Foreign direct investment, in its simplest definition is an investment by an entity placed outside the country where the investment is being made. In India, overseas investment is a significant driver of economic growth.
Apart from being a facilitator of economic development, foreign direct investment in India also brings in new technology, managerial expertise, new raw materials, and improved infrastructure into the country. It is characterized by a notion of direct control in the business.
India has become an attractive destination for overseas investors, who take advantage of relatively cheaper wages and liberal foreign investment norms and policies.
Foreign direct investment by an individual or a company based outside the country is regulated through two routes- the automatic route and approval route.
- 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.
- 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.
Proposals for foreign investment under approval route as laid down in the FDI policy are considered by either Foreign Investment Promotion Board (FIPB) or Cabinet Committee on Economic Affairs or Cabinet Committee on Securities.
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.
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.