Simply put– Foreign Direct Investment is an investment in one country by an entity based in another country. The Indian government has over the years taken several measures to ease foreign direct investment policies in order to facilitate more overseas equity inflows into the country. This effort has made the country one of the most attractive destinations for FDI today.
Apart from being a significant driver of economic growth, FDI also helps bring in more job opportunities, new technology, managerial expertise, and improved infrastructure.
One main prerequisite of FDI is that the foreign investors is given at least 10 per cent voting rights in the business. This means that the investors’ interest in the firm is not superficial but is with the intention of a long-term association.
These voting rights are obtained by (methods in which FDI can be done):
- By the means of including a fully owned subsidiary or firm anywhere
- By obtaining shares in an associated company
- Via a merger or an acquisition of a firm that is not related
- By taking part in an equity joint venture with another investor or company
Now, while most sectors of the Indian economy is liberal when it comes to foreign direct investment, there are sectors where no or limited FDI is permitted. These sectors are:
- Atomic Energy Generation
- Trading in TDR’s
- Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc)
- Cigars, Cigarettes, or any related tobacco industry
- Any Gambling or Betting businesses
- Lotteries (online, private, government, etc)
- Investment in Chit Funds
- Housing and Real Estate (except townships, commercial projects, etc)
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.