Foreign direct investment or FDI is when an investor based in one country makes an investment in a business of another country. A main characteristic of this type of investment is the notion of ‘lasting interest’. Lasting interest is ensured with a controlling ownership.
Under foreign direct investment, the foreign investor gets a minimum of 10 per cent voting rights in the company. The notion of controlling ownership differentiates foreign direct investment with foreign portfolio investment.
India, over the years has liberalized FDI norms in order to attract more foreign investors in the country. While most of the sectors of the economy are open to foreign investments under the automatic route of approval, there are some sectors where little or no investment is allowed by the government. These sectors include: lottery business (government, private, and online lotteries), gambling and betting activities, atomic energy, nidhi company etc.
An NRI or non-resident Indian is permitted to invest in the country, and these investments are subject to all foreign direct investment rules and regulations under automatic or government routes of approval. (This does not include a citizen of Pakistan or an entity incorporated in Pakistan).
QFI’s or Qualified Financial Investors are allowed to invest in the country through Securities and Exchange Board of India (SEBI) registered Depository Participants only in the equity shares of listed Indian companies via recognised stock exchanges in India under various SEBI guidelines.
Foreign institutional investors are also permitted to invest in the capital markets in the country via the portfolio investment scheme (PIS). As per PIS, foreign institutional investors can acquire shares or debentures of Indian companies with the assistance of stock exchanges in India.
Foreign investors can invest in India through two routes- automatic and government. While the government route required a prior approval from the government and its ministries, no such approval is needed in the automatic route.