Foreign Funding For Businesses in India
Foreign Direct Investment is an investment made by a foreign entity (a firm or an individual) into the business interests of another country in the form of a controlling ownership. The economic liberalization of 1991 led India to become a fast growing major economy. Since then, the regulatory environment pertaining to foreign direct investment in the country has consistently been eased. The Government of India has reformed foreign funding policies to encourage investment.
There are three types of investors of foreign funding for businesses in India:
- Financial institutions
- Pension and Provident Fund
- Foreign Venture Capital Investors
- Sovereign Wealth Funds
- Foreign Trust
- Non Resident Indians (NRI’s) and Persons of Indian Origin (PIO’s)
- FOREIGN INSTITUTIONAL INVESTORS
- Partnership and Proprietorship Firm
- Private Equity Funds
India has flourished to become one the largest economies in the world today. Foreign companies are looking to invest here to take advantage of easy investment policies and privileges like tax exemptions, etc. and relatively cheaper employment wages. Foreign funding in India is a critical driver of economic growth and development.
Foreign direct investment can be carried out in many ways, including the opening of a associate company or a subsidiary, acquiring a controlling interest in an existing firm, by the means of merger or joint venture with a company.
FDI policy allows foreign funding for businesses in India under two routes:
1. THE AUTOMATIC ROUTE
Under this route, Foreign Direct Investment up to 100% is allowed and no Central Government permission is required except the following. The services/activities listed below require prior approval of the government.
- Where more than 24% foreign equity is proposed to be inducted for manufacture of items reserved for the Small Scale sector.
- FDI in sectors/activities to the extent permitted under Automatic Route does not require any prior approval either by the government or the Reserve Bank of India .
- The investors are only required to notify the Regional Office concerned of the Reserve Bank of India within 30 days of receipt of inward remittances and file the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the non-resident investors.
- Where provisions of Press Note 1 (2005 Series) issued by the Government of India are attracted.
2. 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).
Over the years, the Government of India has regularly amended Foreign Direct Investment (FDI) policies in order to encourage capital inflow in the country. In 2014, the foreign investment upper limit was increased from 26% to 49%.