Foreign Direct Investment is when a foreign entity makes an investment in a business based in another country. This foreign entity can be an individual, a firm, a company, etc. The key factor that distinguishes foreign direct investment from foreign portfolio investment is the controlling interest of the investor. Generally, the foreign investor will acquire or establish a business to get direct control of the business set up in another country.
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.
After the initiation of economic liberalization in 1991, the Government of India amended FDI policies in order to encourage an increased FDI inflow. India is one of the largest economies in the world with tremendous growth potential. With its special investment privileges such as tax exemption and relatively lower wages, India has become an attractive investment destination for foreign companies and individuals. As of February 2019, the Government of India aims to achieve its goal of US $100 Billion worth of foreign direct investment inflows.
To invest in India, an investor must follow two routes:
- Automatic route: Under this route, no prior approval of authority is required by the foreign investor. 100% FDI is allowed. This slows the investor to invest in any company they wish to.
- Government route: A prior approval is needed in order to proceed with FDI under this route.
There is no fixed rate for foreign direct investment in India. While some sectors or industries, allow 100% FDI, the percentages of other industries may vary from 26% to 51%. However, there are some industries where the Government of India strictly prohibits FDI. These industries are as follows:
- Atomic Energy Generation
- Cigars, Cigarettes, or any related tobacco industry
- Lotteries (online, private, government, etc)
- Investment in Chit Funds
- Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc)
- Housing and Real Estate (except townships, commercial projects, etc)
- Trading in TDR’s
- Any Gambling or Betting businesses
FDI inflow is restricted in sectors like defense, insurance, etc. in order to safeguard the country.