In its most generic definition, Foreign Direct Investment is an investment in one country by an entity based in another country. Merely putting money into the assets of another country does not constitute FDI. Foreign direct investment is characterized by direct control and lasting interest. The intent to actively participate in the day to day operations of the business is what distinguishes it from foreign portfolio investment. Therefore, it is safe to say that FDI does not only bring in money but also skills, knowledge and technology; elements essential for the holistic development of a country.
It is common knowledge that India is one of the fastest growing economies of the world with plenty of development opportunities. Recognizing the tremendous growth potential of the country, the government of India amended the FDI policy in order to increase FDI inflow. To make India more investor-friendly, the government has undertaken reforms and simplified investing conditions to encourage foreign investment in different sectors. As of February 2019, the government of India was actively working on a plan to achieve its goal of US $100 billion worth of FDI inflows. To drive more deeply into foreign investment in India let us first outline the types of investors:
- FVCI (Foreign Venture Capital Investors)
- Pension/Provident Fund
- Financial Institutions
- Foreign Trust
- Sovereign Wealth Funds
- NRIs (Non Resident Indians)/ PIOs (Persons of Indian Origin)
- Foreign Institutional Investors
- Private Equity Funds
- Partnership / Proprietorship Firm
Foreign direct investment in India can be done under two routes.
- Automatic Route
Under this route, foreign direct investment up to 100% is allowed in all sectors and activities except the following. The services/activities listed below require prior approval of the government.
- Where more than 24% foreign equity is proposed to be inducted for manufacture of items reserved for the Small Scale sector.
- FDI in sectors/activities to the extent permitted under Automatic Route does not require any prior approval either by the government or the Reserve Bank of India
- The 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.
- 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). One glance at the extensive list of steps involved can be overwhelming. But today, foreign direct investment in India has been made easy. Thanks to government plans and strategies to encourage FDI in the country for a holistic growth across sectors.