which was trying to shape up its economy after gaining independence from British rule.
In India, the government has developed two routes through which the foreign investments can be done in India that is the government route and the automatic route. Investments through the government route require government approval but the investments through the automatic route do not require any government approval.
Beginning of FDI in India
The new India opened up to the global economy trade in 1991 which brought a series of reforms not only to the business in India but also in the development of the nation. Time and again there have various amendments that have been made by the government in the FDI policies due to the circumstances but on the whole, the FDI rules and policies of India have been liberal in order to attract high foreign investment in the country.
Prime Minister, Mr. Narendra Modi, has been working immensely to make India the top destination for foreign investment and has been working to uplift the image the world has about India. To make India an upcoming superpower, FDI is a very important element and it has been booming since the past decade.
In 1991, the Foreign Exchange Management Act (FEMA) was launched by Mr. Manmohan Singh through which the regulations will be passed according to the Foreign Trade Policy of India.
This was the onset of the foreign investments in India and since it’s starting, India has been getting foreign investments in high percentages from various countries.
Current State of FDI in India
Increasing the inflow of foreign investments in the country is always the main aim of the government and they take necessary reforms in order to make India attract FDI.
The country which has the highest FDI in India in FY 2020 is Singapore with investments at INR 1036 billion. The other countries that come below Singapore in terms of FDI in India are Mauritius, Netherlands, USA, Japan, France, United Kingdom, Cyprus, and Germany.
The Indian startup economy got its wings through foreign direct investments as they were looking for capital investments for their ventures. Many countries showed their trust in the Indian startups and provided the capital they required and now they have turned out to be top unicorn companies of India.
Various innovations, technology, and software advancements have come into the country through FDI and also employment opportunities have emerged immensely through it. Earlier the employment opportunities were bleak and still, there are more requirements of job opportunities in India but now the employment rate of the country has improved a lot through FDI which generates jobs and makes the citizens prosper.
The population of India and the increase in the buying capacity of India makes India the perfect destination for the establishment of the manufacturing units and the consumer market for the goods. India is rich in natural and human resources, a robust banking system, and liberal foreign investment policies that attract foreign investors.
The major advantages that India got through foreign direct investment are high employment opportunities, rural development, technological development, and economic development.
Act/Policies Governing FDI in India
The government of India keeps making amendments in the foreign direct investment policies according to the business environment. During the pandemic, the government has imposed restrictions on the foreign investments which are made by the neighboring countries of India with which India shares a border with due to the border clash with China and the pandemic creating a tough survival situation for business.
The government always takes measures in securing the domestic companies and also takes steps to invite foreign investments in the country. FDI in India is in the protection of the Department for Promotion of Industry and International Trade, Ministry of Commerce & Industry.
The modifications are done in the FDI policies through the Press Notes/Press Releases notified by the Reserve Bank of India.
The prohibited activities for FDI in India are atomic energy, railway operations, gambling and betting, chit funds, real estate, manufacture of tobacco products, etc. Such prohibitions are placed to secure national security and defense.
The main features of FEMA are:
- Activities such as payments made to any person outside India or receipts from them, along with the deals in foreign exchange and foreign security is restricted. It is FEMA that gives the central government the power to impose the restrictions.
- Free transactions on the current account subject to reasonable restrictions that may be imposed.
- Without general or specific permission of FEMA, MA restricts the transactions involving a foreign exchange or foreign security and payments from outside the country to India – the transactions should be made only through an authorized person.
- Deals in foreign exchange under the current account by an authorized person can be restricted by the Central Government, based on public interest generally.
- Although selling or drawing of foreign exchange is done through an authorized person, the RBI is empowered by this Act to subject the capital account transactions to a number of restrictions.
- Residents of India will be permitted to carry out transactions in foreign exchange, foreign security or to own or hold immovable property abroad if the currency, security or property was owned or acquired when he/she was living outside India, or when it was inherited by him/her from someone living outside India.
The Regulations under FEMA are:
- Foreign Exchange Management (Current Account Transactions) Rule, 2000
- Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000
- Foreign Exchange Management (Transfer or Issue of any Foreign Security) regulations, 2004
- Foreign Exchange Management (Foreign currency accounts by a person resident in India)Regulations, 2000
- Foreign Exchange Management (Acquisition and transfer of immovable property in India) regulations, 2018
- Foreign Exchange Management (Establishment in India of branch or office or another place of business) regulations, 2000
- Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016
- Foreign Exchange Management (Export of Goods and Services) regulations, 2000
- Foreign Exchange Management (Realisation, repatriation, and surrender of Foreign Exchange) regulations, 2000
- Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000
- Foreign Exchange ( Adjudication Procedure and Appeals) rules,
- Foreign Exchange Management (Borrowing and Lending) Regulations, 2018
- Foreign Exchange Management (Cross Border Merger) Regulations, 2018
- Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017
- Foreign Exchange Management (Remittance of Assets) Regulations, 2016
- Foreign Exchange Management (Deposit) Regulations, 2016
- Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016
Earlier the Foreign Exchange Regulation Act was there but it got replaced with the Foreign Exchange Management Act which was passed in 1999.
The main reason for changing the earlier act governing the foreign direct investment in India as it became incompatible with the pro-liberalization policies of the country.
The Foreign Exchange Management Act is in accordance with the framework of the World Trade Organization and it carved the establishment of the Prevention of Money Laundering Act, 2002.
The acts/rules/guidelines which regulate FDI in India are:
- Foreign Contribution (Regulation) Act, 2010,
- Foreign Contribution (Regulation) Rules, 2011
- And other notification/orders etc. issued thereunder from time to time.
- FCRA, 1976 repealed after coming of FCRA, 2010
FDI has benefitted India a lot in the development of the country and as per the predictions India will be emerging as a strong economy in the coming years. Along with FDI, India will be walking on the road of development and serving its people with major developments in the country.