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Methods of Foreign Direct Investment in India

Methods of Foreign Direct Investment in India

Foreign direct investment or FDI is a type of investment where an investor based in another country invests in a business from another country. The main point of difference between foreign portfolio investment and foreign direct investment is the notion of lasting interest. This lasting interest is ensured by giving the foreign investor at least 10 per cent voting rights in the company.

FDI is a critical driver of economic growth and is often favoured over other means of external finance because FDI equity inflows do not create any debt, are non-volatile and their returns depend on the performance of the projects financed by the foreign investors. Where FDI does not create debt, raising capital from within the country involves very high rates of interest.

Naturally, more and more Indian business are looking beyond country border lines for investments and funding.

There are various ways in which foreign direct investment can be done. The foreign direct investor may obtain voting power of an enterprise in an economy through any of the following methods:

  • 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

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

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