Foreign direct investment or FDI is an investment by an entity based outside the country where the investment is being made. This type of transaction is characterized by a controlling ownership in the business of the domestic country. This ‘controlling ownership’ is ensured by giving foreign investors a lasting interest in the company by the means of at least 10 per cent voting rights. Therefore, foreign direct investment is differentiated from foreign portfolio investment on the grounds of lasting interest in the company where the investment is being made.
FDI plays an important role when it comes to the economic development of India. FDI spurs economic growth especially when domestic saving are not enough to generate funds or capital investments. Even when borrowing from within the country is an option, most business tend to look beyond country lines for investments. This is because—1) capital is not readily available within the country, 2) interest rates are much cheaper when borrowing from oversea investors.
There are two ways in which an overseas investor can make an investment in India:
- The Automatic Route– 100 per cent foreign direct investment is permitted under the automatic route in many sectors, except the ones where a prior government approval is required.
- The 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).
While India has relaxed norms when it comes to FDI, there are sectors where no or limited overseas investment is permitted subject to set guidelines. Sectors in the Indian economy where FDI is not allowed are:
- 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