Foreign direct investment or FDI is an investment that is made by an entity placed outside the country where the investment is being made. It is characterized by a notion of direct control.
Overseas direct investment is a critical driver of economic growth. Ever since the opening of the economy in 1991, the government of India has taken several reforms in FDI rules and regulation in order to attract more foreign investors to invest in the country.
There are two routes by which a foreign investor can invest in India: Automatic route and the government route.
- Automatic Route: Under the automatic route, the borrower can get a loan from a foreign entity without a prior approval from the Reserve Bank of India. However, here the loan agreement has to be registered with the RBI.
- Approval Route: Under the approval route, in order to get a loan from a foreign entity, the borrower is required to submit an application with the RBI in the prescribed form through authorized dealer as specified by the RBI.
A non-resident of India is allowed to invest in India and is subject to FDI rules and regulations under the automatic or government route. This is not applicable to a citizen Pakistan or an entity incorporated in Pakistan.
QFI’s or Qualified Financial Investors can invest through SEBI (Securities and Exchange Board of India) registered Depository Participants only in the equity shares of listed Indian companies through recognized stock exchanges in India under various SEBI guidelines.
A foreign investor can invest in India in the following ways:
- 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.