FDI or foreign direct investment is the investment by an entity (individual or firm) based outside the country where the investment in being made. Apart from being a critical driver of economic growth, FDI bring in managerial know how, new job opportunities, an inflow of new technology, tech expertise and also results in improved infrastructure.
India opened up the economy in 1991 and ever since then, the government has been introducing several reforms in foreign direct investment or FDI norms with the sole motive of attracting more and more investors to invest in domestic businesses.
Businesses look at funds from foreigners because raising capital within the country can prove to be a difficult task. Foreign investors on the other hand are willing to invest in the Indian economy thanks to subsidized taxes and relatively cheaper wages.
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.
There are two ways by which a foreign investor can invest in India- the automatic route and the government route.
- Automatic Route: Under this route, a prior approval from the government of India and its concerned ministries is not required. The RBI can be informed after the investment has taken place.
- Government Route: Under this route of FDI approval, a prior permission by the government and its concerned ministries is mandatory.
Foreign investment in an Indian company can be done in the following ways, permitted by the Foreign Exchange Management Regulations:
- As an integrated entity by incorporating a company under the Companies Act, 1956 through
- Joint ventures; or
- Wholly owned subsidiaries
- As an office of a foreign entity through
- Liaison Office / Representative Office
- Project Office
- Branch Office