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Two Routes of FDI

Two Routes of FDI

Foreign direct investment or FDI is an investment made by a foreign entity (an individual or a company) into a business based in another country. FDI is branded by a notion of direct control and is not just the transfer of monetary funds. A lasting interest differentiates foreign direct investment from foreign portfolio investment.

An overseas investor looking to penetrate the India market can do so in the following ways:

  • Mergers and Acquisitions
  • Getting voting stocks in a business based in another country
  • Joint ventures with firms based overseas
  • Starting a subsidiary of a domestic firm in a foreign country

India opened up the economy in 1991 and ever since then, the government has been introducing several reforms in foreign direct investment or FDI norms with the sole motive of attracting more and more investors to invest in domestic businesses.

Today, the country is one of the most attractive destinations for foreign direct investments. In fact, Prime Minister Narendra Modi calls India a land of ‘golden opportunities.’

Foreign direct investment by an individual or a company based outside the country is regulated through two routes- the automatic route and approval route.

  1. The automatic route

Under this route, investment into different sectors are less restricted. Foreign direct investment norms and regulations are more liberalized. Here, the overseas investor or the Indian company does not require a prior approval from the Reserve Bank of India (RBI) or government of India for investment into the country.

  1. Approval route

The approval route is a little restricted. The foreign investor or the Indian company has to take a prior approval from the Reserve Bank of India (RBI) or the government of India before making an investment.

Apart from being a critical driver of economic growth, FDI also helps bring in more job opportunities, new technology, managerial expertise, and improved infrastructure.

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