Foreign Direct Investment is an investment in one country by an entity based in another country. FDI is characterized by direct control and lasting interest. The intent to actively participate in the day to day operations of the business is what distinguishes it from foreign portfolio investment. Therefore, it is safe to say that FDI does not only bring in money but also skills, knowledge and technology; elements essential for the holistic development of a country.
Now that you know what foreign direct investment is, let us outline the role of the Reserve Bank of India in foreign investments. It is mandatory for foreign investors to get the approval of the RBI in terms of investing in various industrial units in the Indian market- either in the form of Joint Ventures or an affiliated firm of the parent company.
It is, therefore, safe to say that the Reserve Bank of India has a significant role to play in foreign investment in the country. To understand its role better, let us outline the major areas of activity for the RBI in foreign investment.
The areas where the Reserve Bank of India plays a significant role in investments from foreign entities, apart from foreign direct investment are:
- Foreign Venture Capital Investment
- Foreign Portfolio Investment
- Investment In Government Securities and Corporate debt
- Foreign Technical Collaboration
- Procedure for opening branch / project / liaison office
The RBI regulates and approves foreign investments through two routes- the automatic route and the government route.
- 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 foreign investors are required to inform the regional office under the reserve bank of India within 30 days of receiving the inward payments. They must register the necessary documents with the regional office within 30 days of handing over the shares to the NRI investors. 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).